Notes
to Unaudited Condensed Consolidated Financial Statements
June
30, 2017
(Unaudited)
Note
1 – Organization and Nature of Business
Eco-Stim
Energy Solutions, Inc. (the “Company,” “Eco-Stim,” “we” or “us”) is a technology-driven
independent oilfield services company providing well stimulation, coiled tubing and field management services to the domestic
and international upstream oil and gas industry. We are focused on reducing the ecological impact and improving the economic performance
of the well stimulation process in “unconventional” drilling formations. We serve major, national and independent
oil and natural gas exploration and production companies around the world, and we offer products and services with respect to
the various phases of a well’s economic life cycle. Our focus is to bring these technologies and processes to the most active
shale resource basins both domestically and outside of the United States using our technology to differentiate our service
offerings. We do business primarily in the United States and Argentina.
Note
2 – Basis of Presentation and Significant Accounting Policies
The
condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in
the United States (“U.S. GAAP”). The accompanying condensed consolidated financial statements are unaudited and have
been prepared from our books and records in accordance with Rule 10-1 of Regulation S-X for interim financial information. Accordingly,
they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of our
management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have
been included. The results of operations for interim periods are not necessarily indicative of results of operations for a full
year. These condensed consolidated financial statements should be read in conjunction with our Consolidated Financial Statements
and Notes thereto included in our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2016 filed with the SEC on March 9, 2017, and our Consolidated Financial Statements and Notes
thereto included in our Current Report on Form 8-K filed with the SEC on August 9, 2017.
In
addition, due to the second quarter 2017 start-up of operations in the United States, beginning in the second quarter of 2017,
we now manage our business through operating segments aligned with our two geographical operating regions; Latin America and
the United States. We also report certain corporate and other non-operating activities under the heading “Corporate and
Other”. Corporate and Other primarily reflects corporate personnel and activities, incentive compensation programs and other
non-operational allocable costs. For financial information about our segments, see Note 8 - Segment Reporting.
Principles
of Consolidation
We
consolidate all wholly-owned subsidiaries, controlled joint ventures and variable interest entities where the Company has determined
it is the primary beneficiary. All material intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the reporting period. Estimates are used in, but are not limited
to, determining the following: allowance for doubtful accounts, recoverability of long-lived assets and intangibles, useful lives
used in depreciation and amortization, income taxes and stock-based compensation. The accounting estimates used in the preparation
of the condensed consolidated financial statements may change as new events occur, as more experience is acquired, as additional
information is obtained and as the Company’s operating environment changes.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
The Company maintains deposits in several financial institutions in both Argentina and the U.S. Funds held in the U.S. may at
times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (“FDIC”). The
Company has not experienced any losses related to amounts in excess of FDIC limits.
The
Company places its cash and cash equivalents with high credit quality financial institutions.
Revenue
Recognition
The
Company’s revenue is dependent on three major sources: well stimulation, coiled tubing, and field management. All revenue
is recognized when persuasive evidence of an arrangement exists, specific performance completed, the price is fixed or determinable,
and collection is reasonably assured as follows:
Well
Stimulation Revenue
The
Company provides well stimulation services based on contractual arrangements, such as term contracts, exclusivity agreements
and pricing agreements, or on a spot market basis. Jobs for these services are typically short term in nature, lasting anywhere
from a few hours to multiple days. Revenue is recognized and customers invoiced upon the completion of each job, which can consist
of one or more stimulation stages.
Under
term pricing agreement arrangements, customers commit to targeted utilization levels at agreed-upon pricing, but without
termination penalties or obligations to pay for services not used by the customer. In addition, the agreed-upon pricing is
typically subject to periodic review. Under exclusivity agreements, customers agree to dedicate all of their completion
work in a given area to the Company at an agreed upon price so long as a minimum operational performance is maintained during
the term of the agreement.
Spot
market arrangements are priced on an agreed-upon hourly spot market rate. The Company also charges fees for setup and mobilization
of equipment depending on the job, additional equipment used on the job, if any, and materials that are consumed during the well
stimulation process. Generally, these fees and other charges vary depending on the equipment and personnel required for the job
and market conditions in the region in which the services are performed.
The
Company also generates revenues from chemicals and proppants that are consumed while performing well stimulation services.
Coiled
Tubing Revenue
The
Company began providing coiled tubing and other well stimulation services in early 2015. Jobs for these services are typically
short term in nature, lasting anywhere from a few hours to multiple days. Revenue is recognized upon completion of each job based
upon a completed field ticket. The Company charges the customer for mobilization, services performed, personnel on the job, equipment
used on the job, and miscellaneous consumables at agreed-upon spot market rates.
Field
Management Revenue
The
Company enters into arrangements to provide field management services. Field management revenue relates primarily to geophysical
predictions and production monitoring, utilizing down-hole diagnostics tools. Revenue is recognized and customers are invoiced
upon the completion of each job. The service invoices are for a set amount, which includes charges for the mobilization of the
equipment to the location, the service performed, the personnel on the job, additional equipment used on the job, consumables
used throughout the course of the service, and processing and interpretation of data acquired via down-hole diagnostic tools.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, accounts receivable, other assets, accounts payable,
accrued expenses, capital lease obligations and notes payable. The recorded values of cash and cash equivalents, accounts receivable,
other assets, accounts payable, and accrued expenses approximate their fair values based on their short-term nature. The carrying
value of capital lease obligations and notes payable approximate their fair value, and the interest rates approximate market rates.
Functional
and Presentation Currency
Items
included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic
environment in which the entity operates (the “Functional Currency”). The Functional Currency for the Norwegian and
Argentine subsidiaries is the U.S. Dollar. The condensed consolidated financial statements are presented in U.S. Dollars, which
is the Company’s presentation currency.
Net
Loss per Common Share
For
the six months ended June 30, 2017 and 2016, the weighted average shares outstanding excluded certain stock options and
potential shares from convertible debt of 683,074 and 4,412,132, respectively, from the calculation of diluted earnings
per share because these shares would be anti-dilutive. Anti-dilutive warrants of 100,000 for each of the six months ended June
30, 2017 and 2016 were also excluded from the calculation.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the 2017 presentation, with no material effect on the presentation
of December 31, 2016 or June 30, 2016.
Accounts
Receivable
Accounts
receivable are stated at amounts management expects to collect from outstanding balances both billed and unbilled (unbilled accounts
receivable represents amounts recognized as revenue for which invoices have not yet been sent to clients). At June 30, 2017 and
December 31, 2016, there were $3,450,496 and $855,706, respectively, in outstanding unbilled amounts. Management provides for
probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the
current status of individual accounts. To date, the Company has not recognized any losses due to uncollectible accounts. Balances
still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable. The Company evaluated all accounts receivable and determined that no reserve for doubtful
accounts was necessary at June 30, 2017 or December 31, 2016.
Prepaids
and Other Assets
Prepaid
expenses are primarily comprised of Argentinian value added tax and prepaid insurance. The prepaid value added tax will be reduced
as the Company continues to invoice customers in Argentina.
Inventory
Inventories
are stated at the lower of cost or net realizable value using the average cost method and appropriate consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable value. Inventories consist of supplies and consumable
products used in the Company’s services provided to its customers.
Property,
Plant and Equipment
Property,
Plant and Equipment (“PPE”) is stated at historical cost less depreciation. Historical cost includes expenditures
that are directly attributable to the acquisition of the items.
Depreciation
is computed using the straight-line method over the estimated useful lives of the assets for financial reporting purposes. Expenditures
for major renewals and betterments that extend the useful lives are capitalized. Expenditures for normal maintenance and
repairs are expensed as incurred. The cost of assets sold or abandoned and the related accumulated depreciation are eliminated
from the accounts and any gains or losses are reflected in the accompanying consolidated statements of operations for the respective
period.
The
estimated useful lives of our major classes of PPE are as follows:
Major
Classes of PPE
|
|
Estimated
Useful Lives
|
Machinery
and equipment
|
|
2-7
years
|
Vehicles
|
|
5
years
|
Leasehold
improvements
|
|
5
years (or the life of the lease)
|
Furniture
and office equipment
|
|
3-5
years
|
Leases
The
Company leases certain equipment under lease agreements. The Company evaluates each lease to determine its appropriate classification
as an operating or capital lease for financial reporting purposes. Any lease that does not meet the criteria for a capital lease
is accounted for as an operating lease.
Stock-Based
Compensation
The
Company accounts for its stock options, warrants, and restricted stock grants under the fair value recognition provisions of the
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718. The
Company currently uses the straight-line amortization method for recognizing stock option and restricted stock compensation costs.
The measurement and recognition of compensation expense for all share-based payment awards made to our employees, directors or
outside service providers are based on the estimated fair value of the awards on the grant dates. The grant date fair value is
estimated using either an option-pricing model which is consistent with the terms of the award or a market observed price, if
such a price exists. Such cost is recognized over the period during which an employee, director or outside service provider is
required to provide service in exchange for the award, i.e., “the requisite service period” (which is usually the
vesting period). The Company also estimates the number of instruments that will ultimately be earned, rather than accounting for
forfeitures as they occur.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. ASC Topic 360 requires the Company to review long-lived assets for impairment whenever events or changes
in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable. The impairment review includes
a comparison of future cash flows expected to be generated by the asset or group of assets with their associated carrying value.
If the carrying value of the asset or group of assets exceeds expected cash flows (undiscounted and without interest charges),
an impairment loss is recognized to the extent that the carrying value exceeds the fair value. If estimated future cash flows
are not achieved with respect to long-lived assets, additional write-downs may be required. During the six months ended June 30,
2017, the Company evaluated its long-lived assets for impairment and determined no impairment was necessary.
Major
Customers and Concentration of Credit Risk
The
majority of the Company’s business from inception through the first quarter of 2017 was conducted with major and independent
oil and gas companies in Argentina. For the six months ending June 30, 2017, 28% or $3.1 million and 72% or $8.0 million of our
revenue is from the U.S. and Argentina, respectively. The Company evaluates the financial strength of its customers and provides
allowances for probable credit losses when deemed necessary. The Company derives a large amount of revenue from a small number
of major and independent oil and gas companies. At June 30, 2017, the Company had a concentration of receivables with two customers.
For
the three and six months ended June 30, 2017, two major customers accounted for approximately 100% and 97% of our services
revenue, respectively. For the year ended December 31, 2016, two major customers represented 79% of our services revenue.
Our accounts receivable at June 30, 2017 and December 31, 2016 were concentrated with two major customers representing 99.9% and
86%, respectively.
Income
Taxes
Deferred
income taxes are determined using the asset and liability method in accordance with ASC Topic 740. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred income taxes are measured using enacted tax rates expected
to apply to taxable income in years in which such temporary differences are expected to be recovered or settled. The effect of
a change in tax rates on deferred income taxes is recognized in the consolidated statement of operations of the period that includes
the enactment date. In addition, a valuation allowance is established to reduce any deferred tax asset for which it is determined
that it is more likely than not that some portion of the deferred tax asset will not be realized.
The
Company is subject to U.S. federal and foreign income taxes along with state corporate income taxes in Texas. When tax returns
are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while
others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions
that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50%
likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits
in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the
taxing authorities upon examination.
The Fir Tree Transaction (as described in Note 6—Debt, Long-Term Notes Payable), will result in a change
in control and will likely limit the Company’s ability to utilize net operating loss tax benefits due to limitations pursuant
to Section 382 of the U.S. Tax Code. As of June 30, 2017 and December 31, 2016, there was no tax asset benefit recorded, as a provision
was made to fully reserve the benefit.
Recently
Issued and Adopted Accounting Guidance
In
July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires inventory
not measured using either the last in, first out (LIFO) or the retail inventory method to be measured at the lower of cost and
net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably
predictable cost of completion, disposal, and transportation. The new standard was effective for us beginning with the
first quarter of 2017, and is applied prospectively. We adopted ASU 2015-11 in the first quarter of 2017, with such
adoption having no material impact on the accompanying condensed consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which eliminates
the requirement to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead,
all deferred tax assets and liabilities will be required to be classified as noncurrent. We adopted this ASU 2015-17 in the
first quarter of 2017, with such adoption having no effect on our condensed consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). ASU 2016-09 simplifies
several aspects of accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory
tax withholding requirements and classification on the statement of cash flows. Under ASU 2016-09, all excess tax benefits or
deficiencies are recognized as income tax expense or benefit in the income statement and the pool of windfall tax benefits as
a component of additional paid-in capital is eliminated. In regards to forfeitures, companies may make a one-time policy election
to use forfeitures which applies only to instruments with service conditions; the requirement to estimate the probability of achieving
performance conditions remains. For statutory tax withholding requirements, ASU 2016-09 allows for net settlement up to the employer’s
maximum statutory tax withholding requirement. Formerly, only the minimum statutory tax withholding requirement was allowed to
be met through net settlement while retaining equity classification. We adopted ASU 2016-09 in the first quarter of 2017,
with such adoption having no material impact on the accompanying condensed consolidated financial statements.
Accounting
Guidance Issued But Not Adopted as of June 30, 2017
In
May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers, which requires us to recognize the amount of revenue
to which we expect to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing
revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective on January 1, 2018. Early
application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method.
We are evaluating the effect ASU 2014-09 will have on our condensed consolidated financial statements and related disclosures.
The Company has performed an initial evaluation of this standard and its impact on the financial statements. This included tasks
such as identifying contracts, identifying performance obligations and reviewing the applicable revenue streams. In this review,
nothing has been identified that would require a change in the current accounting for revenue. The Company will continue to evaluate,
particularly as we enter into new contracts.
On
February 25, 2016, the FASB issued ASU 2016-02 Leases (Topic 842), which requires an entity to recognize assets and liabilities
arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures
to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising
from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company
is currently evaluating the effect this standard will have on its condensed consolidated financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting,
which clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award.
This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods
within those years, with early adoption permitted. The Company is currently evaluating the effect this standard will have on its
condensed consolidated financial statements.
Note
3 – Accounts Receivable
Accounts
receivable by category were as follows:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
Billed
|
|
$
|
2,285,334
|
|
|
$
|
2,010,001
|
|
Unbilled
|
|
|
3,450,496
|
|
|
|
855,706
|
|
Total
accounts receivable
|
|
$
|
5,735,830
|
|
|
$
|
2,865,707
|
|
As
of June 30, 2017, $0.9 million and $2.5 million of our unbilled receivables were attributable to our Oklahoma and Argentina operations,
respectively. Subsequent to June 30, 2017, the full amount from Oklahoma and a substantial amount from Argentina were invoiced.
Note
4 – Stock-Based Compensation
The
Company has two stock incentive plans, the 2013 Stock Incentive Plan (the “2013 Plan”) and the 2015 Stock Incentive
Plan (the “2015 Plan”), (or collectively, “the Plans”), for the granting of stock-based incentive awards,
including incentive stock options, non-qualified stock options and restricted stock, to employees, consultants and members of
the Company’s Board of Directors (the “Board”). The 2013 Plan was adopted in 2012 and amended in 2013 and authorizes
1,000,000 shares to be issued under the 2013 Plan. The 2015 Plan, f/k/a “the 2014 Stock Incentive Plan,” was adopted
in 2014; in 2015 and 2016, it was amended and a total of 700,000 additional shares were authorized, resulting in a maximum of
1,200,000 shares being authorized for issue under the modified 2015 Plan
On
June 15, 2017, at our annual meeting of stockholders (the “Annual Meeting”), stockholders approved an increase
to the number of shares available under the 2015 Plan by 5,000,000 shares (from 1,200,000 shares to 6,200,000 shares). Both the
2013 Plan and the 2015 Plan have been approved by the stockholders of the Company. As of June 30, 2017, 122,510 shares remained
available for grant under the 2013 Plan and 1,233,000 shares remained available for grant under the 2015 Plan.
The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair
value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options and restricted stock. The expected life of awards granted represents the period of time
that they are expected to be outstanding. The Company determined the initial expected life based on a simplified method in accordance
with the FASB ASC Topic 718, giving consideration to the contractual terms, vesting schedules, and pre-vesting and post-vesting
forfeitures.
During
the six months ended June 30, 2017 and 2016, the Company recorded $551,360 and $432,397, respectively, of stock-based compensation,
which is included in selling, general, and administrative expense and cost of sales in the accompanying consolidated statement
of operations. Total unamortized stock-based compensation expense at June 30, 2017 was $3,903,914 compared to $928,786 at December
31, 2016, and will be fully expensed through 2020.
Note
5 – Commitments and Contingencies
Capital
Lease Obligations
In
the fourth quarter of 2013, the Company purchased and upgraded equipment from non-related third parties, investing approximately
$3.5 million. In December 2013, the Company sold the equipment to a related party leasing company, Impact Engineering, AS. Simultaneously,
the equipment package was leased back to the Company as a capital lease for a 60-month period with payments beginning in February
of 2014. The Company agreed to prepay one year of payments in the amount of approximately $1.0 million and maintain a balance
of no less than six months of prepayments until the final six months of the lease.
These
prepayments were made prior to December 31, 2013. Further lease payments are $81,439 per month and commenced on July 1, 2014.
The final six months of prepaid is shown as other non-current assets in the consolidated balance sheets with a balance of $846,044.
The
minimum present value of the lease payments is $1.5 million with terms of sixty months and implied interest of 14%. The next five
years of lease payments are:
|
|
Capital
Lease Payments
|
|
2017
|
|
$
|
488,633
|
|
2018
|
|
|
977,267
|
|
Total future
payments
|
|
|
1,465,900
|
|
Less debt discount
due to warrants
|
|
|
(105,251
|
)
|
Less
amount representing interest
|
|
|
(150,570
|
)
|
|
|
|
1,210,079
|
|
Less
current portion of capital lease obligations
|
|
|
(846,044
|
)
|
Capital
lease obligations, excluding current installments
|
|
$
|
364,035
|
|
Operating
Leases
The
Company’s operating leases correspond to equipment facilities and office space in Argentina and the United States. The combined
future minimum lease payments as of June 30, 2017 are as follows:
|
|
|
Operating
Leases
|
|
2017
|
|
|
$
|
239,395
|
|
2018
|
|
|
|
192,070
|
|
Thereafter
|
|
|
|
—
|
|
Total
|
|
|
$
|
431,465
|
|
Note
6 – Debt
Short-Term
Note
On
November 30, 2016, the Company entered into a loan agreement (the “Loan Agreement”) with two of the Company’s
largest stockholders, one of which was, at the time, the holder of approximately 20% of the Company’s outstanding shares
of common stock, par value $0.001 per share (the “Common Stock”). A portion of the proceeds from the Loan Agreement
was used to pay the remaining outstanding amount payable (approximately $1 million) by the Company under an equipment purchase
agreement dated October 10, 2014, as amended, with Gordon Brothers Commercial & Industrial, LLC for the purchase of certain
turbine powered pressure pumping equipment (“TPU”).
At
December 31, 2016, the Company had a balance of $2,000,000 and accrued interest of $24,548. The indebtedness created under the
Loan Agreement was repaid on March 6, 2017 with a portion of the proceeds from the Fir Tree Transaction (as described in Note
1).
On
January 1, 2017, the Company financed its operations insurance premiums with US Premium Finance for a total of $211,681 at an
interest rate of 5.87%. As of June 30, 2017, the Company had a balance of $387,029 and accrued interest of $2,354.
Long-Term
Notes Payable
Convertible
Note Facility
On
May 28, 2014 (the “Closing Date”), the Company entered into a Convertible Note Facility Agreement (the “ACM
Note Agreement”) with ACM Emerging Markets Master Fund I, L.P. and ACM Multi-Strategy Delaware Holding LLC (collectively,
the “ACM Entities”). The proceeds from the ACM Note Agreement were used primarily for capital expenditures, certain
working capital needs and approved operating budget expenses.
The
ACM Note Agreement allowed the Company to issue ACM Entities a multiple draw secured promissory note with maximum aggregate principal
amount of $22,000,000, convertible into Common Stock at a price of $6.00 per share at the option of ACM Entities (the “Existing
ACM Note”). The outstanding debt under the facility was convertible immediately and accrued interest at 14% per annum with
interest payments due annually in arrears.
As
of December 31, 2016, the Company had drawn down the full $22,000,000 available under the ACM Note Agreement, which was primarily
used for capital expenditures, certain working capital needs and approved operating budget expenses.
On
March 6, 2017, the Company closed the Fir Tree Transaction, which was part of a comprehensive recapitalization designed to
create a path to a potential conversion to equity of substantially all the Company’s debt, subject to stockholder
approval and satisfaction of certain other conditions. In connection with the Fir Tree Transaction, the Company entered into
the Amended and Restated Convertible Note Facility Agreement (“A&R Note Agreement” and, together with the
Fir Tree Transaction, the “Fir Tree Recapitalization”) with the Fir Tree Affiliate, which
became effective on March 6, 2017 and replaced the ACM Note Agreement. Pursuant to the terms of the A&R Note Agreement,
the Company issued to the Fir Tree Affiliate a secured promissory note (the “Amended and Restated Convertible
Note”) in a principal amount of $22 million, which replaced the Existing ACM Note, and a secured promissory note (the
“New Convertible Note,” and together with the Amended and Restated Convertible Note, the “Notes”) in
a principal amount of approximately $19.4 million, representing an additional $17 million aggregate principal amount of
convertible notes issued by the Company to the Fir Tree Affiliate on March 6, 2017 and approximately $2.4 million principal
amount of convertible notes in payment of accrued and unpaid interest on the Existing ACM Note acquired by the Fir Tree
Affiliate from the ACM Entities. The unpaid principal amount of the Notes bears an interest rate of 20% per annum and matures
on May 28, 2018.
After
giving effect to the Fir Tree Recapitalization, the Company held approximately $41.4 million of outstanding convertible
notes. The Fir Tree Affiliate agreed to convert all the outstanding convertible notes into Common Stock at a conversion price
of $1.40 per share. This conversion was subject to receipt of stockholder approval at the June 15, 2017 Annual Meeting and satisfaction
of certain other conditions. As shareholder approval for the conversion was granted at the June 15, 2017 Annual Meeting,
and satisfaction of the certain other conditions obtained, all convertible debt had been converted into approximately 29.5
million shares of the Company’s Common Stock as of June 30, 2017. Costs associated with the conversion are approximately
$1.1 million.
Note
7 – Equity
The
Company has 50,000,000 preferred stock authorized at $0.001 par value. At June 30, 2017 and December 31, 2016, the Company had
no preferred stock issued or outstanding.
On
July 13, 2016, the Company entered into an At-Market Issuance Sales Agreement (the “Agreement”) as disclosed in our
Annual Report on Form 10-K for the year ended December 31, 2016, Part II – Item 8 – Financial Statements and Supplemental
Data – Notes to consolidated financial statements – Note 11 – “Equity Offerings”. During the six
months ended June 30, 2017, the Company sold an additional 563,753 shares through the Agreement for a total net proceeds of $1.0
million. No shares were sold during the quarter ended June 30, 2017.
Note
8 – Segment Reporting
As
a result of
the beginning of new geographical revenue activity
in the United States in the second quarter of 2017, we are reporting the results of each of our two reportable segments
beginning with the second quarter of 2017 in accordance with ASC 280,
Segment Reporting
. Each of the operating segments
is separately managed by a senior executive who reports to our Chief Executive Officer, who is the chief operating decision maker.
Discrete financial information is available for each of the segments, and the operating results of each of the operating segments
are used for performance evaluation and resource allocation.
We
manage two operating segments aligned with our geographic operating locations of Latin America and the United States. We also
report certain corporate and other non-operating activities under the heading “Corporate and Other.” Corporate and
Other primarily reflects corporate personnel and activities, research and development activities, incentive compensation programs
and other costs.
We
account for intersegment sales at prices that we generally establish by reference to similar transactions with unaffiliated customers.
Reporting segments are measured based on gross margin, which is defined as revenues reduced by total cost of services. Cost of
services exclude research and development expenses and depreciation and amortization expense.
Summarized
financial information is shown in the following tables:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
$
|
5,434,937
|
|
|
$
|
2,337,579
|
|
|
$
|
7,997,594
|
|
|
$
|
4,171,484
|
|
United
States
|
|
|
3,092,722
|
|
|
|
—
|
|
|
|
3,092,722
|
|
|
|
—
|
|
Total
revenues
|
|
$
|
8,527,659
|
|
|
$
|
2,337,579
|
|
|
$
|
11,090,316
|
|
|
$
|
4,171,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
(1,2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
$
|
(1,363,853
|
)
|
|
$
|
(132,459
|
)
|
|
$
|
(2,173,188
|
)
|
|
$
|
(534,681
|
)
|
United
States
|
|
|
(1,630,733
|
)
|
|
|
—
|
|
|
|
(2,113,627
|
)
|
|
|
—
|
|
Total
gross margin
|
|
$
|
(2,994,586
|
)
|
|
$
|
(132,459
|
)
|
|
$
|
(4,286,815
|
)
|
|
$
|
(534,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
$
|
116,977
|
|
|
$
|
1,544,229
|
|
|
$
|
150,270
|
|
|
$
|
2,706,050
|
|
United
States
|
|
|
4,073,083
|
|
|
|
—
|
|
|
|
7,692,269
|
|
|
|
—
|
|
Corporate
and Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
capital expenditures
|
|
$
|
4,190,060
|
|
|
$
|
1,544,229
|
|
|
$
|
7,842,535
|
|
|
$
|
2,706,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin
America
|
|
$
|
1,308,725
|
|
|
$
|
1,155,241
|
|
|
$
|
2,608,869
|
|
|
$
|
2,003,866
|
|
United
States
|
|
|
75,669
|
|
|
|
—
|
|
|
|
75,669
|
|
|
|
—
|
|
Corporate
and Other
|
|
|
38,325
|
|
|
|
56,719
|
|
|
|
79,973
|
|
|
|
112,324
|
|
Total
depreciation and amortization
|
|
$
|
1,422,719
|
|
|
$
|
1,211,960
|
|
|
$
|
2,764,511
|
|
|
$
|
2,116,190
|
|
(1)
|
U.S.
activity began in February 2017 with start-up expenses being incurred. The Company began recognizing revenue in late
May 2017. Intersegment transactions included in revenues were not significant for any of the periods presented.
|
|
|
(2)
|
Gross margin is defined as revenues less costs of services. Cost of services excludes selling, general and
administrative expenses, research and development expenses and depreciation and amortization expense.
|
Note
9 – Subsequent Events
On
July 6, 2017, the Company closed on a private placement of shares of the Company’s common stock providing
gross proceeds of $15 million. As part of the offering, the Company issued 10,000,000 shares of its common stock for $1.50
per share in this private placement with certain existing shareholders. The proceeds from this offering are being used
to finance capital expenditures to support existing contracts the Company has in both Oklahoma and Argentina, for working capital
and for other general corporate purposes.
On
July 20, 2017, the Company executed a one-year contract with a U.S. oil and gas exploration and production company to provide
pressure pumping operations in the north central region of Oklahoma, thus expanding our operations within our United States region.
The Company expects that the work to be performed should support a second U.S. well stimulation crew. The contract does
not require the customer to award any specific volume of work to the Company, however the contract does provide the Company with
the exclusive right to complete all the customer’s wells as long as we meet the operational standards required.
On
July 24, 2017, the Company entered into an Equipment Purchase Agreement (the “Purchase Agreement”) with an equipment
manufacturer providing for the Company’s purchase of used well-stimulation pumps, blenders, data vans and related
equipment, comprising approximately 30 items in all, for an aggregate purchase price of $16.8 million. The purchase of each
item is conditional upon a determination that each item is field-ready as defined in the Purchase Agreement.
On
August 8, 2017, the Company closed on a private placement of shares of the Company’s common stock providing gross
proceeds of $28.0 million. As part of the offering, the Company issued an aggregate of 19,580,420 shares of its common stock
for $1.43 per share in this private placement with two existing stockholders and several new institutional investors. The proceeds
from this offering will be used to finance capital expenditures to support its most recent customer contract (noted above with
reference to the July 20, 2017 one-year contract), for working capital and for other general corporate purposes.