SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
[ ] 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)
|(State or Other Jurisdiction of||(Primary Standard Industrial||(IRS Employer|
|Incorporation or Organization)||Classification Code Number)||Identification Number)|
|2930 W. Sam Houston Pkwy N., Suite 275, Houston, TX||77043|
|(Address of principal executive offices)||(Zip Code)|
(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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” 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]|
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 13,543,614 shares of common stock outstanding at August 7, 2015.
TABLE OF CONTENTS
|CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS||3|
|PART I – FINANCIAL INFORMATION|
|ITEM 1. FINANCIAL STATEMENTS||5|
|CONDENSED CONSOLIDATED BALANCE SHEETS||5|
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS||6|
|CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS||7|
|CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY||8|
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS||9|
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS||10|
|ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS||16|
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK||20|
|ITEM 4. CONTROLS AND PROCEDURES||20|
|PART II – OTHER INFORMATION|
|ITEM 1. LEGAL PROCEEDINGS||21|
|ITEM 1A. RISK FACTORS||21|
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS||21|
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES||21|
|ITEM 4. MINE SAFETY DISCLOSURES||21|
|ITEM 5. OTHER INFORMATION||21|
|ITEM 6. EXHIBITS||21|
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;|
|●||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,” “believe,” “anticipate,” “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;|
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 shareholders 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;|
|●||ability to import equipment or spare parts into Argentina on a timely basis;|
|●||regulations affecting the oil and natural gas industry;|
|●||legislation and regulatory initiatives relating to well stimulation;|
|●||future legislative and regulatory developments;|
|●||foreign currency exchange rate fluctuations;|
|●||effects of climate change;|
|●||volatility of economic conditions in Argentina;|
|●||market acceptance of turbine pressure pumping technology;|
|●||the profitability for our customers of shale oil and gas as commodity prices decrease;|
|●||risks of 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.|
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, as well as “Part I—Item 1A—Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and (2) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I—Item 2 of this Form 10-Q, as well as in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. 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.
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 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 as of the date of the particular statement.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECO-STIM ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|June 30, 2015||December 31, 2014|
|Cash and cash equivalents||$||3,593,271||$||7,013,556|
|Total current assets||13,533,718||13,164,486|
|Property, plant and equipment, net||27,721,065||27,949,347|
|Other non-current assets||843,911||936,592|
|Liabilities and stockholders’ equity|
|Short-term notes payable||40,090||158,036|
|Current portion of long term notes payable||3,965,116||475,000|
|Current portion of capital lease payable||640,464||597,406|
|Total current liabilities||11,468,904||6,342,063|
|Long term notes payable||22,000,000||25,625,000|
|Long-term capital lease payable||1,805,857||2,102,143|
|Total non-current liabilities||23,805,857||27,727,143|
|Preferred stock, $0.001 par value, 50,000 shares authorized, none issued||-||-|
|Common stock, $0.001 par value, 200,000 shares authorized, 6,793,732 and 5,709,523 issued and outstanding in 2015 and 2014, respectively||6,793||5,709|
|Additional paid-in capital||27,160,621||21,116,100|
|Total stockholders’ equity||6,823,933||7,981,219|
|Total liabilities and stockholders’ equity||$||42,098,694||$||42,050,425|
See accompanying notes to the unaudited condensed consolidated financial statements.
ECO-STIM ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
|Three Months Ended June 30,||Six Months Ended June 30,|
|Operating cost and expenses:|
|Cost of services||3,839,345||436,480||6,998,882||1,222,465|
|Selling, general, and administrative expenses||1,933,092||1,234,191||3,509,947||2,617,124|
|Research and development||251,816||-||493,362||-|
|Depreciation and amortization expense||900,845||85,613||1,647,129||87,770|
|Total operating costs and expenses||6,925,098||1,756,284||12,649,320||3,927,359|
|Other income (expense):|
|Gain on sale of trading securities||587,407||-||872,920||-|
|Other income (expenses)||(169,194||)||9,209||(300,927||)||21,068|
|Total other expense||(600,268||)||(328,616||)||(1,430,683||)||(464,318||)|
|Provision for income taxes||-||-||-||-|
|Basic and diluted loss per share||$||(0.52||)||$||(0.50||)||$||(1.11||)||$||(0.96||)|
|Weighted average number of common shares outstanding-basic and diluted||6,791,088||3,988,706||6,502,362||3,988,247|
See accompanying notes to the unaudited condensed consolidated financial statements.
ECO-STIM ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|Three Months Ended June 30,||Six Months Ended June 30,|
|Other comprehensive loss:|
|Foreign currency cumulative translation adjustment||-||-||-||(25,749||)|
|Other comprehensive loss||-||-||-||(25,749||)|
|Comprehensive loss for the year||$||(3,539,947||)||$||(2,010,949||)||$||(7,202,891||)||$||(3,860,130||)|
See accompanying notes to the unaudited condensed consolidated financial statements.
ECO-STIM ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
|Balance at December 31, 2014||5,709,523||$||5,709||$||21,116,100||$||(13,140,590||)||$||7,981,219|
|Sale of common stock, net||1,051,376||1,051||5,230,299||-||5,231,350|
|Stock based compensation||32,833||33||814,222||-||814,255|
|Balance at June 30, 2015||6,793,732||$||6,793||$||27,160,621||$||(20,343,481||)||$||6,823,933|
See accompanying notes to the unaudited condensed consolidated financial statements.
ECO-STIM ENERGY SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|Six Months Ended|
|Depreciation and amortization||1,647,129||87,770|
|Amortization of debt discount||35,084||67,695|
|Amortization of loan origination costs||92,681||-|
|Stock based compensation||814,255||484,954|
|Gain on the sale of trading securities||(872,920||)||-|
|Changes in operating assets and liabilities:|
|Other current assets||(231,203||)||(1,686,766||)|
|Net cash used in operating activities||(7,943,985||)||(3,486,208||)|
|Purchases of equipment||(2,400,194||)||(9,066,085||)|
|Proceeds from sale of trading securities||5,232,067||-|
|Purchase of trading securities||(2,998,379||)||-|
|Net cash used in investing activities||(166,506||)||(9,066,085||)|
|Proceeds from sale of common stock||6,045,412||-|
|Sale of common stock issuance cost||(814,062||)||-|
|Proceeds from convertible debt||-||11,863,885|
|Capitalized loan origination costs||-||(300,000||)|
|Proceeds from exercise of stock options||-||315|
|Proceeds from notes payable||400,000||15,015|
|Payments on notes payable||(652,831||)||(79,895||)|
|Payments on capital lease||(288,313||)||-|
|Net cash provided by financing activities||4,690,206||11,499,320|
|Net decrease in cash and cash equivalents||(3,420,285||)||(1,052,973||)|
|Cash and cash equivalents, beginning of period||7,013,556||4,292,122|
|Cash and cash equivalents, end of period||$||3,593,271||$||3,239,149|
|Supplemental Disclosure of Cash Flow Information|
|Cash paid during the year for interest||$||293,503||$||3,462|
|Cash paid during the year for income taxes||$||-||$||-|
|Fixed asset additions in accrued expenses||$||426,536||$||790,542|
|Debt issuance cost||$||-||$||536,702|
|Prepaid balance withheld from sale lease-back||$||-||$||250,850|
See accompanying notes to the unaudited condensed consolidated financial statements.
ECO-STIM ENERGY SOLUTIONS, INC.
to Condensed Consolidated Financial Statements
June 30, 2015
Note 1 – Organization and Nature of Business
Eco-Stim Energy Solutions, Inc. (the “Company,” “we” or “us”) is an early stage technology-driven independent oilfield services company providing well stimulation, coiled tubing and field management services to the upstream oil and gas industry. We are focused on reducing the ecological impact and improving the economic performance of the well stimulation process. We have assembled technologies and processes that have the ability to (1) reduce the surface footprint, (2) reduce emissions and (3) conserve fuel and water during the stimulation process. The Company will focus on the most active shale resource basins outside of the United States, using our technology to differentiate our service offerings. Our management team has extensive international industry experience. Our first operation is in Argentina, home to the Vaca Muerta, the world’s third-largest shale resource basin as measured by technically recoverable reserves. We will also pursue other markets including Mexico, Colombia and the United States or any other location where we believe we can offer clear advantages and achieve strong returns. The Company may also explore opportunistic acquisitions and/or joint ventures with established companies in target markets.
Note 2 – Basis of Presentation and Significant Accounting Policies
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The December 31, 2014 consolidated balance sheet was derived from audited financial statements, but does not include all the disclosures required by U.S. GAAP. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the Company’s opinion, all the adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation have been included. The results of operations for the six month period ended June 30, 2015 are not necessarily indicative of the results that may be achieved for the full fiscal year or for any future period. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2014, a copy of which was filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
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 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, which 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’s revenue is heavily dependent on two major customers. All revenue is recognized when persuasive evidence of an arrangement exists, 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 and pricing agreements, or on a spot market basis. Revenue will be recognized and customers will be 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.
Spot market basis arrangements are based 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 day’s work 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.
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 consolidated financial statements are presented in U.S. Dollars, which is the Company’s presentation currency.
Investments in marketable securities are classified as trading, available-for-sale or held-to-maturity. Our marketable equity investments are classified as trading and their cost basis is determined by the specific identification method. Realized and unrealized gains and losses on trading securities are included in net income.
During the six months ended June 30, 2015, the Company purchased and sold Argentine bonds to capitalize its subsidiary in Argentina. This resulted in a gain on the sale of trading securities of $872,920 for the six months ended June 30, 2015. This increase was primarily due to the Company taking advantage of the favorable spread in exchange rates between the U.S. Dollar and Argentine Peso.
Net Loss per Common Share
For the six months ended June 30, 2015 and 2014, the weighted average shares outstanding excluded certain stock options and potential shares from convertible debt of 4,117,964 and 2,168,495, 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, 2015 and 2014 were also excluded from the calculation.
Certain prior year amounts have been reclassified to conform to the 2015 presentation.
Accounts receivable are stated at amounts management expects to collect from outstanding balances. 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. 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. There was no reserve for doubtful accounts as of June 30, 2015 or December 31, 2014.
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.
Inventories are stated at the lower of cost or market (net realizable value) using the average method and appropriate consideration is given to deterioration, obsolescence and other factors in evaluating net realizable value.
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|
|Leasehold improvements||5 years (or the life of the lease)|
|Furniture and office equipment||3-5 years|
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. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair market value of the related assets. Assets under capital leases are amortized using the straight-line method over the lease term. Amortization of assets under capital leases is included in depreciation expense.
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.
Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with high credit quality financial institutions.
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 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.
Recent Accounting Pronouncements
The recent accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, but early adoption is permitted. The adoption of the new guidance is not expected to have a material impact on the Company’s condensed financial statements.
Note 3 – Other Assets
As of June 30, 2015, total other assets of the Company are $1,278,739 of which $434,828 and $843,911 are current and long-term assets, respectively. The Company has (1) unamortized debt issuance costs of $540,640, (2) incurred public offering costs, as mentioned in Note 8 – Subsequent Events, of $226,089, (3) prepaid deposits on a capital lease, as described in “Note 5 – Commitments and Contingencies” below, of $488,633 and (4) other assets of approximately $23,377.
Note 4 – Stock-Based Compensation
As of June 30, 2015, the Company has two stock incentive plans, the 2013 Stock Incentive Plan (the “2013 Plan”) and the 2015 Stock Incentive Plan (the “2015 Plan”), 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. As of June 30, 2015, 228,328 shares were available for grant under the 2013 Plan. The 2015 Plan, f/k/a “the 2014 Stock Incentive Plan,” was adopted in 2014; in 2015 it was amended and 500,000 additional shares were authorized, resulting in a maximum of 1,000,000 shares being authorized for issue under the modified 2015 Plan. As of June 30, 2015, 690,000 shares were available for grant under the 2015 Plan. Both the 2013 Plan and the 2015 Plan have been approved by the shareholders of the Company.
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 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, 2015 and 2014, the Company recorded $814,255 and $484,954, respectively, of stock-based compensation, which is included in cost of services, selling, general and administrative expense, and research and development in the accompanying condensed consolidated statements of operations. Total unamortized stock-based compensation expense at June 30, 2015 was $1,842,283 and will be fully expensed through 2018.
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 Eco-Stim Energy Solutions Argentina SA (“EcoStim Argentina”), a subsidiary of 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 rent payments are $81,439 per month and commenced on February 1, 2014. The final six months prepaid is shown as other non-current assets in the condensed consolidated balance sheets with a balance of $488,633.
The minimum present value of the lease payments is $3.1 million with a 60-month term and implied interest of 14%. The next four years of lease payments are scheduled as follows:
|Total future payments||3,420,434|
|Less debt discount due to warrants||(245,585||)|
|Less amount representing interest||(728,528||)|
|Less current portion of capital lease obligations||(640,464||)|
|Capital lease obligations, excluding current installments||$||1,805,857|
During the third quarter of 2014, the Company and EcoStim Argentina each entered into separate three-year office space leases. These companies have also leased a warehouse facility in Neuquen for our Argentina operations and a warehouse in Houston, Texas for research and development and security of our turbine-powered pressure pumping units (“TPUs”) equipment. The combined future minimum lease payments as of June 30, 2015 are as follows:
Note 6 – Debt
On May 28, 2014 (the “Closing Date”), the Company entered into a Convertible Note Facility Agreement (the “Note Agreement”) with ACM Emerging Markets Master Fund I, L.P. (“ACM”). The proceeds from the Note Agreement have been used primarily for capital expenditures, certain working capital needs and approved operating budget expenses.
The Note Agreement allowed the Company to issue ACM a multiple draw secured promissory note with a maximum aggregate principal amount of $22 million, convertible into the common stock of the Company (the “Common Stock”) at a price of $6.00 per share at the option of ACM. The outstanding debt under the facility is convertible immediately and accrues interest at 14% per annum with interest payments due annually in arrears. The debt can be prepaid in full under certain conditions after the first anniversary of the Closing Date and matures on the date that is four years following the Closing Date.
As of June 30, 2015, the Company has drawn down the full $22 million available under the Note Agreement, which was primarily used for capital expenditures, certain working capital needs and approved operating budget expenses. The balance for accrued interest at June 30, 2015 was $2,763,629. The accrued interest balance included the Deferred Interest (as defined below) of $2,485,262, which was converted in its entirety to shares of our common stock as described below.
On May 28, 2015, the Company entered into an amendment with ACM. ACM and the Company agreed to give ACM the ability to have the $2,485,262 interest payment, which was due on May 28, 2015 (the “Deferred Interest”), paid in the form of shares of the Company’s common stock upon the consummation of a future equity offering, should one occur. On July 15, 2015 the Company closed on an equity offering, as described in “Note 8 – Subsequent Events” below, and the Deferred Interest was converted into 523,192 shares of unregistered common stock.
All obligations under the Note Agreement are secured by liens on substantially all of the assets of the Company and have subsidiary guarantees and pledges of the capital stock of the subsidiary guarantors subject to certain terms and exceptions. The Company was in compliance with all covenants under its debt instruments as of June 30, 2015.
On October 10, 2014, the Company entered into an equipment purchase agreement for the TPUs equipment and related spare parts for a total purchase price of approximately $6,500,000, of which $4,100,000 has been financed. The total amount financed, including any accrued interest, was to become due and payable on April 1, 2015. On March 12, 2015, the Company amended the agreement to add a blender, two data vans and a manifold at an increased cost of $400,000, and amended the due date of the final payment to March 31, 2016. The amended agreement provides for monthly installment payments of $50,000 beginning in May 2015. The note accrues interest at a rate of 9% per annum from April 1, 2015 until maturity on March 31, 2016. As of June 30, 2015, the Company has a balance of $3,965,116 and accrued interest of $94,764.
Note 7 – Public Offering
On February 19, 2015, the Company sold 1,051,376 registered securities of common stock at a price of $5.75 per share for gross proceeds to the Company of $6,045,412. The Company used a portion of the net proceeds from the offering to finance capital expenditures, for working capital and for general corporate purposes and expects to use the remainder of the proceeds for additional capital expenditures and working capital.
Note 8 – Subsequent Events
On July 15, 2015, the Company sold 6,164,690 registered securities of common stock at a price of $4.75 per share for gross proceeds to the Company of $29,282,278.
On July 15, 2015, the Company issued 523,192 shares of unregistered common stock at a price of $4.75 per share to ACM as payment for the Deferred Interest in accordance with that certain First Amendment to the Convertible Note Facility Agreement dated May 28, 2015 and described above in “Note 6 – Debt.”
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, 2014. 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.
We are an early stage technology-driven independent oilfield services company providing well stimulation, coiled tubing and field management services to the upstream oil and gas industry. We are focused on reducing the ecological impact and improving the economic performance of the well stimulation process. We have assembled proven technologies and processes that have the ability to (1) reduce the surface footprint, (2) reduce emissions and (3) conserve fuel and water during the stimulation process. We will focus on bringing these technologies and processes to the most active shale resource basins outside of the United States, using our technology to differentiate our service offerings. Our management team has extensive international industry experience. Our first operation is in Argentina, home to the Vaca Muerta, the world’s third-largest shale resource basin as measured by technically recoverable reserves. We also intend to pursue other markets that meet our investment criteria, which may include Mexico, Colombia and the United States as well as other markets and where we believe we can offer clear strategic advantages and achieve acceptable financial returns. We may also explore opportunistic acquisitions and/or joint ventures with established companies in target markets.
Our management team has extensive experience in operating well stimulation fleets, coiled tubing units and other downhole completion equipment, as well as providing “sweet spot” analysis in shale resource basins using geophysical predictive modeling. We expect to leverage our management’s experience and historical local relationships in undersupplied markets to pursue profitable long-term contracts. We expect to compete for business with a limited number of other service companies based on technical capability, quality of equipment, local experience and existing relationships rather than solely on price. We also believe that we benefit from our association with our largest investor, ACM Emerging Markets Master Fund I, L.P., which is managed by Albright Capital Management LLC (collectively, “ACM”). ACM is an internationally recognized private equity firm dedicated to the emerging markets and has many established relationships in countries where the Company is evaluating opportunities.
Results of Operations
For the Three Months Ended June 30, 2015 and 2014
Revenue for the three months ended June 30, 2015 increased $3,911,468 to $3,985,419 from $73,951 for the three months ended June 30, 2014. This increase was primarily due to the start of well stimulation and coiled tubing operations in Argentina compared to the 2014 period which only contained field management services.
Cost of services increased $3,402,865 to $3,839,345 for the three months ended June 30, 2015 compared to $436,480 for the three months ended June 30, 2014. This increase was primarily due to higher activity levels due to the start of our well stimulation and coiled tubing operations in Argentina and the costs associated with the variable nature of these expenses, especially materials, supplies and labor costs.
Our selling, general, and administrative expenses increased $698,901 to $1,933,092 for the three months ended June 30, 2015 compared to $1,234,191 for the three months ended June 30, 2014. This increase is a result of: higher legal costs associated with SEC compliance, proxy filing, internal controls and professional and consulting fees of $201,930; additional labor and benefits cost of $121,074 related to additional strategic personnel; rent, administrative office and marketing expenses of $173,617 related to additional office space in Argentina and Houston and the increase in our sales efforts; higher travel expenses related to Argentina business development opportunities of $91,748; additional costs associated with stock compensation of $89,485; and additional insurance costs of $21,047.
Research and development for the three months ended June 30, 2015 was $251,816. The Company did not have any research and development cost in prior years. Research and development includes the cost associated with research activities of fiber optics technology and latest generation turbine-powered pressure pumping technology.
Net other expense increased $271,652 to $600,268 for the three months ended June 30, 2015 compared to $328,616 for the three months ended June 30, 2014, primarily as a result of an increase of $680,656 in interest expense for the period ended June 30, 2015 related to the ACM loan and the TPUs financing as discussed in “Part I – Item 1 – Financial Statements – Note 6 – Debt.” The increase was partially offset by gains on the sale of trading securities of $587,407 related to the capitalization of our subsidiary in Argentina, whereby we purchased and sold Argentine bonds in order to take advantage of the favorable spread in exchange rates between the US Dollar and Argentine Peso. Finally, other expenses increased $178,403 to $169,194 for the three months ended June 30, 2015 compared to income of $9,209 for the three months ended June 30, 2014, mainly related to foreign exchange gain and losses and Argentina bank transaction fees.
For the Six Months Ended June 30, 2015 and 2014
Revenue for the six months ended June 30, 2015 increased $6,319,816 to $6,877,112 from $557,296 for the six months ended June 30, 2014. This increase was primarily due to the start of well stimulation and coiled tubing operations in Argentina compared to the 2014 period which only contained field management services.
Cost of services increased $5,776,417 to $6,998,882 for the six months ended June 30, 2015 compared to $1,222,465 for the six months ended June 30, 2014. This increase was primarily due to higher activity levels due to the start of our well stimulation and coiled tubing operations in Argentina and the costs associated with the variable nature of these expenses, especially materials, supplies and labor costs.
Our selling, general and administrative expenses increased $892,823 to $3,509,947 for the six months ended June 30, 2015 compared to $2,617,124 for the six months ended June 30, 2014. This increase is a result of: higher legal costs associated with SEC compliance, proxy filing, internal controls and professional and consulting fees of $165,931; additional labor and benefits costs of $305,240 related to additional strategic personnel; rent, administrative office and marketing expenses of $252,593 related to additional office space in Argentina and Houston and the increase in our sales efforts; higher travel expenses related to Argentina business development opportunities of $28,094; additional costs associated with stock compensation of $104,503; and additional insurance costs of $36,462.
Research and development for the six months ended June 30, 2015 was $493,362. The Company did not have any research and development cost in prior years. Research and development includes the cost associated with research activities of fiber optics technology and latest generation turbine-powered pressure pumping technology.
Net other expense increased $966,365 to $1,430,683 for the six months ended June 30, 2015 compared to $464,318 for the six months ended June 30, 2014, primarily as a result of an increase of $1,517,290 in interest expense for the period ended June 30, 2015 related to the ACM loan and the TPUs financing as discussed in “Part I – Item 1 – Financial Statements – Note 6 – Debt.” The increase was partially offset by gains on the sale of trading securities of $872,920 related to the capitalization of our subsidiary in Argentina, whereby we purchased and sold Argentine bonds in order to take advantage of the favorable spread in exchange rates between the US Dollar and Argentine Peso. Finally, other expenses increased $321,995 to $300,927 for the six months ended June 30, 2015 compared to income of $21,068 for the six months ended June 30, 2014, mainly related to foreign exchange gain and losses and Argentina bank transaction fees.
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, as discussed in “Part I – Item 1 – Financial Statements – Note 7 – Public Offering,” and a second offering on July 15, 2015, as discussed in “Part I – Item 1 – Financial Statements – Note 8 – Subsequent Events.”
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.
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.
Going forward, 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 make any significant acquisition for cash would likely require us to obtain additional equity or debt financing, which may not be available to us on favorable terms or at all.
Our ability to fund operations, and to fund planned and committed 2015 and 2016 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.
Our ability to acquire equipment could require us to obtain additional equity or debt financing, which may not be available to us on favorable terms or at all.
Sources and Uses of Cash
Net cash used in operating activities was $7,943,985 for the six months ended June 30, 2015 compared to $3,486,208 for the six months ended June 30, 2014. This increase is primarily due to costs associated with revenue generated from well stimulation, coiled tubing, and field management services operations and the start-up of those activities in Argentina, costs associated with our continuing business development efforts in Latin America, and costs associated with various SEC reporting requirements.
Net cash used in investing activities was $166,506 for the six months ended June 30, 2015 compared to net cash used in investing activities of $9,066,085 for the six months ended June 30, 2014. This decrease is primary related to lower capital expenditures and net proceeds of $2,233,688 during the year related to the purchase and sale of bonds used in the capitalization of the Argentina operations.
Net cash provided by financing activities was $4,690,206 for the six months ended June 30, 2015 compared to net cash provided for financing activities of $11,499,320 for the six months ended June 30, 2014. This decrease is primarily due to lower net proceeds from financing activities.
We had a net decrease in cash and cash equivalents of $3,420,285 for the six months ended June 30, 2015 compared to a net decrease in cash and cash equivalents of $1,052,973 for the six months ended June 30, 2014, primarily resulting from our operating activities.
We do not generate positive cash flow at this time. Further, while we believe we will begin generating positive cash flow from operations in 2016, our liquidity provided by our existing cash and cash equivalents may not be sufficient to fund our full capital expenditure plan and working capital needs. Our current capital 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.
Our business depends on the capital spending programs of our customers. Revenue from our stimulation and field management segments are expected to be generated by providing services to oil and natural gas exploration and production companies throughout Argentina, 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.
On November 21, 2012, the United States District Court for the Southern District of New York issued an injunction preventing Argentina from making payments on the restructured bonds, and ordered Argentina to make a deposit of $1.3 billion related to the claims of the holdout creditors, which order was appealed by the country. Argentina’s appeal was denied by the Second Circuit Court of Appeals, and on June 16, 2014 the Supreme Court of the United States refused to hear Argentina’s appeal from that denial. As a result, it is widely believed that Argentina may default on its restructured debt unless it is able to settle the claims of the plaintiffs in the New York litigation in a manner that will allow payment to be made in accordance with the restructuring. In May 2015, the plaintiffs in the New York proceeding asked the judge to amend their claims to include a recent successful issue of bonds governed by Argentine law; this motion is currently pending.
Argentina’s failure to restructure completely its remaining sovereign debt and settle with the holdout creditors may prevent Argentina from obtaining favorable terms or interest rates when accessing the international capital markets. Litigation initiated by holdout creditors or other parties may result in material judgments against the Argentine government and could result in attachments of or injunctions relating to assets of Argentina, which could have a material adverse effect on the country’s economy, resulting among other things in further devaluation of the Argentine peso, and may also affect our customers’ access to international financing.
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, especially in our stimulation business.
Off-Balance Sheet Arrangements
As of June 30, 2015, 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 arrangement” 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, 2015.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles. As of June 30, 2015, management, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of its internal control over financial reporting, based on criteria established in the updated 2013 Internal Control — Integrated Framework created by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on their assessment, management determined that the Company maintained effective internal control over financial reporting as of June 30, 2015. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in “Part I—Item 1A—Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, which could materially affect our business, financial condition or future results. 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
On May 28, 2015, the Company entered into a First Amendment to the Convertible Note Facility Agreement with ACM, pursuant to which ACM and the Company agreed to give ACM the ability to have the $2,485,262 interest payment, which had accrued under the Company’s Convertible Note Facility Agreement with ACM and was due on May 28, 2015 (the “Deferred Interest”), paid in the form of shares of the Company’s common stock upon the consummation of a future equity offering, should one occur. On July 15, 2015 the Company closed on an equity offering, as described in “Part I – Item 1 – Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 8 – Subsequent Events,” and the Deferred Interest was converted into 523,192 shares of unregistered common stock of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
|3.1||Amended and Restated Articles of Incorporation (incorporated by reference to our Current Report on Form 8-K filed on November 26, 2013).|
|3.2||Amended and Restated Bylaws (incorporated by reference to our Current Report on Form 8-K filed on June 4, 2014).|
|10.1||First Amendment to the Convertible Note Facility Agreement, dated May 28, 2015, between Eco-Stim Energy Solutions, Inc. and ACM Emerging Markets Master Fund I, L.P. (incorporated by reference to our Current Report on Form 8-K filed on May 29, 2015).|
|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.
** Furnished herewith.
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 10, 2015||ECO-STIM ENERGY SOLUTIONS, INC.|
|By:||/s/ Jon Christopher Boswell|
|Jon Christopher Boswell|
|President and Chief Executive Officer|
|By:||/s/ Alexander Nickolatos|
|Chief Financial Officer and Assistant Secretary|