ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information regarding the results of operations for the three and nine months ended September 30, 2019 and 2018, and our financial condition, liquidity and capital resources as of September 30, 2019, and December 31, 2018. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Forward-Looking Statements
The information discussed in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:
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Our capital requirements and the uncertainty of being able to obtain additional funding on terms acceptable to us;
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●
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The significant financial constraints imposed as a result of our indebtedness, including the fact that we have very little borrowing availability on our Credit Facility and there are restrictions imposed on us under the terms of the Credit Agreement and our need to generate sufficient cash flows to repay our debt obligations;
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The volatility of domestic and international oil and natural gas prices and the resulting impact on production and drilling activity, and the effect that lower prices may have on our customers’ demand for our services, the result of which may adversely impact our revenues and financial performance;
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The broad geographical diversity of our operations which, while expected to diversify the risks related to a slow-down in one area of operations, also adds to our costs of doing business;
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Our history of losses and working capital deficits which, at times, were significant;
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Adverse weather and environmental conditions;
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Our ability to retain key members of our senior management and key technical employees;
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The potential impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation with which we and our customers must comply;
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Developments in the global economy;
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The effects of competition;
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The risks associated with the use of intellectual property that may be claimed by others and actual or potential litigation related thereto;
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The effect of unseasonably warm weather during winter months; and
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The effect of further sales or issuances of our common stock and the price and volume volatility of our common stock.
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Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
OVERVIEW
The Company, through its subsidiaries Heat Waves Hot Oil Service, LLC ("Heat Waves"), Adler Hot Oil Service, LLC ("Adler"), and Heat Waves Water Management, LLC ("HWWM"), provides a range of oil field services to the domestic onshore oil and gas industry. These services are broken down into two segments: 1) Well Enhancement services, which include frac water heating, hot oiling, and acidizing, and 2) Water Transfer services. The Company owns and operates through its subsidiaries a fleet of more than 450 specialized trucks, trailers, frac tanks and other well-site related equipment and serves customers in several major domestic oil and gas areas including the DJ Basin/Niobrara area in Colorado and Wyoming, the Bakken area in North Dakota, the San Juan Basin in northwestern New Mexico, the Marcellus and Utica Shale areas in Pennsylvania and Ohio, the Jonah area, Green River and Powder River Basins in Wyoming, the Eagle Ford Shale in Texas and the Stack and Scoop plays in the Anadarko Basin in Oklahoma.
RESULTS OF OPERATIONS
Executive Summary
Revenues for the nine months ended September 30, 2019, increased approximately $6.1 million, or 19%, from the comparable period last year due to a 19% increase in our core Well Enhancement revenue and a 25% increase in Water Transfer revenue. Well Enhancement revenue growth was attributable to the acquisition of Adler Hot Oil in the fourth quarter of 2018 and to ongoing efforts to bundle services with new and existing customers. Increased frac water heating and hot oiling revenues were partially offset by a decline in acidizing revenue. Water Transfer revenue growth was attributable to successful marketing efforts in Wyoming.
Segment profits for the nine-month period ended September 30, 2019, increased by approximately $965,000, or 16%, due to an increase in Well Enhancement service revenue without a corresponding increase in our fixed cost structure. Higher segment profits in Well Enhancement were partially offset by an increased segment loss in Water Transfer as described below. Sales, general & administrative expense, excluding severance and transition costs, increased by approximately $1.1 million, or 28%, year over year due primarily to an increase in general office expenses, related primarily to redundant Adler personnel, facilities, and related costs carried through the heating season which have steadily been eliminated since late in the second quarter of 2019. These duplicative costs were due, in large part, to the timing of the Adler acquisition coinciding with the start of heating season. We also made investments in our IT infrastructure, establishing an electronic dispatch and ticketing system. Interest expense increased $755,000, or 51%, year over year due to a higher average borrowing balance related to the Adler acquisition and our increased time to collection on certain customer receivables which was resolved in the third quarter of 2019.
Net loss for the nine months ended September 30, 2019, was approximately $4.3 million or $0.08 per share, compared to a net loss of approximately $5.3 million, or $0.10 per share, in the same period last year due to the factors noted above, as well as a gain of approximately $1.2 million related to a settlement agreement reached with the sellers of Adler during the nine months ended September 30, 2019.
Adjusted EBITDA for the nine months ended September 30, 2019, was approximately $2.6 million compared to approximately $2.6 million for the same period last year. See the section titled Adjusted EBITDA* within this Item for definition of Adjusted EBITDA.
Industry Overview
During the nine months ended September 30, 2019, WTI crude oil price averaged approximately $57 per barrel, versus an average of approximately $67 per barrel in the comparable period last year. The North American rig count declined to 860 rigs in operation as of September 30, 2019, compared to 1,054 at the same time a year ago. Despite the lower oil price environment and reduced rig count, we have grown our customer base and allocated resources to the most active basins and believe that current customer activity levels should support continuation of demand for our services if crude oil and natural gas prices remain in the range of their current levels. We are focused on increasing utilization levels and optimizing the deployment of our equipment and workforce while maintaining high standards for service quality and safe operations. We compete on the basis of the quality, breadth of our service offerings, and price.
Segment Overview
Enservco’s reportable business segments include the following:
Well Enhancement Services: This segment utilizes a fleet of frac water heating, hot oiling and acidizing trucks and trailers that provide well enhancement, completion and maintenance services to oil and gas development and production companies. Heat Waves and Adler provide these services.
Water Transfer Services: This segment utilizes high and low volume pumps, lay flat hose, aluminum pipe and manifolds, and related equipment to move fresh and/or recycled water from a water source such as a pond, lake, river, stream, or water storage facility to frac tanks at drilling locations for use in well completion activities.
Segment Results:
The following tables set forth revenue from operations and segment profits for our business segments for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well enhancement services
|
|
$
|
3,798
|
|
|
$
|
3,200
|
|
|
$
|
34,949
|
|
|
$
|
29,490
|
|
Water transfer services
|
|
|
899
|
|
|
|
634
|
|
|
|
3,194
|
|
|
|
2,558
|
|
Total Revenues
|
|
$
|
4,697
|
|
|
$
|
3,834
|
|
|
$
|
38,143
|
|
|
$
|
32,048
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
SEGMENT PROFIT (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well enhancement services
|
|
$
|
(737
|
)
|
|
$
|
(746
|
)
|
|
$
|
9,052
|
|
|
$
|
6,553
|
|
Water transfer services
|
|
|
70
|
|
|
|
(16
|
)
|
|
|
(1,107
|
)
|
|
|
(28
|
)
|
Unallocated and other
|
|
|
(480
|
)
|
|
|
(141
|
)
|
|
|
(922
|
)
|
|
|
(467
|
)
|
Total Segment Profit (Loss)
|
|
$
|
(1,147
|
)
|
|
$
|
(903
|
)
|
|
$
|
7,023
|
|
|
$
|
6,058
|
|
Well Enhancement Services
Well Enhancement Services, which accounted for 81% of total revenue for the three months ended September 30, 2019, increased approximately $598,000, or 19%, to $3.8 million compared to $3.2 million for the same quarter last year due to an increase in hot oil services revenue. This segment, which accounted for 92% of total revenue for the nine months ended September 30, 2019, increased $5.5 million, or 19%, to $34.9 million compared to $29.5 million in the same period last year. The increase in revenue primarily resulted from our increased capacity and customer base due to our acquisition of Adler.
Frac water heating revenue for the three months ended September 30, 2019, was flat compared to $48,000 for the same quarter last year. Frac water heating revenue for the nine months ended September 30, 2019, increased $5.1 million, or 29%, to $22.7 million compared to $17.7 million for the same quarter last year. Our acquisition of Adler allowed us to realize revenue from several customers we did not previously perform significant work for, and allowed us to increase services to other customers, particularly in the Bakken and D-J Basin. We also experienced increased demand in the Powder River, Eagle Ford, Marcellus and Utica shale basins.
Hot oil revenue for the three months ended September 30, 2019, increased approximately $447,000, or 20%, compared to the three months ended September 30, 2018, from approximately $2.2 million to approximately $2.7 million. Hot oil revenue for the nine months ended September 30, 2019, increased approximately $801,000, or 9%, from $8.7 million during the nine months ended September 30, 2018 to $9.5 million during the nine months ended September 30, 2019. Both increases were primarily due to the increase in our fleet size and market share in the basins we serve as a result of the acquisition of Adler, as well as due to growth in our customer base in our Central USA region.
Acidizing revenues for the three months ended September 30, 2019, increased by approximately $26,000, or 4%, to approximately $635,000 from approximately $609,000. Acidizing revenues for the nine months ended September 30, 2019, decreased by approximately $599,000, or 25%, to approximately $1.8 million from approximately $2.4 million. The three months ended September 30, 2019 was relatively flat compared to the three months ended September 30, 2018. The year-over-year decline was primarily driven by a decline in services performed for two customers in the Green River Basin and Eagle Ford Shale who changed their maintenance programs. The decline was partially offset by new customer wins and growth in services performed for other customers and in new areas. The Company continues to pursue customers and partner with chemical suppliers to develop new cost-effective acid programs in seeking to expand our acidizing services across our service areas.
Segment loss for our core Well Enhancement services decreased by $9,000, or 1%, to $737,000 for the three months ended September 30, 2019, compared to $746,000 in the same quarter last year, which was primarily the result of the relatively flat frac water heating revenue during the current quarter. Segment profits for our core Well Enhancement services increased by $2.5 million, or 38%, to $9.1 million for the nine months ended September 30, 2019, compared to $6.6 million in the same period last year, primarily due to higher revenue resulting from the acquisition of Adler and the deployment of our fleet into our most active basins, along with certain cost reduction initiatives implemented in the first half of 2019.
Water Transfer Services
Water Transfer revenue for the three months ended September 30, 2019, accounted for 19% of total revenue, and increased by approximately $265,000, or 42%, to approximately $899,000 from approximately $634,000 in the same quarter last year. Water Transfer revenue for the nine months ended September 30, 2019 accounted for 8% of total revenue, and increased approximately $636,000, or 25%, from approximately $2.6 million to approximately $3.2 million. The increase in revenue for both periods was due in part to cross-selling Water Transfer services to several heating customers, and was also the result of organic growth sales among new and existing Water Transfer customers.
The segment profit for Water Transfer for the three months ended September 30, 2019, was approximately $70,000 compared to segment loss of approximately $16,000 during the three months ended September 30, 2018. Increased segment profit related to increased activity as well as a decrease in fuel costs. The segment loss for Water Transfer for the nine months ended September 30, 2019, was approximately $1.1 million compared to segment loss of approximately $28,000 for the nine months ended September 30, 2018, as described above.
Unallocated and Other
Unallocated and other includes general overhead expenses and assets associated with managing all reportable operating segments which have not been allocated to a specific segment. These costs included labor, travel, operating costs for regional managers and safety compliance.
Unallocated segment costs in the three months ended September 30, 2019, increased by approximately $339,000, or 240%, to approximately $480,000 compared to approximately $141,000 in the same quarter last year. The increases were due primarily to an increase in our business development team and redundant Adler personnel costs. Unallocated segment costs in the nine months ended September 30, 2019, increased by approximately $455,000, or 97%, to approximately $922,000 compared to approximately $467,000 in the same quarter last year. The year-over-year increases were primarily due to Adler personnel and related costs not streamlined until late second quarter of 2019.
Geographic Areas
The Company operates solely in three geographically diverse regions of the United States. The following table sets forth revenue from operations for the Company’s three geographic regions during the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
BY GEOGRAPHY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well Enhancement Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain Region (1)
|
|
$
|
1,656
|
|
|
$
|
1,415
|
|
|
$
|
22,644
|
|
|
$
|
17,672
|
|
Central USA Region (2)
|
|
|
1,992
|
|
|
|
1,598
|
|
|
|
8,463
|
|
|
|
8,675
|
|
Eastern USA Region (3)
|
|
|
150
|
|
|
|
187
|
|
|
|
3,842
|
|
|
|
3,143
|
|
Total Well Enhancement Services
|
|
|
3,798
|
|
|
|
3,200
|
|
|
|
34,949
|
|
|
|
29,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Water Transfer Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain Region(1)
|
|
|
899
|
|
|
|
634
|
|
|
|
3,194
|
|
|
|
2,558
|
|
Central USA Region(2)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Eastern USA Region(3)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Water Transfer Services
|
|
|
899
|
|
|
|
634
|
|
|
|
3,194
|
|
|
|
2,558
|
|
Total Revenues
|
|
$
|
4,697
|
|
|
$
|
3,834
|
|
|
$
|
38,143
|
|
|
$
|
32,048
|
|
Notes to tables:
|
(1)
|
Includes the D-J Basin/Niobrara field (northeastern Colorado and southeastern Wyoming), the San Juan Basin (southeastern Colorado and Northeastern New Mexico), the Powder River and Green River Basins (northeastern and southwestern Wyoming), the Bakken area (western North Dakota and eastern Montana).
|
|
(2)
|
Includes the Scoop/Stack Shale in Oklahoma and the Eagle Ford Shale in Texas.
|
|
(3)
|
Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio).
|
Well Enhancement segment revenue in the Rocky Mountain Region for the three months ended September 30, 2019, increased approximately $241,000, or 17%, primarily due to an increase in hot oiling activity in the D-J Basin and Bakken areas. Well Enhancement segment revenue in the Rocky Mountain Region for the nine months ended September 30, 2019, increased approximately $5.0 million, or 28%, primarily driven by our increased fleet size and customer base resulting from the acquisition of Adler.
Well Enhancement segment revenue in the Central USA region for the three months ended September 30, 2019, increased by approximately $394,000, or 25%, due to an increase in hot oiling activity in the Eagle Ford Shale. Well Enhancement segment revenue in the Central USA region for the nine months ended September 30, 2019, decreased by approximately $212,000, or 2%, due to the closure of the two facilities partially offset by improved results from frac water heating in the Scoop/Stack play in Oklahoma.
Well Enhancement segment revenue in the Eastern USA region for the three months ended September 30, 2019, decreased approximately $37,000, or 20%, resulting from decreased hot oiling activity in the Marcellus Shale partially offset by an increase in frac heating. Well Enhancement segment revenue in the Eastern USA region for the nine months ended September 30, 2019, increased approximately $699,000, or 22%, due to an increase in services to customers in the market.
As discussed above, Water Transfer revenue in the Rocky Mountain Region for the three months ended September 30, 2019, increased by approximately $265,000, or 42%. Water Transfer revenue for the nine months ended September 30, 2019 increased approximately $636,000, or 25%. The increases in both periods related to, in part, cross-selling Water Transfer services to several of our largest heating customers, and was also the result of organic growth sales among new and existing Water Transfer customers.
Historical Seasonality of Revenues
Because of the seasonality of our frac water heating and, to a lesser extent, hot oiling business, revenues generated during the cooler first and fourth quarters of our fiscal year, constitute our “heating season” and are significantly higher than revenues during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings changes outside our heating season as our Well Enhancement services (which includes frac water heating and hot oiling) typically decrease as a percentage of total revenues and our Water Transfer services and other services increase as a percentage of total revenue. Thus, the revenues recognized in our quarterly financial statements in any given period are not indicative of the annual or quarterly revenues through the remainder of that fiscal year.
As an indication of this quarter-to-quarter seasonality, the Company generated 75% of its 2018 revenues during the first and fourth quarters compared to 25% during the second and third quarters of 2018.
Direct Operating Expenses:
Direct operating expenses, which include labor costs, propane, fuel, chemicals, truck repairs and maintenance, supplies, insurance, and site overhead costs for our operating segments increased by approximately $2.0 million or 28% during the third quarter of 2019 compared to the comparable period in 2018, primarily due to an increase in compensation costs, an increase in repairs and maintenance, insurance, and site overhead due to our increase in year-to-date well enhancement services activity, larger fleet, and additional site overhead costs related to locations associated with Adler. During the nine months ended September 30, 2019, we consolidated former Adler locations into our Heat Waves locations, and also opened a new location in Douglas, Wyoming. Direct operating expenses, increased by approximately $6.4 million, or 18%, during the nine months ended September 30, 2019 compared to the like period in 2018, primarily due to increases in direct variable costs resulting from the overall increase in service activity in our Well Enhancement service segment as well as our Water Transfer division, equipment rental costs within our water transfer segment, and an increase in site overhead and insurance costs due to the additional locations and fleet size in 2019 as compared to 2018.
Sales, General, and Administrative Expenses:
During the three months ended September 30, 2019, sales, general, and administrative expenses increased approximately $562,000, or 48%, to $1.7 million compared to the same period in 2018 primarily due to an increase in our bad debt reserve, general office expenses, partially due to our acquisition of Adler, and an increase in professional fees related to investment in our IT infrastructure and processes. During the nine months ended September 30, 2019, selling, general, and administrative expenses increased approximately $1.1 million, or 28% to $4.8 million compared to the same period in 2018 primarily due to an increase in our bad debt reserve, an increase in compensation costs for our larger management team and an increase in general office expenses, both partially due to our acquisition of Adler, and an increase in professional fees related to investment in our IT infrastructure and processes.
Patent Litigation and Defense Costs:
Patent litigation and defense costs decreased from $2,000 to $0 for the three months ended September 30, 2019 compared to the like period in 2018. Patent litigation and defense costs decreased to $10,000 from $77,000 for the nine months ended September 30, 2019 compared to the like period in 2018. As discussed in Part II, Item 1. – Legal Proceedings, the U.S. District Court for the District of Colorado issued a decision on March 15, 2019, dismissing the case related to three patent litigation and defense costs in its entirety without any finding of liability of Enservco or Heat Waves. We expect costs related to our defense of such claims to be minimal going forward.
Depreciation and Amortization:
Depreciation and amortization expense for the three months ended September 30, 2019 increased $284,000, or 20%, from the same period in 2018 due to depreciation on equipment acquired in the Adler acquisition, partially offset by additional equipment becoming fully-depreciated during 2019. Depreciation and amortization expense for the nine months ended September 30, 2019 increased $684,000, or 15%, from the same period in 2018 due to depreciation on equipment acquired in the Adler acquisition, partially offset by additional equipment becoming fully-depreciated during 2019.
Income from operations:
For the three months ended September 30, 2019, the Company recognized a loss from operations of $4.6 million compared to $3.5 million for the comparable period in 2018. The increased loss of $1.1 million was primarily due to the decrease in segment profits and increase in sales, general and administrative expenses described above. For the nine months ended September 30, 2019, the Company recognized loss from operations of $3.1 million compared to $2.8 million for the comparable period in 2018. The increased loss was primarily due to the increase in sales, general and administrative expenses described above.
Interest Expense:
Interest expense increased approximately $224,000, or 48%, for the three months ended September 30, 2019, compared to the same period in 2018. Interest expense increased approximately $755,000, or 51%, for the nine months ended September 30, 2019, compared to the same period in 2018. The increase was primarily due to the increase of our average borrowings related to the acquisition of Adler, along with increased interest rates on our floating rate debt.
Discontinued Operations:
Results for the three and nine months ended September 30, 2018 include losses from discontinued operations of approximately $190,000 and $580,000, respectively.
Other expense (income):
Other expense for the three months ended September 30, 2019 was approximately $67,000, compared to other expense of approximately $175,000 for the nine months ended September 30, 2019, respectively, and was primarily driven by a decrease in the fair value of our derivative swap instrument and the expenses incurred to consolidate former Adler facilities into a single location. Other income was approximately $38,000 for the three months ended September 30, 2018, compared to other expense of approximately $468,000 for the nine months ended September 30, 2018 and was comprised of the loss on the fair value of our now-retired warrant liability partially offset by an increase in the fair value of our derivative swap instrument.
Income Taxes:
As of September 30, 2019, the Company had recorded a full valuation allowance on a net deferred tax asset of $3.7 million. Our income tax provision of $32,000 for the nine months ended September 30, 2019 and 2018 reduced the gross amount of the deferred tax asset and we reduced the valuation allowance by a like amount. During the nine months ended September 30, 2019 and 2018, the Company recorded an income tax expense of approximately $32,000 for state taxes.
Our effective tax rate was approximately 1% for the nine months ended September 30, 2019 and 2018, respectively. The effective tax expense for the nine months ended September 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, estimated permanent differences and the recorded valuation allowance.
Adjusted EBITDA*
Management believes that, for the reasons set forth below, Adjusted EBITDA (a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in Enservco's industry.
The following table presents a reconciliation of our net income to our Adjusted EBITDA for each of the periods indicated (in thousands):
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Adjusted EBITDA*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(5,404)
|
|
|
$
|
(4,108)
|
|
|
$
|
(4,310
|
)
|
|
$
|
(5,349)
|
|
Add Back (Deduct)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
695
|
|
|
|
471
|
|
|
|
2,237
|
|
|
|
1,482
|
|
Provision for income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
32
|
|
|
|
32
|
|
Depreciation and amortization (including discontinued operations)
|
|
|
1,703
|
|
|
|
1,483
|
|
|
|
5,122
|
|
|
|
4,669
|
|
EBITDA*
|
|
|
(3,006
|
)
|
|
|
(2,154
|
)
|
|
|
3,081
|
|
|
|
834
|
|
Add back
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
52
|
|
|
|
103
|
|
|
|
221
|
|
|
|
291
|
|
Severance and transition cost
|
|
|
83
|
|
|
|
-
|
|
|
|
83
|
|
|
|
633
|
|
Patent litigation and defense costs
|
|
|
-
|
|
|
|
2
|
|
|
|
10
|
|
|
|
77
|
|
Impairment loss
|
|
|
-
|
|
|
|
-
|
|
|
|
127
|
|
|
|
-
|
|
Acquisition-related expenses
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
38
|
|
Gain on settlement
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,252
|
)
|
|
|
-
|
|
Adler consolidation
|
|
|
156
|
|
|
|
-
|
|
|
|
156
|
|
|
|
-
|
|
Other (income) expense
|
|
|
67
|
|
|
|
(38
|
)
|
|
|
175
|
|
|
|
468
|
|
Gain on disposal of assets
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
(53
|
)
|
EBITDA related to discontinued operations
|
|
|
-
|
|
|
|
126
|
|
|
|
-
|
|
|
|
350
|
|
Adjusted EBITDA*
|
|
$
|
(2,662
|
)
|
|
$
|
(1,923
|
)
|
|
$
|
2,599
|
|
|
$
|
2,638
|
|
*Note: See below for discussion of the use of non-GAAP financial measurements.
Use of Non-GAAP Financial Measures: Non-GAAP results are presented only as a supplement to the financial statements and for use within management’s discussion and analysis based on U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information is provided to enhance the reader's understanding of the Company’s financial performance, but no non-GAAP measure should be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.
EBITDA is defined as net (loss) income, before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA excludes stock-based compensation from EBITDA and, when appropriate, other items that management does not utilize in assessing the Company’s ongoing operating performance as set forth in the next paragraph. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure.
All of the items included in the reconciliation from net income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, impairment losses, etc.) or (ii) items that management does not consider to be useful in assessing the Company’s ongoing operating performance (e.g., income taxes, gain or losses on sale of equipment, patent litigation and defense costs, severance and transition costs, the gain on settlement as discussed in Note 4 of the accompanying Notes to the Condensed Consolidated Financial Statements, the expenses to consolidate former Adler facilities, other expense (income), EBITDA related to discontinued operations, etc.). In the case of the non-cash items, management believes that investors can better assess the company’s operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company’s ability to generate free cash flow or invest in its business.
We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Additionally, our fixed charge coverage ratio covenant associated with our Loan and Security Agreement with East West Bank require the use of Adjusted EBITDA in specific calculations.
Because not all companies use identical calculations, the Company’s presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company’s performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures.
Changes in Adjusted EBITDA*
Adjusted EBITDA for the three months ended September 30, 2019 decreased by approximately $740,000 due primarily to the decline in segment profit and increases in sales, general, and administrative costs discussed above. Adjusted EBITDA for the nine months ended September 30, 2019 decreased by approximately $39,000 primarily due to the increases in sales, general, and administrative costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
As described in more detail in Note 7 to our financial statements included in “Item 1. Financial Statements” of this report, on August 10, 2017, we entered into the 2017 Credit Agreement, as amended, with East West Bank (the "2017 Credit Agreement") which provides for a three-year $37 million senior secured revolving credit facility (the "Credit Facility").
As of September 30, 2019, we had an outstanding principal loan balance under the Credit Facility of approximately $29.5 million with a weighted average interest rates of 5.75% per year for $28.0 million of outstanding LIBOR Rate borrowings and 7.0% per year for the approximately $1.5 million of outstanding Prime Rate borrowings.
The following table summarizes our statements of cash flows for the nine months ended September 30, 2019 and 2018 (in thousands):
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
8,488
|
|
|
$
|
5,664
|
|
Net cash used in investing activities
|
|
|
(200
|
)
|
|
|
(1,363
|
)
|
Net cash used in financing activities
|
|
|
(8,545
|
)
|
|
|
(4,653
|
)
|
Net decrease in Cash and Cash Equivalents
|
|
|
(257
|
)
|
|
|
(352
|
)
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Period
|
|
|
257
|
|
|
|
391
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period
|
|
$
|
-
|
|
|
$
|
39
|
|
The following table sets forth a summary of certain aspects of our balance sheet at September 30, 2019 and December 31, 2018:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
4,053
|
|
|
$
|
13,530
|
|
Total Assets
|
|
$
|
40,458
|
|
|
$
|
49,021
|
|
Current Liabilities
|
|
$
|
4,312
|
|
|
$
|
7,452
|
|
Total Liabilities
|
|
$
|
39,847
|
|
|
$
|
44,419
|
|
Working Capital (Current Assets net of Current Liabilities)
|
|
$
|
(259
|
)
|
|
$
|
6,078
|
|
Stockholders’ Equity
|
|
$
|
611
|
|
|
$
|
4,602
|
|
Overview:
We have relied on cash flow from operations, borrowings under our revolving credit agreements, and equity and debt offerings to satisfy our liquidity needs. Our ability to fund operating cash flow shortfalls, fund capital expenditures, and make acquisitions will depend upon our future operating performance and on the availability of equity and debt financing. At September 30, 2019, we had approximately $218,000 available under the New Credit Facility. Our capital requirements over the next 12 months are anticipated to include, but are not limited to, operating expenses, debt servicing, and capital expenditures including maintenance of our existing fleet of assets.
On March 31, 2017, our largest shareholder, Cross River Partners, L.P., posted a letter of credit in the amount of $1.5 million in accordance with the terms of the Tenth Amendment to our 2014 Credit Agreement, which was provided by PNC Bank. The letter of credit was converted into subordinated debt with a maturity date of June 28, 2022 with a stated interest rate of 10% per annum and a five-year warrant to purchase 967,741 shares of our common stock at an exercise price of $0.31 per share. On May 10, 2017, Cross River Partners, L.P. also provided $1.0 million in subordinated debt to us as required under the terms of the Tenth Amendment to the 2014 Credit Agreement. This subordinated debt has a stated annual interest rate of 10% and maturity date of June 28, 2022. In connection with this issuance of subordinated debt, Cross River Partners L.P. was granted a five-year warrant to purchase 645,161 shares of our common stock at an exercise price of $0.31 per share. On June 29, 2018 Cross River exercised both warrants and acquired 1,612,902 shares of our common stock. Proceeds from the exercise of the warrants in the amount of $500,000 were used to reduce the subordinated debt balance.
Interest Rate Swap
On February 23, 2018, we entered into an interest rate swap agreement with East West Bank (the "2018 Swap") in order to hedge against the variability in cash flows from future interest payments related to the Credit Facility. The terms of the interest rate swap agreement included an initial notional amount of $10.0 million, a fixed payment rate of 2.52% paid by us, and a floating rate payment equal to LIBOR paid by East West Bank. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations.
During the three months ended September 30, 2019, the fair market value of the swap instrument decreased by approximately $5,000, from a liability of June 30, 2019 of $18,000, to a liability as of September 30, 2019 of $23,000 and resulted in an increase in other expense. During the nine months ended September 30, 2019, the fair market value of the swap instrument decreased by approximately $98,000, from an asset of December 31, 2018 of $75,000, to a liability as of September 30, 2019 of $23,000 and resulted in an increase in other expense
During the three months ended September 30, 2018, the fair market value of the swap instrument increased by approximately $33,000 and resulted in an increase in the other expense. During the nine months ended September 30, 2018, the fair market value of the swap instrument increased by approximately $64,000 and resulted in an asset being recorded and an increase in other income.
Liquidity:
As of September 30, 2019, our available liquidity was $218,000, which was comprised entirely of availability on the Credit Facility. We utilize the Credit Facility to fund working capital requirements, and during the nine months ended September 30, 2019, we made net repayments under our Credit Facility of approximately $4.5 million, and additionally received approximately $125,000 in non-cash proceeds to fund costs incurred pursuant to the 2017 Credit Agreement.
Fourth Amendment to Loan and Security Agreement
As of November 12, 2019, EastWest Bank was in the process of obtaining approval from its credit committee on the terms of the Fourth Amendment to Loan and Security Agreement. The Credit Facility, as amended will increase the advance rate on the appraised value of our eligible equipment from 85% to 92.5%, thus providing more liquidity to the Company. This Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), which is currently being drafted, would increase the advance rate to 92.5% immediately upon execution of the Fourth Amendment by all parties. The advance rate will decline to 90% on December 1, 2019, 85% on January 1, 2020 and 80% on March 31, 2020. Additional provisions included in the Amendment: (i) Removal of the trailing twelve-month fixed-charge coverage ratio covenant which requires the Company to maintain minimum liquidity of $1,500,000 when the Company has lower than a 1.20 to 1.00 coverage, (ii) a higher interest rate on borrowings under the Credit Facility; and (iii) an affirmative mandate that the Company raise subordinated debt prior to March 31, 2019.
Amended and Restated Subordinated Loan Agreement
On November 12, 2019 Enservco and Cross River Partners, L.P. entered into an Amended and Restated Subordinated Loan Agreement (the “Amended Subordinated Loan”). The Amended Subordinated Loan increases the principal of the subordinated debt by $500,000 from $2.0 million to $2.5 million and provides Cross River Partners with a five-year warrant to purchase 625,000 shares of the Company’s common stock at an exercise price of $0.20 per share which are fully vested upon issuance.
Working Capital:
As of September 30, 2019, we had a working capital deficit of approximately $259,000 compared to working capital of $6.1 million as of December 31, 2018. The September 30, 2019 figure was impacted by our adoption of the lease accounting standard described in Critical accounting policies and estimates below.
Deferred Tax Asset, net:
As of September 30, 2019, the Company had recorded a valuation allowance to reduce its net deferred tax assets to zero.
Cash flow from Operating Activities:
For the nine months ended September 30, 2019, cash provided by operating activities was approximately $8.5 million compared to $5.7 million in cash provided by operating activities during the comparable period in 2018. The increase was attributable to the increase in net income and the decrease in cash flows related to the change in accounts payable balances partially offset by the decrease in cash provided by the monetization of accounts receivable during the current year period.
Cash flow from Investing Activities:
Cash used investing activities during the nine months ended September 30, 2019 was approximately $200,000, compared to $1.4 million in cash used in Investing Activities during the comparable period in 2018, primarily due to proceeds received from the 2019 sale of equipment related to our discontinued operations compared to our investment in Water Transfer equipment during 2018 which did not recur in 2019.
Cash flow from Financing Activities:
Cash used in financing activities for the nine months ended September 30, 2019 was $8.5 million compared to $4.7 million in cash used in financing activities for the comparable period in 2018. The change is due to our repayment of the Seller Subordinated Note related to the purchase of Adler.
Outlook:
We believe the current oil and gas environment provides us with an opportunity to grow our business through increased utilization of our fleet and a focus on deploying assets into areas where demand is highest. Customer demand for our services has steadily increased since oil and gas prices reached their most recent lows in 2016. Since that time, we have achieved two consecutive years of improved revenue and profit metrics. Our 2019 year-to-date results reflect a continuation of positive revenue trends, driven by increased market share and a growing customer base. Over the past two years we have invested significantly in process improvement initiatives designed to make the Company operate more efficiently and take better advantage of our expanded fleet and national leadership position in frac water heating. Our long-term goals include driving increased fleet utilization, optimizing fleet deployment, driving further operating efficiencies through technology and proactive cost management, and de-levering our balance sheet. Our business is heavily dependent on exploration and production activity levels, which fluctuate based on commodity prices, capital budgets and other factors. Activity levels have declined recently due to year-end capital budget exhaustion around drilling and completion activity. Those declines have been partially offset by relative stability in demand for our production and maintenance related services. We continue to seek opportunities to expand our business operations through organic growth, including increasing the volume of current services offered to our new and existing customers. We will also continue to explore adding new, high margin services to diversify our service mix and expand our customer relationships while maintaining an appropriate balance between recurring maintenance work and drilling and completion related services.
Capital Commitments and Obligations:
Our capital obligations as of September 30, 2019 consist primarily of scheduled principal payments under certain term loans and operating leases. We do not have any scheduled principal payments under the 2017 Credit Agreement until August 10, 2020; however, the Company may need to make future principal payments based upon collateral availability. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2019, we had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
On January 1, 2019, we adopted ASC Topic 842, Leases. ASC Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize the balance sheet assets and liabilities arising from operating leases. As we elected the cumulative-effect adoption method, prior-period information has not been restated. On January 1, 2019, we recognized $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 made an adjustment to retained earnings of approximately $98,000 at January 1, 2019.
There have been no other changes in our critical accounting policies since December 31, 2018.