Aly Energy Services, Inc. - FORM 10-Q

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EX-32.2 - CERTIFICATION - Aly Energy Services, Inc.	alye_ex322.htm
EX-31.1 - CERTIFICATION - Aly Energy Services, Inc.	alye_ex311.htm
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EX-32.1 - CERTIFICATION - Aly Energy Services, Inc.	alye_ex321.htm

United States

Securities and Exchange Commission

Washington, D. C. 20549

Form 10-Q

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

Period Ended March 31, 2014.

o 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.

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.)

Not Applicable

(Former name, Former Address and Former Fiscal year, if changed since last report.)

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 the filing requirements for at least the past 90 days. Yes x No o

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company x

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

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

Common Stock, $ 0.001 Par Value – 102,456,652 shares as of May 15, 2014.

INDEX

ALY ENERGY SERVICES, INC.

Part I.	Financial Information

Item 1.	Condensed Consolidated Financial Statements	3

	Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2014 and 2013	4

	Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2014	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	21

Part II.	Other Information

Item 6.	Exhibits	22

Signatures		23

ALY ENERGY SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares and per share data)

	March 31, 2014			December 31, 2013
	(Unaudited)

Assets
Current Assets
Cash and Cash Equivalents	$	984		$	1,440
Accounts Receivable, Net of Allowance for Doubtful Accounts of $117 and $90, respectively		3,438			3,327
Unbilled Receivables		1,138			882
Inventory		58			43
Prepaid Expenses and Other Current Assets		454			279

Total Current Assets		6,072			5,971

Property and Equipment, Net		21,701			21,423

Intangible Assets, Net		3,990			4,121
Goodwill		8,834			8,834
Deferred Loan Costs, Net		469			515
Deferred Tax Assets		19			131
Other Assets		16			17

Total Assets	$	41,101		$	41,012

Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable	$	980		$	1,131
Accrued Expenses		1,583			964
Deferred Tax Liabilities		73			277
Current Portion of Long-Term Debt		2,946			2,881

Total Current Liabilities		5,582			5,253

Long-Term Debt, Net of Current Portion		7,957			8,532
Deferred Tax Liabilities		6,822			6,945
Other Long-Term Liabilities		33			35

Total Liabilities		20,394			20,765

Commitments and Contingencies (See Note 5)

Series A Preferred Stock, $0.01 par value, 4,000,000 shares authorized, issued and outstanding		4,194			4,132

Stockholders' Equity
Common Stock, $0.001 par value, 100,000,000 shares authorized, 90,042,044 issued, and 90,037,544 oustanding		92			92
Treasury Stock, 4,500 Shares at Cost		(2	)		(2	)
Additional Paid-In-Capital		14,705			14,767
Retained Earnings		1,718			1,258

Total Stockholders' Equity		16,513			16,115

Total Liabilities and Stockholders' Equity	$	41,101		$	41,012

See accompanying notes to condensed consolidated financial statements.

	Three Months Ended March 31,
	2014		2013

Revenues	$	5,282	$	4,397

Cost of Revenues		1,733		1,471

Gross Profit		3,549		2,926

Selling, General and Administrative Expenses		2,627		2,285

Operating Income		922		641

Interest Expense, Net		170		122
Other Expense/(Income)		-		(3	)

Income Before Income Tax		752		522

Income Tax Expense		292		125

Net Income		460		397

Preferred Stock Dividends		53		50
Accretion of Preferred Stock		9		9

Net Income Available to Common Stockholders	$	398	$	338

Basic and Diluted Earnings per Share	$	0.00	$	0.00

Basic and Diluted Average Common Shares Outstanding		90,042,044		67,981,918

See accompanying notes to condensed consolidated financial statements.

ALY ENERGY SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(in thousands, except share data)

(Unaudited)

	Shares of Common Stock						Common		Additional Paid-			Treasury			Retained
	Issued		Outstanding		In Treasury		Stock		In-Capital			Stock			Earnings		Total

Balance at December 31, 2013		90,042,044		90,037,544		4,500	$	92	$	14,767		$	(2	)	$	1,258	$	16,115

Preferred Stock Dividends		-		-		-		-		(53	)		-			-		(53	)
Preferred Stock Accretion		-		-		-		-		(9	)		-			-		(9	)
Net Income		-		-		-		-		-			-			460		460

Balance at March 31, 2014		90,042,044		90,037,544		4,500		92	$	14,705		$	(2	)	$	1,718	$	16,513

See accompanying notes to condensed consolidated financial statements.

	Three Months Ended March 31,
	2014			2013

Cash Flows from Operating Activities
Net Income	$	460		$	397
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation Expense		675			285
Amortization of Deferred Loan Costs		46			34
Amortization of Intangible Assets		131			131
Stock-Based Compensation Expense		-			4
Bad Debt Expense		26			-
Deferred Taxes		(215	)		(38	)
Changes in Operating Assets and Liabilities
Accounts Receivable		(137	)		837
Unbilled Receivables		(256	)		-
Inventory		(15	)		-
Prepaid Expenses and Other Assets		(174	)		75
Accounts Payable		(151	)		818
Accounts Payable - Affiliates		-			397
Accrued Expenses		619			35
Other Liabilities		(2	)		-

Net Cash Provided by Operating Activities		1,007			2,975

Cash Flows from Investing Activities
Purchase of Property and Equipment		(732	)		(3,916	)

Net Cash Used in Investing Activities		(732	)		(3,916	)

Cash Flows from Financing Activities
Proceeds on Borrowing on Debt		-			1,000
Repayment of Debt		(731	)		(825	)
Payment of Deferred Loan Costs		-			(7	)

Net Cash Provided By/(Used In) Financing Activities		(731	)		168

Net Decrease in Cash and Cash Equivalents		(456	)		(773	)

Cash and Cash Equivalents, Beginning of Period		1,440			1,660
Cash and Cash Equivalents, End of Period	$	984		$	887

Supplemental Disclosure of Cash Flow Information
Cash Paid for Interest	$	122		$	92
Cash Paid for State and Federal Income Taxes	$	-		$	504

Non-Cash Financing and Investing Activities
Accretion of Preferred Stock Liquidation Preference	$	9		$	9
Paid-in-Kind Dividends on Preferred Stock	$	53		$	50
Purchase of Equipment through a Capital Lease Obligation	$	221		$	-

See accompanying notes to condensed consolidated financial statements.

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – NATURE OF OPERATIONS

Aly Energy Services Inc. (“Aly Operating”) was incorporated in Delaware on July 17, 2012, for the purpose of creating an oilfield manufacturing, distribution and services company that serves exploration and production companies from well planning to plug and abandonment.

On October 26, 2012, Aly Operating 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 May 14, 2013, Aly Operating and Preferred Voice, Inc. (“Preferred Voice”) entered into a Share Exchange Agreement (the “Exchange Agreement”), pursuant to which the holders of common stock of Aly Operating surrendered all of their shares in exchange for approximately 68 million newly issued shares of common stock of Preferred Voice (the “Share Exchange”), representing approximately 92% of the outstanding common stock of Preferred Voice after giving effect to the Share Exchange. Shares were exchanged at the ratio of 19.91 shares of Preferred Voice common stock for each one share of Aly Operating common stock.

Immediately after the execution and delivery of the Exchange Agreement, Preferred Voice amended its certificate of incorporation to change the name of Preferred Voice to Aly Energy Services, Inc. (“Aly Energy” or the “Company”) and Aly Operating amended its certificate of incorporation to change the name of Aly Energy Services Inc. to Aly Operating, Inc.

For financial accounting purposes, this acquisition (referred to as the “Merger”) was a reverse acquisition of Preferred Voice by Aly Operating under the acquisition method of accounting and was treated as a recapitalization with Aly Operating as the accounting acquirer. Accordingly, the condensed consolidated financial statements have been prepared to give retroactive effect of the Merger completed on May 14, 2013 and represent the operations of Aly Operating.

Aly Operating is a wholly-owned subsidiary of Aly Energy and Aly Operating has one wholly-owned subsidiary, Austin Chalk.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation: The accompanying condensed consolidated financial statements of the Company have not been audited by the Company’s independent registered public accounting firm, except that the consolidated balance sheet at December 31, 2013 is derived from audited consolidated financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for fair presentation have been included.

These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2013, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on April 10, 2014. The operating results for interim periods are not necessarily indicative of results that may be expected for any other interim period or for the full year.

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

These condensed consolidated financial statements include the accounts of Aly Energy and its subsidiaries. All significant inter-company transactions and accounts have been eliminated upon consolidation.

Revenue Recognition: The Company generates revenues from renting equipment at per-day rates and from providing equipment transportation and rig-up/rig-down services at flat rates per job or at an hourly rate. Revenue is recognized when it is realized or realizable and earned.

Fair Value of Financial Instruments: Financial instruments consist of cash and cash equivalents, and accounts receivable and payable. The carrying value of cash and cash equivalents and accounts receivable and payable approximate fair value due to their short-term nature.

Property, Plant and Equipment: Property, plant and equipment are recorded at cost less accumulated depreciation. 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. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operating income.

The cost of property and equipment currently in service is depreciated, on a straight-line basis, over the estimated useful lives of the related assets, which range from one to 12 years. A residual value of 20% is used for asset types deemed to have a minimum salvage value, normally these assets contain a large amount of iron in their construction. Major classifications of property, plant and equipment and their respective useful lives are as follows (in thousands):

	Estimated Useful Lives	March 31, 2014			December 31, 2013

Machinery and Equipment	1-12 years	$	24,304		$	23,322
Office Furniture, Fixtures and Equipment	3-7 years		95			93
Leasehold Improvements	Remaining Term		48			48
	of Lease
			24,447			23,463
Less: Accumulated Depreciation			(2,854	)		(2,185	)

			21,593			21,278
Assets Not Yet Placed In Service			108			145

Property, Plant and Equipment, Net		$	21,701		$	21,423

Depreciation expense for the three months ended March 31, 2014 and 2013 was $0.7 million and $0.3, respectively.

Intangible Assets: Intangible assets consist of the following (in thousands):

	Estimated Useful Lives	March 31, 2014			December 31, 2013

Customer Relationships	10 years	$	3,141		$	3,141
Trade Name	10 years		1,098			1,098
Non-Compete	5 years		491			491

			4,730			4,730
Less: Accumulated Amortization			(740	)		(609	)

Intangible Assets, Net		$	3,990		$	4,121

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Total amortization expense was approximately $131,000 for each of the three month periods ending March 31, 2014 and 2013.

Income Taxes: The Company accounts 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.

The Company recognizes 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 condensed consolidated statements of operations for the three months ended March 31, 2014 or for the three months ended March 31, 2013. The Company had no uncertain tax positions as of March 31, 2014.

Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3 – LONG-TERM DEBT

Long-term debt consists of the following:

	March 31, 2014			December 31, 2013

Term Loan	$	5,775		$	6,188
Delayed Draw Term Loan		4,102			4,375
Revolving Credit Facility		-			-
Capital Leases		1,026			850

		10,903			11,413
Less: Current Portion		(2,946	)		(2,881	)

Long-Term Debt, Net of Current Portion	$	7,957		$	8,532

The terms of our credit facility, which includes the term loan, the delayed draw term loan and a revolving credit facility, are described within Note 4 of the Company's consolidated financial statements for the year ended December 31, 2013 included in the Company's Annual Report on Form 10-K filed with the SEC on April 10, 2014.

We have the capability to borrow up to the lesser of (i) a borrowing base, which is determined monthly based on our receivables, and (ii) $5.0 million under our revolving credit facility. As of March 31, 2014, we had no borrowings outstanding under the revolving credit facility and a borrowing base of $3.3 million.

The Company is required to satisfy certain financial and reporting covenants in conjunction with our debt facilities. We were in compliance with all such covenants as of March 31, 2014.

The Company leases 9 vehicles, with the intent to purchase, under non-cancelable capital leases. The terms of these leases range from three to five years with varying payment dates throughout each month.

NOTE 4 – COMMITMENTS AND CONTINGENCIES

Contractual Commitments — The Company has numerous contractual commitments in the ordinary course of business including debt service requirements and operating leases. The Company leases land and other facilities from an affiliate and leases equipment from non-affiliates. Certain of these leases extend to 2018.

Litigation — The Company is 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 the Company’s financial position or results of operations.

NOTE 5 – PREFERRED STOCK

As part of the acquisition of Austin Chalk, Aly Operating agreed to issue up to 4 million shares of Series A Preferred Stock, with a par value of $0.01, to the seller. The shares were issued in two tranches. The first tranche of 2 million shares was issued on December 31, 2012 and the second tranche of 2 million shares was issued on March 31, 2013.

The Series A Preferred Stock is entitled to a cumulative dividend of 5% per year on its liquidation preference, compounded quarterly. The liquidation preference was $4.0 million on the closing date and will increase by the amount of dividends paid in kind. Aly Operating is not required to pay cash dividends.

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The holder of the preferred stock and Aly Operating can, at either’s option, require the other party to redeem the preferred stock for cash on the fourth anniversary of the closing date of the sale or October 26, 2016. However, there is no requirement for either party to redeem the preferred stock.

The preferred stock agreement also provides for conversion into shares of Company common stock or redemption should the Company transact a liquidity event, as defined in the agreement, or if the Company transacts an initial public offering.

The Series A Preferred Stock is classified outside of permanent equity in the Company’s condensed consolidated balance sheet because the settlement provisions provide the holder the option to require Aly Operating to redeem the Series A Preferred Stock at the liquidation price plus any accrued dividends.

The following table describes the changes in temporary equity, currently consisting of Series A Preferred Stock (in thousands, except for shares, and per share amounts):

	Carrying Value of Series A Preferred Stock		Number of Outstanding Series A Preferred Shares		Liquidation Value of Series A Preferred Stock

December 31, 2013		4,132		4,000,000		4,245

Accrued Dividends		53		-		53
Accretion		9		-		-

March 31, 2014	$	4,194		4,000,000	$	4,298

NOTE 6 – EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares of common stock (“common shares”) outstanding during the applicable period and excludes shares subject to outstanding stock options and shares of restricted stock. Diluted earnings per share is computed based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to outstanding stock options and restricted stock as appropriate. A reconciliation of the denominator used in the basic and diluted per share calculations for the three months ended March 31, 2014 and 2013 is as follows:

	Three Months Ended March 31,
	2014		2013

Denominator for Basic Earnings Per Share		90,042,044		67,981,918
Effect of Potentially Dilutive Securities		-		-

Denominator for Diluted Earnings per Share		90,042,044		67,981,918

The denominator calculated for the three months ended March 31, 2013 uses the weighted average number of shares outstanding of Aly Operating for that period (3,414,461) and a conversion rate of 19.91 per Aly Operating share to reflect the impact of the subsequent reverse merger.

The computation of basic and diluted earnings per share excludes 6,769,400 unvested stock options.

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 – STOCK-BASED COMPENSATION

Share-Based Payments

The Company issued no shares and 19,910 shares of company stock during the three months ended March 31, 2014 and 2013, respectively, as part of compensation of an officer of the Company. The Company recognized share-based compensation expense of approximately $0 and $4,000 for the three months ended March 31, 2014 and 2013, respectively.

Stock Options

The Company has a stock-based compensation plan available to grant incentive stock options, non-qualified stock options and restricted stock to employees and non-employee members of the Board of Directors.

The Omnibus Incentive Plan (the “Plan”) was approved by the Board of Directors on May 2, 2013. A maximum of 6,769,400 shares of common stock may be awarded. As of March 31, 2014, options to purchase 6,769,400 shares of common stock were granted from the Plan, of which 6,769,400 were outstanding.

The option contract term is 10 years and the exercise price is $0.20. 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 $0.40 per share. If the IPO is not effected at $0.40 per share, but the stock price post-IPO reaches $0.40 per share during the six month period immediately following the IPO, then the options vest and are exercisable. If the IPO is not effected at $0.40 per share, but the share price does not reach $0.40 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 $0.40 per share or more. If such change in control occurs at a price less than $0.40 per share, the options do not vest and expire.

The fair value of each option award granted under the Plan is estimated on the date of grant using the Monte Carlo simulation method. The same Monte Carlo simulation method is used to determine the derived service period of five years. In addition, expected volatilities have been based on comparable public company data, with consideration given to the Company’s limited historical data. The Company makes 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 Company’s acquisition of Preferred Voice, which closed on May 14, 2013, the calculation of the Company’s 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. The following table presents the assumptions used in determining the fair value of option awards during the period:

Expected Volatility		80.0	%
Expected Forfeiture Rate		0.0	%
Risk-Free Interest Rate		1.66	%
Fair Value of Company Stock	$	0.171

At March 31, 2014, there is approximately $494,200 of total unrecognized compensation cost related to non-vested stock option awards. Such amount will be recognized in the future upon occurrence of a Liquidity Event that results in a vesting of the options. No options vested during the three months ended March 31, 2014, as no vesting events occurred during the period.

ALY ENERGY SERVICES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 8 – SUBSEQUENT EVENTS

Acquisition

On April 11, 2014, the Company entered into an Asset Purchase, Stock Purchase and Merger Agreement (the “Centrifuge Acquisition Agreement”), by and among the Company, Aly Centrifuge Inc., (a newly formed subsidiary of the Company), United Centrifuge USA, LLC (“United”), United Oilfield, Inc., Canadian Nitrogen Services Ltd., and various affiliates of United. The Centrifuge Acquisition Agreement contemplates the acquisition of the business conducted by United in the solids control and fluids management sectors of the oilfield services and rental equipment industry for a purchase price of $25 million, consisting of $15 million in cash (subject to certain adjustments as described in the Centrifuge Acquisition Agreement), $5 million in the form of preferred stock of Aly Centrifuge Inc. and up to $5 million of contingent consideration based upon the revenues of Aly Centrifuge Inc. for each of the 12 month periods ending on March 31, 2015, 2016 and 2017. On April 15, 2014, the Company consummated the transactions contemplated by the Centrifuge Acquisition Agreement.

Amended and Restated Credit Facility

On April 15, 2014 and in connection with the consummation of the Centrifuge Acquisition Agreement, we entered into an Amended and Restated Credit Agreement with Wells Fargo Bank, as administrative agent. The new agreement increases the size of the credit facility to $30 million, consisting of a $25 million term loan with a maturity date of April 30, 2017 and a $5 million revolving credit facility. The obligations under the agreement are guaranteed by all of the Company’s subsidiaries and secured by substantially all of the assets of the Company and its subsidiaries. The credit agreement contains customary events of default and covenants including restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness, make capital expenditures, pay dividends or make other distributions, grant liens and sell assets. The borrowing base for the revolving credit facility is determined monthly based upon our inventory and receivables.

Borrowings under the credit facility bear interest, at our option, at the base rate or LIBOR. The annual interest rate on each base rate borrowing is (i) the greatest of Wells Fargo’s Prime Rate, the Federal Funds Rate plus 0.5% and the one-month LIBOR rate on such day plus 1.00%, plus (ii) a margin between 2.50% and 3.50% (depending on the then current leverage ratio). The interest rate on each LIBOR loan will be the LIBOR rate for the applicable interest period plus a margin between 3.50% and 4.50% (depending on the then-current leverage ratio). Borrowings under the term loan facility are repayable quarterly in an amount of $1.3 million with a balloon payment of the remaining outstanding borrowings on April 30, 2017. Proceeds of the term loan were used to repay the existing indebtedness under the term loan, delayed draw loan, and revolving credit facility of approximately $9.9 million and to fund the cash portion of the purchase price of the Centrifuge Acquisition Agreement. There are no current borrowings under the revolving credit facility.

Private Placement

On April 11, 2014 and April 18, 2014, we issued 10,328,200 and 2,090,908 shares of our common stock, respectively, to accredited investors at a price of $0.55 per share for gross proceeds of approximately $6.8 million. Such transaction was and is exempt from the registration provisions of the Securities Act of 1933, as amended, pursuant to Regulation S and Section 4(2) of such statute.

We agreed to issue 1,366,068 shares of our common stock to one of our directors in respect of his arrangement of this transaction.

Increase in Authorized Common Stock

On April 11, 2004, we amended our certificate of incorporation to increase the authorized common stock of the Company from 100 million shares to 200 million shares.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes 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:

•

our future revenues, income and operating performance;

•

our ability to sustain and improve our utilization and margins;

•

operating cash flows and availability of capital;

•

the timing and success of future acquisitions and other special projects;

•

future capital expenditures; and

•

our ability to finance equipment, working capital and capital expenditures.

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:

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a sustained decrease in domestic spending by the oil and natural gas exploration and production industry;

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a decline in or substantial volatility of crude oil and natural gas commodity prices;

•

overcapacity and competition in our industry;

	•	increased pressures on pricing due to competition and economic conditions;

	•	unanticipated costs, delays, regulatory compliance requirements and other difficulties in executing our long-term growth strategy, including those related to expansion into new geographic regions and new business lines;

•

the incurrence of significant costs and liabilities in the future resulting from our failure to comply, or our compliance with, new or existing environmental regulations or an accidental release of hazardous substances into the environment;

•

the loss of, or inability to attract new, key management personnel;

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the loss of, or failure to pay amounts when due by, one or more significant customers;

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a shortage of qualified workers;

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operating hazards inherent in our industry;

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accidental damage to or malfunction of equipment;

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an increase in interest rates;

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the potential inability to comply with the financial and other covenants in our debt agreements as a result of reduced revenues and financial performance or our inability to raise sufficient funds through assets sales or equity issuances should need to raise funds through such methods; and

•

the potential failure to maintain effective internal control over financial reporting.

For additional information regarding known material factors that could affect our operating results and performance, please read (1) “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and (2) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q and in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Should one or more of these known material risks occur, or should the underlying assumptions prove incorrect, our actual results, performance, achievements or plans could differ materially from those expressed or implied in any forward-looking statement.

Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise, except as required by law.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related notes thereto included elsewhere in this Form 10-Q, together with the audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2013.

As used in the subsequent discussion, “we,” “our,” and “us” refers to Aly Energy for the three months ended March 31, 2014 and to Aly Operating for the three months ended March 31, 2013. For the purposes of discussing and reporting financial information, we do not distinguish between Aly Energy and Aly Operating because the impact of the inclusion of Aly Energy, a “shell company” (as such term is defined in Rule 12b-2 under Exchange Act) prior to the Share Exchange (described in Note 1 to the condensed consolidated financial statements in this Form 10-Q), on the consolidated financial statements is immaterial.

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 those described in the section titled “Cautionary Note Regarding Forward-Looking Statements” of this Form 10-Q.

Overview of Our Business

We are a provider of 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) for land-based horizontal drilling. Our primary products include mud circulating tanks (400 and 500 barrel capacity), mud pumps (diesel and electric), live oil skimming systems with mud gas separators, flare lines with flare stacks, containment systems with stairs, portable mud mixing plants, high pressure transfer pumps and 3” polyurethane pipe. We fabricate several of our products in-house. We service the Eagle Ford Shale, Austin Chalk formation, Buda Limestone, the Eaglebine, the Permian Basin, and other areas in Texas from operating yards in Giddings, Texas (headquarters), San Angelo, Texas, and Dilley, Texas.

We derive the majority of our operating revenues from day rates for the rental of equipment. The remainder of our operating revenues are generated by delivery and rig-up services which we provide in conjunction with the rental of equipment. We bill customers for these services at either a flat rate per job or an hourly rate. 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 revenues. Our operating expenses consist of both fixed and variable costs. Although most variable costs are highly correlated with revenues and activity, certain variable costs such as sub-rental equipment expenses and third party trucking expenses can be reduced as a percentage of revenues by our investment in new rental and transportation equipment.

Results for the Three Months Ended March 31, 2014 Compared to the Three Months Ended March 31, 2013

The following table summarizes the change in the results of operations of the Company for the three months ended March 31, 2014 when compared to the three months ended March 31, 2013.

	Three Months Ended
	March 31, 2014		March 31, 2013


Revenues	$	5,282	$	4,397

Direct Costs		927		1,055
Depreciation Expense		675		285
Amortization Expense		131		131

Gross Profit		3,549		2,926

Selling, General and Administrative Expenes		2,177		1,854
Corporate Expenses		450		431

Operating Income		922		641

Other Expense/(Income)
Interest Expense		124		88
Amortization of Deferred Loan Costs		46		34
Other Income		-		(3	)

Total Other Expense/(Income)		170		119

Income Before Income Taxes		752		522

Income Tax Expense		292		125

Net Income		460		397

Preferred Stock Dividends		53		50
Accretion of Preferred Stock		9		9

Net Income Available to Common Shareholders	$	398	$	338

Our revenues for the three months ended March 31, 2014 were $5.3 million, an increase of 20.1% over $4.4 million for the three months ended March 31, 2013. The increase is primarily due to rental and service revenue contribution from containment systems and stairs, a new product offering introduced in the second quarter of 2013, slightly offset by a decline in rental revenue generated by mud circulating tanks as a result of both a decrease in pricing of approximately 13.6% and a decrease in the number of revenue-generating rental days. During the three months ended March 31, 2014, we benefitted from our exposure to a larger number of customers across a larger geographic area due to our customer diversification efforts and our entry into the Permian Basin in the second half of 2013. The number of revenue generating customers was 38 compared to 22 and the percentage of revenue generated from the top three customers was 47.1% compared to 74.0% for the three months ended March 31, 2014 and 2013, respectively.

Our direct costs for the three months ended March 31, 2014 decreased 12.1% to $0.9 million, or 17.6% of revenues, compared to $1.1 million, or 24.0% of revenues for the three months ended March 31, 2013. The decrease is primarily due to our capital investments in 2013 in new 500 bbl mud circulating tanks, which replaced tanks which we were previously sub-renting, and our capital investment in new winch trucks, which reduced the frequency with which we had to retain third-party trucking services to transport our equipment. No payroll, or related burden, is included in direct costs.

Depreciation expense for the three months ended March 31, 2014 increased 136.8% to $0.7 million compared to $0.3 million, for the three months ended March 31, 2013. The increase is primarily due to the significant capital expenditures we made upgrading and expanding our rental equipment and trucking fleet in 2013.

Amortization expense, resulting from the intangible assets obtained in conjunction with the acquisition of Austin Chalk on October 26, 2012, was approximately $131,000 for the three months ended March 31, 2014 and 2013.

Selling, general and administrative expense increased 17.4% to $2.2 million for the three months ended March 31, 2014, compared to $1.9 million for the three months ended March 31, 2013. The $0.3 million increase is primarily due to increased payroll expense and related burden attributable to an increase in variable payroll expense associated with the significant increase in revenue and attributable to an increase in fixed payroll expense resulting from the start-up of the San Angelo yard and from the addition of essential personnel such as middle management and support staff to enable efficient growth.

Corporate expense was $0.5 million for the three months ended March 31, 2014 compared to $0.4 million for the three months ended March 31, 2013. The primary components of corporate expense are payroll and professional fees.

Interest expense increased to approximately $124,000 for the three months ended March 31, 2014 from approximately $88,000 for the three months ended March 31, 2013. The increase in interest expense is primarily due to several draws on our delayed draw term loan during the last nine months of 2013.

Our income tax expense for the three months ended March 31, 2014, was $0.3 million, or 38.8% of our income before income taxes, compared to income tax expense of approximately $0.1 million, or 23.9% of our income before income taxes, for the three months ended March 31, 2013. The effective rate for the three months ended March 31, 2013 is not representative of our tax rate going forward as there was a non-recurring adjustment in the period which substantially lowered the effective rate.

Liquidity and Capital Resources

Our on-going capital requirements arise primarily from our need to acquire equipment in order to increase our existing rental fleet and to expand product and service offerings, to service our debt, and to fund our working capital requirements. Our sources of liquidity have been internal cash flows from operations, borrowings under our credit facility, equipment financings, and proceeds from the sale of equity. Future funds are expected to be provided by operating cash flow and, to the extent we determine to do so, the issuance of debt and equity.

The net cash provided by or used in our operating, investing, and financing activities during the three months ended March 31, 2014 and 2013 is summarized below (in thousands):

	Three Months Ended March 31,
	2014			2013

Cash Provided By/(Used In):
Operating Activities	$	1,007		$	2,975
Investing Activities		(732	)		(3,916	)
Financing Activities		(731	)		168

Change in Cash and Cash Equivalents	$	(456	)	$	(773	)

Operating Activities

For the three months ended March 31, 2014, we generated $1.0 million of cash from operating activities. Our net income for this period was $0.5 million. Non-cash additions to net income totaled $0.7 million consisting of $0.9 million of depreciation and amortization which was offset by a decrease in net deferred tax liability of $0.2 million.

During the three months ended March 31, 2014, changes in working capital used $0.1 million in cash. Cash was provided by an increase in accrued expenses of $0.6 million due primarily to an increase in sales tax payable and income tax payable offset by an increase in accounts receivable and unbilled receivables of $0.4 million, an increase in prepaid expenses and other current assets of $0.2 million, and a decrease in accounts payable of $0.1 million.

For the three months ended March 31, 2013, we generated $3.0 million of cash from operating activities. Our net income for this period was $0.4 million and the non-cash addition of depreciation expense and amortization was $0.5 million offset slightly by a decrease in net deferred tax liability of approximately $38,000. Changes in working capital provided $2.2 million of cash due primarily to a decrease in accounts receivable of $0.8 million and an increase in accounts payable of $0.8 million resulting from improvements in working capital management and an increase in accounts payable - affiliate of $0.4 million paid in July 2013.

Investing Activities

During the three months ended March 31, 2014, we used $0.7 million in investing activities, all consisting of the purchase or fabrication of capital assets.

During the three months ended March 31, 2013, we used $3.9 million in investing activities, all consisting of the purchase or fabrication of capital assets, including significant investments in new 500 bbl mud circulating tanks and new winch trucks.

Financing Activities

During the three months ended March 31, 2014, financing activities used $0.7 million in cash, consisting of principal payments on our term loan and delayed draw term loan.

During the three months ended March 31, 2013, financing activities generated $0.2 million in cash, consisting of borrowings on our revolving credit facility offset by principal payments on our term loan.

On October 26, 2012, simultaneous with the acquisition of Austin Chalk, we entered into a credit facility agreement and obtained debt financing of $8.3 million (before deferred loan costs of $0.5 million). The credit facility includes an $8.3 million term loan facility with a maturity date of October 26, 2016, and a revolving credit facility up to the lesser of (i) the borrowing base and (ii) $5.0 million with a maturity date of October 26, 2016. The borrowing base is determined monthly based on our inventory and receivables.

On April 19, 2013, we entered into Amendment No.1 to the credit agreement in order to, among other things, provide for a $5.0 million delayed draw term loan facility for purposes of financing capital expenditures. We were permitted to borrow under the facility from time to time up until December 31, 2013 in order to fund up to 80% of the cost of capital expenditures subject to a $5.0 million limit on aggregate borrowings thereunder.

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

On December 30, 2013, we entered into Amendment No. 3 to our credit agreement which modified certain of the financial covenants set forth in the original credit agreement. The revised financial covenants include requirements to maintain (i) a consolidated funded debt to EBITDA ratio of not more than 3.00 to 1.00 for any fiscal quarter ending on or prior to March 31, 2014, 2.75 to 1.00 for the fiscal quarter ended June 30, 2014, and 2.50 to 1.00 for any fiscal quarter ended on or after September 30, 2014 and (ii) a fixed charge coverage ratio of not less than 1.5 to 1.0. The amendment also modified our permitted capital expenditure basket for capital expenditures not funded by debt or equity from $6.0 million to $3.0 million. We were in compliance with these covenants as of March 31, 2014.

Borrowings under the term loan facility and delayed draw term facility are repayable quarterly in an amount of $0.4 million and $0.3 million, respectively, with a balloon payment of the remaining outstanding borrowings on October 26, 2016.

At March 31, 2014, there was $5.8 million of outstanding borrowings under the term loan, $4.1 million of outstanding borrowings under the delayed draw term loan facility, and no borrowings under the revolving credit facility. As of March 31, 2014, we had a borrowing base of $3.3 million under the revolving credit facility that could be borrowed against if necessary.

The Company entered into non-cancelable capital leases for four pick-up trucks and five winch trucks in February 2014 and in the third quarter of 2013, respectively, with the intent to purchase the trucks at the end of their respective lease terms. The Company makes monthly principal and interest payments on these leases.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required by smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. The Chief Executive Officer and Chief Financial Officer, of the Company have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the quarter covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures as of the end of the quarter covered by this Quarterly Report on Form 10-Q are effective as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act.

Changes in internal controls. There were no changes in our internal controls over financial reporting identified in connection with our evaluation that occurred during our last fiscal quarter ended March 31, 2014 that materially affected, or was reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

Exhibit Number		Exhibit Description

31.1		Certification of Chief Executive Officer

31.2		Certification of Chief Financial Officer

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

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

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.

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: May 15, 2014	By:	/s/ Munawar H. Hidayatallah
		Munawar H. Hidayatallah
		Chairman and Chief Executive Officer
		(Principal Executive Officer)

ALY ENERGY SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except shares and per share data)

(Unaudited)