Notes
to Unaudited Condensed Consolidated Financial Statements
June
30, 2018
(Unaudited)
1
– Organization and Nature of Business
Eco-Stim
Energy Solutions, Inc. (the “Company,” “Eco-Stim,” “we” or “us”) is a growth-oriented,
technology-driven independent oilfield services company offering 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 in “unconventional” drilling formations. We currently offer our services to oil and
natural gas exploration and production (“E&P”) companies in the United States and Argentina. Our focus is to bring
our service offerings, technologies and processes to the most active and emerging shale resource basins both domestically
and outside of North America using our technology to differentiate our service offerings.
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 of America (“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 Annual Report on Form 10-K for the year ended December 31, 2017.
In
the second quarter 2017, we began start-up of operations in the U.S. We now manage our business through operating segments aligned
with our two geographical operating regions; Argentina and the U.S. We also report certain corporate and other non-operating activities
under the heading “Corporate and Other”, which primarily reflects corporate personnel and activities, incentive compensation
programs and other non-operational allocable costs. For financial information about our segments, see Note 9 - 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. Our
wholly-owned subsidiaries include: Viking Rock Holding, AS (100%), Viking Rock, AS (100% owned), Cherokee Rock, Inc. (100% owned),
EcoStim, Inc. (100% owned), and EcoStim Energy Solutions Argentina, SA (100% owned).
Going
Concern
The
Company has incurred net losses and losses from operations since inception and may require additional capital to continue operations.
As of June 30, 2018, the Company had cash and cash equivalents of approximately $1.9 million and a working capital deficit of
approximately $20.8 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
Management’s
plans to alleviate substantial doubt include: (i) improving operating efficiency and utilization; (ii) securing an asset
backed loan facility to enhance liquidity and support growth; (iii) divesting non-core assets to raise capital or reduce our
current contractual obligations; and (iv) raising additional capital for the Company.
As
of August 10, 2018, the Company had one fleet deployed in the U.S. and one fleet deployed in Argentina. In February 2018, the
Company secured a receivable agreement designed to enhance liquidity as described in Note 3. On April 2, 2018,
the Company sold and issued 10,000 shares of Series A Preferred, providing $10.0 million of gross proceeds and $9.7 million of
net proceeds after expenses to the Company as described in Note 8. On June 8, 2018, the Company executed a Negotiable Demand Promissory
Note in the principal amount of up to $15 million, with the lender advancing approximately $5.5 million of gross proceeds and
$5.1 million of net proceeds after expenses. Management believes, based on information available to it at this time, that the
Company has the ability to continue as a going concern for twelve months from the date of filing of this Form 10-Q.
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, tax valuation allowance 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.
Revenue
The
Company adopted Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers,”
which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers,
effective January 1, 2018, using the modified retrospective method. As there was no material impact on the Company’s current
revenue recognition processes, no retrospective adjustments were necessary. Further, there were no significant changes to the
Company’s internal control over revenue recognition due to the Company’s adoption of ASU 2014-09.
Revenue
is earned at a point in time when services are rendered, which is generally on a per stage basis for our well stimulation business
or fixed daily rate for the Company’s coiled tubing operations. All revenue is recognized when a contract with a customer
exists, the performance obligations under the contract have been satisfied, the amount to which the Company has the right to invoice
has been determined and collectability of amounts subject to invoice is probable. The Company does not incur contract acquisition
and origination costs. Taxes collected from customers and remitted to governmental authorities are accounted for on a net basis
and, therefore, are excluded from revenues in the unaudited condensed consolidated statements of operations and net cash provided
by operating activities in the unaudited condensed consolidated statements of cash flows.
The
Company has elected the practical expedient to recognize revenue based upon the transactional value it has the right to invoice
upon completion of each performance obligation per the contract terms, as the Company believes its right to consideration corresponds
directly with the value transferred to the customer, and this expedient does not lend itself to the application of significant
judgment. As a result of electing these practical expedients, there was no material impact on the Company’s current revenue
recognition processes and no retrospective adjustments were necessary.
The
Company’s obligations for refunds as well as the warranties and related obligations stated in its contracts with its customers
are standard to the industry and are related to the correction of any defectiveness in the execution of its performance obligations.
The
Company expenses sales costs and any commissions when incurred as the amortization period would have been one year or less.
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 is recognized upon completion of stimulation stages and includes the components of the services
and the chemicals and proppants consumed while performing the well stimulation services. For our U.S. business, our performance
obligations are defined as stages. In the case of our Argentina business, our performance obligations are defined as stages plus
specific defined services noted within the contract. For both businesses, customers are invoiced upon the completion of each job,
which consist of multiple 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 agreed-upon spot market rates.
Coiled
Tubing Revenue
For
our coiled tubing services, performance obligations are satisfied within a day, in line with day rates established by the contract.
Jobs for these services are typically short term in nature, lasting anywhere from a few hours to a few 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.
Disaggregation
of Revenue
Revenue
activities during the three and six months ended June 30, 2018 and 2017, respectively were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by service type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well stimulation
|
|
$
|
17,765,244
|
|
|
$
|
8,153,691
|
|
|
$
|
35,152,260
|
|
|
$
|
9,548,217
|
|
Coiled tubing
|
|
|
445,884
|
|
|
|
373,968
|
|
|
|
837,712
|
|
|
|
1,542,099
|
|
Total
|
|
$
|
18,211,128
|
|
|
$
|
8,527,659
|
|
|
$
|
35,989,972
|
|
|
$
|
11,090,316
|
|
Contract
Balances
In
line with industry practice, the Company bills its customers for its services in arrears, typically when the stage or well is
completed or at month-end. The majority of the Company’s jobs are completed in less than 14 days. Furthermore, it is currently
not standard practice for the Company to execute contracts with prepayment features. As such, the Company’s contract liabilities
are immaterial to its unaudited condensed consolidated balance sheets.
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 Reporting 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 Company’s
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 reporting currency.
Net
Loss per Common Share
For
the six months ended June 30, 2018 and 2017, the weighted average shares outstanding excluded shares of common stock issuable
upon the exercise of certain stock options and shares of common stock issuable upon the conversion of outstanding shares of Series
A Preferred totaling 11,548,569 and 683,074, respectively, from the calculation of diluted earnings per share because these shares
would be anti-dilutive. As of June 20, 2017, the Company’s convertible debt was converted into common stock at $1.40 per
share and therefore the Company no longer has any convertible debt outstanding. Anti-dilutive warrants of 100,000 for each of
the six months ended June 30, 2018 and 2017 were also excluded from the weighted average share outstanding calculation.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the 2018 presentation, with no material effect on the presentation of
December 31, 2017 or June 30, 2018, and no impact on revenue or net loss.
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). 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. The Company evaluated all accounts receivable and determined that no reserve for
doubtful accounts was necessary at June 30, 2018 or December 31, 2017.
Prepaids
and Other Assets
Prepaid
expenses and other assets are primarily comprised of prepaid insurance, Argentinian value added tax and deposits made on equipment
purchases.
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.
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
|
|
13
months-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 shorter of the asset life or lease term. Amortization of assets under capital leases are
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.
During
the second quarter of 2018, the Company concluded it had a triggering event requiring assessment of impairment for certain of
its long-lived assets in conjunction with our decision to move from providing services operating two well stimulation fleets in
the U.S. to providing a single well stimulation fleet in the U.S. providing pumping services to a single customer. As a result,
crew and staff reductions were taken. Further, the Company reviewed the long-lived assets for impairment and recorded a $3.7 million
impairment expense. The full amount is related to our U.S. segment. The impairment was measured using the market approach utilizing
an appraisal to determine fair value of the impaired assets.
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 natural gas companies in Argentina. For the six months ending June 30, 2018, 77% or $27.7 million and 23% or $8.3 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 national and independent oil and natural gas companies. At June 30, 2018, the Company had a concentration of receivables
with two customers.
For
the six months ended June 30, 2018 and 2017, two major customers accounted for approximately 98% and 97% of our services revenue,
respectively. For the year ended December 31, 2017, two major customers represented 74% of our services revenue. Our accounts
receivable at June 30, 2018 and 2017 were concentrated with two major customers representing 97% and 99.9%, 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 and Oklahoma. The
Company can and does pay taxes as some taxes are based on revenues or other basis other than net income. 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. At June 30, 2018, there are no recorded liabilities associated with our U.S. federal or foreign
income taxes. Additionally, at June 20, 2018, a full valuation allowance has been established reducing any deferred tax asset
as it was determined that it is more likely than not that the deferred tax asset will not be realized.
Further,
the Fir Tree Transaction (see Item 2: “‒Liquidity and Capital Resources” for more information on the Fir Tree
Transaction), resulted 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, 2018 and December 31, 2017, there
was no tax asset benefit recorded as a provision was made to fully reserve the benefit.
Recently
Issued and Adopted Accounting Guidance
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 is applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within
those years, with early adoption permitted. We adopted ASU 2017-09 in the first quarter of 2018, with such adoption having no
material impact on the accompanying condensed consolidated financial statements.
In
May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which replaced most existing revenue recognition
guidance in U.S. GAAP when it became effective. This new standard 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. We adopted the new standard using the modified retrospective
application in the first quarter of 2018, with such adoption having no impact on the accompanying condensed consolidated financial
statements and no cumulative effect adjustment was recognized.
Accounting
Guidance Issued But Not Adopted as of June 30, 2018
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 future condensed consolidated financial statements and related
disclosures.
3
– Accounts Receivable
Accounts
receivable by category were as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Billed
|
|
$
|
3,764,968
|
|
|
$
|
4,439,637
|
|
Unbilled
|
|
|
3,792,644
|
|
|
|
5,727,407
|
|
Total accounts receivable
|
|
$
|
7,557,612
|
|
|
$
|
10,167,044
|
|
Subsequent
to June 30, 2018, a majority amount from the U.S. and a majority amount from Argentina of the unbilled were invoiced.
Receivables
Agreement.
On February 8, 2018, we entered into a Recourse Receivables Purchase & Security Agreement (the “Receivables
Agreement”) with Porter Capital Corporation (“Porter Capital”). Under the terms of the Receivables Agreement,
we may, from time to time, sell accounts receivable (“Accounts”) to Porter Capital in exchange for funds in an amount
equal to 80% (or less as percentage is subject to credit limits established by Porter Capital) of the face amount of the applicable
Account at the time of sale of the Account, with the remaining 20% of the face amount of the applicable Account to be held back
as a required reserve amount to be paid to us following Porter Capital’s receipt of payment on the Account by the account
debtor, less applicable fees and interest charges. The total face amount of outstanding Accounts purchased by Porter Capital under
the Receivables Agreement may not exceed $12.5 million.
Under
the terms of the Receivables Agreement, we are obligated to pay interest on the face amount of the outstanding and unpaid Accounts
purchased by Porter Capital, less the amount of the reserve account, at an interest rate equal to the Prime Rate (as defined in
the Receivables Agreement) plus 8.25%. We are also obligated under the Receivables Agreement to pay certain fees, including a
fee (the “Minimum Term Fee”) payable upon termination of the agreement in an amount equal to: (i) the monthly interest
rate multiplied by $5 million, multiplied by the number of months in the agreement term, less the amount of actual interest paid
during the term of the agreement; or (ii) following the occurrence of an Event of Default (as defined below) that has not been
cured within the time periods contemplated under the agreement, $1.8 million, less the amount of actual interest paid during the
term of the agreement. The Minimum Term Fee is also subject to reduction under certain circumstances if Porter Capital does not
purchase certain eligible Accounts that are presented for purchase by us.
All
of our obligations under the Receivables Agreement are secured by liens on certain of our assets, including the accounts receivable,
chattel paper, inventory relating to our U.S. operations and certain equipment used for our U.S. operations (excluding equipment
subject to vendor financing). The Receivables Agreement further provides for customary events of default (“Events of Default”),
including but not limited to the failure to make payments when due; insolvency events; the failure to comply with covenant obligations
arising under the agreement or other agreements with Porter Capital or its affiliates; and breaches of representations and warranties.
Upon the occurrence of an Event of Default, Porter Capital may terminate the Receivables Agreement and declare all of our outstanding
obligations under the Receivables Agreement to be due and payable. The Receivables Agreement has an initial term of one year and
will renew for successive one-year terms unless we provide notice of cancellation in accordance with the terms of the Receivables
Agreement. We may also terminate the Receivables Agreement prior to the expiration of the term upon written notice and payment
of our obligations thereunder.
For
sales of our receivable under this Receivables Agreement, the Company applies the guidance in ASC 860, “
Transfers and
Servicing – Sales of Financial Assets
”, which requires the derecognition of the carrying value of those accounts
receivable in the Condensed Consolidated Balance Sheets. For the quarter ended June 30, 2018, $15.7 million of accounts receivable
transferred pursuant to the Receivables Agreement qualified as sales of receivables and the carrying amounts were derecognized.
There was no loss associated with the sales of these receivables. At June 30, 2018, we are owed $1.4 million representing the
held back required reserve amount to be paid to us following Porter Capital’s receipt of payment on the Account by the account
debtor. This balance is included in accounts receivable on the Condensed Consolidated Balance Sheets.
4
– Prepaids
Prepaids
by category were as follows:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Prepaid insurance
|
|
$
|
1,488,053
|
|
|
$
|
142,531
|
|
VAT and other taxes
|
|
|
1,829,994
|
|
|
|
2,935,351
|
|
Vehicle registration
|
|
|
465,853
|
|
|
|
606,218
|
|
Equipment deposits
|
|
|
240,000
|
|
|
|
—
|
|
Prepaid other
|
|
|
820,405
|
|
|
|
678,964
|
|
Total prepaids
|
|
$
|
4,844,305
|
|
|
$
|
4,363,064
|
|
A
majority of the increase in Prepaids is attributable to insurance premium payments being recorded at the first of the year for
annual coverage, offset by a decrease in VAT and other taxes attributable to reductions in purchases over time in turn attributable
to the unbundling of third party services provided to our customer in Argentina.
5
– 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, restricted stock and phantom stock awards to employees, consultants
and members of the Company’s Board. The 2013 Plan was adopted in 2012 and amended in 2013 and authorizes 1,000,000 shares
of common stock to be issued under the 2013 Plan. The 2015 Plan, f/k/a “the 2014 Stock Incentive Plan,” was adopted
in 2014 and was amended in 2015 and 2016 to authorize a total of 700,000 additional shares, resulting in a maximum of 1,200,000
shares of common stock being authorized for issue under the modified 2015 Plan. Both the 2013 Plan and the 2015 Plan have been
approved by the stockholders of the Company. On June 15, 2017, at our annual meeting of stockholders (the “2017 Annual Meeting”),
our stockholders approved an increase to the aggregate maximum number of shares of common stock available under the 2015 Plan
by 5,000,000 shares (from 1,200,000 shares to 6,200,000 shares). On June 20, 2018, at our annual meeting of stockholders (the
“2018 Annual Meeting”), our stockholders approved an increase to the aggregate maximum number of shares of common
stock available under the 2015 Plan by 3,000,000 shares (from 6,200,000 shares to 9,200,000 shares). As of June 30, 2018, 142,991
shares of common stock were available for grant under the 2013 Plan and 2,892,214 shares of common stock 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 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, 2018 and 2017, the Company recorded $1,366,933 and $551,360, respectively, of stock-based
compensation, of which $987,644 and $414,406 was included in selling, general and administrative expense for the six
months ended June 30, 2018 and 2017, respectively, and $379,289 and $136,954 was included in cost of sales for the six months
ended June 30, 2018 and 2017, respectively, in the accompanying condensed consolidated statement of operations. Total
unamortized stock-based compensation expense at June 30, 2018 was $2,383,808 compared to $3,247,370 at December 31, 2017 and
will be fully expensed through 2020.
6
– Commitments and Contingencies
Capital
Lease Obligations
The
Company leases certain equipment from a third party, with certain prepayments being made securing the final six months of payments
on the lease. Lease payments are $81,439 per month, with the final six months of prepaid payments being shown as other non-current
assets in the consolidated balance sheets with a balance of $488,634. The minimum present value of the lease payments is $0.7
million with terms of sixty months and implied interest of 14%.
On
April 5, 2018, the Company entered into an equipment lease purchase agreement with a third party. Lease payments range
between $326,550 per month to $1,077,615 per month based on the agreement. The minimum present value of the lease payment is $3.3
million with a term of six months and implied interest rate of 8%.
The
next five years of lease payments are:
|
|
Capital Lease
Payments
|
|
2018
|
|
$
|
3,831,284
|
|
2019
|
|
|
—
|
|
Total future payments
|
|
|
3,831,284
|
|
Less debt discount due to warrants
|
|
|
(35,084
|
)
|
Less amount representing interest
|
|
|
(64,858
|
)
|
|
|
|
3,731,342
|
|
Less current portion of capital lease obligations
|
|
|
(3,731,342
|
)
|
Capital lease obligations, excluding current installments
|
|
$
|
—
|
|
Operating
Leases
The
Company’s operating leases correspond to equipment facilities and office space in Argentina and the U.S. The operating leases
also correspond to operational equipment utilized by the Company’s U.S. operations. The combined future minimum lease payments
as of June 30, 2018 are as follows:
|
|
Operating Leases
|
|
2018
|
|
$
|
228,600
|
|
2019
|
|
|
69,000
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
297,600
|
|
Commitments
In
the normal course of operations, the Company enters into certain long-term raw material supply agreements for the supply of proppant
to be used in hydraulic fracturing. As part of these agreements, the Company is subject to minimum tonnage purchase requirements
and may pay penalties in the event of any shortfall. Additionally, the Company has entered into certain long-term transportation
agreements for the transportation of raw material from the vendors’ point of delivery to the well site. The Company is subject
to certain minimum commitments under the long-term transportation agreements.
Aggregate
minimum commitments under long-term raw material supply and transportation contracts for the next five years as of June
30, 2018 are listed below:
2018
|
|
$
|
1,716,900
|
|
2019
|
|
|
3,793,800
|
|
2020
|
|
|
2,853,800
|
|
2021
|
|
|
793,800
|
|
2022
|
|
|
529,200
|
|
|
|
$
|
9,687,500
|
|
7
– Debt
The
carrying values of our debt obligations, net of unamortized debt issuance costs of $426,005 and $0 as of June 30, 2018 and December
31, 2017, respectively, are as follows:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
Short
Term
|
|
|
Long
Term
|
|
|
Short
Term
|
|
|
Long
Term
|
|
Demand
Promissory Note
|
|
$
|
5,109,995
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Vendor
equipment financing
|
|
|
4,420,228
|
|
|
|
832,843
|
|
|
|
7,047,020
|
|
|
|
1,172,712
|
|
Insurance
financing
|
|
|
847,059
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
10,377,282
|
|
|
$
|
832,843
|
|
|
$
|
7,047,020
|
|
|
$
|
1,172,712
|
|
Negotiable
Demand Promissory Note
On
June 8, 2018, the Company executed a Negotiable Demand Promissory Note (the “Demand Note”) in the principal amount
of up to $15.0 million in favor of Eco-Lender, LLC (the “Lender”), a Delaware limited liability company and an affiliate
of one or more funds that are managed by Fir Tree Capital Management LP (together with its affiliated funds, “Fir Tree”)
and/or its affiliates, which affiliated funds collectively hold a majority of the outstanding shares of capital stock of the Company.
Pursuant to the Demand Note, on June 8, 2018, the Lender advanced approximately $5.5 million of gross proceeds and $5.1 million
of net proceeds after transaction expenses to the Company (the “Initial Advance”). The Company does not have
any right to re-borrow any amounts that have been advanced and repaid under the Demand Note. In addition, the Lender is not obligated
to make any additional advances under the Demand Note following the Initial Advance.
Interest
on the unpaid principal balance of the Note accrues at an annual rate of 10%, subject to a default interest rate of 14.00% or
24.00% depending on the payment date following the occurrence of a default. All payments of principal, interest and other amounts
under the Demand Note are payable immediately upon written demand by the Lender to the Company; provided, however, the Lender
cannot make any demand for payment under the Demand Note until the earlier of (A) 45 days after the date of the Demand Note, (B)
the occurrence of a material adverse change as defined in the Note and determined by the Lender in its sole and absolute discretion,
(C) the occurrence of any default or event of default under any material agreement of the Company or any of its subsidiaries,
and (D) the date upon which the Company or any of its subsidiaries ceases operating for any reason.
The
Company may prepay, in whole or in part, at any time, the principal, interest and other amounts owing under the Demand Note subject
to a prepayment premium of 4.00% of the aggregate amount of such prepayment (inclusive of interest and other amounts due and owing
under the Demand Note), provided that the minimum amount of any such prepayment is equal to the lesser of $1 million and the then
outstanding balance of the Demand Note.
All
of the Company’s obligations under the Demand Note are guaranteed by EcoStim, Inc., a Texas corporation and a wholly owned
subsidiary of the Company (“EcoStim”), and secured by a security interest (subject to permitted liens) in substantially
all of the personal property of the Company and EcoStim, including 100% of the outstanding equity of the Company’s U.S.
subsidiaries (including EcoStim) and 65% of the outstanding equity of the Company’s non-U.S. subsidiaries; provided, however,
that the Lender has a subordinate lien on those assets of the Company and EcoStim that are subject to the lien of Porter Capital
pursuant to the Receivables Agreement.
Vendor
Equipment Financing
During
various dates beginning in late September through November 2017, the Company purchased equipment through a financing arrangement
with an international equipment manufacturer at an interest rate of 8% for 12 months. At June 30, 2018, the Company had a loan
balance of $3,124,207 and accrued interest of $20,683 with monthly payments of $570,113.
Beginning
August 23, 2017 through September 28, 2017, the Company purchased trucks through a financing arrangement with an auto finance
group at an interest rate of 4.99% annual interest for 36 months. At June 30, 2018, the Company had a loan balance of $753,364
and accrued interest of $0, with monthly payments of $29,168.
Beginning
September 21, 2017 through September 29, 2017, the Company purchased tractors through a financing arrangement with an auto finance
group at an interest rate of 8.59% for 24 months. At June 30, 2018, the Company had a loan balance of $696,729 and accrued interest
of $0 with monthly payments of $45,625.
On
December 20, 2017, the Company purchased tractors through a financing arrangement with an auto finance group at an interest rate
of 8.9% for 36 months. At June 30, 2018, the Company had a loan balance of $314,397 and accrued interest of $0 with monthly payments
of $11,729.
On
February 21, 2018, the Company purchased a truck through a financing arrangement with an auto finance group at an interest rate
of 7.49% for 48 months. At June 30, 2018, the Company had a loan balance of $42,220 and accrued interest of $0 with monthly payments
of $1,079.
During
various dates beginning April 12 through April 23, 2018, the Company purchased equipment through a financing arrangement with
an equipment manufacturer at an implied interest rate of 8% for 8 months. At June 30, 2018, the Company had a loan balance of
$322,156 and accrued interest of $0 with monthly payments of $57,328.
The
total future minimum payments due on our vendor equipment financings as of June 30, 2018 are noted as follows:
2018
|
|
$
|
3,991,922
|
|
2019
|
|
|
830,017
|
|
2020
|
|
|
415,721
|
|
2021
|
|
|
12,209
|
|
2022 and
t
hereafter
|
|
|
3,202
|
|
Total
payments
|
|
$
|
5,253,071
|
|
Insurance
Financing
On
January 1, 2018, the Company financed its operations insurance premiums with an insurance financing company for a total of $2,522,158
at an interest rate of 3.95% for ten months. As of June 30, 2018, the Company had a balance of $847,059 and accrued interest
of $2,788.
8
– Equity
The
Company has 50,000,000 shares of preferred stock authorized at $0.001 par value, 30,000 of which have been designated as Series
A Convertible Preferred Stock (“Series A Preferred”). At June 30, 2018 and December 31, 2017, the Company had 10,000
shares of Series A Preferred and no shares of preferred stock issued or outstanding, respectively.
On
March 29, 2018, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Fir Tree,
its majority stockholder, pursuant to which Fir Tree agreed to purchase 10,000 shares of the Company’s newly-designated
Series A Preferred, at a price of $1,000 per share. The Purchase Agreement also provides for the potential sale and issuance of
up to an additional 5,000 shares of Series A Preferred to Fir Tree at a price of $1,000 per share, subject to the mutual agreement
of Fir Tree and the Company, at an additional closing that may be held at any time within six months after the initial closing,
as mutually agreed. An initial closing was conducted on April 2, 2018 providing $10.0 million of gross proceeds and $9.7 million
of net proceeds after expenses to the Company.
Each
share of Series A Preferred ranks senior to the Company’s common stock with respect to dividend rights and rights upon the
liquidation, winding-up or dissolution of the Company and has a stated value of $1,000 per share (the “Stated Value”).
In the event the Company is liquidated, wound up or dissolved, or if the Company effects any Deemed Liquidation Event (as defined
below), the holders of Series A Preferred are entitled to receive in respect thereof the greater of (i) the Stated Value plus
any accrued and unpaid dividends thereon, (ii) the amount the holder thereof would receive if such shares of Series A Preferred
were converted into common stock immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event or
(iii) a liquidating distribution equal to 1.5 times the Stated Value. A “Deemed Liquidation Event” includes certain
merger or consolidation transactions, a sale of all or substantially all of the Company’s assets, a change of control transaction
or similar event.
Holders
of Series A Preferred are entitled to vote with holders of the Company’s common stock and are entitled to one vote per share
of common stock into which a share of Series A Preferred is then-convertible on any matter on which holders of the capital stock
of the Company are entitled to vote. Each share of Series A Preferred was initially and as of June 30, 2018 convertible, at the
option of the holder at any time, into a number of shares of common stock determined by dividing the Stated Value plus any dividends
accrued but unpaid thereon by the conversion price of $1.15 (subject to adjustment for stock splits, combinations, certain distributions
or similar events). In addition, for so long as shares of Series A Preferred are outstanding, the affirmative vote or consent
of holders of a majority of the outstanding shares of Series A Preferred, voting together as a separate class, is necessary before
taking certain actions, including but not limited to (i) amending the articles of incorporation, the bylaws or the Certificate
of Designation for the Series A Preferred in a manner that would materially and adversely or disproportionately affect the powers,
preferences or rights of the Series A Preferred, (ii) liquidating, dissolving or winding up the Company or entering into a Deemed
Liquidation Event, (iii) creating or issuing any class of capital stock unless it ranks junior to the Series A Preferred with
respect to the distribution of assets on the liquidation, dissolution or winding up of the Company or any Deemed Liquidation Event,
payment of dividends and rights of redemption, (iv) reclassifying, altering or amending any existing security that is pari passu
or junior to the Series A Preferred with respect to the distribution of assets on the liquidation, dissolution or winding up of
the Company or any Deemed Liquidation Event, payment of dividends and rights of redemption if such reclassification, alteration
or amendment would render such other security senior or pari passu with the Series A Preferred in respect of any such right, preference
or privilege, (v) subject to certain exceptions, purchasing or redeeming any shares of capital stock or paying any dividend or
making any distribution thereon and (vi) issuing any shares of Series A Preferred to anyone other than the original holders of
the Series A Preferred. Holders of Series A Preferred are entitled to cumulative dividends payable semi-annually in arrears at
a rate of (i) 10% per year, if paid in cash, or (ii) 12% per year, if, at the election of the Company, paid through the issuance
of additional shares of Series A Preferred. In addition to the dividend rights described above, holders of Series A Preferred
are entitled to receive dividends or distributions declared or paid on common stock on an as-converted basis. As of June 30, 2018,
the Company has accrued $250,000 of dividends payable upon the outstanding shares of Series A Preferred. The Company has not yet
determined whether it will pay the first semi-annual dividend payable on the Series A Preferred in cash or in additional shares
of Series A Preferred.
The
Company may redeem shares of Series A Preferred at any time in cash at a price per share equal to the greater of (i) the Stated
Value plus any accrued and unpaid dividends thereon and (ii) the product of 1.5 times the Stated Value.
9
– Segment Reporting
We
report the results of each of our two reportable segments, beginning with the second quarter of 2017, in accordance with ASC 280,
Segment Reporting
. Our Chief Executive Officer evaluates the results of operations on a consolidated as well as a segment
level and is the person responsible for the final assessment of performance and making key operating decisions. 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 allocations.
Our
two operating segments are managed through operating segments that are aligned with our geographic operating locations of Argentina
and the U.S. We also report certain corporate and other non-operating activities under the heading “Corporate and Other”,
which 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 excludes 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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
$
|
3,195,482
|
|
|
$
|
5,434,937
|
|
|
$
|
8,291,100
|
|
|
$
|
7,997,594
|
|
United States
|
|
|
15,015,646
|
|
|
|
3,092,722
|
|
|
|
27,698,872
|
|
|
|
3,092,722
|
|
Total revenues
|
|
$
|
18,211,128
|
|
|
$
|
8,527,659
|
|
|
$
|
35,989,972
|
|
|
$
|
11,090,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of services
(1,2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
$
|
3,079,662
|
|
|
$
|
6,798,790
|
|
|
$
|
8,466,507
|
|
|
$
|
10,170,782
|
|
United States
|
|
|
17,457,300
|
|
|
|
4,521,455
|
|
|
|
33,546,481
|
|
|
|
4,889,349
|
|
Total cost of services
|
|
$
|
20,536,962
|
|
|
$
|
11,320,245
|
|
|
$
|
42,012,988
|
|
|
$
|
15,060,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
(1,2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
$
|
115,820
|
|
|
$
|
(1,363,853
|
)
|
|
$
|
(175,407
|
)
|
|
$
|
(2,173,188
|
)
|
United States
|
|
|
(2,441,654
|
)
|
|
|
(1,428,733
|
)
|
|
|
(5,847,609
|
)
|
|
|
(1,796,627
|
)
|
Total gross margin
|
|
$
|
(2,325,834
|
)
|
|
$
|
(2,792,586
|
)
|
|
$
|
(6,023,016
|
)
|
|
$
|
(3,969,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other:
|
|
$
|
3,531,584
|
|
|
$
|
2,366,943
|
|
|
$
|
6,693,467
|
|
|
$
|
4,011,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
$
|
—
|
|
|
$
|
116,977
|
|
|
$
|
2,846
|
|
|
$
|
150,270
|
|
United States
|
|
|
3,982,306
|
|
|
|
4,073,083
|
|
|
|
5,514,307
|
|
|
|
7,692,269
|
|
Corporate and Other
|
|
|
—
|
|
|
|
—
|
|
|
|
1,040
|
|
|
|
—
|
|
Total capital expenditures
|
|
$
|
3,982,306
|
|
|
$
|
4,190,060
|
|
|
$
|
5,518,193
|
|
|
$
|
7,842,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
$
|
1,494,592
|
|
|
$
|
1,308,725
|
|
|
$
|
2,974,172
|
|
|
$
|
2,608,869
|
|
United States
|
|
|
4,041,528
|
|
|
|
75,669
|
|
|
|
7,656,027
|
|
|
|
75,669
|
|
Corporate and Other
|
|
|
30,599
|
|
|
|
38,325
|
|
|
|
64,384
|
|
|
|
79,973
|
|
Total depreciation and amortization
|
|
$
|
5,566,719
|
|
|
$
|
1,422,719
|
|
|
$
|
10,694,582
|
|
|
$
|
2,764,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
United States
|
|
|
3,685,445
|
|
|
|
—
|
|
|
|
3,685,445
|
|
|
|
—
|
|
Corporate and Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total impairment
|
|
$
|
3,685,445
|
|
|
$
|
—
|
|
|
$
|
3,685,445
|
|
|
$
|
—
|
|
1)
|
U.S.
activity began in February 2017 with start-up expenses being incurred. The Company began recognizing U.S. 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, and depreciation and amortization expense.
|