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 March 31, 2020

 

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.

 

Class

Outstanding at May 5, 2020

Common stock, $.005 par value

55,612,829

 

 

 

 

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

32

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

45

   

Item 4. Controls and Procedures

45

   
   

Part II

 
   

Item 1. Legal Proceedings

46

   

Item 1A.  Risk Factors

46

   

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

47

   

Item 3. Defaults Upon Senior Securities

47

   

Item 4. Mine Safety Disclosures

47

   

Item 5. Other Information

47

   

Item 6. Exhibits

48

   

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

 

   

March 31,

   

December 31,

 

ASSETS

 

2020

   

2019

 
   

(Unaudited)

         

Current Assets

               

Cash and cash equivalents

    217       663  

Accounts receivable, net

    5,695       6,424  

Prepaid expenses and other current assets

    722       1,016  

Inventories

    359       398  

Income tax receivable, current

    57       43  
Current assets of discontinued operations     -       187  

Total current assets

    7,050       8,731  
                 

Property and equipment, net

    25,450       26,620  
Goodwill     546       546  
Intangible assets, net     777       828  

Income taxes receivable, non-current

    -       14  
Right-of-use asset - financing, net     499       569  
Right-of-use asset - operating, net     3,563       3,793  
Other assets     407       445  

Non-current assets of discontinued operations

    1,301       1,430  
                 

TOTAL ASSETS

    39,593       42,976  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               

Current Liabilities

               

Accounts payable and accrued liabilities

    3,600       4,470  
Senior revolving credit facility     34,589       33,994  
Subordinated debt     2,394       2,381  
Lease liability - financing, current     205       207  
Lease liability - operating, current     853       848  
Current portion of long-term debt     148       147  

Current liabilities of discontinued operations

    31       72  

Total current liabilities

    41,820       42,119  
                 

Long-Term Liabilities

               

Long-term debt, less current portion

    175       198  
Lease liability - financing, less current portion     207       259  
Lease liability - operating, less current portion     2,805       3,009  
Other liability     33       33  
Long-term liabilities of discontinued operations     27       34  

Total long-term liabilities

    3,247       3,533  

Total liabilities

    45,067       45,652  
                 

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, 55,612,829 and 55,642,829 shares issued, respectively; 103,600 shares of treasury stock; and 55,509,229 and 55,539,229 shares outstanding, respectively

    275       278  

Additional paid-in capital

    22,108       22,066  

Accumulated deficit

    (27,857 )     (25,020 )

Total stockholders' equity

    (5,474 )     (2,676 )
                 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

    39,593       42,976  

 

 

 

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

 
   

March 31,

 
   

2020

   

2019

 
                 

Revenues

               

Production services

 

$

3,202

   

$

4,116

 

Completion services

   

6,184

     

20,696

 

Total revenues

   

9,386

     

24,812

 
                 

Expenses

               

Production services

   

3,494

     

3,346

 

Completion services

   

4,971

     

12,020

 

Sales, general, and administrative expenses

   

1,762

     

1,602

 

Patent litigation and defense costs

   

-

     

9

 
Loss on disposal of assets     15       -  
Impairment loss     -       127  

Depreciation and amortization

   

1,396

     

1,400

 

Total operating expenses

   

11,638

     

18,504

 
                 

(Loss) Income from Operations

   

(2,252

)

   

6,308

 

                 

Other (Expense) Income

               

Interest expense

   

(641

)

   

(884

)

Other income (expense) 

   

20

     

(65

)

Total other expense

   

(621

)

   

(949

)

                 
(Loss) Income from continuing operations before tax benefit    

(2,873

)

   

5,359

 

Income tax expense

   

-

     

-

 

(Loss) Income from continuing operations

 

$

(2,873

)

 

$

5,359

 

Discontinued operations (Note 6)                
Income (Loss) from operations of discontinued operations     36       (1,056 )
Income tax benefit     -       -  
Income (Loss) from discontinued operations     36       (1,056 )
Net (loss) income   $ (2,837 )   $ 4,303  
                 
                 

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

 

$

(0.05

)

 

$

0.10

 

Loss from discontinued operations per common share - basic     -       (0.02 )
Net (loss) income per share - basic   $ (0.05 )   $ 0.08  
                 
                 
(Loss) Earnings from continuing operations per common share - diluted   $ (0.05 )   $ 0.10  
Loss from discontinued operations per common share - diluted     -       (0.02 )

Net (loss) earnings per share - diluted

 

$

(0.05

)

 

$

0.08

 

                 

Basic weighted average number of common shares outstanding

   

55,518

     

54,266

 

Add: Dilutive shares 

   

-

     

951

 

Diluted weighted average number of common shares outstanding

   

55,518

     

55,217

 

 

 

 

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, 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

 

 

 

 

 

 

Common

Shares

 

 

Common

Stock

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Earnings

(Deficit)

 

 

Total

Stockholders’ 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

 

55,539

 

 

$

278

 

 

$

22,066

 

 

$

(25,020

)

 

$

(2,676

)

Stock-based compensation, net of issuance costs

 

 

-

 

 

 

-

 

 

 

39

 

 

 

-

 

 

 

39

 

Restricted share cancellation     (30 )     (3 )     3       -       -  
Net loss     -       -       -       (2,837 )     (2,837 )

Balance at March 31, 2020

 

 

55,509

 

 

$

275

 

 

$

22,108

 

 

$

(27,857

)

 

 

(5,474

)

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

For the Three Months Ended

 
   

March 31,

 
   

2020

   

2019

 

OPERATING ACTIVITIES

               

Net (loss) income

  $ (2,837 )   $ 4,303  
    Net income (loss) from discontinued operations     36       (1,056 )

Net (loss) income from continuing operations

    (2,873 )     5,359  

Adjustments to reconcile net (loss) income to net cash used in operating activities

               

Depreciation and amortization

    1,396       1,400  
Loss on disposal of equipment     15       -  
Impairment loss     -       127  

Stock-based compensation

    39       92  

Amortization of debt issuance costs and discount

    47       179  

Provision for bad debt expense

    300       -  

Changes in operating assets and liabilities

               

Accounts receivable

    429       (11,199)  

Inventories

    39       118  

Prepaid expense and other current assets

    333       124  
Amortization of operating lease assets     230       -  

Other assets

    15       69  

Accounts payable and accrued liabilities

    (869 )     1,069  
Operating lease liabilities     (204 )     -  
Other liabilities     -       84  
   Net cash used in operating activities - continuing operations     (1,103 )     (2,578 )
   Net cash provided by (used in) operating activities - discontinued operations     134       (68 )
Net cash used in - operating activities     (969 )     (2,646 )
                 

INVESTING ACTIVITIES

               

Purchases of property and equipment

    (164 )     (123 )
Proceeds from disposals of property and equipment     -       155  
   Net cash (used in) provided by investing activities - continuing operations     (164 )     32  
   Net cash provided by (used in) investing activities - discontinued operations     178       553  
Net cash provided by investing activities     14       585  
                 

FINANCING ACTIVITIES

               

Net line of credit borrowings 

    595       2,016  

Repayment of long-term debt

    (23 )     (11 )
Payments of finance leases     (30 )     -  
Repayment of note     -       (200 )
Other financing activities     -       (1 )
Net cash provided by financing activities - continuing operations     542       1,804  
Net cash used in financing activities - discontinued operations     (33 )     -  
Net cash provided by financing activities     509       1,804  
                 
Net Increase (Decrease) in Cash and Cash Equivalents     (446 )     (257 )
                 
Cash and Cash Equivalents, beginning of period     663       257  
                 

Cash and Cash Equivalents, end of period

  $ 217     $ -  
                 
                 

Supplemental Cash Flow Information:

               

Cash paid for interest

  $ 537     $ 595  

Supplemental Disclosure of Non-cash Investing and Financing Activities:

               

Non-cash proceeds from revolving credit facilities 

  $ -     $ 39  

 

 

 

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 (completion services) and hot oiling and acidizing (production 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 March 31, 2020 and December 31, 2019 and the results of operations for the three months ended March 31, 2020 and 2019.

 

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 Operations integrated into Heat Waves during 2019.
       

Heat Waves Water Management LLC 

Colorado

100% by Enservco

Discontinued operations in 2019

       
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 generally accepted accounting principles 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, 2019. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

 

 

 

 

Note 2 - Summary of Significant Accounting Policies

 

Going Concern

 

Our financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. We incurred a net loss of $7.7 million for the year ended December 31, 2019 and have incurred a net loss of $2.8 million for the three months ended March 31, 2020. As of the balance sheet date of this report we had total current liabilities of $41.8 million, which exceeded our total current assets of $7.0 million by $34.8 million. We are in breach of two of our covenants under our Credit Agreement with East West Bank and have failed to pay an overadvance that occurred in October 2019 that has continued through the date of this report  (as discussed in Note 7 of the accompanying Notes to the Condensed Consolidated Financial Statements), resulting in our borrowings payable of $37.0 million being classified in current liabilities.

 

Our ability to continue as a going concern is dependent on the renegotiation of the 2017 Credit Agreement and/or raising further capital and our ability to further reduce costs, of which there can be no assurance. These factors raise substantial doubt over our ability to continue as a going concern and whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the financial statements. Given our current financial situation we may be required to accept terms on the transactions that we are seeking that are onerous to us.

 

Given our current financial situation we may be required to accept terms on transactions, if any, that we are seeking that are onerous to us.

 

Recent Market Conditions

 

The COVID-19 pandemic has significantly impacted the world economic conditions including in the United States, with accelerated effects beginning in February and continuing through the issuance of this report, as federal, state and local governments react to the public health crisis, creating significant uncertainties relating to the United States economy. Consequently, the Company expects a material adverse impact on its revenues, results of operations and cash flows. The situation is rapidly changing and additional impacts to our business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or office closure requirements.

 

In addition, certain producing countries within the Organization of Petroleum Exporting Countries and their allies (" OPEC+") group have attempted to increase market share through pricing activity that has contributed to a severe decline in domestic oil prices and, correspondingly, drilling and operating activity within our markets. Subsequent to the end of the quarter, OPEC+ countries have reportedly agreed to cooperate in limited and short-term production cuts, the impact of which is uncertain at this time.

 

The full extent of the impact of COVID-19 and OPEC+ actions on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets, any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, production response of domestic oil producers to lower oil prices, and the adherence to and continuity of OPEC+ production cuts, among others.

 

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 March 31, 2020, and December 31, 2019, the Company had an allowance for doubtful accounts of approximately $571,000 and $246,000, respectively. For the three months ended March 31, 2020, the Company recorded approximately $300,000 to bad debt expense. For the three months ended March 31, 2019, the Company did not record any 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 months ended March 31, 2020 and 2019, the Company did not recognize any write-downs or write-offs of inventory.

 

7

 

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. 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.

 

The Company amortizes leasehold improvements over the shorter of the life of the lease or the life of the improvements. 

 

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. During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its long-lived assets. The Company reviewed 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 long-lived assets have been impaired. The Company determined that there was no impairment of its long-lived assets during the three months ended March 31, 2020.  During the three months ended March 31, 2019, the Company recorded impairment charges of approximately $127,000 related to its saltwater disposal wells which it expects to divest during 2020.

 

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.

 

During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its goodwill and other intangible assets. The Company reviewed 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 goodwill and other intangible assets have been impaired. The Company determined that there was no impairment of its goodwill and other intangible assets during the three months ended March 31, 2020.

 

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 March 31, 2020 and 2019, there were outstanding stock options and warrants to acquire an aggregate of 2,390,335 and 2,378,499 shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of March 31, 2020, these outstanding stock options and warrants had no aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on March 31, 2020, and the exercise price, multiplied by the number of in-the-money instruments) of outstanding stock options and warrants.

 

 

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 instrument is reflected as an asset or liability 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 March 31, 2020 or December 31, 2019, 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 Liabilities 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 2016 through 2019 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2015 to 2019.

 

In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the three months ended March 31, 2020, there were no material tax impacts to our condensed consolidated financial statements relating to COVID-19 measures. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and others.

 

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 months ended March 31, 2020. 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.

 

10

 

 

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 lattice model to determine the fair value of market-based restricted stock awarded in 2020 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 June 2016, the FASB issued ASU 2016-13, Financial Statements - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to ascertain credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2022. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

 

 

 
 

 

 

Note 3 - Property and Equipment

 

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

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
                 

Trucks and vehicles

  $ 59,791     $ 59,788  

Other equipment

    1,301       1,303  

Buildings and improvements

    3,184       3,184  

Land

    378       378  

Total property and equipment

    64,654       64,653  

Accumulated depreciation

    (39,204 )     (38,033 )

Property and equipment, net

  $ 25,450     $ 26,620  

  

 

 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) execute a mutual release. 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 regarding the recorded balance of goodwill and the definite-lived intangible assets. With regard 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.

 

13

 

 

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

 

 

14

 

 

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, on April 9, 2019. 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.

 

 

15

 

 

 

Note 5 – Intangible Assets 

 

The components of our intangible assets as of March 31, 2020, and December 31, 2019, are as follows (in thousands):

 

             

 

 

March 31, 2020

 

 

December 31, 2019

 

Customer relationships

 

$

626

 

 

$

626

 

Patents and trademarks

 

 

441

 

 

 

441

 

Total intangible assets

 

 

1,067

 

 

 

1,067

 

Accumulated amortization

 

 

(290

)

 

 

(239

)

Net carrying value

 

$

777

 

 

$

828

 

 

The useful lives of our intangible assets are estimated to be five years. Amortization expense was approximately $51,000 for each of the three months ended March 31, 2020 and 2019. 

 

The following table represents the amortization expense for the next five years for the twelve months ending March 31 (in thousands): 

 

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

2025

 

Customer relationships

 

$

125

 

 

$

125

 

 

$

125

 

 

$

76

 

 

$

-

 

Patents and trademarks

 

 

90

 

 

 

90

 

 

 

90

 

 

 

56

 

 

 

-

 

Total intangible asset amortization expense

 

$

215

 

 

$

215

 

 

$

215

 

 

$

132

 

 

$

-

 

 

16

 

 

 

Note 6 – Discontinued Operations 

 

Heat Waves Water Management

 

During December 2019, the Heat Waves Water Management business ceased operations. The decision to discontinue HWWM was made due to its history of net losses, declining revenues, and its failure to generate positive operating cash flow. In early 2020, the Company began disposing of the HWWM assets and plans on selling off the remaining HWWM assets during the remainder of 2020. HWWM was previously reported in the Water Transfer Services segment, however, the Company redefined its segments during the year ended December 31, 2019, and Water Management Services is no longer a reporting segment.

 

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:

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

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

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

-

 

 

$

175

 

Property and equipment, net

 

 

1,250

 

 

 

1,373

 

Prepaid expenses and other current assets

 

 

-

 

 

 

12

 

Other assets     51       57  

Total major classes of assets of the discontinued operation

 

$

1,301

 

 

$

1,617

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

6  

 

 

47

 

Lease liabilities - financing (current and non-current)     52       59  

Total liabilities included as part of discontinued operations

 

$

58

 

 

$

106

 

 

17

 

 

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  

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

-

 

 

$

1,428

 

Cost of sales

 

 

-  

 

 

(2,185

)

Sales, general, and administrative expenses

 

 

-  

 

 

(17

)

Depreciation and amortization

 

 

(6

)

 

 

(283

)

Other income and expense items that are not major

 

 

(12

)

 

 

1

 

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

 

 

(18 )

 

 

(1,056

)

Gain (Loss) on disposal     54       -  

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

 

$

36  

 

$

(1,056

)

 

18

 

 

 

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 March 31, 2020, we had an outstanding principal loan balance under the Credit Facility of approximately $34.6 million with a weighted average interest rates of 5.06% per year for $32.5 million of outstanding LIBOR Rate borrowings and 6.75% per year for the approximately $2.1 million of outstanding Prime Rate borrowings. As of March 31, 2020, our available cash was approximately $217,000 and we did not have any availability under the 2017 Credit Agreement, as discussed below. 

 

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, upon which the ratio is measured on a trailing twelve-month basis;
 
(2In periods when the trailing twelve-month FCCR is less than 1.20 to 1.00, we are required to maintain minimum liquidity of $1,500,000 (including excess availability under the Credit Facility and balance sheet cash).
 

On January 6, 2020, the Company received a notice (the “Default Notice”) from East West Bank regarding the 2017 Credit Agreement. As a result of the events of default, East West Bank may accelerate the $34.0 million outstanding loan balance under the 2017 Credit Agreement to be immediately due and payable. As of the date of this report, East West Bank has not accelerated the outstanding loan balance amount but it may do so in the future.

 

The Default Notice indicates that the Company is in default under the 2017 Credit Agreement as a result of its:


●failure to immediately repay a loan overadvance that occurred on October 10, 2019 that has continued through January 6, 2020;


●failure to maintain a minimum liquidity of not less than $1,500,000 for the months ended October 31, 2019 and November 30, 2019; and


●failure to maintain a minimum fixed charge coverage ratio of not less than 1:10 to 1:00 for the months ended October 31, 2019 and November 30, 2019.

 

The Default Notice indicated that although East West Bank was not as of January 6, 2020, exercising its rights and remedies available as a result of the events of default, it specifically did not waive its rights and remedies resulting from the events of default and it reserves all other available rights and remedies under the Credit Agreement, certain other related documents and applicable law.

 

We are also currently negotiating and working with East West Bank in an effort to obtain a waiver for our breaches of the 2017 Credit Agreement. Our ability to continue as a going concern is dependent on our renegotiation of the 2017 Credit Agreement and our ability to further reduce costs and raise further capital, of which there can be no assurance. Further, there can be no assurance that we will successfully obtain a waiver from the East West Bank or maintain or increase our cash flows from operations. Given our current financial situation we may be required to accept terms on the transactions that we are seeking that are onerous to us.

 

The Default Notice received from East West Bank served as a triggering event for an event of default on our subordinated debt. As such, we have reclassified our subordinated debt to current liabilities. As of the date of this report, the lender of the subordinated debt has not  waived its rights and remedies resulting from the events of default and it reserves all other available rights and remedies under the Amended and Restated Subordinated Loan Agreement with Cross Rivers, L.P., a related party, certain other related documents, and applicable law.

 

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 $47,000 and $82,000 is included in Other Assets in the accompanying condensed consolidated balance sheets for March 31, 2020, and December 31, 2019, respectively. During the three months ended March 31, 2020 and 2019, the Company amortized approximately $35,000 and $34,000, 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):

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
                 
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  
                 
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Matures June 28, 2022     500       500  
                 

Real Estate Loan for a facility in North Dakota, interest at 5.75%, and monthly principal and interest payment of $5,255 until October 3, 2028. Collateralized by land and property purchased with the loan. 

    207       218  
                 
Vehicle loans for three pickups, interest at 8.59% monthly principal and interest payments of $3,966, matures in August 2021     63       74  
                 
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       53  

Total

    2,823       2,845  
Less debt discount     (106 )     (119 )

Less current portion

    (2,542 )     (2,528 )

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

  $ 175     $ 198  

 

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

 

Twelve Months Ending March 31,

       

2021

  $ 2,650  

2022

    75  

2023

    59  

2024

    39  

2025

    -  

Thereafter

    -  

Total

  $ 2,823  

 

 

 

 

 

 

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

 

March 31, 2020

                               

Derivative Instrument

                               
Interest rate swap liability   $ -     $ 23     $ -     $ 23  
                                 

December 31, 2019

                               

Derivative Instrument

                               

Interest rate swap liability

  $ -     $ 23     $ -     $ 23  
                                 

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.

 

 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 March 31, 2020, and December 31, 2019, 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 months ended March 31, 2020.

 

 

 

 

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 three months ended March 31, 2020 and 2019 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 three months ended March 31, 2020, the Company's tax benefit of $0.7 million, and during the three months ended March 31, 2019 the Company's tax provision of $1.2 million, were adjusted by the valuation allowance 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. We recognized approximately $845,000 in right-of-use assets and lease liabilities. We made a cumulative-effect adjustment to retained earnings of approximately $98,000 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 March 31, 2020, 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 March 31,

    Operating Leases     Financing Leases  

2021

  $ 998   $ 247  

2022

    948     232  

2023

    709     17  

2024

    644     -  

2025

    398     -  

Thereafter

    446     -  

 

    4,143     496  
Impact of discounting     (485 )   (84 )
Discounted value of lease obligations   $ 3,658   $ 412  

  

The following table summarizes the components of our gross operating lease costs incurred during the three months ended March 31, 2020 (in thousands):

 

 

 

Three Months Ended 

March 31, 

 
      2020     2019  

Operating lease expense:

 

 

 

 

     
Current lease cost   $ 291   $ 192  
Long-term lease cost     20     125  

Total operating lease cost

 

$

311

 

$ 317  
Finance lease expense:              
Amortization of right-of-use assets   $ 58   $ -  
Interest on lease liabilities     7     -  

Total lease cost

 

$

65

 

$ -  

 

Our weighted-average lease term and discount rate used during the three months ended March 31, 2020 are as follows:

 

 

 

Three Months Ended March 31, 2020

 

Operating        

Weighted-average lease term (years)

 

 

4.35

 

Weighted-average discount rate

 

 

6.08

%

Financing        
Weighted-average lease term (years)     1.91  
Weighted-average discount rate     6.10 %

 

23

 

 

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 individual 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 $130,000 and $68,000 as of March 31, 2020 and December 31, 2019, respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to March 31, 2020 and December 31, 2019, 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 March 31, 2020, 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 March 31, 2020, 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 March 31, 2020, 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 March 31, 2020, 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.

 

On November 11, 2019, in connection with a subordinated loan agreement, the Company granted Cross River one five-year warrant to buy an aggregate total of 625,000 shares of the Company's common stock at an exercise price of $0.20 per share. The warrants had a grant-date fair value $0.16 and were fully vested upon issuance and remain outstanding and exercisable until November 11, 2024.

 

 

A summary of warrant activity for the three months ended March 31, 2020 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, 2019

    655,000     $ 0.22       4.7     $ -  

Issued

    -       -       -       -  

Exercised

    -       -       -       -  

Forfeited/Cancelled

    -       -             -  

Outstanding at March 31, 2020

    655,000     $ 0.22       4.5       -  
                                 

Exercisable at March 31, 2020

    655,000     $ 0.22       4.5       -  

 

Stock Issued for Services

 

During the three months ended March 31, 2020, 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 March 31, 2020, there were options to purchase 274,666 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 March 31, 2020, there were options to purchase 1,460,667 shares and we had granted restricted stock shares of 1,395,833 that remained outstanding under the 2016 Plan 

 

We have not granted any stock options during the three months ended March 31, 2020 or the three months ended March 31, 2019. 

 

 

 

During the three months ended March 31, 2020 and 2019, no options were granted or exercised. 

 

   

Shares

   

Weighted Average

Exercise Price

   

Weighted Average

Remaining

Contractual Term

(Years)

   

Aggregate Intrinsic

Value (in thousands)

 
                                 

Outstanding at December 31, 2019

    1,945,333     $ 0.55       1.95     $ -  

Granted

    -       -       -       -  

Exercised

    -       -       -       -  

Forfeited or Expired

    (210,000 )     1.72       -       -  

Outstanding at March 31, 2020

    1,735,333     $ 0.41       1.92     $ -  
                                 

Vested or Expected to Vest at March 31, 2020

    1,692,332     $ 0.41       1.91       -  

Exercisable at March 31, 2020

    1,692,332     $ 0.41       1.91     $ -  

 

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 March 31, 2020, 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 March 31, 2020.

 

During the three months ended March 31, 2020 and 2019, the Company recognized stock-based compensation costs for stock options of approximately $2,000 and $42,000, respectively, 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, 2019

    53,001     $ 0.22  

Granted

    -       -  

Vested

    -       -  

Forfeited

    (10,000 )     0.22  

Non-vested at March 31, 2020

    43,001     $ 0.22  

 

As of March 31, 2020, there was approximately $1,000 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 0.17 years.

 

27

 

 

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, 2019

    2,006,333     $ 0.55  

Granted

    50,000       0.19  

Vested

    (58,333 )     0.47  

Forfeited

    (652,167 )     0.66  

Restricted shares at March 31, 2020

    1,345,833     $ 0.30  

 

During the three ended March 31, 2020 and 2019, the Company recognized stock-based compensation costs for restricted stock of approximately $36,000 and $49,000 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 months ended March 31, 2020 and 2019: 

 

    Three Months Ended March 31,    
      2020       2019    

Stock options

    1,772,147       2,437,443    

Warrants

    655,000       30,000    

Weighted average

    2,427,147       2,467,443    

 

 

 

 

Note 13- Segment Reporting

 

In 2019 we reorganized our business segments to align with how the oil and gas industry and our management team evaluates the business. Enservco’s reportable business segments are Production Services and Completion 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.

 

Production Services: This segment utilizes a fleet of hot oil trucks and acidizing units to provide maintenance services to the domestic oil and gas industry. These services include hot oil services and acidizing services.

 

Completion Services: This segment utilizes a fleet of frac water heating units to provide frac water heating services to the domestic oil and gas industry.

 

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):

 

   

Production

Services

   

Completion

Services

   

Unallocated &

Other

   

Total

 

Three Months Ended March 31, 2020:

                               

Revenues

  $ 3,202     $ 6,184     $ -     $ 9,386  

Cost of Revenue

    3,494       4,971       -       8,465  

Segment Profit (Loss)

  $ (292 )   $ 1,213     $ -     $ 921  
                                 

Depreciation and Amortization

  $ 671     $ 647     $ 78     $ 1,396  
                                 

Capital Expenditures (Excluding Acquisitions)

  $ 83     $ 81     $ -     $ 164  
                                 
    Identifiable assets (1)   $ 17,662     $

17,033

    $ 1,278     $ 35,973  
                                 

Three Months Ended March 31, 2019:

                               

Revenues

  $ 4,116     $ 20,696     $ -     $ 24,812  

Cost of Revenue

    3,346       12,020       -     $ 15,366  

Segment Profit (Loss)

  $ 770     $ 8,676     $ -     $ 9,446  
                                 

Depreciation and Amortization

  $ 635     $ 742     $ 23     $ 1,400  
                                 

Capital Expenditures (Excluding Acquisitions)

  $ 40     $ 47     $ 36     $ 123  
                                 
    Identifiable assets(1)   $ 23,092     $ 26,977     $ 465     $ 50,534  

 

 

(1)

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

 

 

 

 

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 March 31,

     
   

2020

   

2019

     
                     

Segment profit 

 

$

921

 

 

$

9,446

 

   

Sales, general, and administrative expenses

   

(1,762

)

   

(1,602

)

 

 

Patent litigation and defense costs

   

-

 

   

(9

)

 

 

(Loss) gain on disposals of equipment     (15 )     -      
Impairment     -       (127 )    

Depreciation and amortization

   

(1,396

)

   

(1,400

)

 

 

(Loss) income from Operations

 

$

(2,252

)

 

$

6,308

 

 

 

 

Geographic Areas

 

The Company only does business in the United States, in what it believes are three geographically diverse regions. The following table sets forth revenue from operations for the Company’s three geographic regions during the three months ended March 31, 2020 and 2019 (amounts in thousands):

 

 

   

Three Months Ended March 31,

   
   

2020

   

2019

   

BY GEOGRAPHY

                 
Production Services:                  

Rocky Mountain Region (1)

 

$

1,193

   

$

2,063

   

Central USA Region (2)

   

1,873

     

1,765

   

Eastern USA Region (3)

   

136

     

288

   
Total Production Services     3,202       4,116    
                   
Completion Services:                  
Rocky Mountain Region(1)     5,006       14,811    
Central USA Region(2)     110       2,771    
Eastern USA Region(3)     1,068       3,114    
Total Completion Services     6,184       20,696    

Total Revenues

 

$

9,386

   

$

24,812

   

 

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).

 

 

30

 

 

 

 
Note 14- Subsequent Events

 

On April 10, 2020, the Company, entered into a promissory note (the “Note”) with East West Bank in the aggregate amount of $1,939,900, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which was enacted March 27, 2020 and is administered by the United States Small Business Administration.

 

The Note matures on April 10, 2022 and bears interest at a rate of 1.00% per annum, payable in full plus all accrued interest on April 10, 2022. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Funds received under the Note may only be used for the Company’s payroll costs, costs used to continue group health care benefits, mortgage payments, rent, utilities, and interest on other debt obligations incurred before February 15, 2020. The Company intends to use the entire Note proceeds for qualifying expenses. Under the terms of the PPP, amounts of the Note may be forgiven if they are used for qualifying expenses as described in the CARES Act.

 

 

 

 
 

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 March 31, 2020, and December 31, 2019. 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:      

 

 

Our capital requirements and the uncertainty of being able to obtain additional funding on terms acceptable to us;

 

The significant financial constraints imposed as a result of our indebtedness, including the fact that we have no 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;

 

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;

 

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;

 

Our history of losses and working capital deficits which, at times, were significant;

 

Adverse weather and environmental conditions;

 

Our ability to retain key members of our senior management and key technical employees;

 

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;

 

Developments in the global economy;

 

Changes in tax laws;

 

The effects of competition;

 

The risks associated with the use of intellectual property that may be claimed by others and actual or potential litigation related thereto;

 

The effect of unseasonably warm weather during winter months; and

 

The effect of further sales or issuances of our common stock and the price and volume volatility of our common stock.

 

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, 2019. 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.

 

 

GOING CONCERN

 

Our financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. We incurred a net loss of $2.8 million for the three months ended March 31, 2020. As of the balance sheet date of this report we had total current liabilities of $41.8 million, which exceeded our total current assets of $7.0 million by $34.8 million. We are in breach of two of our covenants as well as failed to pay an overadvance that has continued through the date of this report related to the 2017 Credit Agreement (as discussed in Note 7 of the accompanying Notes to the Condensed Consolidated Financial Statements), resulting in our borrowings payable of $34.6 million being classified in current liabilities. We have very limited liquidity and expect negative cash flow from operations in the near term.

 

We are currently negotiating with East West Bank in an effort to obtain a waiver for our breaches of the 2017 Credit Agreement. Our ability to continue as a going concern is dependent on our renegotiation of the 2017 Credit Agreement and our ability to further reduce costs and raise further capital, of which there can be no assurance. Further, there can be no assurance that we will successfully obtain a waiver from the East West Bank or maintain or increase our cash flows from operations. Given our current financial situation we may be required to accept terms on the financing transactions that we are seeking that are onerous to us. These factors raise substantial doubt over our ability to continue as a going concern and whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the financial statements.

 

Recent Market Conditions

 

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The pandemic has significantly impacted the economic conditions in the United States, with accelerated effects in February and March, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the United States economy.  As a result of these developments, the Company expects a material adverse impact on its revenues, results of operations and cash flows. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or office closure requirements.

 

In addition, certain producing countries within the Organization of Petroleum Exporting Countries and their allies (" OPEC+") group have attempted to increase market share through pricing activity that has contributed to a severe decline in domestic oil prices and, correspondingly, drilling and operating activity within our markets. Subsequent to the end of the quarter, OPEC+ countries have reportedly agreed to cooperate in limited and short-term production cuts, the impact of which is uncertain at this time.

 

The full extent of the impact of COVID-19 and OPEC+ actions on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets, any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, production response of domestic oil producers to lower oil prices, and the adherence to and continuity of OPEC+ production cuts, among others.

 

33

 

OVERVIEW

 

The Company, through its subsidiary, Heat Waves Hot Oil Service, LLC ("Heat Waves"), provides a range of oil field services to the domestic onshore oil and gas industry through two segments: 1) Production services, which include hot oiling and acidizing, and 2) Completion services, which includes frac water heating. The Company owns and operates a fleet of approximately 390 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 three months ended March 31, 2020, decreased approximately $15.4 million, or 62%, from the comparable period last year due to weakness in domestic oil and gas activity levels driven by lower commodity prices, related pricing pressures, above average temperatures in Oklahoma, Pennsylvania, and eastern Ohio, and the more recent and broader impact of the OPEC+ price disputes and the COVID-19 pandemic beginning in March.

 

Segment profits for the three-month period ended March 31, 2020, decreased by approximately $8.5 million, or 90%, due to the reasons noted above.  Sales, general & administrative expense, excluding severance and transition costs, increased by approximately $160,000, or 10%, year over year due primarily to an increase in our bad debt expense and an increase in outside professional services partially offset by a reduction in duplicative general office costs which costs were due, in large part, to the timing of the Adler acquisition coinciding with the start of heating season in 2019. 

 

Net loss for the three months ended March 31, 2020, was approximately $2.8 million or $0.05 per share, compared to a net income of approximately $4.3 million, or $0.08 per share, in the same period last year due to the factors noted above.

 

Adjusted EBITDA for the three months ended March 31, 2020, was a loss of approximately $503,000 compared to earnings of approximately $7.9 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 three months ended March 31, 2020, WTI crude oil price averaged approximately $46 per barrel, versus an average of approximately $55 per barrel in the comparable period last year. The North American rig count declined to 728 rigs in operation as of March 31, 2020, compared to 1,006 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. 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

 

Segment Results:

 

Enservco’s reportable business segments are Production Services and Completion 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.

 

Production Services: This segment utilizes a fleet of hot oil trucks and acidizing units to provide maintenance services to the domestic oil and gas industry. These services include hot oil services and acidizing services.

 

Completion Services: This segment utilizes a fleet of frac water heating units to provide frac water heating services and related support services to the domestic oil and gas industry.

 

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 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 March 31,

     
   

2020

   

2019

     
REVENUES:                    

Production services

 

$

3,202

 

 

$

4,116

 

   

Completion services

   

6,184

 

   

20,696

 

 

 

Total Revenues

 

$

9,386

 

 

$

24,812

 

 

 

 


 

 

   

Three Months Ended March 31,

     
   

2020

   

2019

     
SEGMENT PROFIT (LOSS):                    

Production services

 

$

(292

)

 

$

770

 

   
Completion services     1,213       8,676      

Unallocated and other

    -      

-

 

 

 

Total Segment Profit (Loss)

 

$

921

 

 

$

9,446

 

 

 

 

Production Services

 

Production Services, which accounted for 34% of total revenue for the three months ended March 31, 2020, decreased approximately $914,000, or 22%, to $3.2 million compared to $4.1 million for the same quarter last year due to decreased activity levels related to the lower commodity prices

 

Hot oil revenue for the three months ended March 31, 2020, decreased approximately $715,000, or 20%, compared to the three months ended March 31, 2019, from approximately $3.6 million to approximately $2.9 million. The increase was primarily due to the lower domestic oil and gas activity levels driven by lower commodity prices.

 

Acidizing revenues for the three months ended March 31, 2020, decreased by approximately $199,000, or 42%, to approximately $270,000 from approximately $469,000.   The year-over-year decline was primarily driven by the reasons noted above.   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 Production services decreased by $1.0 million, or 138%, to a loss of $292,000 for the three months ended March 31, 2020, compared to profit of $770,000 in the same quarter last year, which was primarily the result of industry conditions discussed above. 

 

Completion Services

 

Completion Services, which accounted for 66% of total revenue for the three months ended March 31, 2020, decreased approximately $14.5 million, or 70%, to $6.2 million compared to $20.7 million for the same quarter last year due to the aforementioned related downturn in the industry and above average temperatures in Oklahoma, Pennsylvania, and eastern Ohio.

 

The segment profit for Completion services for the three months ended March 31, 2020, was approximately $1.2 million compared to segment approximately $8.7 million during the three months ended March 31, 2019. Decreased segment profit related to the reasons discussed above. 

 

 

 

Geographic Areas

 

The Company operates solely in three geographically diverse regions of the United States. The following table sets forth revenue from operations for the Company’s three geographic regions during the three months ended March 31, 2020 and 2019 (in thousands):

 

   

Three Months Ended March 31,

   
   

2020

   

2019

   

BY GEOGRAPHY

                 
Production Services:                  

Rocky Mountain Region (1)

 

$

1,193

   

$

2,063

   

Central USA Region (2)

   

1,873

     

1,765

   

Eastern USA Region (3)

   

136

     

288

   
Total Production Services     3,202       4,116    
                   
Completion Services:                  
Rocky Mountain Region(1)     5,006       14,811    
Central USA Region(2)     110       2,771    
Eastern USA Region(3)     1,068       3,114    
Total Completion Services     6,184       20,696    

Total Revenues

 

$

9,386

   

$

24,812

   

 

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). 

 

Production Services revenue in the Rocky Mountain Region for the three months ended March 31, 2020, decreased approximately $870,000, or 42%, primarily due to less acidizing and hot oiling activity in the D-J and Bakken Basins.

 

Production Services revenue in the Central USA region for the three months ended March 31, 2020, increased by approximately $108,000, or 6%, due to an increase in hot oiling activity in the Eagle Ford Shale.

 

Production Services segment revenue in the Eastern USA region for the three months ended March 31, 2020, decreased approximately $152,000, or 53%, resulting from less hot oiling in the Marcellus and Utica Basins.

 

Completion Services segment revenue decreased in all of our regions due to combinations of less completions activity and above average temperatures in Oklahoma, Pennsylvania, and eastern Ohio.

 

 

Historical Seasonality of Revenues

 

Because of the seasonality of our frac water heating business and, to a lesser extent, our hot oiling business, revenues generated during the cooler first and fourth quarters of our fiscal year, constitute our “heating season,” and are typically 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 Completion services (which includes frac water heating) typically decrease as a percentage of total revenues and our Production 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 approximately 76%, of its 2019 revenues during the first and fourth quarters compared to 24%, of 2019 revenues during the second and third quarters of 2019. In an effort to grow our year-round hot oiling revenues, in 2019 we introduced a commission program to attract and retain experienced hot oil operators, as these operators are able to retain customers in some cases regardless of which company the operator works for.

 

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 decreased by approximately $6.9 million or 45% during the first quarter of 2020 compared to the comparable period in 2019, primarily due to the severe reduction in revenue, discussed above.

 

Sales, General, and Administrative Expenses:

 

During the three months ended March 31, 2020, sales, general, and administrative expenses increased approximately $160,000, or 10%, to $1.8 million compared to the same period in 2019 primarily due to an increase in our bad debt reserve and an increase in professional fees related to our attempt to restructure our debt partially offset by a decrease in general office expense related to cost reductions by eliminating redundant personnel and facilities primarily related to the Adler acquisition.

 

Patent Litigation and Defense Costs:

 

Patent litigation and defense costs decreased from $9,000 to $0 for the three months ended March 31, 2020 compared to the like period in 2019. 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 March 31, 2020 was essentially flat compared to the same period in 2019.

 

38

 

 

Income from operations:

 

For the three months ended March 31, 2020, the Company recognized a loss from operations of $2.3 million compared to income from operations of $6.3 million for the comparable period in 2019. The decreased loss of $8.6 million was primarily due to the decrease in segment profits described above. 

Interest Expense:

Interest expense decreased approximately $243,000, or 27%, for the three months ended March 31, 2020, compared to the same period in 2019. The increase was primarily due to the decrease of our average borrowings partially offset by increased interest rates on our floating rate debt.

 

Discontinued Operations:

 

Results for the three months ended March 31, 2020 and 2019 include income from discontinued operations of approximately $36,000 and losses from operations of $1.1 million, respectively.

 

Other expense (income):

 

Other income for the three months ended March 31, 2020 was approximately $20,000, compared to other expense of approximately $65,000 for the three months ended March 31, 2019, respectively.

 

Income Taxes:

 

As of March 31, 2020, the Company had recorded a full valuation allowance on a net deferred tax asset of $5.6 million. During the three months ended March 31, 2020, the Company's tax benefit of $0.7 million and during the three months ended March 31, 2019 the Company's tax provision of $1.2 million were adjusted by the valuation allowance which resulted in a net tax provision of zero.

 

Our effective tax rate was approximately 0% for the three months ended March 31, 2020 and 2019, respectively. The effective tax expense for the three months ended March 31, 2020 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 March 31,

     
   

2020

   

2019

     

Adjusted EBITDA*

                   

Net (Loss) Income

 

$

(2,837)

   

$

4,303

     

Add Back (Deduct)

   

 

     

 

     
Interest expense     642       884      
Provision for income tax expense     -       -      

Depreciation and amortization (including discontinued operations)

   

1,403

     

1,683

     
EBITDA*     (792 )     6,870      
Add back                    
Stock-based compensation     39       92      
Patent litigation and defense costs     -       9      
Gain on disposal of equipment     (39 )     -      
Impairment loss     -       127      
Other (income) expense     279       64      
EBITDA related to discontinued operations     10       774      

Adjusted EBITDA*

 

$

(503

)  

$

7,936

     

 

*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, 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.

 

 

40

 

Because not all companies use identical calculations, the Company’s presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company’s performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures.

 

Changes in Adjusted EBITDA*

 

Adjusted EBITDA for the three months ended March 31, 2020 decreased by approximately $8.4 million due primarily to the decline in segment profit and 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 March 31, 2020, we had an outstanding principal loan balance under the Credit Facility of approximately $34.6 million with a weighted average interest rates of 5.06% per year for $32.5 million of outstanding LIBOR Rate borrowings and 6.75% per year for the approximately $2.1 million of outstanding Prime Rate borrowings. 

The following table summarizes our statements of cash flows for the three months ended March 31, 2020 and 2019 (in thousands):

 

   

For the Three Months Ended

March 31,

 
   

2020

   

2019

 
                 

Net cash used in operating activities

  $ (969 )   $ (2,646 )

Net cash provided by investing activities

    14       585  

Net cash used in financing activities

    509       1,804  

Net decrease in Cash and Cash Equivalents

    (446 )     (257 )
                 

Cash and Cash Equivalents, Beginning of Period

    663       257  
                 

Cash and Cash Equivalents, End of Period

  $ 217     $ -  

 

 

 

The following table sets forth a summary of certain aspects of our balance sheet at March 31, 2020 and December 31, 2019:

 

   

March 31,

2020

   

December 31,

2019

 
                 

Current Assets

  $ 7,050     $ 8,731  

Total Assets

  $ 39,593     $ 42,976  

Current Liabilities

  $ 41,820     $ 42,119  

Total Liabilities

  $ 45,067     $ 45,652  

Working Capital (Current Assets net of Current Liabilities)

  $ (34,770 )   $ (33,388 )

Stockholders’ Equity

  $ (5,474 )   $ (2,676 )

 

 Overview:

 

We do not currently generate adequate revenue to satisfy our current operations and expect we will need substantial additional capital to maintain operations for at least the remainder of 2020 absent a significant increase in demand for our services, which we do not expect. We cannot assure that we will be successful in raising additional debt or equity capital, if at all. We incurred significant net operating losses during the years ended December 31, 2019, and 2018, which have continued into the three months ended March 31, 2020 which raise substantial doubt about our ability to continue as a going concern. We are also in breach of two of our covenants under the 2017 Credit Agreement resulting in our borrowings thereunder of $34.6 million being classified as current liability, as well as failure to pay an over-advance that occurred on October 10, 2019 and has continued through the date of this report. Accordingly, our financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. We are also currently negotiating and working with East West Bank in an effort to obtain a waiver for our breaches of the 2017 Credit Agreement. Our ability to continue as a going concern is dependent on our renegotiation of the 2017 Credit Agreement and our ability to further reduce costs and raise further capital, of which there can be no assurance. Further, there can be no assurance that we will successfully obtain a waiver from the East West Bank or maintain or increase our cash flows from operations. Given our current financial situation we may be required to accept terms on the transactions that we are seeking that are less favorable than would be otherwise available.

 

The Default Notice received from East West Bank served as a triggering event for an event of default on our subordinated debt. As such, we have reclassified our subordinated debt to current liabilities. As of the date of this report, the lender of the subordinated debt has not  waived its rights and remedies resulting from the events of default and it reserves all other available rights and remedies under the Amended and Restated Subordinated Loan Agreement with Cross Rivers, L.P., a related party, certain other related documents, and applicable law.

 

We have relied on cash flow from operations, borrowings under our revolving credit agreements, and equity and debt offerings to satisfy our liquidity needs. Our ability to fund operating cash flow shortfalls, fund capital expenditures, and make acquisitions will depend upon our future operating performance and on the availability of equity and debt financing.  At March 31, 2020, we did not have any availability 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.

 

On November 11, 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.

 

 

 

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 March 31, 2020, the fair market value of the swap instrument remained unchanged and was recorded as a liability of $23,000.

 

Liquidity:

 

As of March 31, 2020, our available liquidity was $217,000, which represented our cash balance and we did not have any availability on the  2017 Credit Facility (subject to a covenant requirement that we maintain $1.5 million of available liquidity in periods where our fixed charge coverage ratio is less than 1.2:1). We utilize the 2017 Credit Facility to fund working capital requirements and investments, and during the three months ended March 31, 2020, we received net cash proceeds from our various lines of credit of approximately $595,000.

Working Capital:

As of March 31, 2020, we had a working capital deficit of approximately $34.8 million compared to $33.4 million as of December 31, 2019. 

Deferred Tax Asset, net:

As of March 31, 2020, the Company had recorded a valuation allowance to reduce its net deferred tax assets to zero. 

 

 

Cash flow from Operating Activities:

 

For the three months ended March 31, 2020, cash used in operating activities was approximately $969,000 compared to $2.7 million during the comparable period in 2019. The increase was attributable to the increase in cash provided by the monetization of accounts receivable during the current year period partially offset by the decrease in net income and the increase in cash flows related to the change in accounts payable balances.

 

Cash flow from Investing Activities:

 

Cash provided by investing activities during the three months ended March 31, 2020 was approximately $14,000, compared to $585,000 during the comparable period in 2019, primarily due to proceeds received from the sale of equipment related to our discontinued operations.

 

Cash flow from Financing Activities:

 

Cash provided by financing activities for the three months ended March 31, 2020 was $509,000 compared to $1.8 million for the comparable period in 2019. The change is due to decreased borrowings in 2020 due to decreased activity levels.

 

Outlook: 

 

We face a very difficult operating environment in 2020 with exploration and production companies significantly cutting back their drilling and completions plans and exerting significant pressure on us to reduce our prices for the services we provide. Additionally, as indicated above, we are in default under out 2017 Credit Agreement and we will need additional debt or equity capital to continue operations through 2020. We cannot assure that we will raise such capital on terms acceptable to us, if at all. Due to our lack of capital we may be forced to curtail operations in some or all of our locations which will materially adversely affect our revenues and our ability to continue as a going concern. In the event we are able to continue as a going concern, 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 significantly declined beginning in the fourth quarter of 2019 due to year-end capital budget exhaustion, decreases in drilling and completion activity and substantial price decreases for crude oil and natural gas that occurred during the first quarter of 2020.  Those declines may be partially mitigated by demand for our Production 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 expand our customer relationships while maintaining an appropriate balance between recurring maintenance work and drilling and completion related services.

 

Capital Commitments and Obligations:

 

Our capital obligations as of March 31, 2020 consist primarily the 2017 Credit Agreement which matures August 10, 2020. In addition, we also have scheduled principal payments under certain term loans and operating leases. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the financial statements.  As discussed above, our lender under the 2017 Credit Agreement has declared us to be in default on our $34.6 million of indebtedness due to it and has reserved all its rights and remedies under the agreement including the right to accelerate and declare our loans due and payable and to foreclose on the collateral pledged, in whole or in part.

 

    

 

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of March 31, 2020, 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 

 

Going Concern

 

Our financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. We incurred a net loss of $2.8 for the three months ended March 31, 2020. As of the balance sheet date of this report we had total current liabilities of $41.8 million, which exceeded our total current assets of $7.0 million by $34.8 million. We are in breach of two of our covenants and have failed to repay overadvance that occurred on October 10, 2019 and has continued through the date of this report related to the 2017 Credit Agreement (as discussed in Note 7 of the accompanying Notes to the Condensed Consolidated Financial Statements), resulting in our borrowings payable of $34.6 million being classified in current liabilities.

 

Our ability to continue as a going concern is dependent on the renegotiation of the 2017 Credit Agreement and/or raising further capital. These factors raise substantial doubt over our ability to continue as a going concern and whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the financial statements.

 

We are currently negotiating with East West Bank, however given our current financial situation we may be forced to accept terms on these transactions that are less favorable than would be otherwise available. As of the date of this report East West Bank has not waived our breaches of the 2017 Credit Agreement.

 

There have been no other changes in our critical accounting policies since December 31, 2019. 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.

  

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Exchange Act, as of March 31, 2020, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer). Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2020.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There has been no change in the Company's internal control over financial reporting during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

.

 

 

PART II

 

ITEM 1.     LEGAL PROCEEDINGS 

 

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 liability of 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.

 

ITEM 1A. RISK FACTORS

 

See the Company’s risk factors set forth in the Company’s annual report on Form 10-K for the year ended December 31, 2019, filed on March 20, 2020, which is incorporated herein by reference. In addition, see the additional risk factor below.

 

Our success depends on key members of our management, the loss of any executive or key personnel could disrupt our business operations.

 

We depend to a large extent on the services of certain of our executive officers. The loss of the services of Ian Dickinson or Marjorie Hargrave, could disrupt our operations. Although we have entered into employment agreements with Mr. Dickinson and Ms. Hargrave, that contain, among other things non-compete and confidentiality provisions, we may not be able to enforce the non-compete and/or confidentiality provisions in the employment agreements.

 

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

 

 

 

ITEM 6. EXHIBITS 

 

Exhibit No.

 

Title

31.1

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Ian Dickinson, Principal Executive Officer). Filed herewith.

31.2

 

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Marjorie Hargrave, Principal Financial Officer). Filed herewith.

32

 

Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Ian Dickinson, Chief Executive Officer, and Marjorie Hargrave, Chief Financial Officer). Filed herewith.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Schema Document

101.CAL

 

XBRL Calculation Linkbase Document

101.LAB

 

XBRL Label Linkbase Document

101.PRE

 

XBRL Presentation Linkbase Document

101.DEF

 

XBRL Definition Linkbase Document

 

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ENSERVCO CORPORATION

 

 

 

 

 

 

 

 

 

Date: May 15, 2020

 

/s/ Ian Dickinson

 

 

 

Ian Dickinson, Principal Executive Officer and Chief

Executive Officer

 

 

 

 

 

       

Date: May 15, 2020

  /s/ Marjorie Hargrave  
   

Marjorie Hargrave, Principal Financial Officer and Chief Financial Officer

 

 

 

 

 

49

 

 
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