ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information regarding the results of operations for the three
months ended March 31, 2019 and 2018, and our financial condition, liquidity and capital resources as of March 31, 2019, and December 31, 2018. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Forward
-Looking Statements
The information discussed in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:
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●
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Our capital requirements and the uncertainty of being able to obtain additional funding on terms acceptable to us;
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●
|
The financial constraints imposed as a result of our indebtedness, including restrictions imposed on us under the terms of our credit facility agreement and our need to generate sufficient cash flows to repay our debt obligations;
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●
|
The volatility of domestic and international oil and natural gas prices and the resulting impact on production and drilling activity, and the effect that lower prices may have on our customers
’ demand for our services, the result of which may adversely impact our revenues and financial performance;
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●
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The broad geographical diversity of our operations which, while expected to diversify the risks related to a slow-down in one area of operations, also adds to our costs of doing business;
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●
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Our history of losses and working capital deficits which, at times, were significant;
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●
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Adverse weather and environmental conditions;
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●
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Our reliance on a limited number of customers;
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●
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Our ability to retain key members of our senior management and key technical employees;
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●
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The potential impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation with which we and our customers must comply;
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●
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Developments in the global economy;
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●
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The effects of competition;
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●
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The risks associated with the use of intellectual property that may be claimed by others and actual or potential litigation related thereto;
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●
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The effect of unseasonably warm weather during winter months; and
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●
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The effect of further sales or issuances of our common stock and the price and volume volatility of our common stock.
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Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
OVERVIEW
The Company, through its subsidiaries Heat Waves Hot Oil Service, LLC ("Heat Waves"), Adler Hot Oil Service, LLC ("Adler"), and Heat Waves Water Management, LLC ("HWWM"), provides a range of oil field services to the domestic onshore oil and gas industry. These services are broken down into two segments: 1) Well Enhancement services, which include frac water heating, hot oiling, and acidizing, and 2) Water Transfer. The Company owns and operates through its subsidiaries a fleet of more than 450 specialized trucks, trailers, frac tanks and other well-site related equipment and serves customers in several major domestic oil and gas areas including the DJ Basin/Niobrara area in Colorado, the Bakken area in North Dakota, the San Juan Basin in northwestern New Mexico, the Marcellus and Utica Shale areas in Pennsylvania and Ohio, the Jonah area, Green River and Powder River Basins in Wyoming, the Eagle Ford Shale in Texas and the Stack and Scoop plays in the Anadarko Basin in Oklahoma.
RESULTS OF OPERATIONS
Executive Summary
Revenues for the three months ended March 31, 2019, increased approximately $6.0 million, or 29%, from the comparable period last year due to a 29% increase in our core Well Enhancement revenue and a 44% increase in Water Transfer revenue. Well Enhancement revenue growth was attributable to the acquisition of Adler Hot Oil in the fourth quarter of 2018 and to ongoing efforts to bundle services with new and existing customers. Higher demand for frac water heating in all regions was partially offset by a decline in acidizing revenue. Water Transfer revenue growth was attributable to successful marketing efforts in Wyoming.
Segment profits for the three-month period ended March 31, 2019, increased by approximately $2.6 million, or 43%, due to an increase in Well Enhancement service revenue without a corresponding increase in our fixed cost structure. Higher segment profits in Well Enhancement were partially offset by an increased segment loss in Water Transfer as described below. Selling, general & administrative expense, excluding severance and transition costs, increased by approximately $265,000, or 20%, year over year due primarily to an increase in personnel costs. Interest expense increased $384,000, or 77%, year over year due to a higher average borrowing balance related to the the Adler acquisition.
Net income for the three months ended March 31, 2019, was approximately $4.3 million or $0.08 per share, compared to net income of approximately $2.0 million, or $0.04 per share, in the same quarter last year due primarily due to the factors noted above.
Adjusted EBITDA for the three months ended March 31, 2019, was approximately $7.2 million compared to approximately $4.8 million for the same quarter last year. See the section titled
Adjusted EBITDA*
within this Item for definition of Adjusted EBITDA.
Industry Overview
During the three months ended March 31, 2019, increasing oil prices and increasing rig activity in North America have resulted in modest increases in production and completion activities by our customers, which led to generally stronger demand for our services. The North American rig count has increased since the low point in early 2016, with 1,006 rigs in operation as of March 31, 2019, compared to 993 at the same time a year ago. We believe current activity levels should support continued modest improvement in both metrics if crude oil and natural gas prices remain in the range of their current levels. We have reacted to increased demand by allocating resources to our most active customers and basins. We are focused on increasing utilization levels and optimizing the deployment of our equipment and workforce while maintaining high standards for service quality and safe operations. We compete on the basis of the quality and breadth of our service offerings, as our customers are focused on optimization of production.
Segment Overview
Enservco’s reportable business segments include the following:
Well Enhancement Services: This segment utilizes a fleet of frac water heating, hot oiling and acidizing trucks and trailers that provide well enhancement, completion and maintenance services to oil and gas development and production companies. Our Heat Waves and Adler units provide these services.
Water Transfer Services: This segment utilizes high and low volume pumps, lay flat hose, aluminum pipe and manifolds, and related equipment to move fresh and/or recycled water from a water source such as a pond, lake, river, stream, or water storage facility to frac tanks at drilling locations for use in well completion activities.
Segment Results
:
The following tables set forth revenue from operations and segment profits for our
business segments for the three months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Well enhancement services
|
|
$
|
24,812
|
|
|
$
|
19,285
|
|
Water transfer services
|
|
|
1,428
|
|
|
|
995
|
|
Total Revenues
|
|
$
|
26,240
|
|
|
$
|
20,280
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
SEGMENT PROFIT:
|
|
|
|
|
|
|
|
|
|
Well enhancement services
|
|
$
|
9,600
|
|
|
$
|
6,194
|
|
|
Water transfer services
|
|
|
(757
|
)
|
|
|
38
|
|
|
Unallocated and other
|
|
|
(155
|
)
|
|
|
(145
|
)
|
|
Total Segment Profit
|
|
$
|
8,688
|
|
|
$
|
6,087
|
|
|
Well Enhancement Services
Well Enhancement Services, which accounted for 95% of total revenue for the three months ended March 31, 2019, increased $5.5 million, or 29%, to $24.8 million compared to $19.3 million in the same quarter last year. The increase in revenue primarily resulted from our increased capacity and customer base resulting from our acquisition of Adler.
Frac water heating revenue for the three months ended March 31, 2019, increased $6.1 million, or 42%, to $20.7 million compared to $14.6 million for the same quarter last year. Improved industry conditions, including higher commodity prices and increased drilling rig activity, increased demand for our services. Our acquisition of Adler allowed us to realize revenue from several customers we did not previously perform significant work for, and allowed us to increase services to other customers, particularly in the Bakken and D-J Basin. We also experienced increased demand in the Marcellus Shale and Utica Shale locations in Pennsylvania.
Hot oil revenue for the three months ended March 31, 2019, was essentially flat year over year in the $3.7 million range. Gains from the acquisition of Adler were offset by declines resulting from our closure of two underperforming facilities in the fourth quarter of 2018.
Acidizing revenues for the three months ended March 31, 2019, decreased by approximately $545,000, or 55%, to $469,000 from approximately $1.0 million due to delays in establishing a presence in new markets following a reallocation of our equipment out of certain basins where we believe demand was waning. The year-over-year decline was primarily driven by a decline in services performed for two customers in the Green River Basin and Eagle Ford Shale who changed their maintenance programs. The decline was partially offset by new customer wins and growth in services performed for other customers and in new geographies. The Company continues to pursue customers and partner with chemical suppliers to develop new cost-effective acid programs in seeking to expand our acidizing services across our geographies.
Segment profits for our core Well Enhancement services increased by $3.4 million, or 55%, to $9.6 million for the three months ended March 31, 2019, compared to $6.2 million in the same quarter last year, due to increase was primarily due to higher revenue resulting from the redeployment of our fleet into our most active basins, along with certain cost reduction initiatives implemented in the second half of 2018 that carried into 2019.
Water Transfer Services
Water Transfer revenue for the three months ended March 31, 2019, accounted for 5% of total revenue, and increased by approximately $433,000, or 44%, to approximately $1.4 million from approximately $1.0 million in the same quarter last year. The increase in revenue was due in part to cross-selling Water Transfer services to several of our largest heating customers, and was also the result of organic growth sales among new and existing Water Transfer customers.
The segment loss for Water Transfer for the three months ended March 31, 2019, was approximately $757,000 compared to a segment profit of approximately $38,000 for the same quarter last year. A severe cold weather event in Wyoming in January froze water within our lay-flat hose and pumps in two projects that led to crew downtime and cost overruns related to rental of replacement hose and pumps and the use of third-party labor to complete the project and demobilize our equipment.
Unallocated and Other
Unallocated and other includes general overhead expenses and assets associated with managing all reportable operating segments which have
not
been allocated to a specific segment.
These costs included labor, travel, operating costs for regional managers and safety compliance.
Unallocated segment costs in the three months ended March 31, 2019, increased by approximately $10,000, or 7%, to approximately $155,000 compared to approximately $145,000 in the same quarter last year.
Geographic Areas
The Company
operates solely in three geographically diverse regions of the United States. The following table sets forth revenue from operations for the Company’s three geographic regions during the three months ended March 31, 2019 and 2018 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
BY GEOGRAPHY
|
|
|
|
|
|
|
|
|
Well Enhancement Services:
|
|
|
|
|
|
|
|
|
Rocky Mountain Region
(1)
|
|
$
|
16,875
|
|
|
$
|
11,708
|
|
Central USA Region
(2)
|
|
|
4,536
|
|
|
|
4,801
|
|
Eastern USA Region
(3)
|
|
|
3,401
|
|
|
|
2,776
|
|
Total Well Enhancement Services
|
|
|
24,812
|
|
|
|
19,285
|
|
|
|
|
|
|
|
|
|
|
Water Transfer Services:
|
|
|
|
|
|
|
|
|
Rocky Mountain Region
(1)
|
|
|
1,428
|
|
|
|
995
|
|
Central USA Region
(2)
|
|
|
-
|
|
|
|
-
|
|
Eastern USA Region
(3)
|
|
|
-
|
|
|
|
-
|
|
Total Water Transfer Services
|
|
|
1,428
|
|
|
|
995
|
|
Total Revenues
|
|
$
|
26,240
|
|
|
$
|
20,280
|
|
Notes to tables:
|
(1)
|
Includes the D-J Basin/Niobrara field (northeastern Colorado and southeastern Wyoming), the San Juan Basin (southeastern Colorado and Northeastern New Mexico), the Powder River and Green River Basins (northeastern and southwestern Wyoming), the Bakken area (western North Dakota and eastern Montana).
|
|
(2)
|
Includes the Scoop/Stack Shale in Oklahoma and the Eagle Ford Shale in Texas.
|
|
(3)
|
Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio).
|
Well Enhancement segment revenue in the Rocky Mountain Region for the three months ended March 31, 2019, increased approximately $5.2 million, or 44%, to $16.9 million year over year. The increase was primarily driven by our increase in fleet size and customer base resulting from our Adler acquisition.
Well Enhancement segment revenue in the Central USA region for the three months ended March 31, 2019, decreased by approximately $265,000, or 6%, to $4.5 million year over year. The decrease was due to equipment down time related to facilities realignment after the closure of two Heat Waves locations in the fourth quarter of 2018, partially offset by improved results from frac water heating in the Scoop/Stack play in Oklahoma.
Well Enhancement segment revenue in the Eastern USA region for the three months ended March 31, 2019, increased approximately $625,000, or 23%, to approximately $3.4 million year over year primarily due to increased service work in the Marcellus Shale formation.
Historical Seasonality of Revenues
Because of the seasonality of our frac water heating and, to a lesser extent, hot oiling business, revenues generated during the cooler first and fourth quarters of our fiscal year, constitute our “heating season” and are significantly higher than revenues during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings changes outside our heating season as our Well Enhancement services (which includes frac water heating and hot oiling) typically decrease as a percentage of total revenues and our Water Transfer services and other services increase as a percentage of total revenue. Thus, the revenues recognized in our quarterly financial statements in any given period are not indicative of the annual or quarterly revenues through the remainder of that fiscal year.
As an indication of this quarter-to-quarter seasonality, the Company generated 75% of its 2018 revenues during the first and fourth quarters compared to 25% during the second and third quarters of 2018.
Direct Operating Expenses:
Direct operating expenses, which include labor costs, propane, fuel, chemicals, truck repairs and maintenance, supplies, insurance, and site overhead costs for our operating segments increased by approximately $3.9 million or 23% during the first quarter of 2019 compared to the like period in 2018, primarily due to the overall increase in service activity in our Well Enhancement service segment as well as our Water Transfer division.
Sales, General, and Administrative Expenses:
During the three months ended March 31, 2019, selling, general, and administrative expenses increased approximately $265,000
, or 20
% to $1.6
million compared to the same period in 2018 primarily due to an increase in compensation costs for our larger management team partially due to our acquisition of Adler, partially offset by a reduction in professional services expense.
Patent Litigation and Defense Costs:
Patent litigation and defense costs decreased to $9,000 from $20,000 for the three months ended March 31, 2019 compared to the like period in 2018. As discussed in Part II, Item 1. – Legal Proceedings, the U.S. District Court for the District of Colorado issued a decision on March 15, 2019 this case was dismissed in its entirety without any finding of liability of Enservco or Heat Waves. We expect costs related to our defense of such claims to be minimal going forward.
Depreciation and Amortization:
Depreciation and amortization expense for the three months e
nded March 31, 2019 increased $184,000, or 12%, from the same period in 2018 due to depreciation on equipment acquired in the Adler acquisition, partially offset by certain of our equipment becoming fully-depreciated during 2018.
Income from operations:
For the three months ended March 31, 2019, the Company recognized income from operations of $5.3 million compared to $3.2 million for the comparable period in 2018. The improvement of $2.1 million was primarily due to a $2.6 million increase in segment profits, partially offset by the increase in Selling, General, and Administrative Expenses and Depreciation and amortization as discussed above.
Interest Expense:
Interest expense increased approximately $384,000, or 77%, for the three months ended March 31, 2019, compared to the same period in 2018. The increase was primarily due to the increase of our average borrowings related to the acquisition of Adler, along with increased interest rates on our floating rate debt.
Discontinued Operations:
Results for the three months ended March 31, 2018 include a loss from discontinued operations of approximately $213,000.
Other expense (income):
Other expense for the three months ended March 31, 2019 was approximately $64,000 compared with other expense of approximately $421,000 for the same period in 2018. The decrease was primarily driven by losses recognized on the change in fair value of our now-retired warrant liability during the three months ended March 31, 2018, while 2019 was mostly comprised of a decrease in the fair value of our interest rate swap.
Income Taxes:
As of March 31, 2019, the Company had recorded a full valuation allowance on a net deferred tax asset of $1.9 million. Our income tax provision of $1.2 million for the three months ended March 31, 2019 reduced the gross amount of the deferred tax asset and we reduced the valuation allowance by a like amount which resulted in a net tax provision of zero. During the three months ended March 31, 2018, the Company recorded an income tax provision of approximately $420,000 which reduced the gross amount of the deferred tax asset and we reduced the valuation allowance by a like amount which resulted in a net tax provision of zero. Our effective tax rate was approximately 0% for the three months ended March 31, 2019 and 2018, respectively. The effective tax expense for the three months ended March
31, 2019
and
2018
differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21
%
to pre-tax income primarily because of state income taxes and estimated permanent differences.
Adjusted EBITDA*
Management believes that, for the reasons set forth below, Adjusted EBITDA (a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in Enservco's industry.
The following table presents a reconciliation of our net income to our Adjusted EBITDA for each of the periods indicated (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Adjusted EBITDA*
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
4,303
|
|
|
$
|
2,041
|
|
Add Back (Deduct)
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
884
|
|
|
|
500
|
|
Provision for income tax (benefit) expense
|
|
|
-
|
|
|
|
-
|
|
Depreciation and amortization (including discontinued operations)
|
|
|
1,683
|
|
|
|
1,589
|
|
EBITDA*
|
|
|
6,870
|
|
|
|
4,130
|
|
Add back
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
92
|
|
|
|
73
|
|
Severance and transition costs
|
|
|
-
|
|
|
|
40
|
|
Patent litigation and defense costs
|
|
|
9
|
|
|
|
20
|
|
Impairment loss
|
|
|
127
|
|
|
|
-
|
|
Other expense
|
|
|
64
|
|
|
|
420
|
|
EBITDA related to discontinued operations
|
|
|
-
|
|
|
|
124
|
|
Adjusted EBITDA*
|
|
$
|
7,162
|
|
|
$
|
4,807
|
|
*Note: See below for discussion of the use of non-GAAP financial measurements.
Use of Non-GAAP Financial Measures:
Non-GAAP results are presented only as a supplement to the financial statements and for use within management’s discussion and analysis based on U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information is provided to enhance the reader's understanding of the Company’s financial performance, but no non-GAAP measure should be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.
EBITDA is defined as net income (earnings), before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA excludes stock-based compensation from EBITDA and, when appropriate, other items that management does not utilize in assessing the Company’s ongoing operating performance as set forth in the next paragraph. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure.
All of the items included in the reconciliation from net income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, impairment losses, etc.) or (ii) items that management does not consider to be useful in assessing the Company’s ongoing operating performance (e.g., income taxes, gain or losses on sale of equipment, acquisition-related expenses, patent litigation and defense costs, severance and transition costs, other expense (income), EBITDA related to discontinued operations, etc.). In the case of the non-cash items, management believes that investors can better assess the company’s operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company’s ability to generate free cash flow or invest in its business.
We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Additionally, our fixed charge coverage ratio covenant associated with our Loan and Security Agreement with East West Bank require the use of Adjusted EBITDA in specific calculations.
Because not all companies use identical calculations, the Company’s presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company’s performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures.
Changes in Adjusted EBITDA*
Adjusted EBITDA for the three months ended March 31, 2019 increased by approximately $2.4 million due primarily to the improvement in segment profit discussed above partially offset by increases in sales, general, and administrative costs also discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Update
As described in more detail in Note 7 to our financial statements included in “Item 1. Financial Statements” of this report, on August 10, 2017, we entered into the 2017 Credit Agreement, as amended, with East West Bank (the "New Credit Facility") which provides for a three-year $37 million senior secured revolving credit facility, to replace the Prior Credit Facility provided under the 2014 Credit Agreement with PNC. On October 26, 2018 the Company entered into the Second Amendment to Loan and Security Agreement in connection with the acquisition of Adler which increased the borrowing limit to $37.0 million.
As of March 31, 2019, we were in compliance with all financial covenants contained in the 2017 Credit Agreement.
The following table summarizes our statements of cash flows for the three months ended March 31, 2019 and 2018 (in thousands):
|
|
For the Three
Months Ended
March 31
,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)
provided by operating activities
|
|
$
|
(2,646
|
)
|
|
$
|
3,493
|
|
Net cash provided by (used in) investing activities
|
|
|
585
|
|
|
|
(1,052
|
)
|
Net cash provided by (used in) financing activities
|
|
|
1,804
|
|
|
|
(1,819
|
)
|
Net (decrease) increase in Cash and Cash Equivalents
|
|
|
(257
|
)
|
|
|
622
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Period
|
|
|
257
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$
|
-
|
|
|
$
|
1,013
|
|
The following table sets forth a summary of certain aspects of our balance sheet at March
31, 2019 and December 31, 2018:
|
|
March 31
,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
22,839
|
|
|
$
|
13,530
|
|
Total Assets
|
|
$
|
58,577
|
|
|
$
|
49,021
|
|
Current Liabilities
|
|
$
|
9,395
|
|
|
$
|
7,452
|
|
Total Liabilities
|
|
$
|
49,580
|
|
|
$
|
44,419
|
|
Working Capital (Current Assets net of Current Liabilities)
|
|
$
|
13,244
|
|
|
$
|
6,078
|
|
Stockholders
’ Equity
|
|
$
|
8,997
|
|
|
$
|
4,602
|
|
Overview:
We have relied on cash flow from operations, borrowings under our revolving credit agreements, and equity and debt offerings to satisfy our liquidity needs. Our ability to fund operating cash flow shortfalls, fund capital expenditures, and make acquisitions will depend upon our future operating performance and on the availability of equity and debt financing. At March
31, 2019
, we had approximately $928,000 available under the New Credit Facility. Our capital requirements over the next 12 months are anticipated to include, but are not limited to, operating expenses, debt servicing, and capital expenditures including maintenance of our existing fleet of assets.
As of March 31, 2019, we had an outstanding principal loan balance under the 2017 Credit Agreement of approximately $35.9 million with a weighted average interest rate of 6.0% per year for $34.0 million of outstanding LIBOR Rate borrowings (which includes the effect of our interest rate swap agreement described below) and 7.25% per year for the approximately $1.9 of outstanding Prime Rate borrowings.
The 2017 Credit Agreement allows us to borrow up
to 85% of our eligible receivables and up to 85
% of the appraised value of our eligible equipment.
On March 31, 2017, our largest shareholder, Cross River Partners, L.P., posted a letter of credit in the amount of $1.5 million in accordance with the terms of the Tenth Amendment to the 2014 Credit Agreement. The letter of credit was converted into subordinated debt with a maturity date of June 28, 2022 with a stated interest rate of 10% per annum and a five-year warrant to purchase 967,741 shares of our common stock at an exercise price of $0.31 per share. On May 10, 2017, Cross River Partners, L.P. also provided $1.0 million in subordinated debt to us as required under the terms of the Tenth Amendment to the 2014 Credit Agreement. This subordinated debt has a stated annual interest rate of 10% and maturity date of June 28, 2022. In connection with this issuance of subordinated debt, Cross River Partners L.P. was granted a five-year warrant to purchase 645,161 shares of our common stock at an exercise price of $0.31 per share. On June 29, 2018 Cross River exercised both warrants and acquired 1,612,902 shares of our common stock. Proceeds from the exercise of the warrants in the amount of $500,000 were used to reduce the subordinated debt balance.
Interest Rate Swap
On February 23, 2018, we entered into an interest rate swap agreement with East West Bank (the "2018 Swap") in order to hedge against the variability in cash flows from future interest payments related to the New Credit Facility. The terms of the interest rate swap agreement included an initial notional amount of $10.0 million, a fixed payment rate of 2.52% paid by us, and a floating rate payment equal to LIBOR paid by East West Bank. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations.
During the three months ended March 31, 2019, the fair market value of the swap instrument decreased by approximately $44,000 and resulted in an increase in other expense. During the three months ended March 31, 2018, the fair market value of the swap instrument increased by approximately $8,000 and resulted in an asset being recorded and an increase in other income.
Liquidity:
As of March 31, 2019, our available liquidity was $928,000, which was comprised of availability on the New Credit Facility (at certain times subject to a covenant requirement that we maintain $1.5 million of available liquidity). We utilize the New Credit Facility to fund working capital requirements, and during the three months ended March 31, 2019, we received net cash proceeds from our New Credit Facility of approximately $2.1 million, and additionally received approximately $39,000 in non-cash proceeds to fund costs incurred pursuant to the 2017 Credit Agreement.
Working Capital:
As of March 31, 2019, we had working capital of approximately $13.4 million compared to working capital of $6.1 million as of December 31, 2018, primarily attributable to the period-end accounts receivable balance which was higher due to higher frac water heating revenues in the first quarter of 2019.
As of March 31, 2019, the Company had recorded a valuation allowance to reduce its net deferred tax assets to zero.
Cash flow from Operating Activities:
For the three months ended March 31, 2019, cash used in operating activities was approximately $2.6 million compared to $3.5 in cash provided by operating activities during the comparable period in 2018. The decrease was attributable to an increase in the change in accounts receivable due to increased operations discussed above.
Cash flow from Investing Activities
:
Cash provided by investing activities during the three months ended March 31, 2019 was approximately $585,000, compared to $1.1 million in cash used in Investing Activities during the comparable period in 2018, primarily due to investment in Water Transfer equipment during 2018.
Cash flow from Financing Activities:
Cash provided by financing activities for the three months ended March 31, 2019 was $1.8 million compared to $1.8 million in cash used in financing activities for the comparable period in 2018. The change is due to our use of the proceeds from our New Credit Facility to fund operating activities as described above, partially offset by the change in cash flows from investing activities.
Outlook:
We believe that the current oil and gas environment provides us an opportunity to increase our cash flows through the increased utilization of our asset base, due to industry dynamics and our focus on deploying our assets into areas where our services are in high demand. We have experienced an increase in such demand due to the fairly stable oil and natural gas commodity prices from 2016 lows, and increases in the level of production and development activities across the industry. Our 2019 financial results, to date, reflect our improved operational execution in response to this increased demand, and we are optimistic about the prospects for the remainder of 2019 should oil and natural gas prices remain in their current range. Our long-term goals include driving increased utilization of our assets, an optimized deployment of our fleet, and the right-sizing of our balance sheet by paying down debt. We continue to seek opportunities to expand our business operations through organic growth, including increasing the volume of current services offered to our new and existing customers. We may identify additional services to offer to our customer base, and make related investments as capital and market conditions permits. We will continue to explore adding high margin services that diversify and expand our customer relationships while maintaining an appropriate balance between recurring maintenance work and drilling and completion related services.
Capital Commitments and Obligations:
Our capital obligations as of March 31, 2019 consist primarily of scheduled principal payments under certain term loans and operating leases. We do not have any scheduled principal payments under the 2017 Credit Agreement until August 10, 2020; however, the Company may need to make future principal payments based upon collateral availability. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2019, we had no significant 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 are material to our stockholders.
C
RITICAL ACCOUNTING POLICIES AND ESTIMATES
On January 1, 2019, we adopted ASC Topic 842, Leases. ASC Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize the balance sheet assets and liabilities arising from operating leases. As we elected the cumulative-effect adoption method, prior-period information has not been restated. On January 1, 2019, we recognized $1.9 million in right-of-use assets and $1.9 million in lease liabilities, representing the present value of minimum payment obligations associated with leased facilities and certain equipment with non-cancellable lease terms in excess of one year. We do not have any finance leases, nor are we the lessor in any leasing arrangements. There was no cumulative-effect adjustment to retained earnings required at January 1, 2019. The new standard did not have a material impact on our results of operations of cash flows.
There have been no other changes in our critical accounting policies since December 31, 2018.