1.

Organization and History

Organization

Motley Services, LLC, (the “Company”), a Texas limited liability company, was initially organized as a corporation on May 28, 2010 in the state of Texas and was converted to a limited liability company on October 7, 2016. The Company is governed by a Limited Liability Company Agreement, amended on October 14, 2016.

The Company is primarily engaged in providing cased hole wireline services, coiled tubing, wireline, pumping through tubing and nitrogen services for oil and gas wells. The Company’s operations are concentrated in the Permian Basin region of Texas and New Mexico.

2.

Significant Accounting Policies

A summary of the significant accounting policies consistently applied in the preparation of the accompanying financial statements fallows.

Cash and Cash Equivalents

The Company considers all short-term investments with maturities of three months or less to be cash equivalents.

There were no short-term investments other than cash as of December 31, 2017 and 2016.

The Company’s cash balances may at times exceed federally insured amounts. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk.

Accounts Receivable

The Company’s allowance for doubtful accounts is based on management’s evaluations of the collectability of each account receivable based on the customer’s payment history and general economic conditions.

Prepaid Expenses

Prepaid expenses consist primarily of operating supplies used on jobs, prepaid benefits and other current prepaid expenses.

Fixed Assets

The Company’s fixed assets are recorded at cost. Depreciation is provided on the straight-line method over the following estimated useful lives:

Vehicles

3 years

Equipment

3-10 years

Furniture and fixtures

3-7 years

2.

Significant Accounting Policies (Continued)

Fixed Assets (Continued)

Upon sale or retirement of fixed assets, the cost and related accumulated depreciation are removed from the Company’s property accounts and the resulting gain or loss is recognized.

Maintenance, repairs and minor renewals and replacements are charged to expense when incurred. Betterments and major renewals and replacements are capitalized.

Income Taxes

Effective May 28, 2010, the Company elected to be taxed as an S-Corporation under the provisions of the Internal Revenue Code. Under those provisions, the Company’s earnings and losses were included in the personal income tax returns of the Stockholders of the Company.

On October 14, 2016, the Company elected Q-Sub status and converted to a Partnership for tax purposes. Accordingly, taxable income or losses are reported by the members on their individual income tax returns based on their percentage of ownership. Consequently, no provision for income taxes is reported in the accompanying financial statements. Tax years open for examination by taxing authorities include the years from 2015 through 2017.

Revenue Recognition

The Company recognizes revenues upon completion of services.

Advertising Expense

All advertising costs are expensed when incurred. For the years ended December 31, 2017 and 2016, advertising expense was $64,983 and $62,605, respectively.

Certain Reclassifications — Immaterial

Certain reclassifications have been made to conform to the 2017 presentation.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, (“GAAP”) management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.

Significant Accounting Policies (Continued)

Use of Estimates (Continued)

Areas where critical accounting estimates are made by management include:

·                  Depreciation of property and equipment

·                  Allowance for doubtful accounts

Risk Concentration

Financial instruments that potentially subject the Company to concentrations of credit risk are its receivables. The Company provides services to customers domestically. The Company continuously evaluates its customers’ credit worthiness and financial conditions and generally does not require collateral. The Company does not believe it is exposed to any material risk of concentration.

Recently Issued Accounting Pronouncements

Revenues from Contracts with Customers

In May of 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would:

1.              Remove inconsistencies and weaknesses in revenue requirements.

2.              Provide a more robust framework for addressing revenue issues.

3.              Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.

4.              Provide more useful information to users of financial statements through improved disclosure requirements.

5.              Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.

The core principle of the guidance is that an entity should 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. To achieve that core principle, an entity should apply the following steps:

2.

Significant Accounting Policies (Continued)

Recently Issued Accounting Pronouncements (Continued)

Revenues from Contracts with Customers (Continued)

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

For nonpublic companies the amendments in this Update are effective for annual reporting periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

Management does not expect the adoption will have a material impact on the Company’s financial statements.

Lease Accounting

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which is effective for nonpublic companies beginning after December 15, 2019. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less.

All other leases will fall into one of two categories:

·        Financing leases, similar to capital leases, will require the recognition of an asset and liability, measured at the present value of the lease payments.

·        Interest on the liability will be recognized separately from amortization of the asset.

·        Principal repayments will be classified as financing outflows and payments of interest as operating outflows on the statement of cash flows.

2.

Significant Accounting Policies (Continued)

Lease Accounting (Continued)

·        Operating leases will also require the recognition of an asset and liability measured at the present value of the lease payments.

·        A single lease cost, consisting of interest on the obligation and amortization of the asset, calculated such that the amortization of the asset will increase as the interest amount decreases resulting in a straight-line recognition of lease expense.

·        All cash outflows will be classified as operating on the statement of cash flows.

Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases.

Classification for Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)”. ASU 2016-15 provides accounting guidance related to the presentation and classification of certain transactions in the statement of cash flows where diversity in practice exists. The guidance is effective for annual periods beginning after December 15, 2018, with early adoption permitted. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented and provides for certain practical expedients. Management does not expect the adoption to have a material impact on the Company’s financial statements.

3.

Accounts Receivable

Accounts receivable at December 31, 2017 and 2016 consists of trade receivables of $14,868,860 and $2,978,575, respectively. The Company factors certain of its receivables for cash flow financing purposes. Such receivables serve as collateral for the borrowing arrangement. See Note 6.

Management considers accounts receivable to be fully collectible; accordingly no allowance for doubtful accounts is required. If amounts become uncollectible, they will be charged to operations when that determination is made.

4.

Fixed Assets

Fixed assets consisted of the following at December 31,

2017

2016

Wireline units

$

6,859,446

6,065,685

Coil units

16,677,526

—

Pumps

7,766,073

—

10K units

1,812,750

1,286,897

Shop equipment

3,510,229

708,209

Nitrogen equipment

669,652

—

Trucks

5,398,317

626,350

Furniture and fixtures

186,711

72,865

Equipment under development

1,752,680

11,039,807

44,633,384

19,799,813

Accumulated depreciation and amortization

(4,378,560

)

(1,124,843

)

Fixed assets, net

$

40,254,824

18,674,970

Equipment under development at December 31, 2017, consisted primarily of deposits on and purchases of segments of equipment not yet completed.

Depreciation expense for 2017 and 2016 was $3,323,252 and $518,094, respectively.

5.

Accrued Liabilities

Accrued liabilities consisted of the following at December 31,

2017

2016

Accrued payroll and related expenses

$

956,192

184,460

Accrued franchise taxes

197,364

—

Accrued other

492,054

193,088

$

1,645,610

377,548

6.

Factoring Note Payable

The Company signed an Accounts Receivable factoring agreement with Gulf Coast Bank and Trust Company dated January 11, 2017. The agreement was in effect for one year and was extended automatically for another year. The initial borrowing limit of $5,000,000 increased to $8,500,000 on June 27, 2017 under the first amendment to the agreement. Borrowings under the agreement are subject to interest at the current prime rate with a floor of 3.5% (currently 4.5%). Each invoice factored under the agreement is subject to a 10% reserve retained by the factor until the invoice amount is collected. Invoices that are not collected within 90 days of the invoice date are automatically charged against the current reserve balance.

On December 31, 2017 the Company had $6,691,840 in outstanding borrowings with the factor, and $296,854 in reserve with the factor.

7.

Long-Term Debt

Long term debt as of December 31, is as follows:

2017

2016

Vehicle financing notes payable to Ford Motor Credit, with combined monthly payments of $5,161 including interest at a rate of 5.89% for thirty-six months. The notes mature in April and July of 2019 and are secured by vehicles. Four of the notes either matured or were paid off during 2017.

$

93,359

234,258

Equipment financing note payable to Allegiance Capital, LLC, dated December 20, 2017, with payments of $29,151 per month for 60 months including interest at a rate of 8.75%. The note matures on December 20, 2021 and is secured by equipment.

1,174,251

1,408,500

Vehicle financing notes payable to Ally Financial with combined monthly payments of $4,486 including interest at a rate of 5.89% for thirty-six months. The notes mature in April and July of 2019 and are secured by vehicles.

141,805

121,651

Note payable to D-5 Investments, LLC, dated October 11, 2016, with monthly payments of interest only at a rate of 12% from November 1 2016, to June 1 of 2017 and monthly payments of $50,000 principal plus interest accrued on the outstanding loan balance at a rate of 12% from July 1, 2017 to September 1, 2019. The note matures on September 30, 2019 when all remaining outstanding principal and interest is due. The note is secured by all assets owned by the company that are not subject to liens.

4,650,000

5,000,000

Equipment financing note payable to Allegiance Capital, LLC, dated January 27, 2017, with payments of $3,239 per month for 60 months including interest at a rate of 8.75%. The note matures on January 27, 2022 and is secured by equipment.

132,711

—

7.

Long-Term Debt (Continued)

Long term debt as of December 31, is as follows:

2017

2016

Vehicle financing notes payable to Wells Fargo, with combined monthly payments of $5,704 including interest at a rate of 8.24% for thirty-six months. The notes mature from March to May of 2020 and are secured by vehicles.

$

139,742

—

Equipment financing note payable to Allegiance Capital, LLC, dated March 7, 2017, with payments of $9,929 per month for 60 months including interest at a rate of 8.75%. The note matures on March 7, 2022 and is secured by equipment.

420,549

—

Equipment financing note payable to Portfolio Advisors VIII, LLC, dated June 12, 2017, with payments of $9,986 per month for 60 months including interest at a rate of 9%. The note matures on June 12, 2022 and is secured by equipment.

440,874

—

Equipment financing note payable to Portfolio Advisors VIII, LLC, dated June 30, 2017, with payments of $6,078 per month for 36 months including interest at a rate of 10%. The note matures on June 30, 2020 and is secured by equipment.

160,561

—

Equipment financing note payable to Portfolio Advisors VIII, LLC, dated August 16, 2017, with payments of $12,915 per month for 36 months including interest at a rate of 10%. The note matures on August 16, 2020 and is secured by equipment.

350,986

—

7.

Long-Term Debt (Continued)

Long term debt as of December 31, is as follows:

2017

2016

Equipment financing note payable to Portfolio Advisors VIII, LLC, dated October 31, 2017, with payments of $27,659 per month for 60 months including interest at a rate of 9.5%. The note matures on October 31, 2022 and is secured by equipment.

1,522,450

—

9,227,288

6,764,409

Less current portion of long-term debt

(1,539,802

)

(685,022

)

Less unamortized debt issuance costs

(100,826

)

—

Long-term debt

$

7,586,660

6,079,387

Maturities of long-term debt at December 31, 2017 are as follows:

2018

$

1,539,802

2019

5,158,434

2020

964,952

2021

848,724

2022

715,376

Thereafter

—

$

9,227,288

As of December 31, 2017, the Company was in compliance with all of the covenants on its debt.

8.

Capital Lease Obligations

The Company is the lessee of various equipment under capital leases that expire through March of 2023. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset.  The assets are depreciated over the lower of their related lease terms or their estimated productive lives.  Depreciation of the assets under capital leases is included in the depreciation expenses for 2017 and 2016.

The following is a summary of property held under capital leases:

2017

2016

Equipment cost

$

5,825,921

—

Less: accumulated depreciation

(392,163

)

—

Total

$

5,433,758

—

8.

Capital Lease Obligations (Continued)

Minimum future lease payments under capital leases as of December 31, 2017 for next five years are as follows:

2018

$

1,720,672

2019

1,600,672

2020

1,317,974

2021

714,894

2022

863,356

Thereafter

39,393

Total minimum lease payments

6,256,961

Less: amount representing interest

(1,087,549

)

Less: current portion

(1,295,918

)

Capital leases, net of current portion

$

3,873,494

9.

Operating Leases

The Company leases vehicles under cancelable agreements which expire through December of 2020. The leases are obtained under a commercial credit line with Ford Motor Credit Company dated January 24, 2014. The credit line term was extended on July 21, 2017 through December 31, 2017. Under the provisions of the commercial credit line, Ford Motor Credit Company has agreed to purchase lease agreements from authorized dealerships which lease vehicles to the Company, in the cumulative amount of up to $1,800,000. Once this limit is reached, or the line term expires, Ford Motor Credit Company will not accept additional leases extended to the company. The line of credit was extended in December of 2017 for an additional period of six months and the total limit was raised to $2,500,000.

The Company leases vehicles under a non-cancellable agreement which expires on January 20, 2020. The leases are obtained under a commercial credit line with Ally Financial, Inc. dated 1/13/2017. The credit line term is scheduled to end on January 31, 2018. Under the provisions of the commercial credit line, Ally Financial, Inc. has agreed to purchase lease agreements from authorized dealerships which lease vehicles to the Company, in the cumulative amount of up to $402,000. Once this limit is reached, or the line term expires, Ally Financial, Inc. will not accept additional leases extended to the company.

Vehicle rental expenses under the lease agreements specified above, for the years ended December 31, 2017 and 2016 totaled $433,525 and $303,565.

9.

Operating Leases (Continued)

The Company also leases the buildings and land where its facilities and yard are located under a non-cancelable agreement with a related party. The agreement is classified as an operating lease and requires monthly payments of $40,000 based on the first amendment of the original agreement until it expires on September 30, 2021. Rental expenses under the agreement for the years ended December 31, 2017 and 2016 totaled $371,250 and $180,000 respectively.  Minimum annual rental commitments and minimal lease payments over the next five years are as follows:

December 31,

Vehicle Leases

Facility and land
lease

2018

$

638,039

480,000

2019

585,963

480,000

2020

268,422

480,000

2021

—

360,000

2022

—

—

Thereafter

—

—

$

1,492,424

1,800,000

10.

Related Parties

During 2017 and 2016, the Company rented the buildings and the land where its facilities and yard are located, as discussed in Note 9 above, from Motley Capital, LLC, owned by the Company’s CEO. The Company paid monthly rent of $18,000 in 2016 which increased to $21,875 per month from January to July of 2017 and to $40,000 per month for the remaining term of the agreement. The total rent paid for 2017 and 2016 was $371,250 and $180,000 respectively.  In December of 2017, the Company prepaid $40,000 of rent to the Motley Capital, LLC for January of 2018. 

As of December 31, 2017 and 2016, the Company owed $4,650,000 and $5,000,000 under a note to District 5 Investments, LP as discussed in Note 7 above. In addition to the principal, the Company owed $53,759 in accrued interest to the related party. The Company incurred $597,617 in interest on the note during 2017 and $120,300 during 2016.

In 2017, the Company signed a lease agreement for two tractors at a cost of $100,000 each with Hercules Equipment Management, LLC, owned by District 5 Investment, LP. The lease is classified as capital. Monthly payments of $4,448 are payable to the related party until maturity in December of 2021. As of December 31, 2017, the Company owed $168,942 principal and incurred $22,329 in interest on the lease for 2017.

In 2017, the Company signed a lease agreement for two pumps at a cost of $1,150,000 each with Hercules Equipment Management, LLC, owned by District 5 Investment, LP. The lease is classified as capital. Monthly payments of $72,872 are payable to the related party until maturity in August of 2020. As of December 31, 2017, the Company owed $2,087,463 principal and incurred $60,733 in interest on it for 2017.

10.

Related Parties (Continued)

In 2017, the Company signed a lease agreement on a month-to-month basis for eight pump down units and two frac units with Hercules Equipment Management, LLC, owned by District 5 Investment, LP. The lease is classified as operating. The monthly payments vary based on use per unit. Total rent expense incurred under the lease for 2017 is $2,062,433. As of December 31, 2017, the Company owed $225,972 for use of the equipment for December of 2017.

11.

Significant Customers

The Company had revenues from significant customers that accounted for the following percentages of the Company’s total revenues at December 31,:

2017

2016

Customer A

27

%

31

%

Customer B

23

%

—

%

Customer C

16

%

24

%

Customer D

10

%

—

%

Management believes that in the unlikely event that the Company lost these customers, based on current market conditions, the Company would be able to find comparable work with other existing customers or new customers.

12.

Subsequent Events

The Company has evaluated subsequent events through June 13, 2018, the date the financial statements were available to be issued.

On March 16, 2018, the Company signed a revolving credit note agreement with PNC Bank National Association with a borrowing limit of $20 million. Monthly payments of interest on the outstanding balance are due on the first business day of each month until maturity on March 16, 2021 when all outstanding interest and principal are due. Interest (currently 6.25%) is determined at the rate of 1.5% plus PNC’s Base Rate (determined by the lender and not tied to external rates).The note is subject to various covenants and is guaranteed by the Company’s partners who pledged their full partnership interest as collateral.

On March 16, 2018, the Company signed a term note agreement with PNC Bank National Association in the amount of $8 million. Monthly payments of $166,666.67 commencing on April 1, 2018 are due on the first day of each month until maturity on March 16, 2021 when all outstanding interest and principal are due. Interest (currently 7.25%) is determined at the rate of 2.5% plus PNC’s Base Rate (determined by the lender and not tied to external rates). The note is subject to various covenants and is guaranteed by the Company’s partners who pledged their full partnership interest as collateral.

On April 1, 2018, the Company signed a lease agreement for eight pump down units and two frac units with Hercules Equipment Management, LLC, owned by District 5 Investment, LP. This agreement is classified as capital and it replaced the existing month-to-month agreement disclosed in Note 10. Monthly payments of $302,226.31 consisting of principal and interest are payable to the related party until maturity on September 30, 2021. The market value of the equipment leased is $10.9 million.