Enservco Corp - Quarter Report: 2021 March (Form 10-Q)

 

 

 

 

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 March 31, 2021

 

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 Country Road 9 1/2 Longmont, CO		80504
(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 ☒ 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 files).   Yes ☒ No ☐ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 May 10, 2021
Common stock, $.005 par value	11,432,726

 

 

 

 

		March 31,				December 31,
ASSETS		2021				2020
Current Assets
Cash and cash equivalents		$	3,700			$	1,467
Accounts receivable, net			3,172				1,733
Prepaid expenses and other current assets			971				858
Inventories			334				295
Assets held for sale			527				527
Total current assets			8,704				4,880
Property and equipment, net			19,035				20,317
Goodwill			546				546
Intangible assets, net			563				617
Right-of-use asset - finance, net			110				129
Right-of-use asset - operating, net			2,708				2,918
Other assets			421				423
Non-current assets of discontinued operations			347				353
TOTAL ASSETS		$	32,434			$	30,183
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities		$	1,315			$	1,931
Senior revolving credit facility, related party (including future interest payable of $735 and $892, respectively - see Note 6)			1,318				1,593
Lease liability - finance, current			66				65
Lease liability - operating, current			847				854
Current portion of long-term debt			89				100
Current liabilities of discontinued operations			33				31
Total current liabilities			3,668				4,574
Long-Term Liabilities
Senior revolving credit facility, related party (including future interest payable of $433 and $485, respectively - see Note 6)			13,850				17,485
Subordinated debt, related party (Note 2)			-				1,180
Long-term debt, less current portion			2,038				2,052
Lease liability - finance, less current portion			38				55
Lease liability - operating, less current portion			1,986				2,185
Other liabilities			43				88
Long-term liabilities of discontinued operations			-				9
Total long-term liabilities			17,955				23,054
Total liabilities			21,623				27,628
Commitments and Contingencies (Note 8)
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; 11,439,630 and 6,307,868 shares issued as of March 31, 2021 and December 31, 2020, respectively; 6,907 shares of treasury stock as of March 31, 2021 and December 31, 2020, respectively; and 11,432,723 and 6,300,961 shares outstanding as of March 31, 2021 and December 31, 2020, respectively			57				32
Additional paid-in capital			40,456				30,052
Accumulated deficit			(29,702	)			(27,529	)
Total stockholders' equity			10,811				2,555
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	32,434			$	30,183

 

 

		For the Three Months Ended
		March 31,
		2021				2020
Revenues
Production services		$	1,844			$	3,202
Completion and other services			3,299				6,184
Total revenues			5,143				9,386
Expenses
Production services			1,967				3,494
Completion and other services			3,142				4,971
Sales, general, and administrative expenses			1,005				1,762
Loss on disposal of assets			51				15
Depreciation and amortization			1,336				1,396
Total operating expenses			7,501				11,638
Loss from Operations			(2,358	)			(2,252	)
Other (expense) income
Interest expense			(33	)			(641	)
Other income			226				20
Total other income (expense)			193				(621	)
Loss from continuing operations before taxes			(2,165	)			(2,873	)
Income tax expense			-				-
Loss from continuing operations			(2,165	)			(2,873	)
(Loss) income from discontinued operations (Note 5)			(8	)			36
Net loss		$	(2,173	)		$	(2,837	)
Loss from continuing operations per common share - basic and diluted		$	(0.24	)		$	(0.78	)
(Loss) income from discontinued operations per common share - basic and diluted			-				0.01
Net loss per share - basic and diluted		$	(0.24	)		$	(0.77	)
Weighted average number of common shares outstanding - basic and diluted			9,187				3,701

 

 

		Common Shares				Common Stock				Additional Paid-in Capital				Accumulated Deficit				Total Stockholders’  Equity (Deficit)
Balance at January 1, 2020			3,703			$	19			$	22,325			$	(25,020	)		$	(2,676	)
Stock-based compensation			-				-				39				-				39
Restricted share cancellation			(2	)			-				-				-				-
Net loss			-				-				-				(2,837	)			(2,837	)
Balance at March 31, 2020			3,701			$	19			$	22,364			$	(2,837	)		$	(5,474	)

		Common Shares				Common Stock				Additional Paid-in Capital				Accumulated Deficit				Total Stockholders’  Equity
Balance at January 1, 2021			6,301			$	32			$	30,052			$	(27,529	)		$	2,555
Stock-based compensation			-				-				24				-				24
Shares issued in offering, net of issuance costs			4,200				21				8,824				-				8,845
Shares issued to Cross River Partners, L.P. in subordinated debt and accrued interest conversion, net of discount			602				3				1,246				-				1,249
Restricted share issuances			330				1				310				-				311
Net loss			-				-				-				(2,173	)			(2,173	)
Balance at March 31, 2021			11,433			$	57			$	40,456			$	(29,702	)			10,811

 

		For the Three Months Ended
		March 31,
		2021				2020
OPERATING ACTIVITIES
Net loss		$	(2,173	)		$	(2,837	)
Net (loss) income from discontinued operations			(8	)			36
Net loss from continuing operations			(2,165	)			(2,873	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization			1,336				1,396
Loss on disposal of equipment			51				15
Board compensation issued in equity			311				-
Stock-based compensation			24				39
Amortization of debt issuance costs and discount			8				47
Provision for bad debt expense			38				300
Changes in operating assets and liabilities
Accounts receivable			(1,476	)			429
Inventories			(39	)			39
Prepaid expense and other current assets			(113	)			333
Amortization of operating lease assets			210				230
Other assets			2				15
Accounts payable and accrued liabilities			(556	)			(869	)
Operating lease liabilities			(206	)			(204	)
Other liabilities			(45	)			-
Net cash used in operating activities - continuing operations			(2,620	)			(1,103	)
Net cash (used in) provided by operating activities - discontinued operations			(2	)			134
Net cash used in operating activities			(2,622	)			(969	)
INVESTING ACTIVITIES
Purchases of property and equipment			(45	)			(164	)
Proceeds from disposals of property and equipment			13				-
Net cash used in investing activities - continuing operations			(32	)			(164	)
Net cash provided by investing activities - discontinued operations			-				178
Net cash (used in) provided by investing activities			(32	)			14
FINANCING ACTIVITIES
Gross proceeds from stock issuance			9,660				-
Stock issuance costs and registration fees			(815	)			-
Term loan repayment			(3,000	)			-
Net line of credit (repayments) borrowings			(701	)			595
TDR accrued future interest payments			(209	)			-
Repayment of long-term debt			(25	)			(23	)
Payments of finance leases			(22	)			(30	)
Net cash provided by financing activities - continuing operations			4,888				542
Net cash used in financing activities - discontinued operations			(1	)			(33	)
Net cash provided by financing activities			4,887				509
Net Increase (Decrease) in Cash and Cash Equivalents			2,233				(446	)
Cash and Cash Equivalents, beginning of period			1,467				663
Cash and Cash Equivalents, end of period		$	3,700			$	217
Supplemental Cash Flow Information:
Cash paid for interest		$	220			$	537
Supplemental Disclosure of Non-cash Investing and Financing Activities:
Non-cash conversion of subordinated debt and accrued interest to common stock		$	1,312			$	-
Non-cash conversion of unamortized subordinated debt discount			61				-

 

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 and other services) and hot oiling and acidizing (production services).

 

The accompanying unaudited condensed consolidated financial statements have been derived from the accounting records of Enservco Corporation, Heat Waves Hot Oil Service LLC (“Heat Waves”), Dillco Fluid Service, Inc. (“Dillco”), Heat Waves Water Management LLC (“HWWM”), and Adler Hot Oil Service, LLC ("Adler") (collectively, the “Company”) as of March 31, 2021 and December 31, 2020 and the results of operations for the three months ended March 31, 2021 and 2020.

 

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 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, 2020. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

 

 

 

Note 2 - Summary of Significant Accounting Policies

 

Recent Developments

 

On August 10, 2017, we entered into the 2017 Credit Agreement, as amended, with East West Bank (the "2017 Credit Agreement") which provided 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 533,334 shares of Company common stock and a warrant to purchase up to 1,000,000 additional shares of Company common stock in the future, as well as further extending the maturity date for the repayment of the Credit Facility to October 15, 2021. On February 1, 2021, we entered into the Sixth Amendment to Loan and Security Agreement (the "Sixth Amendment") which extended the maturity date of the loan for an additional year to October 15, 2022, and modified certain covenants. On April 26, 2021, we entered into the Seventh Amendment to Loan and Security Agreement (the "Seventh Amendment") which provided for amortization of the loan on a 10-year straight-line basis commencing on November 15, 2021. As the terms of the Seventh Amendment were contemplated prior to March 31, 2021, the principal payments due over the next twelve months have been classified as current on the consolidated balance sheets as of March 31, 2021.

 

On August 13, 2020, the Company's Board of Directors approved a transaction 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 403,602 shares of Company common stock. This transaction was finalized on September 15, 2020. On February 3, 2021, Cross River Partners, L.P. converted the remaining principal amount of such subordinated debt, or $1.25 million, as well as $62,000 in accrued interest, for 601,674 shares of Company common stock, at a conversion price equal to $2.18 per share, which was the closing price of the Company's stock reported on the NYSE American on the date of the conversion. In connection with such conversion, the Company issued a warrant to Cross River Partners, L.P. to purchase up to 150,418 additional shares of Company common stock in the future at an exercise price of $2.507 per share. The warrant for the 150,418 shares has a five-year term and is exercisable beginning February 3, 2022 until February 3, 2026.

 

On September 28, 2020, the Company filed a final prospectus to its registration statement on Form S-3 (the "Shelf Registration Statement") that was filed with the Securities and Exchange Commission (the "SEC") on July 24, 2020, and declared effective on August 20, 2020. On September 29, 2020, pursuant to the Shelf Registration Statement, the Company, through its sales agent Alliance Global Partners ("AGP"), commenced an at-the-market offering (the "ATM Offering") which was designed to raise capital by issuing securities into the trading market, over-time, at the then-market price of the securities at the time they are sold. The Company sold 1,694,219 shares of Company common stock in the ATM Offering and collected net proceeds of $3.5 million.

 

On February 8, 2021, the Company entered into an Underwriting Agreement with AGP for a firm commitment underwritten public offering of the Company’s common stock pursuant to a registration statement on Form S-1 originally filed with the SEC on January 21, 2021 and declared effective on February 8, 2021 (the "February 2021 Public Offering"). Pursuant to the Underwriting Agreement, the Company issued and sold 4,199,998 shares of Company common stock, including shares issued and sold pursuant to AGP’s over-allotment option, at a public offering price of $2.30 per share. The Company collected net proceeds of $8.8 million in the February 2021 Public Offering, which closed on February 10, 2021. The Company made a $3.0 million principal payment on the Credit Facility upon the closing of the February 2021 Public Offering.

 

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 have had a depressing impact on United States oil demand, and hence our business, which continues through the filing date of this report. 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. Enservco maintains its excess cash in various financial institutions, where deposits may exceed federally insured amounts at times. 

 

Accounts Receivable 

 

Accounts receivable are stated at the amounts billed to customers, net of an allowance for uncollectible accounts. The Company provides an allowance for uncollectible accounts based on a review of outstanding receivables, historical collection information and existing economic conditions. The allowance for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management's best estimate of uncollectible amounts and is determined based on historical collection experience related to accounts receivable coupled with a review of the current status of existing receivables. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of March 31, 2021, and December 31, 2020, the Company had an allowance for doubtful accounts of approximately $359,000 and $322,000, respectively. For the three months ended March 31, 2021 and 2020, the Company recorded approximately $38,000 and $300,000 to bad debt expense, respectively.

 

Inventories

 

Inventory consists primarily of propane, diesel fuel and chemicals that are used in the servicing of oil wells and is carried at the lower of cost or net realizable value in accordance with the first in, first out method (FIFO). The Company periodically reviews the value of items in inventory and provides write-downs or write-offs, of inventory based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. For the three months ended March 31, 2021 and 2020, the Company did not recognize any write-downs or write-offs of inventory.

 

 

Property and Equipment

 

Property and equipment consist 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 did not capitalize any interest during the three months ended March 31, 2021 or 2020. 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 asset may not be recovered. During the first quarter of 2021, the Company concluded that there were no further triggering events which could indicate impairment of its long-lived assets. During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its long-lived assets. The Company reviewed both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company reviews the undiscounted future cash flows in its assessment of whether long-lived assets have been impaired. The Company determined that there was no impairment of its long-lived assets during the three months ended March 31, 2021.

 

Assets Held for Sale

 

The Company classifies long-lived assets to be sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year; (5) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. We assess the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. During the years three months ended March 31, 2021 and 2020, the Company recorded no impairment charges on its held for sale assets.

 

Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line items assets held for sale in our consolidated balance sheets.

 

Goodwill and Other Intangible Assets

 

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

 

During the first quarter of 2021, the Company concluded that there were no further triggering events which could indicate impairment of its goodwill and other intangible assets. During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its goodwill and other intangible assets. The Company reviewed both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company uses both the fair value and discounted future cash flows in its assessment of whether goodwill and other intangible assets have been impaired. The Company determined that there was no impairment of its goodwill and other intangible assets during the three months ended March 31, 2020.

 

Revenue Recognition 

 

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 11 - 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, restricted stock and warrants.

 

As of March 31, 2021 and 2020, there were outstanding stock options, unvested restricted stock awards and warrants to acquire an aggregate of 1,383,489 and 247,048 shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of March 31, 2021 and 2020, the outstanding stock options and warrants had no aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on March 31, 2021 and 2020, and the exercise price, multiplied by the number of in-the-money instruments). Dilution is not permitted if there are net losses during the period. As such, the Company does not show diluted earnings per share for the three months ended March 31, 2021 and 2020.

 

 

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 2017 through 2020 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2016 to 2020.

 

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"). Specific inputs used in the Lattice are the underlying stock price, the exercise price of the warrant, expected dividends, historical volatility, term to expiration and risk-free interest rates. The Company did not have any transfers between hierarchy levels during the three months ended March 31, 2021. 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. Stock based compensation is updated quarterly based on actual forfeitures. The Company used either a Lattice model or the Black-Scholes pricing model to determine the fair value of market-based restricted stock awarded in 2021 and 2020.

 

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 and the valuation of deferred taxes. Actual results could differ from those estimates.

 

 

Reclassifications

 

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

 

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.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, and improves consistent application by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. The standard is effective for fiscal years beginning after December 15, 2020. The Company adopted ASU 2019-12 on January 1, 2021, and the adoption did not have a material impact on its consolidated financial statements.

 

 

 

Note 3 - Property and Equipment

 

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

 

  

 

For the three months ended March 31, 2021 and 2020, the Company recorded depreciation expense of approximately $1.3 million and $1.4 million, respectively.

 

 

Note 4 – Intangible Assets 

 

The components of our intangible assets as of March 31, 2021, and December 31, 2020, are as follows (in thousands):

 

 

 

The useful lives of our intangible assets are estimated to be five years. For the three months ended March 31, 2021 and 2020, amortization expense was approximately $54,000 and $51,000, respectively. 

 

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

 

 

 

 

Note 5 – 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 the remaining HWWM assets during the remainder of 2021.

 

Dillco

 

Effective November 1, 2018, the Dillco water hauling business ceased operations for customers.

 

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 6 – Debt

 

Debt Issuance Costs

 

We capitalized certain debt issuance costs incurred in connection with the Credit Facility discussed above and these costs were amortized to interest expense over the term of the facility on a straight-line basis. There were no remaining unamortized debt issuance costs as of March 31, 2021, and December 31, 2020. During the three months ended March 31, 2020, the Company amortized approximately $35,000 of these costs to Interest Expense. 

 

 

Notes Payable

 

Long-term debt consists of the following (in thousands):

 

 

Aggregate maturities of debt are as follows (in thousands):

 

 

 

 

Note 7 – Income Taxes 

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the three months ended March 31, 2021 and 2020 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily because of state income taxes and estimated permanent differences.

 

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

 

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

 

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

 

During the three months ended March 31, 2021 and 2020, the Company's tax benefit of $0.5 million and $0.7 million, respectively, were adjusted by the valuation allowance which resulted in a net tax provision of zero.

 

 

 

Note 8 – Commitments and Contingencies 

 

Operating Leases

 

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

 

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

 

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

 

As of March 31, 2021, 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 incurred during the three months ended March 31, 2021 and 2020 (in thousands):

 

 

 

Our weighted-average lease term and discount rate used during the three months ended March 31, 2021 and 2020 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 $108,000 and $150,000 as of March 31, 2021 and December 31, 2020, respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to December 31, 2020. Effective January 1, 2021, the Company moved onto a traditional Employee Group Medical Plan and was no longer self-insured for claims occurring after that date.

 

Effective April 1, 2015, the Company had entered into a workers’ compensation and employer’s liability insurance policy with a term through March 31, 2018.  Under the terms of the policy, the Company was required to pay premiums in addition to a portion of the cost of any claims made by our employees, up to a maximum of approximately $1.8 million over the term of the policy (an amount that was variable with changes in annualized compensation amounts). As of March 31, 2021, a former employee of ours had an open claim relating to injuries sustained while in the course of employment, and the projected maximum cost of the policy as determined by the insurance carrier included estimated claim costs that have not yet been paid or incurred in connection with the claim. During the year ended December 31, 2017, our insurance carrier formally denied the workers' compensation claim and has moved to close the claim entirely. Per the terms of our insurance policy, through March 31, 2021, 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. In September 2020, the claim was officially denied by the Kansas Division of Workers Compensation Judicial Unit. As of March 31, 2021, no appeal has been made and the Company expects to collect the remaining $189,000 on deposit with the underwriter. 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.

 

 

 

Note 9– Stockholders’ Equity

 

Warrants

 

In June 2016, the Company granted a principal of the Company’s investor relations firm warrants to acquire 2,000 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 $5.40 per share and vested over a one-year period, 1,000 on December 21, 2016 and 1,000 on June 21, 2017. As of March 31, 2021, all of these warrants remain outstanding and are exercisable until June 21, 2021 at $10.50 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 41,667 shares of the Company's common stock at an exercise price of $3.00 per share. The warrants had a grant-date fair value $2.40 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 1,000,000 shares of the Company's common stock at an exercise price of $3.75 per share. The warrants had a grant-date fair value of $1.42, 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.

 

On February 11, 2021, in connection with the conversion of the subordinated loan agreement to Company common stock, the Company granted Cross River one five-year warrant to buy an aggregate total of 150,418 shares of the Company's common stock at an exercise price of $2.507 per share. The warrants had a grant-date fair value $2.02 and are exercisable beginning one-year from the issuance date on February 11, 2022 until February 11, 2026.

 

All warrants granted to Cross River were reviewed and approved by the independent directors of the Company.

 

On April 12, 2021, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies ("SPACs")(the "Staff Statement"). The SEC highlighted accounting considerations which could, in certain circumstances, indicate that warrants should be accounted for as liabilities rather than equity instruments, in which case the warrants would be subject to fair value adjustments during each reporting period. Although the Staff Statement focused on SPACs, the same accounting considerations may apply to warrants issued by non-SPAC entities. Upon issuance of the Staff Statement, the Company performed further analysis on its population of warrants, which are listed above, giving consideration to the areas of concern noted in the Staff Statement. Upon this further review of its warrant agreements, the Company determined that it has correctly accounted for its warrants as equity instruments.

 

 

A summary of warrant activity for the three months ended March 31, 2021 is as follows (amounts in thousands): 

 

 

 

Note 10 – 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 381,272 shares based upon 2,541,809 shares outstanding on that date. Options were typically granted with an exercise price equal to the estimated fair value of the Company's common stock at the date of grant with a vesting schedule of one to three years and a contractual term of 5 years. As discussed below, the 2010 Plan has been replaced by a new stock option plan and no additional stock option grants will be granted under the 2010 Plan. As of March 31, 2021, there were options to purchase 1,079 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 533,334 shares plus authorized and unissued shares from the 2010 Plan totaling 159,448 for a total reserve of 692,782 shares. As of March 31, 2021, there were options to purchase 3,823 shares and we had granted restricted stock shares of 184,503 that remained outstanding under the 2016 Plan.

 

During the three months ended March 31, 2021 and 2020, no options were granted or exercised. 

 

 

The following is a summary of stock option activity for all equity plans for the three months ended March 31, 2021:

 

 

There was no aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on March 31, 2021, and the exercise price, multiplied by the number of in-the-money options) of our outstanding options.

 

During the three months ended March 31, 2021 and 2020, the Company recognized stock-based compensation costs for stock options of approximately $0 and $2,000, 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. 

 

As of March 31, 2021, 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 ended March 31, 2021 and 2020, the Company recognized stock-based compensation costs for restricted stock of approximately $24,000 and $36,000 in sales, general, and administrative expenses. Compensation cost is revised if subsequent information indicates that the actual number of restricted stock vested due to service is likely to differ from previous estimates.

 

The following table sets forth the weighted average outstanding of potentially dilutive instruments for the three months ended March 31, 2021 and 2020: 

 

 

On January 4, 2021, the Company awarded Company common stock to members of its Board of Directors with an award date fair value of approximately $311,000 based on the closing price of the Company's stock reported on the NYSE American on the date of the award. As of December 31, 2020, the Company accrued Board of Director fees of approximately $221,000 for services rendered from October 2019 through December 2020. During the three months ended March 31, 2021, the Company issued 118,184 shares to settle the outstanding accrual. During the three months ended March 31, 2021, the Company awarded 48,129 restricted shares for 2021 Board of Director fees and has recognized expense of approximately $23,000 related to the award of these shares.

 

 

 

Note 11- Segment Reporting

 

Enservco’s reportable business segments are Production Services and Completion and Other 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 and Other Services: This segment utilizes a fleet of frac water heating units to provide frac water heating services to the domestic oil and gas industry. These services also include other services, which consists primarily of hauling and transport of materials for customers.

 

Unallocated 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).