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 quarterly period ended June 30, 2017

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

ECO-STIM ENERGY SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   31104   20-8203420

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification Number)

 

2930 W. Sam Houston Pkwy N., Suite 275, Houston, TX   77043
(Address of principal executive offices)   (Zip Code)

 

281-531-7200

(Registrant’s telephone number, including area code)

 

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 [X] No [  ]

 

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

 

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

 

Large accelerated filer [  ] Accelerated filer [  ]
   
Non-accelerated filer [  ] (Do not check if a smaller reporting company) 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 7(a)(2)(B) of the Securities 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 registrant had 74,363,796 shares of common stock outstanding at August 9, 2017.

 

 

 

 
 

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS 1
   
PART I – FINANCIAL INFORMATION 4
     
ITEM 1. FINANCIAL STATEMENTS 4
     
  CONDENSED CONSOLIDATED BALANCE SHEETS 4
     
  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 5
     
  CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY 6
     
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 7
     
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 8
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
     
ITEM 4. CONTROLS AND PROCEDURES 24
     
PART II – OTHER INFORMATION 26
     
ITEM 1. LEGAL PROCEEDINGS 25
     
ITEM 1A. RISK FACTORS 25
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 25
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 25
     
ITEM 4. MINE SAFETY DISCLOSURES 25
     
ITEM 5. OTHER INFORMATION 25
     
ITEM 6. EXHIBITS 26
     
SIGNATURES 27

 

i 
 

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1993, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements, other than statements of historical facts, included in this Form 10-Q that address activities, events or developments that we expect, project, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are based on management’s current belief, based on currently available information, as to the outcome and timing of future events. Forward-looking statements may include statements that relate to, among other things, our:

 

  future financial and operating performance and results;
     
  business strategy and budgets;
     
  technology;
     
  financial strategy;
     
  amount, nature and timing of capital expenditures;
     
  competition and government regulations;
     
  operating costs and other expenses;
     
  cash flow and anticipated liquidity;
     
  property and equipment acquisitions and sales; and
     
  plans, forecasts, objectives, expectations and intentions.

 

All statements, other than statements of historical fact included in this Form 10-Q, regarding our strategy, future operations, financial position, estimated revenues and losses, projected costs, prospects, plans and objectives of management are forward-looking statements. When used in this Form 10-Q, the words “could,” “would’, “should”, “believe,” “anticipate,” “plan”, “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. These forward-looking statements are based on our current expectations and assumptions about future events and are based on currently available information as to the outcome and timing of future events.

 

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from the anticipated future results or financial condition expressed or implied by the forward-looking statements. These risks, uncertainties and other factors include but are not limited to:

 

  the cyclical nature of the oil and natural gas industry;
     
  the potential for our oil-company customers to backward-integrate by starting their own well service operations;
     
  the potential for excess capacity in the oil and natural gas service industry;
     
  dependence on the spending and drilling activity by the onshore oil and natural gas industry;
     
  competition within the oil and natural gas service industry;
     
  concentration of our customer base and fulfillment of existing customer contracts;

 

 1 
 

 

  our ability to maintain pricing and obtain contracts;
     
  deterioration of the credit markets;
     
  our ability to raise additional capital to fund future and committed capital expenditures;
     
  increased vulnerability to adverse economic conditions due to indebtedness;
     
  our limited operating history on which investors will evaluate our business and prospects;
     
  our ability to obtain raw materials and specialized equipment;
     
  technological developments or enhancements;
     
  asset impairment and other charges;
     
  our identifying, making and integrating acquisitions;
     
  our major stockholders and management control over stockholder voting;
     
  loss of key executives;
     
  the ability to employ skilled and qualified workers;
     
  work stoppages and other labor matters;
     
  hazards inherent to the oil and natural gas industry;
     
  inadequacy of insurance coverage for certain losses or liabilities;
     
  delays in obtaining required permits;
     
 

our ability to import equipment or spare parts into Argentina on a timely basis;

     
 

legislation and regulations affecting the oil and natural gas industry or aspects of our business, including future legislative and regulatory developments;

     
  legislation and regulatory initiatives relating to well stimulation;
     
  foreign currency exchange rate fluctuations;
     
  effects of climate change;
     
  market acceptance of turbine pressure pumping technology;
     
  the profitability for our customers of shale oil and gas as commodity prices decrease;
     
  risks associated with the start-up of new business operations in a new country, such as the inability to hire sufficient qualified employees, obtain necessary machinery and equipment needed to operate and our ability to obtain operating permits in time;
     
 

geographical and economic risks associated with doing business in Argentina and the United States; and

     
  costs and liabilities associated with environmental, health and safety laws, including any changes in the interpretation or enforcement thereof.

 

 2 
 

 

For additional information regarding known material factors that could affect our operating results and performance, please read (1) “Risk Factors” in Part II—Item 1A of this Form 10-Q, “Risk Factors” in Part II—Item 1A of the Form 10-Q for period ended March 31, 2017, and “Part I—Item 1A—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I—Item 2 of the Form 10-Q for the period ended March 31, 2017, as well as in Part II—Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016. 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. There also may be risks of which we are currently unaware.

 

We believe that it is important to communicate our expectations of future performance to our investors. However, events may occur in the future that we are unable to accurately predict, or over which we have no control. When considering our forward-looking statements, you should keep in mind the cautionary statements in this Form 10-Q, which provide examples of risks, uncertainties and events that may cause our actual results to differ materially from those contained in any forward-looking statement.

 

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to revise or update any forward-looking statements, all of which are expressly qualified by the statements in this section, to reflect events or circumstances after the date of this Form 10-Q.

 

You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only of our expectations based on known factors as of the date of the particular statement.

 

 3 
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2017   December 31, 2016 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $3,927,079   $1,731,364 
Accounts receivable   5,735,830    2,865,707 
Inventory   2,925,661    2,047,163 
Prepaids and other assets   4,218,768    1,950,539 
Total current assets   16,807,338     8,594,773 
           
Property, plant and equipment, net   45,009,376    38,382,391 
Other non-current assets   488,633    325,756 
Total assets  $62,305,347   $47,302,920 
           
Liabilities and stockholders’ equity          
Current liabilities:          
Accounts payable  $11,288,360   $2,453,551 
Accrued expenses   

3,754,834

    4,503,180 
Short-term notes payable   387,029    2,000,000 
Current portion of capital lease payable   846,044    789,166 
Total current liabilities   

16,276,267

    9,745,897 
           
Non-current liabilities:          
Long-term notes payable       21,737,404 
Long-term capital lease payable   364,035    766,687 
Total non-current liabilities   

364,035

    22,504,091 
           
Commitment and contingencies          
           
Stockholders’ equity          
Common stock, $0.001 par value, 200,000,000 shares authorized, 44,805,225 issued and 44,783,375 outstanding at June 30, 2017 and 14,485,937 issued and 14,464,087 outstanding at December 31, 2016   44,805    14,485 
Additional paid-in capital   101,315,157    59,556,505 
Treasury stock, at cost; 21,850 common shares at June 30, 2017 and at December 31, 2016   (57,469)   (57,469)
Accumulated deficit   

(55,637,448

)   (44,460,589)
Total stockholders’ equity   

45,665,045

    15,052,932 
           
Total liabilities and stockholders’ equity  $62,305,347   $47,302,920 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 4 
 

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

   Three Months Ended
June 30,
   Six Months Ended
June 30,
 
   2017   2016   2017   2016 
Revenues  $8,527,659   $2,337,579   $11,090,316   $4,171,484 
                     
Operating cost and expenses:                    
Cost of services   11,522,245    2,470,038    15,377,131    4,706,165 
Selling, general, and administrative expenses   2,048,305    1,579,808    3,490,709    3,153,072 
Research and development   116,638    106,359    203,792    274,815 
Depreciation and amortization expense   1,422,719    1,211,960    2,764,511    2,116,190 
Total operating costs and expenses   15,109,907    5,368,165    21,836,143    10,250,242 
                     
Operating loss   (6,582,248)   (3,030,586)   (10,745,827)   (6,078,758)
                     
Other income (expense):                    
Interest expense   (116,157)   (937,216)   (1,706,615)   (2,131,927)
Interest forgiven   634,477        634,477     
Other income (expense)   (83,906)   376,734    7,846    (172,434)

Total other income (expense)

   434,414    (560,482)   (1,064,292)   (2,304,361)
                     
Benefit (provision) for income taxes       (72,237)   

633,260

    (144,473)
                     
Net loss  $(6,147,834)  $(3,663,305)  $(11,176,859)  $(8,527,592)
Basic and diluted loss per share  $(0.31)  $(0.27)  $(0.64)  $(0.63)
Weighted average number of common shares outstanding – basic and diluted   19,937,375    13,579,848    17,396,511    13,579,889 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 5 
 

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

 

(Unaudited)

 

   Common Stock   Additional
Paid-in
   Treasury   Accumulated     
   Shares   Amount   Capital   Stock   Deficit   Total 
Balance at December 31, 2016   14,464,087   $14,485   $59,556,505   $(57,469)  $(44,460,589)  $15,052,932 
Sale of common stock, net of costs   563,753    564    966,216              966,780 
Stock based compensation   216,750    217    551,143              551,360 
Stock issued upon conversion of debt, net of costs   29,538,785    29,539    40,241,293              40,270,832 
                               
Net loss                       (11,176,859)   (11,176,859)
Balance at June 30, 2017   44,783,375   $44,805   $101,315,157   $(57,469)  $(55,637,448)  $45,665,045 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 6 
 

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

   Six Months Ended
June 30,
 
   2017   2016 
Operating Activities          
Net loss  $(11,176,859)  $(8,527,592)
Depreciation and amortization   2,764,511    2,116,190 
Amortization of debt discount and loan origination cost   424,714    127,771 
Stock based compensation   551,360    432,397 
Changes in operating assets and liabilities:          
Accounts receivable   (2,870,123)   2,778,953 
Inventory   (878,498)   (415,419)
Prepaids and other assets   (1,639,592)   1,156,886 
Accounts payable and accrued expenses   5,207,834    (1,463,793)

Net cash used in operating activities

   (7,616,653)   (3,794,607)
           
Investing Activities          
Purchases of equipment   (7,842,535)   (2,706,050)

Net cash used in investing activities

   (7,842,535)   (2,706,050)
           
Financing Activities          
Proceeds from sale of common stock, net   966,780     
Proceeds from notes payable   19,298,251    194,611 
Payments on notes payable   (2,229,270)   (2,173,922)
Payments on capital lease   (380,858)   (331,371)
Purchase of treasury stock       (37,175)
Net cash provided by (used in) financing activities   17,654,903    (2,347,857)
           
Net increase (decrease) in cash and cash equivalents   2,195,715    (8,848,514)
Cash and cash equivalents, beginning of period   1,731,364    11,742,489 
           
Cash and cash equivalents, end of period  $3,927,079   $2,893,975 
           
Supplemental Disclosure of Cash Flow Information          
Cash paid during the year for interest  $230,473   $3,288,283 
Cash paid during the year for income taxes  $116,286   $81,642 
           
Non-cash transactions          
Property, plant and equipment additions in accounts payable  $1,832,335   $1,566,823 
Conversion of debt to equity  $41,354,301   $ 
Notes payable settled through recapitalization  $22,000,000   $ 

Interest forgiven from convertible debt

  $634,477   $ 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 7 
 

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2017
(Unaudited)

 

Note 1 – Organization and Nature of Business

 

Eco-Stim Energy Solutions, Inc. (the “Company,” “Eco-Stim,” “we” or “us”) is a technology-driven independent oilfield services company providing well stimulation, coiled tubing and field management services to the domestic and international upstream oil and gas industry. We are focused on reducing the ecological impact and improving the economic performance of the well stimulation process in “unconventional” drilling formations. We serve major, national and independent oil and natural gas exploration and production companies around the world, and we offer products and services with respect to the various phases of a well’s economic life cycle. Our focus is to bring these technologies and processes to the most active shale resource basins both domestically and outside of the United States using our technology to differentiate our service offerings. We do business primarily in the United States and Argentina.

 

Note 2 – Basis of Presentation and Significant Accounting Policies

 

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements are unaudited and have been prepared from our books and records in accordance with Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of our management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of operations for interim periods are not necessarily indicative of results of operations for a full year. These condensed consolidated financial statements should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 9, 2017, and our Consolidated Financial Statements and Notes thereto included in our Current Report on Form 8-K filed with the SEC on August 9, 2017.

 

In addition, due to the second quarter 2017 start-up of operations in the United States, beginning in the second quarter of 2017, we now manage our business through operating segments aligned with our two geographical operating regions; Latin America and the United States. We also report certain corporate and other non-operating activities under the heading “Corporate and Other”. Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other non-operational allocable costs. For financial information about our segments, see Note 8 - Segment Reporting.

 

Principles of Consolidation

 

We consolidate all wholly-owned subsidiaries, controlled joint ventures and variable interest entities where the Company has determined it is the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP 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 revenue and expenses during the reporting period. Estimates are used in, but are not limited to, determining the following: allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful lives used in depreciation and amortization, income taxes and stock-based compensation. The accounting estimates used in the preparation of the condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains deposits in several financial institutions in both Argentina and the U.S. Funds held in the U.S. may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses related to amounts in excess of FDIC limits.

 

The Company places its cash and cash equivalents with high credit quality financial institutions.

 

Revenue Recognition

 

The Company’s revenue is dependent on three major sources: well stimulation, coiled tubing, and field management. All revenue is recognized when persuasive evidence of an arrangement exists, specific performance completed, the price is fixed or determinable, and collection is reasonably assured as follows:

 

Well Stimulation Revenue

 

The Company provides well stimulation services based on contractual arrangements, such as term contracts, exclusivity agreements and pricing agreements, or on a spot market basis. Jobs for these services are typically short term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized and customers invoiced upon the completion of each job, which can consist of one or more stimulation stages.

 

Under term pricing agreement arrangements, customers commit to targeted utilization levels at agreed-upon pricing, but without termination penalties or obligations to pay for services not used by the customer. In addition, the agreed-upon pricing is typically subject to periodic review. Under exclusivity agreements, customers agree to dedicate all of their completion work in a given area to the Company at an agreed upon price so long as a minimum operational performance is maintained during the term of the agreement.

 

Spot market arrangements are priced on an agreed-upon hourly spot market rate. The Company also charges fees for setup and mobilization of equipment depending on the job, additional equipment used on the job, if any, and materials that are consumed during the well stimulation process. Generally, these fees and other charges vary depending on the equipment and personnel required for the job and market conditions in the region in which the services are performed.

 

The Company also generates revenues from chemicals and proppants that are consumed while performing well stimulation services.

 

Coiled Tubing Revenue

 

The Company began providing coiled tubing and other well stimulation services in early 2015. Jobs for these services are typically short term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each job based upon a completed field ticket. The Company charges the customer for mobilization, services performed, personnel on the job, equipment used on the job, and miscellaneous consumables at agreed-upon spot market rates.

 

8
 

 

Field Management Revenue

 

The Company enters into arrangements to provide field management services. Field management revenue relates primarily to geophysical predictions and production monitoring, utilizing down-hole diagnostics tools. Revenue is recognized and customers are invoiced upon the completion of each job. The service invoices are for a set amount, which includes charges for the mobilization of the equipment to the location, the service performed, the personnel on the job, additional equipment used on the job, consumables used throughout the course of the service, and processing and interpretation of data acquired via down-hole diagnostic tools.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, other assets, accounts payable, accrued expenses, capital lease obligations and notes payable. The recorded values of cash and cash equivalents, accounts receivable, other assets, accounts payable, and accrued expenses approximate their fair values based on their short-term nature. The carrying value of capital lease obligations and notes payable approximate their fair value, and the interest rates approximate market rates.

 

Functional and Presentation Currency

 

Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (the “Functional Currency”). The Functional Currency for the Norwegian and Argentine subsidiaries is the U.S. Dollar. The condensed consolidated financial statements are presented in U.S. Dollars, which is the Company’s presentation currency.

 

Net Loss per Common Share

 

For the six months ended June 30, 2017 and 2016, the weighted average shares outstanding excluded certain stock options and potential shares from convertible debt of 683,074 and 4,412,132, respectively, from the calculation of diluted earnings per share because these shares would be anti-dilutive. Anti-dilutive warrants of 100,000 for each of the six months ended June 30, 2017 and 2016 were also excluded from the calculation.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the 2017 presentation, with no material effect on the presentation of December 31, 2016 or June 30, 2016.

 

Accounts Receivable

 

Accounts receivable are stated at amounts management expects to collect from outstanding balances both billed and unbilled (unbilled accounts receivable represents amounts recognized as revenue for which invoices have not yet been sent to clients). At June 30, 2017 and December 31, 2016, there were $3,450,496 and $855,706, respectively, in outstanding unbilled amounts. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. To date, the Company has not recognized any losses due to uncollectible accounts. Balances still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. The Company evaluated all accounts receivable and determined that no reserve for doubtful accounts was necessary at June 30, 2017 or December 31, 2016.

 

Prepaids and Other Assets

 

Prepaid expenses are primarily comprised of Argentinian value added tax and prepaid insurance. The prepaid value added tax will be reduced as the Company continues to invoice customers in Argentina.

 

9
 

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value using the average cost method and appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value. Inventories consist of supplies and consumable products used in the Company’s services provided to its customers.

 

Property, Plant and Equipment

 

Property, Plant and Equipment (“PPE”) is stated at historical cost less depreciation. Historical cost includes expenditures that are directly attributable to the acquisition of the items.

 

Depreciation is computed using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Expenditures for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. The cost of assets sold or abandoned and the related accumulated depreciation are eliminated from the accounts and any gains or losses are reflected in the accompanying consolidated statements of operations for the respective period.

 

The estimated useful lives of our major classes of PPE are as follows:

 

Major Classes of PPE   Estimated Useful Lives
Machinery and equipment   2-7 years
Vehicles   5 years
Leasehold improvements   5 years (or the life of the lease)
Furniture and office equipment   3-5 years

 

Leases

 

The Company leases certain equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification as an operating or capital lease for financial reporting purposes. Any lease that does not meet the criteria for a capital lease is accounted for as an operating lease.

 

Stock-Based Compensation

 

The Company accounts for its stock options, warrants, and restricted stock grants under the fair value recognition provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. The Company currently uses the straight-line amortization method for recognizing stock option and restricted stock compensation costs. The measurement and recognition of compensation expense for all share-based payment awards made to our employees, directors or outside service providers are based on the estimated fair value of the awards on the grant dates. The grant date fair value is estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if such a price exists. Such cost is recognized over the period during which an employee, director or outside service provider is required to provide service in exchange for the award, i.e., “the requisite service period” (which is usually the vesting period). The Company also estimates the number of instruments that will ultimately be earned, rather than accounting for forfeitures as they occur.

 

Impairment of Long-Lived Assets

 

The Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. ASC Topic 360 requires the Company to review long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes a comparison of future cash flows expected to be generated by the asset or group of assets with their associated carrying value. If the carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent that the carrying value exceeds the fair value. If estimated future cash flows are not achieved with respect to long-lived assets, additional write-downs may be required. During the six months ended June 30, 2017, the Company evaluated its long-lived assets for impairment and determined no impairment was necessary.

 

10
 

 

Major Customers and Concentration of Credit Risk

 

The majority of the Company’s business from inception through the first quarter of 2017 was conducted with major and independent oil and gas companies in Argentina. For the six months ending June 30, 2017, 28% or $3.1 million and 72% or $8.0 million of our revenue is from the U.S. and Argentina, respectively. The Company evaluates the financial strength of its customers and provides allowances for probable credit losses when deemed necessary. The Company derives a large amount of revenue from a small number of major and independent oil and gas companies. At June 30, 2017, the Company had a concentration of receivables with two customers.

 

For the three and six months ended June 30, 2017, two major customers accounted for approximately 100% and 97% of our services revenue, respectively. For the year ended December 31, 2016, two major customers represented 79% of our services revenue. Our accounts receivable at June 30, 2017 and December 31, 2016 were concentrated with two major customers representing 99.9% and 86%, respectively.

 

Income Taxes

 

Deferred income taxes are determined using the asset and liability method in accordance with ASC Topic 740. 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 income taxes are measured using enacted tax rates expected to apply to taxable income in years in which such temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred income taxes is recognized in the consolidated statement of operations of the period that includes the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some portion of the deferred tax asset will not be realized.

 

The Company is subject to U.S. federal and foreign income taxes along with state corporate income taxes in Texas. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

 

The Fir Tree Transaction (as described in Note 6—Debt, Long-Term Notes Payable), will result in a change in control and will likely limit the Company’s ability to utilize net operating loss tax benefits due to limitations pursuant to Section 382 of the U.S. Tax Code. As of June 30, 2017 and December 31, 2016, there was no tax asset benefit recorded, as a provision was made to fully reserve the benefit.

 

Recently Issued and Adopted Accounting Guidance

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires inventory not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. The new standard was effective for us beginning with the first quarter of 2017, and is applied prospectively. We adopted ASU 2015-11 in the first quarter of 2017, with such adoption having no material impact on the accompanying condensed consolidated financial statements.

 

11
 

 

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which eliminates the requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, all deferred tax assets and liabilities will be required to be classified as noncurrent. We adopted this ASU 2015-17 in the first quarter of 2017, with such adoption having no effect on our condensed consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). ASU 2016-09 simplifies several aspects of accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. Under ASU 2016-09, all excess tax benefits or deficiencies are recognized as income tax expense or benefit in the income statement and the pool of windfall tax benefits as a component of additional paid-in capital is eliminated. In regards to forfeitures, companies may make a one-time policy election to use forfeitures which applies only to instruments with service conditions; the requirement to estimate the probability of achieving performance conditions remains. For statutory tax withholding requirements, ASU 2016-09 allows for net settlement up to the employer’s maximum statutory tax withholding requirement. Formerly, only the minimum statutory tax withholding requirement was allowed to be met through net settlement while retaining equity classification. We adopted ASU 2016-09 in the first quarter of 2017, with such adoption having no material impact on the accompanying condensed consolidated financial statements.

 

Accounting Guidance Issued But Not Adopted as of June 30, 2017

 

In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires us to recognize the amount of revenue to which we expect to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective on January 1, 2018. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect ASU 2014-09 will have on our condensed consolidated financial statements and related disclosures. The Company has performed an initial evaluation of this standard and its impact on the financial statements. This included tasks such as identifying contracts, identifying performance obligations and reviewing the applicable revenue streams. In this review, nothing has been identified that would require a change in the current accounting for revenue. The Company will continue to evaluate, particularly as we enter into new contracts.

 

On February 25, 2016, the FASB issued ASU 2016-02 Leases (Topic 842), which requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its condensed consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its condensed consolidated financial statements.

 

Note 3 – Accounts Receivable

 

Accounts receivable by category were as follows:

 

    June 30, 2017     December 31, 2016  
Billed   $ 2,285,334     $ 2,010,001  
Unbilled     3,450,496       855,706  
Total accounts receivable   $ 5,735,830     $ 2,865,707  

 

As of June 30, 2017, $0.9 million and $2.5 million of our unbilled receivables were attributable to our Oklahoma and Argentina operations, respectively. Subsequent to June 30, 2017, the full amount from Oklahoma and a substantial amount from Argentina were invoiced.

 

Note 4 – Stock-Based Compensation

 

The Company has two stock incentive plans, the 2013 Stock Incentive Plan (the “2013 Plan”) and the 2015 Stock Incentive Plan (the “2015 Plan”), (or collectively, “the Plans”), for the granting of stock-based incentive awards, including incentive stock options, non-qualified stock options and restricted stock, to employees, consultants and members of the Company’s Board of Directors (the “Board”). The 2013 Plan was adopted in 2012 and amended in 2013 and authorizes 1,000,000 shares to be issued under the 2013 Plan. The 2015 Plan, f/k/a “the 2014 Stock Incentive Plan,” was adopted in 2014; in 2015 and 2016, it was amended and a total of 700,000 additional shares were authorized, resulting in a maximum of 1,200,000 shares being authorized for issue under the modified 2015 Plan

 

12
 

 

On June 15, 2017, at our annual meeting of stockholders (the “Annual Meeting”), stockholders approved an increase to the number of shares available under the 2015 Plan by 5,000,000 shares (from 1,200,000 shares to 6,200,000 shares). Both the 2013 Plan and the 2015 Plan have been approved by the stockholders of the Company. As of June 30, 2017, 122,510 shares remained available for grant under the 2013 Plan and 1,233,000 shares remained available for grant under the 2015 Plan.

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and restricted stock. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determined the initial expected life based on a simplified method in accordance with the FASB ASC Topic 718, giving consideration to the contractual terms, vesting schedules, and pre-vesting and post-vesting forfeitures.

 

During the six months ended June 30, 2017 and 2016, the Company recorded $551,360 and $432,397, respectively, of stock-based compensation, which is included in selling, general, and administrative expense and cost of sales in the accompanying consolidated statement of operations. Total unamortized stock-based compensation expense at June 30, 2017 was $3,903,914 compared to $928,786 at December 31, 2016, and will be fully expensed through 2020.

 

Note 5 – Commitments and Contingencies

 

Capital Lease Obligations

 

In the fourth quarter of 2013, the Company purchased and upgraded equipment from non-related third parties, investing approximately $3.5 million. In December 2013, the Company sold the equipment to a related party leasing company, Impact Engineering, AS. Simultaneously, the equipment package was leased back to the Company as a capital lease for a 60-month period with payments beginning in February of 2014. The Company agreed to prepay one year of payments in the amount of approximately $1.0 million and maintain a balance of no less than six months of prepayments until the final six months of the lease.

 

These prepayments were made prior to December 31, 2013. Further lease payments are $81,439 per month and commenced on July 1, 2014. The final six months of prepaid is shown as other non-current assets in the consolidated balance sheets with a balance of $846,044.

 

The minimum present value of the lease payments is $1.5 million with terms of sixty months and implied interest of 14%. The next five years of lease payments are:

 

   Capital Lease Payments 
2017  $488,633 
2018   977,267 
Total future payments   1,465,900 
Less debt discount due to warrants   (105,251)
Less amount representing interest   (150,570)
    1,210,079 
Less current portion of capital lease obligations   (846,044)
Capital lease obligations, excluding current installments  $364,035 

 

13
 

 

Operating Leases

 

The Company’s operating leases correspond to equipment facilities and office space in Argentina and the United States. The combined future minimum lease payments as of June 30, 2017 are as follows:

 

    Operating Leases 
2017   $239,395 
2018    192,070 
Thereafter     
Total   $431,465 

 

Note 6 – Debt

 

Short-Term Note

 

On November 30, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with two of the Company’s largest stockholders, one of which was, at the time, the holder of approximately 20% of the Company’s outstanding shares of common stock, par value $0.001 per share (the “Common Stock”). A portion of the proceeds from the Loan Agreement was used to pay the remaining outstanding amount payable (approximately $1 million) by the Company under an equipment purchase agreement dated October 10, 2014, as amended, with Gordon Brothers Commercial & Industrial, LLC for the purchase of certain turbine powered pressure pumping equipment (“TPU”).

 

At December 31, 2016, the Company had a balance of $2,000,000 and accrued interest of $24,548. The indebtedness created under the Loan Agreement was repaid on March 6, 2017 with a portion of the proceeds from the Fir Tree Transaction (as described in Note 1).

 

On January 1, 2017, the Company financed its operations insurance premiums with US Premium Finance for a total of $211,681 at an interest rate of 5.87%. As of June 30, 2017, the Company had a balance of $387,029 and accrued interest of $2,354.

 

Long-Term Notes Payable

 

Convertible Note Facility

 

On May 28, 2014 (the “Closing Date”), the Company entered into a Convertible Note Facility Agreement (the “ACM Note Agreement”) with ACM Emerging Markets Master Fund I, L.P. and ACM Multi-Strategy Delaware Holding LLC (collectively, the “ACM Entities”). The proceeds from the ACM Note Agreement were used primarily for capital expenditures, certain working capital needs and approved operating budget expenses.

 

The ACM Note Agreement allowed the Company to issue ACM Entities a multiple draw secured promissory note with maximum aggregate principal amount of $22,000,000, convertible into Common Stock at a price of $6.00 per share at the option of ACM Entities (the “Existing ACM Note”). The outstanding debt under the facility was convertible immediately and accrued interest at 14% per annum with interest payments due annually in arrears.

 

As of December 31, 2016, the Company had drawn down the full $22,000,000 available under the ACM Note Agreement, which was primarily used for capital expenditures, certain working capital needs and approved operating budget expenses.

 

On March 6, 2017, the Company closed the Fir Tree Transaction, which was part of a comprehensive recapitalization designed to create a path to a potential conversion to equity of substantially all the Company’s debt, subject to stockholder approval and satisfaction of certain other conditions. In connection with the Fir Tree Transaction, the Company entered into the Amended and Restated Convertible Note Facility Agreement (“A&R Note Agreement” and, together with the Fir Tree Transaction, the “Fir Tree Recapitalization”) with the Fir Tree Affiliate, which became effective on March 6, 2017 and replaced the ACM Note Agreement. Pursuant to the terms of the A&R Note Agreement, the Company issued to the Fir Tree Affiliate a secured promissory note (the “Amended and Restated Convertible Note”) in a principal amount of $22 million, which replaced the Existing ACM Note, and a secured promissory note (the “New Convertible Note,” and together with the Amended and Restated Convertible Note, the “Notes”) in a principal amount of approximately $19.4 million, representing an additional $17 million aggregate principal amount of convertible notes issued by the Company to the Fir Tree Affiliate on March 6, 2017 and approximately $2.4 million principal amount of convertible notes in payment of accrued and unpaid interest on the Existing ACM Note acquired by the Fir Tree Affiliate from the ACM Entities. The unpaid principal amount of the Notes bears an interest rate of 20% per annum and matures on May 28, 2018.

 

14
 

 

After giving effect to the Fir Tree Recapitalization, the Company held approximately $41.4 million of outstanding convertible notes. The Fir Tree Affiliate agreed to convert all the outstanding convertible notes into Common Stock at a conversion price of $1.40 per share. This conversion was subject to receipt of stockholder approval at the June 15, 2017 Annual Meeting and satisfaction of certain other conditions. As shareholder approval for the conversion was granted at the June 15, 2017 Annual Meeting, and satisfaction of the certain other conditions obtained, all convertible debt had been converted into approximately 29.5 million shares of the Company’s Common Stock as of June 30, 2017. Costs associated with the conversion are approximately $1.1 million.

 

Note 7 – Equity

 

The Company has 50,000,000 preferred stock authorized at $0.001 par value. At June 30, 2017 and December 31, 2016, the Company had no preferred stock issued or outstanding.

 

On July 13, 2016, the Company entered into an At-Market Issuance Sales Agreement (the “Agreement”) as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, Part II – Item 8 – Financial Statements and Supplemental Data – Notes to consolidated financial statements – Note 11 – “Equity Offerings”. During the six months ended June 30, 2017, the Company sold an additional 563,753 shares through the Agreement for a total net proceeds of $1.0 million. No shares were sold during the quarter ended June 30, 2017.

 

Note 8 – Segment Reporting

 

As a result of the beginning of new geographical revenue activity in the United States in the second quarter of 2017, we are reporting the results of each of our two reportable segments beginning with the second quarter of 2017 in accordance with ASC 280, Segment Reporting. Each of the operating segments is separately managed by a senior executive who reports to our Chief Executive Officer, who is the chief operating decision maker. Discrete financial information is available for each of the segments, and the operating results of each of the operating segments are used for performance evaluation and resource allocation.

 

We manage two operating segments aligned with our geographic operating locations of Latin America and the United States. We also report certain corporate and other non-operating activities under the heading “Corporate and Other.” Corporate and Other primarily reflects corporate personnel and activities, research and development activities, incentive compensation programs and other costs.

 

We account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers. Reporting segments are measured based on gross margin, which is defined as revenues reduced by total cost of services. Cost of services exclude research and development expenses and depreciation and amortization expense.

 

15
 

 

Summarized financial information is shown in the following tables:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
                 
Revenues(1):                    
Latin America  $5,434,937   $2,337,579   $7,997,594   $4,171,484 
United States   3,092,722        3,092,722     
Total revenues  $8,527,659   $2,337,579   $11,090,316   $4,171,484 
                     
Gross margin(1,2):                    
Latin America  $(1,363,853)  $(132,459)  $(2,173,188)  $(534,681)
United States   (1,630,733)       (2,113,627)    
Total gross margin  $(2,994,586)  $(132,459)  $(4,286,815)  $(534,681)
                     
Capital expenditures:                    
Latin America  $116,977   $1,544,229   $150,270   $2,706,050 
United States   4,073,083        7,692,269     
Corporate and Other                
Total capital expenditures  $4,190,060   $1,544,229   $7,842,535   $2,706,050 
                     
Depreciation and amortization:                    
Latin America  $1,308,725   $1,155,241   $2,608,869   $2,003,866 
United States   75,669        75,669     
Corporate and Other   38,325    56,719    79,973    112,324 
Total depreciation and amortization  $1,422,719   $1,211,960   $2,764,511   $2,116,190 

 

(1) U.S. activity began in February 2017 with start-up expenses being incurred. The Company began recognizing revenue in late May 2017. Intersegment transactions included in revenues were not significant for any of the periods presented.
   
(2) Gross margin is defined as revenues less costs of services. Cost of services excludes selling, general and administrative expenses, research and development expenses and depreciation and amortization expense.

 

Note 9 – Subsequent Events

 

On July 6, 2017, the Company closed on a private placement of shares of the Company’s common stock providing gross proceeds of $15 million. As part of the offering, the Company issued 10,000,000 shares of its common stock for $1.50 per share in this private placement with certain existing shareholders. The proceeds from this offering are being used to finance capital expenditures to support existing contracts the Company has in both Oklahoma and Argentina, for working capital and for other general corporate purposes.

 

On July 20, 2017, the Company executed a one-year contract with a U.S. oil and gas exploration and production company to provide pressure pumping operations in the north central region of Oklahoma, thus expanding our operations within our United States region. The Company expects that the work to be performed should support a second U.S. well stimulation crew. The contract does not require the customer to award any specific volume of work to the Company, however the contract does provide the Company with the exclusive right to complete all the customer’s wells as long as we meet the operational standards required.

 

On July 24, 2017, the Company entered into an Equipment Purchase Agreement (the “Purchase Agreement”) with an equipment manufacturer providing for the Company’s purchase of used well-stimulation pumps, blenders, data vans and related equipment, comprising approximately 30 items in all, for an aggregate purchase price of $16.8 million. The purchase of each item is conditional upon a determination that each item is field-ready as defined in the Purchase Agreement.

 

On August 8, 2017, the Company closed on a private placement of shares of the Company’s common stock providing gross proceeds of $28.0 million. As part of the offering, the Company issued an aggregate of 19,580,420 shares of its common stock for $1.43 per share in this private placement with two existing stockholders and several new institutional investors. The proceeds from this offering will be used to finance capital expenditures to support its most recent customer contract (noted above with reference to the July 20, 2017 one-year contract), for working capital and for other general corporate purposes.

 

16
 

 

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 condensed 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, 2016. Unless the context otherwise requires, “we,” “us,” the “Company” or like terms refer to Eco-Stim Energy Solutions, Inc. and its subsidiaries.

 

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 Statements Regarding Forward-Looking Statements” in this Form 10-Q.

 

Overview

 

We are a technology-driven independent oilfield services company providing well stimulation, coiled tubing and field management services to the domestic and international upstream oil and gas industry. We are focused on reducing the ecological impact and improving the economic performance of the well stimulation process in “unconventional” drilling formations. We serve major, national and independent oil and natural gas exploration and production companies around the world and we offer products and services with respect to the various phases of a well’s economic life cycle. Our focus is to bring these technologies and processes to the most active shale resource basins both domestically and outside of the United States using our technology to differentiate our service offerings.

 

Financial Results

 

For 2016 and into the second quarter 2017, our activity was concentrated in the Vaca Muerta in the Neuquén Basin in Argentina, one of the world’s largest shale resource basin as measured by technically recoverable reserves. Beginning the second quarter of 2017, our activity expanded into one of the fastest growing and most active oil and gas regions in the United States, specifically in the Oklahoma Mississippian / Stack / Scoop shale plays. During the latter part of the first quarter of 2017 and extending into the second quarter, the Company began start-up activity in order to meet our new contract service obligations. Towards the latter half of the second quarter of 2017, the Company began recognizing revenue in our new U.S. activity area.

 

Demand for our services is a function of our customers’ willingness to make operating and capital expenditures to explore for, develop and produce hydrocarbons in these areas, which in turn is affected by current and expected levels of oil and natural gas prices. Companies in the energy services industry have historically tended to delay capital equipment projects, including maintenance and upgrades, during industry downturns. Conversely, as the industry turns upward from its downturn, there can be an anxiousness to return quickly into the market with project activity.

 

The oil and gas industry has traditionally been volatile, is highly sensitive to a combination of long-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling and workover budget, as well as domestic and international economic conditions, political instability in oil producing countries and merger, acquisition and divestiture activity among exploration and production companies. The volatility of the oil and gas industry, and the consequent impact on exploration and production activity could adversely impact the level of drilling and workover activity by our customers. This volatility affects the demand for our services and our ability to negotiate pricing at levels generating desirable margins.

 

17
 

 

In the first quarter of 2017, the government of Argentina passed legislation providing a floor of not less than $6.00 per mmbtu for all tight and unconventional gas developed and produced through 2021. Rig count for June 2017 and 2016 were 60 and 63, respectively. Local emphasis has been placed on maximizing economies of scale efforts in order to reach scale on par with similar shale formation plays in the U.S. According to a Wood Mackenzie study published in May 2017, drilling in Vaca Muerta has largely shifted from vertical to horizontal wells, with the study showing hydrocarbon output from the formation expecting to reach 113,000boe/d by 2018, doubling 2016 levels. During the second quarter of 2016 and 2017, the Company completed 25 and 53 stimulation stages, respectively, and 12 and 8 coiled tubing jobs, respectively. During the first six months of 2016 and 2017, the Company completed 32 and 66 stimulation stages, respectively, and 17 and 13 coiled tubing jobs, respectively.

 

In the United States, our activity level is dependent upon our ability to contract with the drillers and their level of drilling activity. The beginning of 2016 marked a twelve-year low in oil prices with a WTI crude oil price of $26.19 per barrel in February 2016. However, oil prices began to stabilize in the third quarter of 2016 in the mid-$50 per barrel range. During the second quarter of 2017, prices have dropped, averaging in the mid to high $40. As reported by the U.S. Energy Information Administration (“EIA”), WTI crude oil prices averaged $51.62 per barrel for the first quarter of 2017. During the second quarter of 2017, the average was $48.10. The July 2017 average was $46.63. Average rig count for May 2017 in Oklahoma was approximately 121 (per Baker Hughes). During the first quarter of 2017, the average Oklahoma rig count was approximately 101. During the second quarter of 2017, the average Oklahoma rig count was approximately 125, and the average for the month of July 2017 was 134. As mentioned above, there can be a delayed reaction to the price of oil and rig count due to other market conditions in play as well as the capital commitment level by each drilling company. During the second quarter of 2017 (the first quarter of operations), the Company completed 88 stimulation stages.

 

Business Segments

 

We are a supplier of oilfield services, products, technology and systems used in the oil and natural gas business, referred to as oilfield operations. With the start-up of our United States operations during Q2 2017, we now manage our business through operating segments that are aligned with our two geographic regions, Latin America and the United States. We also report certain corporate and other non-operating activities under the heading “Corporate and Other”. Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other non-operational allocable costs. For financial information about our segments, see Note 8, Segment Reporting.

 

Our segment operating results are frequently influenced by the number of active contracts we have in the area, and also the level of our customers’ well activity which dictates the amount of activity we will have in any given period. This directly effects our revenue, but also the level of expenses we incur.

 

Latin America Segment

 

Through our Latin America segment, we serve the needs of our Argentine customers’ based operations by providing pressure pumping, coiled tubing and field management operations services. We began our service offerings in late 2014 in Argentina with our base of operation being located in Neuquen City, Argentina with all our revenues since inception and through the end of the first quarter of 2017 coming from this area. With the awarding and subsequent signing of a two-year contract with the largest operator in Argentina, the Company is expecting an increase in activity in the region. A majority of our revenues in this segment came from our pressure pumping operations.

 

United States Segment

 

Through our United States segment, we serve the needs of our U.S. customers’ based operations by providing pressure pumping, coiled tubing and field management operations services. Beginning mid-quarter one of 2017, subsequent to signing a one year contract to provide pressure pumping in north central Oklahoma, we began setting up and thus incurring start-up related costs associated with our operations in order to properly meet our contract service obligations. We established a base of operation in Fairview, Oklahoma, and are utilizing this base to service the surrounding areas. Revenue recognition for this segment began in the latter half of the second quarter of 2017.

 

18
 

 

Results of Operations

 

Selected Financial Data:

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
     
Revenues:                    
Latin America  $5,434,937   $2,337,579   $7,997,594   $4,171,484 
United States   3,092,722        3,092,722     
Total revenues   8,527,659    2,337,579    11,090,316    4,171,484 
                     
Cost of services:                    
Latin America   6,798,790    2,470,038    10,170,782    4,706,165 
United States   4,723,455        5,206,349     
Total costs of services  $11,522,245   $2,470,038   $15,377,131   $4,706,165 
                     
Research and development   116,638    106,359    203,792    274,815 
Depreciation   1,422,719    1,211,960    2,764,511    2,116,190 
Selling, general and administrative expenses   2,048,305    1,579,808    3,490,709    3,153,072 
Total costs and expenses   15,109,907    5,368,165    21,836,143    10,250,242 
                     
Other income (expense):                    
Interest expense   (116,157)   (937,216)   (1,706,615)   (2,131,927)
Interest forgiven   634,477        634,477     
Gain (loss) on foreign currency, net   (85,380)   (66,730)   (25,058)   (727,677)
Other income (expense), net   1,474    443,464    32,904)   555,243 
Total other income (expense)   434,414    (560,482)   (1,064,292)   (2,304,361)
                     
Loss before provision for income taxes   (6,147,834)   (3,591,068)   (11,810,119)   (8,383,119)
                     
Provision for income taxes       (72,237)   633,260    (144,473)
                     
Net loss  $(6,147,834)  $(3,663,305)  $(11,176,859)  $(8,527,592)

 

19
 

 

For the Three Months Ended June 30, 2017 and 2016

 

Latin America revenue for the three months ended June 30, 2017 increased $3.1 million to $5.4 million, compared to $2.3 million for the three months ended June 30, 2016. This increase was primarily due to higher activity in our well stimulation and coiled tubing operations in Argentina in this three-month period in 2017 period as compared to the corresponding three-month period in 2016. In the quarter ending June 30, 2017, we operated under our first full quarter under our new two-year contract in Argentina.

 

United States revenue for the three months ended June 30, 2017 increased $3.1 million, compared to $0 for the three months ended June 30, 2016. This increase was due exclusively to the start-up of our operations in Oklahoma and resulting revenues earned in the quarter ending June 30, 2017 as we began operations under our new one-year contract in the U.S.

 

Latin America cost of services increased $4.3 million to $6.8 million for the three months ended June 30, 2017, compared to $2.5 million for the three months ended June 30, 2016. This increase was primarily attributable to higher activity level for Argentina in line with the revenue increase.

 

United States cost of services increased $4.7 million, compared to $0 for the three months ended June 30, 2016. This increase was due exclusively to our mid-second quarter 2017 U.S. start-up of operations and costs associated with revenues earned during the three months ending June 30, 2017. Included in these costs were pre-operating start-up and commissioning costs of approximately $2.2 million.

 

Research and development remained relatively stable as we continue our research activities of fiber optics technology and the development of our turbine powered pressure pumping equipment (“TPU”) technology.

 

Depreciation expense increased $0.2 million to $1.4 million for the three months ended June 30, 2017, compared to $1.2 million for the three months ended June 30, 2016. The increase was primarily due to pressure pumping equipment purchased during the first and second quarters of 2017 for the Company’s operational start-up in the United States and in preparation for the recently awarded two-year contract in Argentina.

 

Selling, general, and administrative expenses increased $0.5 million to $2.0 million for the three months ended June 30, 2017, compared to $1.6 million for the three months ended June 30, 2016. This increase was a result of increases in certain salaries and professional fees primarily related to the start-up of our operations in Oklahoma, offset by decreases in our travel, legal and other expenses.

 

Net total other income (expense) decreased $1.0 million to $0.4 million for the three months ended June 30, 2017 compared to ($0.6 million) for the three months ended June 30, 2016. This decrease in expense was primarily a result of the absence of interest expense in the second quarter of 2017 as a result of having fully converted our convertible debt to equity that was outstanding at the same period in 2016, and a reversal of interest expense recognized in the first quarter of 2017 related to the conversion of the debt to equity that was forgiven upon conversion of the debt.

 

For the Six Months Ended June 30, 2017 and 2016

 

Latin America revenue for the six months ended June 30, 2017 increased $3.8 million to $8.0 million, compared to $4.2 million for the six months ended June 30, 2016. This increase was primarily due to higher activity in our well stimulation and coiled tubing operations in Argentina in 2017 period as compared to 2016 as in the same period ending June 30, 2017. During 2017, we began operating under our new two-year contract.

 

United States revenue for the six months ended June 30, 2017 increased $3.1 million, compared to $0 for the six months ended June 30, 2016. This increase was due to our May 2017 start-up of operations and resulting revenues earned from our new one-year contract.

 

Latin America cost of services increased $5.5 million to $10.2 million for the six months ended June 30, 2017, compared to $4.7 million for the six months ended June 30, 2016. The increase was due to higher activity level related to our well stimulation and coiled tubing operations in line with revenue and higher rental and third party costs related to our tight gas trial well which was conducted in the first quarter of 2017 ahead of our Argentina two-year contract award.

 

20
 

 

United States cost of services increased $5.2 million for the six months ended June 30, 2017, compared to $0 for the six months ended June 30, 2016. This increase was primarily due to pre-operating, start-up and commissioning costs incurred, followed by operational costs related to our new contract.

 

Research and development decreased $0.1 million to $0.2 million for the six months ended June 30, 2017, compared to $0.3 million for the six months ended June 30, 2016. This decrease was due primarily to reductions taken in our research activities of fiber optics technology and the development of our TPU technology.

 

Our selling, general, and administrative expenses increased $0.3 million to $3.5 million for the six months ended June 30, 2017 compared to $3.2 million for the six months ended June 30, 2016. This increase was a result of certain accounting and professional fees related to the start-up of our operation in Oklahoma, increases in our salaries and payroll related expenses, offset by decreases in our travel, licenses, legal, insurance and office expenses.

 

Net total other income (expense) decreased $1.2 million to net other expense of $1.1 million for the six months ended June 30, 2017, compared to ($2.3 million) for the six months ended June 30, 2016. This decrease in expense was primarily a result of the absence of interest expense that began with the conversion of our convertible debt that was outstanding during the same period last year, partially offset by a reduction in interest income earned.

 

Liquidity and Capital Resources

 

Our primary sources of liquidity to date have been proceeds from various equity and debt offerings. We completed a public offering during the first quarter of 2015 and a second offering on July 15, 2015. In July 2016, the Company entered into an At-Market Issuance Sale Agreement with equity sales providing proceeds during the second half of 2016 and during the first quarter of 2017. All the above offerings are as discussed in our Annual Report on Form 10-K for the year ended December 31, 2016, Part II – Item 8 – Financial Statements and Supplemental Data – Notes to consolidated financial statements – Note 11 – “Equity Offerings.”

 

On March 6, 2017, the Company closed the Fir Tree Transaction, which was part of a comprehensive recapitalization designed to create a path to a potential conversion to equity of substantially all the Company’s debt, subject to stockholder approval and satisfaction of certain other conditions. In connection with the Fir Tree Transaction, the Company entered into the A&R Note Agreement. Pursuant to the terms of the A&R Note Agreement, the Company issued to the Fir Tree Affiliate the Amended and Restated Convertible Note in a principal amount of $22 million, which replaced the Existing ACM Note, and the New Convertible Note in a principal amount of approximately $19.4 million, representing an additional $17 million aggregate principal amount of convertible notes issued by the Company to the Fir Tree Affiliate on March 6, 2017 and approximately $2.4 million principal amount of convertible notes in payment of accrued and unpaid interest on the Existing ACM Note acquired by the Fir Tree Affiliate from the ACM Entities. The unpaid principal amount of the Notes accrued interest at a rate of 20% per annum and was scheduled to mature on May 28, 2018. Approximately $2.1 million of the proceeds of the additional $17 million aggregate principal amount of convertible notes issued to the Fir Tree Affiliate were used to repay existing debt under the Loan Agreement, with the balance of the proceeds used for equipment purchases, other approved capital expenditures incurred in accordance with an approved operating budget, and other working capital purposes. After giving effect to the Fir Tree Recapitalization, the Company had approximately $41.4 million of outstanding convertible notes.

 

The Fir Tree Affiliate, as part of the Fir Tree Recapitalization, agreed to convert the outstanding convertible Notes into Common Stock at a conversion price of $1.40 per share, subject to receipt of stockholder approval and satisfaction of certain other conditions. On June 15, 2017, stockholder approval was received and, along with all conditions being met, all the outstanding convertible notes converted into approximately 29.5 million share of Common Stock effective as of June 20, 2017.

 

21
 

 

We continually monitor potential capital sources, including equity and debt financings, in order to meet our planned capital expenditures and liquidity requirements. The successful execution of our growth strategy depends on our ability to raise capital as needed to, among other things, finance the purchase of additional equipment. If we are unable to obtain additional capital on favorable terms or at all, we may be unable to sustain or increase our current level of growth in the future. The availability of equity and debt financing will be affected by prevailing economic conditions in our industry and financial, business and other factors, many of which are beyond our control. As discussed in Note 9 – Subsequent Events, subsequent to June 30, 2017, gross proceeds of approximately $43 million of additional capital was raised in two private placements where a total of approximately 29.6 million shares of the Company’s common stock were issued.

 

Capital Requirements

 

The energy services business is capital intensive, requiring significant investment to expand, upgrade and maintain equipment. Our primary uses of capital have been the acquisition of equipment, working capital to finance the start of our operations and general administrative expenses.

 

For the remainder of 2017, we expect our capital requirements to consist primarily of:

 

  growth capital expenditures, such as those to acquire additional equipment and other assets to grow our business; and
     
  maintenance capital expenditures, which are capital expenditures made to extend the useful life of our assets.

 

Additionally, we continually monitor new advances in well stimulation equipment and down-hole technology as well as technologies that may complement our business and opportunities to acquire additional equipment to meet our customers’ needs.

 

Our ability to fund operations and to fund planned and committed 2017 capital expenditures will depend upon our future operating performance, and more broadly, on the availability of equity and debt financing, which will be affected by prevailing economic conditions, market conditions in the exploration and production industry and financial, business and other factors, many of which are beyond our control.

 

We intend to incur approximately $30 million in capital expenditures in the aggregate during the second half of 2017 and will incur additional capital expenditures on a discretionary basis as necessary to meet customer demands and subject to satisfactory financing. As noted in Note 9 -Subsequent Events, the Company entered into an Equipment Purchase Agreement with an equipment manufacturer for the purchase of $16.8 million of used well-stimulation pumps, blenders, data vans and related equipment.

 

Sources and Uses of Cash

 

Net cash used in operating activities increased $3.8 million to $7.6 million for the six months ended June 30, 2017 compared to $3.8 million for the six months ended June 30, 2016. The increase was primarily due to higher activity in accounts payable due to increased expenditure activity, a higher account receivable balance due to higher revenues, prepayments made for certain operating related insurances and an increase in value-added tax (“VAT”) tax assets for the three months ended June 30, 2017 compared to the same period ended June 30, 2016.

 

Net cash used in investing activities increased $5.1 million to $7.8 million for the six months ended June 30, 2017 compared to $2.7 million for the six months ended June 30, 2016. This increase was due to an increase of purchases of equipment, primarily related to our business start-up in the U.S., and ramp up of equipment in Argentina incurred in the six months ended June 30, 2017.

 

Net cash provided by (used in) financing activities increased by $20.0 million to $17.7 million for the six months ended June 30, 2017, compared to ($2.3 million) for the six months ended June 30, 2016. The variance was primarily attributable to proceeds received from issuance of additional notes payable to the Fir Tree Affiliate during March 2017 and issuance of Common Stock, both occurring during the six months ended June 30, 2017.

 

22
 

 

The following table summarizes our cash flows from financing activities for the six months ended June 30, 2017 and 2016:

 

  

Six Months Ended

June 30,

 
   2017   2016 
Financing Activities          
Proceeds from sale of common stock, net  $966,780   $ 
Proceeds from notes payable   19,298,251    194,611 
Payments on notes payable   (2,229,270)   (2,173,922)
Payments on capital lease   (380,858)   (331,371 
Purchase of treasury stock       (37,175)
           
Net cash provided by (used in) financing activities  $17,654,903   $(2,347,857)

 

On December 15, 2015, the Board authorized the Company to repurchase, from time to time, from December 16, 2015 through December 16, 2017, up to $5 million in shares of its outstanding Common Stock. During the six months ended June 30, 2017, no repurchases were made by the Company.

 

On July 13, 2016, the Company entered into an At-Market Issuance Sale Agreement as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, Part II – Item 8 – Financial Statements and Supplemental Data – Notes to consolidated financial statements – Note 11 – “Equity Offerings”. During 2016, the Company sold 796,573 shares through the Agreement for total gross proceeds of $1.7 million. During the six months ended June 30, 2017, the Company sold an additional 563,753 shares through the Agreement for total gross proceeds of $1.0 million. The Company did not sell any shares during the quarter ended June 30, 2017.

 

We had a net increase in cash and cash equivalents of $2.2 million for the six months ended June 30, 2017, compared to a net decrease in cash and cash equivalents of $8.8 million during the six months ended June 30, 2016 primarily resulting from proceeds provided from the Fir Tree Transactions. Please see “‒Liquidity and Capital Resources” for more information on the Fir Tree Transaction.

 

We do not generate positive cash flow from operations at this time. Further, while we believe we will begin generating positive cash flow from operations in 2017, our liquidity provided by our existing cash and cash equivalents may not be sufficient to fund our full capital expenditure plan, nor payments that might become due under our indebtedness. These commitments may require us to obtain additional equity or debt financing, which may not be available to us on favorable terms or at all.

 

Impact of Inflation on Operations

 

Management is of the opinion that inflation has not had a significant impact on our business to date. We purchase our equipment and materials from suppliers who provide competitive prices and employ skilled workers from competitive labor markets. If inflation in the general economy increases, our costs for equipment, materials and labor could increase as well. Also, increases in activity in oilfields can cause upward wage pressures in the labor markets from which we hire employees as well as increases in the costs of certain materials and key equipment components used to provide services to our customers.

 

Industry Trends and Outlook

 

We face many challenges and risks in the industry in which we operate. Although many factors contributing to these risks are beyond our ability to control, we continuously monitor these risks and have taken steps to mitigate them to the extent practicable. In addition, while we believe that we are well positioned to capitalize on available growth opportunities, we may not be able to achieve our business objectives and, consequently, our results of operations may be adversely affected. Please read this section in conjunction with the factors described in the sections titled “Cautionary Statements Regarding Forward-Looking Statements” and “Risk Factors” for additional information about the known material risks that we face.

 

23
 

 

Our business depends on the capital spending programs of our customers. Revenue from our business lines are expected to be generated by providing services to oil and natural gas exploration and production companies throughout Argentina, the U.S., Colombia, Mexico and other countries. Demand for our services is a function of our customers’ willingness to make operating and capital expenditures to explore for, develop and produce hydrocarbons in these areas, which in turn is affected by current and expected levels of oil and natural gas prices. Companies in the energy services industry have historically tended to delay capital equipment projects, including maintenance and upgrades, during industry downturns. Conversely, as the industry turns upward from its downturn, there can be an anxiousness to return quickly into the market with project activity.

 

The oil and gas industry has traditionally been volatile, is highly sensitive to a combination of long-term and cyclical trends, including the domestic and international supply and demand for oil and natural gas, current and expected future prices for oil and natural gas and the perceived stability and sustainability of those prices, production depletion rates and the resultant levels of cash flows generated and allocated by exploration and production companies to their drilling and workover budget, as well as domestic and international economic conditions, political instability in oil producing countries and merger, acquisition and divestiture activity among exploration and production companies. The volatility of the oil and gas industry, and the consequent impact on exploration and production activity could adversely impact the level of drilling and workover activity by our customers. This volatility affects the demand for our services and our ability to negotiate pricing at levels generating desirable margins.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. The term “off-balance sheet arrangements” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have (i) any obligation arising under a guarantee contract, derivative instrument or variable interest or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Pursuant to Item 305(e) of Regulation S-K (§ 229.305(e)), we are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined by Rule 229.10(f)(1).

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act consisting of controls and other procedures designed to give reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our chief executive officer and our chief financial officer, to allow timely decisions regarding such required disclosure. Based on their evaluation as of the end of the quarterly period covered by this Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as defined in Rules 13a-15 and 15d-15 under the Exchange Act, were effective as of June 30, 2017.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our system of internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

24
 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not a party to, and none of our property is the subject of, any pending legal proceedings. To our knowledge, no governmental authority is contemplating any such proceedings.

 

ITEM 1A. RISK FACTORS

 

Investors should carefully consider the risk factors included under Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2016 together with all the other information included in this document, and in our other public filings, press releases and discussions with our management.

 

Notwithstanding the matters discussed herein, there have been no material changes in our risk factors as previously disclosed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2016, except as set forth below:

 

Certain risks are inherent in the start-up of new business operations in a new country, which could adversely impact our results of operations, financial condition and cash flows.

 

The risk associated with the start-up of a new business in a new location must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development. Some of these risks include the ability to provide reliable and cost-effective services to our customers; to respond to technological developments or services offered by our competitors; to enter into strategic relationships with industry participants; and to build, maintain and expand our sales or distribution channels. Our services and products requires personnel with specialized skills and experience who can perform physically demanding work. As a result of the volatility of the oilfield service industry and the demanding nature of the work we perform, workers may choose to pursue employment in fields that offer a more desirable work environment at wage rates that are competitive. The demand for skilled workers is high and the supply is limited. Additionally, our services and products require specialized equipment that may or may not be readily available for purchase or lease in our new areas of operation.

 

Since we are a "controlled company" for purposes of the corporate governance requirements of the NASDAQ, our stockholders will not have, and may never have, the protections that these corporate governance requirements are intended to provide.

 

Since we expect to be a "controlled company" for purposes of the corporate governance requirements of the NASDAQ, we are not required to comply with the provisions requiring that a majority of our directors be independent, the compensation of our executives be determined by independent directors, or nominees for election to our board of directors be selected by independent directors. If we choose to take advantage of any or all of these exemptions, our stockholders may not have the protections that these rules are intended to provide.

 

Fir Tree controls a significant percentage of our voting power.

 

Fir Tree Inc. and affiliated entities (collectively, “Fir Tree”) beneficially owns 67.3% of our outstanding common stock. In addition, certain of our directors are currently employed by Fir Tree. Consequently, Fir Tree will have control over all matters that require approval by our stockholders, including the election and removal of directors, changes to our organizational documents and approval of acquisition offers and other significant corporate transactions. This concentration of ownership will limit other stockholders’ ability to influence corporate matters, and as a result, actions may be taken that other stockholders may not view as beneficial. So long as Fir Tree continues to own a significant amount of our outstanding common stock, it will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe that a transaction is in their own best interests. 

 

Moreover, Fir Tree has a contractual right to maintain its percentage ownership in our Company. Specifically, under the terms of the Amended and Restated Stockholder Rights Agreement, as amended, for so long as Fir Tree beneficially owns more than 10% of our issued and outstanding common stock, Fir Tree, subject to certain exclusions, has a preemptive right to purchase new securities we propose to issue or sell in an amount that is necessary to ensure that the percentage of Fir Tree’s ownership of the outstanding share of common stock after giving effect to the issuance of such new securities is not less than the its percentage immediately prior to the issuance of such new securities. As a result, Fir Tree’s preemptive right will apply to any securities we issue, subject to certain exceptions. Therefore, while other holders of our stock would risk suffering a reduction in percentage ownership in connection with a new issuance of securities by us, Fir Tree would, through this preemptive right, have the opportunity to avoid a reduction in percentage ownership. As long as Fir Tree continues to hold a significant portion of our outstanding common stock, it will have the ability to influence the vote in any election of directors and over decisions that require stockholder approval.

 

Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Effective as of June 20, 2017 after receiving stockholder approval at the June 15, 2017 Annual Meeting, the Company converted amounts owed under outstanding promissory notes into Common Stock at a price of $1.40 per share, resulting in the issuance of 29,538,786 shares of Common Stock (the “Conversion”). The issuance of Common Stock in the Conversion was effected in reliance upon an exemption from registration provided under Section 4(a)(2) of the Securities Act of 1933, as amended. The Company did not receive any proceeds as a result of the Conversion.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

25
 

 

ITEM 6. EXHIBITS

 

  (a) Exhibits.

 

Exhibit Number

 

Description

3.1   Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on November 26, 2013).
     
3.2   Second Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 of the Company’s Annual Report on Form 10-K, filed March 17, 2017).
     
4.1   Amended and Restated Stockholder Rights Agreement, dated as of March 3, 2017, by and among Eco-Stim Energy Solutions, Inc. and the parties named therein (incorporated by reference to Exhibit 4.3 of the Company’s Quarterly Report on Form 10-Q, filed March 9, 2017).
     
4.2   Registration Rights Agreement, dated as of March 3, 2017, by and among Eco-Stim Energy Solutions, Inc. and the note purchaser named therein (incorporated by reference to Exhibit 4.4 of the Company’s Annual Report on Form 10-K, filed March 9, 2017).
     
10.1  

Employment Agreement by and between Eco-Stim Energy Solutions, Inc. and J. Christopher Boswell, effective as of April 1, 2017, (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2017).

     
10.2   Employment Agreement by and between Eco-Stim Energy Solutions, Inc. and Alexander Nickolatos, effective as of April 1, 2017, (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 27, 2017).
     
10.3  

Employment Agreement by and between Eco-Stim Energy Solutions, Inc. and Carlos A. Fernandez, effective as of April 1, 2017, (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 21, 2017).

     
10.4  

Second Amendment to the Eco-Stim 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 the Company’s Current Report on Form 8-K filed on June 21, 2017).

     
31.1*   Rule 13(a)-14(a) Certification of the Chief Executive Officer.
     
31.2*   Rule 13(a)-14(a) Certification of the Chief Financial Officer.
     
32.1*   Section 1350 Certification of the Chief Executive Officer.
     
32.2*   Section 1350 Certification of the Chief Financial Officer.

 

* Filed herewith.

 

26
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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.

 

Date: August 14, 2017 ECO-STIM ENERGY SOLUTIONS, INC.
     
  By: /s/ Jon Christopher Boswell
    Jon Christopher Boswell
    President and Chief Executive Officer
     
  By: /s/ Alexander Nickolatos
    Alexander Nickolatos
    Chief Financial Officer and Assistant Secretary

 

27