Aly Energy Services, Inc. (Form: 10-K, Received: 09/05/2017 16:26:45)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

for the Period Ended December 31, 2016

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

for the Transition Period From ____________ to ____________

Commission File Number 33-92894

ALY ENERGY SERVICES, INC.

(Exact name of registrant as specified in its charter)

Delaware

75-2440201

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

3 Riverway, Suite 920
Houston, TX

77056

(Address of Principal Executive Offices)

(Zip Code)

(713)-333-4000

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

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

Title of Each Class		Names of Each Exchange on which Registered
Common Stock, $0.001 par value per share		None

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

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

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

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

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

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

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x
		Emerging growth company	¨

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

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

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

At August 31, 2017, the registrant had 13,818,795 shares of common stock, $0.001 par value, outstanding.

Documents Incorporated by Reference: None

ALY ENERGY SERVICES, INC.

(A Delaware Corporation)

INDEX

PART I

Item 1.

Business

5

Item 1A.

Risk Factors

11

Item 1B.

Unresolved Staff Comments

19

Item 2.

Properties

20

Item 3.

Legal Proceedings

21

Item 4.

Mine Safety Disclosures

21

PART II

Item 5.

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

22

Item 6.

Selected Financial Data

24

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

37

Item 8.

Financial Statements and Supplementary Data

F-1

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

38

Item 9A.

Controls and Procedures

38

Item 9B.

Other Information

39

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

40

Item 11.

Executive Compensation

42

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

43

Item 13.

Certain Relationships and Related Transactions and Director Independence

44

Item 14.

Principal Accounting Fees and Services

44

PART IV

Item 15.

Exhibits

45

SIGNATURES

47

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

· projected operating or financial results, including any accretion/dilution to earnings and cash flow;

· any plans to obtain financing to fund future operations;

· prospects for services and expected activity in potential and existing areas of operations;

· the effects of competition in areas of operations;

· the outlook of oil and gas prices;

· the current economic conditions and expected trends in the industry we serve;

· the amount, nature and timing of capital expenditures and availability of capital resources;

· future financial condition or results of operations and future revenue and expenses; and

· business strategy and other plans and objectives for future operations.

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

· conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;

· volatility in oil and natural gas prices;

· fluctuations in the domestic land-based rig count;

· changes in laws and regulations;

· our ability to implement price increases or maintain pricing on our core services;

· risks that we may not be able to reduce, and we may experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;

· industry capacity;

· asset impairments or other charges;

· the periodic low demand for our services and resulting operating losses and negative cash flows;

· our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;

· significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations;

· our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;

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· our ability to incur debt or long-term lease obligations;

· our ability to implement technological developments and enhancements;

· severe weather impacts on our business;

· our ability to successfully identify, make and integrate future acquisitions and our ability to finance such acquisitions;

· our ability to finance future growth of our operations through investments in new equipment and service offerings;

· our ability to achieve the benefits expected from disposition transactions;

· the loss of one or more of our larger customers;

· our ability to generate sufficient cash flow to meet future debt service obligations;

· our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue and/or operating income, and our inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Aly Energy Services, Inc. as a whole or for geographic regions and/or certain business operations individually);

· business opportunities (or lack thereof) that may be presented to our company and may be pursued;

· our ability to respond to changing or declining market conditions, including our ability to reduce the costs of labor, fuel, equipment and supplies employed and used in our businesses;

· our ability to maintain sufficient liquidity;

· adverse impact of litigation; and

· other factors affecting our business described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in the other reports we file with the Securities and Exchange Commission.

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

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PART I

Item 1. Business

General

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

We provide a variety of oilfield services to owners and operators of oil and gas wells. Generally, these services fall within the category of surface rental equipment or solids control services.

On July 17, 2012, Munawar “Micki” Hidayatallah founded Aly Energy with the strategic objective of creating an oilfield services company that serves exploration and production companies from well planning to plug and abandonment. We have grown our business both through organic growth resulting from investment in existing operations and through the strategic acquisition of certain businesses operating in our industry.

To date, we have acquired three businesses:

· Austin Chalk Petroleum Services Corp. (“Austin Chalk”) - In October 2012, we acquired Austin Chalk a provider of high performance, explosion-resistant rental equipment used primarily in land-based horizontal drilling. Austin Chalk currently offers a robust inventory of surface rental equipment as well as roustabout services, including the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location;

· United Centrifuge LLC and the leased fixed assets associated with that business (collectively “United”) - United, acquired in April 2014, operates within the solids control sector of the oilfield services 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. United owns centrifuges which are differentiated from the competition due to the ability to remove the rotating assembly from a centrifuge within 45 minutes while on the rig site thereby minimizing customer down time; and

· Evolution Guidance Systems Inc. (“Evolution”) - In July 2014, we acquired Evolution which specialized as an operator of Measurement-While-Drilling (“MWD”) downhole tools. Effective October 26, 2016, we abandoned these operations as a part of a restructuring event (see “Note 2 – Recent Developments” in the notes to our consolidated financial statements for further detail).

Business Outlook

Our core businesses depend on our customers’ willingness to make expenditures to produce, develop and explore for oil and natural gas. Industry conditions are influenced by numerous factors, such as oil and natural gas prices, the supply of and demand for oil and natural gas, domestic and worldwide economic conditions, political instability in oil producing countries and available supply of and demand for the services we provide. Oil and natural gas prices began a rapid and substantial decline in the fourth quarter of 2014. Depressed commodity price conditions persisted and worsened during 2015 and that trend continued into 2016. As a result, the rig count and demand for our products and services declined substantially, and the prices we are able to charge our customers for our products and services have also declined substantially. While we have reshaped our organizational and cost structure to mitigate the negative impact of these declines and to improve our ability to react to future declines, we continued to experience negative operating results and cash flows from operations through 2016.

Oil prices have improved off the low point of 2016 with the November 2016 decision by OPEC to curtail the cartel’s oil production, the Baker Hughes U.S. land drilling rig count has increased significantly from its low point in mid-2016, and our revenue has improved substantially during the first six months of 2017. We believe that stability in oil prices at an attractive price to our customers coupled with the increases in drilling activity during the first half of 2017 will result in further increases in demand for our services and will provide us opportunities to increase the price of our products and services, particularly in 2018. However, with increased demand for oilfield services broadly, the demand for qualified employees and the demand for the sub-rental equipment we require to increase our activity will increase and we may experience increases in costs which we cannot completely offset with price increases to our customers. As of June 30, 2017, based on our expectations of improved activity levels and pricing throughout the remainder of 2017 and 2018, we believe that we will be able to service our debt obligations and ongoing operations through operating cash flow and, if necessary, availability under our credit facility.

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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:

· 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,

· reduction in employer contributions to employee benefits,

· closures of certain operating yards and administrative facilities,

· strategic decision to cease operations in the northeast which resulted in the reduction of costs related to operating in an incremental market,

· 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,

· 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

· 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.

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 (see “ Note 4 – Reduction in Value of Assets and Other Charges ” in the notes to our consolidated financial statements).

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.

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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. As a result of the Recapitalization, the Company became a “Controlled Company” as defined under the listing standards of the principal national securities exchanges; however, since the Shareholder Group’s proportionate interest did not change significantly, a change in control did not occur and the transaction was accounted for at historical cost.

As a result of the Recapitalization, the credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving credit facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old).

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

· 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.

· 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.

· 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.

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.

For a discussion of the accounting treatment for the Recapitalization, see “ Note 2 – Recent Developments ” in the notes to our consolidated financial statements included elsewhere in this document.

Strategy

Since 2012, we have made significant investments to expand operations and capitalize on organic growth opportunities in existing and expansion markets. We consistently seek opportunities to bundle product offerings and to cross sell services across markets and product lines, which we believe increases client retention and the utilization of our equipment.

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Our growth strategy focuses on pursuing organic growth and, when capital resources are available, acquiring existing businesses. The strategy consists of the following elements:

· increase inventory of rental products and increase capacity to provide services;

· add new and differentiated product and service offerings;

· expand into new geographic markets; and,

· diversify and grow our customer base.

Products and Services

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

Our Rental Products:

Centrifuges: We currently own approximately 54 centrifuges. We provide two different sizes of centrifuges to meet varying client specifications (i.e. SS1000 and SS2000). We believe our centrifuges provide a competitive advantage because the rotating assembly within each centrifuge can be removed and replaced on a customer’s well site within 45 minutes if it fails thereby minimizing downtime.

Mud Circulating Tanks (“MCTs”): We currently own approximately 60 vertical 400-barrel MCTs and approximately 125 500-barrel MCTs. We developed vertical 400-barrel MCTs as an innovative solution that minimizes location size, which we believe is an attractive feature for customers. The majority of our 500-barrel MCTs are highly mobile with rounded bottoms and customized jet-lines to ensure more consistent mud and easier cleanout at the completion of a job. In addition to the 500-barrel MCTs we own, we sub-rent 500-barrel MCTs (approximately 235 sub-rented as of June 30, 2017) in order to satisfy demand for our services. MCTs are typically rented to customers with auxiliary equipment such as diesel or electric mud pumps, hoses, and wooden mats.

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

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

Solids control equipment rental: We provide a variety of solids control equipment used in and critical to wellsite activities including shakers, vertical dryers, waste removal units, and/or various tanks.

Our Service Offerings Which Include Personnel:

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

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

Fabricating Capabilities

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

Geographic Markets

We operate primarily in Texas (West Texas and South Texas), Oklahoma, New Mexico, and Louisiana.

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Competition

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

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

Customers

We provide equipment and services to several well-known, established operators, such as EOG Resources, Inc., Pioneer Natural Resources, Sanchez Oil and Gas Corporation, Encana, Continental Resources, Inc. and Devon Energy Corporation.

For the years ended December 31, 2016 and 2015, our top three customers represented approximately 43.5% and 35.4% of total revenue, respectively.

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

Raw Materials

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

Safety

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

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

Employees

As of July 24, 2017, we employed approximately 50 individuals. The corporate cost center employs four individuals, including the chairman, the chief executive officer, the chief operating officer and the chief financial officer, approximately 40 individuals work primarily in the field, and the remaining employees provide selling, general, and administrative services. We believe we have good relationships with our employees.

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Seasonality

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

Intangibles

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

Governmental Regulation

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

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

Environmental Matters

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

Access to Company Reports

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

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Item 1A. Risk Factors

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

Risks Related to Our Business

Our business depends on domestic drilling activity and spending by the oil and natural gas industry in the United States. From late 2014 through most of 2016, our business was severely negatively affected by the significant and rapid decline in domestic drilling activity. We may be adversely affected by industry conditions that are beyond our control in 2017 and beyond.

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

§ domestic and worldwide economic conditions;

§ the supply of and demand for oil and natural gas;

§ the level of prices, and expectations about future prices, of oil and natural gas;

§ the cost of exploring for, developing, producing and delivering oil and natural gas;

§ the expected rates of declining current production;

§ the discovery rates of new oil and natural gas reserves;

§ available pipeline, storage and other transportation capacity;

§ federal, state and local regulation of exploration and drilling activities;

§ weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area;

§ political instability in oil and natural gas producing countries;

§ technical advances affecting energy consumption;

§ the price and availability of alternative fuels;

§ the ability of oil and natural gas producers to raise equity capital and debt financing; and,

§ merger and divestiture activity among oil and natural gas producers.

Current and anticipated oil and natural gas prices, the related level of drilling activity, and general production spending in the areas in which we have operations are the primary drivers of demand for our services. The level of oil and natural gas exploration and production activity in the United States is volatile and this volatility could have a material adverse effect on the level of activity by our customers. A reduction by our customers of activity levels from late 2014 through most of 2016 has caused and may continue to cause a decline in the demand for our services and has adversely affected and may continue to adversely affect the prices that we can charge or collect for our services. In addition, any prolonged substantial reduction in oil and natural gas prices would likely affect oil and natural gas production levels and, therefore, affect demand for the services we provide. Moreover, a decrease in the development rate of oil and natural gas reserves in our market areas, whether due to increased governmental regulation of or limitations on exploration and drilling activity or other factors, may also have an adverse impact on our business, even in an environment of stronger oil and natural gas prices.

From the second half of 2014 through most of 2016, oil prices declined dramatically resulting in a significant reduction in the land-based drilling rig count in the United States. Our customers have sought and received significant price reductions from us and our competitors in 2014, 2015 and 2016, which has materially adversely affected our financial results. Although we believe some oil and natural gas exploration and production companies, including our customers, are beginning to increase their drilling-related capital budgets in 2017, the timing and magnitude of a beneficial impact, if any, from this increase is highly uncertain.

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

The oilfield services industry is competitive and fragmented and includes numerous small companies capable of competing in our markets on a local basis as well as several large companies that possess substantially greater financial and other resources than us. Some of our competitors hold significant market share in the markets in which we operate, which may make it difficult for us to successfully sell competing products and services. Our larger competitors may have greater resources which could allow them to compete more effectively than us and they may benefit from economies of scale which enable them to offer products and services at a lower cost than us. Our operations may be adversely affected if our current competitors or new market entrants introduce new products or services with better features, performance, prices or other characteristics, or that better address environmental concerns, than our products and services. Competitive pressures also may result in significant price competition that could have a material adverse effect on our results of operations and financial condition.

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We operate in a highly competitive industry, with intense price competition, which may intensify as our competitors expand their operations.

The market for oilfield services in which we operate is highly competitive and includes numerous small companies capable of competing effectively in our markets on a local basis, as well as several large companies that possess substantially greater financial resources than we do. Contracts are traditionally awarded on the basis of competitive bids or direct negotiations with customers. The principal competitive factors in our markets are product and service quality and availability, responsiveness, experience, equipment quality, reputation for safety and price. The competitive environment has intensified as recent mergers among exploration and production companies have reduced the number of available customers. The fact that drilling rigs and other vehicles and oilfield services equipment are mobile and can be moved from one market to another in response to market conditions heightens the competition in the industry. We may be competing for work against competitors that may be better able to withstand industry downturns and may be better suited to compete on the basis of price, retain skilled personnel and acquire new equipment and technologies, all of which could affect our revenue and profitability.

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

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

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

We depend upon a number of vendors for supplies and equipment. Increased prices charged by our manufacturers could materially and adversely impact our results of operations. In addition, interruptions or a work stoppage by our manufacturers could adversely affect our operations until arrangements with alternate suppliers could be made. Such alternate arrangements may be less favorable to us and could further adversely affect our results of operations.

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

Our long-term business strategy includes growth through the acquisition of other businesses. However, we may not be able to identify attractive acquisition opportunities or successfully acquire identified targets on terms favorable to us in 2017 and beyond. Competition for acquisition opportunities may be substantial and may cause us to refrain from making acquisitions. In addition, we may not be successful in integrating future acquisitions into our existing operations, which may result in unforeseen operational difficulties, diminished financial performance or our inability to report financial results and may require a disproportionate amount of our management’s attention. If we fail to manage future acquisitions effectively, our results of operations could be adversely affected.

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

§ incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;

§ failure to integrate the operations or management of any acquired operations or assets successfully and timely;

§ potential loss of key employees and customers of the acquired companies;

§ potential lack of experience operating in a geographic market or product line of the acquired business;

§ an increase in our expenses, particularly overhead expenses, and working capital requirements;

§ the possible inability to achieve the intended objectives of the business combination; and

§ the diversion of management’s attention from existing operations or other priorities.

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

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

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

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

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

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

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

We derive a significant amount of our revenue from exploration and production companies and drilling contractors that are active in our markets. For the year ended December 31, 2016, our top three customers accounted for approximately 43.5% of total revenue. If we fail to retain a number of our large existing customers or if we incur significant price reductions in order to retain the business of key customers, our business and operations could be adversely affected. Moreover, if any of these customers fails to remain competitive in their respective markets, encounters financial or operational problems or consolidates with a third party, our revenue and profitability may decline.

We are subject to the credit risk of our customers.

We provide credit to our customers in the normal course of business and generally do not require collateral in extending such credit. This exposure, coupled with material instances of default, could have an adverse effect on our business, financial condition, results of operations and cash flows. In addition, we may need to undertake collection efforts that could cause our business from certain customers to decline, or the collection of certain receivables could become impossible, requiring us to write them off. The current oilfield industry conditions are resulting in an increased number of bankruptcies among companies that could use our services, which may impact the demand for our services.

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

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

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

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

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

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

We have recorded reductions in the value of our assets in the past. We periodically evaluate our long-lived assets, including our property and equipment, intangible assets, and goodwill for impairment. In performing these assessments, we project future cash flows on a discounted basis for goodwill, and on an undiscounted basis for other long-lived assets, and compare these cash flows to the carrying amount of the related assets. These cash flow projections are based on our current operating plans, estimates and other judgmental assumptions. We perform the assessment of potential impairment for our property and equipment whenever facts and circumstances indicate that the carrying value of those assets may not be recoverable due to various external or internal factors. If conditions in our industry do not improve or worsen, we could record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations. These cash flow projections are based on our current operating plans, estimates and judgmental assumptions. During 2016 and 2015, our continuing operations recorded $17.7 million and $11.4 million respectively, in a reduction in value of assets and, if conditions in our industry worsen or do not improve, we may record additional impairment charges in future periods, which could have a material adverse effect on our financial position and results of operations.

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

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

· curtailment of services;

· weather-related damage to facilities and equipment, resulting in suspension of operations;

· inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and

· loss of productivity.

These constraints could delay our operations and materially increase our operating and capital costs. Unusually warm winters may also adversely affect the demand for our services by decreasing the demand for natural gas.

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

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

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

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

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

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

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

Increased regulation of hydraulic fracturing could result in reductions or delays in oil and gas production by our customers, which could adversely impact our revenue.

A significant portion of our customers’ oil and gas production is developed from unconventional sources, such as shales, that require hydraulic fracturing as part of the completion process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into the formation to stimulate gas production. We do not engage in any hydraulic fracturing activities although many of our customers do. If additional levels of regulation and permits were required through the adoption of new laws and regulations at the federal or state level that could lead to delays, increased operating costs and prohibitions for our customers, such regulations could reduce demand for our services and materially adversely affect our results of operations.

Climate change legislation, regulatory initiatives and litigation could result in increased operating costs and reduced demand for the services we provide.

In recent years, the U.S. Congress has considered legislation to restrict or regulate emissions of greenhouse gases, or GHGs, such as carbon dioxide and methane that may be contributing to global warming. In addition, almost half of the states, either individually or through multi-state regional initiatives, have begun to address GHG emissions, primarily through the planned development of emission inventories or regional GHG cap and trade programs.

Although it is not possible at this time to accurately estimate how potential future laws or regulations addressing GHG emissions would impact our business, either directly or indirectly, any future federal or state laws or implementing regulations that may be adopted to address GHG emissions could require us to incur increased operating costs and could adversely affect demand for the natural gas our customers extract using our services. Moreover, incentives to conserve energy or use alternative energy sources could reduce demand for oil and natural gas, resulting in a decrease in demand for our services. We cannot predict with any certainty at this time how these possibilities may affect our operations.

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

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

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

Substantive changes in federal and state tax laws could materially and adversely affect our results of operations. In addition, the final determination of our income tax liabilities involves the interpretation of various federal and state laws and regulations, as well as the significant use of estimates and assumptions regarding the scope of past, current and future operations and results achieved and the timing and nature of income earned and expenditures incurred. Changes in the operating environment, including changes in or interpretation of tax law and currency/repatriation controls, could affect the determination of our income tax liabilities for a tax year.

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

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

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, we would be required to include a report from management on the effectiveness of our internal control over financial reporting in our annual reports once we ceased to be a “smaller reporting company” under applicable SEC rules. Although we are not required to assess internal control over financial reporting, we have included such report in this filing.

In connection with our report from management on the effectiveness of our internal control over financial reporting, management identified certain control deficiencies that represent material weaknesses as of December 31, 2016. Due to these material weaknesses, our management has concluded that our internal control over financial reporting is not effective. This conclusion could adversely impact the market price of our common stock due to a loss of investor confidence in the reliability of our reporting processes.

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Risks Related to Debt

Our indebtedness, which is currently collateralized by substantially all of our assets, could restrict our operations and make us more vulnerable to adverse economic conditions.

Our credit agreement with Pelican, and any replacement or future indebtedness, could have important consequences to our stockholders. For example, it could:

§ require us to maintain compliance under various covenants which are not achievable in light of current industry conditions;

§ require us to raise additional capital;

§ impair our ability to make investments and obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes;

§ limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness;

§ make us more vulnerable to a downturn in our business, our industry or the economy in general as a substantial portion of our operating cash flow will be required to make principal and interest payments on our indebtedness, making it more difficult to react to changes in our business and in industry and market conditions; or,

§ put us at a competitive disadvantage to competitors that have less debt.

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

Our ability to make payments on our indebtedness and fund planned capital expenditures depends on our ability to generate cash flow. Due to the cyclical nature of the industry we operate in, our cash flow from operations can vary significantly from year to year. Consequently, our cash flow may be insufficient to service our debt and that could negatively impact our business, financial condition and results of operations. During 2015 and 2016, our cash flow from operations was not sufficient to service our debt based upon how our credit agreement was structured at the time.

During fiscal year 2016, we had negative cash flows from operations, and this trend could continue if conditions in our industry continue or worsen. If that situation were to recur, we might need to sell assets, seek additional equity or change our business direction to service our debt and there can be no assurance that we could execute these actions in a timely manner sufficient to allow us to service our debt.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our credit agreement with Pelican bear interest at variable rates, exposing us to interest rate risk. We have decided not to hedge against the interest rate risk associated with the borrowings under our credit facility. As such, our debt service obligations could increase significantly in the event of large increases in interest rates.

Risks Related to Ownership of our Common Stock

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

As a result of the Recapitalization, Pelican owns 100% of our outstanding Series A Convertible Preferred Stock, which represents the substantial majority of our fully diluted capital stock. Pelican further owns virtually all of our secured debt, which aggregated to $20.2 million and $6.1 million as of December 31, 2016 and June 30, 2017, respectively. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, subject to certain SEC regulations and if Pelican were to convert the preferred stock, Pelican could begin selling shares of our common stock. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock.

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

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

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

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

Consummation of the Recapitalization resulted in substantial dilution to our existing stockholders, whose aggregate percentage ownership declined from 100% to 9.9%. Further, we may need to raise significant additional funds through equity financings to repay debt, to expand our operations or to execute our acquisition strategy. Holders of our common stock could experience substantial dilution if we issue additional capital stock in the future. Our future capital requirements will primarily depend on our ability to service our debt from operating cash flow and the frequency, timing, and size of future growth opportunities.

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

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

In addition to the risks of having a controlling stockholder as described in the risk factor “The concentration of our capital stock ownership limits the ability of other stockholders to influence corporate matters,” our certificate of incorporation provides authorization to issue up to 10,000,000 shares of preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors. The authorization of preferred shares empowers our board, without further stockholder approval, to issue preferred shares with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of the common stock. If issued, the preferred stock could also dilute the holders of our common stock and could be used to discourage, delay or prevent a change of control.

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

· Before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination;

· Upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding stock held by certain directors and employee stock plans; or

· Following the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock not owned by the interested stockholder.

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

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

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

We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to service debt and fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant. For example, our credit agreement limits our ability to pay dividends. Investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

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

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

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

Due to factors beyond our control, our stock price may be volatile.

The market price of our common stock can be affected by:

§

actual or anticipated variations in our results of operations;

§

changes in earnings estimates; or

§

changes in market valuations of similar companies.

Item 1B: Unresolved Staff Comments

None.

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Item 2. Properties

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

We lease facilities and administrative offices in the various geographic areas in which we operate. We believe that our existing facilities are suitable and adequate and that we have sufficient capacity to meet our current anticipated needs. As of June 30, 2017, we leased properties in Texas and Pennsylvania as follows:

Location

Type of Facility

Size

Lease or Owned

Expiration of Lease

3 Riverway, Suite 920 Houston, TX 77056

Corporate office

2,291 sq. ft.

Leased

January 31, 2020

1080 Private Rd 7703 Giddings, TX 78942

Administrative offices, fabrication/repair shop, equipment yard

6.5 acres, 3,600 sq. ft. office space, 5,000 sq. ft. shop

Leased

December 31, 2017

6126 PR 902 Celina, TX 75009

Fabrication/repair shop, equipment yard

1,813 sq. ft. office space, 5,518 sq. ft. shop

Leased

July 1, 2018

792 McCollum Rd. Montrose, PA 18801

Administrative offices, equipment yard

Small acreage site

Leased

September 30, 2017

12 Free Soil Rd. Mt Morris, PA 15349

Equipment yard

Small acreage site

Month to Month

N/A

State Hwy. 85 West/CR 4715 Dilley, TX 78017

Administrative offices, fabrication/repair shop, equipment yard

5.5 acres, 400 sq. ft. building space

Month to Month

N/A

5039 North Chadbourne San Angelo, TX 76903

Administrative offices, equipment yard

2.25 acres, 1,000 sq. ft. of office space

Leased

May 31, 2018

During 2016, we abandoned a lease in connection with our operational restructuring efforts. There were no cancellation, transfer or assignment charges in the years ended December 31, 2016 and 2015.

During 2017, our lease for the office and shop space utilized by our discontinued operations was assumed by a third party. During the third quarter of 2017, we will cease leasing properties in Celina, Texas, Montrose, Pennsylvania, and Mt. Morris, Pennsylvania. The idle equipment previously stored at these facilities will be transported to Texas to satisfy increasing customer demand. We do not anticipate any cancellation, transfer or assignment charges will be incurred.

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Item 3. Legal Proceedings

In 2015, we ceased compensating our employees on a day rate basis in order to ensure full compliance with the Fair Labor Standards Act (“FLSA”). Certain former employees of Aly Centrifuge, Inc. who were paid a day rate for their work prior to February 2015 alleged that we failed to pay overtime when they worked over 40 hours per week. During the years ended December 31, 2016 and 2015, certain of these employees pursued legal action against us based on such allegations:

· In February 2015, multiple plaintiffs filed a proposed collective action against us alleging overtime violations under the FLSA. We settled this matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2015 and the case was fully paid and dismissed with prejudice, by the end of January 2016.

· In August 2016, several former employees filed a lawsuit against us alleging overtime violations of the FLSA. In May 2017, we settled the matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2016 and, as of June 30, 2017, the settlement was fully paid and the case had been dismissed with prejudice.

· We are currently in the early stages of arbitration with five prior employees who allege overtime violations of the FLSA. We are exploring settlement options to resolve this matter as well as preparing to defend the arbitration should settlement not be feasible. An estimated settlement amount was fully accrued as of December 31, 2016.

The Company entered into certain employment agreements in connection with the acquisition of United and Evolution in 2014 which provided for specified severance obligations of the Company in the event of a termination of employment of the subject employees. The Company also entered into a similar employment agreement in 2014 in connection with the recruitment of an additional employee for the solids control operations. During 2015 and 2016, the employment of these individuals terminated, and the Company did not pay the severance obligations that were contemplated by the employment agreements in the event that the cessation of employment would be determined to have been a termination by the Company “without cause.” As of December 31, 2016, the aggregate unpaid severance obligation under these agreements was approximately $0.7 million.

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

Item 4. Mine Safety Disclosures

Not Applicable.

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PART II

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

Market Information

Commencing May 23, 2013, our common stock was listed on the OTCQB under the symbol “ALYE.” We became delinquent in our filings with the SEC in August 2016. Due to the lack of publicly available financial information, OTCQB subsequently moved the listing of our common stock to OTC Pink and, as of May 1, 2017, ceased to list our common stock.

The following table indicates the quarterly high and low bid price for our common stock on the OTCQB and OTC Pink for the years ended December 31, 2016 and 2015 and for the period from January 1, 2017 to May 1, 2017. Such inter-dealer quotations do not necessarily represent actual transactions and do not reflect retail mark-ups, markdowns or commissions.

Fiscal Year 2017

High

Low

2nd Quarter (April 1 - May 1, 2017)

$ 0.08

$ 0.03

1st Quarter (January 1 - March 31, 2017)

$ 0.12

$ 0.01

Fiscal Year 2016

High

Low

4th Quarter (October 1 - December 31, 2016)

$ 0.08

$ 0.01

3rd Quarter (July 1 - September 30, 2016)

$ 0.11

$ 0.08

2nd Quarter (April 1 - June 30, 2016)

$ 0.20

$ 0.09

1st Quarter (January 1 - March 31, 2016)

$ 1.00

$ 1.00

Fiscal Year 2015

High

Low

4th Quarter (October 1 - December 31, 2015)

$ 2.00

$ 0.80

3rd Quarter (July 1 - September 30, 2015)

$ 4.80

$ 2.00

2nd Quarter (April 1 - June 30, 2015)

$ 6.40

$ 4.80

1st Quarter (January 1 - March 31, 2015)

$ 14.60

$ 5.60

The last reported sales price of our common stock on the OTC Pink was on May 1, 2017 for $0.08 per share.

Our peer group includes, but is not limited to, the following companies: Basic Energy Services Inc., ENSERVCO Corporation, Flotek Industries, Inc., Key Energy Services, Inc., Oil States International, Inc., and Superior Energy Services, Inc.

Holders

The number of holders of record of our common stock as of July 24, 2017 was 89. This number does not include an undetermined number of stockholders whose stock is held in “street” or “nominee” name.

Dividends

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

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Stock Options

As of December 31, 2016 and 2015, we had a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the board of directors.

As of December 31, 2016 and 2015, options to purchase 242,507 and 330,111 common shares under the Plan were outstanding and $0.3 million and $0.5 million of total unrecognized compensation cost related to non-vested stock option awards, respectively. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the years ended December 31, 2016 and 2015. No options were vested as of December 31, 2016 and 2015. During the year ended December 31, 2016 forfeited options totaled 87,604. There were no forfeited options during the year ended December 31, 2015.

Effective April 4, 2017, the 2017 Stock Option Plan (the “2017 Plan”) was approved by the board of directors. On May 30, we granted approximately 16.9 million common shares under the 2017 Plan which was the maximum amount authorized. The option contract term is 10 years and the exercise price is $0.10. The options vested and became exercisable immediately upon grant. The Company is in the process of determining the value of these options.

Recent Sales of Unregistered Securities

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

On January 31, 2017, we completed the Recapitalization which resulted in the issuance of 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 (an aggregate of six individual entities and persons).

On January 31, 2017, we issued 16,092 shares of our Series A Convertible Preferred Stock to Pelican in exchange for a $16.1 million reduction of the Aly Senior Obligations which Pelican acquired on December 12, 2016 in connection with the Recapitalization.

We issued 82,649 shares of our common stock during the year ended December 31, 2015, to one of our directors in respect of his arrangement of certain issuances of common stock.

On September 30, 2015, we closed a private offering and issued 1,047,424 shares of our common stock to multiple accredited investors at a price of $3.20 per share.

On January 12, 2015, we issued 50,000 shares of our common stock in a private placement at a price of $11.00 per share for gross proceeds of approximately $0.6 million. The proceeds were used for general working capital requirements.

Equity Repurchases

We have not repurchased any of our equity securities during the past two years; however, as of December 31, 2016 and 2015, we held 225 shares of treasury stock.

Authorized Shares

As of August 31, 2017, we have approximately 13.8 million shares of common stock outstanding.

On May 18, 2016, we filed an amendment to our certificate of formation reducing our authorized common stock from 100 million to 25 million shares and also reducing our authorized preferred stock from 25 million shares to 10 million shares.

On December 21, 2015, we filed an amendment to our certificate of formation reducing our authorized common stock from 200 million to 100 million shares and also authorizing 25 million shares of preferred stock to be issued in one or more series.

Common Authorized Shares. Authorized common shares total 25,000,000 with a par value of $0.001 per share, of which, 6,707,039 and 6,706,814 were issued and outstanding, respectively as of December 31, 2016 and 6,707,039 and 6,706,814 were issued and outstanding, respectively as of December 31, 2015. Common stock held in treasury as of December 31, 2016 and 2015 were 225 shares.

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Preferred Authorized Shares. Authorized preferred shares total 10,000,000 with a par value of $0.001 per share, of which, none were issued and outstanding as of December 31, 2016 and 2015.

As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to Series A Convertible Preferred Stock and issued 16,092 shares on January 31, 2017. The Series A Convertible Preferred Stock have a par value of $0.001 per share, a face value of $16.1 million, which have no determinable market value as of January 31, 2017. The conversion feature provides that each Series A Convertible Preferred share shall be convertible into 3332.64 common shares at the option of the shareholder and retains a liquidation preference equal to $1,000 per share. All shares vote on an as if converted basis, whereby Pelican, who owns 100% of the Series A Convertible Preferred Stock controls the substantial majority of votes of Aly Energy. (See further discussion in “ Note 11 – Controlling Shareholder and Other Related Party Transactions” in the notes to our consolidated financial statements.)

Item 6. Selected Financial Data

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

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

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

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History of Our Business

To date, we have acquired three businesses:

Subsequent to the acquisition of each of these businesses, we have made significant investments to expand their operations and capitalize on organic growth opportunities in existing and expansion markets. We consistently seek opportunities to bundle product offerings and to cross sell services across markets and product lines, which we believe improves client retention and increases the utilization of our equipment.

Overview of Our Business

We are a provider of solids control systems and surface rental equipment. Our equipment and services are primarily designed for and used in land-based horizontal drilling. Our equipment includes centrifuges and auxiliary solids control equipment, mud circulating tanks (400 and 500 barrel capacity) and auxiliary surface rental equipment, portable mud mixing plants and containment systems. In conjunction with the rental of some of our solids control packages, we provide personnel at the customer’s well site to operate our equipment. We also provide personnel to rig-up/rig-down and haul our equipment to and from the customer’s location. We operate primarily in Texas (West Texas and South Texas), Oklahoma, New Mexico, and Louisiana. Our primary operating yards, shop and repair facilities, and division management are located in Giddings, Texas, San Angelo, Texas, and Houston, Texas.

We derive the majority of our revenue from day rates or hourly rates charged for the rental of our equipment and for the services provided by our personnel. The price we charge for our services depends on both the level of activity within the geographic area in which we operate and also the competitive environment.

Our operating costs do not fluctuate in direct proportion to changes in revenue. Our operating expenses consist of both fixed and variable costs. Although most variable costs are highly correlated with revenue and activity, certain variable costs, such as sub-rental equipment expenses and third-party trucking expenses, can be reduced as a percentage of revenue by our investment in new rental and transportation equipment.

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Industry Trends

We operate in the commodity-driven, cyclical oil and gas industry. From 2011 through mid-2014, the industry operated in an environment where crude oil prices were relatively stable and, except for comparatively short intervals, generally traded at prices at or in excess of $100 per barrel. However, subsequent to the third quarter of 2014, crude oil prices declined significantly due to a variety of factors, including, but not limited to, continued growth in U.S. oil production, weakened outlooks for the global economy and continued strong international crude oil supply resulting in part from OPEC’s unexpected decision to maintain oil production levels. As a result of the weaker crude oil price environment, many crude oil development prospects became less economical for exploration and production operators, leading to a dramatic reduction in U.S. land-based rig count and weaker demand for oilfield services, such as the services we provide.

The decline in both oil prices and the U.S. land-based rig count continued during the first half of 2016. Barring a few brief rallies, the price of oil bottomed out in February 2016 at less than $30 per barrel and the U.S. land-based rig count reached its low of less than 400 rigs in July 2016. After reaching its low point, the price of oil then increased steadily for several months and has hovered between $45 per barrel and $50 per barrel since June 2016. With the price of oil fairly constant for the past twelve months at a level which is economical for exploration and production operators, the U.S. land-based rig count has increased steadily and, in July 2017, the count had increased to over 900 rigs, an increase of greater than 100% compared to its low of less than 400 rigs in July 2016.

The favorable impact of the recent increase in the U.S. land-based rig count on demand for our services has been magnified by an increase in the proportion of rigs drilling directional and horizontal wells. As illustrated in the graph below, the proportion of rigs drilling directional and horizontal wells as a percentage of total U.S. land-based rigs has increased from approximately 80% in the first quarter of 2014 to 92% in the second quarter of 2017. Rigs drilling directional and horizontal wells typically utilize oil-based or other sophisticated mud systems which creates demand for Aly’s specialized mud circulating tanks, pumps, containment systems, solids control and associated equipment.

Our financial performance is significantly affected by the price of oil and the U.S. land-based rig count, specifically the count of rigs drilling directional and horizontal wells. The graph below illustrates the trends in these key drivers from 2014 through mid-2017:

Source: Baker Hughes (Rig Counts) and Bloomberg (Price Per Barrel of WTI Crude)

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How We Evaluate Our Operations

We disclose and discuss EBITDA as a non-GAAP financial measure in our public releases, including quarterly earnings releases, investor conference calls and other filings with the Securities and Exchange Commission.

We define EBITDA as earnings (net income) before interest, income taxes, 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, such as reduction in value of assets, bad debt expense, share-based compensation expense, and changes in fair value of our liability for contingent payments and (ii) certain expenses, such as severance, legal settlements, and professional fees and other expenses related to transactions outside the ordinary course of business, to derive a normalized EBITDA run-rate (“Adjusted EBITDA”), which we believe is a useful measure of operating results and the underlying cash generating capability of our business.

The following table provides the detailed components of EBITDA and Adjusted EBITDA as we define that term for the years ended December 31, 2016 and 2015, respectively (in thousands):

For the Years Ended

December 31,

2016

2015

(unaudited)

Components of EBITDA:

Net loss

$ (22,135 )

$ (15,894 )

Less: Loss from discontinued operations, net of income taxes

2,491

1,950

Net loss from continuing operations

(19,644 )

(13,944 )

Non-GAAP adjustments:

Depreciation and amortization

5,299

5,950

Interest expense, net

2,378

1,961

Debt modification fee

629

-

Interest expense - Pelican

111

-

Income tax benefit

(7,904 )

(3,372 )

EBITDA

$ (19,131 )

$ (9,405 )

Adjustments to EBITDA:

Reduction in value of assets

17,736

11,405

Expenses in connection with lender negotiations and Recapitalization

472

14

Employee-related reorganization expenses, including severance

456

385

Bad debt expense

193

364

Settlements and other losses

127

590

Fair value adjustments to contingent payment liability

(372 )

(1,065 )

Stock-based compensation

-

100

Gain on indemnification-preferred shares holdback

-

(124 )

Transaction costs

-

221

Adjusted EBITDA

$ (519 )

$ 2,485

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

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

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

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

· EBITDA and Adjusted EBITDA do not reflect growth and maintenance capital expenditures,

· EBITDA and Adjusted EBITDA do not reflect the interest, principal payments and other financing-related charges necessary to service the debt that we have incurred to finance acquisitions and invest in our fixed asset base,

· EBITDA and Adjusted EBITDA do not reflect the payment of income taxes, and

· EBITDA and Adjusted EBITDA do not reflect changes in our net working capital position.

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.

Business Outlook

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Operational Restructuring

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.

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Capital Restructuring

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 approached 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.

As a result of the Recapitalization, the credit facility, now with Pelican, consisted of a term loan of $5.1 million and a revolving facility of up to $1.0 million as of January 31, 2017. Availability under the revolving credit facility is determined by a borrowing base calculated as 80% of eligible receivables (receivables less than 90 days old).

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

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Results of Operations

The following table summarizes the change in our results of operations for the year ended December 31, 2016 when compared to the year ended December 31, 2015 (in thousands):

For the Years Ended December 31,

Variance

2016

% of Revenue

2015

% of Revenue

$

%

Revenue

$ 11,002

100.00 %

$ 25,484

100.00 %

$ (14,482 )

-56.83%

Expenses:

Operating expenses

8,324

75.66 %

16,188

63.52 %

(7,864 )

-48.58%

Depreciation and amortization

5,299

48.16 %

5,950

23.35 %

(651 )

-10.94%

Selling, general and administrative expenses

4,073

37.02 %

7,296

28.63 %

(3,222 )

-44.17%

Reduction in value of assets

17,736

161.21 %

11,405

44.75 %

6,331

55.51 %

Total expenses

35,432

322.05 %

40,839

160.25 %

(5,407 )

-13.24%

Loss from continuing operations

(24,430 )

NM

(15,355 )

NM

(9,075 )

NM

Other expense:

Debt modification fee

629

5.72 %

-

0.00 %

629

NM

Interest expense, net

2,378

21.62 %

1,961

7.70 %

417

21.25 %

Interest expense - Pelican

111

1.01 %

-

0.00 %

111

NM

Total other expense

3,118

28.34 %

1,961

7.69 %

1,157

59.00 %

Loss from continuing operations before income taxes

(27,548 )

NM

(17,316 )

NM

(10,232 )

NM

Income tax benefit

(7,904 )

NM

(3,372 )

NM

(4,533 )

NM

Net loss from continuing operations

(19,644 )

NM

(13,944 )

NM

(5,700 )

NM

Loss from discontinued operations, net of income taxes

2,491

22.64 %

1,950

7.65 %

541

27.74 %

Net loss

$ (22,135 )

NM

$ (15,894 )

NM

$ (6,241 )

NM

Results for the Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015

Overview. Our results of operations depend on the demand for our services and our ability to provide high quality equipment and service to satisfy that demand while maintaining an efficient cost structure. During the fourth quarter of 2016, our total revenue was $2.2 million, which was a decline of 76.0% when compared to revenue of $9.0 million during the first quarter of 2015. The steady decline in revenue throughout 2015 and 2016 was a result of decreased activity, decreased pricing of our core products and services of approximately 40% to 50% when comparing the fourth quarter of 2016 to the first quarter of 2015 and the wind-down of our solids control operations in the northeast due to decreased demand in the area combined with high overhead costs. Despite significant declines in activity and pricing, by the end of 2016, after implementing significant cost cutting measures, we successfully achieved a more efficient cost structure in which operating expenses as a percentage of revenue decreased to 66.6% in the fourth quarter of 2016 from 71.8% in the first quarter of 2015 and in which our selling, general and administrative expenses decreased by 76.8% to $0.6 million from $2.4 million when comparing the fourth quarter of 2016 to the first quarter of 2015.

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Revenue. Our revenue for the year ended December 31, 2016 was $11.0 million, a decrease of 56.8%, compared to $25.5 million for the year ended December 31, 2015. Our activity is directly tied to drilling activity and, as discussed in the industry trends section above, the average U.S. land-based rig count for 2016 dropped almost 100% to approximately 485 rigs from the average in 2015 of approximately 940 rigs. This decrease in activity resulted in intense competition in the oilfield services sector, which, in turn, required us to reduce pricing significantly in order to retain existing customers and attract new customers. Pricing for our primary rental products decreased approximately 25% when comparing the year ended December 31, 2016 to the year ended December 31, 2015. In addition, demand for our services declined throughout 2015 and through most of 2016 resulting in reduced utilization of equipment and further contributing to our decline in revenue. During the fourth quarter of 2016, we ceased all operating activity in the northeast due to a significant decline in demand in the area. The resulting declines in revenue were minimally offset by increases in demand for our equipment in Texas, particularly in the Permian Basin, in the fourth quarter of 2016.

Operating Expenses. Our operating expenses for the year ended December 31, 2016 decreased to $8.3 million, or 75.7% of revenue, from $16.2 million, or 63.5% of revenue, for the year ended December 31, 2015. The decrease of $7.9 million from the year ended December 31, 2015 is primarily due to the decline in activity described above, specifically the resulting decline in payroll and other variable expenses, combined with a decrease of our reliance on third party sub-rental and trucking services. During 2016, payroll decreased due to both a decline in headcount, 50 as of December 31, 2016 compared to 125 as of December 31, 2015, and decreases in average wage rates. The increase in the percentage of operating expenses to revenue between the years is primarily due to the significant decline in pricing and the inability to reduce our costs to mirror the timing and magnitude of the reduction in customer pricing (see further discussion of cost cuts in “Operational Restructuring” section above).

Depreciation and Amortization. Depreciation and amortization expense decreased 10.9% to $5.3 million for the year ended December 31, 2016 compared to $6.0 million for the year ended December 31, 2015. The decrease is due primarily to the disposition of assets to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” in the notes to our consolidated financial statements).

Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased to $4.1 million, or 37.0% of revenue, for the year ended December 31, 2016 compared to $7.3 million, or 28.6% of revenue, for the year ended December 31, 2015. Selling, general and administrative expenses consist primarily of overhead costs which we generally consider to be fixed. The year-over-year decline of $3.2 million, or 44.2%, reflects the severe cost cutting initiatives started in 2015 which continued in 2016. These initiatives, implemented in response to the massive downturn in the industry, included headcount and wage rate decreases, the reduction of executive management salaries and elimination of bonuses, and significant reductions in travel, entertainment and office expense. Selling, general and administrative expenses also include expenses that are either non-recurring or non-cash in nature with an aggregate value of $0.9 million and $0.5 million during the years ended December 31, 2016 and 2015, respectively (see further discussion in “How We Evaluate Our Operations” section above).

Reduction in Value of Assets. In the years ended December 31, 2016 and 2015, we recorded a reduction in value of assets of $17.7 million and $11.4 million, respectively. The primary component of the reduction in value during 2016 was a $15.6 million impairment charge on the transfer of equipment to Tiger in connection with the Recapitalization (see further discussion in “Note 2 – Recent Developments” in the notes to our consolidated financial statements). In addition, in 2016, we recorded a reduction in value of intangibles of $1.1 million and a reduction in value of property and equipment of $1.1 million. The reduction in the value of intangibles consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. The $1.1 million reduction in value of property and equipment was in connection with asset sales and disposals completed during the year to fund working capital needs and repay debt. In 2015, we recorded a $11.1 million reduction in value of goodwill in connection with our annual impairment testing (see Critical Accounting Policies and Estimates – Valuation of Indefinite-Lived Intangible Assets ) and a $0.3 million reduction in property and equipment.

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

Interest Expense, net. Interest expense and amortization of deferred loan costs was $2.4 million for the year ended December 31, 2016 compared to $2.0 million for the year ended December 31, 2015. The $0.4 million increase is due primarily to the quarterly ticking fee being accrued for a full year in 2016 compared to one quarter in 2015, the write-off of deferred loan costs related to the Recapitalization, and an increased interest rate on our primary credit facility. These increases were partially offset by interest being charged on a reduced outstanding debt balance subsequent to the debt modification effective in September 2015.

Interest Expense – Pelican. During the year ended December 31, 2016, we recorded $0.1 million of interest expense due to Pelican, a related party, in connection with the Recapitalization.

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Income Taxes. Income taxes increased to a benefit of $7.9 million, or an effective tax rate of 28.7%, for the year ended December 31, 2016 from a benefit of $3.4 million, or an effective tax rate of 19.5%, for the year ended December 31, 2015. The effective tax rate increased by 9.2% when comparing the year ended December 31, 2016 to the year ended December 31, 2015 due to goodwill impairment in 2015 which did not recur in 2016 offset by a valuation allowance taken in 2016. Management assesses the realizability of deferred tax assets on a quarterly basis. From its evaluation as of December 31, 2016, the Company has concluded that based on the weight of available evidence, it is not more likely than not to realize the benefit of its deferred tax assets. Therefore, the Company established a valuation allowance of $2.4 million for the year ended December 31, 2016. There was no valuation allowance recorded during the year ended December 31, 2015.

Discontinued Operations. Discontinued operations include Evolution which specialized as an operator of MWD downhole tools. Losses from discontinued operations, net of income taxes, were $2.5 million during 2016, as compared to $2.0 million during 2015. The increase in the loss from discontinued operations in 2016 is primarily due to a $2.6 million reduction in value of assets and a $3.3 million decrease in revenue partially offset by a corresponding decrease in operating expenses. See “ Note 15 – Discontinued Operations” in the notes to our consolidated financial statements for additional detail.

Liquidity and Capital Resources

Net Cash Provided by Operating Activities. Cash flow used in operating activities was less than $0.1 million for the year ended December 31, 2016 as compared to cash provided by operations of $3.9 million for the year ended December 31, 2015. The decrease in 2016 was due primarily to a decrease in operating cash flow generated by discontinued operations and due to the recording of a valuation allowance, partially offset by a decrease in working capital.

Liquidity. As a result of the industry downturn, many customers have experienced a significant reduction in their liquidity and have faced challenges accessing the capital markets. Several energy service and equipment companies have declared bankruptcy, or have had to exchange equity for the forgiveness of debt, while others have been forced to sell assets in an effort to preserve liquidity. We faced similar challenges requiring us to undergo a capital restructuring. For a discussion of the Recapitalization and its restructuring of our credit facility, see “ Note 2 – Recent Developments ” in the notes to our consolidated financial statements included elsewhere in this document.

While as of December 31, 2016, our liquidity was limited solely to cash and cash equivalents of $0.7 million, the Recapitalization increased our liquidity. The table below reflects our liquidity as of June 30, 2017 (in thousands):

Cash and cash equivalents

$ 573

Revolving facility availability ^{(1), (3)}

250

Delayed draw term loan availability ^{(2), (3)}

975

Total liquidity

$ 1,798

____________

(1) Based on eligible receivables as of June 30, 2017.

(2) Available to finance 90% of purchase price for capital expenditures, including 90% of purchase commitments in table below.

(3) With Permian Pelican LLC, our controlling shareholder.

Capital Expenditures. Capital expenditures are the main component of our investing activities. Cash capital expenditures for the year ended December 31, 2016 decreased to $0.4 million from $1.4 million for the year ended December 31, 2015 due to a significant decrease in expansionary capital expenditures and the minimization of maintenance capital expenditures. In 2017, our cash flows for capital expenditures are limited to maintenance capital expenditures and acquiring assets to replace equipment which we sub-rent to meet customer demand when our owned equipment is fully utilized. Although we do not budget acquisitions in the normal course of business, we regularly engage in discussions related to potential acquisitions of companies which provide oilfield services.

Credit Facility. As of June 30, 2017, we have availability to borrow an incremental $1.2 million under our credit facility with Pelican and, effective January 31, 2017 through the maturity date of December 31, 2019, principal payments on our credit facility are based solely on excess free cash flows, significantly reducing our overall debt service requirements. For a discussion of the Recapitalization and its restructuring of our credit facility, see “ Note 2 – Recent Developments ” in the notes to our consolidated financial statements included elsewhere in this document.

We have experienced significant growth during the beginning of 2017 and we believe that our cash flow from operations combined with access to capital through our lender and controlling shareholder, Pelican, will be sufficient to fund our working capital needs, contractual obligations and maintenance capital expenditures for the next twelve months.

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Contractual Obligations

The table below indicates our contractual obligations as of June 30, 2017 (in thousands):

Total

Less than

1 Year

1-3 Years

3-5 Years

More than

5 Years

Long-term debt - Pelican ⁽¹⁾

$ 6,052

$ -

$ 6,052

$ -

$ -

Interest on long-term debt - Pelican ⁽²⁾

681

272

409

-

-

Severance obligations ⁽³⁾

676

-

676

-

-

Purchase commitments ⁽⁴⁾

346

346

-

-

-

Operating leases

249

159

90

-

-

Equipment financing

7

7

-

-

-

Total

$ 8,011

$ 784

$ 7,227

$ -

$ -

________

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

(2) Interest payments on Pelican credit facility calculated at 4.5% per annum.

(3) See "Note 9 - Commitments and Contingencies" for further detail.

(4) Commitment to purchase eight diesel mud pumps. Purchase commitment is eligible to be financed under delayed draw term loan if necessary.

Off-Balance Sheet Arrangements

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

Net Operating Losses

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

Critical Accounting Policies and Estimates

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

· the estimate requires significant assumptions; and

· changes in estimate could have a material effect on our consolidated results of operations or financial condition; or

· if different estimates that could have been selected had been used, there could be a material effect on our consolidated results of operations or financial condition.

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

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

· Revenue Recognition;

· Allowance for Doubtful Accounts;

· Estimates of Depreciable Lives;

· Valuation of Long-lived Assets;

· Valuation of Goodwill;

· Contingencies;

· Income Taxes;

· Valuation of Contingent Payment Liability;

· Valuation of Redeemable Preferred Stock; and

· Cash Flow Estimates.

For a detailed discussion on the application of these and other accounting policies, see “ Note 3 – Summary of Significant Accounting Policies ” in the notes to our consolidated financial statements included elsewhere in this document.

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

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

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

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

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

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

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

Valuation of Indefinite-Lived Intangible Assets: We periodically review our intangible assets not subject to amortization, including our goodwill, to determine whether an impairment of those assets may exist. These tests must be made on at least an annual basis, or more often if circumstances indicate that the assets may be impaired. These circumstances include, but are not limited to, significant adverse changes in the business climate.

The test for impairment of indefinite-lived intangible assets allows us to first assess the qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. If our qualitative analysis shows that it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount, we will perform the two-step goodwill impairment test. In the first step, a fair value is calculated for each of our reporting units, and that fair value is compared to the current carrying value of the reporting unit, including the reporting unit’s goodwill. If the fair value of the reporting unit exceeds its carrying value, there is no potential impairment, and the second step is not performed. If the carrying value exceeds the fair value of the reporting unit, then the second step is required.

The second step of the test for impairment compares the implied fair value of the reporting unit’s goodwill to its current carrying value. The implied fair value of the reporting unit’s goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination, with the purchase price being equal to the fair value of the reporting unit. If the implied fair value of the reporting unit’s goodwill is in excess of its carrying value, no impairment charge is recorded. If the carrying value of the reporting unit’s goodwill is in excess of its implied fair value, an impairment charge equal to the excess is recorded.

In determining the fair value of our reporting units, we use a weighted-average approach of three commonly used valuation techniques — a discounted cash flow method, a guideline companies method, and a similar transactions method. We assigned a weight to the results of each of these methods based on the facts and circumstances that are in existence for that testing period. We assigned more weight to the discounted cash flow method as we believe it is more representative of the future of the business.

In addition to the estimates made by management regarding the weighting of the various valuation techniques, the creation of the techniques themselves requires that we make significant estimates and assumptions. The discounted cash flow method, which was assigned the highest weight by management during the current year, requires us to make assumptions about future cash flows, future growth rates, tax rates in future periods, book-tax differences in the carrying value of our assets in future periods, and discount rates. The assumptions about future cash flows and growth rates are based on our current budgets for future periods, as well as our strategic plans, the beliefs of management about future activity levels, and analysts’ expectations about our revenue, profitability and cash flows in future periods. The assumptions about our future tax rates and book-tax differences in the carrying value of our assets in future periods are based on the assumptions about our future cash flows and growth rates, and management’s knowledge of and beliefs about tax law and practice in current and future periods. The assumptions about discount rates include an assessment of the specific risk associated with each reporting unit being tested, and were developed with the assistance of a third-party valuation consultant. The ultimate conclusions of the valuation techniques remain our responsibility.

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

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Table of Contents

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

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

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

Valuation of Contingent Payment Liability: In connection with the United Acquisition we recorded a contingent payment liability with an estimated fair value on the acquisition date of $3.5 million. The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million. The fair value of the liability for contingent payments represents the sum of (i) the known required payments for periods which have ended and (ii) the present value of projected required payments for future periods based upon our internal model and projections.

Valuation of Redeemable Preferred Stock: Two of our subsidiaries have redeemable preferred stock. At issuance, our redeemable preferred stock was recorded at fair value as follows:

· Aly Operating – 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.

· Aly Centrifuge – 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.

Our redeemable preferred stock is classified outside of permanent equity in our consolidated balance sheet because the settlement provisions provided the holder the option to require us to redeem the preferred stock at a liquidation price plus any accrued dividends, as defined in the agreement.

Cash Flow Estimates: Our estimates of future cash flow are based on the most recent available market and operating data for the applicable asset base at the time we made the estimate. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on us. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. Our cash flow estimates are used for all our valuation based estimates detailed above.

Recently Issued Accounting Standards

For a discussion of new accounting standards, see “ Note 3 – Summary of Significant Accounting Policies ” in the notes to our consolidated financial statements included elsewhere in this document.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

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Item 8. Financial Statements and Supplementary Data

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 2016 and 2015

F-3

Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015

F-4

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2016 and 2015

F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015

F-6

Notes to Consolidated Financial Statements

F-7

F-1

Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders

Aly Energy Services, Inc.

We have audited the accompanying consolidated balance sheets of Aly Energy Services, Inc. and Subsidiaries (collectively the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting policies used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aly Energy Services, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ RSM US LLP

Houston, TX

F-2

Table of Contents

ALY ENERGY SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

December 31,

2016

2015

ASSETS

Current assets

Cash and cash equivalents

$ 681

$ 514

Restricted cash

30

-

Accounts receivable, net

1,120

3,688

Unbilled receivables

328

721

Prepaid expenses and other current assets

496

957

Assets associated with discontinued operations

-

3,428

Total current assets

2,655

9,308

Property and equipment, net

28,226

51,789

Intangible assets, net

4,931

7,409

Other assets

14

21

Total Assets

$ 35,826

$ 68,527

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities

Accounts payable

$ 912

$ 1,034

Accrued expenses

1,163

2,297

Accrued interest and other - Pelican

1,277

-

Current portion of long-term debt

1,593

20,353

Current portion of long-term debt - Pelican

18,880

-

Current portion of contingent payment liability

810

652

Liabilities associated with discontinued operations

-

1,211

Total current liabilities

24,635

25,547

Long-term debt, net

10

3,185

Long-term debt, net - Pelican

1,315

-

Contingent payment liability, net

-

530

Deferred tax liabilities

-

7,941

Other long-term liabilities

708

31

Total liabilities

26,668

37,234

Commitments and contingencies (note 9)

Aly Operating redeemable preferred stock

4,924

4,647

Aly Centrifuge redeemable preferred stock

10,080

9,755

15,004

14,402

Stockholders' equity (deficit)

Preferred stock of $0.001 par value

-

-

Authorized-10,000,000; none issued and outstanding as of December 31, 2016

Authorized-25,000,000; none issued and outstanding as of December 31, 2015

Common stock of $0.001 par value

7

7

Authorized-25,000,000; Issued-6,707,039; Outstanding-6,706,814 as of December 31, 2016

Authorized-100,000,000; Issued-6,707,039; Outstanding-6,706,814 as of December 31, 2015

Additional paid-in-capital

28,307

28,909

Accumulated deficit

(34,158 )

(12,023 )

Treasury stock, 225 shares at cost

(2 )

(2 )

Total stockholders' equity (deficit)

(5,846 )

16,891

Total liabilities and stockholders' equity (deficit)

$ 35,826

$ 68,527

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

F-3

Table of Contents

ALY ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

For the Years Ended
December 31,

2016

2015

Revenue

$ 11,002

$ 25,484

Expenses:

Operating expenses

8,324

16,188

Depreciation and amortization

5,299

5,950

Selling, general and administrative expenses

4,073

7,296

Reduction in value of assets

17,736

11,405

Total expenses

35,432

40,839

Loss from continuing operations

(24,430 )

(15,355 )

Other expense:

Debt modification fee

629

-

Interest expense, net

2,378

1,961

Interest expense - Pelican

111

-

Total other expense

3,118

1,961

Loss from continuing operations before income taxes

(27,548 )

(17,316 )

Income tax benefit

(7,904 )

(3,372 )

Net loss from continuing operations

(19,644 )

(13,944 )

Loss from discontinued operations, net of income taxes

2,491

1,950

Net loss

$ (22,135 )

$ (15,894 )

Preferred stock dividends

728

687

Accretion of preferred stock, net

(126 )

(127 )

Net loss available to common stockholders

$ (22,737 )

$ (16,454 )

Basic and diluted loss per share information:

Net loss from continuing operations available to common stockholders

$ (3.02 )

$ (2.45 )

Loss from discontinued operations, net of income taxes

(0.37 )

(0.33 )

Net loss available to common stockholders

$ (3.39 )

$ (2.78 )

Weighted-average shares - basic and diluted

6,706,814

5,916,103

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

F-4

Table of Contents

ALY ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(in thousands, except share amounts)

Additional

Retained Earnings

Shares of Common Stock

Paid-In-

(Accumulated

Treasury

Issued

Outstanding

In Treasury

Common Stock

Capital

Deficit)

Stock

Total

Balance as of January 1, 2015

5,511,341

5,511,116

225

$ 6

$ 24,917

$ 3,871

$ (2 )

$ 28,792

Issuance of common stock, net

1,180,073

1,180,073

-

1

4,452

-

-

4,453

Stock compensation expense

15,625

15,625

-

-

100

-

-

100

Preferred stock dividends

-

-

-

-

(687 )

-

-

(687 )

Accretion of preferred stock, net

-

-

-

-

127

-

-

127

Net loss

-

-

-

-

-

(15,894 )

-

(15,894 )

Balance as of December 31, 2015

6,707,039

6,706,814

225

$ 7

$ 28,909

$ (12,023 )

$ (2 )

$ 16,891

Preferred stock dividends

-

-

-

-

(728 )

-

-

(728 )

Accretion of preferred stock, net

-

-

-

-

126

-

-

126

Net loss

-

-

-

-

-

(22,135 )

-

(22,135 )

Balance as of December 31, 2016

6,707,039

6,706,814

225

$ 7

$ 28,307

$ (34,158 )

$ (2 )

$ (5,846 )

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

F-5

Table of Contents

ALY ENERGY SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the Years Ended
December 31,

2016

2015

Cash flows from operating activities:

Net loss

$ (22,135 )

$ (15,894 )

Loss from discontinued operations, net of income taxes

(2,491 )

(1,950 )

Net loss from continuing operations

(19,644 )

(13,944 )

Adjustments to reconcile net loss to net cash provided (used) by operating activities:

Depreciation and amortization

5,299

5,950

Amortization of deferred loan costs

403

389

Reduction in value of assets

17,736

11,405

Debt modification fee

629

-

Stock-based compensation

-

100

Bad debt expense

193

364

Fair value adjustments to contingent payment liability

(372 )

(1,065 )

Gain on indemnification-preferred shares holdback

-

(124 )

Deferred taxes

(7,941 )

(3,273 )

Changes in operating assets and liabilities:

Cash paid upon assumption of net liabilities from discontinued operations

(7 )

-

Receivables

2,768

4,582

Prepaid expenses and other assets

471

217

Accounts payable

(13 )

(2,101 )

Accrued interest and other - Pelican

111

-

Accrued expenses and other liabilities

376

206

Net cash provided by continuing operations

9

2,706

Net cash provided by (used in) discontinued operations

(47 )

1,186

Net cash provided by (used in) operating activities

(38 )

3,892

Cash flows from investing activities:

Purchases of property and equipment

(389 )

(1,427 )

Proceeds from disposal of property and equipment

465

311

Net cash provided by (used in) continuing operations

76

(1,116 )

Net cash provided by discontinued operations

39

13

Net cash provided by (used in) investing activities

115

(1,103 )

Cash flows from financing activities:

Proceeds from issuance of common stock, net

-

3,863

Proceeds from line of credit - Pelican

494

-

Repayment of long-term debt

(348 )

(7,311 )

Payment of contingent payment liability

-

(862 )

Payment of deferred loan costs

-

(24 )

Net cash provided by (used in) continuing operations

146

(4,334 )

Net cash used by discontinued operations

(9 )

(8 )

Net cash provided by (used in) financing activities

137

(4,342 )

Net increase (decrease) in cash, cash equivalents, and restricted cash

214

(1,553 )

Cash, cash equivalents, and restricted cash, beginning of period

497

2,050

Cash, cash equivalents, and restricted cash, end of period

711

497

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

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

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

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

Discontinued Operations

On July 1, 2014, we acquired all of the issued and outstanding stock of Evolution Guidance Systems Inc. (“Evolution”), an operator of Measurement-While-Drilling (“MWD”) downhole tools. From July 2014 through October 2016, Evolution provided directional drilling and MWD services to a variety of exploration and production companies. On October 26, 2016, we abandoned these operations as a part of a restructuring transaction. The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in the United States of America (“U.S. GAAP”). Therefore, the financial results of our directional drilling and MWD services are presented as discontinued operations in the Company’s consolidated financial statements. Assets and liabilities related to the discontinued operations are included in the line item “Assets associated with discontinued operations” and “Liabilities associated with discontinued operations”, respectively, on the consolidated balance sheets for all periods presented. The results of the discontinued operations are included in the line item “Loss from discontinued operations, net of income taxes” on the consolidated statements of operations for all periods presented. Cash flows from discontinued operations appear in the line items “Net cash provided (used) by discontinued operations” on the consolidated statements of cash flows”. See “ Note 15 – Discontinued Operations ” for more information.

Basis of Presentation

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

The consolidated financial statements have been prepared in conformity with U.S. GAAP and include the accounts of Aly Energy Services, Inc. and each of its subsidiaries in the consolidated balance sheets as of December 31, 2016 and 2015 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended. All significant intercompany transactions and account balances have been eliminated upon consolidation.

Reclassifications

Certain reclassifications, including a reclassification related to the adoption of ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs , have been made to prior period consolidated financial statements to conform to the current period presentations. These reclassifications had no effect on our consolidated results of operations or cash flows. See “ Note 6 – Long-term Debt ” for more information.

Subsequent Events

We conducted our subsequent events review through the date these consolidated financial statements were filed with the U.S. Securities and Exchange Commission (“SEC”).

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NOTE 2 — RECENT DEVELOPMENTS

Operational Restructuring

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.

Capital Restructuring

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

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

Unaudited Consolidated Pro Forma Balance Sheet

The following unaudited consolidated pro forma financial information gives effect to the Recapitalization, in a transaction accounted for as both a troubled debt restructuring and extinguishment of debt and other liabilities held as of December 31, 2016. The Company’s capital structure was significantly impacted as a result of the Recapitalization which was completed on January 31, 2017.

The unaudited consolidated pro forma financial information presented herein is based on the historical consolidated financial statements of the Company after giving effect to the Recapitalization and the assumptions and adjustments as described below.

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To complete the transaction, the Company’s directors and principal stockholders formed and organized Pelican. Pursuant to the Recapitalization, Pelican agreed to acquire the Company’s outstanding secured indebtedness with Wells Fargo and its equipment affiliate, 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 December 31, 2016 and any impact is presented in the Company’s historical consolidated financial statements. 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 (see further discussion in “Note 4 – Reduction in Value of Assets and Other Charges” and “Note 15 – Discontinued Operations” ). As part of this transaction and upon satisfaction of such conditions, Tiger extended the forbearance period to December 9, 2016.

The second restructuring event occurred on December 12, 2016 when Pelican acquired the Aly Senior Obligations from Tiger. As the new holder of the Aly Senior Obligations, Pelican further extended the forbearance period for the obligations to January 31, 2017, provided the Company was successful in completing the third and final restructuring event on or before such date.

Effective January 31, 2017, the final restructuring event occurred and the Recapitalization was completed which resulted in the following:

· an exchange of certain of the Company’s outstanding obligations (namely, 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;

· 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 represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017 (liquidation preference of $16.1 million, or $1,000 per share); and

· the formation of a new credit agreement with Pelican (consisting of a $5.1 million term loan and $1.0 million revolving credit facility) with an extended maturity date of December 31, 2018.

The Recapitalization had a significant impact to our capital structure and to our consolidated financial statements, including a significant dilutive effect to those shareholders who held common stock immediately before the transaction was completed. The unaudited consolidated pro forma balance sheet as of December 31, 2016 gives effect to the Recapitalization impact on the capital structure as if it occurred on December 31, 2016.

The unaudited consolidated pro forma balance sheet was prepared in accordance with the regulations of the SEC. The pro forma adjustments reflecting the Recapitalization are based upon troubled debt restructuring (“TDR”) and debt extinguishment accounting in accordance with GAAP and upon the assumptions set forth below.

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

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The unaudited consolidated pro forma balance sheet does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the Recapitalization. The unaudited consolidated pro forma balance sheet has been prepared for illustrative purposes only and is not necessarily indicative of the financial position in future periods or the financial position that would have been realized had the Company completed the Recapitalization during the specified period.

The following unaudited consolidated pro forma balance sheet presents the completion of the Recapitalization as of December 31, 2016. Adjustments have been recorded within the unaudited consolidated pro forma balance sheet to reflect the effects of the Recapitalization 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 long-term debt and other obligations and for the issuance of a new credit facility (in thousands):

Recapitalization Adjustments

As of

TDR Pro

Credit Facility

December 31,

Forma

Pro Forma

2016

Adjustments (i)

Notes

Adjustments (ii)

Notes

Pro Forma

ASSETS

Current assets

Cash and cash equivalents

$ 681

$ -

$ -

$ 681

Restricted cash

30

30

Receivables, net

1,448

1,448

Prepaid expenses and other current assets

496

(31 )

(b)

465

Total current assets

2,655

(31 )

-

2,624

Property and equipment, net

28,226

28,226

Intangible assets, net

4,931

4,931

Other assets

14

14

Total Assets

$ 35,826

$ (31 )

$ -

$ 35,795

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities

Accounts payable

$ 912

$ -

$ -

$ 912

Accrued expenses

1,163

(263 )

(a)

900

Accrued interest and other - Pelican

1,277

(1,277 )

(c)

-

Current portion of long-term debt

1,593

(1,500 )

(a)

(c)

93

Current portion of long-term debt - Pelican

18,880

(18,880 )

(c) (d)

-

Current portion of contingent payment liability

810

(810 )

(a)

-

Total current liabilities

24,635

(2,573 )

(20,157 )

1,905

Long-term debt, net

10

10

Long-term debt, net - Pelican

1,315

4,235

(c) (d)

5,550

Other long-term liabilities

708

708

Total liabilities

26,668

(2,573 )

(15,922 )

8,173

Aly Operating redeemable preferred stock

4,924

(4,924 )

(b)

-

Aly Centrifuge redeemable preferred stock

10,080

(10,080 )

(b)

-

15,004

(15,004 )

-

-

Stockholders' equity (deficit)

Series A Convertible Preferred Stock

-

6,435

(c)

6,435

Common stock of $0.001 par value

7

7

(a)(b)

14

Additional paid-in-capital

28,307

15,164

(a)(b)

9,487

(c)

52,958

Accumulated deficit

(34,158 )

2,375

(a)(b)

(31,783 )

Treasury stock, 225 shares at cost

(2 )

(2 )

Total stockholders' equity (deficit)

(5,846 )

17,546

15,922

27,622

Total liabilities and stockholders' equity (deficit)

$ 35,826

$ (31 )

$ -

$ 35,795

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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 occurring subsequent to December 31, 2016 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 TDR pro forma adjustments in column (i) and in the below table are as follows:

(a) Represents the exchange of subordinated debt and contingent payment liability for common stock resulting in a gain of $2.4 million, or $0.36 per share, on the consolidated statement of operations and recorded as an “Issuance of common stock in exchange for the extinguishment of debt and other liabilities” on the consolidated statement of changes in stockholders’ equity (deficit).

Gain on the Extinguishment of Debt and Other Liabilities

Debt and Other Obligations Extinguished

Common Stock Issued

Gain
Included in
Other Expense(Income)

Subordinated Debt and accrued interest of $1.5 million and $0.3 million, respectively

1,200,000

$1.6 million

Contingent payment liability of $0.8 million

457,494

$0.8 million

(b) 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 consolidated statement of changes in stockholders’ equity (deficit).

Gain on the Extinguishment of Redeemable Preferred Stock

Redeemable Preferred Stock and Other Obligations

Common Stock Issued

Gain

Included in

Additional

Paid-in Capital

Aly Centifuge preferred and accrued dividends of $8.9 million and $1.2 million, respectively

3,039,517

$9.8 million

Aly Operating preferred and accrued dividends of $4.0 million and $0.9 million, respectively

2,414,971

$4.6 million

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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 credit facility pro forma adjustments in column (ii) and in the below table are as follows:

(c) Represents the partial extinguishment and exchange of our Aly Senior Obligations ($16.1 million principal reduction) for shares of our Series A Convertible Preferred Stock resulting in a gain of $9.5 million recorded as an “Issuance of preferred shares in exchange for the extinguishment of debt and other liabilities - Pelican” on the consolidated statement of changes in stockholders’ equity (deficit). The components of Aly Senior Obligations are as follows (in thousands):

Aly Senior Obligations as of December 31, 2016 (c)

Debt and Other Obligations Extinguished

Amount

Credit facility

$ 17,772

Accrued fees and interest on credit facility

1,254

Capital lease obligations

1,930

Accrued interest on capital lease obligations

19

Line of credit - Pelican

498

Total

$ 21,473

(d) Represents the recording of our new credit agreement with Pelican consisting of a $5.1 million term loan and $0.5 million outstanding under a revolving credit facility (which was $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) upon the full extinguishment of our old credit facility.

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NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

· Allowance for doubtful accounts,

· Depreciation and amortization of property and equipment and intangible and other assets,

· Impairment of property and equipment, intangible and other assets, and goodwill,

· Litigation settlement accrual,

· Contingent payment liability, and

· Income taxes.

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

Revenue Recognition

We generate revenue primarily from renting equipment at per-day rates. In connection with certain of our solids control operations, we also provide personnel to operate our equipment at the customer’s location at per-day or per-hour rates. In addition, we may provide equipment transportation and rig-up/rig-down services to the customer at flat rates per job or at an hourly rate. Revenue is recognized when it is realized or realizable and earned and when collectability is reasonably assured.

We present our revenue net of any sales tax charged to our customers which is required to be remitted to local or state governmental taxing authorities. Reimbursements for the purchase of supplies, equipment, personnel services, shipping and other services provided at the request of our customers are recorded as revenue when incurred. The related costs are recorded as operating expenses when incurred.

Major Customers and Concentration of Credit Risk

The Company’s assets that are potentially exposed to concentrations of credit risk consist primarily of cash and trade receivables.

The financial institutions in which the Company transacts business are large, investment grade financial institutions which are “well capitalized” under applicable regulatory capital adequacy guidelines, thereby minimizing its exposure to credit risks for deposits in excess of federally insured amounts.

The majority of the Company’s trade receivables are due from major and independent oil and gas companies operating within the U.S. land-based oil and gas industry. The industry has been, and will likely continue to be, characterized by significant volatility which may negatively impact our customers from time-to-time. The Company evaluates the financial strength of its customers quarterly and provides allowances for probable credit losses when deemed necessary.

During the year ended December 31, 2016, the Company derived revenue from over 50 unique customers of which the top three customers generated approximately $4.8 million, or 43.5%, of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2016 are approximately $0.6 million.

During the year ended December 31, 2015, approximately $9.0 million or 35.4% of our revenue were derived from three customers. One of those customers accounted for 16.2% of our revenue. Amounts due from these customers included in accounts receivable and unbilled receivables as of December 31, 2015 are approximately $1.0 million.

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Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash is defined as cash on-hand and balances in operating bank accounts. We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Restricted cash serves as collateral for the Company’s corporate credit card program.

Accounts Receivable, Unbilled Receivables and Allowance for Doubtful Accounts

Accounts receivable and unbilled receivables are stated at the amount which has been or will be billed to customers. Once billed, customer payments are typically due within 30 days. We provide an allowance for doubtful accounts based upon a review of outstanding receivables, historical collection information, existing economic conditions and specific identification. Provisions for doubtful accounts are recorded when it is deemed probable that the customer will not make the required payments. As of December 31, 2016 and 2015, the allowance for doubtful accounts was approximately $0.6 million and $0.4 million, respectively.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. The cost of property and equipment currently in service less its residual value is depreciated, including property and equipment financed by capital leases, on a straight-line basis over the estimated useful lives of the related assets. A residual value of 20% is used for asset types deemed to have a salvage value. Typically, these assets contain a large amount of iron in their construction. Leasehold improvements are amortized on a straight-line basis over the shorter of their economic lives or the lease term.

Estimated useful lives of property and equipment are as follows:

Machinery and equipment	1 - 20 years
Vehicles, trucks and trailers	5 - 7 years
Office furniture, fixtures and equipment	3 - 7 years
Leasehold improvements	Remaining lease term
Buildings	20 years

When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and the impact of any resulting gain or loss is recognized within “Reduction in value of assets” in the consolidated statement of operations for the period. Maintenance and repairs, which do not improve or extend the life of the related assets, are charged to expense when incurred. Refurbishments and renewals are capitalized when the value of the equipment is enhanced for an extended period.

Reduction in Value of Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is assessed by a comparison of the carrying amount of such assets to their fair value calculated, in part, by the estimated undiscounted future cash flows expected to be generated by the assets. Cash flow estimates are based upon, among other things, historical results adjusted to reflect the best estimate of future market rates, utilization levels, and operating performance. Estimates of cash flows may differ from actual cash flows due to, among other things, changes in economic conditions or changes in an asset’s operating performance. The Company’s assets are grouped by reporting unit for the impairment testing, which represents the lowest level of identifiable cash flows. If the asset grouping’s fair value is less than the carrying amount of those items, impairment losses are recorded in the amount by which the carrying amount of such assets exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less estimated costs to sell. The net carrying value of assets not fully recoverable is reduced to fair value. The estimate of fair value represents the Company’s best estimate based on industry trends and reference to market transactions and is subject to variability. The oil and gas industry is cyclical and estimates of the period over which future cash flows will be generated, as well as the predictability of these cash flows, can have a significant impact on the carrying values of these assets and, in periods of prolonged down cycles, may result in impairment charges. Due to the steep downturn in the oilfield services industry which began in late 2014 and continued throughout much of 2016, we evaluated recoverability quarterly. For each quarter, our estimated undiscounted net cash flow exceeded the carrying amount of the assets, and, as such, no impairment losses were recognized; however, in the quarters ended June 30, 2016 and September 30, 2016, we recognized an impairment in connection with the Recapitalization and an impairment in connection with our discontinued operations. See “ Note 4 – Reduction in Value of Assets and Other Charges” and “ Note 15 – Discontinued Operations“ for a further discussion of the reduction in value recorded during 2016 and 2015.

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Intangible Assets

The Company’s intangible assets with finite lives include customer relationships, trade names, non-compete agreements, and various other contractual agreements. The value of customer relationships is estimated using the income approach, specifically the excess earnings method. The excess earnings method consists of discounting to present value the projected cash flows attributable to the customer relationships, with consideration given to customer contract renewals, the importance or lack thereof of existing customer relationships to the Company’s business plan, income taxes and required rates of return. The value of trade names is estimated using the relief-from-royalty method of the income approach. This approach is based on the assumption that in lieu of ownership, a company would be willing to pay a royalty in order to exploit the related benefits of this intangible asset. For contractual agreements, the specific terms of the agreements were utilized to determine the fair value attributable to the arrangement.

The Company amortizes intangible assets based upon a straight-line basis because the pattern of economic benefits consumption cannot otherwise be reliably estimated. Estimated useful lives of intangible assets are as follows:

Customer relationships	2 - 10 years
Tradename	4 - 10 years
Non-compete	4 - 5 years
Supply agreements	4 years

Intangible assets subject to amortization are reviewed for impairment and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For instance, a significant change in business climate or a loss of a significant customer, among other things, may trigger the need for an impairment test of intangible assets. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. See “ Note 4 – Reduction in Value of Assets and Other Charges” and “ Note 15 – Discontinued Operations“ for a further discussion of the reduction in value recorded during 2016 and 2015.

Goodwill

The carrying amount of goodwill is tested annually for impairment in the fourth quarter and whenever events or circumstances indicate its carrying value may not be recoverable. Impairment testing is conducted at the reporting unit level.

Our detailed impairment testing involves comparing the fair value of our reporting units to their respective carrying values, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale. If the fair value exceeds carrying value, then it is concluded that no goodwill impairment has occurred. If the carrying value exceeds the fair value, a second step is required to measure possible goodwill impairment loss. The second step includes valuing our tangible and intangible assets and liabilities as if we had been acquired in a business combination. Then, the implied fair value of our goodwill is compared to the carrying value of that goodwill. If the carrying value of our goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss in an amount equal to the excess, not to exceed the carrying value.

Our detailed impairment analysis employs the use of discounted cash flow models. Significant management judgment is necessary to evaluate the impact of operating and macroeconomic changes on our business. Critical assumptions include projected revenue growth, gross profit margins, selling, general and administrative expenses, working capital fluctuations, capital expenditures, discount rates and terminal growth rates. We use the capital asset pricing model to estimate the discount rates used in the discounted cash flow models.

During the fourth quarter of 2015, we completed goodwill impairment testing. A severe industry downturn in 2015 due to sustained price depression for oil and natural gas, among other macroeconomic factors, negatively impacted utilization of our equipment and pricing for our products and services throughout the year. The cash flow model utilized in our detailed impairment analysis reflected our belief that we would continue to face significant challenges over the next twelve to eighteen months. The resulting carrying value was in excess of our fair value and we determined that all of the goodwill associated with the acquisition of Austin Chalk and the United Acquisition in the amount of $11.1 million was fully impaired. As of December 31, 2016, there was no goodwill recorded. See also “ Note 15 – Discontinued Operations“ for discussion of goodwill associated with discontinued operations.

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Income Taxes

We account for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In assessing the likelihood and extent that deferred tax assets will be realized, consideration is given to projected future taxable income and tax planning strategies. A valuation allowance is recorded when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

We recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority. Previously recognized tax positions are reversed in the first period in which it is no longer more-likely-than-not that the tax position would be sustained upon examination.

Income tax related interest and penalties, if applicable, are recorded as a component of the provision for income tax expense. However, there were no amounts recognized relating to interest and penalties in the consolidated statements of operations for the years ended December 31, 2016 and 2015. We had no uncertain tax positions as of December 31, 2016 and 2015.

Contingent Payment Liability

The aggregate consideration for the United Acquisition of $24.5 million included contingent consideration of an estimated fair value on the acquisition date of $3.5 million. The contingent consideration consisted of up to three future cash payments to the sellers in an amount equal to 5% of the gross revenue of the business acquired for each of the twelve-month periods ending on March 31, 2015, 2016, and 2017; provided, however, that the aggregate consideration would not exceed $5.0 million.

On May 31, 2015, we made the first cash payment of $0.9 million, or 5% of the gross revenue of the business acquired for the twelve-month period ended March 31, 2015. We did not make the second cash payment of $0.7 million, or 5% of gross revenue of the business acquired for the twelve-month period ended March 31, 2016, which was due on May 31, 2016.

On January 31, 2017, in connection with the Recapitalization (see further discussion in “ Note 2 – Recent Developments ”), the sellers converted both the second payment obligation of $0.7 million, which was past due, and the estimated future obligation of $0.1 million, or 5% of estimated gross revenue of the business for the twelve-month period ended March 31, 2017, into 457,494 shares of common stock. This conversion was accounted for as a trouble debt restructuring, see further details in “ Note 2 – Recent Developments” .

Fair Value Measurements

We measure the fair value of our liability for contingent payments on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, we are required to provide disclosure and categorize assets and liabilities measured at fair value into one of three distinct levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. The fair value hierarchy is defined as follows:

Level 1—Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

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The fair value of the liability for contingent payments represents the sum of (i) the known required payments for periods which have ended and (ii) the present value of projected required payments for future periods based upon our internal model and projections. Due to the industry downturn which began in late 2014 and continued through much of 2016, both actual and projected utilization levels and pricing were significantly lower than the peaks experienced in 2014. Consequently, both the actual revenue and the projected revenue on which the payments are based declined significantly during the years ended December 31, 2016 and 2015 resulting in decreases to the fair value of the liability being recorded in both years.

As of December 31, 2016, the fair value of the liability for contingent payments included (i) the past due payment for the year ended March 31, 2016, (ii) the calculated payment for the nine months ended December 31, 2016, and (iii) the fair value of the liability for the estimated additional cash payment due for the three months ended March 31, 2017.

The following table provides a roll forward of the fair value of our liability for contingent payments which includes Level 3 measurements (in thousands):

For the Years Ended December 31,

2016

2015

Fair value, beginning of period

$ 1,182

$ 3,109

Changes in fair value

(372 )

(1,065 )

Payments

-

(862 )

Fair value, end of period

$ 810

$ 1,182

Stock-Based Compensation

From time-to-time, we issue time-based vesting and performance-based vesting stock options, time-based vesting and performance-based vesting restricted stock units, and restricted stock awards to our employees as part of those employees’ compensation and as a retention tool for non-employee directors. We calculate the fair value of the awards on the grant date and amortize that fair value to compensation expense ratably over the vesting period of the award, net of estimated and actual forfeitures. The grant date fair value of our restricted stock awards and restricted stock units is determined using our stock price on the grant date. The fair value of our stock option awards are estimated using a Black-Scholes fair value model. The valuation of our stock options requires us to estimate the expected term of award, which we estimate using the simplified method, as we do not have sufficient historical exercise information. Additionally, the valuation of our stock option awards is also dependent on historical stock price volatility. In view of our being listed on the Over-the-Counter Bulletin Board, volatility is calculated based on historical stock price volatility of our peer group with a lookback period equivalent to the expected term of the award. Fair value of performance based stock options and restricted stock units is estimated in the same manner as our time-based awards and assumes that performance goals will be achieved and the awards will vest. If the performance based awards do not vest, any previously recognized compensation costs will be reversed. We record share-based compensation as a component of general and administrative or direct operating expense based on the role of the applicable individual. Historically we have not recognized any compensation expense for share-based compensation; however, under our new plan, we anticipate compensation costs for any issued awards. See further discussion in “ Note 12 – Stock-Based Compensation” .

Earnings per Share

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

During 2016 and 2015, the Company incurred losses from continuing operations; therefore, the impact of any incremental shares would be anti-dilutive.

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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.

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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.

NOTE 4 — REDUCTION IN VALUE OF ASSETS AND OTHER CHARGES

During 2016 and 2015, the Company recorded $17.7 million and $11.4 million in expense related to reduction in value of assets, respectively. See also “ Note 15 – Discontinued Operations ” for a discussion of the reduction in value of assets associated with discontinued operations.

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

For the Years Ended

December 31,

2016

2015

Reduction in value of property and equipment:

Impairment in connection with Recapitalization

$ 15,562

$ -

Loss on disposal of assets

1,087

262

Reduction in value of intangibles

1,087

-

Impairment of goodwill

-

11,143

Total reduction in value of assets

$ 17,736

$ 11,405

Impairment of Property and Equipment – Recapitalization

During 2016, the Company recorded an impairment charge of $15.6 million as part of the Recapitalization in which idle and underutilized equipment with a net book value of $18.2 million was transferred to Tiger as an inducement to provide bridge financing. Among other things, the Company received an extended forbearance agreement and a reduction in debt of $2.0 million as consideration for the sale of these assets (see below “Debt Modification Fee – Recapitalization” for further discussion).

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Loss on Disposal of Assets

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

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

During 2015, the Company recorded a loss on the disposal of property and equipment of $0.3 million when the Company sold idle and underutilized equipment and vehicles with a net book value of $0.6 million for cash proceeds of approximately $0.3 million. Due to the depressed market for oilfield services, these assets were sold for proceeds significantly less than the net book value resulting in higher losses than normal. These assets were sold within the basket of permitted asset sales, as defined in our credit facility, and the Company used the proceeds to fund working capital needs created by the significant deterioration in the industry.

Impairment of Goodwill

During 2015, the Company determined that the implied fair value of the goodwill for its surface rental and solids control reporting units was less than its carrying value and the Company recorded an aggregate $11.1 million impairment charge. The reduction in value of goodwill in these reporting units was primarily driven by the significant deterioration of market conditions during 2015 combined with a forecast as of December 31, 2015 which did not indicate a timely recovery sufficient to support the carrying values of goodwill. As of December 31, 2016 and 2015, there was no goodwill remaining on the consolidated balance sheets.

Reduction in Value of Intangibles

During 2016, the Company recorded $1.1 million reduction in value of intangibles which consisted of a $0.5 million reduction in an intangible associated with a non-compete which management determined was non-enforceable and a $0.6 million reduction in an intangible associated with a supply agreement which had no value subsequent to the liquidation of the supplier under bankruptcy proceedings. As of December 31, 2016, these intangibles were recorded with no value on the consolidated balance sheet. As of December 31, 2015, the non-compete and the supply agreement were recorded at $0.7 million and $1.0 million, respectively, on the consolidated balance sheet.

Debt Modification Fee – Recapitalization

In connection with our transfer of property and equipment to Tiger, we received certain modifications to our credit facility, including a $2.0 million reduction in our principal outstanding on the Aly Senior Obligations and an extension of the forbearance period to December 9, 2016. We recorded a debt modification fee of $0.6 million as the property and equipment transferred to Tiger had a fair value exceeding the reduction of our obligations.

Professional Fees - Recapitalization

During 2016, in connection with forbearance agreements and other negotiations with its former lender, Wells Fargo, and in connection with the Recapitalization, the Company recorded an aggregate of $0.5 million of charges, primarily for professional fees, which are included in selling, general and administrative expenses on the consolidated statement of operations. The charges include $0.2 million of expenses the Company incurred for financial advisors that Wells Fargo required the Company to retain and $0.1 million of legal and other professional fees. In addition, the charges in 2016 include $0.2 million of expenses the Company incurred for professionals engaged by Wells Fargo whom the Company was required to pay under the terms of our credit facility. On December 12, 2016, these fees were assumed by Pelican and, on January 31, 2017, 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.

Severance Expense – Operational Restructuring

During 2016 and 2015, the Company recorded $0.5 million and $0.3 million, respectively, in charges relating to severance due to the significant downturn in the industry. In 2016, we ceased making cash severance payments due to our limited liquidity and we do not know when or if we will be able to satisfy the remaining outstanding severance claims. As such, the accrued severance liability balance of $0.7 million as of December 31, 2016, which includes a liability of $0.2 million assumed by Aly Energy related to discontinued operations, is included in other long-term liabilities on the consolidated balance sheet. As of December 31, 2015, an accrued severance liability of $0.1 is included in accrued expenses on the consolidated balance sheet.

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NOTE 5 — LONG-LIVED ASSETS

Property and Equipment

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

As of December 31,

2016

2015

Machinery and equipment

$ 31,541

$ 53,677

Vehicles, trucks & trailers

4,523

5,699

Office furniture, fixtures and equipment

544

544

Leasehold improvements

203

213

Buildings

212

212

37,023

60,345

Less: Accumulated depreciation and amortization

(8,807 )

(8,758 )

28,216

51,587

Assets not yet placed in service

10

202

Property and equipment, net

$ 28,226

$ 51,789

See “ Note 4 – Reduction in Value of Assets and Other Charges ” for further discussion on asset disposals during the years ended December 31, 2016 and 2015.

Depreciation and amortization expense related to property and equipment for the years ended December 31, 2016 and 2015 was $3.9 million and $4.4 million, respectively.

Intangible Assets

Intangible assets consist of the following (in thousands):

Customer Relationships

Tradename

Non-Compete

Supply Agreements

Total

As of December 31, 2016:

Cost

$ 5,323

$ 2,174

$ 492

$ -

$ 7,989

Less: Accumulated amortization

(1,900 )

(749 )

(409 )

-

(3,058 )

Net book value

$ 3,423

$ 1,425

$ 83

$ -

$ 4,931

As of December 31, 2015:

Cost

$ 5,322

$ 2,174

$ 1,651

$ 1,686

$ 10,833

Less: Accumulated amortization

(1,367 )

(531 )

(806 )

(720 )

(3,424 )

Net book value

$ 3,955

$ 1,643

$ 845

$ 966

$ 7,409

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Estimated amortization expense for the next five years and thereafter is as follows (in thousands):

For the Year Ending December 31,

2017

$ 831

2018

750

2019

750

2020

750

2021

750

Thereafter

1,100

$ 4,931

Total amortization expense for the years ended December 31, 2016 and 2015 was approximately $1.4 million and $1.6 million, respectively.

See further discussion of reduction in value of intangibles during the years ended December 31, 2016 and 2015 in “ Note 4 – Reduction in Value of Assets and Other Charges” and “ Note 15 – Discontinued Operations” .

NOTE 6 — LONG-TERM DEBT

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

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

· Term loan – In 2014, our original principal balance on the term loan was $25.0 million; this loan required principal payments each quarter of $1.3 million.

· Delayed draw term loan – In 2014, our original availability under the delayed draw term loan was $5.0 million; the full availability of the loan was reached in May 2015 and beginning in June 2015 the principal balance of $5.0 required scheduled principal payments each quarter of $0.3 million.

· Revolving credit facility – In 2014, our original availability under the revolving credit facility was $5.0 million; however, after subsequent amendments, our availability was reduced to $1.0 million as of December 31, 2015 and then to zero as of December 31, 2016. There were no outstanding borrowings under the revolving credit facility as of December 31, 2016 and 2015.

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

(i) the Wells Fargo’s Prime Rate, plus a margin of 1.75%,

(ii) the Federal Funds Rate plus 0.5%, plus a margin of 1.75% or

(iii) the one-month LIBOR rate on such day plus 1.00%, plus a margin of 1.75%.

Beginning in July 2016, our rate increased to the default rate of 7.25% in connection with the subsequent amendments and forbearance agreements. For the years ended December 31, 2016 and 2015, interest rates on our borrowings under the Credit Facility ranged from 5.25% to 7.25% and 4.24% to 5.25%, respectively.

The obligations under the Credit Facility were guaranteed by all of our subsidiaries and secured by substantially all of our assets. The credit agreement contained customary events of default and covenants including restrictions on our ability to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets.

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

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

(i) waived our covenant default as of June 30, 2015;

(ii) deferred all further principal payments on outstanding borrowings under the Credit Facility until March 31, 2017;

(iii) revised certain financial covenants to facilitate our compliance with such covenants during the downturn in the oilfield services industry; and,

(iv) reduced the size of the revolving credit facility to $1.0 million.

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

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

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

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

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

Effective December 12, 2016, the Aly Senior Obligations were acquired by Pelican. See further discussion in “ Note 7 – Long-term Debt – Pelican ”.

Subordinated Note Payable

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

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

In connection with the Recapitalization, the Subordinated Note Payable was converted into 1,200,000 common shares of the Company. This conversion was accounted for as a trouble debt restructuring, see further details in “ Note 2 – Recent Developments” . As of January 31, 2017, there were no further obligations due under the Subordinated Note Payable.

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Equipment Financing and Capital Leases

We finance the purchase of certain vehicles and equipment using long-term equipment loans and using non-cancelable capital leases. Repayment occurs over the term of the loan or lease, typically three to five years, in equal monthly installments which include principal and interest.

Effective June 30, 2016, the Company entered into an amendment for each capital lease outstanding with Wells Fargo Equipment Finance, aggregating $1.9 million, whereby the maturity date was extended by six months and principal payments suspended for a period of six months.

Effective October 26, 2016, our equipment financing and capital leases with Wells Fargo Equipment Finance were included in the Aly Senior Obligations which were acquired by Tiger, then subsequently acquired on December 12, 2016 by Pelican. See further discussion in “ Note 7 – Long-term Debt – Pelican ”.

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

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

Deferred Loan Costs

Costs incurred to obtain financing are capitalized and amortized on a straight-line basis over the term of the loan, which approximates the effective interest method. The amortization of these costs is classified within interest expense on the accompanying consolidated statements of operations and was approximately $0.3 million and $0.4 million for the years ended December 31, 2016 and 2015, respectively. During 2016, in connection with various amendments to our credit facility and in connection with the Recapitalization, we incurred an aggregate charge of $0.1 million, classified within interest expense, to write-off all remaining unamortized deferred loan costs. There were no new deferred loan costs recorded in connection with the Recapitalization.

As a result of the adoption of Accounting Standards Update (“ASU”) 2015-03, “Simplifying the Presentation of Debt Issuance Costs” on January 1, 2016, the Company reclassified debt issuance costs of $0.8 million and retrospectively reclassified debt issuance costs of $0.4 million as a reduction in the carrying amount of the related Credit Facility as of December 31, 2016 and December 31, 2015, respectively.

There were no deferred loan costs recorded on the consolidated balance sheet as of December 31, 2016. Deferred loan costs and accumulated amortization were $1.0 million and $0.6 million, respectively, as of December 31, 2015.

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

December 31, 2016

December 31, 2015

Current

Long-Term

Current

Long-Term

Credit facility

Term loan

$ -

$ -

$ 15,573

$ -

Delayed draw term loan

-

-

4,500

-

Subordinated note payable

1,500

-

-

1,500

Equipment financing and capital leases

93

10

683

1,685

1,593

10

20,756

3,185

Less: Deferred loan costs, net

-

-

(403 )

-

Total

$ 1,593

$ 10

$ 20,353

$ 3,185

As of December 31, 2016 and December 31, 2015, we had approximately $0.1 million and $2.4 million outstanding under equipment financing and capital leases, respectively. The gross amount of equipment held under capital leases was approximately $0.3 million and $3.5 million as of December 31, 2016 and 2015, respectively. Accumulated amortization of that same equipment was $0.2 million and $1.0 million as of December 31, 2016 and 2015, respectively.

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NOTE 7 — 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 accrued 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. The agreement also waived the requirement, previously imposed by wells Fargo, to continue retaining the CRO.

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, make capital expenditures, 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.

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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):

December 31, 2016

Current

Long-Term

Credit facility

Term loan

$ 13,339

$ -

Delayed draw term loan

4,433

-

Line of credit - Pelican

494

-

Equipment financing and capital leases

614

1,315

18,880

1,315

Less: Deferred loan costs, net

-

-

Total

$ 18,880

$ 1,315

As of December 31, 2016, we had $1.9 million outstanding under equipment financing and capital leases with Pelican. The gross amount of equipment held under such equipment financing and capital leases and related accumulated amortization was $3.3 million and $1.6 million, respectively, as of December 31, 2016. There were no borrowings outstanding under equipment financing and capital leases with Pelican during 2015.

The completion 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” in the Recapitalization and Unaudited Consolidated Pro Forma Balance Sheet sections.

NOTE 8 — INCOME TAXES

The provision for income taxes consists of the following (in thousands):

For the Years Ended
December 31,

2016

2015

Current provision:

Federal

$ -

$ -

State

33

(99 )

Total current provision

33

(99 )

Deferred benefit:

Federal

(7,298 )

(2,857 )

State

(639 )

(416 )

Total deferred benefit

(7,937 )

(3,273 )

Provision for income taxes

$ (7,904 )

$ (3,372 )

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The following table reconciles the statutory tax rates to our effective tax rate:

For the Years Ended
December 31,

2016

2015

Federal statutory rate

34.00 %

34.00 %

State taxes, net of federal benefit

1.85 %

1.35 %

Goodwill impairment

-0.33
%

-21.88
%

Change in valuation allowance

-8.60
%

0.00 %

Other

1.79 %

6.01 %

Effective income tax rate

28.71 %

19.48 %

We currently project a loss for the year ended December 31, 2016, for federal income tax purposes and in certain state income tax jurisdictions. As of December 31, 2016, we had a gross net operating loss (“NOL”) carryforward for U.S. federal income tax purposes of approximately $29.5 million. This NOL will begin to expire in 2033 if not utilized. We will carryforward the net federal NOL of approximately $10.0 million. We also have state NOL carryforwards that will affect state taxes of approximately $0.9 million as of December 31, 2016. State NOLs begin to expire in 2034. Carryback provisions are not allowed by all states, accordingly the state NOLs also give rise to a deferred tax asset.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets. Management considers cumulative losses and other negative evidence as well as positive evidence such as the scheduled reversal of deferred tax liabilities, future profitability, and tax planning strategies in making this assessment. From its evaluation, the Company has concluded that based on the weight of available evidence, it is not more likely than not to realize the benefit of its deferred tax assets. Therefore, the Company established a valuation allowance of $2.4 million for the year ended December 31, 2016. Should the factors underlying management’s analysis change, future valuation adjustments to net deferred tax assets may be necessary. The benefit from any reversal of the valuation allowance will be charged directly to income tax expense. As of December 31, 2015, no valuation allowance was necessary.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income taxes. Components of our deferred income taxes as of December 31, 2016 and 2015 are as follows (in thousands):

For the Years Ended
December 31,

2016

2015

Deferred tax assets:

Allowance for doubtful accounts

$ 191

$ 148

Net operating loss

10,024

5,514

Start-up costs

17

18

State net operating loss, net of federal benefit

604

344

Accrued compensation

220

42

Charitable contributions and other

26

19

Total deferred tax assets

11,082

6,085

Deferred tax liabilities:

Prepaid assets

32

28

Property and equipment

7,334

11,539

Intangibles

1,208

2,013

State deferreds, net of federal benefit

139

446

Total deferred tax liabilities

8,713

14,026

Net deferred tax assets (liabilities) before valuation allowance

2,369

(7,941 )

Valuation allowance

(2,369 )

-

Net deferred tax liabilities after valuation allowance

$ -

$ (7,941 )

We follow accounting guidance under ASC 740-10 Income Taxes related to uncertainty in income tax positions, which clarifies the accounting and disclosure requirements for uncertainty in tax positions. We assessed our filing positions in all significant jurisdictions where we are required to file income tax returns for all open tax years and determined no liability existed or there was no liability for uncertain positions. Our major taxing jurisdictions include the U.S. federal income taxes and the Texas franchise tax. Our federal tax returns remain open for tax years 2012 forward and our state tax returns remain open for tax years 2011 forward. None of our federal or state income tax returns are currently under examination by the Internal Revenue Service or state authorities.

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NOTE 9 — COMMITMENTS AND CONTINGENCIES

Litigation

We are subject to certain claims arising in the ordinary course of business. Management does not believe that any claims will have a material adverse effect on our financial position or results of operations.

The Company entered into certain employment agreements in connection with the acquisition of United and Evolution in 2014 which provided for specified severance obligations of the Company in the event of a termination of employment of the subject employees. The Company also entered into a similar employment agreement in 2015 in connection with the recruitment of an additional employee for the solids control operations. During 2015 and 2016, the employment of these individuals terminated, and the Company did not pay the severance obligations that were contemplated by the employment agreements in the event that the cessation of employment would be determined to have been a termination by the Company “without cause.” As of December 31, 2016, the aggregate unpaid severance obligation under these agreements was approximately $0.7 million.

Contractual Commitments

We have numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. We lease land, facilities and equipment from non-affiliates. Certain of these leases extend to 2020.

Operating Leases

We lease certain property and equipment under non-cancelable operating leases. The terms of our operating leases generally range from one to five years. Lease expense under all operating leases totaled approximately $0.4 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, the future minimum lease payments under non-cancelable operating leases were as follows (in thousands):

Year Ending December 31,

2017

$ 190

2018

73

2019

55

2020

5

$ 323

NOTE 10 — REDEEMABLE PREFERRED STOCK

Two of our subsidiaries have 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 acquisition of United (“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.

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Aly Operating Redeemable Preferred Stock

As part of the acquisition of Austin Chalk, Aly Operating agreed to issue up to 4 million shares of Aly Operating Redeemable Preferred Stock, with a par value of $0.01, to the seller, with a fair value and liquidation value of $3.8 million and $4.0 million, respectively. The preferred stock was valued as of the date of acquisition by discounting the sum of (i) the liquidation value at issuance and (ii) the future cumulative accrued dividends as of the date of optional redemption for a lack of marketability.

The Aly Operating Redeemable Preferred Stock was entitled to a cumulative paid-in-kind dividend of 5% per year on its liquidation preference, compounded quarterly. Aly Operating was not required to pay cash dividends.

The following table describes the changes in Aly Operating Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2016 and 2015:

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, 2015

$ 4,382

4,000,000

$ 4,458

Accrued dividends

227

-

227

Accretion

38

-

-

December 31, 2015

4,647

4,000,000

4,685

Accrued dividends

239

-

239

Accretion

38

-

-

December 31, 2016

$ 4,924

4,000,000

$ 4,924

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

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

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.

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The following table describes the changes in the Aly Centrifuge Redeemable Preferred Stock (in thousands, except for shares) for the years ended December 31, 2016 and 2015:

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, 2015

$ 9,584

9,000

$ 9,254

Holdback adjustment

(124 )

(124 )

(124 )

Accrued dividends

460

-

460

Amortization

(165 )

-

-

December 31, 2015

9,755

8,876

9,590

Accrued dividends

489

-

489

Amortization

(164 )

-

-

December 31, 2016

$ 10,080

8,876

$ 10,079

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

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

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

NOTE 11 — 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, which aggregated $21.5 million as of December 31, 2016 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 Aly Energy Convertible Preferred Stock that represented approximately 80% of our common stock, or 53,628,842 common shares, on a fully diluted basis as of January 31, 2017. 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.

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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.

See “ Note 7 – Long-term Debt – Pelican” and “ Note 2 – Recent Developments” for details of the Aly Senior Obligations, Recapitalization and Unaudited Consolidated Pro Forma Balance Sheet.

Other Related Party Transactions

One of our directors, Tim Pirie, who was 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 of which approximately $0.2 million would be allocable to Mr. Pirie. On January 31, 2017, in connection with the Recapitalization, the aggregate contingent payment liability was converted into 457,494 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 326,834 shares. See further discussion in “ Note 2 – Recent Developments” and “ Note 3 – Summary of Significant Accounting Principles (Contingent Payment Liability)”.

As part of the acquisition price of United, the sellers also received Aly Centrifuge redeemable preferred stock. On January 31, 2017, the outstanding Aly Centrifuge redeemable preferred stock and accrued PIK dividends were converted into 3,039,517 shares of the Company’s common stock of which Mr. Pirie controls all of the voting rights to 593,815 shares. See further discussion in “ Note 2 – Recent Developments” and “ Note 10 – Redeemable Preferred Stock (Aly Centrifuge Redeemable Preferred Stock)”.

We issued 82,649 shares of our common stock during the year ended December 31, 2015, to one of our directors in respect of his arrangement of certain issuances of common stock to non-U.S. investors.

NOTE 12 — STOCK-BASED COMPENSATION

Stock-Based Payments

We issued 15,625 shares of our stock during the year ended December 31, 2015 as part of compensation to one of our former employees in accordance with his employment agreement. In connection with this issuance, we recognized stock-based compensation expense of $0.1 million for the year ended December 31, 2015.

Stock Options

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

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

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

As of December 31, 2016 and 2015, options to purchase 242,507 and 330,111 common shares under the Plan were outstanding and $0.3 million and $0.5 million of total unrecognized compensation cost related to non-vested stock option awards, respectively. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options were granted during the years ended December 31, 2016 and 2015. No options were vested as of December 31, 2016 and 2015. During the year ended December 31, 2016, forfeited options totaled 87,604. No forfeitures occurred in the year ended December 31, 2015.

NOTE 13 — STOCKHOLDERS’ EQUITY (DEFICIT)

Common Shares

Authorized common shares total 25,000,000 with a par value of $0.001 per share, of which, 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2016 and 6,707,039 and 6,706,814 were issued and outstanding, respectively, as of December 31, 2015. Common stock held in treasury as of December 31, 2016 and 2015 were 225 shares.

On January 12, 2015, we issued 50,000 shares of our common stock in a private placement at a price of $11.00 per share for gross proceeds of approximately $0.6 million. In connection with the private placement we incurred approximately $37,000 in issuance costs which have been netted against proceeds in the consolidated statement of changes in stockholders’ equity (deficit).

On June 24, 2015, we initiated a private offering to accredited investors. On September 30, 2015, we closed the offering and issued 1,047,424 shares of common stock to multiple accredited investors at a price of $3.20 per share.

We issued 82,649 shares of our common stock during the year ended December 31, 2015, to one of our directors in respect of his arrangement of certain issuances of common stock to non-U.S. investors.

Preferred Shares

Authorized preferred shares total 10,000,000 with a par value of $0.001 per share, of which, none were issued and outstanding as of December 31, 2016 and 2015.

As a result of the Recapitalization, the Company allocated 20,000 of its authorized shares from available authorized preferred shares to Series A Convertible Preferred Stock and issued 16,092 shares on January 31, 2017. The Series A Convertible Preferred Stock have a par value of $0.001 per share, a face value of $16.1 million, which has no determinable market value as of January 31, 2017. The conversion feature provides that each Series A Preferred share shall be convertible into 3332.64 common shares at the option of the shareholder and retains a liquidation preference equal to $1,000 per share. All shares vote on an as if converted basis, whereby Pelican, who owns 100% of the Series A Convertible Preferred Stock, controls the substantial majority of votes of Aly Energy (See further discussion in “ Note 11 – Controlling Shareholder and Other Related Party Transactions”).

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NOTE 14 — SUPPLEMENTAL CASH FLOW INFORMATION

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

For the Years Ended
December 31,

2016

2015

Supplemental disclosure of cash flow information:

Cash paid for interest

$ 973

$ 1,590

Cash paid for interest - discontinued operations

1

1

Cash paid for income taxes, net

2

109

Non-cash investing and financing activities:

Purchase of equipment through a capital lease obligation

$
-

$
1,068

Accretion of preferred stock liquidation preference, net

126

127

Paid-in-kind dividends on preferred stock

728

687

Common shares issued for transaction cost of equity raise

-

590

Exchange of property and equipment for reduction in debt in connection with Recapitalization

2,000

-

Principal payments financed through disposition of assets

301

-

Assumption of Aly Senior Obligations by Pelican in connection with the Recapitalization

20,867

-

NOTE 15 — DISCONTINUED OPERATIONS

On October 26, 2016, we abandoned the operations of Evolution, our directional drilling and MWD business, as a part of the Recapitalization (See further discussion in “ Note 2 – Recent Developments”). The abandonment of these operations meets the criteria established for recognition as discontinued operations under generally accepted accounting principles in U.S. GAAP.

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

For the Years Ended
December 31,

2016

2015

Revenue

$ 250

$ 3,618

Expenses:

Operating expenses

124

3,239

Depreciation and amortization

572

780

Selling, general and administrative expenses

222

1,713

Reduction in value of assets

2,591

3

Total expenses

3,509

5,735

Loss from discontinued operations

(3,259 )

(2,117 )

Interest expense, net

1

2

Loss from discontinued operations before income taxes

(3,260 )

(2,119 )

Income tax benefit

(769 )

(169 )

Loss from discontinued operations, net of income taxes

$ (2,491 )

$ (1,950 )

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The reduction in value of assets included in the loss from discontinued operations consisted of the following (in thousands):

For the Years Ended
December 31,

2016

2015

Reduction in value of property and equipment:

Impairment in connection with Recapitalization

$ 1,676

$ -

Loss on disposal of assets

-

3

Reduction in value of intangibles

651

-

Impairment of goodwill

264

-

Total reduction in value of assets

$ 2,591

$ 3

On October 26, 2016, in connection with the Recapitalization and the abandonment of the Evolution assets, we recorded an impairment of property and equipment. The value remaining for intangibles and goodwill associated with these discontinued operations was reduced to zero.

For the year ended December 31, 2015, the loss from discontinued operations includes $0.3 million in charges relating to severance. As of December 31, 2015, the remaining unpaid severance liability of $0.2 million is included in liabilities associated with discontinued operations on the consolidated balance sheet. The liability was assumed by Aly Energy on December 31, 2016 and is included in other long-term liabilities on the consolidated balance sheet as of December 31, 2016.

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

As of
December 31,

2015

Current assets

$ 222

Property and equipment, net

1,933

Intangible assets, net

1,004

Goodwill

264

Other assets

5

Total assets

3,428

Current liabilities

436

Deferred tax liabilities

754

Other liabilities

21

Total liabilities

1,211

Net assets

$ 2,217

By December 31, 2016, the abandonment of these operations and sell-off of the remaining assets was completed with approximately $0.2 million of remaining liabilities assumed by the continuing operations of the Company.

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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, under supervision and with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e). Based upon this evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of December 31, 2016, because of the material weaknesses in our internal control over financial reporting (“ICFR”) described below, our disclosure controls and procedures were not effective.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that required information to be disclosed in our reports filed or submitted under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that required information to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 14d-14(f). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

All internal control systems, no matter how well designed, have inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can only provide reasonable assurance with respect to financial reporting reliability and financial statement preparation and presentation. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making the assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework 2013. Based on its assessment, management concluded that, as of December 31, 2016, our internal control over financial reporting was not effective and that material weaknesses in ICFR existed as more fully described below.

As defined by Auditing Standard No. 5, “An Audit of Internal Control Over Financial Reporting that is Integrated with an Audit of Financial Statements” established by the Public Company Accounting Oversight Board (“PCAOB”), a material weakness is a deficiency or combination of deficiencies that results in more than a remote likelihood that a material misstatement of annual or interim financial statements will not be prevented or detected. In connection with the assessment described above, management identified the following control deficiencies that represent material weaknesses as of December 31, 2016:

1) Lack of an independent audit committee. This factor may be counter to corporate governance practices as defined by the various stock exchanges and may lead to less supervision over management;

2) Insufficient written policies and procedures, and personnel, for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements, specifically to address technical accounting around complex transactions;

3) Control over information technology applications and the processing of transactions, specifically segregation of duties and elevated access privileges; and

4) Controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements or other required reports filed or submitted under the Securities Exchange Act.

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Management’s Remediation Initiatives

As of December 31, 2016, management assessed the effectiveness of our internal control over financial reporting. Based on that evaluation, it was concluded that during the period covered by this report, the internal controls and procedures were not effective due to deficiencies that existed in the design or operation of our internal controls over financial reporting. However, management believes these weaknesses did not have an effect on our financial results. During the course of our evaluation, we did not discover any fraud involving management or any other personnel who play a significant role in our disclosure controls and procedures or internal controls over financial reporting.

Due to a lack of financial and personnel resources, we are not able to, and do not intend to, immediately take any action to remediate these material weaknesses. We will not be able to do so until, if ever, we acquire sufficient financing and staff to do so. We will implement further controls as circumstances, cash flows, and working capital permits. Notwithstanding the assessment that our ICFR was not effective and that there were material weaknesses as identified in this report, we believe that our financial statements contained in our Annual Report on Form 10-K for the period ended December 31, 2016, fairly presents our financial position, results of operations, and cash flows for the periods covered, as identified, in all material respects.

Management believes that the material weaknesses set forth above were the result of the scale of our operations and intrinsic to our small size.

Changes in Internal Control over Financial Reporting

During the period covered by this report, there were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting due to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted into law in July 2010. The Dodd-Frank Act provides smaller public companies and debt-only issuers with a permanent exemption from the requirement to obtain an external audit on the effectiveness of internal financial reporting controls provided in Section 404(b) of the Sarbanes-Oxley Act. Aly Energy is a smaller reporting company and is eligible for this exemption under the Dodd-Frank Act.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

The table below sets forth information about our directors and executive officers:

Name	Age	Position

Munawar H. Hidayatallah	73	Chairman
Shauvik Kundagrami	53	Chief Executive Officer and Vice-Chairman
Greg Price	65	President and Chief Operating Officer
Alya Hidayatallah	42	Chief Financial Officer
Bryan Dutt	57	Director
Kouros Sariri	61	Director
Saeed M. Sheikh	80	Director
Timothy J. Pirie	51	Director
Zane Tankel	77	Director

Munawar H. “Micki” Hidayatallah has served on the board of directors of Aly Operating since it was founded in July 2012 and has served as a director of Aly Energy since the Share Exchange. From July 2012 until May 2017, Mr. Hidayatallah served as the Company’s chief executive officer. From 2001 to 2011, he served as chairman, chief executive officer and a director of Allis-Chalmers Energy Inc. (“Allis-Chalmers”), where he was responsible for the overall management of the company. From 2004 to 2010, Allis-Chalmers’ revenue increased by more than tenfold (from $47.7 million to $659.7 million) and market capitalization increased by over seven times (from $72.2 million to $565.4 million). In February 2011, Archer Ltd. acquired Allis-Chalmers for $1.1 billion. Mr. Hidayatallah is a qualified chartered accountant and serves as a director of Stewart & Stevenson LLC and as its vice chairman of financial affairs.

Shauvik Kundagrami has served as the Company’s chief executive officer since May 2017 and joined the board of directors in December 2016. Prior to joining the Company, he served as co-head of the energy group at The Royal Bank of Canada for the prior 10 years.

Greg Price was elected as President and chief operating officer of the Company in December 2016. From April 2016 until such date, he served as a Special Advisor to the CEO of the Company. From 2005 to 2016, he served in various positions, including President of Directional Drilling Services and President of Rental Tubular Division, at Allis-Chalmers Energy Inc., which was acquired in 2011 and subsequently named Archer.

Alya H. Hidayatallah became chief financial officer of Aly Operating in January 2013 and has served as our chief financial officer since the Share Exchange. Previously, from 2005 through 2012, she served as director of planning and budgeting at Allis-Chalmers, which was acquired in 2011 and subsequently named Archer. From 2000 until 2004, Ms. Hidayatallah was an investment banker in the financial restructuring group of Houlihan Lokey Howard & Zukin. Ms. Hidayatallah graduated summa cum laude with a degree in Business Economics from the University of California at Los Angeles in 1997. Ms. Hidayatallah is Mr. Hidayatallah’s daughter.

Bryan Dutt is the Founder and President of Ironman Energy Capital Management, LLC, which he founded in 1999. Ironman has three SEC registered private partnership funds which specialize in upstream energy securities. Mr. Dutt joined our board of directors in December 2016.

Kouros Sariri joined the board of directors of Aly Operating in October 2012, and has served as our director since the Share Exchange. Mr. Sariri is the founder and CEO of Frequency Management International (“FMI”) Inc. Founded in 2003, FMI is a manufacturer of high reliability & extreme environment electronic components used in advanced electronic system applications. In 2003, Mr. Sariri also founded Chronos Technology (merged with FMI) which serves in a research and development capacity, conducting advanced research for NASA and DOE in the area of extreme environment electronic solutions and the related manufacturing processes. Innovations envisioned and introduced by Mr. Sariri have been used in commercial satellites and scientific/robotic space missions as well as in numerous oil, gas and geothermal fields worldwide. FMI is a globally recognized brand for the high reliability solutions used successfully in LWD, MWD, wire-line and digital oilfield systems.

Saeed M. Sheikh joined the board of directors of Aly Operating in October 2012 and has served as our director since the Share Exchange. He founded Star Trading & Marine, Inc., a transportation and shipping company, in 1973 and has served as its president since inception. In October 2013, Mr. Sheikh was appointed to serve as Ambassador at Large for the Government of Pakistan.

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Timothy J. Pirie has over 25 years of oilfield experience. In 2003, he founded United Oilfield International, a Canadian solids control equipment& service provider with operations in Canada, United States and Peru and remained as president and director from its inception until its acquisition by the Company in 2014. He also founded Canadian Nitrogen Services in 2005 and has been president and director since its inception. It is a Canadian based N2 pumping service utilizing membrane technology with operations in Canada, United States and Saudi Arabia. In 2013 was a founder of Decisive Dividend Corporation, a publicly traded Canadian corporation. Mr. Pirie is also a founder and director of a privately held engineering / construction company currently working on E&P projects in the Middle East and a founder of Petro Toro Inc., a Peruvian focused Oil & Gas Exploration Company.

Zane Tankel has served on the board of directors of Aly Energy since October 2012, and has served as our director since the Share Exchange. Mr. Tankel is the Chairman and CEO of Apple-Metro, Inc., a multi-unit operator of family restaurants in the New York metropolitan area, which he co-founded in 1994. Mr. Tankel was a director of Morton’s Restaurant Group, Inc., a New York Stock Exchange company, from February 2006 until February 2012, and a director of Allis-Chalmers Energy Inc. from February 2007 until February 2011, as well as the Caribbean Restaurant Group, the San Juan, Puerto Rico based owner/operator of Burger King restaurants in and around the Caribbean.

Board Committees and Charters

Because Pelican owns substantially in excess of a majority of our issued and outstanding voting stock, we are a “controlled company” within the meaning of the Nasdaq corporate governance standards. Under the rules pertaining to “controlled companies,” we are required to have an audit committee made up entirely of independent directors, but we are not required to maintain a compensation committee or a nominating committee, and we no longer do so.

Our Board has established an Audit Committee comprised of Mr. Hidayatallah. The Audit Committee is governed by a written charter. The full text of the Audit Committee charter is available on our website located at www.alyenergy.com or in print to any interested party who requests it. Requests should be sent in writing to the attention of the Secretary at 3 Riverway, Suite 920, Houston, Texas 77056, 713-333-4000. The Audit Committee assists our Board in fulfilling its oversight responsibility relating to (i) the integrity of our financial statements and other financial information furnished by the Company, (ii) our compliance with legal and regulatory requirements, (iii) our system of internal accounting and financial controls, (iv) our independent registered public accounting firm’s qualifications, performance, compensation and independence, (v) the performance of our internal audit function, and (vi) compliance with our code of business conduct and ethics. Our board of directors has determined that Mr. Hidayatallah does not meet the independence standards of Audit Committee members prescribed by the NASDAQ Capital Market listing rules. However, our Board has determined that Mr. Hidayatallah qualifies as an “audit committee financial expert” under Item 407 of Regulation S-K promulgated by the SEC.

Code of Ethics

The board of directors has adopted a code of business ethics that applies to its directors, officers and management employees generally. A copy of this code of business ethics may be obtained, at no cost, from our investor relations website (www.alyenergy.com), by writing or by telephoning us at: Aly Energy Services, Inc., 3 Riverway, Suite 920, Houston, Texas 77056, 713-333-4000, Attn: Secretary.

Stockholder Communications

We do not have a formal policy regarding communications with our board of directors; however, stockholders may communicate with the board of directors by writing to us at: Aly Energy Services, Inc., 3 Riverway, Suite 920, Houston, Texas 77056, Attention: Chief Financial Officer. Stockholders who would like their submission directed to a member of the board of directors may so specify and the communication will be forwarded, as appropriate.

Board Assessment of Risk

The board of directors has an active role in overseeing management of our risks. The board of directors regularly receives reports from senior management on our areas of material risk, including our credit, liquidity, operational and legal and regulatory risks. Pursuant to its charter, the audit committee reviews our major financial risk exposures and the steps management has taken to monitor and control such exposures, and it also meets periodically with management to discuss policies with respect to risk assessment and risk management. While the audit committee oversees certain risks and the management of such risks, the entire board of directors is regularly informed through committee reports about such risks.

Board Diversity

While we do not have a formal policy on diversity, our board of directors considers diversity to include the skill set, background, reputation, type and length of business experience of our board of director’s members as well as a particular nominee’s contributions to that mix. Our board of directors believes that diversity brings a variety of ideas, judgments and considerations that benefit our stockholders and us. Although there are many other factors, the board of directors seeks individuals with experience in operating growing businesses.

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Item 11. Executive Compensation

Executive Compensation

The following table summarizes the overall compensation earned over each of the past two fiscal years ending December 31, 2016 by the persons named below (collectively the “Named Executive Officers”):

Name and Principal Position

Year

Salary

Bonus

All Other Compensation

Total

Micki Hidayatallah

2016

$ 53,673 (1)

$ -

$ 20,000 (2)

$ 73,673

Chairman and Chief Executive Officer

2015

360,062 (1)

-

29,992 (2)

390,054

Alya Hidayatallah

2016

163,245 (3)

-

-

163,245

Chief Financial Officer

2015

186,254 (3)

-

-

186,254

Mark Patterson

2016

207,422 (4)

-

3,000 (5)

210,422

President and Chief Operating Officer

2015

232,892 (4)

-

3,000 (5)

235,892

________

(1) Mr. Hidayatallah accepted a voluntary reduction in salary in 2015 of 20% from the stated amount in his employment agreement. In January 2016, Mr. Hidayatallah accepted a voluntary reduction in salary to $25,000 per annum. Mr. Hidayatallah resigned as Chief Executive Officer in May 2017.

(2) Reflects reimbursement of commuting expenses from Los Angeles to Houston.

(3) Ms. Hidayatallah accepted a voluntary reduction in salary in 2015 of 10% from the stated amount in her employment agreement. In May 2016, the Board reduced Ms. Hidayatallah's salary by an incremental 20%.

(4) Mr. Patterson accepted a voluntary reduction in salary in 2015 of 10% from the stated amount in his employment agreement. In May 2016, the Board reduced Mr. Patterson's salary by an incremental 20%. In September 2016, although the Company ceased paying Mr. Patterson a cash salary, the Company continued to accrue his salary and will satisfy such liability if and when it is able to do so. Mr. Patterson's employment agreement expired on December 31, 2016 and was not renewed.

(5) Reflects personal use of company automobile.

Executive Employment Agreements

On May 30, 2017, we executed employment agreements with each of Shauvik Kundagrami, Greg Price and Alya Hidayatallah. The employment agreements provide for the following:

	·	Annual base salaries of $300,000 to Shauvik Kundagrami and $200,000 to each of Greg Price and Alya Hidayatallah

	·	Target EBITDA to be set annually by the board

	·	If the Company achieves EBITDA target (after giving effect to deductions for executive bonuses), bonus will equal 100% of base salary

	·	If the Company does not achieve such target but achieves EBITDA target prior to giving effect to deductions for execution bonuses, a lesser bonus will be determined at discretion of the board

	·	Severance (salary continuation for 12 months) to be paid for termination without cause or termination by executive for good reason (which includes a change of control). A terminated executive will receive 50% of bonus (when and if otherwise earned by management) if terminated in first six months of year and 100% of bonus if terminated in second six months of year.

	·	Stock option plan grants as described under “Adoption of Equity Awards Plan” below.

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Director Compensation

During the year ended December 31, 2016, we compensated each of our independent directors in the amount of $5,000 for their service during the year.

Adoption of Equity Awards Plan

On April 4, 2017, we adopted a 2017 Stock Option Plan (the “Stock Option Plan”) and reserved an aggregate of 16,861,908 shares of common stock (20% of our outstanding shares on a fully diluted basis) for the issuance of shares pursuant to options to be granted under the Stock Option Plan.

On May 30, 2017, we granted stock options under the Stock Option Plan to Micki Hidayatallah (our Chairman), Shauvik Kundagrami (our CEO), Greg Price (our President and COO) and Alya Hidayatallah (our CFO) to purchase 5,058,572 shares, 5,058,572 shares, 3,372,382 shares and 3,372,382 shares, respectively, at an exercise price of $.10 per share. The options are fully vested and expire 10 years from the date of grant.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth information regarding beneficial ownership of our common stock as of June 30, 2017 by (i) each person or group who is known by us to beneficially own more than 10% of our common stock; (ii) each director; (iii) each of the Named Executive Officers and (iv) all such executive officers and directors as a group. Except as indicated in the footnotes to this table, the persons named in the table to our knowledge have sole voting and investment power with respect to all shares of securities shown as beneficially owned by them. Unless otherwise noted in the table below, each of our executive officers, directors and principal stockholders may be contacted at 3 Riverway, Suite 920, Houston, Texas 77056. The information in this table is based upon 88,308,715 common shares which is comprised of 13,818,795 shares of common stock outstanding as of June 30, 2017, 57,628,011 additional shares of common stock issuable if all of the outstanding shares of our Series A Convertible Preferred Stock were converted into common shares and 16,861,908 shares of common stock issuable upon exercise of stock options.

Common Stock

Name

Number of Shares Beneficially Owned

Percent of Class

Permian Pelican LLC

(1 )

57,628,011

65.26 %

Munawar H. Hidayatallah

(2 )

5,712,701

6.47 %

Shauvik Kundagrami

(3 )

5,058,572

5.73 %

Greg Price

(4 )

3,376,362

3.82 %

Alya Hidayatallah

(5 )

3,372,382

3.82 %

Timothy J. Pirie

(6 )

931,843

1.06 %

Zane Tankel

(7 )

297,834

0.34 %

Kouros Sariri

(8 )

164,804

0.19 %

Saeed M. Sheikh

(9 )

122,817

0.14 %

Bryan Dutt

(10 )

105,065

0.12 %

All directors and officers as a group

19,037,315

21.56 %

__________

(1) Permian Pelican LLC ("Pelican") owns 17,292 shares of the Company's Series A Convertible Preferred Stock which are convertible into an aggregate of 57,628,011 shares of common stock (approximately 65.3% of fully diluted shares). Munawar H. Hidayatallah and Ali Afdhal are the sole managers of Pelican and therefore share voting and dispositive power over the shares owned by Pelican.

(2) Mr. Hidayatallah and his spouse beneficially own 447,750 shares of common stock and an additional 206,379 shares of common stock are owned by a trust for which Mr. Hidayatallah is a trustee. Mr. Hidayatallah also has options to acquire an additional 5,058,572 shares of common stock. Mr. Hidayatallah owns approximately 9.8% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of shares of common stock owned by Pelican.

(3) Mr. Kundagrami has options to acquire 5,058,572 shares of common stock. Mr. Kundagrami owns approximately 9.8% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

(4) Mr. Price has options to acquire 3,372,382 shares of common stock. Mr. Price owns approximately 0.2% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

(5) Ms. Hidayatallah has options to acquire 3,372,382 shares of common stock. Ms. Hidayatallah owns approximately 0.2% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

(6) Canadian Nitrogen Services Ltd, in which Mr. Pirie has a beneficial ownership interest, owns 920,649 shares of common stock. In addition, Mr. Pirie owns 11,194 shares of common stock.

(7) Mr. Tankel owns approximately 4.1% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

(8) Mr. Sariri owns approximately 1.4% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

(9) Mr. Sheikh owns approximately 1.4% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

(10) Ironman Energy Master Fund, in which Mr. Dutt has a beneficial ownership interest, owns 105,065 shares of common stock. Mr. Dutt owns approximately 8.8% of the membership interests of Pelican and may be deemed to indirectly own such proportionate amount of the shares of common stock owned by Pelican.

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Item 13. Certain Relationships and Related Transactions and Director Independence

Recapitalization

As described in Item 1 of this Report, we consummated a recapitalization transaction with Pelican, a newly formed entity organized by certain of the Company’s directors and principal stockholders. Pursuant to the recapitalization, on December 12, 2016, Pelican agreed to acquire the Company’s outstanding secured indebtedness provided that the Company was successful in effecting the exchange of the Aly Operating preferred stock, Aly Centrifuge 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 and resulted in the following:

· Pelican’s contribution of approximately $16.1 million of the Aly Senior Obligations into shares of Aly Energy convertible preferred stock that represented approximately 80% of our common stock on a fully diluted basis as of January 31, 2017.

· 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.

Director Independence

Using the definition of independence set forth in the rules of Nasdaq, all of our directors except Mr. Hidayatallah (our former chief executive officer) and Mr. Kundragrami (our current chief executive officer) are independent.

Item 14. Principal Accountant Fees and Services

Our independent auditors for the year ending December 31, 2016, RSM US LLP (“RSM”) have no direct interest in us and have been our auditors since October 13, 2015.

Audit and audit related fees by RSM related to their audit of our December 31, 2016 consolidated financial statements and their review of those consolidated financial statements included in the Company’s quarterly reports on Form 10-Q totaled approximately $170,000.

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PART IV

Item 15. Exhibits

Exhibit

Number

Exhibit Description

2.1

Share Exchange Agreement, dated May 14, 2013, by and among Preferred Voice, Inc., Aly Energy Services, Inc. and the stockholders of Aly Energy Services, Inc. (1)

2.2

Stock Purchase Agreement, dated as of September 27, 2012, by and between Aly Energy Services, Inc. and Kurt Chew (1)

2.3

Securities Exchange Agreement, dated January 31, 2017, by and among Aly Energy Services, Inc. and the holders named therein (4)

3.1

Certificate of Incorporation, filed on August 3, 1992 with the Secretary of State of Delaware (1)

3.2

Certificate of Amendment, filed on May 2, 1994 with the Secretary of State of Delaware (1)

3.3

Certificate of Amendment, filed on March 21, 1995 with the Secretary of State of Delaware (1)

3.4

Certificate of Amendment, filed on July 27, 1995 with the Secretary of State of Delaware (1)

3.5

Certificate of Amendment, filed on March 7, 1997 with the Secretary of State of Delaware (1)

3.6

Certificate of Amendment, filed on April 27, 2007 with the Secretary of State of Delaware (1)

3.7

Certificate of Amendment, filed on May 14, 2013 with the Secretary of State of Delaware (1)

3.8

Certificate of Amendment, filed on April 10, 2014 with the Secretary of State of Delaware (2)

3.9

Certificate of Amendment, filed on June 18, 2015 with the Secretary of State of Delaware (6)

3.10

Certificate of Amendment, filed on December 21, 2015 with the Secretary of State of Delaware (7)

3.11

Certificate of Amendment, filed on May 18, 2016 with the Secretary of State of Delaware (8)

3.12

Certificate of Designation of Convertible Preferred Stock, filed on February 10, 2017 with the Secretary of State of Delaware (7)

3.13

Bylaws of the Registrant (1)

4.1

Second Amended and Restated Credit Agreement, dated as of January 31, 2017, by and between Aly Energy Services, Inc. and Pelican Permian, LLC, including amendments #1 through #3 thereto (4)

10.1

Employment Agreement, dated May 30, 2017, by and between Aly Energy Services, Inc. and Shauvik Kundagrami (4)

10.2

Employment Agreement, dated May 30, 2017, by and between Aly Energy Services, Inc. and Greg Price (4)

10.3

Employment Agreement, dated May 30, 2017, by and between Aly Energy Services, Inc. and Alya Hidayatallah (4)

10.4

Aly Energy Services, Inc. 2017 Stock Option Plan (4)

10.5

Form of Stock Option Agreement under Aly Energy Services, Inc. 2017 Stock Option Plan (4)

21.1

List of Subsidiaries (5)

31.1

Certification of Chief Executive Officer (4)

31.2

Certification of Chief Financial Officer (4)

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)

32.2

Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (4)

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101.INS **		XBRL Instance Document

101.SCH **		XBRL Taxonomy Extension Schema Document

101.CAL **		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF **		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB **		XBRL Taxonomy Extension Label Linkbase Document

101.PRE **		XBRL Taxonomy Extension Presentation Linkbase Document

________

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1) Filed as exhibit to Report on Form 8-K, dated May 15, 2013

(2) Filed as exhibit to Report on Form 8-K, dated April 16, 2014

(3) Filed as exhibit to Report on Form 8-K/A, dated July 31, 2013

(4) Filed herewith

(5) Filed as exhibit to Report on Form 10-K for year ended December 31, 2014

(6) Filed as exhibit to Report on Form 8-K, dated June 22, 2015

(7) Filed as exhibit to Report on Form 8-K, dated December 29, 2015

(8) Filed as exhibit to Report on Form 8-K dated May 23, 2016

(9) Filed as exhibit to Report on Form 8-K dated February 16, 2017

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALY ENERGY SERVICES, INC .

Date: August 31, 2017 By: /s/ Shauvik Kundagrami

Shauvik Kundagrami

Vice-Chairman and Chief Executive Officer

(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Signature Title Date

/s/ Munawar H. Hidayatallah Chairman August 31, 2017

Munawar H. Hidayatallah

/s/ Shauvik Kundagrami
Vice-Chairman and Chief Executive Officer
August 31, 2017

Shauvik Kundagrami (principal executive officer)

/s/ Greg Price President and Chief Operating Officer August 31, 2017

Greg Price

/s/ Alya Hidayatallah

Chief Financial Officer,

August 31, 2017

Alya Hidayatallah

(principal financial and accounting officer)

/s/ Bryan Dutt

Director

August 31, 2017

Bryan Dutt

/s/ Kouros Sariri

Director

August 31, 2017

Kouros Sariri

/s/ Saeed M. Sheikh

Director

August 31, 2017

Saeed M. Sheikh

/s/ Zane Tankel

Director

August 31, 2017

Zane Tankel

/s/ Timothy J. Pirie

Director

August 31, 2017

Timothy J. Pirie

EXHIBIT 2.3

SECURITIES EXCHANGE AGREEMENT

This Securities Exchange Agreement (this “ Agreement ”), dated as of January ___, 2017, is by and among Aly Energy Services, Inc., a Delaware corporation (the “ Company ”), and each of the security holders listed on Schedule I hereto (each a “Holder” and collectively the “Holders”).

In consideration of the mutual promises and conditions contained herein, the parties hereto hereby agree and covenant as follows:

1. Preliminary Notes .

(a) The Holders own (i) shares of preferred stock (“ Aly Operating Preferred Stock ”) of Aly Operating, Inc. (“ Aly Operating ”), (ii) shares of preferred stock (“ Aly Centrifuge Preferred Stock ”) of Aly Centrifuge Inc. (“Aly Centrifuge”), (iii) a subordinated note issued by Aly Centrifuge (the “ Aly Centrifuge Subordinated Note ”) and (iv) rights to contingent payments based upon the revenues of Aly Centrifuge (the “ Aly Centrifuge Contingent Payments ” and together with the Aly Operating Preferred Stock, Aly Centrifuge Preferred Stock and Aly Centrifuge Subordinated Notes, the “ Exchange Securities ”).

(b) The Company has outstanding secured indebtedness originally extended by Wells Fargo Bank and its affiliates (“ Wells Fargo ”) aggregating approximately $21.9 million (the “ Secured Indebtedness ”) as of the date hereof. The amount of the Secured Indebtedness substantially exceeds the fair market value of the Company’s assets. The Company has been in default in respect of the Secured Indebtedness commencing as of March 31, 2016. Since that date, the Company has continued operations under a series of forbearance agreements with Wells Fargo (the “ Forbearance Agreement ”), pursuant to which Wells Fargo agreed to forbear from exercising its remedies in respect of the Secured Indebtedness for limited periods of time and upon the satisfaction by the Company of certain conditions.

(c) Effective October 26, 2016, Tiger Finance, LLC (“ Tiger ”) acquired all of the Secured Indebtedness from Wells Fargo and extended the effectiveness of the Forbearance Agreement to December 12, 2016. Effective December 12, 2016, Permian Pelican, LLC (“ Pelican ”), acquired all of the Secured Indebtedness from Tiger and extended the effectiveness of the Forbearance Agreement to January 31, 2017.

(d) The forbearance agreement provides that Pelican will restructure the Secured Indebtedness if the Company is able to consummate a recapitalization plan, satisfactory to Pelican (the “ Recap ”), that will, at a minimum, result in the surrender of the Exchange Securities in exchange for the issuance of shares of common stock of the Company (“ Aly Energy Common Stock ”) prior to January 31, 2017.

(e) Pelican has proposed to the Company that, after giving effect to the consummation of the Recap and the restructure of the Secured Indebtedness:

(i) Approximately $16.9 million of the Secured Indebtedness will be converted into 16,900 shares of convertible preferred stock of the Company having an original liquidation preference of $16,900,000. Such shares will be convertible into 55,185,029 shares of Aly Energy Common Stock (an effective rate of approximately $0.306 per share of Aly Energy Common Stock), which would represent approximately 80% of the fully diluted capital stock of the Company.

(ii) Approximately $5.6 million of the Secured Indebtedness will remain outstanding (of which $5.1 million will be in the form of a term loan and approximately $0.5 million will be in the form of a $1.0 million revolving credit arrangement).

(iii) The Holders will receive an aggregate of 7,089,443 shares of Aly Energy Common Stock pursuant to the transactions contemplated by this Agreement, which will represent approximately 10.3% of the fully diluted capital stock of the Company.

(iv) The current holders of Aly Energy Common Stock, owning an aggregate of 6,706, 814 shares of Aly Energy Common Stock as of the date hereof, which will represent approximately 9.7% of the fully diluted capital stock of the Company.

(e) The Company has requested that the Holders execute and deliver this Agreement in order to consummate the Recap and permit the Company to restructure the Secured Indebtedness and continue operations.

2. Basis of Exchange . Upon the terms and subject to the conditions set forth in this Agreement, at the Closing defined herein, (i) each of the Holders agrees to sell, assign, transfer, convey and deliver to the Company the Exchange Securities set forth opposite such Holder’s name on Schedule I hereto and (ii) the Company agrees to issue to such Holders the number of shares of Aly Energy Common Stock to be issued in consideration therefor, all as more particularly set forth on Schedule I hereto.

3 Closing Procedure . The surrender of the Exchange Securities and issuance and delivery of the shares of Aly Energy Common Stock described in Section 2 above shall occur on the first business day, but in any event prior to January 31, 2017, on which the conditions set forth in Section 6 below have been satisfied or waived by the Company. At the Closing, the Company will cancel the Exchange Securities delivered by the Holders and issue in consideration therefor the applicable number of shares of Aly Energy Common Stock. The parties hereto shall further execute and deliver such additional documents and take such additional actions as any party reasonably may deem to be practical and necessary in order to consummate the transactions contemplated by this Agreement.

4. Representations and Warranties of the Holders . Each Holder hereby represents and warrants to the Company as follows:

(a) Holder is the record and beneficial owner of the Exchange Securities to be surrender for exchange to the Company hereunder, and upon the surrender of the Exchange Securities at the Closing in accordance with the terms of this Agreement, the Holder will transfer such Exchange Securities to the Company free and clear of all liens, claims and encumbrances.

(b) Holder has not employed any broker or finder or incurred any liability for any brokerage fees, commissions, or finders' fees in connection with the transactions contemplated hereby.

(c) Holder is acquiring the shares of Aly Energy Common Stock to be issued hereunder for Holder’s own account for investment purposes and not with a view to, or for sale in connection with, a distribution, as that term is used in Section 2(11) of the Securities Act of 1933, as amended (the “1933 Act”).

(d) Holder has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the shares of Aly Energy Common Stock, is able to bear the risks of an investment in shares of Aly Energy Common Stock and understands the risks of, and other considerations relating to, an investment in Aly Energy Common Stock, including the matters set forth under the captions “Risk Factors” in the Company’s reports filed with the Securities and Exchange Commission (“ SEC ”). Holder further understands that the shares of Aly Energy Common Stock have not been registered under the 1933 Act and that accordingly the certificates evidencing such shares will bear a restrictive legend to such effect.

(e) Holder acknowledges that (i) the Company has been delinquent in filing periodic reports with the SEC since the filing of its financial statements as of March 31, 2016 and for the quarter then ended and (ii) the Company has experienced a material adverse change in its financial condition and results of operations since the date of its most recently filed financial statements.

(f) Holder acknowledges that the shares of Aly Energy Common Stock are quoted on OTC Pink at prices substantially lower than the effective price at which such shares are being issued to Holder hereunder in consideration for the face amount of the Exchange Securities.

(g) Holder acknowledges that there is no assurance that the Company will be able to successfully operate its business even if the Secured Indebtedness is restructured after the consummation of the Recap.

(h) Holder has been advised that there will be substantial dilution in the Holder’s percentage ownership of the Company as a result of the consummation of the Recap.

(i) Holder acknowledges that the Aly Operating Preferred Stock, Aly Centrifuge Preferred Stock and Aly Centrifuge Subordinated Note have different rates of exchange into shares of Aly Energy Common Stock; such different exchange rates are arbitrarily determined by the Company based on the relative priorities of the Exchange Securities and the relative values of the Company’s subsidiaries which issued such Exchange Securities; and the Holder has been given no opportunity to negotiate such exchange rates.

5. Representations and Warranties of the Company . The Company hereby represents and warrants to the Holders that:

(a) The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware.

(b) The Company has all requisite corporate power and authority (corporate and other) to enter into and perform this Agreement. This Agreement has been duly and validly executed and delivered by the Company and is the legal, valid, and binding obligation of the Company, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency or similar laws affecting the rights of creditors generally and by the availability of certain equitable remedies.

(c) All of the shares of Aly Energy Common Stock to be issued to the Holders will upon issuance be duly authorized, validly issued, fully paid and nonassessable, and free of preemptive rights (statutory or contractual).

(d) The Company has not employed any broker or finder or incurred any liability for any brokerage fees, commissions, or finders' fees in connection with the transactions contemplated hereby.

6. Effectiveness of this Agreement . This Agreement will become effective upon the Company’s receipt of signature pages from (i) Kurt Chew, the sole holder of the Aly Operating Preferred Stock, (ii) United Centrifuge, Ltd., the sole holder of the Aly Centrifuge Subordinated Note and (iii) a majority in interest of the holders of the Aly Centrifuge Preferred Stock and Contingent Payments. In the event that such condition is not satisfied prior to January 31, 2017 (unless such date is extended in the sole discretion of the Company and Pelican), this Agreement will not become effective and all signature pages previously received from Holders will be null and void.

7. Successors and Assigns . This Agreement shall bind and inure to the benefit of the parties and their respective successors and assigns.

8. Governing Law . This Agreement shall be interpreted and construed in accordance with, under, and governed by, the laws of the State of Texas. The parties agree that any litigation directly or indirectly relating to this Agreement must be brought before and determined by a court of competent jurisdiction within Harris County, Texas, and the parties hereby agree to waive any rights to object to, and hereby agree to submit to, the jurisdiction of such courts.

9. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed an original and all of which shall constitute the same instrument, but only one of which need be produced.

10. Expenses . Each party will bear the fees and expenses incurred by it in connection with the transactions contemplated hereunder.

11. Amendments . This Agreement may be amended, modified or supplemented only by a written instrument executed by all of the parties hereto.

12. Severability . If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable and this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision never comprised a part hereof; and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable provision, there shall be added automatically as part of this Agreement, a provision as similar in its terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable.

13. Entire Agreement . This Agreement (together with the documents referenced herein) embodies the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to the subject matter hereof.

IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed as of the date first above written.

Aly Energy Services, Inc.

By:

Alya Hidayatallah

Chief Financial Officer

SIGNATURE PAGE FOR HOLDER

Date: January _____, 2017

The undersigned is one of the “Holders” referenced in the foregoing Securities Exchange Agreement and hereby tenders this signature page to the Company in accordance with the provisions of Section 6 of the foregoing agreement.

Legal Name of Holder: ______________________________________

Printed Name of Signatory: __________________________________

Signature: _______________________________________

Address for Notices: [please fill in below]

______________________

Schedule I

Name

Exchange Securities

Shares of Aly Energy

CNS

Aly Centrifuge Preferred

593,815

CNS

Contingent Payment

326,834

1211296

Aly Centrifuge Preferred

593,815

1211296

Contingent Payment

130,660

Rivera

Aly Centrifuge Preferred

296,066

Bowman

Aly Centrifuge Preferred

198,499

United Centrifuge, Ltd.

Aly Centrifuge Preferred

1,357,322

United Centrifuge, Ltd.

Subordinated Debt

1,200,000

Kurt Chew

Aly Operating Preferred

2,414,971

Total

7,111,981

EXHIBIT 4.1

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

This SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this “Agreement”) is entered into as of January 31, 2017 (“Effective Date”), by and between Pelican Permian, LLC, a Texas limited liability company (“Lender”), and Aly Energy Services, Inc., a Delaware corporation (“Borrower”).

WHEREAS, Borrower entered into that certain Amended and Restated Credit Agreement, dated as of April 15, 2014 (as amended prior to the date hereof, the “Original Credit Agreement”), by and among Borrower, the Lenders (as defined therein), and Wells Fargo Bank, National Association as Administrative Agent for the Lenders, as Issuing Lender and as Swing Line Lender; and

WHEREAS, on December 12, 2016, Lender has acquired all of the “Obligations” under the Original Credit Agreement, including without limitation the rights under the loan documents described on Schedule 1 hereto (the “Original Loan Documents”); and

WHEREAS, prior to December 12, 2016, Lender advanced an additional $494,332 to Borrower, and Borrower issued to Lender a line of credit note dated October 27, 2016 and due and payable on January 31, 2016 (the “Working Capital Note”); and

WHEREAS, as of the Effective Date, Lender and Borrower mutually desire to refinance the Working Capital Note by adding it to the “Obligations;” and

WHEREAS, Wells Fargo Equipment Finance, Inc. (“WFEF”) is the lessor under certain lease agreements, lender with a loan, and party to the lease purchase agreement with certain subsidiaries of Borrower (the “Lease Documents”) described in Schedule 2 attached hereto; and

WHEREAS, on December 12, 2016, Lender has acquired all of the rights of WFEF under the Lease Documents; and

WHEREAS, as of the Effective Date, Lender and Borrower mutually desire to refinance the obligations under the Lease Documents by adding them to the Obligations;

WHEREAS, as of the Effective Date, Lender and the Borrower desire to amend and restate the Original Credit Agreement in its entirety;

NOW, THEREFORE, the parties do hereby agree as follows:

1. DEFINITIONS AND CONSTRUCTION.

1.1 Definitions . As used in this Agreement, all capitalized terms shall have the definitions set forth on Exhibit A . Any term used in the Code and not defined herein shall have the meaning given to the term in the Code.

1.2 Accounting Terms . Any accounting term not specifically defined on Exhibit A shall be construed in accordance with GAAP and all calculations shall be made in accordance with GAAP. The term “financial statements” shall include the accompanying notes and schedules.

2. LOANS AND TERMS OF PAYMENT.

2.1 Refinancing of the Obligations; Promise to Pay . As of the Effective Date, the total amount of the Obligations (including all unpaid principal, interest, fees and expenses thereon and inclusive of the unpaid balance of the Working Capital Note and obligations under the Lease Documents) aggregated $21,641,934.46. Borrower promises to pay to the order of Lender, in lawful money of the United States, the aggregate unpaid principal amount of all Credit Extensions made by Lender to Borrower, together with interest on the unpaid principal amount of such Credit Extensions at rates in accordance with the terms hereof.

2.2 Revolving Line . Of the outstanding obligations as of the Effective Date, $500,000 shall be deemed to constitute outstanding Credit Extensions under the Revolving Line. Subject to and upon the terms and conditions of this Agreement Borrower may request Advances in an aggregate outstanding amount not to exceed the lesser of (A) the Revolving Line Limit or (B) the Borrowing Base. Amounts borrowed pursuant to this Section 2.2 may be repaid and reborrowed at any time without penalty or premium prior to the Final Maturity Date, at which time all Advances under this Section 2.2 shall be immediately due and payable; provided, however, that Borrower shall repay any outstanding amount to the extent that, as of the end of any month, the aggregate amount outstanding exceeds the Borrowing Base.

2.3 Term Loan . Of the outstanding Obligations as of the Effective Date, $5,050,000 shall be converted into the Term Loan as of the Effective Date. The then outstanding principal amount of the Term Loan will be paid in full on the Final Maturity Date. Notwithstanding the foregoing: (i) Borrower shall have the right to prepay all or a portion of the principal amount of the Term Loan at any time prior to the Final Maturity Date, without prepayment or penalty; (ii) Borrower shall be required to prepay the Term Loan in an amount equal to the Net Cash Proceeds from any sales of assets; and (iii) Borrower shall be required to prepay the Term Loan in an amount equal to 50% of the Excess Cash Flow for each calendar year, commencing with the year ending December 31, 2017 (such prepayment due on the earlier of (A) the date which is 60 days after the end of such year or (B) if applicable, the date on which Borrower’s independent auditors have completed their review of the financial statements for such year. All partial prepayments of the Term Loan shall be credited first to accrued and unpaid interest on the Term Loan and second to the outstanding balance of the Term Loan.

2.4 Interest . The Company shall pay interest on the unpaid principal amount of the Credit Extensions until the principal amount thereof shall be paid in full. The interest rate shall be the lower of (i) the Highest Lawful Rate or (ii) 6 month LIBOR + 3% per annum; provided, however, that upon the occurrence and during the continuance of an Event of Default, the unpaid principal amount of the Credit Extensions shall bear interest (after as well as before judgment) at the rate of 6 month LIBOR + 5% but not to exceed 6% per annum. Interest shall be paid in arrears on the last Business Day of each month commencing on the last business day of February 2017, until the principal amount of, and all accrued and unpaid interest on, the Credit Extensions has been paid in full. All computations of interest shall be determined by the Lender on a daily basis and for the actual number of days elapsed based on a 360 day year.

2.5 Place and Method of Payment; Taxes . Any and all payments by the Company in respect of the Credit Extensions shall be made in U.S. dollars, free and clear of and without deduction for any and all present or future levies, deductions, stamp or documentary taxes or similar charges or withholdings.

2.6 Guaranty; Security . Payment of the principal amount of, and interest on, the Credit Extensions will continue to be guaranteed by each of the Guarantors, as set forth in each Guaranty and secured by the assets of the Borrower and Guarantors, as set forth in the Security Agreement.

2.7 Fees and Expenses . Borrower shall pay to Lender all Lender Expenses as incurred and billed to Borrower by Lender.

2.8 Term . This Agreement shall become effective on the Effective Date and shall continue in full force and effect for so long as any Obligations remain outstanding or Lender has any obligation to make Credit Extensions under this Agreement. Notwithstanding the foregoing, Lender shall have the right to terminate its obligation to make Credit Extensions under this Agreement immediately and without notice upon the occurrence and during the continuance of an Event of Default.

2.9 Conversion of Obligations . As of the Effective Date, the Lender has converted $16,091,934.46 of the Obligations into 16,092 shares of Series A Convertible Preferred Stock of the Borrower.

3. CONDITIONS PRECEDENT.

The obligation of Lender to refinance the Obligations is subject to the condition precedent that Lender shall have received, in form and substance satisfactory to Lender, the following: (i) an amendment of the Security Agreement, (ii) a reaffirmation of each Guaranty and (iii) an executed and delivered copy of this Agreement and the other Loan Documents required by Lender.

4. SECURITY INTEREST.

4.1 Grant of Security Interest . The Borrower, on behalf of itself and the other Credit Parties, grants and pledges to Lender a continuing security interest in the Collateral to secure prompt repayment of any and all Obligations and to secure prompt performance by the Borrower of each of its covenants and duties under the Loan Documents. Except for Permitted Liens, such security interest constitutes a valid, first priority security interest in the presently existing Collateral, and will constitute a valid, first priority security interest in later-acquired Collateral. Notwithstanding any termination of this Agreement, Lender’s Lien on the Collateral shall remain in effect for so long as any Obligations are outstanding.

4.2 Perfection of Security Interest . The Borrower authorizes Lender to file at any time financing statements, continuation statements, and amendments thereto that (i) either specifically describe the Collateral or describe the Collateral as all assets of the Borrower of the kind pledged hereunder, and (ii) contain any other information required by the Code for the sufficiency of filing office acceptance of any financing statement, continuation statement, or amendment, including whether the Borrower is an organization, the type of organization and any organizational identification number issued to the Borrower, if applicable. Any such financing statements may be filed by Lender at any time in any jurisdiction whether or not Division 9 of the Code is then in effect in that jurisdiction. The Borrower shall from time to time endorse and deliver to Lender, at the request of Lender, all Negotiable Collateral and other documents that Lender may reasonably request, in form satisfactory to Lender, to perfect and continue perfection of Lender’s security interests in the Collateral and in order to fully consummate all of the transactions contemplated under the Loan Documents. Borrower shall have possession of the Collateral, except where expressly otherwise provided in this Agreement or where Lender is required by the Code, or (after an Event of Default) otherwise chooses, to perfect its security interest by possession in addition to the filing of a financing statement. Where Collateral is in possession of a third party bailee, Borrower shall take such steps as Lender reasonably requests for Lender (i) to obtain an acknowledgment, in form and substance satisfactory to Lender, of the bailee that the bailee holds such Collateral for the benefit of Lender, and (ii) to obtain “control” of any Collateral consisting of investment property, deposit accounts, securities accounts, letter-of-credit rights or electronic chattel paper (as such items and the term “control” are defined in Division 9 of the Code) by causing the securities intermediary or depositary institution or issuing Lender to execute a control agreement in form and substance satisfactory to Lender. No Borrower will create any chattel paper without placing a legend on the chattel paper acceptable to Lender indicating that Lender has a security interest in the chattel paper.

4.3 Right to Inspect . Lender (through any of its officers, employees, or agents) shall have the right, upon reasonable prior notice and at its own expense, from time to time during the Borrower’s usual business hours but no more than one time per year (unless an Event of Default has occurred and is continuing), to inspect the Borrower’s Books and to make copies thereof and to check, test, and appraise the Accounts in order to verify the Borrower’s financial condition or the amount, condition of, or any other matter relating to, the Accounts.

5. REPRESENTATIONS AND WARRANTIES .

The Borrower represents and warrants as follows:

5.1 Due Organization and Qualification . The Borrower and each of its Subsidiaries is an entity duly existing under the laws of the jurisdiction in which it is organized and qualified and licensed to do business in any state in which the conduct of its business or its ownership of property requires that it be so qualified, except where the failure to do so could not reasonably be expected to cause a Material Adverse Effect

5.2 Due Authorization; No Conflict . The execution, delivery, and performance of the Loan Documents are within the Borrower’s powers, have been duly authorized, and are not in conflict with nor constitute a breach of any provision contained in the Borrower’s organizational documents, nor will they constitute an event of default under any material agreement by which the Borrower is bound. The Borrower is not in default under any agreement by which it is bound, except to the extent such default would not reasonably be expected to cause a Material Adverse Effect.

5.3. Collateral . The Credit Parties have rights in or the power to transfer the Collateral, and their title to the Collateral is free and clear of Liens, adverse claims, and restrictions on transfer or pledge except for Permitted Liens.

5.4 Actions, Suits, Litigation, or Proceedings . There are no actions, suits, litigation or proceedings, at law or in equity, pending by or against the Borrower or any Subsidiary of the Borrower before any court, administrative agency, or arbitrator in which a likely adverse decision could reasonably be expected to have a Material Adverse Effect.

5.5 No Material Adverse Change in Financial Statements . All consolidated and consolidating financial statements related to the Borrower and any Subsidiary of the Borrower that are delivered by the Borrower to Lender fairly present in all material respects the Borrower’s consolidated and consolidating financial condition as of the date thereof and the Borrower’s consolidated and consolidating results of operations for the period then ended. There has not been a material adverse change in the consolidated or in the consolidating financial condition of the Borrower since the date of the most recent of such financial statements submitted to Lender.

5.6 Compliance with Laws and Regulations . The Borrower and each of its Subsidiaries have met the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. No event has occurred resulting from the Borrower’s failure to comply with ERISA that is reasonably likely to result in the Borrower’s incurring any liability that could reasonably be expected to have a Material Adverse Effect. The Borrower is not an “investment company” or a company “controlled” by an “investment company” within the meaning of the Investment Company Act of 1940. The Borrower is not engaged principally, or as one of the important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulations T, U and X of the Board of Governors of the Federal Reserve System). The Borrower has complied in all material respects with all the provisions of the Federal Fair Labor Standards Act. The Borrower has complied in all material respects with all environmental laws, regulations and ordinances. The Borrower has not violated any statutes, laws, ordinances or rules applicable to it, the violation of which could reasonably be expected to have a Material Adverse Effect. The Borrower and each Subsidiary of the Borrower have filed or caused to be filed all tax returns required to be filed, and have paid, or have made adequate provision for the payment of, all taxes reflected therein except those being contested in good faith with adequate reserves under GAAP or where the failure to file such returns or pay such taxes could not reasonably be expected to have a Material Adverse Effect.

5.7 Investments . The Borrower does not own any Equity Interests of any Person, except for Permitted Investments.

5.8 Government Consents . The Borrower and each of its Subsidiaries have obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Governmental Authorities that are necessary for the continued operation of the Borrower’s business as currently conducted, except where the failure to do so would not reasonably be expected to cause a Material Adverse Effect.

6. AFFIRMATIVE COVENANTS .

The Borrower covenants that, until payment in full of all outstanding Obligations, and for so long as Lender may have any commitment to make a Credit Extension hereunder, the Borrower shall, and shall cause the other Credit Parties to, do all of the following, unless the consent or waiver of the Lender is obtained:

6.1 Good Standing and Government Compliance . The Borrower shall maintain its, and each of its Subsidiaries’ organizational existence and good standing in their respective jurisdictions of formation, shall maintain qualification and good standing in each other jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect, and shall furnish to Lender the organizational identification number issued to the Borrower by the authorities of the jurisdiction in which the Borrower is organized, if applicable. The Borrower shall meet, and shall cause each of its Subsidiaries to meet, the minimum funding requirements of ERISA with respect to any employee benefit plans subject to ERISA. The Borrower shall comply in all material respects with all applicable Environmental Laws, and maintain all material permits, licenses and approvals required thereunder where the failure to do so could reasonably be expected to have a Material Adverse Effect. The Borrower shall comply, and shall cause each of its Subsidiaries to comply, with all statutes, laws, ordinances and government rules and regulations to which it is subject, and shall maintain, and shall cause each of its Subsidiaries to maintain, in force all licenses, approvals and agreements, the loss of which or failure to comply with which would reasonably be expected to have a Material Adverse Effect.

6.2 Financial Statements, Reports, Certificates . Borrower shall deliver to Lender: (i) as soon as available, but in any event within thirty (30) days after the end of each calendar month, a company prepared consolidated and consolidating balance sheet and income statement covering Borrower’s and its consolidated Subsidiaries’ operations during such period, prepared in accordance with GAAP, and in a form reasonably acceptable to Lender; (ii) as soon as available, but in any event within one hundred twenty (120) days after the end of Borrower’s fiscal year, beginning with the year ended December 31, 2017, audited consolidated and consolidating financial statements of Borrower and its consolidated Subsidiaries prepared in accordance with GAAP, consistently applied, together with an opinion or otherwise consented to in writing by Lender on such financial statements of an independent certified public accounting firm reasonably acceptable to Lender; (iii) if applicable, copies of all statements, reports and notices sent or made available generally by Borrower to their security holders and all reports on Forms 10-K and 10-Q filed with the Securities and Exchange Commission; (iv) promptly upon receipt of notice thereof, a report of any legal actions pending or threatened against the Borrower or any of its Subsidiaries that could result in damages or costs to the Borrower or any of its Subsidiaries of One Hundred Thousand Dollars ($100,000) or more; (v) promptly upon receipt, each management letter prepared by the Borrower’s independent certified public accounting firm regarding the Borrower’s management control systems; (vi) as soon as available, but in any event not later than December 15 of each calendar year, the Borrower’s financial and business projections and budget for the immediately following year, with evidence of approval thereof by the Borrower’s Board of Directors (copies of any Board of Directors approved revisions to projections shall be delivered to Lender within thirty (30) days of such approval); and (vii) such other budgets, sales projections, operating plans or other financial information as Lender may reasonably request from time to time. Immediately upon becoming aware of the occurrence or existence of an Event of Default hereunder, a written statement of the Borrower setting forth details of the Event of Default, and the action which the Borrower has taken or proposes to take with respect thereto.

6.3 Taxes . On or before September 30, 2017, the Borrower shall make, and cause each of its Subsidiaries to make, due and timely payment or deposit of all material federal, state, and local taxes, assessments, or contributions required of it by law, including, but not limited to, those laws concerning income taxes, F.I.C.A., F.U.T.A. and state disability, and will execute and deliver to Lender, on demand, proof satisfactory to Lender indicating that the Borrower or a Subsidiary of the Borrower has made such payments or deposits and any appropriate certificates attesting to the payment or deposit thereof; provided that the Borrower or a Subsidiary of the Borrower need not make any payment if the amount or validity of such payment is contested in good faith by appropriate proceedings and is reserved against (to the extent required by GAAP) by the Borrower or its Subsidiary, as applicable.

6.4 Insurance . The Borrower, at its expense, shall keep the Collateral insured against loss or damage by fire, theft, explosion, sprinklers, and all other hazards and risks, and in such amounts, as ordinarily insured against by other owners in similar businesses conducted in the locations where the Credit Parties’ business is conducted on the date hereof. Notwithstanding the foregoing, the Lender acknowledges that the Borrower does not, and will not, carry property and casualty insurance in respect of its equipment. Subject to the foregoing, the Borrower shall also maintain liability and other insurance in amounts and of a type that are customary to businesses similar to the Borrower’s. If a Credit Party fails to maintain insurance as required by this Agreement, Lender may, but shall not be obliged to, maintain or effect such insurance coverage, or so much thereof as Lender considers necessary for its protection. All such policies of insurance shall be in such form, with such companies, and in such amounts as reasonably satisfactory to Lender. All policies of property insurance shall contain a lender’s loss payable endorsement, in a form satisfactory to Lender, showing Lender as an additional loss payee, and all liability insurance policies shall show Lender as an additional insured and specify that the insurer must give at least twenty (20) days’ notice to Lender before canceling its policy for any reason. Upon Lender’s request, the Borrower shall deliver to Lender certified copies of the policies of insurance and evidence of all premium payments. If no Event of Default has occurred and is continuing, proceeds payable under any casualty policy will, at the Borrower’s option, be payable to the Borrower to replace the property subject to the claim, provided that any such replacement property shall be deemed Collateral in which Lender has been granted a first priority security interest. If an Event of Default has occurred and is continuing, all proceeds payable under any such policy shall, at Lender’s option, be payable to Lender to be applied on account of the Obligations.

6.5 Restricted Agreement Consents . Prior to any Credit Party entering into or becoming bound by any Restricted Agreement after the Closing, the Borrower shall: (i) provide written notice to Lender of the material terms of such Restricted Agreement with a description of its likely impact on the Borrower’s business or financial condition; and (ii) upon Lender’s request, will use commercially reasonable efforts to obtain the consent of, or waiver by, any person whose consent or waiver is necessary for (A) the Borrower’s interest in such licenses or contract rights to be deemed Collateral and for Lender to have a security interest in such license or contract right, and to have the power to assign such license or contract rights in connection with an enforcement of remedies, that might otherwise be restricted by the terms of the applicable license or agreement, whether now existing or entered into in the future, and (B) Lender to have the ability in the event of a liquidation of any Collateral to dispose of such Collateral in accordance with Lender’s rights and remedies under this Agreement and the other Loan Documents.

6.6 Further Assurances . At any time and from time to time the Borrower shall execute and deliver such further instruments and take such further action as may reasonably be requested by Lender to effect the purposes of this Agreement.

7. NEGATIVE COVENANTS.

The Borrower covenants and agrees that, so long as any credit hereunder shall be available and until the outstanding Obligations are paid in full or for so long as Lender may have any commitment to make any Credit Extensions, the Borrower shall not, and shall each Credit Party to not, do any of the following unless the consent or waiver of the Lender is obtained:

7.1 Change in Name, Location, Executive Office, or Executive Management; Change in Business; Change in Fiscal Year; Change in Control . Change its name or state of formation or relocate its chief executive office or principal place of business without thirty (30) days prior written notification to Lender; replace its chief executive officer or chief financial officer without thirty (30) days prior written notification to Lender; engage in any business, or permit any of its Subsidiaries to engage in any business, other than or reasonably related or incidental to the businesses currently engaged in by the Borrower; change its fiscal year end; or have a Change in Control unless such Change in Control occurs in connection with the complete satisfaction and repayment of all Obligations and Lender’s termination of all of its commitments to extend credit to Borrower.

7.2. Mergers or Acquisitions . Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with or into any other business organization (other than mergers or consolidations of a Subsidiary of the Borrower into another Subsidiary of the Borrower or into the Borrower), or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the Equity Interests or property of another Person, or enter into any agreement to do any of the same.

7.3 Indebtedness . Create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness, or permit any of its Subsidiaries to do so, other than Permitted Indebtedness, or prepay any Indebtedness or take any actions which impose on a Credit Party an obligation to prepay any Indebtedness, except Indebtedness to Lender.

7.4 Encumbrances . Create, incur, assume or allow any Lien with respect to any of its property, or assign or otherwise convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries so to do, except for Permitted Liens, or covenant to any other Person that a Credit Party in the future will refrain from creating, incurring, assuming or allowing any Lien with respect to any of a Credit Party’s property.

7.5 Distributions . Pay any dividends or make any other distribution or payment on account of or in redemption, retirement or purchase of any Equity Interests of the Borrower.

7.6 Investments . Directly or indirectly acquire or own, or make any Investment in or to any Person, or permit any of its Subsidiaries to do so, other than Permitted Investments, or maintain or invest any of its property with a Person other than Lender or Lender’s Affiliates or permit any of its Subsidiaries to do so unless such Person has entered into a control agreement with Lender, in form and substance satisfactory to Lender, or suffer or permit any of its Subsidiaries to be a party to, or be bound by, an agreement that restricts such Subsidiary of the Borrower from paying dividends or otherwise distributing property to the Borrower. Further, the Credit Parties shall not enter into any license or agreement with any Prohibited Territory or with any Person organized under or doing business in a Prohibited Territory

7.7 Subordinated Debt . Make any payment in respect of any Subordinated Debt, or permit any of its Subsidiaries to make any such payment, except in compliance with the terms of such Subordinated Debt and the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision of any document evidencing such Subordinated Debt, except in compliance with the terms of the subordination agreement relating to such Subordinated Debt, or amend any provision affecting Lender’s rights contained in any documentation relating to the Subordinated Debt without Lender’s prior written consent.

7.8 Asset Sales . Sell assets in excess of an aggregate of $1.0 million in any calendar year.

8. EVENTS OF DEFAULT.

Any one or more of the following events shall constitute an Event of Default by Borrower under this Agreement:

8.1 Payment Default . If the Borrower fails to pay any of the Obligations when due.

8.2 Covenant Default .

(a) If the Borrower fails to perform any obligation under Article 6 or violates any of the covenants contained in Article 7 of this Agreement; or

(b) If the Borrower fails or neglects to perform or observe any other material term, provision, condition, covenant contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between the Borrower and Lender and as to any default under such other term, provision, condition or covenant that can be cured, has failed to cure such default within ten (10) days after the Borrower receives notice thereof or any officer of the Borrower becomes aware thereof; provided, however, that if the default cannot by its nature be cured within the ten (10) day period or cannot after diligent attempts by Borrower be cured within such ten (10) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional reasonable period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, so long as Borrower continue to diligently attempt to cure such default, and within such reasonable time period the failure to have cured such default shall not be deemed an Event of Default but no Credit Extensions will be made.

8.3. Material Adverse Change . If there occurs any circumstance or circumstances that could reasonably be expected to have a Material Adverse Effect.

8.4 Attachment . If any material portion of the Borrower’s and/or any of its Subsidiaries’ assets is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes into the possession of any trustee, receiver or person acting in a similar capacity and such attachment, seizure, writ or distress warrant or levy has not been removed, discharged or rescinded within five (5) days, or if the Borrower and/or any of its Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs, or if a judgment or other claim becomes a lien or encumbrance upon any material portion of the Borrower’s and/or any of its Subsidiaries’ assets, or if a notice of lien, levy, or assessment is filed of record with respect to any of the Borrower’s and/or any of its Subsidiaries’ assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, and the same is not paid within five (5) days after the Borrower and/or any of its Subsidiaries receives notice thereof, provided that none of the foregoing shall constitute an Event of Default where such action or event is stayed or an adequate bond has been posted pending a good faith contest by the applicable Credit Party (provided that no Credit Extensions will be made during such cure period).

8.5 Insolvency . If an Insolvency Proceeding is commenced by the Borrower and/or any of its Subsidiaries, or if an Insolvency Proceeding is commenced against the Borrower and/or any of its Subsidiaries and is not dismissed or stayed within thirty (30) days (provided that no Credit Extensions will be made prior to the dismissal of such Insolvency Proceeding).

8.6 Other Agreements . If there is a default or other failure to perform in any agreement to which the Borrower and/or any of its Subsidiaries is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of One Hundred Thousand Dollars ($100,000) or that would reasonably be expected to have a Material Adverse Effect.

8.7 Judgments; Settlements . If one or more (a) judgments, orders, decrees or arbitration awards requiring the Borrower and/or any of its Subsidiaries to pay an aggregate amount of One Hundred Thousand Dollars ($100,000) or greater shall be rendered against the Borrower and/or its Subsidiaries and the same shall not have been vacated or stayed within ten (10) days thereafter (provided that no Credit Extensions will be made prior to such matter being vacated or stayed); or (b) settlements is agreed upon by the Borrower and/or its Subsidiaries for the payment by the Borrower and/or its Subsidiaries of an aggregate amount of One Hundred Thousand Dollars ($100,000) or greater or that could reasonably be expected to have a Material Adverse Effect.

9. LENDER’S RIGHTS AND REMEDIES.

9.1 Rights and Remedies . Upon the occurrence and during the continuance of an Event of Default, Lender may, at its election, without notice of its election and without demand, do any one or more of the following, all of which are authorized by the Borrower:

(a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable provided that upon the occurrence of an Event of Default described in Section 8.5 (insolvency), all Obligations shall become immediately due and payable without any action by Lender);

(b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement or under any other agreement between Borrower and Lender

(c) Settle or adjust disputes and claims directly with account debtors for amounts, upon terms and in whatever order that Lender reasonably considers advisable;

(d) Make such payments and do such acts as Lender considers necessary or reasonable to protect its security interest in the Collateral. The Borrower agrees to assemble the Collateral if Lender so requires, and to make the Collateral available to Lender as Lender may designate. The Borrower authorizes Lender to enter the premises where the Collateral is located, to take and maintain possession of the Collateral, or any part of it, and to pay, purchase, contest, or compromise any encumbrance, charge, or lien which in Lender’s determination appears to be prior or superior to its security interest and to pay all expenses incurred in connection therewith. With respect to a Credit Party’s owned premises, the Borrower hereby grants Lender a license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of Lender’s rights or remedies provided herein, at law, in equity, or otherwise;

(e) Set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by Lender, and (ii) indebtedness at any time owing to or for the credit or the account of Borrower held by Lender;

(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Collateral. Lender is hereby granted a license or other right, solely pursuant to the provisions of this Section 9.1, to use, without charge, the Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Lender’s exercise of its rights under this Section 9.1, the Borrower’s rights under all licenses and all franchise agreements shall inure to Lender’s benefit;

(g) Sell the Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including a Credit Party’s premises) as Lender determines is commercially reasonable and as more particularly set forth in the Security Agreement.

9.2 Power of Attorney . Effective only upon the occurrence and during the continuance of an Event of Default, the Borrower hereby irrevocably appoints Lender (and any of Lender’s designated officers, or employees) as the true and lawful attorney for each of the Credit Parties to: (a) send requests for verification of Accounts or notify account debtors of Lender’s security interest in the Accounts; (b) endorse a Credit Party’s name on any checks or other forms of payment or security that may come into Lender’s possession; (c) sign a Credit Party’s name on any invoice or bill of lading relating to any Account, drafts against account debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all claims under and decisions with respect to a Credit Party’s policies of insurance; (f) settle and adjust disputes and claims respecting the accounts directly with account debtors, for amounts and upon terms which Lender determines to be reasonable; and (g) file, in its sole discretion, one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of a Credit Party where permitted by law. The appointment of Lender as attorney in fact, and each and every one of Lender’s rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully repaid and performed and Lender’s obligation to provide advances hereunder is terminated.

9.3 Accounts Collection . At any time after the occurrence and during the continuation of an Event of Default, Lender may notify any Person owing funds to a Credit Party of Lender’s security interest in such funds and verify the amount of such Account. The Borrower shall collect all amounts owing to the Credit Parties for Lender, receive in trust all payments as Lender’s trustee, and immediately deliver such payments to Lender in their original form as received from the account debtor, with proper endorsements for deposit.

9.4 Lender Expenses . If Borrower fails to pay any amounts or furnish any required proof of payment due to third persons or entities, as required under the terms of this Agreement, then Lender may do any or all of the following after reasonable notice to Borrower: (a) make payment of the same or any part thereof; (b) set up such reserves under the Revolving Line as Lender deems necessary to protect Lender from the exposure created by such failure; or (c) obtain and maintain insurance policies of the type referenced in this Agreement, and take any action with respect to such policies as Lender deems prudent. Any amounts so paid or deposited by Lender shall constitute Lender Expenses, shall be immediately due and payable, and shall bear interest at the then applicable rate hereinabove provided, and shall be secured by the Collateral. Any payments made by Lender shall not constitute an agreement by Lender to make similar payments in the future or a waiver by Lender of any Event of Default under this Agreement.

9.5 Lender’s Liability for Collateral . Lender has no obligation to clean up or otherwise prepare the Collateral for sale. All risk of loss, damage or destruction of the Collateral shall be borne by Borrower.

9.6 No Obligation to Pursue Others . Lender has no obligation to attempt to satisfy the Obligations by collecting them from any other Person liable for them and Lender may release, modify or waive any collateral provided by any other Person to secure any of the Obligations, all without affecting Lender’s rights against Borrower. Borrower waives any right it may have to require Lender to pursue any other Person for any of the Obligations.

9.7 Remedies Cumulative . Lender’s rights and remedies under this Agreement, the Loan Documents, and all other agreements shall be cumulative. Lender shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by Lender of one right or remedy shall be deemed an election, and no waiver by Lender of any Event of Default on the Borrower’s part shall be deemed a continuing waiver. No delay by Lender shall constitute a waiver, election, or acquiescence by it. No waiver by Lender shall be effective unless made in a written document signed on behalf of Lender and then shall be effective only in the specific instance and for the specific purpose for which it was given. The Borrower expressly agrees that this Section 9.7 may not be waived or modified by Lender by course of performance, conduct, estoppel or otherwise.

9.8 Demand; Protest . Except as otherwise provided in this Agreement, the Borrower waives demand, protest, notice of protest, notice of default or dishonor, notice of payment and nonpayment and any other notices relating to the Obligations.

10. NOTICES.

Unless otherwise provided in this Agreement, all notices or demands by any party relating to this Agreement or any other agreement entered into in connection herewith shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by a recognized overnight delivery service, certified mail, postage prepaid, return receipt requested, or by facsimile to Borrower or to Lender, as the case may be, at the principal place of business of the Borrower or Lender, as the case may be. The parties hereto may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other.

11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.

This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Texas, without regard to principles of conflicts of law. The Borrower and Lender hereby submit to the exclusive jurisdiction of the State and Federal courts located in the State of Texas. THE UNDERSIGNED ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED UNDER CERTAIN CIRCUMSTANCES. TO THE EXTENT PERMITTED BY LAW, EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF ITS, HIS OR HER CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THE MUTUAL BENEFIT OF ALL PARTIES, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION ARISING OUT OF OR RELATED TO THIS AGREEMENT OR ANY OTHER DOCUMENT, INSTRUMENT OR AGREEMENT BETWEEN THE UNDERSIGNED PARTIES.

12. GENERAL PROVISIONS.

12.1 Successors and Assigns . This Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of each of the parties and shall bind all persons who become bound as a debtor to this Agreement; provided, however, that neither this Agreement nor any rights hereunder may be assigned by Borrower without Lender’s prior written consent, which consent may be granted or withheld in Lender’s sole discretion. Lender shall have the right without the consent of or notice to the Borrower to sell, assign, transfer, negotiate, or grant participation in all or any part of, or any interest in, Lender’s obligations, rights and benefits hereunder.

12.2 Indemnification . INDEMNIFICATION AND HOLD HARMLESS,WITHOUT LIMITING ANY OTHER PROVISIONS OF THIS AGREEMENT, THE BORROWER AGREES TO INDEMNIFY AND HOLD LENDER HARMLESS FROM AND AGAINST ALL LOSSES, COSTS, DAMAGES, LIABILITIES AND EXPENSES, INCLUDING, WITHOUT LIMITATION, IN-HOUSE AND OUTSIDE ATTORNEYS’ FEES AND DISBURSEMENTS, INCURRED BY LENDER IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY LOANS OR TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR BY REASON OF ANY DEFAULT OR EVENT OF DEFAULT, OR ENFORCING THE OBLIGATIONS OF BORROWER OR ANY LOAN PARTY UNDER THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, AS APPLICABLE, OR IN EXERCISING ANY RIGHTS OR REMEDIES OF LENDER OR IN THE PROSECUTION OR DEFENSE OF ANY ACTION OR PROCEEDING CONCERNING ANY MATTER GROWING OUT OF OR CONNECTED WITH THIS AGREEMENT OR ANY OF THE LOAN DOCUMENTS; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT BE APPLICABLE, AND THE BORROWER SHALL NOT BE LIABLE FOR ANY SUCH LOSSES, COSTS, DAMAGES, LIABILITIES OR EXPENSES, TO THE EXTENT (BUT ONLY TO THE EXTENT) THE SAME ARISE OR RESULT FROM THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF LENDER OR ANY OF ITS AGENTS OR EMPLOYEES, THE PROVISIONS OF THIS SECTION SHALL SURVIVE REPAYMENT OF THE INDEBTEDNESS AND SATISFACTION OF ALL OBLIGATIONS OF BORROWER TO LENDER AND TERMINATION OF THIS AGREEMENT.

12.3 Time of Essence . Time is of the essence for the performance of all obligations set forth in this Agreement.

12.4 Severability of Provisions . Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision.

12.5 Amendments in Writing, Integration . All amendments to or terminations of this Agreement or the other Loan Documents must be in writing signed by the parties. All prior agreements, understandings, representations, warranties, and negotiations between the parties hereto with respect to the subject matter of this Agreement and the other Loan Documents, if any, are merged into this Agreement and the Loan Documents.

12.6 Counterparts . This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement.

12.7 Survival . All covenants, representations and warranties made in this Agreement shall continue in full force and effect so long as any Obligations remain outstanding or Lender has any obligation to make any Credit Extension to Borrower. The obligations of Borrower to indemnify Lender with respect to the expenses, damages, losses, costs and liabilities described in Section 13.2 shall survive until all applicable statute of limitations periods with respect to actions that may be brought against Lender have run.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written.

ALY ENERGY SERVICES, INC.

By: /s/ ALYA HIDAYATALLAH

Alya Hidayatallah, Chief Financial Officer

PERMIAN PELICAN, LLC

By:

/s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Manager

EXHIBIT A

DEFINITIONS

“Accounts” mean all presently existing and hereafter arising accounts, contract rights, payment intangibles and all other forms of obligations owing to a Credit Party arising out of the sale or lease of goods or the rendering of services by a Credit Party and any and all credit insurance, guaranties, and other security therefor, and the Borrower’s Books relating to any of the foregoing.

“Advance” or “Advances” mean a cash advance or cash advances under the Revolving Line.

“Affiliate” means, with respect to any Person, any Person that owns or controls directly or indirectly such Person, any Person that controls or is controlled by or is under common control with such Person, and each of such Person’s senior executive officers, directors, and partners.

“Board of Directors” means the Board of Directors of Borrower.

“Borrower’s Books” mean all of the books and records of the Credit Parties including: ledgers; accounting records concerning the assets or liabilities, the Collateral, business operations or financial condition of the Credit Parties; and all computer programs, or tape files, and the equipment, containing such information.

“Borrowing Base” means 80% of the Eligible Accounts Receivable of the Credit Parties.

“Business Day” means any day that is not a Saturday, Sunday, or other day on which Lenders in the State of Texas are authorized or required to close.

“Capital Expenditures” means, with respect to any Person, all expenditures made by such Person during any measuring period for the acquisition of assets that are required to be capitalized under GAAP.

“Cash” means unrestricted cash and cash equivalents.

“Change in Control” shall mean any transaction or series of related transactions in which any “person” or “group” (within the meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) becomes the “beneficial owner” (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of a sufficient number of shares of all classes of Equity Interests then outstanding of the Borrower ordinarily entitled to vote in the election of directors, empowering such “person” or “group” to elect a majority of the Board of Directors of the Borrower, who did not have such power before such transaction.

“Code” means the Texas Uniform Commercial Code as amended or supplemented from time to time.

“Collateral” has the meaning set forth in the Security Agreement.

“Contingent Obligation” means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to (i) any indebtedness, lease, dividend, letter of credit or other obligation of another Person including, without limitation, any such obligation directly or indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by that Person, or in respect of which that Person is otherwise directly or indirectly liable; (ii) any obligations with respect to undrawn letters of credit, corporate credit cards or merchant services issued or provided for the account of that Person; and (iii) all obligations arising under any interest rate, currency or commodity swap agreement, interest rate cap agreement, interest rate collar agreement, or other agreement or arrangement designed to protect such Person against fluctuation in interest rates, currency exchange rates or commodity prices; provided, however, that the term “Contingent Obligation” shall not include endorsements for collection or deposit in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determined amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by Lender in good faith; provided, however, that such amount shall not in any event exceed the maximum amount of the obligations under the guarantee or other support arrangement.

“Copyrights” mean any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret, now or hereafter existing, created, acquired or held.

“Credit Extension” means each credit by Lender to or for the benefit of the Credit Parties hereunder.

“Credit Parties” means the Borrower and its Subsidiaries.

“Dollars” mean lawful money of the United States.

“EBITDA” shall mean, for any period, consolidated Net Income of the Credit Parties determined after excluding all amounts expensed during such period with respect to (i) income taxes, (ii) interest expense, (iii) amortized debt discount and (iv) depreciation and amortization; provided , however , that, for the purposes of determining EBITDA there shall not be included in Net Income (i) any proceeds of any life insurance policy, (ii) any gain or loss which is classified as “extraordinary” in accordance with GAAP, (iii) any gain or loss arising from the disposition of assets or (iv) any non-cash gains or losses.

“Eligible Receivables” means, as to the Credit Parties, on a consolidated basis and without duplication, all Accounts reflected on its books in accordance with GAAP and which under 90 days old.

“Environmental Laws” mean all laws, rules, regulations, orders and the like issued by any federal, state, municipal, local, foreign or other governmental or quasi-Governmental Authority or any agency pertaining to the environment or to any hazardous materials or wastes, toxic substances, flammable, explosive or radioactive materials, asbestos or other similar materials.

“Equipment” means all present and future machinery, equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments in which a Credit Party has any interest.

“Equity Interests” mean, with respect to any Person, the capital stock, partnership, membership or limited liability company interest, or other equity securities or equity ownership interest of such Person.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder.

“Excess Cash Flow” shall mean, for any fiscal year of Borrower and its Subsidiaries, the excess (if any) of (i) the EBITDA for such year, plus or minus any change in net working capital (determined in accordance with GAAP, but exclusive of cash) for such year, minus (ii) Capital Expenditures actually made in cash, minus (iv) cash interest paid in respect of Indebtedness, minus (v) Taxes paid in cash by Borrower and its Subsidiaries plus (vi) Tax refunds received in cash by Borrower and its Subsidiaries.

“Final Maturity Date” means December 31, 2018.

“GAAP” means generally accepted accounting principles, consistently applied, as in effect from time to time in the United States of America.

“Governmental Authority” shall mean any federal, state or local government, or any agency or instrumentality thereof.

“Guaranty” means the Amended and Restated Guaranty Agreement executed by the Credit Parties in connection with the Original Credit Agreement.

“Indebtedness” means (a) all indebtedness for borrowed money or the deferred purchase price of property or services, including without limitation reimbursement and other obligations with respect to surety bonds and letters of credit, (b) all obligations evidenced by notes, bonds, debentures or similar instruments, (c) all capital lease obligations and (d) all Contingent Obligations.

“Insolvency Proceeding” means any proceeding commenced by or against any Person or entity under any provision of the United States Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law, including assignments for the benefit of creditors, formal or informal moratoria, compositions, extension generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

“Intellectual Property Collateral” means, with respect to the Borrower, all of the Borrower’s right, title, and interest in and to the following: (i) Copyrights, Trademarks and Patents; (ii) any and all trade secrets and design rights hereafter existing, created, acquired or held; (iii) any and all claims for damages by way of past, present and future infringement of any of the rights included above, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the intellectual property rights identified above; (iv) all licenses or other rights to use any of the Copyrights, Patents or Trademarks, and all license fees and royalties arising from such use to the extent permitted by such license or rights; and (v) all proceeds and products of the foregoing, including without limitation all payments under insurance or any indemnity or warranty payable in respect of any of the foregoing.

“Inventory” means all present and future inventory in which a Credit Party has any interest.

“Investment” means any beneficial ownership (including Equity Interests) of any Person, or any loan, advance or capital contribution to any Person.

“IRC” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder.

“Lender Expenses” mean all costs or expenses of Lender, or any other holder or owner of the Loan Documents (including, without limit, court costs, legal expenses and reasonable attorneys’ fees and expenses, whether generated in-house or by outside counsel, whether or not suit is instituted, and, if suit is instituted, whether at trial court level, appellate court level, in a bankruptcy, probate or administrative proceeding or otherwise) incurred in connection with the preparation, negotiation, execution, delivery, amendment, administration, and performance, or incurred in collecting, attempting to collect under the Loan Documents or the Obligations, or incurred in defending the Loan Documents, or incurred in any other matter or proceeding relating to the Loan Documents or the Obligations.

“LIBOR” means, for any date of determination, a rate per annum equal to the greater of (a) zero percent (0%) and (b) the offered rate for deposits for a six month period in United States dollars as displayed in the Bloomberg Financial Markets system (or such other authoritative source as selected by Lender in its sole discretion) as of 11:00 a.m. (London time) two Business Days prior to the date of determination.

“Lien” means any mortgage, lien, deed of trust, charge, pledge, security interest or other encumbrance.

“Loan Documents” mean, collectively, the Original Loan Documents, the Lease Documents, this Agreement and any other document, instrument or agreement entered into in connection with this Agreement, all as amended or extended from time to time.

“Material Adverse Effect” means (i) a material adverse change in the prospects, business or financial condition of the Credit Parties considered as a whole, (ii) a material impairment in the prospect of repayment of all or any portion of the Obligations or in otherwise performing a Credit Party’s obligations under the Loan Documents, or (iii) a material impairment in the perfection, value or priority of Lender’s security interests in the Collateral.

“Negotiable Collateral” means, with respect to the Borrower, all of the Borrower’s present and future letters of credit of which it is a beneficiary, drafts, instruments (including promissory notes), securities, documents of title, and chattel paper, and the Borrower’s Books relating to any of the foregoing.

“Net Cash Proceeds” shall mean with respect to any sale of assets by a Credit Party, all cash and cash equivalents received from such sale, transfer or other disposition after (i) payment of, or provision for, all brokerage commissions and other reasonable out‑of‑pocket fees and expenses actually incurred; (ii) payment of any outstanding obligations relating to such property; (iii) the amount of reserves recorded in accordance with GAAP for indemnity or similar obligations of the Credit Party directly related to such sale, transfer or other disposition and (iv) all income taxes and other taxes as a result of such transaction.

“Net Income” shall mean gross revenues and other proper income credits of Borrower and its Subsidiaries, less all proper income charges, including taxes on income, all determined in accordance with GAAP on a consolidated basis.

“Obligations” means all principal, interest (including post-petition interest), fees, reimbursements, indemnifications, and other amounts now or hereafter owed by any of the Credit Parties to the Lender, the under this Agreement and the other Loan Documents, and any increases, extensions, and rearrangements of those obligations under any amendments, supplements, and other modifications of the Loan Documents.

“Patents” mean all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

“Permitted Indebtedness” means: (i) Indebtedness of a Credit Party in favor of Lender arising under this Agreement or any other Loan Document; (ii) Indebtedness existing on the Effective Date; (iii) other Indebtedness not to exceed One Hundred Thousand Dollars ($100,000) in the aggregate secured by a lien described in clause (iii) of the defined term “Permitted Liens,” provided such Indebtedness does not exceed the lesser of the cost or fair market value of the equipment financed with such Indebtedness; (iv) Indebtedness to trade creditors incurred in the ordinary course of business; (v) Indebtedness incurred to finance the payment of insurance premiums up to an aggregate of $750,000 at any time outstanding; and (vi) extensions, refinancings and renewals of any items of Permitted Indebtedness, provided that the principal amount is not increased or the terms modified to impose more burdensome terms upon the applicable Credit Party.

“Permitted Investments” mean: (i) Investments existing on the Effective Date; (ii) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof maturing within one (1) year from the date of acquisition thereof, (iii) commercial paper maturing no more than one (1) year from the date of creation thereof and currently having rating of at least A-2 or P-2 from either Standard & Poor’s Rating Service or Moody’s Investors Service, Inc., and (iv) money market accounts and deposit accounts.

“Permitted Liens” mean: (i) any Liens existing on the Effective Date or arising under this Agreement or the other Loan Documents; (ii) Liens for taxes, fees, assessments or other governmental charges or levies, either not delinquent or being contested in good faith by appropriate proceedings and for which the applicable Credit Party maintains adequate reserves, provided the same have no priority over any of Lender’s security interests; (iii) Liens securing Indebtedness (A) upon or in any Equipment (other than Equipment financed by an Term Loan Advance) acquired or held by a Credit Party or any of its Subsidiaries to secure the purchase price of such Equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such Equipment, or (B) existing on such Equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such Equipment; and (iv) Liens incurred in connection with the extension, renewal or refinancing of the indebtedness secured by Liens of the type described in clauses (i) through (iii) above, provided that any extension, renewal or replacement Lien shall be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness being extended, renewed or refinanced does not increase.

“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or governmental agency.

“Prohibited Territory” means any person or country listed by the Office of Foreign Assets Control of the United States Department of Treasury as to which transactions between a United States Person and that territory are prohibited.

“Restricted Agreement” is any material license (other than over-the-counter software that is commercially available to the public and “open source” licenses) pursuant to which a Credit Party is the licensee: (a) that prohibits or otherwise restricts a Credit Party from assigning to Lender, or granting to Lender a Lien in, the Borrower’s interest in such license or agreement, the rights arising thereunder or any other property, or (b) for which a default under or termination of such license or contract could interfere with the Lender’s right to use, license, sell or collect any Collateral or otherwise exercise its rights and remedies with respect to the Collateral under the Loan Documents or applicable law.

“Revolving Line” means Credit Extensions which are made in accordance with the provisions of Section 2.2.

“Revolving Line Limit” means $1,000,000.

“Security Agreement” means collectively (i) the Amended and Restated Pledge and Security Agreement among the Credit Parties and Wells Fargo Bank in connection with the Original Credit Agreement and (ii) all amendments thereto through the Effective Date.

“Subordinated Debt” means any debt incurred by a Credit Party that is subordinated in writing to the Obligations on terms reasonably acceptable to Lender.

“Subsidiary” means any corporation, partnership or limited liability company or joint venture in which (i) any general partnership interest or (ii) more than fifty percent (50%) of the Equity Interests of which by the terms thereof ordinary voting power to elect the Board of Directors, managers or trustees of the entity, at the time as of which any determination is being made, is owned by a Credit Party, either directly or through an Affiliate.

“Tax” shall mean any tax, charge or assessment by or liability to any Governmental Authority, including, but not limited to, any deficiency, interest or penalty, whether required to be paid for a Person’s own account or for the account of another Person.

“Term Loan” means all Credit Extensions which are not part of the Revolving Line.

“Trademarks” mean any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of a Credit Party connected with and symbolized by such trademarks.

“United States” means the United States of America.

SCHEDULE 1

ORIGINAL LOAN DOCUMENTS

1. Amended and Restated Credit Agreement, dated as of April 15, 2014, by and among Aly Energy Services, Inc. (the “ Borrower ”), each subsidiary of the Borrower party thereto (each, a “ Guarantor ” and collectively with the Borrower, the “ Credit Parties ”), and Wells Fargo Bank, National Association (“WF”).

2. Agreement and Amendment No. 1 to Amended and Restated Credit Agreement, dated as of November 16, 2014, by and among the Credit Parties and WF.

3. Waiver to Credit Agreement, dated as of May 12, 2015, among the Credit Parties and WF.

4. Agreement and Amendment No. 2 to Amended and Restated Credit Agreement, dated as of September 30, 2015, by and among the Credit Parties and WF.

5. Forbearance Agreement and Amendment No. 3 to Amended and Restated Credit Agreement, dated as of March 31, 2016, by and among the Credit Parties and WF.

6. Amendment No. 1 to Forbearance Agreement and Amendment No. 3 to Amended and Restated Credit Agreement, dated as of May 13, 2016, by and among the Credit Parties and WF.

7. Limited Forbearance Agreement, dated as of August 4, 2016, by and among the Credit Parties and WF.

8. Second Limited Forbearance Agreement, dated October 5, 2016 by and among the Credit Parties and WF, and Third Limited Forbearance Agreement, dated October 27, 2016, by and among the Credit Parties and Tiger Finance, LLC.

9. Revolving Note, dated April 15, 2014 in the original principal amount of $5,000,000, executed by Borrower payable to the order of WF.

10. Term Note dated April 15, 2014 in the original principal amount of $25,000,000, executed by Borrower payable to the order of WF.

11. Swing Line Note dated April 15, 2014 in the original principal amount of $1,000,000, executed by Borrower payable to the order of WF.

12. Amended and Restated Pledge and Security Agreement dated as of April 15, 2014, by Credit Parties in favor of WF.

13. Supplement No. 1: Amended and Restated Pledge and Security Agreement, dated as of July 1, 2014, among the Borrower, Evolution Guidance Systems, Inc. and WF.

14. Amended and Restated Guaranty Agreement, dated as of April 15, 2014, by the Guarantors in favor of WF.

15. Supplement No. 1: Amended and Restated Guaranty Agreement, dated as of July 1, 2014, by Evolution Guidance Systems, Inc. in favor of WF.

16. Grant of Security Interest in Intellectual Property, dated as of August 10, 2016, by Borrower in favor of WF, recorded on August 10, 2016 with the United States Patent and Trademark Office as Reel 5851, Frame 0658.

17. Security Agreement: Immediately Restricted Wells Fargo Bank, National Association Deposit Account, dated as of March 31, 2016, by the Borrower in favor of WF.

18. Deposit Account Control Agreement, dated as of July 26, 2016, among the Credit Parties and WF.

19. Landlord Agreement, dated as of October 26, 2012, among Kurt Chew, LLC, WF and Austin Chalk Petroleum Services Corp.

20. UCC-1 Financing Statement naming Aly Centrifuge Inc. as Debtor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party, filed with the Delaware Secretary of State on April 16, 2014, as File No. 2014 1493642.

21. UCC-1 Financing Statement naming Aly Energy Services Inc. as Debtor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party, filed with the Delaware Secretary of State on November 7, 2012, as File No. 2012 4279966.

22. UCC-3 Financing Statement Amendment, amending Debtor’s name and address for File No. 2012 4279966, filed with the Delaware Secretary of State on June 14, 2013 under File No. 2013 2299528.

23. UCC-3 Financing Statement Amendment, amending Debtor’s address for File No. 2012 4279966, filed with the Delaware Secretary of State on April 16, 2014 under File No. 2014 1493634.

24. UCC-1 Financing Statement naming Borrower as Debtor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party, filed with the Delaware Secretary of State on June 14, 2013, as File No. 2013 2299486.

25. UCC-3 Financing Statement Amendment, amending Debtor’s address for File No. 2013 2299486, filed with the Delaware Secretary of State on April 16, 2014 under File No. 2014 1493626.

26. UCC-1 Financing Statement naming Austin Chalk Petroleum Services Corp., as Debtor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party, filed with the Texas Secretary of State on November 6, 2012 under File No. 12-0034957768.

27. UCC-1 Financing Statement naming Evolution Guidance Systems Inc., as Debtor, and Wells Fargo Bank, National Association, as Administrative Agent, as Secured Party, filed with the Texas Secretary of State on August 18, 2014 under File No. 14-0026413405.

28. Original Stock Certificate No. 001A for 100 shares of common Stock of Aly Operating, Inc., together with a stock power executed in blank.

29. Original Stock Certificate No. 001 for 10,000 shares of Aly Centrifuge Inc., together with a stock power executed in blank.

30. Original Stock Certificate No. 2 for 1,000 shares of Austin Chalk Petroleum Services Corp., together with a stock power executed in blank.

31. Original Stock Certificate No. 003 for 1,000 shares of Evolution Guidance Systems Inc., together with a stock power executed in blank.

SCHEDULE 2

LEASE DOCUMENTS

Austin Chalk Documents

1. Combination Loan and Security Agreement, Contract Number 407448-700, dated as of December 26, 2014, between Austin Chalk Petroleum Services Corp. and Wells Fargo Equipment Finance, Inc.

2. Master Lease Number 407448, dated as of January 23, 2015, between Austin Chalk Petroleum Services Corp. and Wells Fargo Equipment Finance, Inc.

3. Guaranty, dated as of December 26, 2014, by Aly Centrifuge Inc., Aly Energy Services Inc., Aly Operating, Inc. and Evolution Guidance Systems, Inc., in favor of Wells Fargo Equipment Finance, Inc., guaranteeing the obligations of Austin Chalk Petroleum Services Corp.

4. Supplement to Master Lease Number 407448-100, dated as of January 23, 2015, between Austin Chalk Petroleum Services Corp. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated January 29, 2015, by Austin Chalk Petroleum Services Corp., as amended by the Amendment, dated August 5, 2016.

5. Supplement to Master Lease Number 407448-101, dated as of February 26, 2015, between Austin Chalk Petroleum Services Corp. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated March 9, 2015, by Austin Chalk Petroleum Services Corp., as amended by the Amendment, dated August 5, 2016

Aly Operating, Inc. Documents

1. Master Lease Number 406630, dated as of July 18, 2013, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc.

2. Continuing Guaranty, dated as of July 18, 2013, by Austin Chalk Petroleum Services Corp., guaranteeing the obligations of Aly Operating, Inc.

3. Continuing Guaranty, dated as of July 18, 2013, by Aly Energy Services, Inc., guaranteeing the obligations of Aly Operating, Inc.

4. Secretary’s Certificate, dated August 5, 2013, by Alya Hidayatallah and Mark Patterson, as authorized officers of Aly Energy Services, Inc.

5. Supplement to Master Lease Number 406630-100, dated as of July 18, 2013, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated July 24, 2013, by Aly Operating, Inc., as amended by the Amendment, dated July 22, 2016.

6. Supplement to Master Lease Number 406630-101, dated as of August 6, 2013, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated August 9, 2013, by Aly Operating, Inc., as amended by the Amendment, dated July 22, 2016.

7. Supplement to Master Lease Number 406630-102, dated as of August 16, 2013, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated August 22, 2013, by Aly Operating, Inc., as amended by the Amendment, dated July 22, 2016.

8. Waiver of Interest, dated as of February 14, 2014, by Austin Chalk Petroleum Services Corp.

9. Supplement to Master Lease Number 406630-104, dated as of February 17, 2014, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated February 22, 2014, by Aly Operating, Inc., as amended by the Amendment, dated July 22, 2016

10. Addendum to Master Lease, dated as of July 18, 2013, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc.

11. Supplement to Master Lease Number 406630-400, dated as of April 14, 2014, between Aly Operating, Inc. and Wells Fargo Equipment Finance, Inc., together with a Delivery and Acceptance, dated April 4, 2014, by Aly Operating, Inc., as amended by the Amendment, dated July 22, 2016

Financing Statements

1. UCC-1 Financing Statement naming Aly Operating, Inc., as Debtor, and Wells Fargo Equipment Finance, Inc., as Secured Party, filed with Delaware Secretary of State on February 28, 2014 under File No. 2014 0790964.

2. UCC-1 Financing Statement Amendment, amending Debtor’s address for File No. 2014 0790964, filed with the Delaware Secretary of State on March 4, 2014 under File No. 2014 0821686.

3. UCC-1 Financing Statement naming Aly Operating, Inc., as Debtor, and Wells Fargo Equipment Finance, Inc., as Secured Party, filed with Delaware Secretary of State on April 28, 2014 under File No. 2014 1645845.

4. UCC-1 Financing Statement Amendment, amending and restating the collateral for File No. 2014 1645845, filed with the Delaware Secretary of State on April 30, 2014 under File No. 2014 1685742.

AMENDMENT NO. 1 TO

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

This AMENDMENT NO. 1 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is entered into as of March 1, 2017, by and between Pelican Permian, LLC, a Texas limited liability company (“Lender”), and Aly Energy Services, Inc., a Delaware corporation (“Borrower”).

WHEREAS, Borrower and Lender have entered into that certain Second Amended and Restated Credit Agreement, dated as of January 31, 2017 (the “Credit Agreement”); and

WHEREAS, Lender and the Borrower mutually desire to amend the Credit Agreement as set forth herein;

NOW, THEREFORE, the parties do hereby agree as follows:

1. Article 2 of the Credit Agreement shall be amended to add Section 2.3A to read as follows:

“2.3A CapEx Commitment . Lender agrees, on the terms and conditions set forth in this Agreement, to make CapEx Advances to the Borrower from time to time until the Final Maturity Date; provided that after giving effect to such CapEx Advances, the sum of the aggregate outstanding amount of all CapEx Advances shall not exceed $500,000. Each CapEx Advance shall be for the sole purpose of financing the purchase of equipment (other than liners and hoses) purchased on and after January 1, 2017 that, on the date of purchase has a useful life of at least two years. Further, the amount of the CapEx Advance (i) if the proceeds thereof are to be applied to fund or refinance the purchase of equipment from a vendor selling such equipment as part of its inventory, shall not exceed 80% of the Net Invoiced Cost of such equipment, and (ii) if the proceeds thereof are to be applied to fund or refinance the purchase of equipment from a Person other than a vendor selling such equipment as part of its inventory, shall not exceed 80% of the NOLV of such equipment. The Borrower may not reborrow any CapEx Advances that have been repaid. For the purposes of this Section 2.3A, the terms set forth below shall have the following meanings:

“ CapEx Advance ” means any advance by the Lender to the Borrower as part of this Section 2.3A.

“ Net Invoiced Costs ” means, as to the purchase of any equipment by a Credit Party, (a) the invoice cost for such equipment as set forth in a written invoice provided by the seller of such equipment to the applicable Credit Party minus (b) to the extent included or otherwise reflected in the invoice cost described in preceding clause (a), all fees and expenses over and above the actual purchase price of the equipment incurred by a Credit Party, including but not limited to, delivery fees, interest charges, finance fees, and other closing fees and expenses.

“ NOLV ” means with respect to any fixed assets of any Credit Party permanently located in the United States of America and any machinery, parts, equipment and other fixed assets acquired by a Credit Party the net orderly liquidation value thereof (taking into account any loss, destruction, damage, condemnation, seizure or taking, by exercise of the power of eminent domain or otherwise, confiscation, or the requisition, of such property and after taking into account all soft costs associated with the liquidation thereof, including but not limited to, delivery fees, interest charges, finance fees, taxes, installation fees and professional fees) as established by a written appraisal conducted by an industry recognized third party appraiser acceptable to the Lender.”

2. Except as modified hereby, the remaining terms of the Credit Agreement shall continue in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

ALY ENERGY SERVICES, INC.

By: /s/ ALYA HIDAYATALLAH

Alya Hidayatallah, Chief Financial Officer

PERMIAN PELICAN, LLC

By:

/s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Manager

AMENDMENT NO. 2 TO

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

This AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is entered into as of May 23, 2017, by and between Pelican Permian, LLC, a Texas limited liability company (“Lender”), and Aly Energy Services, Inc., a Delaware corporation (“Borrower”).

WHEREAS, Borrower and Lender have entered into that certain Second Amended and Restated Credit Agreement, dated as of January 31, 2017 (as amended to date, the “Credit Agreement”); and

WHEREAS, Lender and the Borrower mutually desire to amend the Credit Agreement as set forth herein;

NOW, THEREFORE, the parties do hereby agree as follows:

1. The definition of “Final Maturity Date” in Exhibit A is hereby amended to read as follows:

“Final Maturity Date” means December 31, 2019.

2. The definition of “Revolving Line Limit” in Exhibit A is hereby amended to read as follows:

“’Revolving Line Limit’ means $1,750,000.”

3. In consideration for the increase in the Revolving Line Limit and extension of the Final Maturity Date, Borrower agrees to issue to Lender, as an amendment fee, an aggregate of 1,200 shares of Borrower’s Series A Convertible Preferred Stock.

4. Except as modified hereby, the remaining terms of the Credit Agreement shall continue in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

ALY ENERGY SERVICES, INC.

By: /s/ ALYA HIDAYATALLAH

Alya Hidayatallah, Chief Financial Officer

PERMIAN PELICAN, LLC

By:
/s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Manager

AMENDMENT NO. 3 TO

SECOND AMENDED AND RESTATED CREDIT AGREEMENT

This AMENDMENT NO. 3 TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”) is entered into as of June 15, 2017, by and between Pelican Permian, LLC, a Texas limited liability company (“Lender”), and Aly Energy Services, Inc., a Delaware corporation (“Borrower”).

WHEREAS, Borrower and Lender have entered into that certain Second Amended and Restated Credit Agreement, dated as of January 31, 2017 (as amended to date, the “Credit Agreement”); and

WHEREAS, Lender and the Borrower mutually desire to amend the Credit Agreement as set forth herein;

NOW, THEREFORE, the parties do hereby agree as follows:

1. The first three sentences of Section 2.3A shall be amended to read as follows:

“Lender agrees, on the terms and conditions set forth in this Agreement, to make CapEx Advances to the Borrower from time to time until the Final Maturity Date; provided that after giving effect to such CapEx Advances, the sum of the aggregate outstanding amount of all CapEx Advances shall not exceed $1,250,000. Each CapEx Advance shall be for the sole purpose of financing the purchase of equipment (other than liners and hoses) purchased on and after January 1, 2017 that, on the date of purchase has a useful life of at least two years. Further, the amount of the CapEx Advance (i) if the proceeds thereof are to be applied to fund or refinance the purchase of equipment from a vendor selling such equipment as part of its inventory, shall not exceed 90% of the Net Invoiced Cost of such equipment, and (ii) if the proceeds thereof are to be applied to fund or refinance the purchase of equipment from a Person other than a vendor selling such equipment as part of its inventory, shall not exceed 90% of the NOLV of such equipment.”

2. The definition of “Revolving Line Limit” in Exhibit A is hereby amended to read as follows:

“’Revolving Line Limit’ means $1,000,000.”

3. Except as modified hereby, the remaining terms of the Credit Agreement shall continue in full force and effect.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

ALY ENERGY SERVICES, INC.

By: /s/ ALYA HIDAYATALLAH

Alya Hidayatallah, Chief Financial Officer

PERMIAN PELICAN, LLC

By:

/s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Manager

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated as of May 1, 2017 (“Effective Date”), is entered into by and between Aly Energy Services, Inc., (the “Employer”) and Shauvik Kundagrami (the “Executive”).

The Employer and the Executive hereby agree as follows:

1. Compensation and Employment . Executive agrees to enter into the employment of Employer, and Employer agrees to employ Executive, on the terms and conditions set forth below.

(a) Duties of Executive . Executive's job title shall be the Chief Executive Officer of the Employer, and Executive’s responsibilities shall include such services commensurate with such title. Executive’s job duties will be principally located within the Houston, Texas metropolitan area.

(b) Performance of Duties . Executive agrees during the Term (as defined hereinafter) of his/her employment, (i) he/she shall devote sufficient business time (at least 40 hours per week) and efforts, skills and abilities during business time exclusively to the performance of his/her duties as stated in this Agreement and to the furtherance of Employer's business, and (ii) he/she shall not be engaged in, or employed by, any other business enterprise without the written approval of the board of managers of Employer. Executive shall also use his/her best efforts to preserve the business of the Employer and the goodwill of all employees, customers, suppliers and other persons having business relations with the Employer. Notwithstanding the preceding, Executive may (i) advise, consult with and/or invest in businesses outside of the business or (ii) engage in the management of personal investments and in charitable service activities outside of the business so long as the foregoing do not materially detract from the performance of his/her duties hereunder or otherwise have a material adverse effect on Employer.

(c) Base Salary . Commencing [October 1, 2017], the Employer shall pay to Executive, and Executive agrees to accept for his/her employment by Employer, a base salary (the "Base Salary") which shall be $300,000, payable in installments by Employer in accordance with its payroll policies and subject to all appropriate withholdings.

(d) Bonus Plan . Prior to January 1, 2018 and each subsequent year, Employer’s management will prepare a recommendation to the board of directors of targeted results of operations for such year (with targets set before the reduction in EBITDA for the assumed payment of full executive bonuses), and the board will set proposed target results in a written bonus plan for such year. If Employer’s target results of operations for such year are achieved, Executive will receive a bonus equal to 100% of the Base Salary for such year. If Employer’s results of operations do not achieve such target results of operations but do achieve the target results prior to giving effect to the reduction in EBITDA from the assumed payment of full executive bonuses, then Executive shall be eligible for a bonus in amount to be set in the discretion of Employer’s board of directors. By way of example, if the board of directors sets a target of $4.7 million of EBITDA (prior to the deduction for the assumed payment of $700,000 of executive bonuses): (i) Executive will receive the full (100%) bonus if Employer achieves $4.7 million of actual EBITDA for such year, (ii) Executive will be eligible for a discretionary bonus if Employer achieves more than $4.0 million but less than $4.7 million of actual EBITDA for such year, and (iii) Executive will be ineligible for a discretionary bonus if Employer achieves less than $4.0 million of actual EBITDA for such year. Further, management may recommend to the board that EBITDA targets for any year be revised in the event that the Employer consummates any business acquisitions or any acquisitions of equipment in excess of budgeted amounts during the applicable year; and the board shall make such revisions that it deems appropriate after consideration of management’s recommendation.

(e) Option Grant . Executive shall receive a fully vested grant of non-qualified stock options under Employer’s 2017 Stock Option Plan to purchase 5,058,572 shares of common stock at an exercise price of $.10 per share.

(f) Benefits . Executive shall be entitled to participate in all employee benefits of the Employer as are generally afforded to other senior management employees of Employer.

(g) Expense Reimbursement . Employer shall reimburse Executive for all business travel and other out-of-pocket expenses authorized by Employer and reasonably incurred by Executive in the performance of his/her duties hereunder during the Term. All reimbursable expenses shall be appropriately documented in reasonable detail by Executive upon submission of any request for reimbursement, and in a format and manner consistent with Employer's expense reporting policy applicable to executives of Employer at the level of Executive's position, as well as applicable federal and state tax record keeping requirements.

(f) Vacation . Executive shall be entitled to 30 business days of vacation per calendar year of employment (which shall accrue ratably during each calendar year of employment). Accrued, untaken vacation days from one calendar year shall not carry over to the next succeeding calendar year of employment or be permitted to be paid in cash.

2. Term .

(a) The term of this Agreement (the "Term") shall begin on the Effective Date and continue until the earliest of:

(i) the 3 ^rd day after Employer gives Executive written notice of his/her termination for "Cause" (as defined hereinafter);

(ii) the date on which Employer terminates it for any reason other than for "Cause” or on which Executive terminates it for “Good Reason” (as defined hereinafter), provided that in such case, Employer shall pay Executive severance pay equal to (A) the Executive’s Base Salary for the “Severance Period” (as defined hereinafter), less (B) any amounts Employer is entitled to offset pursuant to subsection (c) below; and provided, further, that Employer shall also pay to Executive (when and if a bonus would otherwise have been paid pursuant to Section 1(d) above), the following portion of the bonus for the year in which the termination occurred: (A) if the termination occurred during the first six months of any bonus year, 50% of the bonus, or (B) if the termination occurred during the second six months of any bonus year, 100% of the bonus.

(iii) the death or “total disability” (as defined hereinafter) of Executive; or

(iv) the date specified in Executive's written notice of his/her resignation for any reason.

(b) For purposes of this Agreement:

(i) “Severance Period” shall mean 12 months.

(ii) "Cause" for termination shall be limited to the following conduct of Executive: (a) has engaged in gross negligence, gross incompetence or willful misconduct in the performance of Executive’s duties with respect to Employer or any of its affiliates, (b) has refused without proper legal reason to perform Executive’s duties and responsibilities to Employer or any of its affiliates, (c) has breached any provision of Article VIII or any other provision of this Agreement, (d) has materially breached any provision of any written agreement or corporate policy or code of conduct established by Employer or any of its affiliates (and as amended from time to time), (e) has engaged in conduct that is materially injurious to Employer or any of its affiliates, (f) has disclosed, without specific authorization from Employer, confidential information of Employer or any of its affiliates that is injurious to any such entity, (g) has committed an act of theft, fraud, embezzlement, misappropriation or breach of a fiduciary duty to Employer or any of its affiliates or (h) has been convicted of (or pleaded no contest to) a crime involving fraud, dishonesty or moral turpitude or any felony, provided, however, that termination for Cause by Employer under any of clause (a) through (f) above shall not be permitted unless Employer has given the Executive at least thirty (30) days’ prior written notice that it has a basis for a termination for Cause, which notice shall specify the facts and circumstances constituting a basis for termination for Cause and Executive has not remedied such facts and circumstances constituting a basis for termination for Cause, to the extent possible, within such 30-day period.

(iii) “total disability” shall mean the certification by a reputable physician after examination of the Executive, of the Executive’s inability to substantially perform his/her duties pursuant to this Agreement as a result of a medical condition (other than a medical condition arising out of or attributable to the abuse of drugs and/or alcohol).

(iv) “Good Reason” shall mean (a) the occurrence of a “Change of Control,” (b) the relocation of Executive to a location outside the Houston, Texas metropolitan area without Executive’s consent, (c) the material reduction by Employer in Executive’s Base Salary, responsibilities, duties, authority, title, compensation or reporting relationship without Executive’s consent or (d) Employer adversely affects Executive’s participation in or materially reduces Executive’s benefit under any benefit plan of Employer (including stock option and bonus arrangements) in which Executive is participating, without Executive’s consent.

(v) “Change of Control” shall have the meaning set forth in Employer’s 2017 Stock Option Plan.

(c) In the event of any termination of Executive's employment under this Agreement for any reason, the Employer's obligation to make any payments hereunder shall be subject to offset for, among other items, any loans or other monetary obligations Executive has with the Employer which shall be deemed paid to the extent subtracted from the amount of payments due Executive. All payments and benefits payable under this Agreement are gross payments subject to applicable withholdings.

(d) The Employer will pay to Executive the severance pay referenced above only upon the parties signing a mutual release that waives all claims that the Employer and Executive may have against the other, except (i) in regard to the enforcement of a party’s rights under this Agreement or (ii) in respect of actions or omissions of a party constituting gross negligence or willful misconduct.

3. Trade Secrets and Confidential Information .

(a) For purposes of this section, "Confidential Information" means any data or information, other than Trade Secrets, that is valuable to the Employer, its direct or indirect subsidiaries, or its customers or prospective customers, and not generally known to the public or to competitors of the Employer. For purposes of this Agreement, "Trade Secret" means information including, but not limited to, any technical or non-technical data, formula, pattern, compilation, program, device, method, technique, drawing, process, financial data, financial plan, product plan, list of actual or potential customers or suppliers or other information similar to any of the foregoing, which (i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can derive economic value from its disclosure or use and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

(b) Executive acknowledges that by this Agreement, he/she shall be employed by the Employer in a confidential relationship wherein he, in the course of his/her employment with the Employer, will receive and will have access to Confidential Information and Trade Secrets of the Employer, including but not limited to confidential and secret business and marketing plans, strategies, and studies, detailed client/customer lists and information relating to the operations and business requirements of those clients/customers and, accordingly, he/she is willing to enter into the covenants contained in Sections 3 and 4 of this Agreement in order to provide the Employer with what he/she considers to be reasonable protection for his/her interests.

(c) Executive hereby agrees that, during the Term and for an additional period of 12 months thereafter, he/she will hold in confidence all Confidential Information of the Employer, its direct or indirect subsidiaries, or its customers or prospective customers, that came into Executive's knowledge during his/her employment by the Employer and will not disclose, publish or make use of such Confidential Information without the prior written consent of the Employer.

(d) Executive shall hold in confidence all Trade Secrets of the Employer, its direct or indirect subsidiaries, or its customers or prospective customers, that came into Executive's knowledge during his/her employment by the Employer and shall not disclose, publish or make use of at any time after the date hereof such Trade Secrets without the prior written consent of the Employer's board of managers for as long as the information remains a Trade Secret.

(e) Notwithstanding the foregoing, the provisions of this Section 3 will not apply to (i) information required to be disclosed by Executive in the ordinary course of his/her duties hereunder, (ii) Confidential Information that otherwise becomes generally known in the industry or to the public through no act of Executive or any person or entity acting on Executive's behalf, or which is required to be disclosed by court order or applicable law, or (iii) information independently developed by Executive without use or reference to any Confidential Information.

(f) The parties agree that the restrictions contained in this Section 3 are in addition to and not in lieu of protections afforded to trade secrets and confidential information under applicable state law. Nothing in this Agreement is intended to or shall be interpreted as diminishing or otherwise limiting the Employer's right under applicable law to protect its Trade Secrets and Confidential Information.

4. Return of Employer Property . All records, designs, patents, business plans, financial statements, manuals, memoranda, customer lists, customer databases, rolodexes and other property delivered to or compiled by Executive for or on behalf of the Employer or its representatives, vendors or customers that pertain to the Business of the Employer (including the respective subsidiaries thereof) shall be and remain the property of the Employer, and be subject at all times to its discretion and control. Upon the request of the Employer and, in any event, upon the termination of Executive's employment with the Employer, Executive shall deliver all such materials to the Employer. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the Employer that are collected by Executive shall be delivered promptly to the Employer without request by it upon termination of Executive's employment.

5. Compliance with Section 409A of the Code . Each payment under this Agreement, including each payment in a series of installment payments, is intended to be a separate payment for purposes of Treas. Reg. § 1.409A-2(b), and is intended to be: (i) exempt from Section 409A of the Internal Revenue Code of 1986, the regulations and other binding guidance promulgated thereunder (“Section 409A”) or (ii) in compliance with Section 409A; and the provisions of this Agreement will be administered, interpreted and construed accordingly. Notwithstanding the foregoing provisions of this Agreement, if the payment of any severance compensation or severance benefits under Article VII would be subject to additional taxes and interest under Section 409A, then any such payments that Executive would otherwise be entitled to during the first six months following Executive’s separation from service shall be accumulated and paid on the date that is six months after Executive’s separation from service (or if such payment date does not fall on a business day of Employer, the next following business day of Employer), or such earlier date upon which such amount can be paid under Section 409A without being subject to such additional taxes and interest.

6. Entire Agreement . This Agreement supersedes any and all other agreements, either oral or written, between the parties hereto with respect to the subject matter hereof and contains all of the covenants and agreements between the parties with respect thereto.

7. Modification . No change or modification of this Agreement shall be valid or binding upon the parties hereto, nor shall any waiver of any term or condition in the future be so binding, unless such change or modification or waiver shall be in writing and signed by the parties hereto.

8. Governing Law and Venue . This Agreement shall be governed by, and construed in accordance with, the laws of the State of Texas (excluding conflicts of law principles). If any action is brought to enforce or interpret this Agreement, venue for such action shall be in the state courts of Texas.

9. Attorney's Fees . If any action, proceeding, or litigation is brought under or with respect to this Agreement, the prevailing party shall be entitled to his/her costs and expenses incurred in relation thereto, including reasonable attorneys' fees.

10. Counterparts . This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document.

11. Estate . If Executive dies prior to the expiration of the Term of employment, any monies that may be due him/her from Employer under this Agreement as of the date of his/her death shall be paid to his/her estate.

12. Assignment . Employer shall have the right to assign this Agreement to its successors or assigns. Employer further covenants to cause any such successor or assign to assume the terms and conditions of this Agreement. The terms "successors" and "assigns" shall include any person, corporation, partnership or other entity that buys all or substantially all of Employer's assets or all of its stock, or with which Employer merges or consolidates. The rights, duties and benefits to Executive hereunder are personal to him/her. Accordingly, no such right or benefit may be assigned by him/her, and no other person shall have any rights therein.

13. Binding Effect . This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns.

14. Waiver of Breach . The waiver by any party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by the breaching party.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

Aly Energy Services, Inc.

By: /s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Chairman

EXECUTIVE:

/s/ SHAUVIK KUNDAGRAMI

Shauvik Kundragrami

EXHIBIT 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated as of May 1, 2017 (“Effective Date”), is entered into by and between Aly Energy Services, Inc., (the “Employer”) and Greg Price (the “Executive”).

The Employer and the Executive hereby agree as follows:

1. Compensation and Employment . Executive agrees to enter into the employment of Employer, and Employer agrees to employ Executive, on the terms and conditions set forth below.

(a) Duties of Executive . Executive's job title shall be the President and Chief Operating Officer of the Employer, and Executive’s responsibilities shall include such services commensurate with such title. Executive’s job duties will be principally located within the Houston, Texas metropolitan area.

(c) Base Salary . The Employer shall pay to Executive, and Executive agrees to accept for his/her employment by Employer, a base salary (the "Base Salary") which shall be $200,000, payable in installments by Employer in accordance with its payroll policies and subject to all appropriate withholdings.

(e) Option Grant . Executive shall receive a fully vested grant of non-qualified stock options under Employer’s 2017 Stock Option Plan to purchase 3,372,382 shares of common stock at an exercise price of $.10 per share.

(f) Benefits . Executive shall be entitled to participate in all employee benefits of the Employer as are generally afforded to other senior management employees of Employer.

(h) Vacation . Executive shall be entitled to 30 business days of vacation per calendar year of employment (which shall accrue ratably during each calendar year of employment). Accrued, untaken vacation days from one calendar year shall not carry over to the next succeeding calendar year of employment or be permitted to be paid in cash.

2. Term .

(a) The term of this Agreement (the "Term") shall begin on the Effective Date and continue until the earliest of:

(i) the 3 ^rd day after Employer gives Executive written notice of his/her termination for "Cause" (as defined hereinafter),

(iii) the death or “total disability” (as defined hereinafter) of Executive; or

(iv) the date specified in Executive's written notice of his/her resignation for any reason.

(b) For purposes of this Agreement:

(i) “Severance Period” shall mean 12 months.

(v) “Change of Control” shall have the meaning set forth in Employer’s 2017 Stock Option Plan.

3. Trade Secrets and Confidential Information .

10. Counterparts . This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document.

13. Binding Effect . This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

Aly Energy Services, Inc.

By: /s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Chairman

EXECUTIVE:

/s/ GREG PRICE

Greg Price

EXHIBIT 10.3

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”), dated as of May 1, 2017 (“Effective Date”), is entered into by and between Aly Energy Services, Inc., (the “Employer”) and Alya Hidayatallah (the “Executive”).

The Employer and the Executive hereby agree as follows:

1. Compensation and Employment . Executive agrees to enter into the employment of Employer, and Employer agrees to employ Executive, on the terms and conditions set forth below.

(a) Duties of Executive . Executive's job title shall be the Chief Financial Officer of the Employer, and Executive’s responsibilities shall include such services commensurate with such title. Executive’s job duties will be principally located within the Houston, Texas metropolitan area.

(f) Benefits . Executive shall be entitled to participate in all employee benefits of the Employer as are generally afforded to other senior management employees of Employer.

2. Term .

(a) The term of this Agreement (the "Term") shall begin on the Effective Date and continue until the earliest of:

(i) the 3 ^rd day after Employer gives Executive written notice of his/her termination for "Cause" (as defined hereinafter),

(iii) the death or “total disability” (as defined hereinafter) of Executive; or

(iv) the date specified in Executive's written notice of his/her resignation for any reason.

(b) For purposes of this Agreement:

(i) “Severance Period” shall mean 12 months.

(v) “Change of Control” shall have the meaning set forth in Employer’s 2017 Stock Option Plan.

3. Trade Secrets and Confidential Information .

10. Counterparts . This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall constitute one document.

13. Binding Effect . This Agreement shall be binding upon the parties hereto, together with their respective executors, administrators, successors, personal representatives, heirs and assigns.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

Aly Energy Services, Inc.

By: /s/ MICKI HIDAYATALLAH

Micki Hidayatallah, Chairman

EXECUTIVE:

/s/ ALYA HIDAYATALLAH

Alya Hidayatallah

EXHIBIT 10.4

ALY ENERGY SERVICES, INC.

2017 STOCK OPTION PLAN

The purpose of the Aly Energy Services, Inc. 2017 Equity Compensation Plan (the “Plan”) is to provide designated employees of Aly Energy Services, Inc. (the “Company”) and its subsidiaries with the opportunity to receive grants of stock options. The Company believes that the Plan will encourage the participants to contribute materially to the growth of the Company, thereby benefiting the Company’s shareholders, and will align the economic interests of the participants with those of the shareholders.

The Board of Directors of the Company (the “Board”) has approved the Plan on April 4, 2017. The Plan shall become effective on the date on which it is approved by a majority in interest of the Company’s shareholders.

1. Administration

(a) Committee . The Plan shall be administered and interpreted by the Compensation Committee of the Board of Directors (the “Committee”). The Committee shall consist of two or more persons appointed by the Board, all of whom shall be “outside directors” as defined under section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) and related Treasury regulations and may be “non-employee directors” as defined under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). To the extent that the Company has not constituted a Compensation Committee, references hereunder to the “Committee” shall mean the entire Board.

(b) Committee Authority . The Committee shall have the sole authority to (i) determine the individuals to whom grants shall be made under the Plan, (ii) determine the type, size and terms of the grants to be made to each such individual, (iii) determine the time when the grants will be made and the duration of any applicable exercise or restriction period, including the criteria for exercisability and the acceleration of exercisability and (iv) deal with any other matters arising under the Plan.

(c) Committee Determination s. The Committee shall have full power and authority to administer and interpret the Plan, to make factual determinations and to adopt or amend such rules, regulations, agreements and instruments for implementing the Plan and for the conduct of its business as it deems necessary or advisable, in its sole discretion. The Committee’s interpretations of the Plan and all determinations made by the Committee pursuant to the powers vested in it hereunder shall be conclusive and binding on all persons having any interest in the Plan or in any awards granted hereunder. All powers of the Committee shall be executed in its sole discretion, in the best interest of the Company, not as a fiduciary, and in keeping with the objectives of the Plan and need not be uniform as to similarly situated individuals.

2. Grants

Awards under the Plan may consist of grants (herein “Grants”) of incentive stock options as described in Section 5 (“Incentive Stock Options”) or nonqualified stock options as described in Section 5 (“Nonqualified Stock Options”) (Incentive Stock Options and Nonqualified Stock Options are collectively referred to as “Options”). All Grants shall be subject to the terms and conditions set forth herein and to such other terms and conditions consistent with this Plan as the Committee deems appropriate and as are specified in writing by the Committee to the individual in a grant instrument (the “Grant Instrument”) or an amendment to the Grant Instrument. The Committee shall approve the form and provisions of each Grant Instrument. Grants under a particular Section of the Plan need not be uniform as among the grantees.

3. Shares Subject to the Plan

(a) Shares Authorized . Subject to the adjustment specified below, the aggregate number of shares of common stock of the Company (“Company Stock”) that may be issued or transferred under the Plan is 16,861,908 shares, and the maximum number of shares of Company Stock that may be delivered pursuant to Incentive Stock Options is 5,000,000 of those shares. The maximum aggregate number of shares of Company Stock that shall be subject to Grants made under the Plan to any individual during any calendar year shall be 5,200,000 shares. The shares may be authorized but unissued shares of Company Stock or reacquired shares of Company Stock, including shares purchased by the Company on the open market for purposes of the Plan. If and to the extent Options granted under the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered without having been exercised, the shares subject to such Grants shall again be available for purposes of the Plan.

(b) Adjustments . If there is any change in the number or kind of shares of Company Stock outstanding (i) by reason of a stock dividend, spinoff, recapitalization, stock split, or combination or exchange of shares, (ii) by reason of a merger, reorganization or consolidation in which the Company is the surviving corporation, (iii) by reason of a reclassification or change in par value, or (iv) by reason of any other extraordinary or unusual event affecting the outstanding Company Stock as a class without the Company’s receipt of consideration, or if the value of outstanding shares of Company Stock is substantially reduced as a result of a spinoff or the Company’s payment of an extraordinary dividend or distribution, the maximum number of shares of Company Stock available for Grants, the maximum number of shares of Company Stock that any individual participating in the Plan may be granted in any year, the number of shares covered by outstanding Grants, the kind of shares issued under the Plan, and the price per share or the applicable market value of such Grants shall be appropriately adjusted by the Committee to reflect any increase or decrease in the number of, or change in the kind or value of, issued shares of Company Stock to

preclude, to the extent practicable, the enlargement or dilution of rights and benefits under such Grants; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. Any adjustments determined by the Committee shall be final, binding and conclusive.

4. Eligibility for Participation

(a) Eligible Persons . All employees of the Company and its subsidiaries (“Employees”) shall be eligible to participate in the Plan.

(b) Selection of Grantees . The Committee shall select the Employees to receive Grants and shall determine the number of shares of Company Stock subject to a particular Grant in such manner as the Committee determines. Employees who receive Grants under this Plan shall hereinafter be referred to as “Grantees.” In no event shall Options be granted to any Grantee in substitution for, or upon cancellation of, previously granted Options to purchase Company Stock, or shall similar action be taken to effect the “repricing” of previously granted Options.

5. Granting of Options

(a) Number of Shares . The Committee shall determine the number of shares of Company Stock that will be subject to each Grant of Options to Employees.

(b) Type of Option and Price . The Committee may grant Incentive Stock Options that are intended to qualify as “incentive stock options” within the meaning of section 422 of the Code or Nonqualified Stock Options that are not intended so to qualify or any combination of Incentive Stock Options and Nonqualified Stock Options, all in accordance with the terms and conditions set forth herein. The purchase price (the “Exercise Price”) of Company Stock subject to an Option shall be determined by the Committee but in all cases shall be equal to, or greater than, the Fair Market Value of a share of Company Stock on the date the Option is granted; provided, however, that an Incentive Stock Option may not be granted to an Employee who, at the time of grant, owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary of the Company, unless the Exercise Price per share is not less than 110% of the Fair Market Value of Company Stock on the date of grant. So long as the Company Stock is publicly traded, Fair Market Value per share shall be determined as follows:

(x) if the principal trading market for the Company Stock is a national securities exchange or the Nasdaq National Market, the last reported sale price thereof on the relevant date or (if there were no trades on that date) the latest preceding date upon which a sale was reported; or

(y) if the Company Stock is not principally traded on such exchange or market, the mean between the last reported “bid” and “asked” prices of Company Stock on the relevant date, as reported on Nasdaq or, if not so reported, as reported in a customary financial reporting service, as applicable and as the Committee determines. If the Company Stock is not publicly traded or, if publicly traded, is not subject to reported transactions or “bid” or “asked” quotations as set forth above, the Fair Market Value per share shall be as determined by the Committee.

(c) Option Term . The Committee shall determine the term of each Option. The term of any Option shall not exceed ten years from the date of grant. However, an Incentive Stock Option that is granted to an Employee who, at the time of grant, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company, or any parent or subsidiary of the Company, may not have a term that exceeds five years from the date of grant.

(d) Exercisability of Options . Options shall become exercisable in accordance with such terms and conditions, consistent with the Plan, as may be determined by the Committee and specified in the Grant Instrument or an amendment to the Grant Instrument. The Committee may accelerate the exercisability of any or all outstanding Options at any time for any reason.

(e) Termination of Employment, Disability or Death .

(i) Except as provided below, an Option may only be exercised while the Grantee is employed by the Company as an Employee. In the event that a Grantee ceases to be employed by the Company for any reason other than a “disability” or death, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within 90 days after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee’s Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date. Notwithstanding the foregoing provisions of this Section, in the event a Grant issued under the Plan is subject to Section 409A of the Code, then, to the extent necessary to comply with the requirements of Section 409A of the Code, a Grantee shall be considered to cease employment with the Company for any reason other than a disability or death, provided that such employment shall cease in accordance with the definition of “separation from service” provided for under Section 409A of the Code and the regulations or other guidance issued thereunder.

(ii) In the event the Grantee ceases to be employed by the Company because the Grantee is “disabled”, any Option which is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee’s Options which are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date.

(iii) If the Grantee dies while employed by the Company or within 90 days after the date on which the Grantee ceases to be employed on account of a termination of employment specified in Section 5(e)(i) above (or within such other period of time as may be specified by the Committee), any Option that is otherwise exercisable by the Grantee shall terminate unless exercised within one year after the date on which the Grantee ceases to be employed by the Company (or within such other period of time as may be specified by the Committee), but in any event no later than the date of expiration of the Option term. Any of the Grantee’s Options that are not otherwise exercisable as of the date on which the Grantee ceases to be employed by the Company shall terminate as of such date.

(iv) For purposes of this Section 5(e):

(A) The term “Company” shall mean the Company and its parent and subsidiary corporations.

(B) “Employed by the Company” shall mean employment or service as an Employee (so that, for purposes of exercising Options, a Grantee shall not be considered to have terminated employment or service until the Grantee ceases to be an Employee), unless the Committee determines otherwise.

(C) “Disability” shall mean a Grantee’s becoming disabled within the meaning of section 22(e)(3) of the Code. Notwithstanding the foregoing provisions of this Section 5(e)(iv)(C), in the event a Grant issued under the Plan is subject to Section 409A of the Code, then, in lieu of the foregoing definition and to the extent necessary to comply with the requirements of Section 409A of the Code, the definition of “disability” for purposes of such Grant shall be the definition of “disability” provided for under Section 409A of the Code and the regulations or other guidance issued thereunder.

(v) Notwithstanding anything to the contrary in this Plan, (i) if upon the date of a Grantee’s termination of employment with the Company, the Grantee is a “specified employee” within the meaning of Section 409A of the Code, and the delay of any amounts otherwise payable under this Plan as a result of the Grantee’s termination of employment is necessary in order to prevent any accelerated or additional tax to Grantee under Section 409A of the Code, then the Company will delay the payment of any such amounts hereunder until the date that is six (6) months following the date of Grantee’s termination of employment with the Company at which time any such delayed amounts will be paid to Grantee in a single lump sum.

(f) Exercise of Options . A Grantee may exercise an Option that has become exercisable, in whole or in part, by delivering a notice of exercise to the Company with payment of the Exercise Price. The Grantee shall pay the Exercise Price for an Option in cash or by such other method as the Committee may approve, including payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board. The Grantee shall pay the Exercise Price and the amount of any withholding tax due at the time of exercise.

(g) Limits on Incentive Stock Options . Each Incentive Stock Option shall provide that, if the aggregate Fair Market Value of the stock on the date of the grant with respect to which Incentive Stock Options are exercisable for the first time by a Grantee during any calendar year, under the Plan or any other stock option plan of the Company or a parent or subsidiary, exceeds $100,000, then the option, as to the excess, shall be treated as a Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any person who is not an Employee of the Company or a parent or subsidiary (within the meaning of section 424(f) of the Code).

6. Withholding of Taxes

All Grants under the Plan shall be subject to applicable federal (including FICA), state and local tax withholding requirements. The Company shall have the right to deduct from all Grants paid in cash, or from other wages paid to the Grantee, any federal, state or local taxes required by law to be withheld with respect to such Grants. In the case of Options and other Grants paid in Company Stock, the Company may require the Grantee or other person receiving such shares to pay to the Company the amount of any such taxes that the Company is required to withhold with respect to such Grants, or the Company may deduct from other wages paid by the Company the amount of any withholding taxes due with respect to such Grants.

7. Transferability of Grants

(a) Nontransferability of Grants . Except as provided below, only the Grantee may exercise rights under a Grant during the Grantee’s lifetime. A Grantee may not transfer those rights except by will or by the laws of descent and distribution or, with respect to Grants other than Incentive Stock Options, if permitted in any specific case by the Committee, pursuant to a domestic relations order (as defined under the Code or Title I of the Employee Retirement Income Security Act of 1974, as amended, or the regulations thereunder). When a Grantee dies, the personal representative or other person entitled to succeed to the rights of the Grantee (“Successor Grantee”) may exercise such rights. A Successor Grantee must furnish proof satisfactory to the Company of his or her right to receive the Grant under the Grantee’s will or under the applicable laws of descent and distribution.

(b) Transfer of Nonqualified Stock Options . Notwithstanding the foregoing, the Committee may provide, in a Grant Instrument, that a Grantee may transfer Nonqualified Stock Options to family members or other persons or entities according to such terms as the Committee may determine; provided that the Grantee receives no consideration for the transfer of an Option and the transferred Option shall continue to be subject to the same terms and conditions as were applicable to the Option immediately before the transfer.

8. Change of Control of the Company

As used herein, a “Change of Control” shall be deemed to have occurred if:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 51% or more of the voting power of the then outstanding securities of the Company; or

(ii) The shareholders of the Company approve (or, if shareholder approval is not required, the Board approves) an agreement providing for (i) the merger or consolidation of the Company with another corporation where the shareholders of the Company, immediately prior to the merger or consolidation, will not beneficially own, immediately after the merger or consolidation, shares entitling such shareholders to 51% or more of all votes to which all shareholders of the surviving corporation would be entitled in the election of directors (without consideration of the rights of any class of stock to elect directors by a separate class vote), (ii) the sale or other disposition of all or substantially all of the assets of the Company, or (iii) a liquidation or dissolution of the Company.

Notwithstanding the foregoing provisions of this Section 8, in the event a Grant issued under the Plan is subject to Section 409A of the Code, then, in lieu of the foregoing definition and to the extent necessary to comply with the requirements of Section 409A of the Code, the definition of “Change of Control” for purposes of such Grant shall be the definition provided for under Section 409A of the Code and the regulations or other guidance issued thereunder.

9. Consequences of a Change of Control

(a) Notice and Acceleration . Upon a Change of Control, unless the Committee determines otherwise, (i) the Company shall provide each Grantee with outstanding Grants written notice of such Change of Control and (ii) all outstanding Options shall automatically accelerate and become fully exercisable.

(b) Assumption of Grants . Upon a Change of Control where the Company is not the surviving corporation (or survives only as a subsidiary of another corporation), unless the Committee determines otherwise, all outstanding Options that are not exercised shall be assumed by, or replaced with comparable options or rights by, the surviving corporation.

(c) Other Alternatives . Notwithstanding the foregoing, subject to subsection (d) below, in the event of a Change of Control, the Committee may take one or both of the following actions: the Committee may (i) require that Grantees surrender their outstanding Options in exchange for a payment by the Company, in cash or Company Stock as determined by the Committee, in an amount equal to the amount by which the then Fair Market Value of the shares of Company Stock subject to the Grantee’s unexercised Options exceeds the Exercise Price of the Options, or (ii) after giving Grantees an opportunity to exercise their outstanding Options, terminate any or all unexercised Options at such time as the Committee deems appropriate. Such surrender or termination shall take place as of the date of the Change of Control or such other date as the Committee may specify.

10. Amendment and Termination of the Plan

(a) Amendment . The Board may amend or terminate the Plan at any time; provided, however, that the Board shall not amend the Plan without shareholder approval if such approval is required by Sections 162(m), 421 and 422 of the Code.

(b) Termination of Plan . The Plan shall terminate on the day immediately preceding the tenth anniversary of its effective date, unless the Plan is terminated earlier by the Board or is extended by the Board with the approval of the shareholders.

(c) Termination and Amendment of Outstanding Grants . A termination or amendment of the Plan that occurs after a Grant is made shall not materially impair the rights of a Grantee unless the Grantee consents. The termination of the Plan shall not impair the power and authority of the Committee with respect to an outstanding Grant. Whether or not the Plan has terminated, an outstanding Grant may be amended by agreement of the Company and the Grantee consistent with the Plan.

(d) Governing Document . The Plan shall be the controlling document. No other statements, representations, explanatory materials or examples, oral or written, may amend the Plan in any manner. The Plan shall be binding upon and enforceable against the Company and its successors and assigns.

11. Funding of the Plan

This Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any Grants under this Plan. In no event shall interest be paid or accrued on any Grant, including unpaid installments of Grants.

12. Rights of Participants

Nothing in this Plan shall entitle any Employee or other person to any claim or right to be granted a Grant under this Plan. Neither this Plan nor any action taken hereunder shall be construed as giving any individual any rights to be retained by or in the employ of the Company or any other employment rights.

13. Grants in Connection with Corporate Transactions and Otherwise .

Nothing contained in this Plan shall be construed to (i) limit the right of the Committee to make Grants under this Plan in connection with the acquisition, by purchase, lease, merger, consolidation or otherwise, of the business or assets of any corporation, firm or association, including Grants to employees thereof who become Employees of the Company, or for other proper corporate purposes, or (ii) limit the right of the Company to grant stock options or make other awards outside of this Plan. Without limiting the foregoing, the Committee may make a Grant to an employee of another corporation who becomes an Employee by reason of a corporate merger, consolidation, acquisition of stock or property, reorganization or liquidation involving the Company or any of its subsidiaries in substitution for a stock option made by such corporation. The terms and conditions of the substitute grants may vary from the terms and conditions required by the Plan and from those of the substituted stock incentives. The Committee shall prescribe the provisions of the substitute grants.

14. Compliance with Law .

The Plan, the exercise of Options and the obligations of the Company to issue or transfer shares of Company Stock under Grants shall be subject to all applicable laws and to approvals by any governmental or regulatory agency as may be required. With respect to persons subject to section 16 of the Exchange Act, it is the intent of the Company that the Plan and all transactions under the Plan comply with all applicable provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee may revoke any Grant if it is contrary to law or modify a Grant to bring it into compliance with any valid and mandatory government regulation. The Committee may also adopt rules regarding the withholding of taxes on payments to Grantees. The Committee may, in its sole discretion, agree to limit its authority under this Section.

15. Governing Law .

The validity, construction, interpretation and effect of the Plan and Grant Instruments issued under the Plan shall exclusively be governed by and determined in accordance with the law of State of Delaware.

16. Section 409A .

To the extent this Plan provides for nonqualified deferred compensation, it is intended to satisfy the provisions of Section 409A of the Code and related regulations and Treasury pronouncements. If any provision herein results in the imposition of an excise tax on any Grantee under Section 409A of the Code, any such provision will be reformed to avoid any such imposition in such manner as the Committee determines is appropriate to comply with Section 409A of the Code.

EXHIBIT 10.5

ALY ENERGY SERVICES, INC.

NONQUALIFIED STOCK OPTION AGREEMENT

THIS AGREEMENT is made as of __________, by and between Aly Energy Services, Inc. (the "Company") and ____________ (“Optionee"), pursuant to the Company's 2017 Stock Option Plan (the "Plan").

WHEREAS, the Board of Directors of the Company (the "Board") has authority to make certain Grants of Options under the Plan to Employees of the Company; and

WHEREAS, the Board has determined to Grant Optionee the Option described in this Agreement;

NOW, THEREFORE, the Company and Optionee agree as follows:

1. Effect of Plan and Authority of Board . This Agreement and the grant of the Option hereunder are subject to the Plan, which is incorporated herein by reference. The Board is authorized to make all determinations and interpretations with respect to matters arising under the Plan, this Agreement and the Option Grant hereunder. Capitalized terms used and not otherwise defined herein have the respective meanings given them in the Plan.

2. Grant of Option .

(a) Effective as of the date of this Agreement (the "Grant Date"), the Company grants to Optionee an Option to purchase an aggregate of _________ shares of Common Stock at an exercise price of $___ per share (the "Option"). Except as otherwise provided in the Plan, the Option may not be exercised unless Optionee shall have been in the continuous employ or service of the Company from the date of this Agreement to the date of exercise of the Option. In no event shall the Option be exercisable in whole or in part after the expiration of 10 years from the date of this Agreement. The Option is intended to be and shall be treated as a Nonqualified Stock Option.

(b) Subject to the provisions of Section 2(a) hereof, this Option may be exercised over a period commencing on the date of this Agreement and ending 10 years from the date of this Agreement.

(c) Upon exercise of the Option, the exercise price of the Option shall be payable to the Company in the manner specified in the Plan.

(d) Promptly after demand by the Company, and at its direction, Optionee shall pay to the Company an amount equal to the applicable withholding taxes due in connection with the exercise of the Option.

3. Delivery of Shares . Delivery of the certificates representing the shares of Common Stock purchased upon exercise of this Option shall be made promptly after receipt of notice of exercise and full payment of the exercise price and any required withholding taxes.

4. Nonassignability . The Option granted hereunder may not be sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of, other than by will or pursuant to the applicable laws of descent and distribution. In the case of the death of Optionee or other person entitled to exercise the Option, the Company may require, as a condition to the transfer of the Option by will or pursuant to the laws of descent and distribution or the exercise thereof, that the person entitled to exercise the Option execute and deliver to the Company such instruments and documents as may be reasonably requested by the Company to evidence and confirm such person's right and title to the Option.

5. Notices . All notices between the parties hereto shall be in writing. Notices to Optionee shall be given to Optionee’s address as contained in the Company's records. Notices to the Company shall be addressed to its executive offices (attention: Chief Financial Officer).

6. Relationship With Contract of Employment .

(a) The grant of an Option does not form part of Optionee's entitlement to remuneration or benefit pursuant to a contract of employment agreement, if any, nor does the existence of a contract of employment between any person and the Company give such person any right or entitlement to have an Option granted to him or any expectation that an Option might be granted to him whether subject to any conditions or at all.

(b) Except as provided in this Agreement, the rights and obligations of Optionee under the terms of his employment with the Company shall not be affected by the grant of an Option.

(c) The rights granted to Optionee upon the grant of an Option shall not afford Optionee any rights or additional rights to compensation or damages in consequence of the loss or termination of his office, employment or service with the Company for any reason whatsoever.

(d) Optionee shall not be entitled to any compensation or damages for any loss or potential loss which he may suffer by reason of being or becoming unable to exercise an Option in consequence of the loss or termination of his office, employment or services with the Company for any reason (including, without limitation, any breach of contract by the Company) or in any other circumstances whatsoever.

7. Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws (and not the principles relating to conflicts of laws) of the State of Delaware, except as superseded by applicable federal law.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.

ALY ENERGY SERVICES, INC.

By:

Shauvik Kundagrami, CEO

OPTIONEE:

Signature of Optionee

Name:

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Shauvik Kundagrami, certify that:

1. I have reviewed this annual report on Form 10-K of Aly Energy Services, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report.

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and I have:

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c. presented in this annual report my conclusions about the effectiveness of the disclosure controls and procedures based on my evaluation as of the Evaluation Date;

5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

August 31, 2017
By: /s/ Shauvik Kundagrami

Shauvik Kundagrami

Vice-Chairman and Chief Executive Officer

(Principal Executive Officer)

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Alya Hidayatallah, certify that:

5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

August 31, 2017 By: /s/ Alya Hidayatallah

Alya Hidayatallah

Chief Financial Officer

(Principal Financial Officer)

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aly Energy Services, Inc. (the "Company") on Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shauvik Kundagrami, Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

August 31, 2017
By: /s/ Shauvik Kundagrami

Shauvik Kundagrami

Principal Executive Officer

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aly Energy Services, Inc. (the "Company") on Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Alya Hidayatallah, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

August 31, 2017
By: /s/ Alya Hidayatallah

Alya Hidayatallah

Principal Financial Officer

Delaware		75-2440201
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3 Riverway, Suite 920 Houston, TX		77056
(Address of Principal Executive Offices)		(Zip Code)

PART I

Item 1.	Business	5
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	20
Item 3.	Legal Proceedings	21
Item 4.	Mine Safety Disclosures	21

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6.	Selected Financial Data	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 8.	Financial Statements and Supplementary Data	F-1
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	38
Item 9A.	Controls and Procedures	38
Item 9B.	Other Information	39

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43
Item 13.	Certain Relationships and Related Transactions and Director Independence	44
Item 14.	Principal Accounting Fees and Services	44

PART IV

Item 15.	Exhibits	45

SIGNATURES		47

	·	projected operating or financial results, including any accretion/dilution to earnings and cash flow;
	·	any plans to obtain financing to fund future operations;
	·	prospects for services and expected activity in potential and existing areas of operations;
	·	the effects of competition in areas of operations;
	·	the outlook of oil and gas prices;
	·	the current economic conditions and expected trends in the industry we serve;
	·	the amount, nature and timing of capital expenditures and availability of capital resources;
	·	future financial condition or results of operations and future revenue and expenses; and
	·	business strategy and other plans and objectives for future operations.

	·	conditions in the oil and natural gas industry, especially oil and natural gas prices and capital expenditures by oil and natural gas companies;
	·	volatility in oil and natural gas prices;
	·	fluctuations in the domestic land-based rig count;
	·	changes in laws and regulations;
	·	our ability to implement price increases or maintain pricing on our core services;
	·	risks that we may not be able to reduce, and we may experience increases in, the costs of labor, fuel, equipment and supplies employed in our businesses;
	·	industry capacity;
	·	asset impairments or other charges;
	·	the periodic low demand for our services and resulting operating losses and negative cash flows;
	·	our highly competitive industry as well as operating risks, which are primarily self-insured, and the possibility that our insurance may not be adequate to cover all of our losses or liabilities;
	·	significant costs and potential liabilities resulting from compliance with applicable laws, including those resulting from environmental, health and safety laws and regulations;
	·	our historically high employee turnover rate and our ability to replace or add workers, including executive officers and skilled workers;

	·	our ability to incur debt or long-term lease obligations;
	·	our ability to implement technological developments and enhancements;
	·	severe weather impacts on our business;
	·	our ability to successfully identify, make and integrate future acquisitions and our ability to finance such acquisitions;
	·	our ability to finance future growth of our operations through investments in new equipment and service offerings;
	·	our ability to achieve the benefits expected from disposition transactions;
	·	the loss of one or more of our larger customers;
	·	our ability to generate sufficient cash flow to meet future debt service obligations;
	·	our inability to achieve our financial, capital expenditure and operational projections, including quarterly and annual projections of revenue and/or operating income, and our inaccurate assessment of future activity levels, customer demand, and pricing stability which may not materialize (whether for Aly Energy Services, Inc. as a whole or for geographic regions and/or certain business operations individually);
	·	business opportunities (or lack thereof) that may be presented to our company and may be pursued;
	·	our ability to respond to changing or declining market conditions, including our ability to reduce the costs of labor, fuel, equipment and supplies employed and used in our businesses;
	·	our ability to maintain sufficient liquidity;
	·	adverse impact of litigation; and
	·	other factors affecting our business described in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 and in the other reports we file with the Securities and Exchange Commission.

	·	Austin Chalk Petroleum Services Corp. (“Austin Chalk”) - In October 2012, we acquired Austin Chalk a provider of high performance, explosion-resistant rental equipment used primarily in land-based horizontal drilling. Austin Chalk currently offers a robust inventory of surface rental equipment as well as roustabout services, including the rig-up and rig-down of equipment and the hauling of equipment to and from the customer’s location;
	·	United Centrifuge LLC and the leased fixed assets associated with that business (collectively “United”) - United, acquired in April 2014, operates within the solids control sector of the oilfield services 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. United owns centrifuges which are differentiated from the competition due to the ability to remove the rotating assembly from a centrifuge within 45 minutes while on the rig site thereby minimizing customer down time; and
	·	Evolution Guidance Systems Inc. (“Evolution”) - In July 2014, we acquired Evolution which specialized as an operator of Measurement-While-Drilling (“MWD”) downhole tools. Effective October 26, 2016, we abandoned these operations as a part of a restructuring event (see “Note 2 – Recent Developments” in the notes to our consolidated financial statements for further detail).

	·	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,
	·	reduction in employer contributions to employee benefits,
	·	closures of certain operating yards and administrative facilities,
	·	strategic decision to cease operations in the northeast which resulted in the reduction of costs related to operating in an incremental market,
	·	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,
	·	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
	·	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.

	·	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.
	·	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.
	·	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.

	·	increase inventory of rental products and increase capacity to provide services;
	·	add new and differentiated product and service offerings;
	·	expand into new geographic markets; and,
	·	diversify and grow our customer base.

	§	domestic and worldwide economic conditions;
	§	the supply of and demand for oil and natural gas;
	§	the level of prices, and expectations about future prices, of oil and natural gas;
	§	the cost of exploring for, developing, producing and delivering oil and natural gas;
	§	the expected rates of declining current production;
	§	the discovery rates of new oil and natural gas reserves;
	§	available pipeline, storage and other transportation capacity;
	§	federal, state and local regulation of exploration and drilling activities;
	§	weather conditions, including hurricanes that can affect oil and natural gas operations over a wide area;
	§	political instability in oil and natural gas producing countries;
	§	technical advances affecting energy consumption;
	§	the price and availability of alternative fuels;
	§	the ability of oil and natural gas producers to raise equity capital and debt financing; and,
	§	merger and divestiture activity among oil and natural gas producers.

	§	incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized as a result of acquiring operations or assets;
	§	failure to integrate the operations or management of any acquired operations or assets successfully and timely;
	§	potential loss of key employees and customers of the acquired companies;
	§	potential lack of experience operating in a geographic market or product line of the acquired business;
	§	an increase in our expenses, particularly overhead expenses, and working capital requirements;
	§	the possible inability to achieve the intended objectives of the business combination; and
	§	the diversion of management’s attention from existing operations or other priorities.

	·	curtailment of services;
	·	weather-related damage to facilities and equipment, resulting in suspension of operations;
	·	inability to deliver equipment, personnel and products to job sites in accordance with contract schedules; and
	·	loss of productivity.

	§	require us to maintain compliance under various covenants which are not achievable in light of current industry conditions;
	§	require us to raise additional capital;
	§	impair our ability to make investments and obtain additional financing for working capital, capital expenditures, acquisitions or other general corporate purposes;
	§	limit our ability to use operating cash flow in other areas of our business because we must dedicate a substantial portion of these funds to make principal and interest payments on our indebtedness;
	§	make us more vulnerable to a downturn in our business, our industry or the economy in general as a substantial portion of our operating cash flow will be required to make principal and interest payments on our indebtedness, making it more difficult to react to changes in our business and in industry and market conditions; or,
	§	put us at a competitive disadvantage to competitors that have less debt.

	·	Before that person became an interested stockholder, our board of directors approved the transaction in which the interested stockholder became an interested stockholder or approved the business combination;
	·	Upon consummation of the transaction that resulted in the interested stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding stock held by certain directors and employee stock plans; or
	·	Following the transaction in which that person became an interested stockholder, the business combination is approved by our board of directors and authorized at a meeting of stockholders by the affirmative vote of the holders of at least 66 2/3% of our outstanding voting stock not owned by the interested stockholder.

	§	actual or anticipated variations in our results of operations;
	§	changes in earnings estimates; or
	§	changes in market valuations of similar companies.

Location	Type of Facility	Size	Lease or Owned	Expiration of Lease

3 Riverway, Suite 920 Houston, TX 77056	Corporate office	2,291 sq. ft.	Leased	January 31, 2020

1080 Private Rd 7703 Giddings, TX 78942	Administrative offices, fabrication/repair shop, equipment yard	6.5 acres, 3,600 sq. ft. office space, 5,000 sq. ft. shop	Leased	December 31, 2017

6126 PR 902 Celina, TX 75009	Fabrication/repair shop, equipment yard	1,813 sq. ft. office space, 5,518 sq. ft. shop	Leased	July 1, 2018

792 McCollum Rd. Montrose, PA 18801	Administrative offices, equipment yard	Small acreage site	Leased	September 30, 2017

12 Free Soil Rd. Mt Morris, PA 15349	Equipment yard	Small acreage site	Month to Month	N/A

State Hwy. 85 West/CR 4715 Dilley, TX 78017	Administrative offices, fabrication/repair shop, equipment yard	5.5 acres, 400 sq. ft. building space	Month to Month	N/A

5039 North Chadbourne San Angelo, TX 76903	Administrative offices, equipment yard	2.25 acres, 1,000 sq. ft. of office space	Leased	May 31, 2018

	·	In February 2015, multiple plaintiffs filed a proposed collective action against us alleging overtime violations under the FLSA. We settled this matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2015 and the case was fully paid and dismissed with prejudice, by the end of January 2016.
	·	In August 2016, several former employees filed a lawsuit against us alleging overtime violations of the FLSA. In May 2017, we settled the matter for business purposes with no admission of liability. The settlement amount was fully accrued as of December 31, 2016 and, as of June 30, 2017, the settlement was fully paid and the case had been dismissed with prejudice.
	·	We are currently in the early stages of arbitration with five prior employees who allege overtime violations of the FLSA. We are exploring settlement options to resolve this matter as well as preparing to defend the arbitration should settlement not be feasible. An estimated settlement amount was fully accrued as of December 31, 2016.

Fiscal Year 2017	High		Low

2nd Quarter (April 1 - May 1, 2017)	$	0.08	$	0.03
1st Quarter (January 1 - March 31, 2017)	$	0.12	$	0.01

Fiscal Year 2016	High		Low

4th Quarter (October 1 - December 31, 2016)	$	0.08	$	0.01
3rd Quarter (July 1 - September 30, 2016)	$	0.11	$	0.08
2nd Quarter (April 1 - June 30, 2016)	$	0.20	$	0.09
1st Quarter (January 1 - March 31, 2016)	$	1.00	$	1.00

Fiscal Year 2015	High		Low

4th Quarter (October 1 - December 31, 2015)	$	2.00	$	0.80
3rd Quarter (July 1 - September 30, 2015)	$	4.80	$	2.00
2nd Quarter (April 1 - June 30, 2015)	$	6.40	$	4.80
1st Quarter (January 1 - March 31, 2015)	$	14.60	$	5.60

	For the Years Ended December 31,
	2016			2015
	(unaudited)

Components of EBITDA:

Net loss	$	(22,135	)	$	(15,894	)
Less: Loss from discontinued operations, net of income taxes		2,491			1,950

Net loss from continuing operations		(19,644	)		(13,944	)

Non-GAAP adjustments:

Depreciation and amortization		5,299			5,950
Interest expense, net		2,378			1,961
Debt modification fee		629			-
Interest expense - Pelican		111			-
Income tax benefit		(7,904	)		(3,372	)

EBITDA	$	(19,131	)	$	(9,405	)

Adjustments to EBITDA:

Reduction in value of assets		17,736			11,405
Expenses in connection with lender negotiations and Recapitalization		472			14
Employee-related reorganization expenses, including severance		456			385
Bad debt expense		193			364
Settlements and other losses		127			590
Fair value adjustments to contingent payment liability		(372	)		(1,065	)
Stock-based compensation		-			100
Gain on indemnification-preferred shares holdback		-			(124	)
Transaction costs		-			221

Adjusted EBITDA	$	(519	)	$	2,485

	·	EBITDA and Adjusted EBITDA do not reflect growth and maintenance capital expenditures,
	·	EBITDA and Adjusted EBITDA do not reflect the interest, principal payments and other financing-related charges necessary to service the debt that we have incurred to finance acquisitions and invest in our fixed asset base,
	·	EBITDA and Adjusted EBITDA do not reflect the payment of income taxes, and
	·	EBITDA and Adjusted EBITDA do not reflect changes in our net working capital position.

	For the Years Ended December 31,												Variance
	2016			% of Revenue			2015			% of Revenue			$			%

Revenue	$	11,002			100.00	%	$	25,484			100.00	%	$	(14,482	)		-56.83%

Expenses:
Operating expenses		8,324			75.66	%		16,188			63.52	%		(7,864	)		-48.58%
Depreciation and amortization		5,299			48.16	%		5,950			23.35	%		(651	)		-10.94%
Selling, general and administrative expenses		4,073			37.02	%		7,296			28.63	%		(3,222	)		-44.17%
Reduction in value of assets		17,736			161.21	%		11,405			44.75	%		6,331			55.51	%

Total expenses		35,432			322.05	%		40,839			160.25	%		(5,407	)		-13.24%

Loss from continuing operations		(24,430	)	NM				(15,355	)	NM				(9,075	)	NM

Other expense:
Debt modification fee		629			5.72	%		-			0.00	%		629		NM
Interest expense, net		2,378			21.62	%		1,961			7.70	%		417			21.25	%
Interest expense - Pelican		111			1.01	%		-			0.00	%		111		NM

Total other expense		3,118			28.34	%		1,961			7.69	%		1,157			59.00	%

Loss from continuing operations before income taxes		(27,548	)	NM				(17,316	)	NM				(10,232	)	NM

Income tax benefit		(7,904	)	NM				(3,372	)	NM				(4,533	)	NM

Net loss from continuing operations		(19,644	)	NM				(13,944	)	NM				(5,700	)	NM

Loss from discontinued operations, net of income taxes		2,491			22.64	%		1,950			7.65	%		541			27.74	%

Net loss	$	(22,135	)	NM			$	(15,894	)	NM			$	(6,241	)	NM

Cash and cash equivalents	$	573
Revolving facility availability ^{(1), (3)}		250
Delayed draw term loan availability ^{(2), (3)}		975

Total liquidity	$	1,798

(1)	Based on eligible receivables as of June 30, 2017.
(2)	Available to finance 90% of purchase price for capital expenditures, including 90% of purchase commitments in table below.
(3)	With Permian Pelican LLC, our controlling shareholder.

	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years

Long-term debt - Pelican ⁽¹⁾	$	6,052	$	-	$	6,052	$	-	$	-
Interest on long-term debt - Pelican ⁽²⁾		681		272		409		-		-
Severance obligations ⁽³⁾		676		-		676		-		-
Purchase commitments ⁽⁴⁾		346		346		-		-		-
Operating leases		249		159		90		-		-
Equipment financing		7		7		-		-		-

Total	$	8,011	$	784	$	7,227	$	-	$	-

(1)	Maturity date is December 31, 2019 unless such debt is refinanced.
(2)	Interest payments on Pelican credit facility calculated at 4.5% per annum.
(3)	See "Note 9 - Commitments and Contingencies" for further detail.
(4)	Commitment to purchase eight diesel mud pumps. Purchase commitment is eligible to be financed under delayed draw term loan if necessary.

	·	the estimate requires significant assumptions; and
	·	changes in estimate could have a material effect on our consolidated results of operations or financial condition; or
	·	if different estimates that could have been selected had been used, there could be a material effect on our consolidated results of operations or financial condition.

	·	Revenue Recognition;
	·	Allowance for Doubtful Accounts;
	·	Estimates of Depreciable Lives;
	·	Valuation of Long-lived Assets;
	·	Valuation of Goodwill;
	·	Contingencies;
	·	Income Taxes;
	·	Valuation of Contingent Payment Liability;
	·	Valuation of Redeemable Preferred Stock; and
	·	Cash Flow Estimates.

	·	Aly Operating – 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.
	·	Aly Centrifuge – 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.

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, 2016 and 2015	F-3

Consolidated Statements of Operations for the Years Ended December 31, 2016 and 2015	F-4

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2016 and 2015	F-5

Consolidated Statements of Cash Flows for the Years Ended December 31, 2016 and 2015	F-6

Notes to Consolidated Financial Statements	F-7

ALY ENERGY SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
*(in thousands, except share and per share amounts)*

	December 31,
	2016			2015
ASSETS
Current assets
Cash and cash equivalents	$	681		$	514
Restricted cash		30			-
Accounts receivable, net		1,120			3,688
Unbilled receivables		328			721
Prepaid expenses and other current assets		496			957
Assets associated with discontinued operations		-			3,428
Total current assets		2,655			9,308

Property and equipment, net		28,226			51,789
Intangible assets, net		4,931			7,409
Other assets		14			21

Total Assets	$	35,826		$	68,527

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	912		$	1,034
Accrued expenses		1,163			2,297
Accrued interest and other - Pelican		1,277			-
Current portion of long-term debt		1,593			20,353
Current portion of long-term debt - Pelican		18,880			-
Current portion of contingent payment liability		810			652
Liabilities associated with discontinued operations		-			1,211
Total current liabilities		24,635			25,547

Long-term debt, net		10			3,185
Long-term debt, net - Pelican		1,315			-
Contingent payment liability, net		-			530
Deferred tax liabilities		-			7,941
Other long-term liabilities		708			31
Total liabilities		26,668			37,234

Commitments and contingencies (note 9)

Aly Operating redeemable preferred stock		4,924			4,647
Aly Centrifuge redeemable preferred stock		10,080			9,755
		15,004			14,402

Stockholders' equity (deficit)
Preferred stock of $0.001 par value		-			-
Authorized-10,000,000; none issued and outstanding as of December 31, 2016
Authorized-25,000,000; none issued and outstanding as of December 31, 2015
Common stock of $0.001 par value		7			7
Authorized-25,000,000; Issued-6,707,039; Outstanding-6,706,814 as of December 31, 2016
Authorized-100,000,000; Issued-6,707,039; Outstanding-6,706,814 as of December 31, 2015
Additional paid-in-capital		28,307			28,909
Accumulated deficit		(34,158	)		(12,023	)
Treasury stock, 225 shares at cost		(2	)		(2	)
Total stockholders' equity (deficit)		(5,846	)		16,891

Total liabilities and stockholders' equity (deficit)	$	35,826		$	68,527