UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30September 30, 20172019
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.) | |
Denver, CO |
| |
(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 |
Common stock, $.005 par value |
|
ENSERVCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
September 30, | December 31, | |||||||
ASSETS | 2017 | 2016 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 479,851 | $ | 620,764 | ||||
Accounts receivable, net | 3,880,464 | 4,814,276 | ||||||
Prepaid expenses and other current assets | 944,142 | 970,802 | ||||||
Inventories | 431,462 | 407,379 | ||||||
Income tax receivable | - | 223,847 | ||||||
Total current assets | 5,735,919 | 7,037,068 | ||||||
Property and Equipment, net | 30,928,820 | 34,617,961 | ||||||
Deferred Tax Asset, net | 1,962,979 | - | ||||||
Other Assets | 1,255,610 | 714,967 | ||||||
TOTAL ASSETS | $ | 39,883,328 | $ | 42,369,996 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 3,095,793 | $ | 3,682,599 | ||||
Senior revolving credit facility (1) | 23,543,802 | - | ||||||
Current portion of long-term debt | 176,956 | 318,499 | ||||||
Total current liabilities | 26,816,551 | 4,001,098 | ||||||
Long-Term Liabilities | ||||||||
Senior revolving credit facility | - | 23,180,514 | ||||||
Subordinated debt | 2,213,796 | - | ||||||
Long-term debt, less current portion | 265,465 | 304,373 | ||||||
Deferred income taxes, net | - | 468,565 | ||||||
Warrant liability | 586,312 | - | ||||||
Total long-term liabilities | 3,065,573 | 23,953,452 | ||||||
Total liabilities | 29,882,124 | 27,954,550 | ||||||
Commitments and Contingencies (Note 9) | ||||||||
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, 51,171,260 and 51,171,260 shares issued, respectively; 103,600 shares of treasury stock; and 51,067,660 and 51,067,660 shares outstanding, respectively | 255,337 | 255,337 | ||||||
Additional paid-in capital | 19,439,609 | 18,867,702 | ||||||
Accumulated deficit | (9,693,742 | ) | (4,707,593 | ) | ||||
Total stockholders' equity | 10,001,204 | 14,415,446 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 39,883,328 | $ | 42,369,996 |
(1) See Note 2 and Note 5 for discussion regarding the presentation of borrowings under our senior revolving credit facility as a current liability as of September 30, 2017.
June 30, | December 31, | |||||||
ASSETS | 2019 | 2018 | ||||||
(Unaudited) | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 506 | $ | 257 | ||||
Accounts receivable, net | 8,628 | 10,729 | ||||||
Prepaid expenses and other current assets | 1,001 | 1,081 | ||||||
Inventories | 372 | 514 | ||||||
Income tax receivable, current | 85 | 85 | ||||||
Current assets of discontinued operations | 37 | 864 | ||||||
Total current assets | 10,629 | 13,530 | ||||||
Property and equipment, net | 30,306 | 33,057 | ||||||
Goodwill | 546 | 546 | ||||||
Intangible assets, net | 931 | 1,033 | ||||||
Income taxes receivable, non-current | 28 | 28 | ||||||
Right-of-use asset - financing, net | 777 | - | ||||||
Right-of-use asset - operating, net | 4,899 | - | ||||||
Other assets | 556 | 650 | ||||||
Non-current assets of discontinued operations | - | 177 | ||||||
TOTAL ASSETS | $ | 48,672 | $ | 49,021 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts payable and accrued liabilities | $ | 2,961 | $ | 3,391 | ||||
Note payable | - | 3,868 | ||||||
Lease liability - financing, current | 197 | - | ||||||
Lease liability - operating, current | 846 | - | ||||||
Current portion of long-term debt | 144 | 149 | ||||||
Current liabilities of discontinued operations | - | 44 | ||||||
Total current liabilities | 4,148 | 7,452 | ||||||
Long-Term Liabilities | ||||||||
Senior revolving credit facility | 31,862 | 33,882 | ||||||
Subordinated debt | 1,857 | 1,832 | ||||||
Long-term debt, less current portion | 246 | 312 | ||||||
Lease liability - financing, less current portion | 441 | - | ||||||
Lease liability - operating, less current portion | 4,056 | - | ||||||
Other liability | 89 | 941 | ||||||
Total long-term liabilities | 38,551 | 36,967 | ||||||
Total liabilities | 42,699 | 44,419 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Stockholders' Equity | ||||||||
Preferred stock, $.005 par value, 10,000,000 shares authorized, no shares issued or outstanding | - | - | ||||||
Common stock. $.005 par value, 100,000,000 shares authorized, 55,432,829 and 54,389,829 shares issued, respectively; 103,600 shares of treasury stock; and 55,329,229 and 54,286,229 shares outstanding, respectively | 277 | 271 | ||||||
Additional paid-in capital | 21,960 | 21,797 | ||||||
Accumulated deficit | (16,264 | ) | (17,466 | ) | ||||
Total stockholders' equity | 5,973 | 4,602 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 48,672 | $ | 49,021 |
See notes to condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands except per share amounts)
(Unaudited)
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenues | ||||||||||||||||
Well enhancement services | $ | 4,033,487 | $ | 3,060,565 | $ | 21,836,551 | $ | 12,880,914 | ||||||||
Water transfer services | 797,805 | - | 1,855,811 | 31,688 | ||||||||||||
Water hauling services | 910,834 | 917,767 | 2,676,739 | 2,922,207 | ||||||||||||
Construction services | - | 1,524,879 | 254,066 | 2,113,813 | ||||||||||||
Total revenues | 5,742,126 | 5,503,211 | 26,623,167 | 17,948,622 | ||||||||||||
Expenses | ||||||||||||||||
Well enhancement services | 4,162,171 | 3,016,337 | 16,935,563 | 10,763,483 | ||||||||||||
Water transfer services | 822,322 | 254,304 | 2,114,094 | 1,133,556 | ||||||||||||
Water hauling services | 801,049 | 897,200 | 2,906,106 | 2,918,076 | ||||||||||||
Construction services | - | 1,621,732 | 211,644 | 2,334,058 | ||||||||||||
Functional support | 216,670 | 171,967 | 645,479 | 520,633 | ||||||||||||
General and administrative expenses | 1,138,741 | 966,873 | 3,423,040 | 2,894,769 | ||||||||||||
Patent litigation and defense costs | 28,447 | 33,171 | 95,677 | 108,783 | ||||||||||||
Severance and Transition Costs (1) | 16,666 | - | 784,421 | - | ||||||||||||
Depreciation and amortization | 1,617,957 | 1,602,901 | 4,869,260 | 4,968,493 | ||||||||||||
Total operating expenses | 8,804,023 | 8,564,485 | 31,985,284 | 25,641,851 | ||||||||||||
Income (Loss) from Operations | (3,061,897 | ) | (3,061,274 | ) | (5,362,117 | ) | (7,693,229 | ) | ||||||||
Other Income (Expense) | ||||||||||||||||
Interest expense | (599,616 | ) | (553,049 | ) | (1,809,320 | ) | (1,426,500 | ) | ||||||||
Gain (Loss) on disposals of equipment | - | - | - | 233,473 | ||||||||||||
Other (expense) income | (263,713 | ) | 5,198 | (221,734 | ) | 12,204 | ||||||||||
Total other expense | (863,329 | ) | (547,851 | ) | (2,031,054 | ) | (1,180,823 | ) | ||||||||
Income (Loss) Before Tax Expense | (3,925,226 | ) | (3,609,125 | ) | (7,393,171 | ) | (8,874,052 | ) | ||||||||
Income Tax Benefit (Expense) | 1,415,494 | 1,251,301 | 2,407,023 | 3,060,008 | ||||||||||||
Net Loss | $ | (2,509,732 | ) | $ | (2,357,824 | ) | $ | (4,986,148 | ) | $ | (5,814,044 | ) | ||||
Earnings (Loss) per Common Share - Basic | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.15 | ) | ||||
Earnings (Loss) per Common Share – Diluted | $ | (0.05 | ) | $ | (0.06 | ) | $ | (0.10 | ) | $ | (0.15 | ) | ||||
Basic weighted average number of common shares outstanding | 51,067,660 | 38,130,160 | 51,067,660 | 38,129,994 | ||||||||||||
Add: Dilutive shares assuming exercise of options and warrants | - | - | - | - | ||||||||||||
Diluted weighted average number of common shares outstanding | 51,067,660 | 38,130,160 | 51,067,660 | 38,129,994 |
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues | ||||||||||||||||
Well enhancement services | $ | 6,339 | $ | 7,005 | $ | 31,151 | $ | 26,290 | ||||||||
Water transfer services | 867 | 929 | 2,295 | 1,924 | ||||||||||||
Total revenues | 7,206 | 7,934 | 33,446 | 28,214 | ||||||||||||
Expenses | ||||||||||||||||
Well enhancement services | 6,150 | 5,900 | 21,362 | 18,991 | ||||||||||||
Water transfer services | 1,287 | 979 | 3,472 | 1,936 | ||||||||||||
Functional support and other | 287 | 181 | 442 | 326 | ||||||||||||
Sales, general, and administrative expenses | 1,460 | 1,236 | 3,078 | 2,589 | ||||||||||||
Patent litigation and defense costs | 1 | 55 | 10 | 75 | ||||||||||||
Severance and transition costs | - | 593 | - | 633 | ||||||||||||
Loss (gain) on disposal of assets | 12 | (53 | ) | 12 | (53 | ) | ||||||||||
Impairment loss | - | - | 127 | - | ||||||||||||
Depreciation and amortization | 1,736 | 1,520 | 3,419 | 3,019 | ||||||||||||
Total operating expenses | 10,933 | 10,411 | 31,922 | 27,516 | ||||||||||||
(Loss) Income from Operations | (3,727 | ) | (2,477 | ) | 1,524 |
| 698 |
| ||||||||
Other (Expense) Income | ||||||||||||||||
Interest expense | (658 | ) | (511 | ) | (1,542 | ) | (1,011 | ) | ||||||||
Other income (expense) | 1,208 | (85 | ) | 1,144 |
| (506 | ) | |||||||||
Total other income (expense) | 550 |
| (596 | ) | (398 | ) | (1,517 | ) | ||||||||
(Loss) income from continuing operations before tax benefit | (3,177 | ) | (3,073 | ) | 1,126 |
| (819 | ) | ||||||||
Income tax (expense) benefit | (32 | ) | (32 | ) | (32 | ) | (32 | ) | ||||||||
Income from continuing operations | $ | (3,209 | ) | $ | (3,105 | ) | $ | 1,094 |
| $ | (851 | ) | ||||
Discontinued operations (Note 6) | ||||||||||||||||
Loss from operations of discontinued operations | - | (177 | ) | - | (390 | ) | ||||||||||
Income tax benefit | - | - | - | - | ||||||||||||
Loss from discontinued operations | - | (177 | ) | - | (390 | ) | ||||||||||
Net (loss) income | $ | (3,209 | ) | $ | (3,282 | ) | $ | 1,094 | $ | (1,241 | ) | |||||
(Loss) earnings from continuing operations per common share - basic | $ | (0.06 | ) | $ | (0.06 | ) | $ | 0.02 |
| $ | (0.02 | ) | ||||
Loss from discontinued operations per common share - basic | - | - | - | - | ||||||||||||
Net (loss) income per share - basic | $ | (0.06 | ) | $ | (0.06 | ) | $ | 0.02 | $ | (0.02 | ) | |||||
(Loss) Earnings from continuing operations per common share - diluted | $ | (0.06 | ) | $ | (0.06 | ) | $ | 0.02 | $ | (0.02 | ) | |||||
Loss from discontinued operations per common share - diluted | - | - | - | - | ||||||||||||
Net (loss) income per share - diluted | $ | (0.06 | ) | $ | (0.06 | ) | $ | 0.02 |
| $ | (0.02 | ) | ||||
Basic weighted average number of common shares outstanding | 54,978 | 51,677 | 54,589 | 51,413 | ||||||||||||
Add: Dilutive shares | - | - | 1,215 | - | ||||||||||||
Diluted weighted average number of common shares outstanding | 54,978 | 51,677 | 55,804 | 51,413 |
(1) Severance and transition costs comprise (i) payments and accruals for future payments to our former Chief Executive Officer and Chief Financial Officer and (ii) professional fees directly related to separation and transition activities.
See notes to condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands)
|
| Common Shares |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Earnings (Deficit) |
|
| Total Stockholders’ Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2018 |
|
| 51,094 |
|
| $ | 255 |
|
| $ | 19,571 |
|
| $ | (11,601 | ) |
| $ | 8,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation, net of issuance costs |
|
| - |
|
|
| - |
|
|
| 63 |
|
|
| - |
|
|
| 73 |
|
Cashless option exercise | 66 | - | - | - | - | |||||||||||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,041 |
|
|
| 2,041 |
|
Balance at March 31, 2018 |
|
| 51,160 |
|
|
| 255 |
|
|
| 19,634 |
|
|
| (9,560 | ) |
|
| 10,329 |
|
Stock-based compensation, net of issuance costs |
|
| - |
|
|
| - |
|
|
| 105 |
|
|
| - |
|
|
| 105 |
|
Cashless option exercise | 663 | 3 | (3 | ) | - | - | ||||||||||||||
Restricted share issuance | 990 | 5 | (5 | ) | - | - | ||||||||||||||
Cashless exercise of warrants |
|
| 1,613 |
|
|
| 8 |
|
|
| 1,863 |
|
|
| - |
|
|
| 1,871 |
|
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,282 | ) |
|
| (3,282 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018 |
|
| 54,426 |
|
| $ | 271 |
|
| $ | 21,594 |
|
| $ | (12,842 | ) |
| $ | 9,023 |
|
|
| Common Shares |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Accumulated Earnings (Deficit) |
|
| Total Stockholders’ Equity |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019 |
|
| 54,286 |
|
| $ | 271 |
|
| $ | 21,797 |
|
| $ | (17,466 | ) |
| $ | 4,602 |
|
Opening balance adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 108 |
|
|
| 108 |
|
Stock-based compensation, net of issuance costs |
|
| - |
|
|
| - |
|
|
| 92 |
|
|
| - |
|
|
| 92 |
|
Restricted share cancellation | (55 | ) | - | - | - | - | ||||||||||||||
Net income |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,303 |
|
|
| 4,303 |
|
Balance at March 31, 2019 |
|
| 54,231 |
|
|
| 271 |
|
|
| 21,889 |
|
|
| (13,055 | ) |
|
| 9,105 |
|
Stock-based compensation, net of issuance costs |
|
| - |
|
|
| - |
|
|
| 77 |
|
|
| - |
|
|
| 77 |
|
Restricted share issuance |
|
| 1,123 |
|
|
| 6 |
|
|
| (6 | ) |
|
| - |
|
|
| - |
|
Restricted share cancellation | (25 | ) | - | - | - | - | ||||||||||||||
Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,209 | ) |
|
| (3,209 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2019 |
|
| 55,329 |
|
| $ | 277 |
|
| $ | 21,960 |
|
| $ | (16,264 | ) |
|
| 5,973 |
|
See accompanying notes to consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
For the Nine Months Ended | ||||||||
September 30, | ||||||||
2017 | 2016 | |||||||
OPERATING ACTIVITIES | ||||||||
Net loss | $ | (4,986,148 | ) | $ | (5,814,044 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities | - | |||||||
Depreciation and amortization | 4,869,260 | 4,968,493 | ||||||
(Gain) loss on disposal of equipment | - | (233,473 | ) | |||||
Unrealized loss on warrant liability | 279,665 | - | ||||||
Deferred income taxes | (2,294,388 | ) | (3,073,082 | ) | ||||
Stock-based compensation | 571,909 | 493,458 | ||||||
Stock issued for services | - | 1,714 | ||||||
Amortization of debt issuance costs and warrants | 447,885 | 113,816 | ||||||
Bad debt expense | 93,402 | 145,902 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 755,430 | 3,520,841 | ||||||
Inventories | (24,083 | ) | (54,285 | ) | ||||
Prepaid expense and other current assets | 66,679 | 155,926 | ||||||
Income taxes receivable | 223,847 | (1,400 | ) | |||||
Other assets | (610,369 | ) | 26,249 | |||||
Accounts payable and accrued liabilities | 55,727 | 901,243 | ||||||
Net cash (used in) provided by operating activities | (551,184 | ) | 1,151,358 | |||||
INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (1,283,773 | ) | (4,804,328 | ) | ||||
Proceeds from disposal of equipment | 120,537 | 321,725 | ||||||
Net cash used in investing activities | (1,163,236 | ) | (4,482,603 | ) | ||||
FINANCING ACTIVITIES | ||||||||
Net line of credit borrowings | 789,667 | 3,465,363 | ||||||
Proceeds from issuance of long-term debt | 1,000,000 | - | ||||||
Repayment of long-term debt | (180,451 | ) | (107,580 | ) | ||||
Payment of debt issuance costs | (35,709 | ) | (50,000 | ) | ||||
Net cash provided by financing activities | 1,573,507 | 3,307,783 | ||||||
Net Decrease in Cash and Cash Equivalents | (140,913 | ) | (23,462 | ) | ||||
Cash and Cash Equivalents, beginning of period | 620,764 | 804,737 | ||||||
Cash and Cash Equivalents, end of period | $ | 479,851 | $ | 781,275 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 303,117 | $ | 37,534 | ||||
Cash (received) paid for taxes | $ | (222,110 | ) | $ | 1,400 | |||
Supplemental Disclosure of Non-cash Investing and Financing Activities: | ||||||||
Non-cash proceeds from subordinated debt borrowings (1) | $ | 1,500,000 | $ | - | ||||
Non-cash proceeds from revolving credit facilities (2) | $ | 1,123,621 | $ | 1,146,980 | ||||
Non-cash repayment of revolving credit facility (1) | $ | (1,500,000 | ) | $ | - |
For the Six Months Ended | ||||||||
June 30, | ||||||||
2019 | 2018 | |||||||
OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | 1,094 | $ | (1,241 | ) | |||
Net loss from discontinued operations | - | (390 | ) | |||||
Net income (loss) from continuing operations | 1,094 | (851 | ) | |||||
Adjustments to reconcile net loss to net cash used in operating activities | ||||||||
Depreciation and amortization | 3,419 | 3,186 | ||||||
Loss (gain) on disposal of equipment | 12 | (53 | ) | |||||
Impairment loss | 127 | - | ||||||
Gain on settlement (Note 4) | (1,252 | ) | - | |||||
Change in fair value of warrant liability | - | 540 | ||||||
Stock-based compensation | 168 | 188 | ||||||
Amortization of debt issuance costs and discount | 226 | 126 | ||||||
Provision for bad debt expense | 3 | 33 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 2,098 | 6,839 | ||||||
Inventories | 142 | 82 | ||||||
Prepaid expense and other current assets | (21 | ) | 195 | |||||
Amortization of operating lease assets | 329 | - | ||||||
Other assets | 138 | (60 | ) | |||||
Accounts payable and accrued liabilities | (429 | ) | (3,101 | ) | ||||
Operating lease liabilities | (322 | ) | - | |||||
Other liabilities | 99 | - | ||||||
Net cash provided by operating activities - continuing operations | 5,831 | 7,124 | ||||||
Net cash provided by (used in) operating activities - discontinued operations | 23 | (599 | ) | |||||
Net cash provided by - operating activities | 5,854 | 6,525 | ||||||
INVESTING ACTIVITIES | ||||||||
Purchases of property and equipment | (567 | ) | (1,426 | ) | ||||
Proceeds from disposals of property and equipment | 219 | 145 | ||||||
Proceeds from insurance claims | 27 | 122 | ||||||
Net cash used in investing activities - continuing operations | (321 | ) | (1,159 | ) | ||||
Net cash provided by (used in) investing activities - discontinued operations | 760 | (44 | ) | |||||
Net cash provided by (used in) investing activities | 439 | (1,203 | ) | |||||
FINANCING ACTIVITIES | ||||||||
Net line of credit payments | (2,071 | ) | (5,386 | ) | ||||
Repayment of long-term debt | (70 | ) | (66 | ) | ||||
Payments of finance leases | (202 | ) | - | |||||
Repayment of note | (3,700 | ) | - | |||||
Other financing activities | (1 | ) | (26 | ) | ||||
Net cash used in financing activities | (6,044 | ) | (5,478 | ) | ||||
Net Increase (Decrease) in Cash and Cash Equivalents | 249 | (156 | ) | |||||
Cash and Cash Equivalents, beginning of period | 257 | 391 | ||||||
Cash and Cash Equivalents, end of period | $ | 506 | $ | 235 | ||||
Supplemental Cash Flow Information: | ||||||||
Cash paid for interest | $ | 1,254 | $ | 863 | ||||
Cash paid for taxes | $ | 32 | $ | 32 | ||||
Supplemental Disclosure of Non-cash Investing and Financing Activities: | ||||||||
Non-cash proceeds from revolving credit facilities | $ | - | $ | 49 | ||||
Cashless exercise of stock options | $ | - | $ | 994 | ||||
Non-cash proceeds of warrant exercise | $ | - | $ | 500 | ||||
Non-cash subordinated debt principal repayment | $ | - | $ | (500 | ) | |||
Non-cash conversion of warrant liability to equity | $ | - | $ | 1,371 |
(1) As discussed in more detail in Note 5, during the nine months ended September 30, 2017, we received proceeds from two subordinated promissory notes issued to our largest shareholder. Proceeds from one of these borrowings were remitted directly to the PNC Bank, N.A. to reduce the outstanding balance under our previous senior revolving credit facility.
(2) Non-cash proceeds from our revolving credit facilities comprise interest and other charges incurred pursuant to our senior revolving credit facilities, which were calculated periodically and added to the principal balance of the loans.
See notes to condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
Enservco Corporation (“Enservco”) through its wholly-owned subsidiaries (collectively referred to as the “Company”, “we” or “us”) provides various services to the domestic onshore oil and natural gas industry. These services include frac water heating, hot oiling and acidizing (well enhancement services); and water transfer and water treatment services (water transfer services); water hauling, fluid disposal, frac tank rental (water hauling services); and dirt hauling and other general oilfield services (construction 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.Inc. (“Dillco”), Heat Waves Water Management LLC (“HWWM”), HE Servicesand Adler Hot Oil Service, LLC (“HES”), and Real GC LLC (“Real GC”("Adler") (collectively, the “Company”) as of SeptemberJune 30, 2017 2019 and December 31, 2016 2018 and the results of operations for the three and nine six months ended SeptemberJune 30, 2017 2019 and 2016.2018.
The below table provides an overview of the Company’s current ownership hierarchy:
Name | State of Formation | Ownership | Business |
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Heat Waves Hot Oil Service LLC | Colorado | 100% by Enservco | Oil and natural gas well services, including logistics and stimulation. |
Adler Hot Oil Service, LLC | Delaware | 100% by Enservco | Oil and natural gas well services, including logistics and stimulation |
Heat Waves Water Management LLC | Colorado | 100% by Enservco | Water Transfer |
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. |
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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-Q10-Q and Article 8 of Regulation S-X.S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all of the normal and recurring adjustments necessary to fairly present the interim financial information set forth herein have been included. The results of operations for interim periods are not necessarily indicative of the operating results of a full year or of future years.
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow the same accounting policies and methods of their application as the most recent annual financial statements. These interim financial statements should be read in conjunction with the financial statements and related footnotes included in the Annual Report on Form 10-K10-K of Enservco Corporation for the year ended December 31, 2016. 2018. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
The accompanying unaudited condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Note 2– Liquidity and Management's Plans
As described in more detail in Note 5, Revolving Credit Facilities on August 10, 2017, we entered into a Loan and Security Agreement (the "2017 Credit Agreement") with East West Bank, a California banking corporation ("East West Bank"), which provides for a three-year $30 million senior secured revolving credit facility (the “New Credit Facility”). On August 10, 2017 we repaid all amounts due under our prior credit facility with PNC Bank (the "Prior Credit Facility") using proceeds from New Credit Facility. Upon entering the 2017 Credit Agreement and repaying all amounts due pursuant to the 2014 Credit Agreement, we had availability of approximately $4.7 million under the New Credit Facility.
As of September 30, 2017, our available liquidity was approximately $3.2 million, which was substantially comprised of $2.7 million of availability under our credit facility (the "New Credit Facility") provided pursuant to the Loan and Security Agreement with East West Bank ("East West Bank"), (the “2017 Credit Agreement”) and approximately $480,000 in cash. On August 10, 2017, we repaid approximately $21.5 million which we had borrowed pursuant to a previous credit facility (the "Prior Credit Facility") provided pursuant to the Amended and Restated Revolving Credit and Security Agreement with PNC Bank, N.A. (the “2014 Credit Agreement”) using proceeds from the New Credit Facility. During the nine months ended September 30, 2017, the company received proceeds of approximately $23.5 million under the New Credit Facility.
As of September 30, 2017, we were in violation of a loan covenant under the New Credit Facility that requires our Fixed Charge Coverage Ratio (as defined in the 2017 Credit Agreement) (“FCCR”) to be not less than 1.10 to 1.00 at the end of each month, with a build up beginning with January 1, 2017. Our FCCR as of September 30, 2017, was 0.62, calculated in accordance with the 2017 Credit Agreement, and constituted an Event of Default, as defined in the 2017 Credit Agreement. East West Bank may, at its election, declare all our obligations under the New Credit Facility immediately due and payable and cease advancing money or extending credit to us, among other remedies. We are currently in negotiations with East West Bank regarding a waiver of the testing of this covenant until December 31, 2017 through an amendment to the 2017 Credit Agreement, which would remedy the covenant violation. However, as of November 14, 2017, we had not finalized an amendment and we therefore classified borrowings under the New Credit Facility ($23,543,802) as a current liability in the accompanying condensed consolidated balance sheet as of September 30, 2017, resulting in us having a significant working capital deficit of approximately $21.1 million. We cannot provide assurance that we will reach an agreement regarding the waiver, however, we believe it is probable that such an agreement will be reached. If East West Bank exercises its option to declare our borrowings under the 2017 Credit Agreement immediately due and payable, or cease advancing money or extending credit to us, our ability to continue as a going concern will be negatively affected.
Note 3 - Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests. Enservco maintains its excess cash in various financial institutions, where deposits may exceed federally insured amounts at times.
Accounts Receivable
Accounts Receivable
Accounts receivable are stated at the amounts billed to customers, net of an allowance for uncollectible accounts. The Company provides an allowance for uncollectableuncollectible 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 SeptemberJune 30, 2017 2019, and December 31, 2016, 2018, the Company had an allowance for doubtful accounts of approximately $127,000 and $34,000, respectively.approximately $139,000. For thethe three and ninesix months ended SeptemberJune 30, 2017,2019, the CompanyCompany recorded approximately $3,000 to bad debt expense (net of recoveries) of approximately $44,000 and $93,000, respectively. For the three and nine months ended September 30, 2016, the Company recorded bad debt expense (net of recoveries) of approximately $59,000 and $146,000, respectively.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 marketnet realizable value in accordance with the first in, first out method (FIFO). The Company periodically reviews the value of items in inventory and provides write-downs or write-offs, of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. For the three and ninesix months ended SeptemberJune 30 2017 and 2016, no amounts were expensed for , 2019, the Company did not recognize any write-downs and write-offs.or write-offs of inventory.
Property and Equipment
Property and equipment consists of (1)(i) trucks, trailers and pickups; (2)(ii) water transfer pumps, pipe, lay flat hose, trailers, and other support equipment; (3)(iii) real property which includes land and buildings used for office and shop facilities and wells used for the disposal of water; and (4)(iv) other equipment such as tools used for maintaining and repairing vehicles, and (v) office furniture and fixtures, and computer equipment. Property and equipment is stated at cost less accumulated depreciation. The Company capitalizes interest on certain qualifying assets that are undergoing activities to prepare them for their intended use. Interest costs incurred during the fabrication period are capitalized and amortized over the life of the assets. The Company charges repairs and maintenance against income when incurred and capitalizes renewals and betterments, which extend the remaining useful life, expand the capacity or efficiency of the assets. Depreciation is recorded on a straight-line basis over estimated useful lives of 5 to 30 years.
Any difference between net book value of the property and equipment and the proceeds of an assets’ sale or settlement of an insurance claim is recorded as a gain or loss in the Company’s earnings.
Leases
The Company assesses whether an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. We have elected the practical expedient to not separate lease and non-lease components for all assets. Operating lease assets and operating lease liabilities are calculated based on the present value of the future minimum lease payments over the lease term at the lease start date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease start date in determining the present value of future payments. The operating lease asset is increased by any lease payments made at or before the lease start date and reduced by lease incentives and initial direct costs incurred. The lease term includes options to renew or terminate the lease when it is reasonably certain that we will exercise that option. The exercise of lease renewal options is at our sole discretion. The depreciable life of lease assets and leasehold improvements are limited by the lease term. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
The Company conducts a major part of its operations from leased facilities. Each of these leases is accounted for as an operating lease. Normally, the Company records rental expense on its operating leases over the lease term as it becomes payable. If rental payments are not made on a straight-line basis, per terms of the agreement, the Company records a deferred rent expense and recognizes the rental expense on a straight-line basis throughout the lease term. The majority of the Company’s facility leases contain renewal clauses and expire through June 2022. April 2024. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company amortizes leasehold improvements over the shorter of the life of the lease or the life of the improvements. As of June 30, 2019, and December 31, 2018, the Company had a deferred rent liability of approximately $15,000 and $64,000, respectively.
The Company has leased trucks and equipment in the normal course of business, which aremay be recorded as operating leases.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. There are no significant equipment leases outstanding as of September 30, 2017.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company reviews both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company reviews the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. No impairments wereThe Company recorded impairment charges of approximately $127,000 related to its salt water disposal wells which it expects to divest during the three or nine months ended September 30, 2017 and 2016.2019.
Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business acquisitions and combinations. Goodwill and other intangible assets are measured for impairment at least annually and/or whenever events and circumstances arise that indicate impairment may exist, such as a significant adverse change in the business climate. In assessing the value of goodwill, assets and liabilities are assigned to the reporting units and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. Identified intangible assets are amortized using the straight-line method over their estimated useful lives.
Revenue Recognition
We have adopted Accounting Standards Update 2014-09, Revenue - Revenue from Contracts with Customers, Accounting Standards Codification ("ASC") Topic 606, beginning January 1, 2018, using the modified retrospective approach, which we have applied to contracts within the scope of the standard. There was no material impact on the Company's condensed consolidated financial statements from adoption of this new standard. The Company evaluates revenue when we can identify the contract with the customer, the performance obligations in the contract, the transaction price, and we are certain that the performance obligations have been met. Revenue is recognized when the service has been provided to the customer. The vast majority of the Company's services and product offerings are short-term in nature. The time between invoicing and when payment is due under these arrangements is generally 30 to 60 days. Revenue is not generated from contractual arrangements that include multiple performance obligations.
The Company’s agreements with its customers are often referred to as “price sheets” and sometimes provide pricing for multiple services. However, these agreements generally do not authorize the performance of specific services or provide for guaranteed throughput amounts. As customers are free to choose which services, if any, to use based on the Company’s price sheet, the Company recognizes revenue when evidenceprices its separate services on the basis of an arrangement exists, the fee is fixedtheir standalone selling prices. Customer agreements generally do not provide for performance, cancellation, termination, or determinable,refund type provisions. Services based on price sheets with customers are generally performed under separately issued “work orders” or “field tickets” as services are provided, and collection is reasonably assured.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 shareCommon 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 per share is calculated by dividing net income (loss) by the diluted weighted average number of common shares. The diluted weighted average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding stock options and warrants.
As of June September 30, 20172019 and 2016,2018, there were outstanding stock options and warrants to acquire an aggregate of 6,850,6702,203,499 and 4,490,6692,662,766 shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of September June 30, 2017, 2019, the aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on June 30, 2019, and the exercise price, multiplied by the number of in-the-money instruments) of outstanding stock options and warrants was approximately $1.0 million. Dilution is not permitted if there are net losses during the period. As such,$103,000.
Derivative Instruments
From time to time, the Company does not show dilutive earnings per sharehas interest rate swap agreements in place to hedge against changes in interest rates. The fair value of the Company’s derivative instruments are reflected as assets or liabilities on the balance sheet. The accounting for changes in the threefair value of a derivative instrument depends on the intended use of the derivative instrument and nine months ended September the resulting designation. Transactions related to the Company’s derivative instruments accounted for as hedges are classified in the same category as the item hedged in the consolidated statement of cash flows. The Company did not hold derivative instruments at June 30, 2017 and 2016.2019 or December 31, 2018, for trading purposes.
Loan FeesOn 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 Deferred CostsAssets and changes to the fair value are recorded to Other Expense.
In the normal course of business, the Company enters into loan agreements and amendments thereto with its primary lending institutions. The majority of these lending agreements and amendments require origination fees and other fees in the course of executing the agreements. For all costs associated with the execution of the lending agreements, the Company recognizes these as capitalized costs and amortizes these costs over the term of the loan agreement. All other costs not associated with the execution of the loan agreements are expensed as incurred. As of September 30, 2017, we had approximately $230,000 in unamortized loan fees and other deferred costs associated with the 2017 Credit Agreement, which we expect to charge to expense ratably over the three-year term of that agreement. Income Taxes
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 general and administrative expenses.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 20122015 through 20162018 remain open to examination inexamination. In general, the taxing jurisdictionsCompany’s various state tax filings remain open for tax years 2014 to which the Company is subject.2018.
Fair Value
The Company follows authoritative guidance that applies to all financial assets and liabilities required to be measured and reported on a fair value basis. The Company also applies the guidance to non-financial assets and liabilities measured at fair value on a nonrecurring basis, including non-competition agreements and goodwill. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best information available in the circumstances. Beginning in 2017 the Company valued its warrants using the Binomial Lattice model ("Lattice"). The Company did not change its valuation techniques nor were there have any transfers between hierarchy levels during the ninethree and six months ended SeptemberJune 30, 2017.2019. The financial and nonfinancial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.
The hierarchy is broken down into three levels based on the reliability of the inputs as follows:
Level 1: | Quoted prices are available in active markets for identical assets or liabilities; |
Level 2: | Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or |
Level 3: | Unobservable pricing inputs that are generally less observable from objective sources, such as discounted cash flow models or valuations. |
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 further 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 also uses the Black-Scholes valuationa Lattice model to determine the fair value of certain warrants. The expected term used was the remaining contractual term. Expected volatility is based upon the weighted average of historical volatility over a term consistent with the contractual term of the warrant and implied volatility.remaining term. The risk-free interest rate is based upon impliedderived from the yield on azero-coupon U.S. Treasury zero-coupon issuegovernment securities with a remaining term equal to the contractual term of the warrants. The dividend yield is assumed to be none.zero.
The Company used the market-value of Company stock to determine the fair value of the performance-based restricted stock awarded in 2018 and 2019. The fair-value is updated quarterly based on actual forfeitures.
The Company used a Monte Carlo simulation program to determine the fair value of market-based restricted stock awarded in 2018 and 2019.
Management Estimates
The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the realization of accounts receivable, stock basedevaluation of impairment of long-lived assets, stock-based compensation expense, income tax provision, the valuation of derivative financial instruments (warrantswarrant liability and the Company's interest rate swaps),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 fiscal 201current7 presentation. These reclassifications have no effect on the Company’s consolidated statement of operations.
Accounting PronouncementsBusiness Combinations
In May 2014,We recognize and measure the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenueassets 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 Contractsa bargain purchase. For material acquisitions, management typically engages an independent valuation specialist to assist with Customers”, which requires an entity to recognize the amountdetermination of revenue to which it expects to be entitledfair 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 transferbusiness combination is incomplete by the end of promised goods or servicesthe reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015 the FASB agreed to defer the effective date byacquisition, and not later than one year from the acquisition date, we will record any material adjustments to the initial estimate based on new standard becomes effective for us on January 1, 2018. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently determining the impactinformation obtained about facts and circumstances that existed as of the new standardacquisition 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 fromand 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 services we provide. Our approach includes performingmarket, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a detailed reviewcomparable asset at prices at the time of key contracts representativethe acquisition reduced for depreciation of the asset. See Note 4 – Business Combinationsfor additional information regarding our different subsidiary businesses and comparing historical accounting policies and practices to the new standard. Our services are primarily short-term in nature, and generally revenue is recognized at a point in time when services are completed. Our assessment is that for the significant majority of our revenue, we do not expect the new revenue recognition standard will have a material impact on our financial statements upon adoption. However, from time to time we enter into service contracts with certain of our customers whereby revenue is earned over a period of time. We anticipate that with the adoption of ASU 2014-09, we will be required to disclose these various revenue streams on a disaggregated basis and provide disclosure detailing our considerations with regard to revenue recognized under service contracts. We currently intend to adopt the new standard as of January 1, 2018.business combinations.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”,Leases, which requires a lessee to record a right-of-use assetintroduces the recognition of lease assets and a lease liability on the balance sheetliabilities by lessees for allthose leases with terms longer than 12 months. Leases will be classified as either finance or operating with classification affecting the pattern of expense recognition in the income statement.leases under previous guidance. The new standardupdate is effective for fiscal yearsannual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Areporting periods, with early adoption permitted. The original guidance required application on a modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning ofbasis 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 period presentedperiods in transition and elect to use the financial statements. We continue to evaluateeffective date of ASC 842, Leases, as the impactdate of initial application of transition. Based on the effective date, the Company adopted this newASU beginning on January 1, 2019 and elected the transition option provided under ASU 2018-11. This standard had a material effect on our consolidated financial statements. Once adopted,balance sheet with the Company expects to recognize additionalrecognition 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 itsour consolidated balance sheet relatedsheets 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 operating leases withnot separate lease and non-lease components. The Company did not elect the practical expedient to use hindsight in determining the lease terms longer than one year.or assessing impairment of the Right-of-Use (‘ROU”) assets. See Note 10 - Commitments and Contingencies for more information.
In August 2016,January 2017, the FASB issued ASU 2016-15, “Statement2017-01, "Business Combinations (Topic 805): Clarifying the Definition of Cash Flows (Topic 230), Classificationa Business," that clarifies the definition of Certain Cash Receipts and Cash Payments (a consensusa business. This ASU provides a screen to determine whether a group of assets constitutes a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated as acquisitions. If the screen is not met, this ASU (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create an output and (2) removes the evaluation of whether a market participant could replace missing elements. Although outputs are not required for a set to be a business, outputs generally are a key element of a business; therefore, the FASB Emerging Issues Task Force) (ASU 2016-15)”, that clarifies how entities should classify certain cash receiptshas developed more stringent criteria for sets without outputs. We adopted this ASU in the first quarter of 2018 and cash paymentsthe adoption of this ASU did not have a material impact on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluating the effect of ASU 2016-15 on its consolidated financial statements.
Recently Adopted
In March 2016,May 2017, the FASB issued ASU 2016-09 “Compensation –2017-09, "Compensation - Stock Compensation (Topic 718)”,: Scope of Modification Accounting," which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification upprovides guidance about which changes to the employees' maximum statutory tax rates, allowingterms or conditions of a share-based payment award require an entity-wideentity to apply modification accounting policy election to either estimatein Topic 718. The Company adopted this ASU on January 1, 2018, and the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.statements.
Note 34 - Property and Equipment
Property and equipment consists of the following:following (amounts in thousands):
September 30, | December 31, | June 30, | December 31, | |||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Trucks and vehicles | $ | 55,107,844 | $ | 54,353,632 | $ | 59,621 | $ | 59,535 | ||||||||
Water transfer equipment | 4,658,965 | 4,520,155 | 5,190 | 4,952 | ||||||||||||
Other equipment | 3,205,894 | 2,898,457 | 1,032 | 961 | ||||||||||||
Buildings and improvements | 3,875,259 | 3,896,865 | 2,955 | 2,822 | ||||||||||||
Land | 784,636 | 784,636 | 378 | 378 | ||||||||||||
Disposal wells | 391,003 | 391,003 | - | 400 | ||||||||||||
Total property and equipment | 68,023,601 | 66,844,748 | 69,176 | 69,048 | ||||||||||||
Accumulated depreciation | (37,094,781 | ) | (32,226,787 | ) | (38,870 | ) | (35,991 | ) | ||||||||
Property and equipment – net | $ | 30,928,820 | $ | 34,617,961 | ||||||||||||
Property and equipment, net | $ | 30,306 | $ | 33,057 |
Note 4 – Business Combinations
Acquisition of Adler Hot Oil Service, LLC
On October 26, 2018, Enservco Corporation entered into a Membership Interest Purchase Agreement (the “Agreement”) with Adler Hot Oil Holdings, LLC, a Delaware limited liability company (the “Seller”), pursuant to which Enservco acquired all of the outstanding membership interests of Adler Hot Oil Service, LLC, a Delaware limited liability company (“Adler”) for a gross aggregate purchase price of $12.5 million, plus approximately $500,000 in working capital adjustments (the “Transaction”). The purchase price allocation differs from the gross aggregate purchase price due to fair value adjustments to the indemnity holdback, earnout, plus the discount on the subordinated note. Certain former members of Adler are also parties to the Agreement. Adler is a provider of frac water heating and hot oiling services, whose assets consist primarily of vehicles and equipment, with a complementary base of customers in several oil and gas producing basins where Enservco operates.
The consideration paid or to be paid by Enservco under the Agreement originally included: (i) $3.7 million in cash paid to or for the benefit of the Seller at the closing; (ii) a subordinated promissory note issued to the Seller in the principal amount of $4.8 million, plus interest accrued thereon (the “Seller Subordinated Note”), as further discussed below; (iii) retirement by Enservco of $2.5 million in indebtedness of Adler; (iv) an earn-out payment of up to $1.0 million in cash payable to the Seller (the "Earn-Out Payment"), the actual amount of which is subject to Enservco’s satisfaction of certain EBITDA-related performance conditions during 2019; and (v) $1.0 million in cash held by Enservco and payable to the Seller on the 18 month anniversary of October 26, 2018, subject to offset by Enservco for any indemnification obligations owed by the Seller or certain former members of Adler under the Agreement (the "Indemnity Holdback Payment"). Certain aspects of the consideration have been modified since execution of the Agreement as further discussed below.
On April 4, 2019 Enservco and the Seller entered into a Settlement Agreement and Mutual Release (the “Settlement Agreement”) in order to resolve certain disputes and disagreements relating to the Transaction without litigation. Pursuant to the Settlement Agreement the parties agreed to (i) waive all rights of the Seller to the Earn-Out Payment and the Indemnity Holdback Payment, (ii) reduce the original principal balance of the Seller Subordinated Note from $4,800,000 to $4,500,000, (iii) extend the maturity date of the Seller Subordinated Note from March 31, 2019 to April 10, 2019, subject to a nine day grace period, and (iv) mutually release one another from any and all demands, claims and causes of action, existing, or arising out of or related to (A) the sale and purchase of Adler, (B) the Purchase Agreement or the Ancillary Documents referred to therein, (C) Adler, (D) loans by the Seller to Adler, or (E) the transactions or activities connected with any of the foregoing or any prior dealings of any of the Seller, on the one hand, and Enservco on the other hand, in each case subject to exceptions for claims arising from breaches of the Settlement Agreement and enumerated provisions of the Purchase Agreement. All adjustments to the original purchase accounting are recognized in the second quarter of 2019, when the settlement occurred. We also considered whether the execution of the Settlement Agreement was an indicator of impairment with regards to the recorded balance of goodwill and the definite-lived intangible assets. With regards to goodwill, we determined that it was not more likely than not that the carrying amount of the reporting unit was greater than its fair value, and thus determined that further evaluation of goodwill for potential impairment was not necessary. We will perform a goodwill impairment analysis over the recorded balance on an annual basis, or if we determine an indicator of impairment exists. With regards to the definite-lived intangible assets, we determined that there were no events or changes in circumstances that would indicate that its carrying amount may not be recoverable, and therefore determined that a test for recoverability was not required.
The acquisition of Adler qualified as a business combination and as such, we estimated the fair value of the assets acquired and liabilities assumed as of the closing date. Additionally, we estimated the fair value of contingent consideration given. The fair value measure of the assets acquired and liabilities assumed applied various valuation methods to estimate the value of the intangibles that would provide a fair and reasonable value to a market participant, in view of the facts available at the time. Each valuation method was analyzed to determine which method would generate the most reasonable estimate of value of the Company’s intangible assets as of October 26, 2018. Both internal and external factors influencing the value of the intangibles were considered such as Adler’s financial position, results of operations, historical financial data, future financial expectations, economic conditions, status of the oil and gas industry and Adler’s position in the industry.
In connection with the execution of the Settlement Agreement, we reviewed our estimates and allocation of the fair value of assets acquired, consideration transferred, and contingent consideration given in connection with the Transaction. In our judgment, the reduction in the fair value of the consideration did not have a clear and direct link to the purchase price, and therefore the change in the fair value of the Indemnity Holdback Payment of approximately $908,000, the change in the fair value of the Earn-Out Payment, of approximately $44,000, and the $300,000 reduction in the amount of the Seller Subordinated Note, were each recorded as gains within Other Income (Expense) in the accompanying Statements of Operations.
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 |
|
Below are consolidated results of operations for the three and six months ended June 30, 2018, as though the acquisition of Adler had been completed on January 1, 2018.
Three Months Ended | Six Months Ended | |||||||
June 30, | June 30, | |||||||
2018 | 2018 | |||||||
Total revenues | $ | 9,623 | $ | 39,173 | ||||
Income from continuing operations | $ | (3,978 | ) | $ | 679 | |||
Income per common share - basic and diluted | $ | (0.08 | ) | $ | 0.09 |
The pro forma results for the three and six months ended June 30, 2018, includes adjustments related to the following purchase accounting and acquisition related items:
- Elimination of Adler interest expense.
- Additional interest expense related to long-term debt issued to fund the acquisition.
- Adjustment to depreciation expense based on the adjustment of Adler's Property, plant, and equipment to fair value.
- Adjustment to remove certain professional fees from Adler's expenses.
- Adjustment to remove gain on extinguishment of debt from Adler's results.
Subordinated Note
In connection with the Transaction and pursuant to the terms of the Agreement, on October 26, 2018, Enservco issued to the Seller the Seller Subordinated Note in the original principal amount of $4.8 million in connection with the Settlement Agreement, which was reduced to $4.5 million as discussed above, and unpaid amounts thereunder beared simple interest at a rate of 8% per annum. Enservco was required to and made principal payments on November 30, 2018 of $800,000, on February 28, 2019 of $200,000, and on April 9, 2019, subject to a 10-day grace period, of all remaining outstanding principal and interest. The Seller Subordinated Note was guaranteed by Enservco’s subsidiaries and secured by a junior security interest in substantially all assets of Enservco and its subsidiaries. The Seller Subordinated Note was subject to a subordination agreement by and among Enservco, the Seller, and East West Bank. On April 19, 2019, Enservco made the final payment to settle the principal balance and accrued interest on the Seller Subordinated Note and has no further obligations to the Seller.
Second Amendment to Loan and Security Agreement and Consent
In connection with the Transaction, on October 26, 2018, Enservco and East West Bank entered into a Second Amendment to Loan and Security Agreement and Consent (the “Second Amendment to LSA”), which amended the Loan and Security Agreement dated August 10, 2017 by and between Enservco and East West Bank (the “Loan Agreement”). Pursuant to the Second Amendment to LSA, East West Bank consented to the Transaction and increased the maximum borrowing limit of the senior secured revolving credit facility provided to Enservco under the Loan Agreement to $37.0 million. Proceeds of $6.2 million from the increased senior secured revolving credit facility were used in the Transaction to make the cash payments at closing and retire the indebtedness of Adler. In connection with the Second Amendment to LSA the capital expenditure limitation contained within the Loan Agreement was increased to $3.0 million from $2.5 million.
On October 26, 2018, in connection with the Second Amendment to LSA, Adler entered into a Joinder Agreement, pursuant to which Adler was joined as a party to the Loan Agreement.
Note 5 – Intangible Assets
The components of our intangible assets as of June 30, 2019, and December 31, 2018, are as follows (in thousands):
|
| June 30, 2019 |
|
| December 31, 2018 |
| ||
Customer relationships |
| $ | 626 |
|
| $ | 626 |
|
Patents and trademarks |
|
| 441 |
|
|
| 441 |
|
Total intangible assets |
|
| 1,067 |
|
|
| 1,067 |
|
Accumulated amortization |
|
| (136 | ) |
|
| (34 | ) |
Net carrying value |
| $ | 931 |
|
| $ | 1,033 |
|
The useful lives of our intangible assets are estimated to be five years. Amortization expense was approximately $51,000 and $102,000 for the three and six months ended June 30, 2019.
The following table represents the amortization expense for the next five years for the twelve months ending June 30 (in thousands):
|
| 2020 |
|
| 2021 |
|
| 2022 |
|
| 2023 |
|
| 2024 |
| |||||
Customer relationships |
| $ | 125 |
|
| $ | 125 |
|
| $ | 125 |
|
| $ | 125 |
|
| $ | 41 |
|
Patents and trademarks |
|
| 90 |
|
|
| 90 |
|
|
| 90 |
|
|
| 90 |
|
|
| 30 |
|
Total intangible asset amortization expense |
| $ | 215 |
|
| $ | 215 |
|
| $ | 215 |
|
| $ | 215 |
|
| $ | 71 |
|
Note 6 – Discontinued Operations
Dillco
Effective November 1, 2018, the Dillco water hauling business ceased operations for customers. In December 2018, we held an auction for all of the Dillco fixed assets which resulted in a gain of approximately $129,000. Additionally, we recorded an impairment charge of $130,000 related to land and building sold subsequent to December 31, 2018.
The following table represents a reconciliation of the carrying amounts of major classes of assets and liabilities disclosed as discontinued operations in the Balance Sheets:
|
| June 30, |
|
| December 31, |
| ||
|
| 2019 |
|
| 2018 |
| ||
Carrying amount of major classes of assets included as part of discontinued operations: |
|
|
|
|
|
|
|
|
Accounts receivable, net |
| $ | 30 |
|
| $ | 97 |
|
Inventories |
|
| - |
|
|
| - |
|
Property and equipment, net |
|
| - |
|
|
| 177 |
|
Receivable from equipment sales |
|
| - |
|
|
| 760 |
|
Prepaid expenses and other current assets |
|
| 7 |
|
|
| 7 |
|
Total major classes of assets of the discontinued operation |
| $ | 37 |
|
| $ | 1,041 |
|
|
|
|
|
|
|
|
|
|
Carrying amounts of major classes of liabilities included as part of discontinued operations: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
| - |
|
|
| 44 |
|
Total liabilities included as part of discontinued operations |
| $ | - |
|
| $ | 44 |
|
The following table represents a reconciliation of the major classes of line items constituting pretax loss of discontinued operations that are disclosed as discontinued operations in the Statements of Operations:
Three months ended | ||||||||
|
| June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
|
|
|
Revenue |
| $ | - |
|
| $ | 858 |
|
Cost of sales |
|
| - |
|
|
| (953 | ) |
Sales, general, and administrative expenses |
|
| - |
|
|
| (5 | ) |
Depreciation and amortization |
|
| - |
|
|
| (78 | ) |
Other income and expense items that are not major |
|
| - |
|
|
| 1 |
|
Pretax loss of discontinued operations related to major classes of pretax profit |
|
| - |
|
|
| (177 | ) |
Pretax gain on sale at auction |
|
| - |
|
|
| - |
|
Loss on disposal | - | - | ||||||
Pretax loss on impairment |
|
| - |
|
|
| - |
|
Income tax benefit |
|
| - |
|
|
| - |
|
Total loss on discontinued operations that is presented in the Statements of Operations |
| $ | - |
|
| $ | (177 | ) |
Six months ended | ||||||||
|
| June 30, |
| |||||
|
| 2019 |
|
| 2018 |
| ||
|
|
|
|
|
|
|
|
|
Revenue |
| $ | - |
|
| $ | 1,699 |
|
Cost of sales |
|
| - |
|
|
| (1,901 | ) |
Sales, general, and administrative expenses |
|
| - |
|
|
| (22 | ) |
Depreciation and amortization |
|
| - |
|
|
| (167 | ) |
Other income and expense items that are not major |
|
| - |
|
|
| 1 |
|
Pretax loss of discontinued operations related to major classes of pretax profit |
|
| - |
|
|
| (390 | ) |
Pretax gain on sale at auction |
|
| - |
|
|
| - |
|
Loss on disposal | - | - | ||||||
Pretax loss on impairment |
|
| - |
|
|
| - |
|
Income tax benefit |
|
| - |
|
|
| - |
|
Total loss on discontinued operations that is presented in the Statements of Operations |
| $ | - |
|
| $ | (390 | ) |
Note 75 – Revolving Credit FacilitiesDebt
PNC Revolving Credit Facility
In September 2014, we entered into an Amended and Restated Revolving Credit and Security Agreement (the "2014 Credit Agreement") with PNC Bank, National Association ("PNC") which provided for a five-year $30 million senior secured revolving credit facility. Under the 2014 Credit Agreement, there were no required principal payments until maturity and we had the option to pay variable interest rate based on (i) 1, 2 or 3 month LIBOR plus an applicable margin ranging from 4.50% to 5.50% for LIBOR Rate Loans or (ii) interest at PNC Base Rate plus an applicable margin of 3.00% to 4.00% for Domestic Rate Loans. Interest was calculated monthly and added to the principal balance of the loan.
On March 31, 2017, we entered into the Tenth Amendment to the 2014 Credit Agreement with PNC Bank that among other things (i) required us to raise $1.5 million in subordinated debt or post a letter of credit in favor of PNC by March 31, 2017; (ii) raise an additional $1 million of subordinated debt by May 15, 2017; (iii) reduced the maturity date of the loan from September 12, 2019 to April 30, 2018; (iv) changed the definition of Adjusted EBITDA to include proceeds from subordinated debt; and (v) changed the calculation of fixed charge and leverage ratio from a trailing four-quarter basis to a quarterly build from the quarter ended December 31, 2016. On March 31, 2017, our largest shareholder, Cross River Partners, L.P. ("Cross River"), whose general partner's managing member is the chairman of our Board of Directors, posted a letter of credit in the amount of $1.5 million in accordance with the terms of the Tenth Amendment. The letter of credit was converted into subordinated debt with a maturity dateAs of June 28, 2022 with a stated interest rate30, 2019, our available liquidity was approximately $506,000, which was comprised of 10% per annum and a five-year warrant to purchase 967,741 shares of our common stock at an exercise price of $.31 per share. On May 10, 2017, Cross River also provided $1.0 million in subordinated debt to us as required under the terms of our 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 was granted a five-year warrant to purchase 645,161 shares of our common stock at an exercise price of $0.31 per share. We accounted for the warrants issued in connection with the subordinated debt as a liability in the accompanying consolidated balance sheet as of September 30, 2017.cash.
As of December 31, 2016, we had an outstanding principal loan balance under the 2014 Credit Agreement of $23.2 million. The interest rate at December 31, 2016 ranged from 5.21% to 5.27% per year for the $21.3 million of outstanding LIBOR Rate Loans and 6.75% per year for the $1.9 million of outstanding Domestic Rate Loans. As of December 31, 2016, approximately $4.5 million was available under the 2014 Credit Agreement. As of December 31, 2016, June 30, 2019, we were in compliance with ourall financial covenants undercontained in the 20142017 Credit Agreement.
Debt Issuance Costs
We have capitalized certain debt issuance costs incurred in connection with the credit agreementsCredit Facility discussed above and these costs are being amortized to interest expense over the term of the facility on a straight-line basis. AsThe long-term portion of September 30, 2017 and December 31, 2016, approximately $230,000 and $171,000, respectively, of unamortized debt issuance costs wereof approximately $152,000 and $208,000 is included in Other Assets in the accompanying condensed consolidated balance sheets.sheets for June 30, 2019, and December 31, 2018, respectively. During the three and ninesix months ended September June 30, 2017, we2019, the Company amortized approximately $135,000$24,000 and $427,000 $58,000, respectively, of these costs which is included within to Interest Expense in the accompanying consolidated statements of operations.Expense. During the three and ninesix months ended September June 30, 2016, we2018, the Company amortized approximately $39,000$24,000 and $114,000$47,000, respectively, of these costs respectively.to Interest Expense.
Upon the acceleration of the maturity date upon entering into the Tenth Amendment to the 2014 Credit Agreement, and subsequently upon our repayment of the 2014 Credit Agreement on August 10, 2017, we accelerated the amortization of approximately $110,000 and $317,000 of debt issuance costs incurred in connection with the 2014 Credit Agreement, during the three and nine months ended September 30, 2017, respectively.
Interest Rate Swap
On September 17, 2015, we entered into an interest rate swap agreement with PNC in order to hedge against the variability in cash flows from future interest payments related to the 2014 Credit Agreement. The terms of the interest rate swap agreement included an initial notional amount of $10.0 million, a fixed payment rate of 1.88% plus applicable a margin ranging from 4.50% to 5.50% paid by us and a floating payment rate equal to LIBOR plus applicable margin of 4.50% to 5.50% paid by PNC. The purpose of the swap agreement was to adjust the interest rate profile of our debt obligations and to achieve a targeted mix of floating and fixed rate debt.
In connection with the termination of the 2014 Credit Agreement, on August 10, 2017, we terminated the interest rate swap agreement with PNC. Our cost to terminate the agreement was approximately $90,000, which compared to our estimate of the fair value of the swap prior to the termination of approximately $72,000. We recorded the difference of approximately $18,000 as additional interest expense during the three months ended September 30, 2017.
Note Notes Payable6 – Long-Term Debt
Long-term debt (excluding borrowings under our 2017 Credit AgreementFacility described in Note 5)above) consists of the following:following (in thousands):
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Real Estate Loan for facility in North Dakota, interest at 3.75%, monthly principal and interest payment of $5,255 ending October 3, 2028. Collateralized by land and property purchased with the loan. | $ | 317,421 | $ | 355,033 | ||||
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. | 125,000 | 170,000 | ||||||
Mortgages payable to banks, interest ranging from 5.9% to 7.25%, due in monthly principal and interest payments of $6,105, secured by land. Remaining principal balances were paid in February 2017. | - | 97,839 | ||||||
Total | 442,421 | 622,872 | ||||||
Less current portion | (176,956 | ) | (318,499 | ) | ||||
Long-term debt, net of current portion | $ | 265,465 | $ | 304,373 |
June 30, | December 31, | |||||||
2019 | 2018 | |||||||
Seller Subordinated Note. Interest is at 8%. Matured March 31, 2019 (1) | $ | - | $ | 4,000 | ||||
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Matures June 28, 2022 | 1,000 | 1,000 | ||||||
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Matures June 28, 2022 | 1,000 | 1,000 | ||||||
Real Estate Loan for a facility in North Dakota, interest at 5.75%, and monthly principal and interest payment of $5,254.64 until October 3, 2028. Collateralized by land and property purchased with the loan. | 243 | 258 | ||||||
Vehicle loans for three pickups, interest at 8.59% monthly principal and interest payments of $3,966, matures in August 2021 | 94 | 113 | ||||||
Note payable to the seller of Heat Waves. The note was garnished by the Internal Revenue Service (“IRS”) in 2009 and is due on demand; paid in annual installments of $36,000 per agreement with the IRS | 53 | 89 | ||||||
Total | 2,390 | 6,460 | ||||||
Less debt discount | (143 | ) | (299 | ) | ||||
Less current portion | (144 | ) | (4,017 | ) | ||||
Long-term debt, net of debt discount and current portion | $ | 2,103 | $ | 2,144 |
(1) In accordance with the Settlement Agreement discussed in Notes 4 the agreed upon due date was extended to April 10, 2019, subject to a nine-day grace period. On April 19, 2019, Enservco made the final payment to settle the principal balance and accrued interest on the Seller Subordinated Note and has no further obligations to the Seller. |
Aggregate maturities of debt, (excluding borrowings under our the 2017 Credit Agreement described in Note above5)), are as follows:follows (in thousands):
Twelve Months Ending September 30, | ||||||||
2017 | $ | 176,956 | ||||||
2018 | 53,898 | |||||||
2019 | 55,963 | |||||||
Twelve Months Ending June 30, | ||||||||
2020 | 58,148 | $ | 144 | |||||
2021 | 60,398 | 98 | ||||||
2022 | 2,064 | |||||||
2023 | 60 | |||||||
2024 | 24 | |||||||
Thereafter | 37,058 | - | ||||||
Total | $ | 442,421 | $ | 2,390 |
Note 87 – 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: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 | |||||||||||||
September 30, 2017 | ||||||||||||||||
Derivative Instrument | ||||||||||||||||
Warrant liability | $ | - | $ | - | $ | 586,312 | $ | 586,312 | ||||||||
December 31, 2016 | ||||||||||||||||
Derivative Instrument | ||||||||||||||||
Interest rate swap | $ | - | $ | 91,000 | $ | - | $ | 91,000 |
Fair Value Measurement Using | ||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value Measurement | |||||||||||||
June 30, 2019 | ||||||||||||||||
Derivative Instrument | ||||||||||||||||
Interest rate swap liability | $ | - | $ | 18 | $ | - | $ | 18 | ||||||||
December 31, 2018 | ||||||||||||||||
Derivative Instrument | ||||||||||||||||
Interest rate swap asset | $ | - | $ | 75 | $ | - | $ | 75 | ||||||||
Earn-Out Payment liability | $ | - | $ | - | $ | 44 | $ | 44 | ||||||||
Indemnity Holdback Payment liability | - | - | 887 | 887 | ||||||||||||
$ | - | $ | - | $ | 931 | $ | 931 |
The Company's warrant liability was valued as a derivative instrument at issuance and at September 30, 2017 usingfair value of the Black-Scholes option pricing model, using observable market inputs and management judgment based on the following assumptions: a risk-free interest rate of 1.62%, expected dividend yield of 0%,swap is estimated using a term of 2.4 years,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 a volatility of 100.10%. The valuation policies used are approved by the Chief Financial Officer who reviews and approves the inputs usedrespective counterparty’s nonperformance risk in the fair value calculations andmeasurements, which we have concluded are not material to the changes in fair value measurements from periodvaluation. Due to period for reasonableness. Fair value measurements are discussed with the Company’s Chief Executive Officer, as deemed appropriate.
The Company’s interest rate swap is valued using models which require a variety of inputs, including contractual terms, market prices, yield curves, credit spreads,swaps being unique and correlations of such inputs. Some of the model inputs used in valuing the derivative instruments trade in liquid markets, and therefore the derivative instrument is classified within Level 2 ofnot actively traded, the fair value hierarchy. For applicableis classified as Level 2.
The fair value of the Indemnity Holdback Payment liability was estimated based on the present value using a risk-adjusted interest rate of 9.5%. The fair value of the Earn-Out Payment liability was estimated using a financial projection with a risk-adjusted interest rate of 9.5%.
Certain assets carriedand liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. As of June 30, 2019, and December 31, 2018, the credit standingcarrying 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 counterparties is analyzed and factored into the fair value measurement of those assets. The fair value estimates of our derivative financial instruments do not reflect their actual trading value.
The change inCompany’s credit agreements are carried at cost which are approximately the fair value of the warrant liability resulted in a chargedebt as the related interest rate are at the terms that approximate rates currently available to earnings of approximately $280,000 during the three and nine months ended September 30, 2017, and is included within Other (expense) income in the accompanying consolidated statement of operations. Company.
The Company did not have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the three and six months ended June 30, 2019.
Note 98 – 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 threesix months ended September June 30, 2017 2019 and 20162018 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 34%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 and ninesix months ended SeptemberJune 30, 2017,2019 and 2018, the Company recorded netan income tax benefitexpense of $1.4 millionapproximately $314,000 and $2.4 million,$235,000, respectively, primarily due to our net operating losses duringreduced the three and nine months ended September 30, 2017. Asgross amount of September 30, 2017, the Company had recorded a deferred tax asset and we reduced the valuation allowance by a like amount which resulted in a net tax provision of approximately $2.0 million. zero.
Note 109 – Commitments and Contingencies
Operating Leases
On January 1, 2019, we adopted ASC 842, Leases. Results for reporting periods beginning January 1, 2019 are presented in accordance with ASC 842, while prior period amounts are reported in accordance with ASC 840. On January 1, 2019, we recognized $2.4 million in right-of-use assets and $2.4 million in lease liabilities, representing the present value of minimum payment obligations associated with leased facilities and certain equipment with non-cancellable lease terms in excess of one year. During the six months ended June 30, 2019, we entered into several finance leases related to equipment. We recognized approximately $845,000 in right-of-use assets and lease liabilities. We made a cumulative-effect adjustment to retained earnings of approximately $108,000 at January 1, 2019.
Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets. To determine the present value of lease payments not yet paid, the Company uses the weighted average interest rate on its Credit Facility. Long-term leases typically contain rent escalations over the lease term. The Company recognizes expense for these leases on a straight-line basis over the lease term.
The Company has elected the short-term lease recognition exemption for all applicable classes of underlying assets. Short-term disclosures include only those leases with a term greater than one month and 12 months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of 12 months or less, that do not include an option to purchase the underlying asset that we are reasonably certain to exercise, are not recorded on the balance sheet.
The Company elected the expedient to account for lease and non-lease components as a single component for our entire population of operating lease assets.
As of June September 30, 2017, 2019, the Company leases facilities and certain equipment under lease commitments that expire through August 2022. June 2026. Future minimum lease commitments for these operating lease commitments are as follows:follows (in thousands):
Twelve Months Ending September 30, | |||||||||||
2018 | $ | 665,189 | |||||||||
2019 | 631,655 | ||||||||||
Twelve Months Ending June 30, | Operating Leases | Financing Leases | |||||||||
2020 | 611,341 | $ | 1,096 | $ | 275 | ||||||
2021 | 406,267 | 1,041 | 239 | ||||||||
2022 | 257,923 | 933 | 191 | ||||||||
2023 | 644 | - | |||||||||
2024 | 613 | - | |||||||||
Thereafter | - | 717 | - | ||||||||
Total | $ | 2,572,375 | |||||||||
| 5,044 | 705 | |||||||||
Impact of discounting | (142 | ) | (67 | ) | |||||||
Discounted value of lease obligations | $ | 4,902 | $ | 638 |
Rent expense underThe following table summarizes the components of our gross operating leases, including month-to-month leases, for the three and nine months ended September 30, 2017 were approximately $185,000 and $589,000, respectively. Rent expense under operating leases, including month-to-month leases, forlease costs incurred during the three and ninesix months ended SeptemberJune 30, 2016 were $188,0002019 (in thousands):
|
| Three Months Ended |
| Six Months Ended | |||
June 30, 2019 | |||||||
Operating lease expense: |
|
|
|
| |||
Current lease cost | $ | 175 | $ | 367 | |||
Long-term lease cost | 197 | 322 | |||||
Total operating lease cost |
| $ | 372 |
| $ | 689 | |
Finance lease expense: | |||||||
Amortization of right-of-use assets | $ | 68 | $ | 68 | |||
Interest on lease liabilities | 9 | 9 | |||||
Total lease cost |
| $ | 77 |
| $ | 77 |
Our weighted-average lease term and $591,000 respectively.
HydroFLOW Agreement
Pursuant to a Sales Agreement with HydroFLOW USA, HWWM hasdiscount rate used during the exclusive right to sell or rent patented hydropath devices in connection with bacteria deactivation and scale treatment services for treating injection and disposal wells, fracking water and recycled water in the oil and gas industry to HWWM customers in the United States. Pursuant to the sales agreement, HWWM is required to pay 3.5% royalties of its gross revenues on certain rental transactions and, in order to maintain the exclusivity provision under the agreement, the Company is required to purchase approximately $655,000 of equipment per year commencing in 2016 and ending 2025. In November 2016, the Company and HydroFLOW USA agreed to allocate $220,000 of the 2016 commitment to 2017, thereby increasing the minimum purchase requirement for 2017 to $875,000. During the ninesix months ended SeptemberJune 30, 2017, the Company completed the purchase of $280,000 of equipment to fulfill its 2016 purchase commitment for exclusivity. During the three and nine months ended September 30, 2017 and 2016, the Company did not accrue or pay any royalties to HydroFLOW. The Company has negotiated a release of all 2016 and 2017 purchase commitments, while leaving intact the exclusive right to sell or rent the patented hydropath devices through 2017. 2019 are as follows:
Six Months Ended June 30, 2019 | ||||
Operating | ||||
Weighted-average lease term (years) | 4.96 | |||
Weighted-average discount rate | 6.08 | % | ||
Financing | ||||
Weighted-average lease term (years) | 2.66 | |||
Weighted-average discount rate | 6.10 | % |
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$50,000 in medical costs per individual participant. 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 $55,000$68,000 and $23,000$60,000 as of September June 30, 2017 2019 and December 31, 2016, 2018, respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to quarter end.June 30, 2019 and December 31, 2018, respectively.
Effective April 1, 2015, the Company had entered into a workers’workers’ compensation and employer’s liability insurance policy with a term through March 31, 2018. Under the terms of the policy, the Company iswas 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 $1.5$1.8 million over the term of the policy. Inpolicy (an amount that was variable with changes in annualized compensation amounts). As of June 2017, an30, 2019, a former employee of one of our subsidiariesours had an open claim relating to injuries sustained bodily injury while in the course of employment, and the projected maximum cost of the claim exceededpolicy as determined by the amount we had previously paid in under the policy. As a result, during the three months ended September 30, 2017, we made a payment of approximately $612,000 under the terms of the policy. The amount was based on an estimate of the total cost of theinsurance carrier included estimated claim including costs that as of September 30, 2017, have not yet been paid or incurred in connection with the claim. During the three monthsyear ended September 30,December 31, 2017, our insurance carrier formally denied the workers' compensation claim and is movinghas moved to close the claim entirely. As a result, duringPer the three months ended Septemberterms of our insurance policy, through June 30, 2017, we reversed an accrual2019, we had recorded during the three months ended June 30, 2017, based on our estimatepaid in approximately $1.8 million of the expected totalprojected maximum plan cost of $1.8 million, and had recorded approximately $1.6 million as expense over the insurance plan.term of the policy. We recorded the remaining approximately $572,000$189,000 in payments made under the planpolicy as a long-term asset, which we expect will either be recorded as expense in future periods, or refunded to us by ourthe 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. Per the terms of our policy, through September 30, 2017, we had paid in approximately $1.4 million of the projected maximum plan cost of $1.5 million. As of SeptemberJune 30, 2017,2019, we estimate that our maximum continued exposure to thisbelieve 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 othertherefore are no longer partially self-insured for workers' compensation claims through the term of our policy and additional policy premiums is approximately $162,000.employer's liability.
Litigation
The CompanyEnservco and our subsidiary Heat Waves Hot Oil Service LLC (“Heat Waves”) arewere defendants in a civil lawsuit in federal court in Colorado, Civil Action No. 1:15-cv-00983-RBJ (“Colorado Case”), that allegesalleged 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”). The complaint relates- i.e., the ‘993 Patent and the ‘875 Patent. In March of 2019, the parties moved to only a portiondismiss 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 providedoffered by Heat Waves. The Colorado Case is now stayed pending resolution of appeal byWaves prior to and through March 13, 2019. Heat Waves dismissed its counterclaims against HOTF of a North Dakota court’s ruling that the primary patent (“the ‘993 Patent”)without prejudice in order to preserve its defenses.
While the Colorado Case was invalid. Neither Enservco nor Heat Waves is a party to the North Dakota Case, which involves other energy companies.
The ‘993 Patent has undergone several reexaminations by the USPTO and in February 2015, the USPTO rejected all 99 claims of the ‘993 Patent in the latest reexamination. However, in May 2016, the USPTO reversed its decision and confirmed all 99 claims as being patentable over the cited prior art in the reexamination proceeding. Further, in September 2016 and February 2017,pending, HOTF was issued two additional patents, bothwhich were related to the ‘993 and ‘875 Patents, but were not part of which could be asserted against the Company.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 each of HOTF’sthese additional HOTF patents. If these Patents are ultimately held to be invalid and/or enforceable, the Colorado Case would become moot.
In the event that HOTF’s appeal is successful and the ‘993 Patent is found to be valid and/or enforceable in the North Dakota Case, the Colorado Case may resume. To the extent that Enservco and Heat Waves are unsuccessful in their defense of the Colorado Case, they could be liable for enhanced damages/attorneys’ fees (both of which may be significant) and Heat Waves could possibly be enjoined from using any technology that is determined to be infringing. Either result could negatively impact Heat Waves’ business and operations. At this time, the Company is unable to predict the outcome of this case, and accordingly has not recorded an accrual for any potential loss.
Note 1110– Stockholders’ Equity
Warrants
In conjunction with a private placement transaction and subordinated debt conversion in November 2012, the Company granted warrants to purchase shares of the Company’s common stock, exercisable at $0.55 per share for a five year term. Each of the warrants may be exercised on a cashless basis. The warrants also provide that subject to various conditions, the holders have piggy-back registration rights with respect to the shares of common stock that may be acquired upon the exercise of the warrants. As of September 30, 2017, 150,001 of these warrants remain outstanding.
In June 2016, the Company granted a principal of the Company’s existing 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$0.36 per share and vestvested over a one year-year period, 15,000 on December 21, 2016 and 15,000 on June 21, 2017. As of SeptemberJune 30, 2017, 30,0002019, all of these warrants remain outstanding.outstanding and are exercisable until June 21, 2021 at $0.70 per share.
In June 2017, in connection with a subordinated loan agreement described in more detail in Note 5,, the Company granted Cross River two five-yearfive-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$0.31 per share, the average closing price of the Company’s common stock for the 20 day-day period ended May 11, 2017. The warrants had a grant-date fair value of $0.19$0.19 per share and vested in full on June 28, 2017. TheseOn June 29, 2018 Cross River exercised both warrants are accounted for as a liabilityand acquired 1,612,902 shares of our $0.005 par value common stock. Proceeds from the exercise of the warrants in the accompanying balance sheet. Asamount of September 30, 2017, all$500,000 were used to reduce the subordinated debt balance. The warrants exercised had a total intrinsic value of these warrants remain outstanding.approximately $1.4 million at the time of exercise.
A summary of warrant activity for the six nine months ended September June 30, 2017 2019 is as follows:follows (amounts in thousands):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Warrants | Shares | Price | Life (Years) | Value | ||||||||||||
Outstanding at December 31, 2016 | 180,001 | $ | 0.57 | 1.51 | $ | 1,500 | ||||||||||
Issued | 1,612,902 | 0.31 | 4.75 | 361,290 | ||||||||||||
Exercised | - | - | ||||||||||||||
Forfeited/Cancelled | - | - | ||||||||||||||
Outstanding at September 30, 2017 | 1,792,903 | $ | 0.34 | 4.34 | 361,290 | |||||||||||
Exercisable at September 30, 2017 | 1,792,903 | $ | 0.34 | 4.34 | 361,290 |
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Warrants | Shares | Price | Life (Years) | Value | ||||||||||||
Outstanding at December 31, 2018 | 30,000 | $ | 0.70 | 2.5 | $ | - | ||||||||||
Issued | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited/Cancelled | - | - | - | - | ||||||||||||
Outstanding at June 30, 2019 | 30,000 | $ | 0.70 | 2.0 | - | |||||||||||
Exercisable at June 30, 2019 | 30,000 | $ | 0.70 | 2.0 | - |
Stock Issued for Services
During the ninethree and six months ended September June 30, 2016,2019, respectively, the Company issued 3,031did not issue any shares of common stock to a consultant as partial compensation for services provided to the Company. The shares were granted under the 2010 Stock Incentive Plan and were fully vested and unrestricted at the time of issuance. During the nine months ended September 30, 2016, the Company recorded $1,700 of consulting expense for these services.
Note 1121 – Stock Options and Restricted Stock
Stock Option PlansOptions
On July 27, 2010, the Company’s Board of Directors adopted the 2010 Stock Incentive Plan (the “2010“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 SeptemberJune 30, 2017, 2019, there were options to purchase 1,501,167574,666 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“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 September June 30, 2017,2019, there were options to purchase 3,556,6001,598,833 shares and we had granted restricted stock shares of 1,857,166 that remained outstanding under the 2016 Plan. Plan
A summary of the range of assumptions used to valueWe have not granted any stock options granted for theduring the three and ninesix months ended SeptemberJune 30, 20172019 or the three and 2016 are as follows:six months ended June 30, 2018.
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||
September 30, | September 30, | |||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Expected volatility | 93% | 81% | - | 104% | 89% | - | 93% | 81% | - | 104% | ||||||||||||||
Risk-free interest rate | 1.5% | 0.6% | - | 0.9% | 1.4% | - | 1.5% | 0.6% | - | 1.2% | ||||||||||||||
Forfeiture rate | 0% | 0% | 0% | 0% | ||||||||||||||||||||
Dividend yield | 0% | 0% | 0% | 0% | ||||||||||||||||||||
Expected term (in years) | 3.0 | 3.1 | - | 3.3 | 3.0 | 3.5 | 3.1 | - | 3.5 |
During the nine months ended September 30, 2017, the Company granted options to acquire 2,971,600 shares of common stock with a weighted-average grant-date fair value of $0.19 per share. During the nine months ended September 30, 2017, no options were exercised. During the nine months ended September 30, 2016, the Company granted options to acquire 3,525,000 shares of common stock with a weighted-average grant-date fair value of $0.28 per share. On July 18, 2016, the Company cancelled 875,000 of these stock option grants pursuant to letter agreements between the Company and option holders. The Company subsequently granted 875,000 New Options under the 2016 Plan.
During the six months ended June 30, 2019,no options were exercised. During the six months ended June 30, 2018, 1,230,002 options to purchase shares of Company common stock were exercised on a cashless basis resulting in the issuance of 663,938 shares. The following is a summary of stock option activity for all equity plans for the six nine months ended SeptemberJune 30 2017:,2019:
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2016 | 4,211,168 | $ | 1.09 | 2.85 | $ | 16,520 | ||||||||||
Granted | 2,971,600 | 0.32 | 4.71 | 636,342 | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited or Expired | (2,125,000 | ) | 0.93 | 0.29 | - | |||||||||||
Outstanding at September 30, 2017 | 5,057,768 | $ | 0.69 | 3.65 | 652,862 | |||||||||||
Vested or Expected to Vest at September 30, 2017 | 2,054,334 | $ | 1.08 | 2.71 | 154,707 | |||||||||||
Exercisable at September 30, 2017 | 2,054,334 | $ | 1.08 | 2.71 | $ | 154,707 |
Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Outstanding at December 31, 2018 | 2,544,665 | $ | 0.85 | 2.54 | $ | 93 | ||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | - | - | - | - | ||||||||||||
Forfeited or Expired | (371,166 | ) | 1.50 | - | - | |||||||||||
Outstanding at June 30, 2019 | 2,173,499 | $ | 0.73 | 2.24 | $ | 103 | ||||||||||
Vested or Expected to Vest at June 30, 2019 | 2,098,998 | $ | 0.74 | 2.21 | 102 | |||||||||||
Exercisable at June 30, 2019 | 2,098,998 | $ | 0.74 | 2.21 | $ | 102 |
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the estimated fair value of the Company’s common stock on SeptemberJune 30 2017, , 2019, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they exercised their options on SeptemberJune 30 2017., 2019.
During the three and nine six months ended SeptemberJune 30 2017,, 2019, the Company recognized stock-based compensation costs for stock options of approximately $126,000$29,000 and $572,000$71,000, respectively, in sales, general, and administrative expenses. During the three and nine six months ended SeptemberJune 30 2016,, 2018, the Company recognized stock-based compensation costs for stock options of approximately $176,000$61,000 and $494,000, respectively,$134,000, 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 | Number of Shares | Weighted-Average Grant- Date Fair Value | |||||||||||||
Non-vested at December 31, 2016 | 1,659,834 | $ | 0.58 | |||||||||||||
Non-vested at December 31, 2018 | 593,833 | $ | 0.20 | |||||||||||||
Granted | 2,971,600 | 0.19 | - | - | ||||||||||||
Vested | (1,651,333 | ) | 0.47 | (489,332 | ) | 0.19 | ||||||||||
Forfeited | (76,668 | ) | 0.51 | (30,000 | ) | 0.22 | ||||||||||
Non-vested at September 30, 2017 | 2,903,433 | $ | 0.24 | |||||||||||||
Non-vested at June 30, 2019 | 74,501 | $ | 0.22 |
As of September June 30, 2017, 2019, there was approximately $690,000$13,000 of total unrecognized compensation costs related to non-vested shares under the Company’s stock option plans which will be recognized over the remaining weighted-average period of 1.670.94 years.
Restricted Stock
Restricted shares issued pursuant to restricted stock awards under the 2016 Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically generally over a period of three years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value on the date of the grant of the stock with a service condition is amortized and charged to income on a straight-line basis over the requisite service period for the entire award. The fair market value on the date of the grant of the stock with a performance condition shall be accrued and recognized when it becomes probable that the performance condition will be achieved. Restricted shares that contain a market condition are amortized and charged over the life of the award.
A summary of the restricted stock activity is presented below:
Number of Shares | Weighted-Average Grant- Date Fair Value | |||||||
Restricted shares at December 31, 2018 | 836,667 | $ | 0.98 | |||||
Granted | 1,123,000 | 0.27 | ||||||
Vested | (37,501 | ) | 1.38 | |||||
Forfeited | (65,000 | ) | 1.0 | |||||
Restricted shares at June 30, 2019 | 1,857,166 | $ | 0.51 |
During the three and six months ended June 30, 2019, the Company recognized stock-based compensation costs for restricted stock of approximately $48,000 and $97,000 in sales, general, and administrative expenses. Compensation cost is revised if subsequent information indicates that the actual number of restricted stock vested due to service is likely to differ from previous estimates.
The following table sets forth the weighted average outstanding of potentially dilutive instruments for the three and six months ended June 30, 2019 and 2018:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Stock options | 2,229,378 | 3,376,984 | 2,332,836 | 3,764,147 | ||||||||||||
Warrants | 30,000 | 1,625,178 | 30,000 | 1,633,991 | ||||||||||||
Weighted average | 2,259,378 | 5,002,162 | 2,362,836 | 5,398,138 |
Note 1132- Segment Reporting
Enservco’s reportable business segments are Well Enhancement Services and Water Transfer Services, Water Hauling Services, and Construction Services. These segments have been selected based on changes in management’s resource allocation and performance assessment in making decisions regarding the Company.
The following is a description of the segments.
Well Enhancement Services: This segment utilizes a fleet of frac water heating units, hot oil trucks and acidizing units to provide well enhancementmaintenance and completion services to the domestic oil and gas industry. These services include frac water heating, hot oil services, pressure testing, and acidizing services.
Water Transfer Services: This segment utilizes high and low volume pumps, lay flat hose, aluminum pipe and manifolds and related equipment to move fresh and/or recycled water from a water source such as a pond, lake, river, stream, or water storage facility to frac tanks at drilling locations to be used in connection with well completion activities. Also included in this segment are water treatment services whereby the Company uses patented hydropath technology under a sales agreement with HydroFLOW USA to remove bacteria and scale from water.
Water Hauling Services: This segment utilizes a fleet of trucks and related assets, including specialized tank trucks, vacuum trailers, storage tanks, and disposal facilities to provide various water hauling services. These services are primarily provided by Dillco in the Hugoton Field in Kansas.
Construction Services: This segment utilizes a fleet of trucks and equipment to provide excavation grading, and dirt hauling services to the oil and gas and construction industry. In 2016, the Company started utilizing these assets to provide dirt hauling services to a general contractor in Colorado.
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:
Well Enhancement | Water Transfer Services | Water Hauling | Construction Services | Unallocated & Other | Total | |||||||||||||||||||
Three Months Ended September 30, 2017: | ||||||||||||||||||||||||
Revenues | $ | 4,033,487 | $ | 797,805 | $ | 910,834 | $ | - | $ | - | $ | 5,742,126 | ||||||||||||
Cost of Revenue | 4,162,171 | 822,322 | 801,049 | - | 216,670 | 6,002,212 | ||||||||||||||||||
Segment Profit (Loss) | $ | (128,684 | ) | $ | (24,517 | ) | $ | 109,785 | $ | - | $ | (216,670 | ) | $ | (260,086 | ) | ||||||||
Depreciation and Amortization | $ | 1,192,724 | $ | 253,304 | $ | 164,184 | $ | - | $ | 7,745 | $ | 1,617,957 | ||||||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 273,665 | $ | 2,459 | $ | - | $ | - | $ | - | $ | 276,124 | ||||||||||||
Three Months Ended September 30, 2016: | ||||||||||||||||||||||||
Revenues | $ | 3,060,565 | $ | - | $ | 917,767 | $ | 1,524,879 | $ | - | $ | 5,503,211 | ||||||||||||
Cost of Revenue | 3,016,337 | 254,304 | 897,200 | 1,621,732 | 171,967 | $ | 5,961,540 | |||||||||||||||||
Segment Profit (Loss) | $ | 44,228 | $ | (254,304 | ) | $ | 20,567 | $ | (96,853 | ) | $ | (171,967 | ) | $ | (458,329 | ) | ||||||||
Depreciation and Amortization | $ | 1,211,202 | $ | 215,946 | $ | 164,809 | $ | - | $ | 10,944 | $ | 1,602,901 | ||||||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 212,815 | $ | 12,157 | $ | 7,039 | $ | - | $ | - | $ | 232,011 |
segments (in thousands):
Well Enhancement | Water Transfer Services | Unallocated & Other | Total | |||||||||||||
Three Months Ended June 30, 2019: | ||||||||||||||||
Revenues | $ | 6,339 | $ | 867 | $ | - | $ | 7,206 | ||||||||
Cost of Revenue | 6,150 | 1,287 | 287 | 7,724 | ||||||||||||
Segment Profit (Loss) | $ | 189 | $ | (420 | ) | $ | (287 | ) | $ | (518 | ) | |||||
Depreciation and Amortization | $ | 1,430 | $ | 294 | $ | 12 | $ | 1,736 | ||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 167 | $ | 87 | $ | 2 | $ | 256 | ||||||||
Identifiable assets(1) | $ | 41,331 | $ | 2,819 | $ | 1,388 | $ | 45,538 | ||||||||
Three Months Ended June 30, 2018: | ||||||||||||||||
Revenues | $ | 7,005 | $ | 929 | $ | - | $ | 7,934 | ||||||||
Cost of Revenue | 5,900 | 979 | 181 | $ | 7,060 | |||||||||||
Segment Profit (Loss) | $ | 1,105 | $ | (50 | ) | $ | (181 | ) | $ | 874 | ||||||
Depreciation and Amortization | $ | 1,226 | $ | 289 | $ | 5 | $ | 1,520 | ||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 245 | $ | 106 | $ | 1 | $ | 352 | ||||||||
Identifiable assets(1) | $ | 29,169 | $ | 3,235 | $ | 516 | $ | 32,920 |
Well Enhancement | Water Transfer Services | Water Hauling | Construction Services | Unallocated & Other | Total | |||||||||||||||||||
Nine Months Ended September 30, 2017: | ||||||||||||||||||||||||
Revenues | $ | 21,836,551 | $ | 1,855,811 | $ | 2,676,739 | $ | 254,066 | $ | - | $ | 26,623,167 | ||||||||||||
Cost of Revenue | 16,935,563 | 2,114,094 | 2,906,106 | 211,644 | 645,479 | 22,812,886 | ||||||||||||||||||
Segment Profit (Loss) | $ | 4,900,988 | $ | (258,283 | ) | $ | (229,367 | ) | $ | 42,422 | $ | (645,479 | ) | $ | 3,810,281 | |||||||||
Depreciation and Amortization | $ | 3,616,847 | $ | 731,100 | $ | 497,672 | $ | - | $ | 23,641 | $ | 4,869,260 | ||||||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 677,981 | $ | 456,977 | $ | 106,431 | $ | - | $ | 5,561 | $ | 1,246,950 | ||||||||||||
Identifiable assets (1) | $ | 30,485,866 | $ | 3,768,021 | $ | 1,726,351 | $ | - | $ | 516,119 | $ | 36,496,356 | ||||||||||||
Nine Months Ended September 30, 2016: | ||||||||||||||||||||||||
Revenues | $ | 12,880,914 | $ | 31,688 | $ | 2,922,207 | $ | 2,113,813 | $ | - | $ | 17,948,622 | ||||||||||||
Cost of Revenue | 10,763,483 | 1,133,556 | 2,918,076 | 2,334,058 | 520,633 | $ | 17,669,806 | |||||||||||||||||
Segment Profit (Loss) | $ | 2,117,431 | $ | (1,101,868 | ) | $ | 4,131 | $ | (220,245 | ) | $ | (520,633 | ) | $ | 278,816 | |||||||||
Depreciation and Amortization | $ | 3,788,420 | $ | 647,839 | $ | 503,007 | $ | - | $ | 29,227 | $ | 4,968,493 | ||||||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 582,096 | $ | 176,202 | $ | 34,512 | $ | - | $ | 16,331 | $ | 809,141 | ||||||||||||
Identifiable assets (1) | $ | 34,248,566 | $ | 3,699,964 | $ | 2,167,718 | $ | - | $ | 314,822 | $ | 40,431,070 |
| Identifiable assets is calculated by summing the balances of accounts receivable, net; inventories; property and equipment, net; and other assets. |
Well Enhancement |
Water Transfer Services |
Unallocated & Other |
Total | |||||||||||||
Six Months Ended June 30, 2019: | ||||||||||||||||
Revenues | $ | 31,151 | $ | 2,295 | $ | - | $ | 33,446 | ||||||||
Cost of Revenue | 21,362 | 3,472 | 442 | 25,276 | ||||||||||||
Segment Profit (Loss) | $ | 9,789 | $ | (1,177 | ) | $ | (442 | ) | $ | 8,170 | ||||||
Depreciation and Amortization | $ | 2,817 | $ | 577 | $ | 25 | $ | 3,419 | ||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 254 | $ | 275 | $ | 38 | $ | 567 | ||||||||
Six Months Ended June 30, 2018: | ||||||||||||||||
Revenues | $ | 26,290 | $ | 1,924 | $ | - | $ | 28,214 | ||||||||
Cost of Revenue | 18,991 | 1,936 | 326 | $ | 21,253 | |||||||||||
Segment Profit (Loss) | $ | 7,299 | $ | (12 | ) | $ | (326 | ) | $ | 6,961 | ||||||
Depreciation and Amortization | $ | 2,455 | $ | 552 | $ | 12 | $ | 3,019 | ||||||||
Capital Expenditures (Excluding Acquisitions) | $ | 786 | $ | 647 | $ | 8 | $ | 1,441 |
The following table reconciles the segment profits reported above to the lossincome from operations reported in the consolidated statements of operations:operations (in thousands):
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
September 30, 2017 | September 30, 2016 | September 30, 2017 | September 30, 2016 | |||||||||||||
Segment profit (loss) | $ | (260,086 | ) | $ | (458,329 | ) | $ | 3,810,281 | $ | 278,816 | ||||||
General and administrative expenses | (1,138,741 | ) | (966,873 | ) | (3,423,040 | ) | (2,894,769 | ) | ||||||||
Patent litigation and defense costs | (28,447 | ) | (33,171 | ) | (95,677 | ) | (108,783 | ) | ||||||||
Severance and Transition Costs | (16,666 | ) | - | (784,421 | ) | - | ||||||||||
Depreciation and amortization | (1,617,957 | ) | (1,602,901 | ) | (4,869,260 | ) | (4,968,493 | ) | ||||||||
Income (loss) from Operations | $ | (3,061,897 | ) | $ | (3,061,274 | ) | $ | (5,362,117 | ) | $ | (7,693,229 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Segment profit | $ | (518 | ) | $ | 874 |
| $ | 8,170 | $ | 6,961 | ||||||
Sales, general, and administrative expenses | (1,460 | ) | (1,236 | ) | (3,078 | ) | (2,589 | ) | ||||||||
Patent litigation and defense costs | (1 | ) | (55 | ) | (10 | ) | (75 | ) | ||||||||
Severance and transition costs | - | (593 | ) | - |
| (633 | ) | |||||||||
(Loss) gain on disposals of equipment | (12 | ) | 53 | (12 | ) | 53 | ||||||||||
Impairment | - | - | (127 | ) | - | |||||||||||
Depreciation and amortization | (1,736 | ) | (1,520 | ) | (3,419 | ) | (3,019 | ) | ||||||||
(Loss) income from Operations | $ | (3,727 | ) | $ | (2,477 | ) | $ | 1,524 |
| $ | 698 |
|
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 and six months ended June 30, 2019 and 2018 (amounts in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
BY GEOGRAPHY | ||||||||||||||||
Well Enhancement Services: | ||||||||||||||||
Rocky Mountain Region (1) | $ | 4,114 | $ | 4,671 | $ | 20,988 | $ | 16,257 | ||||||||
Central USA Region (2) | 1,935 | 2,154 | 6,471 | 7,077 | ||||||||||||
Eastern USA Region (3) | 290 | 180 | 3,692 | 2,956 | ||||||||||||
Total Well Enhancement Services | 6,339 | 7,005 | 31,151 | 26,290 | ||||||||||||
Water Transfer Services: | ||||||||||||||||
Rocky Mountain Region(1) | 867 | 929 | 2,295 | 1,924 | ||||||||||||
Central USA Region(2) | - | - | - | - | ||||||||||||
Eastern USA Region(3) | - | - | - | - | ||||||||||||
Total Water Transfer Services | 867 | 929 | 2,295 | 1,924 | ||||||||||||
Total Revenues | $ | 7,206 | $ | 7,934 | $ | 33,446 | $ | 28,214 |
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). |
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 month periodssix months ended SeptemberJune 30, 20172019 and 2016,2018, and our financial condition, liquidity and capital resources as of SeptemberJune 30, 2017,2019, and December 31, 2016.2018. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Forward-Looking Statements
The information discussed in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:
● | 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 very little borrowing availability on our Credit Facility and there are restrictions imposed on us under the terms of |
● | 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 reliance on a limited number of customers; |
● | 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, 2016.2018. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
OVERVIEW
The Company, through its subsidiaries Heat Waves Hot Oil Service, LLC ("Heat Waves"), Adler Hot Oil Service, LLC ("Adler"), and Heat Waves Water Management, LLC ("HWWM"), provides the followinga range of oil field services to the domestic onshore oil and natural gas industry – (i)industry. These services are broken down into two segments: 1) Well Enhancement services, which include frac water heating, hot oiling, and acidizing, (well enhancement services); (ii) water transfer and water treatment services (water transfer services); (iii) water hauling, fluid disposal, frac tank rental (water hauling services); and, (iv) dirt excavating and dirt hauling (construction services).2) Water Transfer services. The Company owns and operates through its subsidiaries a fleet of more than 650450 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 Mississippi LimeStack and Hugoton areasScoop plays in Kansas andthe Anadarko Basin in Oklahoma.
RESULTS OF OPERATIONS
Executive Summary
The nine months ended September 30, 2017 brought several positive developments. Overall demand for our services increased due to improved industry conditions and cooler temperatures in several of our heating markets compared to the same period in 2016. In addition, we added three major customers that expanded our frac water heating business and helped to offset warm weather in the Marcellus/Utica shale market during the winter of 2016-2017. Also, we continued to grow and expand our water transfer business. We acquired these assets in January 2016 and due to the dramatic drop in crude oil prices in early 2016, we were not able to generate any water transfer business until late in the fourth quarter of 2016.
Revenues for the ninesix months ended SeptemberJune 30, 20172019, increased $8.7approximately $5.2 million, or 48%19%, from the comparable period last year due to a 70%18% increase in our core well enhancementWell Enhancement revenue and a 19% increase in Water Transfer revenue. Higher Well Enhancement revenue growth was attributable to the acquisition of Adler Hot Oil in the fourth quarter of 2018 and to ongoing efforts to bundle services with new and existing customers. Increased frac water heating revenues in our Rocky Mountain region, improved demand for hot oil services in the Bakken, and continued expansion of hot oiling and acidizing services in the Eagle Ford all contributed to the increase in well enhancement revenues. Water transfer revenues were approximately $1.8 million higher than the comparable period last year duepartially offset by a decline in acidizing revenue. Water Transfer revenue growth was attributable to continued expansion of services.successful marketing efforts in Wyoming.
Segment lossesprofits for the three monthssix-month period ended SeptemberJune 30, 2017 improved2019, increased by approximately $198,000, to a loss of approximately $260,000 from a loss of approximately $458,000 in the comparable period in 2016$1.2 million, or 17%, due to improved results from our well enhancement services and the results from our water transfer segment. For the nine month period ended September 30, 2017, segment profits increased by $3.5 million, due primarily to an increase in Well Enhancement service revenue fromwithout a corresponding increase in our core well enhancement services. Generalfixed cost structure. Higher segment profits in Well Enhancement were partially offset by an increased segment loss in Water Transfer as described below. Sales, general & administrative expenses,expense, excluding severance and transition costs, increased by approximately $528,000 for the nine months ended September 30, 2017, compared to the same period in 2016,$489,000, or 19%, year over year due primarily to an increase in personnel costs at the corporate level. Severance and transitiongeneral office expenses, including costs related to the resignation of the Company’s former Presidentinvestment in our IT systems and Chief Executive Officer and Chief Financial Officer of approximately $784,000 were incurred during the nine months ended September 30, 2017.processes. Interest expense for the nine months ended September 30, 2017 increased $383,000 from the first nine months of 2016 primarily$531,000, or 53%, year over year due to $327,000 of accelerated amortization of debt issuance costs related to reduction in term and extinguishment of the credit facility provided by PNC, and due to an increase ina higher average borrowing costs due to the higher weighted-average interest rate paid on borrowings with PNC and other lenders, partially offset by savingsbalance related to the lower interest rateAdler acquisition and our increased time to collection on our new credit facility provided by East West Bank, which we closed on August 10, 2017.certain customer receivables.
ForNet income for the ninesix months ended SeptemberJune 30, 2017, the Company recognized a net loss of2019, was approximately $5.0$1.1 million or ($0.10)$0.02 per share, compared to a net loss of $5.8approximately $1.2 million, or ($0.15)$0.02 per share, in the same period last year primarily due to the aforementioned increase in higher marginfactors noted above, as well enhancement revenues.as a gain on settlement of approximately $1.2 million related to a settlement agreement reached with the sellers of Adler during the three months ended June 30, 2019.
Adjusted EBITDA for the threesix months ended SeptemberJune 30, 20172019, was a loss of approximately $1.3$5.3 million compared to a loss of approximately $1.2$4.6 million for the comparablesame period in 2016. last year. See the section titled Adjusted EBITDAEBITDA* within this Item for definition of Adjusted EBITDA.
Industry Overview
During the ninesix months ended SeptemberJune 30, 2017 was2019, WTI crude oil price averaged approximately $959,000 compared to a loss$57 per barrel, versus an average of $2.1 million forapproximately $65 per barrel in the comparable period last year. The North American rig count declined to 967 rigs in 2016. For further details regardingoperation as of June 30, 2019, compared to 1,047 at the calculation of Adjusted EBITDA see Adjusted EBITDA section below.
Industry Overview
During 2015 and 2016,same time a majority of our customers scaled back drilling and completion programs, required substantial concessions from service vendors,year ago. Taking into account the lower oil price environment and reduced or delayed certain maintenance-related workrig count, we believe current customer activity levels should support continuation of demand for our services��if crude oil and natural gas prices remain in the range of their current levels. We have responded to preserve capital. Certain of these customers also shifted capitalthe current market dynamics by allocating resources to basins where we do not have established operations. Further, the overall reduction in service activity resulted in same amount of service vendors pursuing fewer jobs which put even further downward pressure on the pricing of services. Some competitors responded by pricing work at what we believe to be negative margins. Although the Company has been able to partially mitigate the impact of the operating environment by deploying resources to moreour most active customers and basins,basins. We are focused on increasing utilization levels and optimizing the deployment of our revenue growthequipment and operating margins were significantly negatively impacted by reduced overall demandworkforce while maintaining high standards for service quality and safe operations. We compete on the basis of the quality and breadth of our services, required pricing concessions and delays in requiring the services we provide. service offerings.
Crude prices and the North American rig count have increased since the low points in February 2016 and May 2016, respectively, signaling that the industry downturn may have stabilized. The United States rig count bottomed out at approximately 400 in the spring of 2016 and has increased to approximately 940 as of September 30, 2017, which translated into increased activity for the nine months ended September 30, 2017, compared to the same period in 2016. However, the growth in the rig count is overweighted to the Permian Basin. We started to see an increase in completion and production maintenance service activity towards the end of the fourth quarter of 2016, due to some stabilization of commodity prices and the oil and gas industry overall. We believe this industry turnaround has contributed to an increase in demand for service activity compared to 2016.Segment Overview
Segment Overview
Enservco’sEnservco’s reportable business segments are Well Enhancement Services, Water Transfer Services, Water Hauling Services, and Construction Services. These segments have been selected based on changes in management’s resource allocation and performance assessment in making decisions regardinginclude the Company.following:
The following is a description of the segments:
Well Enhancement Services:Services: This segment utilizes a fleet of frac water heating, units, hot oiloiling and acidizing trucks and acidizing units totrailers that provide well enhancement, completion and completionmaintenance services to the domestic oil and gas industry. These services include frac water heating, hot oil services, pressure testing,development and acidizingproduction companies. Heat Waves and Adler provide these services.
Water Transfer Services:Services: This segment utilizes high and low volume pumps, lay flat hose, aluminum pipe and manifolds, and related equipment to move fresh and/or recycled water from a water source such as a pond, lake, river, stream, or water storage facility to frac tanks at drilling locations to be usedfor use in connection with well completion activities. Also included in this segment are water treatment services whereby to remove bacteria and scale from water, the Company uses patented hydropath technology under an agreement with HydroFLOW USA.
Water Hauling Services: This segment utilizes a fleet of trucks and related assets, including specialized tank trucks, vacuum trailers, storage tanks, and disposal facilities to provide various water hauling services. These services are primarily provided by Dillco in the Hugoton area in Kansas and Oklahoma.
Construction Services: This segment utilizes a fleet of trucks and equipment to provide supplementary construction and roustabout services to the oil and gas and construction industry. In 2016, the Company started utilizing this fleet of equipment to provide dirt hauling services to a general construction contractor in Colorado.
Segment Results:
The following tables set forth revenue from operations and segment profits for the Companyour’s business segments for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018 (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
REVENUES: | ||||||||||||||||||||||||||||||||
Well enhancement services | $ | 4,033,487 | $ | 3,060,565 | $ | 21,836,551 | $ | 12,880,914 | $ | 6,339 |
| $ | 7,005 |
| $ | 31,151 | $ | 26,290 | ||||||||||||||
Water transfer services | 797,805 | - | 1,855,811 | 31,688 | 867 |
| 929 |
| 2,295 |
| 1,924 |
| ||||||||||||||||||||
Water hauling services | 910,834 | 917,767 | 2,676,739 | 2,922,207 | ||||||||||||||||||||||||||||
Construction services | - | 1,524,879 | 254,066 | 2,113,813 | ||||||||||||||||||||||||||||
Total Revenues | $ | 5,742,126 | $ | 5,503,211 | $ | 26,623,167 | $ | 17,948,622 | $ | 7,206 |
| $ | 7,934 |
| $ | 33,446 |
| $ | 28,214 |
|
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
SEGMENT PROFIT (LOSS): | ||||||||||||||||
Well enhancement services | $ | (128,684 | ) | $ | 44,228 | $ | 4,900,988 | $ | 2,117,431 | |||||||
Water transfer services | (24,517 | ) | (254,304 | ) | (258,283 | ) | (1,101,868 | ) | ||||||||
Water hauling services | 109,785 | 20,567 | (229,367 | ) | 4,131 | |||||||||||
Construction services | - | (96,853 | ) | 42,422 | (220,245 | ) | ||||||||||
Unallocated & Other | (216,670 | ) | (171,967 | ) | (645,479 | ) | (520,633 | ) | ||||||||
Total Segment Profit (loss) | $ | (260,086 | ) | $ | (458,329 | ) | $ | 3,810,281 | $ | 278,816 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
SEGMENT PROFIT (LOSS): | ||||||||||||||||
Well enhancement services | $ | 189 |
| $ | 1,105 |
| $ | 9,789 | $ | 7,299 | ||||||
Water transfer services | (420 | ) | (50 | ) | (1,177 | ) | (12 | ) | ||||||||
Unallocated and other | (287 | ) | (181 | ) | (442 | ) | (326 | ) | ||||||||
Total Segment Profit (Loss) | $ | (518 | ) | $ | 874 |
| $ | 8,170 |
| $ | 6,961 |
|
Well Enhancement Services
Well Enhancement Services,, which accounted for 70%88% of total revenuesrevenue for the three months ended SeptemberJune 30, 2017, increased $973,000,2019, decreased approximately $666,000, or 32%10%, to $4.0$6.3 million compared to $7.0 million for the same quarter last year due to an $893,000 decrease in frac water heating services, as described below, partially offset by an increase in hot oil services revenue. This segment, which accounted for 93% of total revenue for the six months ended June 30, 2019, increased $4.9 million, or 18%, to $31.2 million compared to $26.3 million in the same period last year. The increase in revenue primarily resulted from our increased capacity and customer base due to our acquisition of Adler.
Frac water heating revenue for the three months ended SeptemberJune 30, 2017. Well Enhancement Services accounted for 82% of total revenues2019, decreased approximately $815,000, or 25%, to $2.4 million compared to $3.2 million for the nine months ended September 30, 2017, increased $9.0 million, or 70%,same quarter last year due to warmer temperatures during 2019 compared to the same period in 2016. Increased demand for services due to improved industry conditions, the addition of three major customers in our frac water heating business, more normal winter temperatures, and an extended heating season in our heating markets all contributed to the increase in revenues over last year.
year-ago quarter. Frac water heating revenues, which are typically very lowrevenue for the six months ended June 30, 2019, increased $5.5 million, or 31%, to $23.1 million compared to $17.6 million for the same quarter last year. Our acquisition of Adler allowed us to realize revenue from several customers we did not previously perform significant work for, and allowed us to increase services to other customers, particularly in the third quarter, Bakken and D-J Basin. We also experienced increased demand in the Marcellus Shale and Utica Shale locations in Pennsylvania.
Hot oil revenue for the three months ended SeptemberJune 30, 2017 by $57,000,2019, increased approximately $368,000, or 67%13%, from the comparable period in 2016. Frac water heating revenues for the nine months ended September 30, 2017, increased by $6.1 million, or 134% compared to the same period in 2016. Improved industry conditions including relatively stable commodity prices and increased drilling rig activity has increased demand for our services since December 2016. Further, the addition of three additional customers in the Rocky Mountain region also contributed to a substantial increase in frac water heating in this area. Warm winter temperatures in the Northeast for the second consecutive heating season continued to negatively impact frac water heating in the Marcellus/Utica Shale market, which was down significantly during the three and nine months ended September 30, 2017 compared to the same period in 2016.
Hot oil revenues for the three months ended SeptemberJune 30, 20172018, from approximately $2.8 million to approximately $3.2 million. Hot oil revenue for the six months ended June 30, 2019, increased approximately $610,000,$354,000 million, or 34%5%, comparedfrom $6.5 million during the six months ended June 30, 2018 to $6.8 million during the six months ended June 30, 2019. Both increases were primarily due to the same periodincrease in 2016,our fleet size and increased approximately $1.6 million, or 26%, during the nine months ended September 30, 2017, compared to the same period in 2016. Incremental hot oil service revenues from our geographic expansion into the Eagle Ford combined with increased revenuesmarket share in the DJ Basin and North Dakotabasins we serve as a result of the acquisition of Adler, as well as due to improved commodity prices were the primary reasons for the increase over last year.growth in our customer base in our Central USA region.
Acidizing revenues for the three months ended SeptemberJune 30, 20172019, decreased by approximately $264,000,$79,000, or 25%10%, due in part to a slowdownapproximately $679,000 from approximately $758,000. Acidizing revenues for the six months ended June 30, 2019, decreased by approximately $624,000, or 35%, to approximately $1.1 million from approximately $1.8 million. Both declines were due to Hurricane Harveydelays in Texasestablishing a presence in Augustnew markets following a reallocation of our equipment out of certain basins where we believe demand was waning. The year-over-year decline was primarily driven by a decline in services performed for two customers in the Green River Basin and into September. Acidizing revenues increased approximately $414,000, or 26%, over the comparable periodEagle Ford Shale who changed their maintenance programs. The decline was partially offset by new customer wins and growth in 2016, primarily dueservices performed for other customers and in new areas. The Company continues to incrementalpursue customers and partner with chemical suppliers to develop new cost-effective acid programs in seeking to expand our acidizing revenues fromservices across our geographic expansion into the Eagle Ford.service areas.
Segment profits for our core well enhancementWell Enhancement services decreaseddecreased by $173,000,$916,000, or 83%, to a loss of $129,000$189,000 for the three months ended SeptemberJune 30, 20172019, compared to $1.1 million in the same quarter last year, which was primarily the result of the lower frac water heating revenue during the current year, without a segment profit of approximately $44,000corresponding reduction in our fixed costs. Segment profits for our core Well Enhancement services increased by $2.5 million, or 34%, to $9.8 million for the six months ended June 30, 2019, compared to $7.3 million in the same period in 2016,last year, primarily due primarily to higher revenue resulting from the seasonalityacquisition of Adler and the deployment of our frac heating services and the ramp up offleet into our employee base and maintenance work performedmost active basins, along with certain cost reduction initiatives implemented in advance of the historically busier fourth and first quarters. For the nine months ended September 30, 2017, segment profits increased by approximately $2.8 million, or 131%, compared to the nine months ended September 30, 2016. Increased revenues from the aforementioned more normal winter temperatures, the extension of heating season into the second quarter, the reboundhalf of oil prices, and addition of new customers contributed to the improved segment profits. In the near future, the Company plans to continue to re-deploy equipment to more active basins to increase utilization and improve this segment’s profits.2018 that carried into 2019.
Water Transfer Services:Services
Water Transfer Services, which accounted for 14% of total revenuesrevenue for the three months ended SeptemberJune 30, 2017, increased2019, accounted for 12% of total revenue, and decreased by approximately $62,000, or 7%, to $798,000, compared to no revenues duringapproximately $867,000 from approximately $929,000 in the same quarter last year. During the three months ended SeptemberJune 30, 2016. For2019, we worked for three distinct water transfer customers, compared to six in the nineprior year. Water Transfer revenue for the six months ended SeptemberJune 30, 2017, Water Transfer Services2019 accounted for 7% of total revenue, and increased by $1.8approximately $371,000, or 19%, from approximately $1.9 million to $1.9 million,approximately $2.3 million. The increase in revenue was due in part to cross-selling Water Transfer services to several of our largest heating customers, and was also the incremental revenues from four new customers during 2017. The Company is scheduled for additional water transfer projects through the endresult of 2017. We consider the water transfer services segment to be an opportunity to grow our business with bothorganic growth sales among new and existing customers and believe it offers opportunity to reduce the level of seasonality we have historically experienced. Segment results for the water transfer segment in the three and nine months ended September 30, 2017 include approximately $68,000 and $226,000 of marketing and trial costs related to the HydroFLOW water treatment services, respectively.Water Transfer customers.
The segment loss for Water Transfer for the three months ended June 30, 2019, was approximately $420,000 compared to segment loss of approximately $50,000 during the three months ended June 30, 2018. Lower total revenue, and increases in personnel costs and time and expense related to the work being performed in remote locations, increases in rental equipment, and increased repairs and maintenance costs were primary drivers of the increase in segment losses for the three months ended SeptemberJune 30, 2017 were approximately $25,000,2019 compared to a loss of $254,000 for the comparable period in 2016. For the nine months ended September 30, 2017, we realized segment losses of $258,000, compared to losses of $1.1 million in the nine months ended September 30, 2016.
The Company continues to market and conduct proof of concept studies for the new water treatment technology utilized in devices sold under the name of HydroFLOW. HydroFLOW products offer water treatment services based on patented hydropath technology that can remove bacteria and scale from water using electrical induction to reduce or eliminate down-hole scaling and corrosion. During the three and nine months ended September 30, 2017, the Company recognized revenues of $10,000 related to HydroFLOW products.
Water Hauling Services
Water hauling service revenues, which represent 16% of revenues for the three months ended SeptemberJune 30, 2017, decreased approximately $7,000, or 1%, during the three months ended September 30, 2017 compared to the comparable period in 2016. For the nine months ended September 30, 2017, water hauling service revenues decreased approximately $245,000, or 8%, primarily due to cessation of certain low margin accounts and reduced service activity in our Central USA region due to heavy rains during February.
The Company recorded a segment profit of approximately $110,000 for the three months ended September 30, 2017 compared to segment profit of approximately $21,000 for the comparable period in 2016.2018. The segment loss for Water Transfer for the ninesix months ended SeptemberJune 30, 2017 of2019, was approximately $229,000 compares$1.2 million compared to a segment profit of approximately $4,000 during the nine months ended September 30, 2016. Segment results for the three months ended September 30, 2017 include the reversal of a $250,000 accrual recorded during our second quarter for costs related to a workers' compensation claim related to an injury sustained by an employee in our water hauling subsidiary, due to updated information related to the claim. Our accounting for the claim and workers compensation insurance policy costs are described in more detail in Note 9 to our financial statements included in “Item 1. Financial Statements” of this Quarterly Report on Form 10-Q.
Construction Services:
In May 2016, the Company began to provide dirt excavation and hauling services to general contractors in the construction industry to offset some of the seasonal decline in revenues from our frac heating business and to utilize and retain key frac heating operators over the summer months. The Company used some of its existing construction equipment in both Heat Waves and Dillco to launch this service.
For the three months ended September 30, 2017, the Company did not record construction service revenue or costs, as we focused our efforts and workforce on core areas of our business. We recorded revenues of $1.5 million and a segment loss of $97,000 duringapproximately $12,000 for the threesix months ended SeptemberJune 30, 2016. For2018. A severe cold weather event in Wyoming in January froze water within our lay-flat hose and pumps in two projects that led to crew downtime and significant cost overruns related to rental of replacement hose and pumps and the nine months ended September 30, 2017,use of third-party labor to complete the Company recognized approximately $254,000 in construction services revenues, compared to approximately $2.1 million during the comparable period in 2016. The revenues recognized in the threeproject and nine months ended September 30, 2016 primarily resulted from one large dirt hauling project that concluded in 2016. The Company has utilized the construction segment to retain employees during slow periods.demobilize our equipment.
Unallocated and Other:Other
Unallocated and other costs include costsincludes general overhead expenses and assets associated with managing all reportable operating segments which are have not specifically been allocated to the business segments above includinga specific segment. These costs included labor, travel, and operating costs for regional managers and sales personnel that sell services for various segments.safety compliance.
During Unallocated segment costs in the three months ended SeptemberJune 30, 2017, unallocated segment costs2019, increased by $45,000,approximately $106,000, or 26%59%, to approximately $217,000$287,000 compared to $172,000 forapproximately $181,000 in the comparable periodsame quarter last year. Unallocated segment costs in 2016. For the ninesix months ended SeptemberJune 30, 2017, unallocated segment costs2019, increased by $125,000,approximately $116,000, or 24%36%, to $645,000,approximately $442,000 compared to approximately $326,000 in the same quarter last year. The year-over-year increases were due primarily due to an increase in personnel costs.increased headcount assigned to our company-wide safety team and service line management that was not allocated to specific operating segments.
Geographic Areas:Areas
The Company operates solely in the United States, in what it believes are three geographically diverse regions.regions of the United States. The following table sets forth revenue from operations for the Company’s three geographic regions during the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018 (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
BY GEOGRAPHY | ||||||||||||||||
Rocky Mountain Region (1) | $ | 2,805,211 | $ | 2,840,640 | $ | 18,011,207 | $ | 9,833,499 | ||||||||
Central USA Region (2) | 2,657,742 | 2,569,474 | 7,935,260 | 7,017,494 | ||||||||||||
Eastern USA Region (3) | 279,173 | 93,097 | 676,700 | 1,097,629 | ||||||||||||
Total Revenues | $ | 5,742,126 | $ | 5,503,211 | $ | 26,623,167 | $ | 17,948,622 |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
BY GEOGRAPHY | ||||||||||||||||
Well Enhancement Services: | ||||||||||||||||
Rocky Mountain Region (1) | $ | 4,114 | $ | 4,671 | $ | 20,988 | $ | 16,257 | ||||||||
Central USA Region (2) | 1,935 | 2,154 | 6,471 | 7,077 | ||||||||||||
Eastern USA Region (3) | 290 | 180 | 3,692 | 2,956 | ||||||||||||
Total Well Enhancement Services | 6,339 | 7,005 | 31,151 | 26,290 | ||||||||||||
Water Transfer Services: | ||||||||||||||||
Rocky Mountain Region(1) | 867 | 929 | 2,295 | 1,924 | ||||||||||||
Central USA Region(2) | - | - | - | - | ||||||||||||
Eastern USA Region(3) | - | - | - | - | ||||||||||||
Total Water Transfer Services | 867 | 929 | 2,295 | 1,924 | ||||||||||||
Total Revenues | $ | 7,206 | $ | 7,934 | $ | 33,446 | $ | 28,214 |
Notes to tables:
(1) | Includes the |
(2) | Includes the Scoop/Stack Shale in Oklahoma and the Eagle Ford Shale |
(3) | Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). |
RevenuesWell Enhancement segment revenue in the Rocky Mountain Region decreased approximately $35,000, or 1%, to $2.8 million. While total revenue in each period was comparable, revenues during the three months ended September 30, 2016 included approximately $1.5 million of low margin construction services revenues. Revenues for the three months ended SeptemberJune 30, 2017, is comprised of well enhancement services and water transfer services. Revenues for the nine months ended September 30, 2017 increased $8.2 million,2019, decreased approximately $556,000, or 83%12%%, to $18.0 million, compared to $9.8 million during the same period in 2016primarily due to several factors including (i) increaseda decline in frac water heating activityrevenues in the DJ Basin/Niobrara Shale,D-J Basin and Bakken Field, and Wyoming basins due to more normal winter temperatures and incremental revenues generated from three new customers, (ii) the ramp up of our water transfer business during 2017, and (iii) increasedareas, partially offset by an increase in hot oiling service activityservices resulting from the acquisition of Adler. Well Enhancement segment revenue in the Bakken FieldRocky Mountain Region for the six months ended June 30, 2019, increased approximately $4.7 million, or 29%, primarily driven by our increased fleet size and DJ Basin.customer base resulting from the acquisition of Adler.
RevenuesWell Enhancement segment revenue in the Central USA region for the three months ended SeptemberJune 30, 2017 increased2019, decreased by approximately $88,000,$219,000, or 3%10%, to $2.7 million, compareddue to the same periodclosure of two facilities in 2016. Revenuesthe region, and redeployment certain related equipment into our facilities in the Rocky Mountain Region. Well Enhancement segment revenue in the Central USA region for the ninesix months ended SeptemberJune 30, 2017 increased2019, decreased by approximately $918,000,$606,000, or 13%9%, compareddue to the same period in 2016, primarily due to incremental revenues from our geographic expansion intoclosure of the Eagle Ford Shale. This increase wastwo facilities partially offset by a decline inimproved results from frac water hauling activityheating in the Hugoton field area. Scaled back service work due to heavy rainsScoop/Stack play in February, 2017, price concessions and elimination of certain low margin water hauling customers were the primary reasons for a decline in water hauling businessOklahoma.
Well Enhancement segment revenue in the Hugoton field area.
Revenues in the Eastern USA region increased approximately $186,000, or 200%, to approximately $279,000 for the three months ended SeptemberJune 30, 2017 compared to the same period in 2016. Revenues2019, increased approximately $110,000, or 61%, resulting from increased service volume, particularly for the nine months ended September 30, 2017 decreased approximately $421,000, or 38%, compared to the same period in 2016, primarily due to lower frac water heating and hot oil service activity in the Marcellus and Utica shale basin. Unseasonably warm weathernon-oilfield customers during the last two heating seasons has significantly reduced demand for heating services in this basin and essentially eliminated most of our frac water heatinghistorically slower warmer season. Well Enhancement segment revenue in the nineEastern USA region for the six months ended SeptemberJune 30, 2019, increased approximately $736,000, or 25%, due to an increase in services to customers in the market.
As discussed above, Water Transfer revenue in the Rocky Mountain Region for the three months ended June 30, 2017.2019, decreased by approximately $62,000, or 7%. During 2017, the Company redeployed certain fracthree months ended June 30, 2019, we worked for three distinct water transfer customers, compared to six in the prior year. Water Transfer revenue for the six months ended June 30, 2019 increased approximately $371,000, or 19%, due in part to cross-selling Water Transfer services to several of our largest heating equipment to other regions to increase utilization rates.customers, and was also the result of organic growth sales among new and existing Water Transfer customers.
Historical Seasonality of Revenues:Revenues
Because of the seasonality of our frac water heating and, to a lesser extent, hot oiling business, revenues generated during the cooler first and fourth quarters of our fiscal year, covering the months duringconstitute our “heating season”, and are significantly higher than our revenues during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings also changes outside our heating season as our Well Enhancement services (which includes frac water heating and hot oiling) maytypically decrease as a percentage of total revenues and our Water HaulingTransfer services and other services increase.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 72%75% of its 20162018 revenues during the first and fourth quarters of 2016 compared to 28%25% during the second and third quarters of 2016.2018.
Direct Operating Expenses:
Direct operating expenses, which include labor costs, propane, fuel, chemicals, truck repairs and maintenance, supplies, insurance, and site overhead costs for our operating segments increased by approximately $522,000 or 5% during the second quarter of 2019 compared to the comparable period in 2018, primarily due to an increase in compensation costs, an increase in repairs and maintenance, insurance, and site overhead due to our increase in year-to-date well enhancement services activity, larger fleet, and additional site overhead costs related to locations associated with Adler. During the six months ended June 30, 2019, we consolidated former Adler locations into our Heat Waves locations, and also opened a new location in Douglas, Wyoming. Direct operating expenses, increased by approximately $4.4 million, or 16%, during the six months ended June 30, 2019 compared to the like period in 2018, primarily due to increases in direct variable costs resulting from the overall increase in service activity in our Well Enhancement service segment as well as our Water Transfer division, equipment rental costs within our water transfer segment, and an increase in site overhead and insurance costs due to the additional locations and fleet size in 2019 as compared to 2018.
Sales, General, and Administrative Expenses:
During the three months ended SeptemberJune 30, 2017,2019, sales, general, and administrative expenses increased $172,000,approximately $224,000, or 18%, to $1.5 million compared to the same period in 2018 primarily due to a discretionary bonus payment madean increase in Septembergeneral office expenses, partially due to the Company's Chief Executive Officerour acquisition of Adler, and the accrual of potential annual bonusesan increase in professional fees related to company personnel.investment in our IT infrastructure and processes. During the ninesix months ended SeptemberJune 30, 2017,2019, selling, general, and administrative expenses increased $528,000,approximately $489,000, or 18% 19% to $3.1 million compared to the same period in 2018 primarily due to (i) the aforementioned bonus payment and accruals, (ii) an increase in stock compensation expense, including approximately $115,000costs for our larger management team and an increase in incremental expensegeneral office expenses, both partially due to the accelerated vestingour acquisition of options grantedAdler, and an increase in professional fees related to investment in our former PresidentIT infrastructure and CEO, and (iii) consulting costs and contract labor costs incurred during the executive transition period. processes.
Patent Litigation and Defense Costs:
PatentPatent litigation and defense costs decreased slightlyfrom $55,000 to $28,000 and $96,000$1,000 for the three and nine months ended SeptemberJune 30, 2017, respectively.2019 compared to the like period in 2018. Patent litigation and defense costs decreased to $10,000 from $75,000 for the six months ended June 30, 2019 compared to the like period in 2018. As discussed in Part II, Item 3.1. – Litigation,Legal Proceedings, the U.S. District Court for the District of Colorado issued a decision on July 20, 2015March 15, 2019, dismissing the case related to stay the Company’s case with HOTF pending an appeal of a 2015 judgment by a North Dakota Court invalidating the ‘993 Patent. As a result of the stay,three patent litigation and defense costs have been minimal since July 2015.
liability of Enservco andor Heat Waves deny that they are infringing any valid, enforceable claimWaves. We expect costs related to our defense of the asserted HOTF patents, and intend to continue to vigorously defend themselves in the Colorado Case and challenge the validity and/or enforceability of these patents should the lawsuit resume. The Company expects associated legal feessuch claims to be minimal going forward until the Colorado Case is resumed. In the event that HOTF’s appeal is successful and the ‘993 Patent is found to be valid and/or enforceable in the North Dakota Case, the Colorado Case may resume.forward.
Depreciation and Amortization:
Depreciation and amortization expense for the three months ended Septemberended June 30, 20172019 increased $15,000,$216,000, or 1%14%, from the same period in 2016,2018 due to asset acquisitions subsequent to September 30, 2016. Fordepreciation on equipment acquired in the nine months ended September 30, 2017, depreciation expense decreasedAdler acquisition, partially offset by $99,000, or 2%, primarily due to certain of our assetsequipment becoming fully depreciatedfully-depreciated during 2018 and 2019. Depreciation and amortization expense for the six months ended June 30, 2019 increased $400,000, or amortized13%, from the same period in 20162018 due to depreciation on equipment acquired in the Adler acquisition, partially offset by certain of our equipment becoming fully-depreciated during 2018 and 2017.2019.
General and Administrative Expenses, the accelerated vesting of option grants made to our former President and CEO caused us to recognize an incremental $115,000 in stock-based compensation expense.
Income (Loss) from operations:
For the three months ended SeptemberJune 30, 2017,2019, the Company recognized a loss from operations of $3.1$3.7 million compared to a loss from operations of $3.1$2.5 million for the comparable period in 2016.2018. The $198,000 improvementincreased loss of $1.2 million was primarily due to the decrease in segment profits was offset by increases in G&A costs, severance and transition costs, and a slight increase in depreciation expense discussedgeneral and administrative expenses described above. For the ninesix months ended SeptemberJune 30, 2017,2019, the Company recognized a lossincome from operations of $5.4$1.5 million compared to a loss from operations of $7.7 million in$698,000 for the comparable period in 2016.2018. The improvement of $2.3 million is$826,000 was primarily due to a $3.5the $1.2 million increaseimprovement in segment profits, partially offset by the increase in Sales, General and Administrative Expenses and SeveranceDepreciation and Transition Costs discussedAmortization described above.
Interest Expense:
Interest expense increased approximately $47,000,$147,000, or 8%29%, for the three months ended SeptemberJune 30, 2017,2019, compared to the same period in 2016, due to a higher average borrowing balance and borrowing costs incurred in connection with the closing our New Credit Facility and extinguishment of our Prior Credit Facility.2018. Interest expense increased approximately $531,000, or 53%, for the ninesix months ended SeptemberJune 30, 2017 increased approximately $383,000, or 27%, to $1.8 million2019, compared to $1.4 million during the same period in 2016,2018. The increase was primarily due to the increase of our average borrowings related to the acquisition of Adler, along with increased interest rates on our floating rate debt.
Discontinued Operations:
Results for the three and six months ended June 30, 2018 include losses from discontinued operations of approximately $327,000$177,000 and $390,000, respectively.
Other expense (income):
Other income for the three and six months ended June 30, 2019 was approximately $1.2 million and $1.1 million, respectively, and was primarily driven by a gain on settlement resulting from the Adler settlement of accelerated amortizationapproximately $1.3 million. Other expense of debt issuance costswas approximately $85,000 and $506,00, respectively, during the ninethree and six months ended SeptemberJune 30, 2017 related to reduction in term2018, and extinguishmentwas comprised of the loss on the fair value of our PNC credit facility. In addition, higher amendment fees and increases in our effective interest rate due to amendments to our PNC credit facility also contributed to the increase. These increases werenow-retired warrant liability partially offset by a $126,000 reductionan increase in interest expense from last year related to the fair value adjustments on the PNC interest rateof our derivative swap agreement.instrument and other income.
Income Taxes:
Income
As of June 30, 2019, the Company had recorded a full valuation allowance on a net deferred tax benefit was $1.4 millionasset of $2.7 million. Our income tax provision of $314,000 for the threesix months ended SeptemberJune 30, 2017 compared to2019 reduced the gross amount of the deferred tax asset and we reduced the valuation allowance by a tax benefit of $1.3 million inlike amount. During the comparable period in 2016. For the ninesix months ended SeptemberJune 30, 2017, we recognized2018, the Company recorded an income tax benefit of $2.4 million, compared to an incomeapproximately $235,000 which increased the gross amount of the deferred tax benefit of $3.1 million forasset and we increased the ninevaluation allowance by a like amount. During the six months ended SeptemberJune 30, 2016. 2019 and 2018, the Company recorded tax expense of approximately $32,000 for state taxes.
Our effective tax rate was approximately 36%5% and 33%-3% for the three and ninesix months ended SeptemberJune 30, 2017, respectively,2019 and 35% and 34%2018, respectively. The effective tax expense for the three and ninesix months ended SeptemberJune 30, 2016, respectively. Our effective2019 and 2018 differs from the amount that would be provided by applying the statutory U.S. federal income tax benefit in 2017 and 2016 approximates the federal statutory rate of 35%.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:indicated (in thousands):
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Adjusted EBITDA* | ||||||||||||||||
Income (Loss) | $ | (2,509,732 | ) | $ | (2,357,824 | ) | $ | (4,986,148 | ) | $ | (5,814,044 | ) | ||||
Add Back (Deduct) | ||||||||||||||||
Interest Expense | 599,616 | 553,049 | 1,809,320 | 1,426,500 | ||||||||||||
Provision for income taxes (benefit) expense | (1,415,494 | ) | (1,251,301 | ) | (2,407,023 | ) | (3,060,008 | ) | ||||||||
Depreciation and amortization | 1,617,957 | 1,602,901 | 4,869,260 | 4,968,493 | ||||||||||||
EBITDA* | (1,707,653 | ) | (1,453,175 | ) | (714,591 | ) | (2,479,059 | ) | ||||||||
Add Back (Deduct) | ||||||||||||||||
Stock-based compensation | 126,152 | 175,954 | 571,909 | 493,458 | ||||||||||||
Severance and Transition Costs | 16,666 | - | 784,421 | - | ||||||||||||
Patent Litigation and defense costs | 28,447 | 33,171 | 95,677 | 108,783 | ||||||||||||
(Gain) on sale and disposal of equipment | - | - | - | (233,473 | ) | |||||||||||
Interest and other expense (income) | 263,713 | (5,198 | ) | 221,734 | (12,204 | ) | ||||||||||
Adjusted EBITDA* | $ | (1,272,675 | ) | $ | (1,249,248 | ) | $ | 959,150 | $ | (2,122,495 | ) |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Adjusted EBITDA* | ||||||||||||||||
Net (Loss) Income | $ | (3,209) | $ | (3,282) | $ | 1,094 | $ | (1,241) | ||||||||
Add Back (Deduct) |
|
|
|
| ||||||||||||
Interest expense | 658 | 511 | 1,542 | 1,011 | ||||||||||||
Provision for income tax expense | 32 | 32 | 32 | 32 | ||||||||||||
Depreciation and amortization (including discontinued operations) | 1,736 | 1,597 | 3,419 | 3,186 | ||||||||||||
EBITDA* | (783 | ) | (1,142 | ) | 6,087 | 2,988 | ||||||||||
Add back | ||||||||||||||||
Stock-based compensation | 77 | 115 | 169 | 188 | ||||||||||||
Severance and transition cost | - | 593 | - | 633 | ||||||||||||
Patent litigation and defense costs | 1 | 55 | 10 | 75 | ||||||||||||
Impairment loss | - | - | 127 | - | ||||||||||||
Software Implementation costs | 25 | - | 25 | - | ||||||||||||
Other (income) expense | (1,208 | ) | 85 | (1,144 | ) | 505 | ||||||||||
Loss (gain) on disposal of assets | 12 | (53 | ) | 12 | (53 | ) | ||||||||||
EBITDA related to discontinued operations | - | 100 | - | 224 | ||||||||||||
Adjusted EBITDA* | $ | (1,876 | ) | $ | (247 | ) | $ | 5,286 | $ | 4,560 |
*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, (earnings), before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA excludes stock-based compensation from EBITDA and, when appropriate, other items that management does not utilize in assessing the Company’s ongoing operating performance as set forth in the next paragraph. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure.
All of the items included in the reconciliation from net income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, warrants issued,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, severance and transition costs related to the executive management team, gain or losses on sale of investments, loss on disposal of assets,equipment, software implementation costs, 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’scompany’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’scompany’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 2017 CreditLoan 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 SeptemberJune 30, 2017 declined2019 decreased by approximately $23,000,$1.6 million due primarily to the increasedecline in segment profit and increases in sales, general, and administrative expensescosts discussed above, partially offset byabove. Adjusted EBITDA for the increase in revenues and segment profits from well enhancement and water transfer services. For the ninesix months ended SeptemberJune 30, 2017, our Adjusted EBITDA improved2019 increased by $3.1 million, from a loss of $2.1 million to approximately $959,000 in positive EBITDA,$726,000 primarily due to the improvement in segment profitsprofit, partially offset by the increases in sales, general, and administrative costs discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Update
As of June 30, 2019, we had an outstanding principal loan balance under the AmendedCredit Facility of approximately $31.9 million with a weighted average interest rates of 5.98% per year for $27.0 million of outstanding LIBOR Rate borrowings and Restated Revolving7.25% per year for the approximately $4.9 million of outstanding Prime Rate borrowings. As of June 30, 2019, we had borrowed approximately $753,000 in excess of the maximum amount available under the Credit Facility and, under the Credit Facility we were required to immediately replay the borrowing excess. While we paid all of the borrowing excess on July 3, 2019, the non-payment on July 1, 2019 constituted a payment default under the Credit Agreement. On August 12, 2019, we entered into the Third Amendment to Loan and Security Agreement (the “2014 Credit Agreement”) with PNC Bank, National Association (“PNC”). As of September 30, 2017, we were in violation of one of the loan covenants of the 2017 Credit Agreement, which required that we maintain a trailing nine-month Fixed Charge Coverage Ratio (“FCCR”) of an amount not less than 1.10 to 1.00 at the end of the month with a build up beginning on January 1, 2017 through December 31, 2017. Our FCCR as of September 30, 2017, calculated in accordance with the 2017 Credit Agreement, was 0.62 to 1.00, which constituted an Event of Default. Under the 2017 Credit Agreement, upon an Event of Default, East West Bank, may at its election, declare all of our obligations under the agreement immediately due and payable, demand that we deposit cash with the bank as collateral security, and cease advancing money or extending credit to us, among other remedies. We are in negotiationsWaiver with East West Bank regarding a waiver ofthat (i) waived the testing of this covenant through December 31, 2017 through an amendmentforegoing default; (ii) provided for slightly higher interest rates on borrowings under the Credit Facility; and (iii) reduced our allowable capital expenditures in any fiscal year from $3.0 million to the 2017 Credit Agreement, which would remedy the covenant violation. We believe it is probable that we will reach such an agreement with East West Bank, however, we cannot provide assurance that East West Bank will agree to provide the waiver, and as of November 14, 2017 we had not finalized such an agreement. If East West Bank exercises its option to declare the debt immediately due and payable, our ability to continue as a going concern will be materially, negatively affected.$1.5 million.
The following table summarizes our statements of cash flows for the ninesix months ended SeptemberJune 30, 20172019 and 2016:2018 (in thousands):
For the Nine Months Ended September 30, | For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
Net cash provided by operating activities | $ | (551,184 | ) | $ | 1,151,358 | $ | 5,854 | $ | 6,525 | |||||||
Net cash used in investing activities | (1,163,236 | ) | (4,482,603 | ) | ||||||||||||
Net cash (used in) provided by financing activities | 1,573,507 | 3,307,783 | ||||||||||||||
Net Decrease in Cash and Cash Equivalents | (140,913 | ) | (23,462 | ) | ||||||||||||
Net cash provided by (used in) investing activities | 439 | (1,203 | ) | |||||||||||||
Net cash used in financing activities | (6,044 | ) | (5,478 | ) | ||||||||||||
Net increase (decrease) in Cash and Cash Equivalents | 249 | (156 | ) | |||||||||||||
Cash and Cash Equivalents, Beginning of Period | 620,764 | 804,737 | 257 | 391 | ||||||||||||
Cash and Cash Equivalents, End of Period | $ | 479,851 | $ | 781,275 | $ | 506 | $ | 235 |
The following table sets forth a summary of certain aspects of our balance sheet at JuneSeptember 30, 20172019 and December 31, 2016:2018:
September 30, 2017 | December 31, 2016 | June 30, 2019 | December 31, 2018 | |||||||||||||
Current Assets | $ | 5,735,919 | $ | 7,037,068 | $ | 10,629 | $ | 13,530 | ||||||||
Total Assets | 39,883,328 | 42,369,996 | $ | 48,672 | $ | 49,021 | ||||||||||
Current Liabilities | 26,816,551 | 4,001,098 | $ | 4,148 | $ | 7,452 | ||||||||||
Total Liabilities | 29,882,124 | 27,954,550 | $ | 42,699 | $ | 44,419 | ||||||||||
Stockholders’ equity | 10,001,204 | 14,415,446 | ||||||||||||||
Working Capital (deficit) (Current Assets net of Current Liabilities) | (21,080,632 | ) | 3,035,970 | |||||||||||||
Long-term debt to Equity | 0.25 to 1 | 1.63 to 1 | ||||||||||||||
Working Capital (Current Assets net of Current Liabilities) | $ | 6,481 | $ | 6,078 | ||||||||||||
Stockholders’ Equity | $ | 5,973 | $ | 4,602 |
Overview:
We have relied on cash flow from operations, borrowings under our revolving credit agreements, and equity and debt offerings to satisfy our liquidity needs. Our ability to fund operating cash flow shortfalls, fund capital expenditures, and make acquisitions will depend upon our future operating performance and on the availability of equity and debt financing. At As discussed above, at JuneSeptember 30, 2017,2019, we had approximately $480,000 of cash and cash equivalents and approximately $2.7 milliondid not have any capacity available under the Credit Facility, however, subsequent to June 30, 2019, cash collections from our asset-based senior revolving credit facility.customers allowed us to repay a portion of the outstanding balance, resulting in modest additional borrowing capacity. Our capital requirements over the next 12 months are anticipated to include, but are not limited to, operating expenses, debt servicing, and capital expenditures including maintenance of our existing fleet of assets.
As described in more detail in Note 5 to our financial statements included in “Item 1. Financial Statements” of this report,June 30, 2019, we entered into had an outstanding principal loan balance under the 2017 Credit Agreement of approximately $31.9 million with East West Bank which providesa weighted average interest rate of 5.98% per year for a three-year $30$27.0 million senior secured revolving credit facility. of outstanding LIBOR Rate borrowings (which includes the effect of our interest rate swap agreement described below) and 7.25% per year for the approximately $4.9 million of outstanding Prime Rate borrowings. The 2017 Credit Agreement allows us to borrow up to 85% of our eligible receivables and up to 85%85% of the appraised value of our eligible equipment. We used initial proceeds of approximately $21.8 million to repay all amounts due pursuant to our Amended and Restated Revolving Credit and Security Agreement (the "2014 Credit Agreement") with PNC Bank, National Association ("PNC"), and pay other closing costs and fees. Upon entering into the 2017 Credit Agreement, we had approximately $4.7 million available under the terms of the agreement.
Interest Rate Swap
During the three months ended SeptemberJune 30, 2017, we terminated2019, the interest rate swap agreement with PNC. The cost to terminate the interest rate swap was approximately $90,000, and we recorded the difference between the cost to terminatefair market value of the swap and the valuationinstrument decreased by approximately $49,000, from an asset of the swapMarch 31, 2019 of $31,000, to a liability as of June 30, 2017,2019 of $18,000 and resulted in an increase in other expense. During the six months ended June 30, 2019, the fair market value of the swap instrument increased by approximately $93,000, from an asset of December 31, 2018 of $75,000, to a liability as additional interestof June 30, 2019 of $18,000 and resulted in an increase in other expense during
During the three months ended SeptemberJune 30, 2017. We expect to enter into a similar interest rate swap agreement in connection with2018, the 2017 Credit Agreement.
other expense. During the ninesix months ended SeptemberJune 30, 2017,2018, the fair market value of the swap instrument increased by approximately $19,000 and resulted in a decrease to the liabilityan asset being recorded and a reduction in interest expense.
Liquidity:
As of SeptemberJune 30, 2017,2019, our available liquidity was $3.2 million,$506,000, which was substantially comprised entirely of $2.7 million of availabilityour cash balance. Availability on the credit facility (subjectCredit Facility as of June 30, 2019, was zero, due to a covenant requirement thatour borrowing balance exceeding collateral availability as defined in the Credit Facility. Subsequent to June 30, 2019, we maintain $1.5 million of available liquidity) and $480,000 in cash.made repayments under the Credit Facility creating modest availability under the Credit Facility. We utilize the 2017 Credit Facility to fund working capital requirements, and during the ninesix months ended SeptemberJune 30, 2017,2019, we receivedmade net cash proceeds fromrepayments under our various lines of creditCredit Facility of approximately $790,000,$2.1 million, and additionally received $1.1 millionapproximately $45,000 in non-cash proceeds to fund interest due on the notes.
On August 10, 2017 an initial advance of $21.8 million was made under the New Credit Facilitycosts incurred pursuant to repay in full all obligations outstanding under the Prior Credit Facility and fees and expenses incurred in connection with the termination of the 2014 Credit Agreement and the origination of the 2017 Credit Agreement. Upon entering the 2017 Credit Agreement and repaying all amounts due pursuant to the 2014 Credit Agreement, we had availability of approximately $4.7 million under the New Credit Facility.
Working Capital:
As of SeptemberJune 30, 2017,2019, we had negative working capital of approximately $21.1$6.5 million compared to positive working capital of $3.0$6.1 million as of December 31, 2016, primarily attributable to the presentation of2018. The June 30, 2019 figure was impacted by our senior revolving line of credit as a current liability as of September 30, 2017, due to the violation of a loan covenant with respect to our Senior Credit Facility discussed above. Also, as discussed above, we are in negotiations with East West Bank regarding a waiveradoption of the testing of this covenant through December 31, 2017 through an amendment to the 2017 Credit Agreement.lease accounting standard described in Critical accounting policies and estimates below.
Cash flow from Operating Activities:
For the ninesix months ended SeptemberJune 30, 2017, we used approximately $551,000 in2019, cash provided by operating activities was approximately $5.9 million compared to $1.2$6.5 million in cash provided by operating activities during the comparable period in 2016.2018. The decrease was partially attributable to (i) the decline in operating income and increase in interest expense described above, and a decrease in cash flows provided by the monetization of accounts receivable during the nine months ended September 30, 2017 comparedcurrent year period, partially offset by a decrease in cash flows related to the comparable periodchange in 2016, (ii) our payment of approximately $612,000accounts payable balance from December 31, 2018 to the provider of our workers' compensation insurance policy in the nine months ended SeptemberJune 30, 2017, and (iii) severance and transition costs paid during the nine months ended September 30, 2017.2019.
Cash flow from Investing Activities:Activities:
Cash used inprovided by investing activities during the ninesix months ended SeptemberJune 30, 20172019 was approximately $439,000, compared to $1.2 million compared to $4.5 millionin cash used in Investing Activities during the comparable period in 2016,2018, primarily due to investment in Water Transfer equipment during 2018 which did not recur in 2019, and proceeds received from the $4.2 million purchase2019 sale of water transfer assets and patented hydropath technology assets from WET and HIIT in the nine months ended September 30, 2016. The $1.3 million of capital expenditures for the nine months ended September 30, 2017 primarily comprised capital expenditures for maintenance of our existing fleet of assets and for assets acquired pursuantequipment related to our agreement with HydroFLOW.discontinued operations.
Cash flow from Financing Activities:
Cash provided byused in financing activities for the ninesix months ended SeptemberJune 30, 20172019 was $1.6$6.0 million compared to $3.3$5.5 million in cash provided byused in financing activities for the comparable period in 2016. During2018. The change is due to our use of the nine months ended September 30, 2017, we borrowed a net $790,000 (excluding non-cash advances for interest payments) underproceeds from our revolving credit facilities and issued subordinated debt of $2.5 million,Credit Facility to fund working capital requirements and invest in our fleet of assets. During the nine months ended September 30, 2016, we borrowed a net of approximately $3.5 million under our revolving credit facility capital expenditures, including the $4.2 million purchase of water transfer assets,operating activities as described above, partially offset by repayments made upon the monetization of accounts receivable.change in cash flows from investing activities.
Outlook:
We believe that the current oil and gas environment provides us an opportunity to optimizeincrease our cash flows through the increased utilization of our asset base, due to industry dynamics and increase our cash flow through thefocus on deploying our assets into areas where our services are in high demand. We have experienced an increase in bothsuch demand due to the oil prices andfairly stable oil and natural gas drilling activities.commodity prices from 2016 lows, and modest increases in the level of production and development activities across the industry. Our long term goal is2019 financial results, to right-sizedate, reflect our improved operational execution in response to this increased demand, and we are optimistic about the prospects for the remainder of 2019 should oil and natural gas prices remain in their current range. Our long-term goals include driving increased utilization of our assets, an optimized deployment of our fleet, and the right-sizing of our balance sheet by paying down debt and increasing the utilization rate of our assets.debt. We plan to continue to look forseek opportunities to expand our business operations through organic growth, such as geographic expansion andincluding increasing the volume and scope of current services offered to our new and existing customerscustomers. We may identify additional services to offer to our customer base, and make related investments as capital and market conditions permits. We will continue to explore adding high margin services that reducediversify and expand our seasonality, diversify our service offerings, and maintain a goodcustomer 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 SeptemberJune 30, 20172019 consist primarily of scheduled principal payments under certain term loans and operating leases. We repaid all amounts due under the 2014 Credit Agreement using proceeds from the 2017 Credit Agreement. We do not have any scheduled principal payments under the 2017 Credit Agreement until August 10, 2020,2020; however, the Company may need to make future principal payments based upon collateral availability. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the financial statements.
Pursuant to a Sales Agreement with HydroFLOW USA, HWWM has the exclusive right to sell or rent patented hydropath devices in connection with bacteria deactivation and scale treatment services for treating injection and disposal wells, fracking water and recycled water in the oil and gas industry to HWWM customers in the United States. Pursuant to the sales agreement, HWWM is required to pay 3.5% royalties of its gross revenues on certain rental transactions and, in order to maintain the exclusivity provision under the agreement, we must purchase approximately $655,000 of equipment per year commencing in 2016 and ending 2025. In November 2016, we and HydroFLOW USA agreed to allocate $220,000 of the 2016 commitment to 2017, thereby increasing the minimum purchase requirement for 2017 to $875,000. During 2017, we purchased $280,000 of equipment to meet our 2016 purchase commitment for exclusivity. During the nine months ended September 30, 2017 and 2016, we did not accrue or pay any royalties to HydroFLOW, however, subsequent to September 30, 2017, we completed our first job using the technology. We have negotiated a release of all 2016 and 2017 purchase commitments, while leaving intact the exclusive right to sell or rent the patented hydropath devices through 2017.
OFF-BALANCE SHEET ARRANGEMENTS
As of SeptemberJune 30, 2017, 2019, we had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
On January 1, 2019, we adopted ASC Topic 842, Leases. ASC Topic 842 requires the recognition of lease rights and obligations as assets and liabilities on the balance sheet. Previously, lessees were not required to recognize the balance sheet assets and liabilities arising from operating leases. As we elected the cumulative-effect adoption method, prior-period information has not been restated. On January 1, 2019, we recognized $2.4 million in right-of-use assets and $2.4 million in lease liabilities, representing the present value of minimum payment obligations associated with leased facilities and certain equipment with non-cancellable lease terms in excess of one year. During the six months ended June 30, 2019, we entered into several finance leases related to equipment. We made an adjustment to retained earnings of approximately $108,000 at January 1, 2019.
Our significantThere have been no other changes in our critical accounting policies and estimates have not changed from those reported in Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations" in in our 2016 10-K.since December 31, 2018.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.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 Securities Exchange Act, of 1934 (the “1934 Act”), as of SeptemberJune 30, 2017,2019, 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 thethe 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 SeptemberJune 30, 2017.2019.
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 1934Exchange 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 1934Exchange 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
Beginning January 1, 2019, we adopted ASC 842 "Leases". Although the adoption of the new accounting standard did not have a material impact on our Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows, we implemented changes to our processes related to accounting for leases and related internal controls. These changes included the development of new policies related to the new leasing framework, training, ongoing contract review requirements, and gathering of information to comply with disclosure requirements.
There were not any changeshas been no change in ourthe Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the 1934 Act) during the quarter ended September 30, 2017,covered by this report that havehas materially affected, or areis reasonably likely to materially affect, ourits internal control over financial reporting.
.
Enservco Corporation ("Enservco") and its subsidiary Heat Waves Hot Oil Service LLC (“Heat Waves”) arewere defendants in a civil lawsuit in federal court in Colorado, Civil Action No. 1:15-cv-00983-RBJ (“Colorado Case”), that allegesalleged 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”). The complaint relates- i.e., the ‘993 Patent and the ‘875 Patent. In March of 2019, the parties moved to only a portiondismiss 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 providedoffered by Heat Waves. The Colorado Case is now stayed pending resolution of appeal byWaves prior to and through March 13, 2019. Heat Waves dismissed its counterclaims against HOTF of a North Dakota court’s ruling that the primary patent (“the ‘993 Patent”)without prejudice in order to preserve its defenses.
While the Colorado Case was invalid. Neither Enservco nor Heat Waves is a party to the North Dakota Case, which involves other energy companies.
The ‘993 Patent has undergone several reexaminations by the USPTO and in February 2015, the USPTO rejected all 99 claims of the ‘993 Patent in the latest reexamination. However, in May 2016, the USPTO reversed its decision and confirmed all 99 claims as being patentable over the cited prior art in the reexamination proceeding. Further, in September 2016 and February 2017,pending, HOTF was issued two additional patents, bothwhich were related to the ‘993 and ‘875 Patents, but were not part of which could be asserted against us.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 each of HOTF’sthese additional HOTF patents. If these Patents are ultimately held to be invalid and/or enforceable, the Colorado Case would become moot.
As noted above, the Colorado Case has been stayed. However, in the event that HOTF’s appeal is successful and the ‘993 Patent is found to be valid and/or enforceable in the North Dakota Case, the Colorado Case may resume. To the extent that Enservco and Heat Waves are unsuccessful in their defense of the Colorado Case, they could be liable for enhanced damages and attorneys’ fees (both of which may be significant) and Heat Waves could possibly be enjoined from using any technology that is determined to be infringing. Either result could negatively impact Heat Waves’ business and operations. At this time, the Company is unable to predict the outcome of this case, and accordingly has not recorded an accrual for any potential loss.
In addition toSee the Company’s risk factors set forth in ourthe Company’s annual report on Form 10-K for the year ended December 31, 20162018, filed on March 31, 2017, the Company28, 2019, which is also subject to the following risks:
We are in violation of a loan covenant in our 2017 Credit Agreement and our lender, East West Bank, has the right to immediately declare the outstanding loan balance due and payable, cease making further advances under the loan and exercise other remedies in the event it declares an Event of Default. If East West Bank exercises its option to declare the debt to be immediately due and payable, our ability to continue as a going concern will be materially, negatively affected. We may be unable to meet the obligations of the various financial covenants in that agreement.
As of September 30, 2017, we were in violation of the Fixed Charge Coverage Ratio, or FCCR, covenant under the 2017 Credit Agreement. Our FCCR, as calculated in accordance with the 2017 Credit Agreement, was 0.62 to 1.00. Failure to satisfy the financial covenants contained in the 2017 Credit Agreement constitutes an Event of Default under the 2017 Credit Agreement. Upon an Event of Default, under the 2017 Credit Agreement, East West Bank may, at its election, declare all of our obligations under the 2017 Credit Agreement immediately due and payable, demand that we deposit cash with the bank as collateral security, and cease advancing money or extending credit to us, among other remedies. As of November 14, 2017, East West Bank had not informed us of its election to exercise of any of these rights and remedies, and we are seeking a covenant waiver or amendment to the terms of the 2017 Credit Agreement to remedy the covenant violation. We have no assurance that any waiver or amendment will be reached, or if so reached will not subject us to additional covenants and monetary payments. There is no assurance that we will cure this existing covenant violation. If East West Bank exercises its option to declare the debt immediately due and payable, our ability to continue as a going concern will be materially, negatively affected.
incorporated herein by reference. In addition, due tosee the foregoing loan covenant violation, on our consolidated condensed balance sheets, we have included all amounts outstanding under the 2017 Credit Agreement as of September 30, 2017, or approximately $23.5 million as a current liability, resulting in us having a material, significant working capital deficit as of September 30, 2017, of approximately $21.1 million.
Our 2017 Credit Agreement imposes various other obligations and financial covenants on us. The 2017 Credit Agreement has a variable interest rate and is collateralized by substantially all of the assets of us and our subsidiaries.
We must maintain minimum liquidity levels and our ability to incur additional debt or operating lease obligations is significantly constrained by the 2017 Credit Agreement. A downturn in the domestic oil and natural gas exploration and production sector will likely result in reduced drilling activity in our service areas and make it more difficult to meet our financial covenants.risk factor below.
Our debt obligations may reducesuccess depends on key members of our financial and operating flexibility.management, the loss of any executive or key personnel could disrupt our business operations.
AsWe depend to a large extent on the services of September 30, 2017, we had borrowed approximately $23.5 million undercertain of our 2017 Credit Agreement and had approximately $2.7 millionexecutive officers. The loss of borrowing capacity available under this facility. However, due tothe services of Ian Dickinson, Kevin Kersting or Marjorie Hargrave, could disrupt our noncompliance with a debt covenant as discussed above, our bank may determine to not advance us any further funds under the 2017 Credit Agreement.operations. Although we plan to utilize future cash flow from operations to reduce our outstanding borrowings,have entered into employment agreements with Messrs. Dickinson and Kersting and Ms. Hargrave, that contain, among other things non-compete and confidentiality provisions, we may be unable to achieve this objective. If we are unable to reduce debt or new debt or other liabilities are added to our current debt levels, the related risks that we now face would increase.
A high level of indebtedness subjects us to a number of adverse risks. In particular, a high level of indebtedness may make it more likely that a reduction in the borrowing base of our credit facility following a periodic redetermination could require us to repay a portion of outstanding borrowings, may impair our ability to obtain additional financing in the future, and increases the risk that we may default on our debt obligations. In addition, we may be required to devote a significant portion of our cash flows to servicing our debt, and that we are subject to interest rate risk under our credit facility, which bears interest at a variable rate. Any further increase in our interest rates (whether by amendment to its 2017 Credit Agreement or as the result of economic conditions) would likely have an adverse impact on our financial condition, results of operations and growth prospects.
Our ability to meet our debt obligations and to reduce our level of indebtedness depends on our future performance. General economic conditions, oil and natural gas prices and financial, business and other factors affect our operations and its future performance. Many of these factors are beyond our control. If we do not have sufficient funds on hand to pay our debt when due, we may be required to seek a waiver or amendment from our lenders, refinance our indebtedness, incur additional indebtedness, sell assets or sell additional shares of our equity securities. We may not be able to complete such transactions on terms acceptable to us, enforce the non-compete and/or at all. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully could resultconfidentiality provisions in a default on our debt obligations, which would materially adversely affect our business, results of operations and financial condition.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.
None.
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101.INS | XBRL Instance Document | |
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101.CAL | XBRL Calculation Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document | |
101.DEF | XBRL Definition Linkbase Document |
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, we havethe registrant has duly caused this report to be signed on ourits behalf by the undersigned, thereunto duly authorized.
| ENSERVCO CORPORATION |
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Date: |
| /s/ Ian Dickinson |
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| Ian Dickinson, Principal Executive Officer and Chief Executive Officer |
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Date: | /s/ | ||
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