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 September 30, 2016

 

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, 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 14,416,727 shares of common stock outstanding at November 14, 2016.

 

 

 

  
  

 

TABLE OF CONTENTS

 

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS   3
PART I – FINANCIAL INFORMATION   6
ITEM 1. FINANCIAL STATEMENTS   6
CONDENSED CONSOLIDATED BALANCE SHEETS   6
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS   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   18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   21
ITEM 4. CONTROLS AND PROCEDURES   21
PART II – OTHER INFORMATION   22
ITEM 1. LEGAL PROCEEDINGS   22
ITEM 1A. RISK FACTORS   22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES   22
ITEM 4. MINE SAFETY DISCLOSURES   22
ITEM 5. OTHER INFORMATION   22
ITEM 6. EXHIBITS   22
SIGNATURES   23

 

 2 
  

 

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,” “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;

 

 3 
  

 

  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.

 

 4 
  

 

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, 2015 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, 2015. 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.

 

 5 
  

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30, 2016   December 31, 2015 
   (Unaudited)     
Assets          
Current assets:          
Cash and cash equivalents  $1,623,010   $11,742,489 
Accounts receivable, net   4,361,877    8,155,264 
Inventory   1,947,355    1,546,463 
Prepaid   2,333,067    3,328,265 
Other assets   54,520    48,648 
Total current assets   10,319,829    24,821,129 
Property, plant and equipment, net   40,410,581    37,142,578 
Other non-current assets   488,633    488,633 
Total assets  $51,219,043   $62,452,340 
           

Liabilities and stockholders’ equity

          
Current liabilities:          
Accounts payable  $3,464,916   $1,112,812 
Accrued expenses   3,886,186    3,843,497 
Short-term notes payable   39,686    - 
Current portion of long term notes payable   786,647    2,825,428 
Current portion of capital lease payable   762,178    686,624 
Total current liabilities   8,939,613    8,468,361 
           
Non-current liabilities:          
Long-term notes payable   21,876,425    21,737,403 
Long-term capital lease payable   956,852    1,485,686 
Total non-current liabilities   22,833,277    23,223,089 
           
Stockholders’ equity          
Preferred stock, $0.001 par value, 50,000,000 shares authorized, none issued        
Common stock, $0.001 par value, 200,000,000 shares authorized, 14,373,185 issued and 14,349,635 outstanding at September 30, 2016 and 13,572,989 issued and 13,566,050 outstanding at December 31, 2015   14,371    13,572 
Additional paid-in capital   59,357,509    57,302,953 
Treasury stock, at cost; 21,850 common shares at September 30, 2016 and 6,939 common shares at December 31, 2015.   (57,469)   (20,294)
Accumulated deficit   (39,868,258)   (26,535,341)
Total stockholders’ equity   19,446,153    30,760,890 
           
Total liabilities and stockholders’ equity  $51,219,043   $62,452,340 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 6 
  

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(Unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
Revenues  $2,117,977   $4,381,371   $6,289,461   $11,258,483 
Operating cost and expenses:                    
Cost of services   3,058,554    4,514,801    7,764,719    11,513,683 
Selling, general, and administrative expenses   1,459,865    1,749,880    4,612,937    5,259,827 
Research and development   129,013    269,202    403,828    762,564 
Depreciation and amortization expense   1,238,370    889,396    3,354,560    2,536,525 
Total operating costs and expenses   5,885,802    7,423,279    16,136,044    20,072,599 
                     
Operating loss   (3,767,825)   (3,041,908)   (9,846,583)   (8,814,116)
                     
Other income (expense):                    
Gain on sale of trading securities       1,542,687        2,415,607 
Interest expense   (932,232)   (1,010,878)   (3,064,159)   (3,013,554)
Other expense   (33,031)   (171,685)   (205,465)   (472,612)
                     
Total other income (expense)   (965,263)   360,124    (3,269,624)   (1,070,559)
Provision for income taxes   (72,237)       (216,710)    
                     
Net loss  $(4,805,325)  $(2,681,784)  $(13,332,917)  $(9,884,675)
                     
Basic and diluted loss per share  $(0.35)  $(0.21)  $(0.98)  $(1.14)
                     
Weighted average number of common shares outstanding-basic and diluted   13,634,476    12,881,952    13,597,940    8,685,260 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 7 
  

 

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, 2015   13,566,050   $13,572   $57,302,953   $(20,294)  $(26,535,341)  $30,760,890 
Public equity placement, net   707,746    708    1,487,826            1,488,534 
Treasury Stock   (14,911)           (37,175)       (37,175)
Stock based compensation   90,750    91    566,730            566,821 
Net loss                   (13,332,917)   (13,332,917)
Balance at September 30, 2016   14,349,635   $14,371   $59,357,509   $(57,469)  $(39,868,258)  $19,446,153 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 8 
  

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Unaudited)

 

   Nine Months Ended September 30, 
   2016   2015 
Operating Activities          
Net loss  $(13,332,917)  $(9,884,675)
Depreciation and amortization   3,354,560    2,536,525 
Amortization of debt discount and loan origination cost   191,647    191,650 
Stock based compensation   566,821    1,229,073 
Gain on the sale of trading securities   -    (2,415,607)
Changes in operating assets and liabilities:          
Accounts receivable   3,793,387    (6,756,799)
Inventory   (400,892)   440,883 
Prepaids and other assets   989,327    (1,179,430)
Accounts payable and accrued expenses   (194,077)   3,024,703 
Net cash used in operating activities   (5,032,144)   (12,813,677)
Investing Activities          
Purchases of equipment   (3,942,516)   (7,371,601)
Proceeds from sale of trading securities       10,775,501 
Purchase of trading securities       (6,999,127)
Net cash used in investing activities   (3,942,516)   (3,595,227)
Financing Activities          
Proceeds from sale of common stock   1,559,285    35,327,690 
Sale of common stock issuance cost   (70,751)   (3,087,805)
Proceeds from notes payable   194,611    400,000 
Payments on notes payable   (2,284,882)   (1,539,596)
Payments on capital lease   (505,907)   (440,171)
Purchase of treasury stock   (37,175)    
Net cash provided by (used in) financing activities   (1,144,819)   30,660,118 
           
Net increase (decrease) in cash and cash equivalents   (10,119,479)   14,251,214 
Cash and cash equivalents, beginning of period   11,742,489    7,013,556 
           
Cash and cash equivalents, end of period  $1,623,010   $21,264,770 
           
Supplemental Disclosure of Cash Flow Information          
Cash paid during the year for interest  $3,382,069   $2,948,086 
Cash paid during the year for income taxes  $94,834   $ 
           
Non-cash transactions          
Property plant and equipment additions in account payable  $2,691,444   $379,111 
Interest converted to common stock  $   $2,485,162 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 9 
  

 

ECO-STIM ENERGY SOLUTIONS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

September 30, 2016
(Unaudited)

 

Note 1 – Organization and Nature of Business

 

Eco-Stim Energy Solutions, Inc. (the “Company,” “we” or “us”) is a 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 also intend to 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, 2015 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 nine-month period ended September 30, 2016 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, 2015, a copy of which was filed with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

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.

 

 10 
  

 

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.

 

Revenue Recognition

 

The Company’s revenue is heavily dependent on three 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.

 

 11 
  

 

Marketable Securities

 

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 loss.

 

During the nine months ended September 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 $2,415,607 for the nine months ended September 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. No trading securities transactions occurred during the nine months ended September 30, 2016.

 

Net Loss per Common Share

 

For the nine months ended September 30, 2016 and 2015, the weighted average shares outstanding excluded certain stock options and potential shares from convertible debt of 4,472,632 and 4,133,131, 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 nine months ended September 30, 2016 and 2015 were also excluded from the calculation.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the 2015 presentation.

 

Accounts Receivable

 

Accounts receivable are stated at amounts management expects to collect from outstanding balances both billed and unbilled (unbilled accounts receivable represent amounts recognized as revenue for which invoices have not yet been sent to clients). 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 September 30, 2016. At September 30, 2015, the Company had an allowance for doubtful accounts of $72,600.

 

Included in the Accounts Receivable balance are certain unbilled receivables with a significant customer that relate to work performed before the Company entered into its rotational on-call contract in March 2016. Under this prior arrangement, the Company was required to go through an arduous process to collect the outstanding amounts and while the Company has a track record of collecting amounts billed under this prior arrangement, it has proven to take a long period of time. At September 30, 2016, there were approximately $1,300,000 in outstanding unbilled amounts due under this prior arrangement. Further, amounts billed to this significant customer under the rotational on-call contracts signed earlier this year have been collected within a more normal timeframe.

 

Prepaids

 

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.

 

Inventory

 

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.

 

 12 
  

 

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. 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.

 

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. The Company evaluated its long-lived assets for impairment at September 30, 2016 and has determined no impairment is necessary.

 

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Major Customers and Concentration of Credit Risk

 

The majority of the Company’s business is conducted with major and independent oil and gas companies in Argentina. 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.

 

We derive a significant portion of our revenue from a limited number of major clients. For the nine months ended September 30, 2016 and September 30, 2015 three major customers accounted for approximately 83.63% and 71.25% of our services revenue, respectively. Our accounts receivable, at September 30, 2016 and September 30, 2015 were concentrated, with major customers representing 82.94% and 90.50% 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 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

 

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. We adopted ASU 2015-03 during the quarter ended March 31, 2016 resulting in reclassification of short-term debt issuance cost of $185,362 and $185,362 as of September 30, 2016 and December 31, 2015 respectively; and long-term debt issuance cost of $123,575 and $262,597 as of September 30, 2016 and December 31, 2015 respectively.

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU 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 this ASU, 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 applies only to instruments with service conditions; the requirement to estimate the probability of achieving performance conditions remains. For statutory tax withholding requirements, this ASU 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. This ASU is effective for annual periods, and interim periods within those annual periods beginning after December 15, 2016. Earlier adoption is permitted in any interim or annual period for which financial statements have not yet been issued. The application of this ASU in regards to the accounting for income taxes, forfeitures and statutory tax withholding requirements should be applied using a modified retrospective application with a cumulative effect adjustment to additional paid-in capital as of the beginning of the period of adoption. The presentation of employee taxes paid on the statement of cash flows should be applied retrospectively.

 

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Note 3 – Accounts Receivable

 

The following table shows accounts receivable balances representing work completed, both invoiced and un-invoiced at September 30, 2016 and December 31, 2015 respectively.

 

   September 30, 2016   December 31, 2015 
Billed  $2,422,196   $2,386,863 
Unbilled   1,939,681    5,768,401 
Total accounts receivable  $4,361,877   $8,155,264 

 

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”), 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 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. The 2015 Plan was further amended in 2016 to authorize an additional 200,000 shares. Both the 2013 Plan and the 2015 Plan, as amended, have been approved by the shareholders of the Company. As of September 30, 2016, 18,328 shares were available for grant under the 2013 Plan and 741,000 shares were 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. 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 Accounting Standards Codification Topic 718, giving consideration to the contractual terms, vesting schedules, and pre-vesting and post-vesting forfeitures.

 

During the nine months ended September 30, 2016 and 2015, the Company recorded $566,821 and $1,229,073, 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 September 30, 2016 was $1,063,659 and will be fully expensed through 2019.

 

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.

 

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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:

 

   Capital Lease
Payments
 
2016  $244,317 
2017   977,267 
2018   977,267 
Total future payments   2,198,851 
Less debt discount due to warrants   (157,876)
Less amount representing interest   (321,945)
    1,719,030 
Less current portion of capital lease obligations   (762,178)
Capital lease obligations, excluding current installments  $956,852 

 

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 September 30, 2016 are as follows:

 

   Operating Leases 
2016   172,635 
2017   315,207 
Thereafter    
Total   487,842 

 

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 September 30, 2016, 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 September 30, 2016 was $1,063,232.

 

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 $2,485,162 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 issued 523,192 shares of unregistered common stock at a price of $4.75 per share to ACM as payment for the Deferred Interest.

 

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. From time to time, management has obtained amendments and waivers to the agreement to accommodate and adapt to the changing business environment. Management believes that the Company will be in compliance with the amended covenants, but there can be no assurance that the Company will achieve such compliance. Failure to comply with these covenants could result in an event of default which, if not cured or waived, would have a material adverse effect on us. The Company was in compliance with all covenants or had obtained any necessary waiver as of September 30, 2016.

 

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On October 10, 2014, the Company entered into an equipment purchase agreement for the turbine pump units equipment and related spare parts for a total purchase price of approximately $6,500,000, of which $4,100,000 was 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. On February 11, 2016 the Company further amended the agreement, which provided for a reduction in the principal amount of $2,000,000 and monthly installment payments of $25,000 beginning in April 1, 2016. The note accrues interest at a rate of 9% per annum until maturity on December 15, 2016. As of September 30, 2016, the Company had a balance of $972,009 and accrued interest of $38,464.

 

On January 1, 2016, the Company financed its operational insurance premiums with US Premium Finance for a total of $194,611 at an interest rate of 5.87%. As of September 30, 2016, the Company had a balance of $39,686 and accrued interest of $194.

 

Note 7 – Equity

 

On July 13, 2016, the Company entered into an At-Market Issuance Sales Agreement (the “Agreement”) with FBR Capital Markets & Co. and MLV & Co. LLC (the “Distribution Agents”). Pursuant to the terms of the Agreement, the Company may sell from time to time through the Distribution Agents shares of the Company’s common stock, par value $0.001 per share, with an aggregate sales price of up to $5,801,796 (the “Shares”). Sales of the Shares, if any, will need to be approved by the Company’s Board of Directors and will be made by any method permitted that is deemed an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), including sales made directly on or through the NASDAQ Capital Market, the existing trading market for our common stock or on any other existing trading market for our common stock, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices, and/or any other method permitted by law. Sales of the Shares may be made at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices, and subject to such other terms as may be agreed upon at the time of sale including a minimum sales price that may be stipulated by the Company’s Board of Directors. During the third quarter ended September 2016, the Company sold 707,746 shares through the Agreement, for total net proceeds of $1,488,534.

 

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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, 2015. 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 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 basin, 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 investors, which give us strategic advantages in emerging markets such as Argentina.

 

Results of Operations

 

For the Three Months Ended September 30, 2016 and 2015

 

Revenue for the three months ended September 30, 2016 decreased $2,263,394 to $2,117,977 from $4,381,371 for the three months ended September 30, 2015. The decrease in revenue was related to many factors including, but not limited to; (1) uncertainty surrounding the energy policies of the newly elected president of Argentina; (2) the depressed international oil prices which reduced global capital expenditures for oil and gas companies; (3) the departure of the CEO of our largest customer; and (4) an oversupply of equipment which reduced pricing for our services.

 

Cost of services decreased $1,456,247 to $3,058,554 for the three months ended September 30, 2016 compared to $4,514,801 for the three months ended September 30, 2015. This decrease was primarily due to lower activity levels during the third quarter of 2016 compared to the third quarter of 2015 and certain cost reduction efforts.

 

Our selling, general, and administrative expenses decreased $290,015 to $1,459,865 for the three months ended September 30, 2016 compared to $1,749,880 for the three months ended September 30, 2015. This decrease was mainly as a result of cost reduction efforts to match the Company’s lower activity levels. These reductions included lower professional and consulting fees of $31,364, lower travel, labor and benefits costs of $307,912, and lower administrative office costs and marketing expenses of $12,713. This decrease was partially offset by an increase in insurance costs of $12,926 and higher bad debt expenses of $49,048.

 

Research and development for the three months ended September 30, 2016 decreased $140,189 to $129,013 for the three months ended September 30, 2016 compared to $269,202 for the three months ended September 30, 2015. Research and development includes the cost associated with research activities of our fiber optics technology and latest generation turbine-powered pressure pumping technology. The research efforts around the initial reconfiguration of the turbine powered pressure pumping units was substantially completed during the second quarter.

 

Net other expense increased $1,325,387 to $965,263 for the three months ended September 30, 2016 compared to net gain of $360,124 for the three months ended September 30, 2015. This increase was primarily due to the absence of the gain on sale of trading securities which was $1,542,687 for the third quarter of 2015, in addition to an increase in foreign currency of $9,110. These increases were offset by higher interest income of $114,219 and lower interest and other expenses of $112,191.

 

For the nine Months Ended September 30, 2016 and 2015

 

Revenue for the nine months ended September 30, 2016 decreased $4,969,022 to $6,289,461 from $11,258,483 for the nine months ended September 30, 2015. The decrease in revenue was related to many factors including, but not limited to; (1) uncertainty surrounding the energy policies of the newly elected president of Argentina; (2) the depressed international oil prices which reduced global capital expenditures for oil and gas companies; (3) the departure of the CEO of our largest customer; and (4) an oversupply of equipment which reduced pricing for our services. This decrease was offset by a slight increase in our field management services.

 

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Cost of services decreased $3,748,964 to $7,764,719 for the nine months ended September 30, 2016, compared to $11,513,683 for the nine months ended September 30, 2015. This decrease was primarily due to lower activity levels during the nine months ended September 2016 compared to the nine months ended September 2015.

 

Our selling, general and administrative expenses decreased $646,890 to $4,612,937 for the nine months ended September 30, 2016 compared to $5,259,827. This decrease was mainly as a result of cost reduction efforts including lower professional, consulting, and travel expenses of $342,568; lower labor and benefits cost of $26,873, lower stock compensation of $435,627, and a reduction in marketing expenses of $60,042. These reductions were partially offset by an increase in rent and administrative office costs of $132,789, higher bad debt expenses of $49,048 and insurance costs of $36,383.

 

Research and development for the nine months ended September 30, 2016 decreased $358,736 to $403,828 for the nine months ended September 30, 2016 compared to $762,564 for the nine months ended September 30, 2015. Research and development includes the cost associated with research activities of fiber optics technology and latest generation turbine-powered pressure pumping technology. The research efforts around the initial reconfiguration of the turbine powered pressure pumping units was substantially completed during the third quarter.

 

Net other expense increased $2,199,065 to $3,269,624 for the nine months ended September 30, 2016 compared to a net gain of $1,070,559 for the nine months ended September 30, 2015. This increase was primarily due to the absence of the gain on sale of trading securities which was $2,415,607, higher interest and foreign currency expenses of $580,381. These increases were offset by interest income of $744,786 and other expenses of $52,137.

 

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 during the third quarter of 2015 as discussed in in our Annual Report on Form 10-K for the year ended December 31, 2015 Part II – Item 8 – Financial Statements and Supplemental Data – Notes to the consolidated financial statements – Note 11 – “Equity Offering.” Our immediate liquidity is threatened by our reduced cash flow from operations, and we are currently seeking to raise additional capital through debt or equity financing to address our liquidity issues. Please see 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, 2015 and the risk factor included under Part II, Item IA, Risk Factors, in our previous Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.

 

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.

 

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.

 

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;
     
  maintenance capital expenditures, which are capital expenditures made to extend the useful life of our assets; and.
     
  working capital.
     
  service of debt obligations.

 

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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 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.

 

Sources and Uses of Cash

 

Net cash used in operating activities was $5,032,144 for the nine months ended September 30, 2016 compared to $12,813,677 for the nine months ended September 30, 2015. This decrease was primarily due to lower activity and pricing levels during the nine months ended September 2016 compared to the nine months ended September 2015.

 

Net cash used in investing activities was $3,942,516 for the nine months ended September 30, 2016 compared to $3,595,227 for the nine months ended September 30, 2015. This decrease is primary related to the absence of the gain on sale of trading securities of $3,776,374 and a decrease in purchases of equipment of $3,429,085.

 

Net cash used in financing activities was $1,144,819 for the nine months ended September 30, 2016 compared to $30,660,118 for the nine months ended September 30, 2015. This decrease is primarily due to the sale of common stock of $30,751,388 during 2015. The following table summarizes our cash flows from financing activities for the nine months ended September 30, 2016 and 2015 respectively:

 

   Nine Months Ended September 30, 
   2016   2015 
Financing Activities          
Proceeds from sale of common stock  $1,559,285   $35,327,690 
Sale of common stock issuance cost   (70,751)   (3,087,805)
Proceeds from notes payable   194,611    400,000 
Payments on notes payable   (2,284,882)   (1,539,596)
Payments on capital lease   (505,907)   (440,171)
Purchase of treasury stock   (37,175)    
Net cash provided by (used in) financing activities  $(1,144,819)  $30,660,118 

 

On December 15, 2015, the board of directors authorized the Company to repurchase, from time to time up to $5 million in shares of its outstanding common stock, from December 16, 2015 through December 16, 2017. As of September 30, 2016 the Company had purchased 21,850 shares at a cost of $57,469 under this program.

 

On July 13, 2016, the Company entered into an At-Market Issuance Sales Agreement as disclosed in Note 7 – “Equity”. During the third quarter ended September 2016, the Company sold 707,746 shares through the Agreement, for total net proceeds of $1,488,534.

 

We had a net decrease in cash and cash equivalents of $10,119,479, for the nine months ended September 30, 2016 compared to a net increase in cash and cash equivalents of $14,251,214 for the nine months ended September 30, 2015, primarily resulting from our operating activities and capital expenditures.

 

We do not generate positive cash flow at this time. Further, while we believe we will begin generating positive cash flow from operations in the first half of 2017, 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 will require us to obtain additional equity or debt financing, which may not be available to us on favorable terms or at all.

 

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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.

 

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 September 30, 2016, 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 September 30, 2016.

 

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 September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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, 2015 and the risk factor included under Part II, Item IA, Risk Factors, in our previous Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, together with all of 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, 2015, and Part II, Item IA, Risk Factors, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a)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 At Market Issuance Sale Agreement, dated July 13, 2016, by and among the Company and FBR Capital Markets & Co. and MLV & Co. LLC (incorporated by reference to our Current Report on From 8-K filed on July 14, 2016).
     
  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.

 

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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: November 14, 2016 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

 

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