Enservco Corp - Quarter Report: 2020 September (Form 10-Q)

 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-36335

 

ENSERVCO CORPORATION

(Exact Name of registrant as Specified in its Charter)

 

 

Delaware		84-0811316
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
14133 County Rd 9 1/2 Longmont, CO		80504
(Address of principal executive offices)		(Zip Code)

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, par value $0.005 per share		ENSV		New York Stock Exchange

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).            Yes ☒ No ☐ 

 

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

 

Large accelerated filer ☐                                                                             Accelerated filer ☐

Non-accelerated filer ☒                                                                               Smaller reporting company ☒

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 ☒

 

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 November 9, 2020
Common stock, $.005 par value	77,137,597

 

 

 

 

		September 30,				December 31,
		2020				2019
		(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents		$	-			$	663
Accounts receivable, net			1,012				6,424
Prepaid expenses and other current assets			1,609				1,016
Inventories			310				398
Income tax receivable, current			57				43
Current assets of discontinued operations			-				187
Total current assets			2,988				8,731
Property and equipment, net			22,590				26,620
Goodwill			546				546
Intangible assets, net			672				828
Income taxes receivable, non-current			-				14
Right-of-use asset - financing, net			148				569
Right-of-use asset - operating, net			3,124				3,793
Other assets			349				445
Non-current assets of discontinued operations			809				1,430
TOTAL ASSETS		$	31,226			$	42,976
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued liabilities		$	2,540			$	4,470
Senior revolving credit facility, related party (including future interest payable of $950 and $0, respectively - see Note 2 and Note 7)			950				33,994
Subordinated debt, related party			-				2,381
Lease liability - financing, current			64				207
Lease liability - operating, current			836				848
Current portion of long-term debt			110				147
Current liabilities of discontinued operations			31				72
Total current liabilities			4,531				42,119
Long-Term Liabilities
Senior revolving credit facility, related party (including future interest payable of $822 and $0, respectively - see Note 2 and Note 7)			17,931				-
Subordinated debt, related party			1,168				-
Long-term debt, less current portion			2,066				198
Lease liability - financing, less current portion			72				259
Lease liability - operating, less current portion			2,406				3,009
Other liability			33				33
Long-term liabilities of discontinued operations			15				34
Total long-term liabilities			23,691				3,533
Total liabilities			28,222				45,652
Commitments and Contingencies (Note 10)
Stockholders' Equity (Deficit)
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, 70,088,783 and 55,642,829 shares issued, respectively; 103,600 shares of treasury stock; and 69,985,183 and 55,539,229 shares outstanding, respectively			352				278
Additional paid-in capital			26,461				22,066
Accumulated deficit			(23,809	)			(25,020	)
Total stockholders' equity (deficit)			3,004				(2,676	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	31,226			$	42,976

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2020				2019				2020				2019
Revenues
Production services		$	1,363			$	3,288			$	5,948			$	11,239
Completion services			401				510				7,343				23,711
Total revenues			1,764				3,798				13,291				34,950
Expenses
Production services			1,347				3,305				6,655				9,994
Completion services			1,126				1,710				7,613				16,829
Sales, general, and administrative expenses			1,049				1,712				4,058				4,772
Patent litigation and defense costs			-				-				-				10
Severance and transition costs			-				83				139				83
Loss (gain) on disposal of assets			21				-				59				(4	)
Impairment loss			-				-				-				127
Depreciation and amortization			1,271				1,404				3,977				4,246
Total operating expenses			4,814				8,214				22.501				36.057
Loss from operations			(3,050	)			(4,416	)			(9,210	)			(1,107	)
Other income (expense)
Interest expense			(477	)			(695	)			(1,665	)			(2,235	)
Gain on restructuring of senior revolving credit facility (Note7)			11,916				-				11,916				-
Other income (expense)			29				(67	)			125				1,070
Total other income (expense)			11,468				(762	)			10,376				(1,165	)
Income (loss) from continuing operations before tax expense			8,418				(5,178	)			1,166				(2,272	)
Income tax expense			(6	)			-				(15	)			(32	)
Income (loss) from continuing operations		$	8,412			$	(5,178	)		$	1,151			$	(2,304	)
(Loss) income from discontinued operations (Note 6)			(7)				(226	)			60				(2,006	)
Net income (loss)		$	8,405			$	(5,404	)		$	1,211			$	(4,310	)
Earnings (loss) from continuing operations per common share - basic		$	0.14			$	(0.09	)		$	0.02			$	(0.04	)
Loss from discontinued operations per common share - basic			-				(0.01	)			-				(0.04	)
Net income (loss) per share - basic		$	0.14			$	(0.10	)		$	0.02			$	(0.08	)
Earnings (loss) from continuing operations per common share - diluted		$	0.14			$	(0.09	)		$	0.02			$	(0.04	)
Loss from discontinued operations per common share - diluted			-				(0.01	)			-				(0.04	)
Net income (loss) per share - diluted		$	0.14			$	(0.10	)		$	0.02			$	(0.08	)
Basic weighted average number of common shares outstanding			58,649				55,457				56,514				54,925
Diluted weighted average number of common shares outstanding			58,649				55,457				56,514				54,925

 

		Common Shares				Common Stock				Additional Paid-in Capital				Accumulated Earnings (Deficit)				Total Stockholders’ Equity (Deficit)
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
Opening balance adjustment			-				-				-				(10	)			(10	)
Stock-based compensation, net of issuance costs			-				-				53				-				53
Restricted share issuance			330				1				(2	)			-				(1	)
Restricted share cancellation			(160	)			-				-				-				-
Net loss			-				-				-				(5,404	)			(5,404	)
Balance at September 30, 2019			55,499			$	278			$	22,011			$	(21,678	)		$	611

		Common Shares				Common Stock				Additional Paid-in Capital				Accumulated Earnings (Deficit)				Total Stockholders’ Equity (Deficit)
Balance at January 1, 2020			55,539			$	278			$	22,066			$	(25,020	)		$	(2,676	)
Stock-based compensation, net of issuance costs			-				-				39				-				39
Restricted share cancellation			(30	)			(3	)			3				-				-
Net loss			-				-				-				(2,837	)			(2,837	)
Balance at March 31, 2020			55,509				275				22,108				(27,857	)			(5,474	)
Stock-based compensation, net of issuance costs			-				-				322				-				322
Restricted share issuance			100				(4	)			4				-				-
Restricted share cancellation			(682	)			(1	)			1				-				-
Restricted shares vested			-				5				-				-				5
Net loss			-				-				-				(4,357	)			(4,357	)
Balance at June 30, 2020			54,927				275				22,435				(32,214	)			(9,504	)
Stock-based compensation, net of issuance costs			-				-				16				-				16
Restricted share cancellation			(42)				-				-				-				-
Shares issued to Cross River Partners, L.P. in subordinated debt and accrued interest conversion (Note 2)			6,054				31				1,484				-				1,515
Shares and warrants issued to East West Bank in senior revolving credit debt restructuring (Note 2 and Note 7)			8,000				40				2,492				-				2,532
Shares issued in at-the-market offering, net of offering costs (Note 2)			1,046				6				34				-				40
Net income			-				-				-				8,405				8,405
Balance at September 30, 2020			69,985			$	352			$	26,461			$	(23,809	)		$	3,004

 

		For the Nine Months Ended
		September 30,
		2020				2019
OPERATING ACTIVITIES
Net income (loss)		$	1,211			$	(4,310	)
Net income (loss) from discontinued operations			60				(2,006	)
Net income (loss) from continuing operations			1,151				(2,304	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation and amortization			3,977				4,245
Loss (gain) on disposal of equipment			59				(4	)
Gain on settlement (Note 4)			-				(1,252	)
Impairment loss			-				127
Stock-based compensation			377				221
Amortization of debt issuance costs and discount			119				273
Gain on restructuring of senior revolving credit facility (Note7)			(11,916	)			-
Lease termination expense			-				62
Provision for bad debt expense			362				171
Changes in operating assets and liabilities
Accounts receivable			5,048				7,213
Inventories			88				176
Prepaid expense and other current assets			(593	)			281
Income taxes receivable			(14	)			-
Amortization of operating lease assets			635				599
Other assets			363				239
Accounts payable and accrued liabilities			(1,469	)			(342	)
Operating lease liabilities			(615	)			(546	)
Other liabilities			-				104
Net cash (used in) provided by operating activities - continuing operations			(2,428	)			9,263
Net cash provided by (used in) operating activities - discontinued operations			133				(775)
Net cash (used in) provided by operating activities			(2,295	)			8,488
INVESTING ACTIVITIES
Purchases of property and equipment			(344	)			(859	)
Proceeds from insurance claims			294				27
Proceeds from disposals of property and equipment			341				219
Net cash provided by (used in) investing activities - continuing operations			291				(613	)
Net cash provided by investing activities - discontinued operations			675				413
Net cash provided by (used in) investing activities			966				(200	)
FINANCING ACTIVITIES
Gross proceeds from stock issuance			205				-
Stock issuance costs and registration fees			(165	)			-
Net line of credit payments			(855	)			(4,474	)
Proceeds from PPP loan (Note 7)			1,940				-
Repayment of long-term debt			(109	)			(92	)
Payments of finance leases			(350	)			(279	)
Repayment of note			-				(3,700	)
Other financing activities			-				(1	)
Net cash provided by (used in) financing activities - continuing operations			666				(8,546	)
Net cash provided by financing activities - discontinued operations			-				1
Net cash provided by (used in) financing activities			666				(8,545	)
Net Decrease in Cash and Cash Equivalents			(663	)			(257)
Cash and Cash Equivalents, beginning of period			663				257
Cash and Cash Equivalents, end of period		$	-			$	-
Supplemental Cash Flow Information:
Cash paid for interest		$	1,415			$	1,794
Cash paid for taxes			2				32
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Non-cash reduction of debt in connection with restructuring of senior revolving credit facility		$	16,000			$	-
Non-cash issuance of common stock and warrants in connection with restructuring of senior revolving credit facility			2,532				-
Non-cash conversion of subordinated debt and accrued interest to common stock			1,515				-
Non-cash conversion of accrued interest to senior revolving credit facility			219				-
Non-cash proceeds from revolving credit facilities			-				125

 

Note 1 – Basis of Presentation

 

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

 

The accompanying unaudited condensed consolidated financial statements have been derived from the accounting records of Enservco Corporation, Heat Waves Hot Oil Service LLC (“Heat Waves”), Dillco Fluid Service, Inc. (“Dillco”), Heat Waves Water Management LLC (“HWWM”), and Adler Hot Oil Service, LLC ("Adler") (collectively, the “Company”) as of September 30, 2020 and December 31, 2019 and the results of operations for the three and nine months ended September 30, 2020 and 2019.

 

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

 

 

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

 

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow the same accounting policies and methods of their application as the most recent annual financial statements. These interim financial statements should be read in conjunction with the financial statements and related footnotes included in the Annual Report on Form 10-K of Enservco Corporation for the year ended December 31, 2019. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

 

 

Note 2 - Summary of Significant Accounting Policies

 

Going Concern

 

Our financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. We incurred a net loss of $7.7 million for the year ended December 31, 2019 and have recorded net income of $8.4 million and $1.2 million for the three and nine months ended September 30, 2020, respectively. As of the balance sheet date of this report we had total current liabilities of $4.5 million, which exceeded our total current assets of $3.0 million by $1.5 million. On August 10, 2017, we entered into the 2017 Credit Agreement, as amended, with East West Bank (the "2017 Credit Agreement") which provides for a three-year, $37.0 million senior secured revolving credit facility (the "Credit Facility"). On September 23, 2020, the Company and East West Bank entered into the Fifth Amendment to Loan and Security Agreement and Waiver (the "Fifth Amendment") which, among other things, provided for a loan concession of $16.0 million in exchange for 8,000,000 shares of Company common stock and a warrant to purchase up to 15,000,000 additional shares of Company common stock in the future. On August 13, 2020, the Company exchanged 50%, or $1.25 million, of our subordinated debt with a related party, as well as $265,000 in accrued interest, for 6,054,022 of Company common stock.

 

The Fifth Amendment modifies certain covenants and cured our previous breaches of two covenants, as well as extending the maturity date for the repayment of the Credit Facility to October 15, 2021. Since the Fifth Amendment cured the covenant breaches under the 2017 Credit Agreement, we are now in compliance with both our Credit Facility and subordinated debt agreements with a related party, and maturities of these debts were reclassified from current to long-term during the third quarter (see Note 7 of the accompanying Notes to the Condensed Consolidated Financial Statements).

 

On September 28, 2020, the Company filed a prospectus supplement to finalize the S-3 (the "Shelf Registration") that was filed on July 24, 2020. On September 29, 2020, in connection with the Shelf Registration, the Company, through its sales agent Alliance Global Partners ("AGP"), released an at-the-market offering (the "Public Offering") which has been designed to raise capital by issuing approximately 15,000,000 securities into the trading market, over-time, at the then-market price of the securities at the time they are sold.

 

Our ability to continue as a going concern is dependent on our ability to paydown and/or refinance the 2017 Credit Agreement prior to its maturity on October 15, 2021, raising further capital and our ability to further reduce costs, of which there can be no assurance. These factors raise substantial doubt over our ability to continue as a going concern and whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the financial statements. Given our current financial situation we may be required to accept onerous terms on the transactions that we are seeking.

 

Recent Market Conditions

 

The COVID-19 pandemic has significantly impacted the world economic conditions including in the United States, with significant effects beginning in February 2020, and continuing through the issuance of this report, as federal, state and local governments react to the public health crisis, creating significant uncertainties relating to the United States economy. Consequently, the Company has experienced and expects to further experience a material adverse impact on its revenues, results of operations and cash flows. COVID-19 related quarantines and business restrictions had a depressing impact on United States oil demand, and hence our business, during the latter half of March through much of the second quarter. The situation continues to change rapidly and additional impacts to our business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or office closure requirements.

 

In addition, certain producing countries within the Organization of Petroleum Exporting Countries and their allies ("OPEC+") group attempted to increase market share through pricing activity that has had limited impact on the severe decline in domestic oil prices that occurred during the first quarter of 2020, and drilling and operating activity within our markets has remained depressed. There is no assurance that such efforts will not re-occur in the future.

 

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

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable 

 

Accounts receivable are stated at the amounts billed to customers, net of an allowance for uncollectible accounts. The Company provides an allowance for uncollectible accounts based on a review of outstanding receivables, historical collection information and existing economic conditions. The allowance for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management's best estimate of uncollectible amounts and is determined based on historical collection experience related to accounts receivable coupled with a review of the current status of existing receivables. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of September 30, 2020, and December 31, 2019, the Company had an allowance for doubtful accounts of approximately $544,000 and $246,000, respectively, an increase directly related to some of our customers in the depressed oil market during that period. For the three and nine months ended September 30, 2020, the Company recorded approximately $64,000 and $362,000 to bad debt expense. For the three and nine months ended September 30, 2019, the Company recorded approximately $168,000 and $171,000 to bad debt expense.

 

Inventories

 

Inventory consists primarily of propane, diesel fuel and chemicals that are used in the servicing of oil wells and is carried at the lower of cost or net realizable value in accordance with the first in, first out method (FIFO). The Company periodically reviews the value of items in inventory and provides write-downs or write-offs, of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. For the three and nine months ended September 30, 2020 and 2019, the Company did not recognize any write-downs or write-offs of inventory.

 

 

Property and Equipment

 

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

 

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

 

Leases

 

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

 

The Company conducts a major part of its operations from leased facilities. Each of these leases is accounted for as an operating lease. Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent our right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives, and impairment of operating lease assets.

 

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

 

 

 

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 assets may not be recovered. During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its long-lived assets. The Company reviewed both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company reviewed the undiscounted future cash flows in its assessment of whether long-lived assets were impaired. The Company determined that there was no impairment of its long-lived assets during the three months and nine months ended September 30, 2020.  During the three and nine months ended September 30, 2019, the Company recorded impairment charges of approximately $0 and $127,000 related to its saltwater disposal wells. The Company divested the last saltwater disposal well during the second quarter of 2020.

 

Goodwill and Other Intangible Assets

 

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

 

During the first nine months of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events during the three months ended March 31, 2020, which could indicate impairment of its goodwill and other intangible assets. The Company reviewed both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company reviewed the undiscounted future cash flows in its assessment of whether goodwill and other intangible assets were impaired. The Company concluded that there were no further triggering events during the nine months ended September 30, 2020. Further, the Company determined that there was no impairment of its goodwill and other intangible assets during the three months and nine months ended September 30, 2020.

 

Revenue Recognition 

 

The Company evaluates revenue when we can identify the contract with the customer, the performance obligations in the contract, the transaction price, and we are certain that the performance obligations have been met. Revenue is recognized when the service has been provided to the customer. The vast majority of the Company's services and product offerings are short-term in nature. The time between invoicing and when payment is due under these arrangements is generally 30 to 60 days. Revenue is not generated from contractual arrangements that include multiple performance obligations.

 

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

 

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

 

Disaggregation of Revenue

 

See Note 13 - Segment Reporting for disaggregation of revenue.

 

Earnings (Loss) Per Share

 

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

 

As of September 30 of 2020 and 2019, there were outstanding stock options, warrants and unvested restricted stock awards to acquire an aggregate of 17,500,997 and 4,011,499 shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of September 30, 2020, these outstanding stock options, warrants and unvested restricted stock awards had no aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on September 30, 2020, and the exercise price, multiplied by the number of in-the-money instruments).

 

 

Offering Costs

 

The Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A - "Expenses of Offering". Offering costs consist principally of commissions and fees associated with the sale of the offered securities, as well as professional and other fees associated with the negotiation and filing of the Public Offering, that were incurred through the balance sheet date and were charged to stockholders' equity upon the completion and continuing sale of the Public Offering. As the securities are being offered into the market over-time by AGP, the Company will continue to incur commissions and fees associated with the sales until all of the securities in the Public Offering are sold into the market. At September 30, 2020 and December 31, 2019, offering costs totaling approximately $165,000 and $0, respectively, have been charged to stockholders' equity (deficit).

 

Derivative Instruments

 

From time to time, the Company has interest rate swap agreements in place to hedge against changes in interest rates. The fair value of the Company’s derivative instrument is reflected as an asset or liability on the balance sheet. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. Transactions related to the Company’s derivative instruments accounted for as hedges are classified in the same category as the item hedged in the consolidated statement of cash flows. The Company did not hold derivative instruments at September 30, 2020 or December 31, 2019, for trading purposes.

 

On February 23, 2018, we entered into an interest rate swap agreement with East West Bank in order to hedge against the variability in cash flows from future interest payments related to the 2017 Credit Agreement. The terms of the interest rate swap agreement included an initial notional amount of $10.0 million, a fixed payment rate of 2.52% paid by us and a floating payment rate equal to LIBOR paid by East West Bank. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations. The fair value of the interest rate swap agreement is recorded in other liabilities as of December 31, 2019, and changes to the fair value are recorded to other income (expense). The swap agreement matured during the second quarter of 2020, the balance was adjusted to $0 and a $23,000 gain was recorded to other income.

 

Income Taxes 

 

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

 

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

 

Interest and penalties associated with tax positions are recorded in the period assessed as other expense. The Company files income tax returns in the United States and in the states in which it conducts its business operations. The Company’s United States federal income tax filings for tax years 2016 through 2019 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2015 to 2019.

 

In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. For the three and nine months ended September 30, 2020, there were no material tax impacts to our condensed consolidated financial statements relating to COVID-19 measures. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service, and others.

 

Fair Value

 

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

 

Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best information available in the circumstances.  Beginning in 2017 the Company valued its warrants using the Binomial Lattice model ("Lattice"). The Company did not have any transfers between hierarchy levels during the three and nine months ended September 30, 2020. The financial and nonfinancial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

 

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

 

Level 1:

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

Level 2:

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

Level 3:

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

 

 

Stock-Based Compensation

 

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

 

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

 

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

 

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

 

The Company used a lattice model to determine the fair value of market-based restricted stock awarded in 2020 and 2019.

 

Management Estimates 

 

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the realization of accounts receivable, evaluation of impairment of long-lived assets, stock-based compensation expense, income tax provision, the valuation of warrant liability and the Company's interest rate swaps, undiscounted future cash flow projections and the valuation of deferred taxes. Actual results could differ from those estimates.

 

Reclassifications

 

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

 

Related Parties

 

From time-to-time, the Company enters into other transactions and agreements with certain related parties for various professional services.

 

The restructuring of the Credit Facility through the Fifth Amendment, pursuant to which the Company issued 8,000,000 shares of common stock and one warrant to acquire up to 15,000,000 shares of common stock to East West Bank on September 23, 2020, resulted in East West Bank becoming a related party given that its beneficial ownership exceeds 5% of the Company's outstanding common stock. See Note 7 - Debt for additional information regarding the restructuring of the Credit Facility.

 

On August 13, 2020, the Company, upon receiving approval from the Company's Board of Directors, agreed to exchange 50%, or $1.25 million, of our subordinated debt with Cross River Partners, L.P., a related party, as well as $265,000 in accrued interest, for 6,054,022 of Company common stock. The discount that the Company received was recorded to additional paid-in capital.

 

Business Combinations 

 

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

 

Recently Adopted Accounting Pronouncements 

 

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

 

 

Note 3 - Property and Equipment

 

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

 

  

 

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 April 26, 2020, 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. Pursuant to the Settlement Agreement the parties agreed to (i) waive all rights of the Seller to the Earn-Out Payment and the Indemnity Holdback Payment, (ii) reduce the original principal balance of the Seller Subordinated Note from $4,800,000 to $4,500,000, (iii) extend the maturity date of the Seller Subordinated Note from March 31, 2019 to April 10, 2019, subject to a nine-day grace period, and (iv) execute a mutual release. All adjustments to the original purchase accounting were recognized in the second quarter of 2019, when the settlement occurred. We also considered whether the execution of the Settlement Agreement was an indicator of impairment regarding the recorded balance of goodwill and the definite-lived intangible assets. With regard to goodwill, we determined that it was not more likely than not that the carrying amount of the reporting unit was greater than its fair value, and thus determined that further evaluation of goodwill for potential impairment was not necessary. We perform a goodwill impairment analysis over the recorded balance on an annual basis, or if we determine an indicator of impairment exists. With regard 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 during 2019.

 

 

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.

 

 

 

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, which was reduced to $4.5 million as discussed above, and unpaid amounts thereunder incurred 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 additional payments during April 2019 totaling $3.5 million. 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 Enservco 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 consist of the following (in thousands):

 

 

The useful lives of our intangible assets are estimated to be five years. Amortization expense was approximately $54,000 and $156,000 for the three and nine months ended September 30, 2020. Amortization expense was approximately $51,000 and $154,000 for the three and nine months ended September 30, 2019.

 

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

 

 

 

Note 6 – Discontinued Operations

 

Heat Waves Water Management

 

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

 

Dillco

 

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

 

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

 

 

 

 

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:  

 

 

 

 

Note 7 – Debt

 

East West Bank Revolving Credit Facility

 

The 2017 Credit Agreement (as defined in Note 2 of the accompanying Notes to the Condensed Consolidated Financial Statements) originally allowed us to borrow up to 85% of our eligible receivables and up to 85% of the appraised value of our eligible equipment. The Fifth Amendment restructured the loan and provides for a loan forgiveness of $16.0 million and converts the remaining principal balance to a $17.0 million equipment term loan and a revolver to provide the Company with a maximum $1,000,000 line of credit. There are no required principal payments until maturity on October 15, 2021, and interest is fixed at 8.25%. Interest on the first 5.25% is calculated monthly and paid in arrears, while the remaining 3.00% is accrued to the loan balance and due with all remaining outstanding principal on the maturity date. Additionally, the Credit Facility is subject to an unused credit line fee of 0.5% per annum multiplied by the amount by which total availability exceeds the average monthly balance of the Credit Facility, payable monthly in arrears. The Credit Facility is collateralized by substantially all our assets and subject to financial covenants. Under the Fifth Amendment, the Fixed Charge Coverage Ratio has been waived.

 

As of September 30, 2020, we had an outstanding principal loan balance under the Credit Facility of approximately $17.3 million with a weighted average interest rates of 8.25% per year. As of September 30, 2020, our availability under the amended 2017 Credit Agreement was approximately $0.7 million. The Credit Facility balance of $18.9 million at September 30, 2020 includes $1.6 million of future interest payable due over the remaining term of the Credit Facility in accordance with ASC 470-60, Troubled Debt Restructuring by Debtors.

 

Under the amended 2017 Credit Agreement, we are subject to the following financial covenants:

 

(1) Beginning on December 31, 2020, we are required to maintain liquidity of not less $1.5 million; and

 

(2) We are limited to a capital expenditures cap of $1.2 million for any fiscal year that the loan remains outstanding.

 

In connection with amending the 2017 Credit Agreement on September 23, 2020, the Company issued to East West Bank 8,000,000 shares of Company common stock, and a five-year warrant to purchase up to 15,000,000 additional shares of Company common stock at an exercise price of $0.25 per share. The 8,000,000 shares of Company common stock was valued at a price of $0.1385 per share, or a total value of $1.1 million. The 8,000,000 common shares issued to East West Bank cannot be sold or transferred March 23, 2021. The warrant for 15,000,000 shares is exercisable beginning September 23, 2021 until September 23, 2025. The fair value of the warrant was determined to be $1.4 million and were recorded in additional paid-in capital. The Company recorded a total gain on the debt restructuring of $11.9 million for both the three and nine months ended September 30, 2020, which is calculated by subtracting from the $16.0 million loan forgiveness, a) the future interest payable on the Credit Facility; b) the value of the Company common stock issued; and c) the fair value of the warrant. The per share effect of the gain on both basic and diluted earnings per common share was $0.20 and $0.21 for the three and nine months ended September 30, 2020, respectively.

 

Debt Issuance Costs

 

We capitalized certain debt issuance costs incurred in connection with the Credit Facility discussed above and these costs are being amortized to interest expense over the term of the facility on a straight-line basis, which approximates the effective interest rate. The long-term portion of debt issuance costs of approximately $0 and $82,000 is included in Other Assets in the accompanying condensed consolidated balance sheets for September 30, 2020, and December 31, 2019, respectively. During the three and nine months ended September 30, 2020, the Company amortized approximately $12,000 and $82,000, respectively, of these costs to interest expense. During the three and nine months ended September 30, 2019, the Company amortized approximately $35,000 and $104,000, respectively, of these costs to interest expense. As of September 30, 2020, these costs have been fully amortized.

 

Paycheck Protection Program

 

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

 

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

 

On November 9, 2020, the Company submitted the initial loan forgiveness application to East West Bank for review and approval. East West Bank has sixty days from the receipt of the application to complete their review process, render a recommendation on the amount of loan forgiveness and then to send the application to the SBA for final approval. The Company does not expect to receive approval on the application of loan forgiveness from the SBA until the first or second quarter of 2021.

 

 

Notes Payable

 

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

 

 

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

 

 

 

Note 8 – Fair Value Measurements

 

The following table presents the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy (in thousands). The interest rate swap is valued at zero because it matured during the second quarter of 2020.  

 

 

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

 

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. As of September 30, 2020, and December 31, 2019, the carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and interest approximates fair value due to the short-term nature of such items. The carrying value of the Company’s credit agreements are carried at cost which are approximately the fair value of the debt as the related interest rate are at the terms that approximate rates currently available to the Company.

 

The Company did not have any transfers of assets or liabilities between Level 1, Level 2 or Level 3 of the fair value measurement hierarchy during the three and nine months ended September 30, 2020.

 

 

Note 9 – Income Taxes

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the nine months ended September 30, 2020 and 2019 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily because of state income taxes and estimated permanent differences.

 

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

 

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

 

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

 

During the nine months ended September 30, 2020 and 2019, the Company's tax provisions of $15,000 and $32,000, respectively, were adjusted by the valuation allowance which resulted in a net tax provision of zero.

 

 

Note 10 – Commitments and Contingencies

 

Operating Leases

 

On January 1, 2019, we adopted ASC 842, Leases. Results for reporting periods beginning January 1, 2019 are presented in accordance with ASC 842, while prior period amounts are reported in accordance with ASC 840. On January 1, 2019, we recognized $2.4 million in right-of-use assets and $2.4 million in lease liabilities, representing the present value of minimum payment obligations associated with leased facilities and certain equipment with non-cancellable lease terms in excess of one year. We recognized approximately $845,000 in right-of-use assets and lease liabilities. We made a cumulative-effect adjustment to retained earnings of approximately $98,000 at January 1, 2019.

 

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

 

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

 

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

 

As of September 30, 2020, the Company leases facilities and certain equipment under lease commitments that expire through June 2026. Future minimum lease commitments for these operating lease commitments are as follows (in thousands):

 

  

The following table summarizes the components of our gross operating lease costs (in thousands):

 

 

Our weighted-average lease term and discount rate used during the nine months ended September 30, 2020 and 2019 are as follows:

 

 

 

Self-Insurance

 

In June 2015, the Company became self-insured under its Employee Group Medical Plan, and currently is responsible to pay the first $50,000 in medical costs per individual participant for claims incurred in the calendar year up to a maximum of approximately $1.8 million per year in the aggregate based on enrollment. The Company had an accrued liability of approximately $119,000 and $68,000 as of September 30, 2020 and December 31, 2019, respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to September 30, 2020 and December 31, 2019, respectively.

 

Effective April 1, 2015, the Company had entered into a workers’ compensation and employer’s liability insurance policy with a term through March 31, 2018.  Under the terms of the policy, the Company was required to pay premiums in addition to a portion of the cost of any claims made by our employees, up to a maximum of approximately $1.8 million over the term of the policy (an amount that was variable with changes in annualized compensation amounts). As of June 30, 2020, a former employee of ours had an open claim relating to injuries sustained while in the course of employment, and the projected maximum cost of the policy as determined by the insurance carrier included estimated claim costs that have not yet been paid or incurred in connection with the claim. During the year ended December 31, 2017, our insurance carrier formally denied the workers' compensation claim and has moved to close the claim entirely. Per the terms of our insurance policy, through September 30, 2020, we had paid in approximately $1.8 million of the projected maximum plan cost of $1.8 million and had recorded approximately $1.6 million as expense over the term of the policy. We recorded the remaining approximately $189,000 in payments made under the policy as a long-term asset, which we expect will either be recorded as expense in future periods, or refunded to us by the insurance carrier, depending on the outcome of the individual claim described above, and the final cost of any additional open claims incurred under the policy. As of September 30, 2020, we believe we have paid all amounts contractually due under the policy. Effective April 1, 2018, we entered into a new workers’ compensation policy with a fixed premium amount determined annually, and therefore are no longer partially self-insured for workers' compensation and employer's liability.

 

Litigation 

 

Enservco and Heat Waves were defendants in a civil lawsuit in federal court in Colorado, Civil Action No. 1:15-cv-00983-RBJ (“Colorado Case”), that alleged that Enservco and Heat Waves, in offering and selling frac water heating services, infringed and induced others to infringe two patents owned by Heat-On-The-Fly, LLC (“HOTF”)- U.S. Patent No. 8,171,993 (the "'993 Patent") and U.S. Patent No. 8,739,875 (the "'875 Patent"). In March of 2019, the parties moved to dismiss the Colorado Case. On March 15, 2019, the Colorado Case was dismissed in its entirety without any finding of wrongdoing by Enservco or Heat Waves.   

 

While the Colorado Case was pending, HOTF was issued two additional patents, which were related to the '993 and '875 Patents, but were not asserted in the Colorado Case. However, on March 31, 2015, the U.S. District Court for the District of North Dakota (Civil Action No. 4:13-cv-00010) ruled, in a case not involving Enservco or Heat waves, that the '993 Patent was invalid. On January 14, 2016, the court ruled that the ‘993 Patent was also unenforceable due to inequitable conduct by HOTF and the inventor. HOTF appealed, and on May 4, 2018, the United States Court of Appeals for the Federal Circuit (Case No. 16-1894) upheld the lower court's ruling of unenforceability. In light of the foregoing, Management believes that the inequitable conduct related to the '993 Patent could serve as a basis for asserting unenforceability of the two additional patents.

 

Note 11– Stockholders’ Equity

 

Warrants

 

In June 2016, the Company granted a principal of the Company’s investor relations firm warrants to acquire 30,000 shares of the Company’s common stock in connection with a reduction of the firm's ongoing monthly cash service fees. The warrants had a grant-date fair value of $0.36 per share and vested over a one-year period, 15,000 on December 21, 2016 and 15,000 on June 21, 2017. As of September 30, 2020, all of these warrants remain outstanding and are exercisable until June 21, 2021 at $0.70 per share.

 

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

 

On September 23, 2020, in connection with the Fifth Amendment, the Company granted East West Bank one five-year warrant to buy an aggregate total of 15,000,000 shares of the Company's common stock at an exercise price of $0.25 per share. The warrants had a grant-date fair value $0.09 and were fully vested upon issuance and remain outstanding and are exercisable beginning one-year from the issuance date on September 23, 2021 and until September 23, 2025.

 

 

A summary of warrant activity for the nine months ended September 30, 2020 is as follows (amounts in thousands): 

 

 

Stock Issued for Services

 

During the three and nine months ended September 30, 2020, respectively, the Company did not issue any shares of common stock as compensation for services provided to the Company. 

 

Board Approval of Reverse Stock Spilt

 

On June 26, 2020, upon approval from shareholders at the Company's annual meeting of the stockholders, the Company is authorized to a reverse stock split of the Company's shares of common stock issued and outstanding, or reserved for issuance, at an exchange ratio of not greater than 25-to-1 and not less than 10-to-1. Both the timing, if any, and the exchange ratio, are to be determined at the sole discretion of the Company's Board of Directors. On November 3, 2020, the Company's Board of Directors approved a reverse split at a ratio of 15-to-1. This reverse split is expected to be effective on November 20, 2020.

 

Note 12 – Stock Options and Restricted Stock

 

Stock Options

 

On July 27, 2010, the Company’s Board of Directors adopted the 2010 Stock Incentive Plan (the “2010 Plan”). The aggregate number of shares of common stock that could be granted under the 2010 Plan was reset at the beginning of each year based on 15% of the number of shares of common stock then outstanding. As such, on January 1, 2016 the number of shares of common stock available under the 2010 Plan was reset to 5,719,069 shares based upon 38,127,129 shares outstanding on that date. Options were typically granted with an exercise price equal to the estimated fair value of the Company's common stock at the date of grant with a vesting schedule of one to three years and a contractual term of 5 years. As discussed below, the 2010 Plan has been replaced by a new stock option plan and no additional stock option grants will be granted under the 2010 Plan. As of September 30, 2020, there were options to purchase 116,166 shares outstanding under the 2010 Plan.

 

On July 18, 2016, the Board of Directors unanimously approved the adoption of the Enservco Corporation 2016 Stock Incentive Plan (the “2016 Plan”), which was approved by the stockholders on September 29, 2016. The aggregate number of shares of common stock that may be granted under the 2016 Plan is 8,000,000 shares plus authorized and unissued shares from the 2010 Plan totaling 2,391,711 for a total reserve of 10,391,711 shares. As of September 30, 2020, there were options to purchase 1,357,333 shares and we had granted restricted stock shares of 372,498 that remained outstanding under the 2016 Plan. 

 

We have not granted any stock options during the three and nine months ended September 30, 2020 or the three and nine months ended September 30, 2019. 

 

During the nine months ended September 30, 2020 and 2019, no options were granted or exercised. 

 

 

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 September 30, 2020, and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had they exercised their options on September 30, 2020.

 

During the three and nine months ended September 30, 2020, the Company recognized stock-based compensation costs for stock options of approximately $0 and $3,000, respectively, in sales, general, and administrative expenses. During the three and nine months ended September 30, 2019, the Company recognized stock-based compensation costs for stock options of approximately $3,000 and $74,000, 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:

 

 

As of September 30, 2020, there was no remaining unrecognized compensation costs related to non-vested shares under the Company’s stock option plans.

 

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:

 

 

During the three and nine months ended September 30, 2020, the Company recognized stock-based compensation costs for restricted stock of approximately $16,000 and $374,000 in sales, general, and administrative expenses, of which $0 and $301,000 for the three and nine months ended September 30, 2020, respectively, was related to severance compensation in connection with a separation agreement with the Company's former CEO during the second quarter of 2020. In addition, of the 1,043,334 shares that vested during the first nine months of 2020, 895,000 shares were related to the former CEO's separation agreement, as were 100,000 of the 150,000 shares that were granted during the same period. During the three and nine months ended September 30, 2019, the Company recognized stock-based compensation costs for restricted stock of approximately $50,000 and $147,000 in sales, general, and administrative expenses. Compensation cost is revised if subsequent information indicates that the actual number of restricted shares vested due to service is likely to differ from previous estimates.

 

The following table sets forth the weighted average outstanding of potentially dilutive instruments: 

 

 

 

Note 13- Segment Reporting

 

In 2019 we reorganized our business segments to align with how the oil and gas industry and our management team evaluates the business. Enservco’s reportable business segments are Production Services and Completion Services. These segments have been selected based on management’s resource allocation and performance assessment in making decisions regarding the Company.

 

The following is a description of the segments.

 

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

 

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

 

Unallocated and other includes general overhead expenses and assets associated with managing all reportable operating segments which have not been allocated to a specific segment.

 

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

 

 

(1)

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

 

 

 

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

 

 

 

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 (amounts in thousands):

 

 

 

 

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).