Aly Energy Services, Inc.

Based on the Company’s assessments of lease classification, each of the tank leases were classified as operating leases and each of the DMP leases were classified as finance leases. The DMPs were classified as financing leases because the present value of the lease payments aggregate to an amount equal to substantially all the estimated fair value of the DMPs. The estimated fair value of the frac tanks was determined based on quoted market prices for similar tanks, as adjusted for differences in configuration. The estimated fair value for the DMPs was determined based on the cost of a new DMP, as adjusted for the upgrades added by the Company. The estimated incremental borrowing rate is based on the Company’s estimate of the rate at which a third-party lender would finance the purchase of equipment under a secured loan of a similar term to the leasing arrangement.

Given the declining Rig Count and the uncertainty regarding the current market environment, we have implemented a low-risk strategy. We will focus on (i) maintaining current pricing levels and increasing activity and utilization of our equipment, particularly with existing customers who are not reducing the number of rigs they operate and (ii) monitoring the utilization of our equipment daily in order to ensure high-cost sub-rented equipment is replaced with owned equipment or equipment sub-rented at more favorable rates whenever possible. We believe there is significant growth potential for our solids control product line as we currently have the capacity to more than double our existing solids control job count with insignificant capital expenditures. As new jobs are added, the income from such jobs will have a significant positive impact on financial performance as the variable costs associated with the rental of our solids control products are minimal. Variable costs associated with the rental of surface rental equipment are also minimal and we will seek to increase our surface rental activity; however, potential growth of our surface rental product line is more limited than growth of our solids control product line as our lead surface rental products, consisting primarily of tanks and pumps, are fully utilized and we are reluctant to increase our dependence on high cost sub-rental vendors. In an effort to alleviate the impact of this limitation, during the first six months of 2019, we invested heavily in 500bbl tanks, our lead surface rental product, which can either generate incremental rental income at higher margins by satisfying additional demand or generate cost savings by replacing equipment which is currently being sub-rented. In addition, beginning in the second quarter, we signed lease agreements for tanks and pumps from Permian Pelican Rentals, LLC (“PPR”), a related party, at day rates which are more favorable than the rates charged by our existing sub-rental vendors. With the addition of 60 owned tanks and 14 tanks from PPR during the first nine months of 2019, we have increased our average number of 500bbl round-bottom tanks generating revenue per day to approximately 290 during the third quarter of 2019 from approximately 260 during the first quarter of 2019. In addition, we have returned more than 20 sub-rented tanks to third-party vendors in the third quarter of 2019. We believe the combination of (i) increased contribution from our solids control product line as we improve utilization of our existing equipment fleet, (ii) increased surface rental activity using owned or less costly equipment, and (iii) decreased costs as sub-rented equipment is returned will result in increased margins during the remainder of the year and in 2020.

Net Cash Provided by Operating Activities. During the nine months ended September 30, 2019 and 2018, operating activities provided $1.7 million and $2.9 million in cash, respectively. Changes in operating assets and liabilities used approximately $0.6 million of cash during the nine months ended September 30, 2019 compared to generating $0.2 million during the nine months ended September 30, 2018. The change in receivables used $0.2 million in cash during the nine months ended September 30, 2019 compared to generating $0.4 million in cash during the nine months ended September 30, 2018. During the nine months ended September 30, 2019, days of receivables outstanding remained relatively flat at 68 days. The same measure for the prior year period decreased from 102 days as of December 31, 2017 to 69 days as of September 30, 2018 resulting in a significant source of cash during the nine months ended June 30, 2018 as we billed and collected receivables which had been delayed during the fourth quarter of 2017. The change in accounts payable, accrued expenses, operating leases and other liabilities used $0.8 million in cash during the nine months ended September 30, 2019 compared to using $0.2 million in cash during the nine months ended September 30, 2018. Significant reductions to accrued expenses during the nine months ended September 30, 2019 included severance payments and repayment of insurance financing. The balance of the change from the nine months ended September 30, 2019 as compared to 2018 was a result of the change in our net income (loss).

Capital Expenditures. Capital expenditures are the main component of our investing activities. Capital expenditures for the nine months ended September 30, 2019 and 2018 were $2.8 million and $1.7 million, respectively. The primary investing focus in 2019 was to purchase and fabricate equipment which could either replace similar equipment being sub-rented from third-party vendors or could be used to satisfy incremental demand. During the nine months ended September 30, 2019, aggregate expenditures on 500bbl round bottom tanks were approximately $2.4 million and we placed 60 new or refurbished 500bbl round bottom tanks in service. To date, virtually all these tanks have been used to satisfy incremental demand resulting in a more than 15.0% increase in the number of revenue-generating days for 500bbl tanks when comparing the month ended September 30, 2019 to the month ended January 31, 2019. To the extent the new tanks have not been needed for incremental work, the tanks have replaced sub-rented tanks on existing jobs. During the three months ended September 30, 2019, we returned a significant amount of sub-rented tanks generating annual cost savings of approximately $0.2 million. The full benefit of these cost savings will be recognized during the fourth quarter of 2019. The remaining $0.4 million of capital expenditures during the nine months ended September 30, 2019 related to routine replacement of items such as hoses and liners, the fabrication of three open top tanks, and other miscellaneous items.

In May 2019, we entered into a lease agreement with PPR, a related party and a wholly-owned subsidiary of our related party lender, PPF. The lease agreement, in conjunction with three subsequent amendments, provides for the Company to rent 40 500bbl tanks and six diesel mud pumps (“DMPs”) under operating and finance leases, respectively. As of September 30, 2019, we had recorded approximately $0.3 million of operating right-of-use (“ROU”) assets and lease liabilities and approximately $0.5 million of finance ROU assets and lease liabilities as a result of this arrangement. On or prior to March 31, 2020, we will incur approximately $0.5 million in incremental operating ROU assets and lease liabilities in connection with this lease agreement. The agreement requires monthly payments based on a fixed day rate per piece of equipment and extends through December 31, 2023.