Quarterly Report (10-q)

Date : 08/14/2019 @ 10:09PM
Source : Edgar (US Regulatory)
Stock : ENSERVCO Corporation (ENSV)
Quote : 0.237577  -0.001523 (-0.64%) @ 6:05PM

Quarterly Report (10-q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30 , 2019

 

or

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-36335

 

ENSERVCO CORPORATION

(Exact Name of registrant as Specified in its Charter)

 

 

Delaware

 

84-0811316

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

     

999 18th St., Ste. 1925N

Denver, CO

 

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

 

Registrant ’s telephone number: (303) 333-3678

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Enservco was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes X No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐                                                                              Accelerated filer 

Non-accelerated filer ☐ (Do not check if a smaller reporting company)      Smaller reporting company X

Emerging growth company  

 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                Yes     No X

 

Indicate the number of shares outstanding of each of the Issuer's classes of common stock as of the latest practicable date.

 

Clas s

Outstanding at August 7, 2019

Common stock, $.005 par value

55,757,829

 

 

 

 

TABLE OF CONTENTS

 

 

 

Page

   

Part I – Financial Information

 
   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets

2

   

Condensed Consolidated Statements of Operations

3

   
Condensed Consolidated Statements of Stockholders' Equity

4

   
Condensed Consolidated Statements of Cash Flows 5
   
Notes to the Condensed Consolidated Financial Statements    6
   

Item 2. Management ’s Discussion and Analysis of Financial Condition and Results of Operations

30

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

43

   

Item 4. Controls and Procedures

43

   
   

Part II

 
   

Item 1. Legal Proceedings

44

   

Item 1A.   Risk Factors

44

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

45

   

Item 3. Defaults Upon Senior Securities

45

   

Item 4. Mine Safety Disclosures

45

   

Item 5. Other Information

45

   

Item 6. Exhibits

46

   

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

 

 

   

June 30,

   

December 31,

 

ASSETS

 

2019

   

2018

 
   

(Unaudited)

         

Current Assets

               

Cash and cash equivalents

  $ 506     $ 257  

Accounts receivable, net

    8,628       10,729  

Prepaid expenses and other current assets

    1,001       1,081  

Inventories

    372       514  

Income tax receivable, current

    85       85  
       Current assets of discontinued operations     37       864  

Total current assets

    10,629       13,530  
                 

Property and equipment, net

    30,306       33,057  
Goodwill     546       546  
Intangible assets, net     931       1,033  

Income taxes receivable, non-current

    28       28  
Right-of-use asset - financing, net     777       -  
Right-of-use asset - operating, net     4,899       -  
Other assets     556       650  

Non-current assets of discontinued operations

    -       177  
                 

TOTAL ASSETS

  $ 48,672     $ 49,021  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current Liabilities

               

Accounts payable and accrued liabilities

  $ 2,961     $ 3,391  
       Note payable     -       3,868  
Lease liability - financing, current     197       -  
Lease liability - operating, current     846       -  
       Current portion of long-term debt     144       149  

Current liabilities of discontinued operations

    -       44  

Total current liabilities

    4,148       7,452  
                 

Long-Term Liabilities

               

Senior revolving credit facility

    31,862       33,882  

Subordinated debt

    1,857       1,832  

Long-term debt, less current portion

    246       312  
Lease liability - financing, less current portion     441       -  
Lease liability - operating, less current portion     4,056       -  
Other liability     89       941  

Total long-term liabilities

    38,551       36,967  

Total liabilities

    42,699       44,419  
                 

Commitments and Contingencies (Note 10)

               
                 

Stockholders' Equity

               

Preferred stock, $.005 par value, 10,000,000 shares authorized, no shares issued or outstanding

    -       -  

Common stock. $.005 par value, 100,000,000 shares authorized, 55,432,829 and 54,389,829 shares issued, respectively; 103,600 shares of treasury stock; and 55,329,229 and 54,286,229 shares outstanding, respectively

    277       271  

Additional paid-in capital

    21,960       21,797  

Accumulated deficit

    (16,264 )     (17,466 )

Total stockholders' equity

    5,973       4,602  
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 48,672     $ 49,021  

 

 

See notes to condensed consolidated financial statements.

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands except per share amounts)

(Unaudited)

 

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Revenues

                               

Well enhancement services

 

$

6,339

   

$

7,005

   

$

31,151

   

$

26,290

 

Water transfer services

   

867

     

929

     

2,295

     

1,924

 

Total revenues

   

7,206

     

7,934

     

33,446

     

28,214

 
                                 

Expenses

                               

Well enhancement services

   

6,150

     

5,900

     

21,362

     

18,991

 

Water transfer services

   

1,287

     

979

     

3,472

     

1,936

 

Functional support and other

   

287

     

181

     

442

     

326

 

Sales, general, and administrative expenses

   

1,460

     

1,236

     

3,078

     

2,589

 

Patent litigation and defense costs

   

1

     

55

     

10

     

75

 

Severance and transition costs

   

-

     

593

     

-

     

633

 
Loss (gain) on disposal of assets     12       (53 )     12       (53 )
Impairment loss     -       -       127       -  

Depreciation and amortization

   

1,736

     

1,520

     

3,419

     

3,019

 

Total operating expenses

   

10,933

     

10,411

     

31,922

     

27,516

 
                                 

(Loss) Income from Operations

   

(3,727

)

   

(2,477

)

   

1,524

 

   

698

 

                                 

Other (Expense) Income

                               

Interest expense

   

(658

)

   

(511

)

   

(1,542

)

   

(1,011

)

Other income (expense) 

   

1,208

     

(85

)

   

1,144

 

   

(506

)

Total other income (expense)

   

550

 

   

(596

)

   

(398

)

   

(1,517

)

                                 
(Loss) income from continuing operations before tax benefit    

(3,177

)

   

(3,073

)

   

1,126

 

   

(819

)

Income tax (expense) benefit

   

(32

)    

(32

)    

(32

)

   

(32

)

Income from continuing operations

 

$

(3,209

)

 

$

(3,105

)

 

$

1,094

 

 

$

(851

)

Discontinued operations (Note 6)                                
Loss from operations of discontinued operations     -       (177 )     -       (390 )
Income tax benefit     -       -       -       -  
Loss from discontinued operations     -       (177 )     -       (390 )
Net (loss) income   $ (3,209 )   $ (3,282 )   $ 1,094     $ (1,241 )
                                 
                                 

(Loss) earnings from continuing operations per common share - basic

 

$

(0.06

)

 

$

(0.06

)

 

$

0.02

 

 

$

(0.02

)

Loss from discontinued operations per common share - basic     -       -       -       -  
Net (loss) income per share - basic   $ (0.06 )   $ (0.06 )   $ 0.02     $ (0.02 )
                                 
                                 
(Loss) Earnings from continuing operations per common share - diluted   $ (0.06 )   $ (0.06 )   $ 0.02     $ (0.02 )
Loss from discontinued operations per common share - diluted     -       -       -       -  

Net (loss) income per share - diluted

 

$

(0.06

)

 

$

(0.06

)

 

$

0.02

 

 

$

(0.02

)

                                 

Basic weighted average number of common shares outstanding

   

54,978

     

51,677

     

54,589

     

51,413

 

Add: Dilutive shares 

   

-

     

-

     

1,215

     

-

 

Diluted weighted average number of common shares outstanding

   

54,978

     

51,677

     

55,804

     

51,413

 

 

 

 

See notes to condensed consolidated financial statements.

 

3

 
 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(In thousands)

  

 

 

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Earnings

(Deficit)

 

 

Total

Stockholders’ 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2018

 

 

51,094

 

 

$

255

 

 

$

19,571

 

 

$

(11,601

)

 

$

8,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation, net of issuance costs

 

 

-

 

 

 

-

 

 

 

63

 

 

 

-

 

 

 

73

 

Cashless option exercise     66       -       -       -       -  

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,041

 

 

 

2,041

 

Balance at March 31, 2018

 

 

51,160

 

 

 

255

 

 

 

19,634

 

 

 

(9,560

)

 

 

10,329

 

                                         

Stock-based compensation, net of issuance costs

 

 

-

 

 

 

-

 

 

 

105

 

 

 

-

 

 

 

105

 

Cashless option exercise     663       3       (3 )     -       -  
Restricted share issuance     990       5       (5 )     -       -  

Cashless exercise of warrants

 

 

1,613

 

 

 

8

 

 

 

1,863

 

 

 

-

 

 

 

1,871

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,282

)

 

 

(3,282

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2018

 

 

54,426

 

 

$

271

 

 

$

21,594

 

 

$

(12,842

)

 

$

9,023

 

 

 

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Earnings

(Deficit)

 

 

Total

Stockholders’ 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

 

54,286

 

 

$

271

 

 

$

21,797

 

 

$

(17,466

)

 

$

4,602

 

Opening balance adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

108

 

 

 

108

 

Stock-based compensation, net of issuance costs

 

 

-

 

 

 

-

 

 

 

92

 

 

 

-

 

 

 

92

 

Restricted share cancellation     (55 )     -       -       -       -  

Net income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,303

 

 

 

4,303

 

Balance at March 31, 2019

 

 

54,231

 

 

 

271

 

 

 

21,889

 

 

 

(13,055

)

 

 

9,105

 

                                         
                                         

Stock-based compensation, net of issuance costs

 

 

-

 

 

 

-

 

 

 

77

 

 

 

-

 

 

 

77

 

Restricted share issuance

 

 

1,123

 

 

 

6

 

 

 

(6

)

 

 

-

 

 

 

-

 

Restricted share cancellation     (25 )     -       -       -       -  

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,209

)

 

 

(3,209

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

 

55,329

 

 

$

277

 

 

$

21,960

 

 

$

(16,264

)

 

 

5,973

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

For the Six Months Ended

 
   

June 30,

 
   

2019

   

2018

 

OPERATING ACTIVITIES

               

Net income (loss)

  $ 1,094     $ (1,241 )
    Net loss from discontinued operations     -       (390 )

Net income (loss) from continuing operations

    1,094       (851 )

Adjustments to reconcile net loss to net cash used in operating activities

               

Depreciation and amortization

    3,419       3,186  
Loss (gain) on disposal of equipment     12       (53 )
Impairment loss     127       -  
Gain on settlement (Note 4)     (1,252 )     -  
       Change in fair value of warrant liability     -       540  

Stock-based compensation

    168       188  

Amortization of debt issuance costs and discount

    226       126  

Provision for bad debt expense

    3       33  

Changes in operating assets and liabilities

               

Accounts receivable

    2,098       6,839  

Inventories

    142       82  

Prepaid expense and other current assets

    (21 )     195  
Amortization of operating lease assets     329       -  

Other assets

    138       (60 )

Accounts payable and accrued liabilities

    (429 )     (3,101 )
Operating lease liabilities     (322 )     -  
Other liabilities     99       -  
   Net cash provided by operating activities - continuing operations     5,831       7,124  
   Net cash provided by (used in) operating activities - discontinued operations     23       (599 )
Net cash provided by - operating activities     5,854       6,525  
                 

INVESTING ACTIVITIES

               

Purchases of property and equipment

    (567 )     (1,426 )
Proceeds from disposals of property and equipment     219       145  
Proceeds from insurance claims     27       122  
   Net cash used in  investing activities - continuing operations     (321 )     (1,159 )
   Net cash provided by (used in)  investing activities - discontinued operations     760       (44 )
Net cash provided by (used in) investing activities     439       (1,203 )
                 

FINANCING ACTIVITIES

               

Net line of credit payments

    (2,071 )     (5,386 )

Repayment of long-term debt

    (70 )     (66 )
Payments of finance leases     (202 )     -  
Repayment of note     (3,700 )     -  
Other financing activities     (1 )     (26 )
Net cash used in financing activities     (6,044 )     (5,478 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents     249       (156 )
                 
Cash and Cash Equivalents, beginning of period     257       391  
                 

Cash and Cash Equivalents, end of period

  $ 506     $ 235  
                 
                 

Supplemental Cash Flow Information:

               

Cash paid for interest

  $ 1,254     $ 863  
Cash paid for taxes   $ 32     $ 32  

Supplemental Disclosure of Non-cash Investing and Financing Activities:

               

Non-cash proceeds from revolving credit facilities 

  $ -     $ 49  
Cashless exercise of stock options   $ -     $ 994  
Non-cash proceeds of warrant exercise   $ -     $ 500  
Non-cash subordinated debt principal repayment   $ -     $ (500 )
Non-cash conversion of warrant liability to equity   $ -     $ 1,371  

 

 

 

See notes to condensed consolidated financial statements.

 

5

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 1 – Basis of Presentation

 

Enservco Corporation (“Enservco”) through its wholly-owned subsidiaries (collectively referred to as the “Company”, “we” or “us”) provides various services to the domestic onshore oil and natural gas industry. These services include frac water heating, hot oiling and acidizing (well enhancement services) and water transfer and water treatment services (water transfer services).

 

The accompanying unaudited condensed consolidated financial statements have been derived from the accounting records of Enservco Corporation, Heat Waves Hot Oil Service LLC (“Heat Waves”), Dillco Fluid Service, Inc . (“Dillco”), Heat Waves Water Management LLC (“HWWM”), and Adler Hot Oil Service, LLC ("Adler") (collectively, the “Company”) as of June 30, 2019  and December 31, 2018  and the results of operations for the three and six  months ended June 30, 2019  and 2018.

 

The below table provides an overview of the Company ’s current ownership hierarchy:

 

Name

State of

Formation

Ownership

Business

Heat Waves Hot Oil Service LLC 

Colorado

100% by Enservco

Oil and natural gas well services, including logistics and stimulation.

       
Adler Hot Oil Service, LLC  Delaware 100% by Enservco Oil and natural gas well services, including logistics and stimulation
       

Heat Waves Water Management LLC 

Colorado

100% by Enservco

Water Transfer Services.

       
Dillco Fluid Service, Inc Kansas 100% by Enservco Discontinued operation in 2018
       

HE Services LLC 

Nevada

100% by Heat Waves

No active business operations. Owns construction equipment used by Heat Waves.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10 -Q and Article 8 of Regulation S- X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all of the normal and recurring adjustments necessary to fairly present the interim financial information set forth herein have been included. The results of operations for interim periods are not necessarily indicative of the operating results of a full year or of future years.

 

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow the same accounting policies and methods of their application as the most recent annual financial statements. These interim financial statements should be read in conjunction with the financial statements and related footnotes included in the Annual Report on Form 10 -K of Enservco Corporation for the year ended December 31, 2018. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

 

 

 

 

Note 2  - Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Enservco maintains its excess cash in various financial institutions, where deposits may exceed federally insured amounts at times. 

 

Accounts Receivable  

 

Accounts receivable are stated at the amounts billed to customers, net of an allowance for uncollectible accounts. The Company provides an allowance for uncollectible accounts based on a review of outstanding receivables, historical collection information and existing economic conditions. The allowance for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management's best estimate of uncollectible amounts and is determined based on historical collection experience related to accounts receivable coupled with a review of the current status of existing receivables. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of June 30, 2019,  and December 31, 2018, the Company had an allowance for doubtful accounts of approxim ately $139,000. For t he three and six months ended June 30, 2019, the Compan y recorded approximately $3,000 to bad debt expense.

 

Inventories

 

Inventory consists primarily of propane, diesel fuel and chemicals that are used in the servicing of oil wells and is carried at the lower of cost or net realizable value in accordance with the first in, first out method (FIFO). The Company periodically reviews the value of items in inventory and provides write-downs or write-offs, of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. For the three and six months  ended June 30 , 2019, the Compan y did not recognize any write-downs or write-offs of inventory .

 

Property and Equipment

 

Property and equipment consists of (i) trucks, trailers and pickups; (ii) water transfer pumps, pipe, lay flat hose, trailers, and other support equipment; (iii) real property which includes land and buildings used for office and shop facilities and wells used for the disposal of water; (iv) other equipment such as tools used for maintaining and repairing vehicles, and (v) office furniture and fixtures, and computer equipment. Property and equipment is stated at cost less accumulated depreciation. The Company capitalizes interest on certain qualifying assets that are undergoing activities to prepare them for their intended use. Interest costs incurred during the fabrication period are capitalized and amortized over the life of the assets. The Company charges repairs and maintenance against income when incurred and capitalizes renewals and betterments, which extend the remaining useful life, expand the capacity or efficiency of the assets. Depreciation is recorded on a straight-line basis over estimated useful lives of 5 to 30 years.

 

Any difference between net book value of the property and equipment and the proceeds of an assets’ sale or settlement of an insurance claim is recorded as a gain or loss in the Company’s earnings.

 

Leases

 

The Company assesses whether an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We have elected the practical expedient to not separate lease and non-lease components for all assets. Operating lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over the lease term at the lease start date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease start date in determining the present value of future payments. The operating lease asset is increased by any lease payments made at or before the lease start date and reduced by lease incentives and initial direct costs incurred. The lease term includes options to renew or terminate the lease when it is reasonably certain that we will exercise that option. The exercise of lease renewal options is at our sole discretion. The depreciable life of lease assets and leasehold improvements are limited by the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.

 

The Company conducts a major part of its operations from leased facilities. Each of these leases is accounted for as an operating lease. Normally, the Company records rental expense on its operating leases over the lease term as it becomes payable. If rental payments are not made on a straight-line basis, per terms of the agreement, the Company records a deferred rent expense and recognizes the rental expense on a straight-line basis throughout the lease term. The majority of the Company ’s facility leases contain renewal clauses and expire through April  2024. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company amortizes leasehold improvements over the shorter of the life of the lease or the life of the improvements. As of June  30, 2019, and December 31, 2018, the Company had a deferred rent liability of approximately $ 15,000  and $64,000 , respectively.

 

The Company has leased trucks and equipment in the normal course of business, which may be recorded as operating or financing leases, depending on the term of the lease. The Company recorded rental expense on equipment under operating leases over the lease term as it becomes payable; there were no rent escalation terms associated with these equipment leases. The Company records amortization expense on equipment under financing leases on a straight-line basis as well as interest expense based on our implicit borrowing rate at the date of the lease inception. The equipment leases contain purchase options that allow the Company to purchase the leased equipment at the end of the lease term, based on the market price of the equipment at the time of the lease termination. 

 

 

Long-Lived Assets

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company reviews both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company reviews the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. The Company recorded impairment charges of approximately $127,000 related to its salt water disposal wells which it expects to divest during 2019.

 

Goodwill and Other Intangible Assets

 

Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business acquisitions and combinations. Goodwill and other intangible assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate impairment may exist, such as a significant adverse change in the business climate. In assessing the value of goodwill, assets and liabilities are assigned to the reporting units and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. Identified intangible assets are amortized using the straight-line method over their estimated useful lives.

 

Revenue Recognition

 

We have adopted Accounting Standards Update 2014-09, Revenue - Revenue from Contracts with Customers, Accounting Standards Codification ("ASC") Topic 606, beginning January 1, 2018, using the modified retrospective approach, which we have applied to contracts within the scope of the standard. There was no material impact on the Company's condensed consolidated financial statements from adoption of this new standard. The Company evaluates revenue when we can identify the contract with the customer, the performance obligations in the contract, the transaction price, and we are certain that the performance obligations have been met. Revenue is recognized when the service has been provided to the customer. The vast majority of the Company's services and product offerings are short-term in nature. The time between invoicing and when payment is due under these arrangements is generally 30 to 60 days. Revenue is not generated from contractual arrangements that include multiple performance obligations.

 

The Company’s agreements with its customers are often referred to as “price sheets” and sometimes provide pricing for multiple services. However, these agreements generally do not authorize the performance of specific services or provide for guaranteed throughput amounts. As customers are free to choose which services, if any, to use based on the Company’s price sheet, the Company prices its separate services on the basis of their standalone selling prices. Customer agreements generally do not provide for performance, cancellation, termination, or refund type provisions. Services based on price sheets with customers are generally performed under separately issued “work orders” or “field tickets” as services are requested.

 

Revenue is recognized for certain projects that take more than one day projects over time based on the number of days during the reporting period and the agreed upon price as work progresses on each project.

 

Disaggregation of revenue

 

See Note 13  - Segment Reporting for disaggregation of revenue.

 

Earnings (Loss) Per Share 

 

Earnings per Common Share - Basic is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Earnings per Common Share - Diluted earnings is calculated by dividing net income (loss) by the diluted weighted average number of common shares. The diluted weighted average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding stock options and warrants.

 

As of June  30, 2019 and 2018 , there were outstanding stock options and warrants to acquire an aggregate of 2,203,499  and 2,662,766  shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of June  30, 2019, the aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on June 30 , 2019, and the exercise price, multiplied by the number of in-the-money instruments)  of outstanding stock options and warrants was approximately $103 ,000 .  

 

 

Derivative Instruments

 

From time to time, the Company has  interest rate swap agreements in place to hedge against changes in interest rates. The fair value of the Company’s derivative instruments are reflected as assets or liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. Transactions related to the Company’s derivative instruments accounted for as hedges are classified in the same category as the item hedged in the consolidated statement of cash flows. The Company did not hold derivative instruments at June  30, 2019  or December 31, 2018, for trading purposes.

 

On February 23, 2018, we entered into an interest rate swap agreement with East West Bank in order to hedge against the variability in cash flows from future interest payments related to the 2017 Credit Agreement. 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 payment rate 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. The fair value of the interest rate swap agreement is recorded in Other Assets and changes to the fair value are recorded to Other Expense.

 

Income Taxes  

 

The Company recognizes deferred tax liabilities and assets based on the differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities will be recognized in income in the period that includes the enactment date. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date. The Company records a valuation allowance to reduce deferred tax assets to an amount that it believes is more likely than not expected to be realized.

 

The Company accounts for any uncertainty in income taxes by recognizing the tax benefit from an uncertain tax position only if, in the Company’s opinion, it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous.  As such, the Company is required to make many subjective assumptions and judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company’s subjective assumptions and judgments which can materially affect amounts recognized in the consolidated balance sheets and consolidated statements of income. The result of the reassessment of the Company’s tax positions did not have an impact on the consolidated financial statements.

 

Interest and penalties associated with tax positions are recorded in the period assessed as Other expense. The Company files income tax returns in the United States and in the states in which it conducts its business operations. The Company ’s United States federal income tax filings for tax years 2015  through 2018  remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2014  to 2018.

 

Fair Value

 

The Company follows authoritative guidance that applies to all financial assets and liabilities required to be measured and reported on a fair value basis. The Company also applies the guidance to non-financial assets and liabilities measured at fair value on a nonrecurring basis, including non-competition agreements and goodwill. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

 

Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best information available in the circumstances.  Beginning in  2017 the Company valued its warrants using the Binomial Lattice model ("Lattice"). The Company did not have any transfers between hierarchy levels during the three and six months  ended June  30, 2019 . The financial and nonfinancial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

 

The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

 

 

Level 1:

Quoted prices are available in active markets for identical assets or liabilities;

 

Level 2:

Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

 

Level 3:

Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations.

 

9

 

 

Stock-based Compensation

 

Stock-based compensation cost is measured at the date of grant, based on the calculated fair value of the award as described below, and is recognized over the requisite service period, which is generally the vesting period of the equity grant.

 

The Company uses the Black-Scholes pricing model as a method for determining the estimated grant date fair value for all stock options awarded to employees, independent contractors, officers, and directors. The expected term of the options is based upon evaluation of historical and expected exercise behavior. The risk-free interest rate is based upon U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life of the grant. Volatility is determined upon historical volatility of our stock and adjusted if future volatility is expected to vary from historical experience. The dividend yield is assumed to be none as we have not paid dividends nor do we anticipate paying any dividends in the foreseeable future.

 

The Company  uses a Lattice model to determine the fair value of certain warrants. The expected term used was the remaining contractual term. Expected volatility is based upon historical volatility over a term consistent with the remaining term. The risk-free interest rate is derived from the yield on zero -coupon U.S. government securities with a remaining term equal to the contractual term of the warrants. The dividend yield is assumed to be zero.

 

The Company used the market-value of Company stock to determine the fair value of the performance-based restricted stock awarded in 2018 and 2019. The fair-value is updated quarterly based on actual forfeitures.

 

The Company used a Monte Carlo simulation program to determine the fair value of market-based restricted stock awarded in 2018 and 2019.

 

Management Estimates  

 

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 revenues and expenses during the reporting period. Significant estimates include the realization of accounts receivable, evaluation of impairment of long-lived assets, stock-based compensation expense, income tax provision, the valuation of warrant liability and the Company's interest rate swaps, and the valuation of deferred taxes. Actual results could differ from those estimates.

 

 

Reclassifications

 

Certain prior-period amounts have been reclassified for comparative purposes to conform to the current  presentation. These reclassifications have no effect on the Company’s consolidated statement of operations.

 

Business Combinations 

 

We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date, with any remaining difference recorded as goodwill or gain from a bargain purchase. For material acquisitions, management typically engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed, noncontrolling interest, if any, and goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate based on new information obtained about facts and circumstances that existed as of the acquisition date. An income, market or cost valuation method may be utilized to estimate the fair value of the assets acquired, liabilities assumed, and noncontrolling interest, if any, in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management’s estimates of volumes, commodity prices, revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset. See Note 4 – Business Combinations   for additional information regarding our business combinations.

 

Recently Adopted Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In August 2018, the FASB issued ASU 2018-11, Targeted Improvements to ASC 842, Leases, which includes an option to not restate comparative periods in transition and elect to use the effective date of ASC 842, Leases, as the date of initial application of transition. Based on the effective date, the Company adopted this ASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated balance sheet with the recognition of new right of use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than one year. Upon adoption, both assets and liabilities on our consolidated balance sheets increased by approximately $2.4 million. The Company elected a package of transition practical expedients which include not reassessing whether any expired or existing contracts are or contain leases, not reassessing the lease classification of expired or existing leases, and not reassessing initial direct costs for existing leases. The Company also elected a practical expedient to not separate lease and non-lease components. The Company did not elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the Right-of-Use (‘ROU”) assets. See Note 10 - Commitments and Contingencies for more information.

 

In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," that clarifies the definition of a business. This ASU provides a screen to determine whether a group of assets constitutes a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated as acquisitions. If the screen is not met, this ASU (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output and (2) removes the evaluation of whether a market participant could replace missing elements. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. We adopted this ASU in the first quarter of 2018 and the adoption of this ASU did not have a material impact on the consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting," which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted this ASU on January 1, 2018, and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

 

 
 

 

 

Note 3  - Property and Equipment

 

Property and equipment consists of the following (amounts in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Trucks and vehicles

  $ 59,621     $ 59,535  

Water transfer equipment

    5,190       4,952  

Other equipment

    1,032       961  

Buildings and improvements

    2,955       2,822  

Land

    378       378  

Disposal wells

    -       400  

Total property and equipment

    69,176       69,048  

Accumulated depreciation

    (38,870 )     (35,991 )

Property and equipment,  net

  $ 30,306     $ 33,057  

  

 

  Note 4 – Business Combinations 

 

Acquisition of Adler Hot Oil Service, LLC 

 

On October 26, 2018, Enservco Corporation entered into a Membership Interest Purchase Agreement (the “Agreement”) with Adler Hot Oil Holdings, LLC, a Delaware limited liability company (the “Seller”), pursuant to which Enservco acquired all of the outstanding membership interests of Adler Hot Oil Service, LLC, a Delaware limited liability company (“Adler”) for a gross aggregate purchase price of $12.5 million, plus approximately $500,000 in working capital adjustments (the “Transaction”). The purchase price allocation differs from the gross aggregate purchase price due to fair value adjustments to the indemnity holdback, earnout, plus the discount on the subordinated note. Certain former members of Adler are also parties to the Agreement. Adler is a provider of frac water heating and hot oiling services, whose assets consist primarily of vehicles and equipment, with a complementary base of customers in several oil and gas producing basins where Enservco operates.

 

The consideration paid or to be paid by Enservco under the Agreement originally included: (i) $3.7 million in cash paid to or for the benefit of the Seller at the closing; (ii) a subordinated promissory note issued to the Seller in the principal amount of $4.8 million, plus interest accrued thereon (the “Seller Subordinated Note”), as further discussed below; (iii) retirement by Enservco of $2.5 million in indebtedness of Adler; (iv) an earn-out payment of up to $1.0 million in cash payable to the Seller (the "Earn-Out Payment"), the actual amount of which is subject to Enservco’s satisfaction of certain EBITDA-related performance conditions during 2019; and (v) $1.0 million in cash held by Enservco and payable to the Seller on the 18 month anniversary of October 26, 2018, subject to offset by Enservco for any indemnification obligations owed by the Seller or certain former members of Adler under the Agreement (the "Indemnity Holdback Payment"). Certain aspects of the consideration have been modified since execution of the Agreement as further discussed below. 

 

On April 4, 2019 Enservco and the Seller entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) in order to resolve certain disputes and disagreements relating to the Transaction without litigation. Pursuant to the Settlement Agreement the parties agreed to (i) waive all rights of the Seller to the Earn-Out Payment and the Indemnity Holdback Payment, (ii) reduce the original principal balance of the Seller Subordinated Note from $4,800,000 to $4,500,000, (iii) extend the maturity date of the Seller Subordinated Note from March 31, 2019 to April 10, 2019, subject to a nine day grace period, and (iv) mutually release one another from any and all demands, claims and causes of action, existing, or arising out of or related to (A) the sale and purchase of Adler, (B) the Purchase Agreement or the Ancillary Documents referred to therein, (C) Adler, (D) loans by the Seller to Adler, or (E) the transactions or activities connected with any of the foregoing or any prior dealings of any of the Seller, on the one hand, and Enservco on the other hand, in each case subject to exceptions for claims arising from breaches of the Settlement Agreement and enumerated provisions of the Purchase Agreement. All adjustments to the original purchase accounting are recognized in the second quarter of 2019, when the settlement occurred. We also considered whether the execution of the Settlement Agreement was an indicator of impairment with regards to the recorded balance of goodwill and the definite-lived intangible assets. With regards to goodwill, we determined that it was not more likely than not that the carrying amount of the reporting unit was greater than its fair value, and thus determined that further evaluation of goodwill for potential impairment was not necessary. We will perform a goodwill impairment analysis over the recorded balance on an annual basis, or if we determine an indicator of impairment exists. With regards to the definite-lived intangible assets, we determined that there were no events or changes in circumstances that would indicate that its carrying amount may not be recoverable, and therefore determined that a test for recoverability was not required.

 

The acquisition of Adler qualified as a business combination and as such, we estimated the fair value of the assets acquired and liabilities assumed as of the closing date. Additionally, we estimated the fair value of contingent consideration given. The fair value measure of the assets acquired and liabilities assumed applied various valuation methods to estimate the value of the intangibles that would provide a fair and reasonable value to a market participant, in view of the facts available at the time. Each valuation method was analyzed to determine which method would generate the most reasonable estimate of value of the Company’s intangible assets as of October 26, 2018. Both internal and external factors influencing the value of the intangibles were considered such as Adler’s financial position, results of operations, historical financial data, future financial expectations, economic conditions, status of the oil and gas industry and Adler’s position in the industry.

 

In connection with the execution of the Settlement Agreement, we reviewed our estimates and allocation of the fair value of assets acquired, consideration transferred, and contingent consideration given in connection with the Transaction. In our judgment, the reduction in the fair value of the consideration did not have a clear and direct link to the purchase price, and therefore the change in the fair value of the Indemnity Holdback Payment of approximately $908,000, the change in the fair value of the Earn-Out Payment, of approximately $44,000, and the $300,000 reduction in the amount of the Seller Subordinated Note, were each recorded as gains within Other Income (Expense) in the accompanying Statements of Operations.

 

12

 

 

The goodwill of approximately $245,000 arising from the acquisition consists largely of the synergies expected be achieved from combining the operations of Enservco and Adler. None of the goodwill is expected to be deductible for income tax purposes. 

 

The following tables represent the consideration paid to the Seller and the estimated fair value of the assets acquired and liabilities assumed.

 

Consideration paid to Seller:

 

 

 

 

Cash consideration, including payment to retire Adler debt

 

$

6,206

 

Subordinated note, net of discount

 

 

4,580

 

Indemnity holdback at fair value

 

 

873

 

Earnout at fair value

 

 

44

 

Net purchase price

 

$

11,703

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

 

 

 

 

Cash

 

$

43

 

Accounts receivable, net

 

 

1,317

 

Prepaid expenses and other current assets

 

 

239

 

Property, plant, and equipment

 

 

9,664

 

Intangible assets

 

 

1,045

 

Accounts payable and accrued liabilities

 

 

(850

)

Total identifiable net assets

 

 

11,458

 

Goodwill

 

 

245

 

Total identifiable assets acquired

 

$

11,703

 

 

13

 

 

 

Below are consolidated results of operations for the three and six months ended June 30, 2018, as though the acquisition of Adler had been completed on January 1, 2018.

 

    Three Months Ended     Six Months Ended  
   

June 30,

   

June 30,

 
   

2018

   

2018

 
                 

Total revenues

 
$
9,623    
$
39,173  

Income from continuing operations

  $ (3,978 )   $ 679  

Income per common share - basic and diluted

  $ (0.08 )   $ 0.09  

 

The pro forma results for the three and six months ended June 30, 2018, includes adjustments related to the following purchase accounting and acquisition related items:

 

- Elimination of Adler interest expense.

- Additional interest expense related to long-term debt issued to fund the acquisition.

- Adjustment to depreciation expense based on the adjustment of Adler's Property, plant, and equipment to fair value.

- Adjustment to remove certain professional fees from Adler's expenses.

- Adjustment to remove gain on extinguishment of debt from Adler's results.

 

Subordinated Note

 

In connection with the Transaction and pursuant to the terms of the Agreement, on October 26, 2018, Enservco issued to the Seller the Seller Subordinated Note in the original principal amount of $4.8 million in connection with the Settlement Agreement, which was reduced to $4.5 million as discussed above, and unpaid amounts thereunder beared simple interest at a rate of 8% per annum. Enservco was required to and made principal payments on November 30, 2018 of $800,000, on February 28, 2019 of $200,000, and on April 9, 2019, subject to a 10-day grace period, of all remaining outstanding principal and interest. The Seller Subordinated Note was guaranteed by Enservco’s subsidiaries and secured by a junior security interest in substantially all assets of Enservco and its subsidiaries. The Seller Subordinated Note was subject to a subordination agreement by and among Enservco, the Seller, and East West Bank. On April 19, 2019, Enservco made the final payment to settle the principal balance and accrued interest on the Seller Subordinated Note and has no further obligations to the Seller.

 

Second Amendment to Loan and Security Agreement and Consent 

 

In connection with the Transaction, on October 26, 2018, Enservco and East West Bank entered into a Second Amendment to Loan and Security Agreement and Consent (the “Second Amendment to LSA”), which amended the Loan and Security Agreement dated August 10, 2017 by and between Enservco and East West Bank (the “Loan Agreement”). Pursuant to the Second Amendment to LSA, East West Bank consented to the Transaction and increased the maximum borrowing limit of the senior secured revolving credit facility provided to Enservco under the Loan Agreement to $37.0 million. Proceeds of $6.2 million from the increased senior secured revolving credit facility were used in the Transaction to make the cash payments at closing and retire the indebtedness of Adler. In connection with the Second Amendment to LSA the capital expenditure limitation contained within the Loan Agreement was increased to $3.0 million from $2.5 million.

 

On October 26, 2018, in connection with the Second Amendment to LSA, Adler entered into a Joinder Agreement, pursuant to which Adler was joined as a party to the Loan Agreement.

 

 

14

 

 

 

Note  5 – Intangible Assets 

 

The components of our intangible assets as of June 30, 2019, and December 31, 2018, are as follows (in thousands):

 

             

 

 

June 30, 2019

 

 

December 31, 2018

 

Customer relationships

 

$

626

 

 

$

626

 

Patents and trademarks

 

 

441

 

 

 

441

 

Total intangible assets

 

 

1,067

 

 

 

1,067

 

Accumulated amortization

 

 

(136

)

 

 

(34

)

Net carrying value

 

$

931

 

 

$

1,033

 

 

 

The useful lives of our intangible assets are estimated to be five years. Amortization expense was approximately $51,000 and $102,000 for the three and six months ended June 30, 2019. 

 

The following table represents the amortization expense for the next five years for the twelve months ending June 30 (in thousands): 

 

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

Customer relationships

 

$

125

 

 

$

125

 

 

$

125

 

 

$

125

 

 

$

41

 

Patents and trademarks

 

 

90

 

 

 

90

 

 

 

90

 

 

 

90

 

 

 

30

 

Total intangible asset amortization expense

 

$

215

 

 

$

215

 

 

$

215

 

 

$

215

 

 

$

71

 

 

15

 

 

 

Note 6 – Discontinued Operations

 

Dillco

 

Effective November 1, 2018, the Dillco water hauling business ceased operations for customers. In December 2018, we held an auction for all of the Dillco fixed assets which resulted in a gain of approximately $129,000. Additionally, we recorded an impairment charge of $130,000 related to land and building sold subsequent to December 31, 2018.

 

The following table represents a reconciliation of the carrying amounts of major classes of assets and liabilities disclosed as discontinued operations in the Balance Sheets:

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Carrying amount of major classes of assets included as part of discontinued operations:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

30

 

 

$

97

 

Inventories

 

 

-

 

 

 

-

 

Property and equipment, net

 

 

-

 

 

 

177

 

Receivable from equipment sales

 

 

-

 

 

 

760

 

Prepaid expenses and other current assets

 

 

7

 

 

 

7

 

Total major classes of assets of the discontinued operation

 

$

37

 

 

$

1,041

 

 

 

 

 

 

 

 

 

 

Carrying amounts of major classes of liabilities included as part of discontinued operations:

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

-

 

 

 

44

 

Total liabilities included as part of discontinued operations

 

$

-

 

 

$

44

 

 

The following table represents a reconciliation of the major classes of line items constituting pretax loss of discontinued operations that are disclosed as discontinued operations in the Statements of Operations:   

 

    Three months ended  

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

-

 

 

$

858

 

Cost of sales

 

 

-

 

 

 

(953

)

Sales, general, and administrative expenses

 

 

-

 

 

 

(5

)

Depreciation and amortization

 

 

-

 

 

 

(78

)

Other income and expense items that are not major

 

 

-

 

 

 

1

 

Pretax loss of discontinued operations related to major classes of pretax profit

 

 

-

 

 

 

(177

)

Pretax gain on sale at auction

 

 

-

 

 

 

-

 

Loss on disposal     -       -  

Pretax loss on impairment 

 

 

-

 

 

 

-

 

Income tax benefit

 

 

-

 

 

 

-

 

Total loss on discontinued operations that is presented in the Statements of Operations

 

$

-

 

 

$

(177

)

 

    Six months ended  

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

-

 

 

$

1,699

 

Cost of sales

 

 

-

 

 

 

(1,901

)

Sales, general, and administrative expenses

 

 

-

 

 

 

(22

)

Depreciation and amortization

 

 

-

 

 

 

(167

)

Other income and expense items that are not major

 

 

-

 

 

 

1

 

Pretax loss of discontinued operations related to major classes of pretax profit

 

 

-

 

 

 

(390

)

Pretax gain on sale at auction

 

 

-

 

 

 

-

 

Loss on disposal     -       -  

Pretax loss on impairment 

 

 

-

 

 

 

-

 

Income tax benefit

 

 

-

 

 

 

-

 

Total loss on discontinued operations that is presented in the Statements of Operations

 

$

-

 

 

$

(390

)

 

 

16

 

 

 

Note 7  – Debt

 

East West Bank Revolving Credit Facility
 
On August 10, 2017, we entered into the  2017 Credit Agreement, as amended, with East West Bank,  which provides for a three -year $37  million senior secured revolving credit facility (the "Credit Facility"). 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. Under the 2017 Credit Agreement, there are no required principal payments until maturity and we have the option to pay variable interest rate based on (i) 1 -month LIBOR plus a margin of 3.5%  or (ii) interest at the Wall Street Journal prime rate plus a margin of 1.75%. Interest is calculated monthly and paid in arrears. Additionally, the Credit Facility is subject to an unused credit line fee of 0.5% per annum multiplied by the amount by which total availability exceeds the average monthly balance of the Credit Facility, payable monthly in arrears. The Credit Facility is collateralized by substantially all of our assets and subject to financial covenants. The outstanding principal loan balance matures on August 10, 2020. Under the terms of the 2017 Credit Agreement, collateral proceeds are collected in bank-controlled lockbox accounts and credited to the Credit Facility within one business day.

 

As of June 30, 2019, we had an outstanding principal loan balance under the Credit Facility of approximately $31.9 million with a weighted average interest rates of 5.98% per year for $27.0 million of outstanding LIBOR Rate borrowings and 7.25% per year for the approximately $4.9 million of outstanding Prime Rate borrowings. As of June 30, 2019, we had borrowed approximately $753,000 in excess of the maximum amount available under the Credit Facility and, under the Credit Facility we were required to immediately replay the borrowing excess. While we paid all of the borrowing excess on July 3, 2019, the non-payment on July 1, 2019 constituted a payment default under the Credit Agreement. On August 12, 2019, we entered into the Third Amendment to Loan and Security Agreement and Waiver with East West Bank that (i) waived the foregoing default; (ii) provided for slightly higher interest rates on borrowings under the Credit Facility; and (iii) reduced our allowable capital expenditures in any fiscal year from $3.0 million to $1.5 million.

 

Under the 2017 Credit Agreement, we are subject to the following financial covenants:
 
( 1 ) Maintenance of a Fixed Charge Coverage Ratio (“FCCR”) of not less than 1.10 to 1.00 at the end of each month, with a build up beginning on January 1, 2017, through December 31, 2017, upon which the ratio is measured on a trailing twelve -month basis;
 
( 2 In periods when the trailing twelve -month FCCR is less than 1.20 to 1.00, we are required t o maintain minimum liquidity of $1,500,000 (including excess availability under the Credit Facility and balance sheet cash).

As of June  30, 2019, our available liquidity was approximately $506,000 , which was comprised of cash.

 

As of June  30, 2019, we were in compliance with all financial covenants contained in the 2017 Credit Agreement.

 

Debt Issuance Costs

 

We have capitalized certain debt issuance costs incurred in connection with the Credit Facility discussed above and these costs are being amortized to interest expense over the term of the facility  on a straight-line basis. The long-term portion of debt issuance costs of approximately $ 152,000  and $208,000  is included in Other Assets in the accompanying condensed consolidated balance sheets for June 30, 2019,  and December 31, 2018, respectively. During the three and six  months ended June  30, 2019 , the Company amortized approximately $ 24,000  and $ 58,000, respectively,   of these costs to Interest Expense. During the three and six  months ended June  30, 2018 , the Company amortized approximately $ 24,000  and $ 47,000, respectively,   of these costs to Interest Expense .

 

 

 

 

 

Notes Payable

 

Long-term debt (excluding borrowings under our Credit Facility described above) consists of the following (in thousands):

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 
Seller Subordinated Note. Interest is at 8%. Matured March 31, 2019 (1)   $ -     $ 4,000  
                 
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Matures June 28, 2022     1,000       1,000  
                 
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Matures June 28, 2022     1,000       1,000  
                 

Real Estate Loan for a facility in North Dakota, interest at 5.75%, and monthly principal and interest payment of $5,254.64 until October 3, 2028. Collateralized by land and property purchased with the loan. 

    243       258  
                 
Vehicle loans for three pickups, interest at 8.59% monthly principal and interest payments of $3,966, matures in August 2021     94       113  
                 
Note payable to the seller of Heat Waves. The note was garnished by the Internal Revenue Service (“IRS”) in 2009 and is due on demand; paid in annual installments of $36,000 per agreement with the IRS     53       89  

Total

    2,390       6,460  
Less debt discount     (143 )     (299 )

Less current portion

    (144 )     (4,017 )

Long-term debt, net of debt discount and current portion

  $ 2,103     $ 2,144  

 

(1) In accordance with the Settlement Agreement discussed in Notes 4 the agreed upon due date was extended to April 10, 2019, subject to a nine-day grace period. On April 19, 2019, Enservco made the final payment to settle the principal balance and accrued interest on the Seller Subordinated Note and has no further obligations to the Seller.

 

Aggregate maturities of debt, (excluding the  2017  Credit Agreement described in above ), are as follows (in thousands):

 

Twelve Months Ending June 30,

       

2020

  $ 144  

2021

    98  

2022

    2,064  

2023

    60  

2024

    24  

Thereafter

    -  

Total

  $ 2,390  

 

 

 

 

 

Note 8  – Fair Value Measurements

 

The following table presents the Company ’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy(in thousands):

 

   

Fair Value Measurement Using

         
   

Quoted

Prices in

Active Markets (Level 1)

   

Significant Other

Observable

Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

   

Fair Value

Measurement

 

June 30 , 2019

                               

Derivative Instrument

                               
Interest rate swap liability   $ -     $ 18     $ -     $ 18  
                                 

December 31, 2018

                               

Derivative Instrument

                               

Interest rate swap asset

  $ -     $ 75     $ -     $ 75  
                                 
Earn-Out Payment liability   $ -     $ -     $ 44     $ 44  
Indemnity Holdback Payment liability     -       -       887       887  
    $ -     $ -     $ 931     $ 931  

 

The fair value of the interest rate swap is estimated using a discounted cash flow model. Such models involve using market-based observable inputs, including interest rate curves. We incorporate credit valuation adjustments to appropriately reflect both our nonperformance risk and respective counterparty’s nonperformance risk in the fair value measurements, which we have concluded are not material to the valuation. Due to the interest rate swaps being unique and not actively traded, the fair value is classified as Level 2.

 

The fair value of the Indemnity Holdback Payment liability was estimated based on the present value using a risk-adjusted interest rate of 9.5%. The fair value of the Earn-Out Payment liability was estimated using a financial projection with a risk-adjusted interest rate of 9.5%.

 

  Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. As of June 30, 2019, and December 31, 2018, the carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and interest approximates fair value due to the short-term nature of such items. The carrying value of the Company’s credit agreements are carried at cost which are approximately the fair value of the debt as the related interest rate are at the terms that approximate rates currently available to the Company.

 

The Company did not have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the three  and six months ended June  30, 2019 .

 

 

 

 

Note 9  – Income Taxes 

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the six months ended June  30, 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.

 

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than  not  that some portion or all of the deferred tax assets will  not  be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

 

Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management recorded a valuation allowance to reduce its net deferred tax assets to zero.

 

During the six months ended June 30, 2019 and 2018, the Company recorded an income tax expense of approximately $314,000 and  $235,000, respectively, 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.

 

 

 

 

 

Note 10  – Commitments and Contingencies

 

Operating Leases

 

On January 1, 2019, we adopted ASC 842, Leases. Results for reporting periods beginning January 1, 2019 are presented in accordance with ASC 842, while prior period amounts are reported in accordance with ASC 840. On January 1, 2019, we recognized $2.4 million in right-of-use assets and $2.4 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. During the six months ended June 30, 2019, we entered into several finance leases related to equipment. We recognized approximately $845,000 in right-of-use assets and lease liabilities. We made a cumulative-effect adjustment to retained earnings of approximately $108,000 at January 1, 2019.

 

Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company uses the weighted average interest rate on its Credit Facility. Long-term leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term.

 

The Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.

 

The Company elected the expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.

 

As of June  30, 2019, the Company leases facilities and certain equipment under lease commitments that expire through June  2026. Future minimum lease commitments for these operating lease commitments are as follows (in thousands):

 

Twelve Months Ending June 30,

    Operating Leases     Financing Leases  

2020

  $ 1,096   $ 275  

2021

    1,041     239  

2022

    933     191  

2023

    644     -  

2024

    613     -  

Thereafter

    717     -  

 

    5,044     705  
Impact of discounting     (142 )   (67 )
Discounted value of lease obligations   $ 4,902   $ 638  

   

The following table summarizes the components of our gross operating lease costs incurred during the three and six months ended June 30, 2019 (in thousands):

 

 

 

Three Months Ended 

 

  Six Months Ended  
    June 30, 2019  

Operating lease expense:

 

 

 

 

     
Current lease cost   $ 175   $ 367  
Long-term lease cost     197     322  

Total operating lease cost

 

$

372

 

$ 689  
Finance lease expense:              
Amortization of right-of-use assets   $ 68   $ 68  
Interest on lease liabilities     9     9  

Total lease cost

 

$

77

 

$ 77  

 

Our weighted-average lease term and discount rate used during the six months ended June 30, 2019 are as follows:

 

 

 

Six Months Ended June 30, 2019

 

Operating        

Weighted-average lease term (years)

 

 

4.96

 

Weighted-average discount rate

 

 

6.08

%

Financing        
Weighted-average lease term (years)     2.66  
Weighted-average discount rate     6.10 %

 

22

 

 

Self-Insurance

 

In June 2015, the Company became self-insured under its Employee Group Medical Plan, and currently is responsible to pay the first   $50,000 in medical costs per indiv idual participant for claims incurred in the calendar year up to a maximum of approximately $1.8 million per year in the aggregate based on enrollment. The Company had an accrued liability of approximately $ 68,000   and $60,000  as of June  30, 2019  and December 31, 2018, respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to June 30, 2019 and December 31, 2018, respectively.

 

Effective April 1, 2015, the Company had entered into a workers’ compensation and employer’s liability insurance policy with a term through March 31, 2018.  Under the terms of the policy, the Company was required to pay premiums in addition to a portion of the cost of any claims made by our employees, up to a maximum of approximately $1.8 million over the term of the policy (an amount that was variable with changes in annualized compensation amounts). As of June 30, 2019, a former employee of ours had an open claim relating to injuries sustained while in the course of employment, and the projected maximum cost of the policy as determined by the insurance carrier included estimated claim costs that have not yet been paid or incurred in connection with the claim. During the year ended December 31, 2017, our insurance carrier formally denied the workers' compensation claim and has moved to close the claim entirely. Per the terms of our insurance policy, through June 30, 2019, we had paid in approximately $1.8 million of the projected maximum plan cost of $1.8 million, and had recorded approximately $1.6 million as expense over the term of the policy. We recorded the remaining approximately $189,000 in payments made under the policy as a long-term asset, which we expect will either be recorded as expense in future periods, or refunded to us by the insurance carrier, depending on the outcome of the individual claim described above, and the final cost of any additional open claims incurred under the policy. As of June 30, 2019, we believe we have paid all amounts contractually due under the policy. Effective April 1, 2018, we entered into a new workers’ compensation policy with a fixed premium amount determined annually, and therefore are no longer partially self-insured for workers' compensation and employer's liability.

 

 

Litigation 

 

Enservco and Heat Waves were defendants in a civil lawsuit in federal court in Colorado, Civil Action No. 1:15-cv-00983-RBJ (“Colorado Case”), that alleged that Enservco and Heat Waves, in offering and selling frac water heating services, infringed and induced others to infringe two patents owned by Heat-On-The-Fly, LLC (“HOTF”)- i.e. , the ‘993 Patent and the ‘875 Patent.  In March of 2019, the parties moved to dismiss the Colorado Case.  On March 15, 2019, the Colorado Case was dismissed in its entirety without any finding of wrongdoing by Enservco or Heat Waves.   

 

HOTF dismissed its claims with regard to the ‘993 Patent with prejudice and its claims with regard to the ‘875 Patent without prejudice.  However, HOTF agreed not to sue Enservco or Heat Waves in the future for infringement of the ‘875 Patent based on the same type of frac water heating services offered by Heat Waves prior to and through March 13, 2019.  Heat Waves dismissed its counterclaims against HOTF without prejudice in order to preserve its defenses.

 

While the Colorado Case was pending, HOTF was issued two additional patents, which were related to the ‘993 and ‘875 Patents, but were not part of the Colorado Case.  However, in March of 2015, a North Dakota federal court determined in an unrelated lawsuit (not involving Enservco or Heat Waves) that the ‘993 Patent was invalid. The same court also found that the ‘993 Patent was unenforceable due to inequitable conduct by the patent owner and/or the inventor. The Federal Circuit Court of Appeals later confirmed, among other things, the North Dakota court’s findings of inequitable conduct.  In light of the foregoing, Management believes that final findings of invalidity and/or unenforceability of the ‘993 Patent based on inequitable conduct could serve as a basis to affect the validity and/or enforceability of these additional HOTF patents.

 

 

Note 11 – Stockholders Equity

 

Warrants

 

In June 2016, the Company granted a principal of the Company’s investor relations firm warrants to acquire 30,000 shares of the Company’s common stock in connection with a reduction of the firm's ongoing monthly cash service fees. The warrants had a grant-date fair value of $0.36 per share and vested over a one -year period, 15,000 on December 21, 2016 and 15,000 on June 21, 2017. As of June 30, 2019 , all of these warrants remain outstanding and are exercisable until June 21, 2021 at $0.70 per share.

 

In June 2017, in connection with a subordinated loan agreement , the Company granted Cross River two five -year warrants to buy an aggregate total of 1,612,902 shares of the Company’s common stock at an exercise price of $0.31 per share, the average closing price of the Company’s common stock for the 20 -day period ended May 11, 2017. The warrants had a grant-date fair value of $0.19 per share and vested in full on June 28, 2017. On June 29, 2018 Cross River exercised both warrants and acquired 1,612,902 shares of our $0.005 par value common stock. Proceeds from the exercise of the warrants in the amount of $500,000 were used to reduce the subordinated debt balance. The warrants exercised had a total intrinsic value of approximately $1.4 million at the time of exercise.

 

 

A summary of warrant activity for the six  months ended June  30, 2019  is as follows (amounts in thousands): 

 

                   

Weighted

         
           

Weighted

   

Average

         
           

Average

   

Remaining

   

Aggregate

 
           

Exercise

   

Contractual

   

Intrinsic

 

Warrants

 

Shares

   

Price

   

Life (Years)

   

Value

 
                                 

Outstanding at December 31, 2018

    30,000     $ 0.70       2.5     $ -  

Issued

    -       -       -       -  

Exercised

    -       -       -       -  

Forfeited/Cancelled

    -       -             -  

Outstanding at June 30, 2019

    30,000     $ 0.70       2.0       -  
                                 

Exercisable at June 30, 2019

    30,000     $ 0.70       2.0       -  

 

Stock Issued for Services

 

During the three  and six months ended June  30, 2019 , respectively, the Company did not issue any shares of common stock as compensation for services provided to the Company. 

 

 

Note 12  – Stock Options and Restricted Stock

 

Stock Options

 

On July 27, 2010, the Company’s Board of Directors adopted the 2010 Stock Incentive Plan (the “2010 Plan”). The aggregate number of shares of common stock that could be granted under the 2010 Plan was reset at the beginning of each year based on 15% of the number of shares of common stock then outstanding. As such, on January 1, 2016 the number of shares of common stock available under the 2010 Plan was reset to 5,719,069 shares based upon 38,127,129 shares outstanding on that date. Options were typically granted with an exercise price equal to the estimated fair value of the Company's common stock at the date of grant with a vesting schedule of one to three years and a contractual term of 5 years. As discussed below, the 2010 Plan has been replaced by a new stock option plan and no additional stock option grants will be granted under the 2010 Plan. As of June 30, 2019, there were options to purchase 574,666 shares outstanding under the 2010 Plan.

 

On July 18, 2016, the Board of Directors unanimously approved the adoption of the Enservco Corporation 2016 Stock Incentive Plan (the “2016 Plan”), which was approved by the stockholders on September 29, 2016. The aggregate number of shares of common stock that may be granted under the 2016 Plan is 8,000,000 shares plus authorized and unissued shares from the 2010 Plan totaling 2,391,711 for a total reserve of 10,391,711 shares. As of June  30, 2019, there were options to purchase 1,598,833 shares and we had granted restricted stock shares of 1,857,166 that remained outstanding under the 2016 Plan 

 

We have  not granted any stock options during t he three and six  months ended June 30,  2019 or  t he three and six  months ended June 30,  2018.  

 

 

 

During the six months ended June 30 , 2019,   no options were exercised. During the six months ended June 30, 2018, 1,230,002 options to purchase shares of Company common stock were exercised on a cashless basis resulting in the issuance of 663,938 shares. The following is a summary of stock option activity for all equity plans for the six  months ended June  30 , 2019:  

 

   

Shares

   

Weighted Average

Exercise Price

   

Weighted Average

Remaining

Contractual Term

(Years)

   

Aggregate Intrinsic

Value (in thousands)

 
                                 

Outstanding at December 31 , 2018

    2,544,665     $ 0.85       2.54     $ 93  

Granted

    -       -       -       -  

Exercised

    -       -       -       -  

Forfeited or Expired

    (371,166 )     1.50       -       -  

Outstanding at June 30 , 2019

    2,173,499     $ 0.73       2.24     $ 103  
                                 

Vested or Expected to Vest at June 30, 2019

    2,098,998     $ 0.74       2.21       102  

Exercisable at June 30, 2019

    2,098,998     $ 0.74       2.21     $ 102  

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s common stock on June 30 , 2019, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they exercised their options on June 30 , 2019.

 

During the three and six  months ended Jun e 30 , 2019 , the Company recognized stock-based compensation costs for stock options of approximately $29,000 and $71,000, respectively, in sales, general, and administrative expenses. During the three and six  months ended June 30 , 2018 , the Company recognized stock-based compensation costs for stock options of approximately $61,000 and $134,000 , res pectively, in sales, general, and administrative expenses. The Company currently expects all outstanding options to vest. Compensation cost is revised if subsequent information indicates that the actual number of options vested due to service is likely to differ from previous estimates. 

 

A summary of the status of non-vested shares underlying the options are presented below:

 

   

Number of Shares

   

Weighted-Average Grant-

Date Fair Value

 
                 

Non-vested at December 31, 2018

    593,833     $ 0.20  

Granted

    -       -  

Vested

    (489,332 )     0.19  

Forfeited

    (30,000 )     0.22  

Non-vested at June 30, 2019

    74,501     $ 0.22  

 

As of June  30, 2019, there was approximately $13,000  of total unrecognized compensation costs related to non-vested shares under the Company’s stock option plans which will be recognized over the remaining weighted-average period of 0.94   years.

 

26

 

 

Restricted Stock

 

Restricted shares issued pursuant to restricted stock awards under the 2016 Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically generally over a period of three years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value on the date of the grant of the stock with a service condition is amortized and charged to income on a straight-line basis over the requisite service period for the entire award. The fair market value on the date of the grant of the stock with a performance condition shall be accrued and recognized when it becomes probable that the performance condition will be achieved. Restricted shares that contain a market condition are amortized and charged over the life of the award.

 

A summary of the restricted stock activity is presented below:

 

   

Number of Shares

   

Weighted-Average Grant-

Date Fair Value

 
                 

Restricted shares at December 31, 2018

    836,667     $ 0.98  

Granted

    1,123,000       0.27  

Vested

    (37,501 )     1.38  

Forfeited

    (65,000 )     1.0  

Restricted shares at June 30, 2019

    1,857,166     $ 0.51  

 

During the three and six months ended June 30, 2019, the Company recognized  stock-based compensation costs for restricted stock of approximately $ 48,000 and $ 97,000  in sales, general, and administrative expenses. Compensation cost is revised if subsequent information indicates that the actual number of restricted stock vested due to service is likely to differ from previous estimates.

 

The following table sets forth the weighted average outstanding of potentially dilutive instruments for the three and six months ended June 30, 2019 and 2018:

 

    Three Months Ended June 30,     Six Months Ended June 30,  
      2019       2018       2019       2018  

Stock options

    2,229,378       3,376,984       2,332,836       3,764,147  

Warrants

    30,000       1,625,178       30,000      
1,633,991 
 

Weighted average

    2,259,378       5,002,162       2,362,836       5,398,138  

 

 

 

 

Note 13 - Segment Reporting

 

Enservco’s reportable business segments are Well Enhancement Services and Water Transfer Services. These segments have been selected based on management’s resource allocation and performance assessment in making decisions regarding the Company.

 

The following is a description of the segments.

 

Well Enhancement Services : This segment utilizes a fleet of frac water heating units, hot oil trucks and acidizing units to provide maintenance and completion services to the domestic oil and gas industry. These services include frac water heating, hot oil services, pressure testing, and acidizing 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 to be used in connection with well completion activities. 

 

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.

 

The following tables set forth certain financial information with respect to Enservco’s reportable segments (in thousands):

 

   

Well

Enhancement

   

Water Transfer

Services

   

Unallocated &

Other

   

Total

 

Three Months Ended  June  30, 2019:

                               

Revenues

  $ 6,339     $ 867     $ -     $ 7,206  

Cost of Revenue

    6,150       1,287       287       7,724  

Segment Profit (Loss)

  $ 189     $ (420 )   $ (287 )   $ (518 )
                                 

Depreciation and Amortization

  $ 1,430     $ 294     $ 12     $ 1,736  
                                 

Capital Expenditures (Excluding Acquisitions)

  $ 167     $ 87     $ 2     $ 256  
                                 
    Identifiable assets (1)   $ 41,331     $

2,819

    $ 1,388     $ 45,538  
                                 

Three Months Ended June 30, 2018:

                               

Revenues

  $ 7,005     $ 929     $ -     $ 7,934  

Cost of Revenue

    5,900       979       181     $ 7,060  

Segment Profit (Loss)

  $ 1,105     $ (50 )   $ (181 )   $ 874  
                                 

Depreciation and Amortization

  $ 1,226     $ 289     $ 5     $ 1,520  
                                 

Capital Expenditures (Excluding Acquisitions)

  $ 245     $ 106     $ 1     $ 352  
                                 
    Identifiable assets (1)   $ 29,169     $ 3,235     $ 516     $ 32,920  

 

 

( 1 )

Identifiable assets is calculated by summing the balances of accounts receivable, net; inventories; property and equipment, net; and other assets.

 

   

 

Well
Enhancement
   

 

Water Transfer
Services
   

 

Unallocated &
Other
   

 

Total
 

Six Months Ended June 30, 2019:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues

 
$
31,151    
$
2,295    
$
-
   
$
33,446  

Cost of Revenue

    21,362       3,472       442       25,276  

Segment Profit (Loss)

 
$
9,789    
$
(1,177
)
 
$
(442
)
 
$
8,170  
                                 

Depreciation and Amortization

 
$
2,817    
$
577    
$
25    
$
3,419  
                                 

Capital Expenditures (Excluding Acquisitions)

 
$
254    
$
275    
$
38    
$
567  
                                 

Six Months Ended June 30, 2018:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Revenues

 
$
26,290    
$
1,924    
$
-
   
$
28,214  

Cost of Revenue

    18,991       1,936       326    
$
21,253  

Segment Profit (Loss)

 
$
7,299    
$
(12 )  
$
(326
)
 
$
6,961  
                                 

Depreciation and Amortization

 
$
2,455    
$
552    
$
12    
$
3,019  
                                 

Capital Expenditures (Excluding Acquisitions)

 
$
786    
$
647    
$
8    
$
1,441  

 

 

 

The following table reconciles the segment profits reported above to the income from operations reported in the consolidated statements of operations (in thousands):

 

   

Three Months Ended June 30,

   

Six Months Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Segment profit 

 

$

(518

)

 

$

874

 

 

$

8,170

   

$

6,961

 

Sales, general, and administrative expenses

   

(1,460

)

   

(1,236

)

   

(3,078

)

   

(2,589

)

Patent litigation and defense costs

   

(1

)

   

(55

)

   

(10

)

   

(75

)

Severance and transition costs

   

-

     

(593

)

   

-

 

   

(633

)

(Loss) gain on disposals of equipment     (12 )     53       (12 )     53  
Impairment     -       -       (127 )     -  

Depreciation and amortization <