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:
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●
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Our capital requirements and the uncertainty of being able to obtain additional funding on terms acceptable to us;
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●
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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;
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●
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The volatility of domestic and international oil and natural gas prices and the resulting impact on production and drilling activity, and the effect that lower prices may have on our customers’ demand for our services, the result of which may adversely impact our revenues and financial performance;
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●
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The broad geographical diversity of our operations which, while expected to diversify the risks related to a slow-down in one area of operations, also adds to our costs of doing business;
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●
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Our history of losses and working capital deficits which, at times, were significant;
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●
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Adverse weather and environmental conditions;
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●
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Our ability to retain key members of our senior management and key technical employees;
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●
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The potential impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation with which we and our customers must comply;
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●
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Developments in the global economy;
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●
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The effects of competition;
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●
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The risks associated with the use of intellectual property that may be claimed by others and actual or potential litigation related thereto;
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●
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The effect of unseasonably warm weather during winter months; and
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●
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The effect of further sales or issuances of our common stock and the price and volume volatility of our common stock.
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Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K for the fiscal year ended December 31, 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.
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.
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.
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.