10-Q 1 ensv20210331_10q.htm FORM 10-Q ensv20170731_10q.htm
 
 
 

 

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

 

 

 

TABLE OF CONTENTS 

 

 

 

Page

   

Part I – Financial Information

 
   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets

2

   

Condensed Consolidated Statements of Operations

3

   
Condensed Consolidated Statements of Stockholders' Equity

4

   
Condensed Consolidated Statements of Cash Flows 5
   
Notes to the Condensed Consolidated Financial Statements    6
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

45

   

Item 4. Controls and Procedures

45

   
   

Part II

 
   

Item 1. Legal Proceedings

46

   

Item 1A.  Risk Factors

46

   

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

47

   

Item 3. Defaults Upon Senior Securities

47

   

Item 4. Mine Safety Disclosures

47

   

Item 5. Other Information

47

   

Item 6. Exhibits

48

   

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

   

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  

 

 

See notes to condensed consolidated financial statements.

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands except per share amounts)

(Unaudited)

 

   

For the Three Months Ended

 
   

March 31,

 
   

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  

 

 

See notes to condensed consolidated financial statements.

 

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

 

 

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  

 

See accompanying notes to consolidated financial statements.

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

For the Three Months Ended

 
   

March 31,

 
   

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       -  

 

See notes to condensed consolidated financial statements.

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 1 – Basis of Presentation

 

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

 

Name

State of

Formation

Ownership

Business

Heat Waves Hot Oil Service LLC 

Colorado

100% by Enservco

Oil and natural gas well services, including logistics and stimulation.

       
Adler Hot Oil Service, LLC  Delaware 100% by Enservco Operations integrated into Heat Waves during 2019.
       

Heat Waves Water Management LLC 

Colorado

100% by Enservco

Discontinued operations in 2019

       
Dillco Fluid Service, Inc Kansas 100% by Enservco Discontinued operation in 2018
       

HE Services LLC 

Nevada

100% by Heat Waves

No active business operations. Owned construction equipment used by Heat Waves. HE Services LLC was dissolved on December 23, 2020.

 

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. 

 

The Company has leased trucks and equipment in the normal course of business, which may be recorded as operating or finance leases, depending on the term of the lease. The Company recorded rental expense on equipment under operating leases over the lease term as it becomes payable; there were no rent escalation terms associated with these equipment leases. The Company records amortization expense on equipment under finance leases on a straight-line basis as well as interest expense based on our implicit borrowing rate at the date of the lease inception. The equipment leases contain purchase options that allow the Company to purchase the leased equipment at the end of the lease term, based on the market price of the equipment at the time of the lease termination. 

 

 

Long-Lived Assets

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. During the first quarter of 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):

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 
                 

Trucks and vehicles

  $ 57,090     $ 57,224  

Other equipment

    1,324       1,319  

Buildings and improvements

    3,176       3,176  

Land

    378       378  

Total property and equipment

    61,968       62,097  

Accumulated depreciation

    (42,933 )     (41,780 )

Property and equipment, net

  $ 19,035     $ 20,317  

  

 

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):

 

   

March 31, 2021

   

December 31, 2020

 

Customer relationships

  $ 626     $ 626  

Patents and trademarks

    441       441  

Total intangible assets

    1,067       1,067  

Accumulated amortization

    (504 )     (450 )

Net carrying value

  $ 563     $ 617  

 

 

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): 

 

   

2022

   

2023

   

2024

   

2025

   

2026

 

Customer relationships

  $ 125     $ 125     $ 73     $ -     $ -  

Patents and trademarks

    93       93       54       -       -  

Total intangible asset amortization expense

  $ 218     $ 218     $ 127     $ -     $ -  

 

 

 

 

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:

 

 

 

March 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

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

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

321  

 

 

321

 

Other assets     26       32  

Total major classes of assets of the discontinued operation

 

$

347  

 

$

353

 

 

 

 

   

 

 

 

 

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

 

 

   

 

 

 

 

Accounts payable and accrued liabilities

 

 

6  

 

 

6

 

Other liabilities     27       34  

Total liabilities included as part of discontinued operations

 

$

33  

 

$

40

 

 

 

The following table represents a reconciliation of the major classes of line items constituting pretax loss of discontinued operations that are disclosed as discontinued operations in the Statements of Operations:  

 

    Three Months Ended March 31,  

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

-  

 

$

-  

Cost of sales

 

 

(1 )

 

 

-  

Sales, general, and administrative expenses

 

 

-  

 

 

-  

Depreciation and amortization

 

 

(6 )

 

 

(6 )

Other expense items that are not major

 

 

(1 )

 

 

(12 )

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

 

 

(8 )

 

 

(18 )
Gain on disposal     -       54  

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

 

$

(8 )

 

$

36  

 

 

 

Note 6 – Debt

 

East West Bank Revolving Credit Facility
 

The 2017 Credit Agreement (as defined in Note 2) 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 provided 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 $1.0 million line of credit. The Sixth Amendment further extended the maturity date and modified the financial covenants effective January 1, 2021. There are no required principal payments until maturity on October 15, 2022, 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 through October 15, 2021, 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.

 

On February 11, 2021, the Company made a $3.0 million payment of principal on the equipment term loan. As of March 31, 2021, we had an outstanding principal loan balance under the Credit Facility of approximately $15.2 million with a weighted average interest rates of 8.25% per year. As of March 31, 2021, our availability under the amended 2017 Credit Agreement was $1.0 million. The Credit Facility balance of $15.2 million at March 31, 2021 includes $1.2 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, with which we were in compliance as of March 31, 2021:
 
(1
On December 31, 2020, we were required to maintain liquidity of not less than $1.5 million; and
 
(2
For each trailing three-month period, commencing with the three-month period ending March 31, 2021, we are required to achieve gross revenue of at least seventy percent (70%) of our projected gross revenue; and
 
(3) 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 533,334 shares of Company common stock, and a five-year warrant to purchase up to 1,000,000 additional shares of Company common stock at an exercise price of $3.75 per share. The 533,334 shares of Company common stock were valued at a price of $2.0775 per share, or a total value of $1.1 million. The 533,334 common shares issued to East West Bank could not be sold or transferred prior to March 23, 2021. The warrant for 1,000,000 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 during the third quarter of 2020, which was 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.

 

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):

 

   

March 31,

   

December 31,

 
   

2021

   

2020

 
                 
Senior Revolving Credit Facility with related party. All future interest through October 15, 2021 accrued to loan pursuant to the Fifth Amendment. Interest at 8.25%, 5.25% is paid monthly while 3% is accrued and paid upon maturity. Matures October 15, 2022.   $ 15,168   $   19,078  
                 
Paycheck Protection Loan. Interest is at 1% with payments deferred until October 10, 2020. Matures April 10, 2022.     1,940       1,940  
                 
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Matures June 28, 2022. See Note 2 - Summary of Significant Accounting Policies and Recent Developments for discussion of conversion of debt balance.     -       1,250  
                 

Real Estate Loan for a facility in North Dakota, interest at 5.75%, and monthly principal and interest payment of $5,255 until October 3, 2023. Collateralized by land and property purchased with the loan. 

    153       167  
                 
Vehicle loans for three pickups, interest at 8.59% monthly principal and interest payments of $3,966, matures in August 2021.     20       31  
                 
Note payable to the seller of Heat Waves. The note was garnished by the Internal Revenue Service (“IRS”) in 2009 and is due on demand; paid in annual installments of $36,000 per agreement with the IRS     14       14  

Total

    17,295       22,480  
Less debt discount     -       (70 )

Less current portion

    (1,407 )     (1,693 )

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

  $ 15,888     $ 20,717  

 

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

 

Twelve Months Ending March 31,

       

2022

    824  

2023

    16,432  

2024

    39  

Thereafter

    -  

Total

  $ 17,295  

 

 

 

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):

 

Twelve Months Ending March 31,

  Operating Leases     Finance Leases  

2022

  $ 948     $ 99  

2023

    709       20  

2024

    645       14  

2025

    399       6  
2026     356       -  

Thereafter

    90       -  
Total future lease commitments     3,147       139  
Impact of discounting     (314 )     (35 )
Discounted value of lease obligations   $ 2,833     $ 104  

 

  

 

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):

 

   

Three Months Ended March 31,

 
    2021     2020  

Operating lease expense:

               
Current lease cost   $ 14     $ 291  
Long-term lease cost     257       20  

Total operating lease cost

  $ 271     $ 311  
Finance lease expense:                
Amortization of right-of-use assets   $ 25     $ 58  
Interest on lease liabilities     16       7  

Total lease cost

  $ 41     $ 65  

 

 

Our weighted-average lease term and discount rate used during the three months ended March 31, 2021 and 2020 are as follows:

 

    Three Month Ended March 31,  
    2021     2020  
Operating                

Weighted-average lease term (years)

    3.90       4.35  

Weighted-average discount rate

    6.08 %     6.08 %
Finance                
Weighted-average lease term (years)     1.91       1.91  
Weighted-average discount rate     5.92 %     6.10 %

 

 

Self-Insurance

 

In June 2015, the Company became self-insured under its Employee Group Medical Plan, and currently is responsible to pay the first $50,000 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): 

 

                   

Weighted

 
           

Weighted

   

Average

 
           

Average

   

Remaining

 
           

Exercise

   

Contractual

 

Warrants

 

Shares

   

Price

   

Life (Years)

 
                         

Outstanding at December 31, 2020

    1,043,667     $ 3.73       4.7  

Issued

    150,418       2.51       4.9  

Outstanding at March 31, 2021

    1,194,085     $ 3.58       4.5  
                         

Exercisable at March 31, 2021

    43,667     $ 3.34       3.5  

 

 

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:

 

   

Shares

   

Weighted Average

Exercise Price

   

Weighted Average

Remaining

Contractual Term

(Years)

 
                         

Outstanding at December 31, 2020

    11,569     $ 5.87       0.53  

Forfeited or Expired

    (6,667 )     5.55       -  

Outstanding at March 31, 2021

    4,902     $ 6.31       0.94  
                         

Vested at March 31, 2021

    4,902     $ 6.31       0.94  

Exercisable at March 31, 2021

    4,902     $ 6.31       0.94  

 

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:

 

   

Number of Shares

   

Weighted-Average Grant-

Date Fair Value

 
                 

Restricted shares at December 31, 2020

    24,393     $ 7.32  

Granted

    165,000       1.05  

Vested

    (3,667 )     7.05  

Forfeited

    (1,223 )     9.99  

Restricted shares at March 31, 2021

    184,503     $ 1.70  

 

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: 

 

    Three Months Ended March 31,  
    2021     2020  

Stock options

    6,235       118,143  
Restricted stock     170,338       112,531  

Warrants

    1,123,890       43,667  

Weighted average

    1,300,463       274,341  

 

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):

 

   

Production

Services

   

Completion and Other

Services

   

Unallocated

   

Total

 

Three Months Ended March 31, 2021:

                               

Revenues

  $ 1,844     $ 3,299     $ -     $ 5,143  

Cost of Revenue

    1,967       3,142       -       5,109  

Segment (Loss) Profit

  $ (123 )   $ 157     $ -     $ 34  
                                 

Depreciation and Amortization

  $ 528     $ 712     $ 96     $ 1,336  
                                 

Capital Expenditures

  $ 19     $ 26     $ -     $ 45  
                                 
    Identifiable assets (1)   $ 10,842     $ 14,636     $ 829     $ 26,307  
                                 

Three Months Ended March 31, 2020:

                               

Revenues

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

Cost of Revenue

    3,494       4,971             $ 8,465  

Segment (Loss) Profit

  $ (292 )   $ 1,213     $       $ 921  
                                 

Depreciation and Amortization

  $ 671     $ 647     $ 78     $ 1,396  
                                 

Capital Expenditures

  $ 83     $ 81     $ -     $ 164  
                                 
    Identifiable assets (1)   $ 17,662     $ 17,033     $ 1,278     $ 35,973  

 

 

(1)

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

 

 

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

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
                 

Segment profit

  $ 34     $ 921  

Sales, general, and administrative expenses

    (1,005 )     (1,762)  
Loss on disposals of equipment     (51 )     (15 )

Depreciation and amortization

    (1,336 )     (1,396 )

Loss from operations

  $ (2,358 )   $ (2,252 )

 

 

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):

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

BY GEOGRAPHY

               
Production Services:                

Rocky Mountain Region (1)

  $ 444     $ 1,193  

Central USA Region (2)

    1,240       1,873  

Eastern USA Region (3)

    160       136  
Total Production Services     1,844       3,202  
                 
Completion and Other Services:                
Rocky Mountain Region(1)     1,952       5,006  
Central USA Region(2)     -       110  
Eastern USA Region(3)     1,347       1,068  
Total Completion and Other Services     3,299       6,184  

Total Revenues

  $ 5,143     $ 9,386  

 

 

Notes to tables:

 

(1)

Includes the D-J Basin/Niobrara field (northeastern Colorado and southeastern Wyoming), the San Juan Basin (southeastern Colorado and northeastern New Mexico, the Powder River and Green River Basins (northeastern and southwestern Wyoming), the Bakken area (western North Dakota and eastern Montana).
 

(2)

Includes the Scoop/Stack Shale in Oklahoma and the Eagle Ford Shale in Texas.
 

(3)

Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio).

 

 

 

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion provides information regarding the results of operations for the three months ended March 31, 2021 and 2020, and our financial condition, liquidity and capital resources as of March 31, 2021, and December 31, 2020. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.

 

Forward-Looking Statements

 

The information discussed in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:      

 

 

Our ability to maintain certain operating covenants under our existing Loan and Security Agreement, which if violated and not cured, could result in our outstanding loan balance being accelerated, due and payable;
 

Our ability to successfully repay or refinance on terms acceptable to us the outstanding balance of the 2017 Credit Agreement when due in October 2022 unless earlier accelerated;
 

Potential decreases in the prices for crude oil and natural gas which would likely result in exploration and production companies cutting back their capital expenditures for oil and gas well drilling which in turn would result in significantly reduced demand for our drilling completion services, thereby negatively affecting our revenues and results of operations;
 

Competition for the services we provide in our areas of operations, which has increased significantly due to the recent fluctuations in prices for crude oil and natural gas;
 

Constraints on us as a result of our indebtedness, including restrictions imposed on us under the terms of our Credit Facility agreement and our ability to generate sufficient cash flows to repay our debt obligations;
 

Our capital requirements and uncertainty of obtaining additional funding on terms acceptable to us;
  The impact of general economic conditions on the demand for oil and natural gas and the availability of capital which may impact our ability to perform services for our customers;
  The geographical diversity of our operations which adds significantly to our costs of doing business;
  Our history of losses and working capital deficits which, at times, have been significant;
  Weather and environmental conditions, including the potential of abnormally warm winters in our areas of operations that adversely impact demand for our services;
 

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

 

The impact of environmental, health and safety and other governmental regulations, and of current or pending legislation with which we and our customers must comply;
 

Developments in the global economy as well as pandemic risks related to the COVID-19 virus and resulting demand and supply for oil and natural gas;
 

Risks relating to any unforeseen liabilities;
 

Federal and state initiatives relating to the regulation of hydraulic fracturing; and
 

The price and volume volatility of our common stock.

 

Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

 

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.

 

 

OVERVIEW

 

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).

 

We and our wholly owned subsidiaries provide well enhancement and fluid management services to the domestic onshore oil and natural gas industry. These services include frac water heating and hot oiling and acidizing. We own and operate a fleet of approximately 335 specialized trucks, trailers, frac tanks and other well-site related equipment and serve customers in several major domestic oil and gas areas, including the DJ Basin/Niobrara area in Colorado and Wyoming, the Bakken area in North Dakota, the San Juan Basin in northwestern New Mexico, the Marcellus and Utica Shale areas in Pennsylvania and Ohio, the Jonah area, Green River and Powder River Basins in Wyoming, the Eagle Ford Shale in Texas.

 

The Company’s corporate offices are located at 14133 County Road 9 1/2, Longmont, CO 80504. Our telephone number is (303) 333-3678. Our website is www.enservco.com.

 

RESULTS OF OPERATIONS

 

Executive Summary

 

Revenues for the three months ended March 31, 2021, decreased approximately $4.2 million, or 45%, from the comparable period last year due to weakness in domestic oil and gas activity levels, and the broader impact of the COVID-19 pandemic beginning in March 2020. Average North American rig count declined by 50% from 785 rigs in operation during the first quarter of 2020 to 393 rigs in operation during the first quarter of 2021.

 

Segment profits for the three-month period ended March 31, 2021, decreased by approximately $887,000, or 96%, due to the reasons noted above.  Sales, general & administrative expense decreased by approximately $757,000, or 43%, year-over-year due primarily to a decrease in our bad debt expense and a decrease in outside professional services. 

 

Net loss for the three months ended March 31, 2021, was approximately $2.2 million or $0.24 per share, compared to a net loss of approximately $2.8 million, or $0.77 per share, in the same period last year due to the factors noted above.

 

Adjusted EBITDA for the three months ended March 31, 2021, was a loss of approximately $940,000 compared to a loss of approximately $503,000 for the same period last year. See the section titled Adjusted EBITDA* within this Item for definition of Adjusted EBITDA.

 

Industry Overview

 

During the three months ended March 31, 2021, WTI crude oil price averaged approximately $58 per barrel, versus an average of approximately $46 per barrel in the comparable period last year. The North American rig count declined to 417 rigs in operation as of March 31, 2021, compared to 728 rigs at the same time a year ago.  Despite the lower activity levels and reduced rig count, we have grown our customer base and allocated resources to the most active basins. We are focused on increasing utilization levels and optimizing the deployment of our equipment and workforce while maintaining high standards for service quality and safe operations. We compete on the basis of the quality, breadth of our service offerings, and price.

 

Beginning in early March of 2020, the market experienced a precipitous decline in oil prices in response to oil demand concerns due to the economic impacts of the COVID-19 virus and anticipated increases in supply from Russia and OPEC, particularly Saudi Arabia. We expect that our customers will continue to have lower activity during this period of significantly reduced North American oil rigs in operation. 

 

 

Segment Overview

 

Segment Results:

 

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 and related support services to the domestic oil and gas industry. These services also include other services for other industries, which consists primarily of hauling and transport of materials and heat treating 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 revenue from operations and segment profits for our business segments for the three months ended March 31, 2021 and 2020 (in thousands):

 

   

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  

 

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 
SEGMENT PROFIT (LOSS):                

Production services

  $ (123 )   $ (292 )
Completion and other services     157       1,213  

Total Segment Profit

  $ 34     $ 921  

 

Production Services

 

Production Services, which accounted for 36% of total revenue for the three months ended March 31, 2021, decreased approximately $1.4 million, or 42%, to $1.8 million compared to $3.2 million for the same quarter last year due to decreased activity levels related to the lower active oil rigs.

 

Hot oil revenue for the three months ended March 31, 2021, decreased approximately $1.1 million, or 39%, compared to the three months ended March 31, 2020, from approximately $2.9 million to approximately $1.8 million. The decrease was primarily due to the lower domestic oil and gas activity levels driven by lower active oil rigs.

 

Acidizing revenues for the three months ended March 31, 2021, decreased by approximately $225,000, or 83%, to approximately $45,000 from approximately $270,000.   The year-over-year decline was primarily driven by the reasons noted above. The Company continues to pursue customers and partner with chemical suppliers to develop new cost-effective acid programs in seeking to expand our acidizing services across our service areas. 

 

Segment loss for our Production services decreased by $169,000, or 58%, to a loss of $123,000 for the three months ended March 31, 2021, compared to loss of $292,000 in the same quarter last year, which was primarily the result of cost saving measures implemented to offset the industry conditions discussed above. 

 

Completion and Other Services

 

Completion and Other Services, which accounted for 64% of total revenue for the three months ended March 31, 2021, decreased approximately $2.9 million, or 47%, to $3.3 million compared to $6.2 million for the same quarter last year due to the aforementioned related downturn in the industry.

 

The segment profit for Completion and other services for the three months ended March 31, 2021, was approximately $157,000 compared to segment profit of approximately $1.2 million during the three months ended March 31, 2020. Decreased segment profit related to the reasons discussed above. 

 

 

Geographic Areas

 

The Company operates solely in three geographically diverse regions of the United States. The following table sets forth revenue from operations for the Company’s three geographic regions during the three months ended March 31, 2021 and 2020 (in thousands):

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

BY GEOGRAPHY

               
Production Services:                

Rocky Mountain Region (1)

  $ 444     $ 1,193  

Central USA Region (2)

    1,240       1,873  

Eastern USA Region (3)

    160       136  
Total Production Services     1,844       3,202  
                 
Completion and Other Services:                
Rocky Mountain Region(1)     1,952       5,006  
Central USA Region(2)     -       110  
Eastern USA Region(3)     1,347       1,068  
Total Completion and Other Services     3,299       6,184  

Total Revenues

  $ 5,143     $ 9,386  

 

Notes to tables:

 

(1)

Includes the D-J Basin/Niobrara field (northeastern Colorado and southeastern Wyoming), the San Juan Basin (southeastern Colorado and Northeastern New Mexico), the Powder River and Green River Basins (northeastern and southwestern Wyoming), the Bakken area (western North Dakota and eastern Montana). 
 

(2)

Includes the Scoop/Stack Shale in Oklahoma and the Eagle Ford Shale in Texas. 
 

(3)

Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). 

 

Production Services segment revenue in the Rocky Mountain Region for the three months ended March 31, 2021, decreased approximately $749,000, or 63%, primarily due to less acidizing and hot oiling activity in the D-J and Bakken Basins.

 

Production Services segment revenue in the Central USA region for the three months ended March 31, 2021, decreased by approximately $633,000, or 34%, due to a decrease in hot oiling and acidizing activity in the Eagle Ford Shale.

 

Production Services segment revenue in the Eastern USA region for the three months ended March 31, 2021, increased approximately $24,000, or 18%, resulting from increased hot oiling in the Marcellus and Utica Basins.

 

Completion and Other Services segment revenue in the Rocky Mountain Region for the three months ended March 31, 2021, decreased approximately $3.1 million, or 61%, primarily due to less completion activity in the D-J and Bakken Basins.

 

Completion and Other Services segment revenue in the Central USA Region for the three months ended March 31, 2021, decreased approximately $110,000, or 100%, primarily due to the closure of a location in the Anadarko Basin.

 

Completion and Other Services segment revenue in the Eastern USA region for the three months ended March 31, 2021, increased approximately $279,000, or 26%, resulting from increased frac water heating in the Marcellus and Utica Basins.

 

 

Historical Seasonality of Revenues

 

Because of the seasonality of our frac water heating business and, to a lesser extent, our hot oiling business, revenues generated during the cooler first and fourth quarters of our fiscal year, constitute our “heating season,” and are typically significantly higher than revenues during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings changes outside our heating season as our Completion and other services (which includes frac water heating) typically decrease as a percentage of total revenues and our Production services increase as a percentage of total revenue. Thus, the revenues recognized in our quarterly financial statements in any given period are not indicative of the annual or quarterly revenues through the remainder of that fiscal year.

 

As an indication of this quarter-to-quarter seasonality, the Company generated approximately 75% of its 2020 revenues during the first and fourth quarters compared to 25% of 2020 revenues during the second and third quarters.

 

Direct Operating Expenses:

 

Direct operating expenses, which include labor costs, propane, fuel, chemicals, truck repairs and maintenance, supplies, insurance, and site overhead costs for our operating segments decreased by approximately $3.4 million or 40% during the first quarter of 2021 compared to the comparable period in 2020, primarily due to the severe reduction in revenue, discussed above.

 

Sales, General, and Administrative Expenses:

 

During the three months ended March 31, 2021, sales, general, and administrative expenses decreased approximately $757,000, or 43%, to $1.0 million compared to the same period in 2020 primarily due to a decrease in our bad debt expense and a decrease in professional fees related to our attempt to restructure our debt facility during the first quarter of 2020.

 

Depreciation and Amortization:

 

Depreciation and amortization expense for the three months ended March 31, 2021 decreased by $60,000, or 4%, compared to the same period in 2020 due primarily to the disposal of assets throughout 2020.

 

 

Income from operations:

 

For the three months ended March 31, 2021, the Company recognized a loss from operations of $2.4 million compared to a loss from operations of $2.3 million for the comparable period in 2020. The increased loss of $106,000 was primarily due to the decrease in segment profits described above. 

 

Interest Expense:

 

Interest expense decreased approximately $608,000, or 95%, for the three months ended March 31, 2021, compared to the same period in 2020. The decrease was primarily due to the cessation of recording interest expense after the troubled debt restructuring of our Credit Facility during the third quarter of 2020.

 

Discontinued Operations:

 

Results for the three months ended March 31, 2021 and 2020 include loss from discontinued operations of approximately $8,000 and income from discontinued operations of $36,000, respectively.

 

Other expense (income):

 

Other income for the three months ended March 31, 2021 was approximately $226,000, compared to other income of approximately $20,000 for the three months ended March 31, 2020, respectively. This increase in other income was due primarily to the recognition of CARES Act payroll tax credits during the first quarter of 2021. The Company expects the recognition of these CARES Act payroll tax credits to continue during the second quarter of 2021.

 

Income Taxes:

 

As of March 31, 2021, the Company had recorded a full valuation allowance on a net deferred tax asset of $5.3 million. 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.

 

Our effective tax rate was approximately 0% for the three months ended March 31, 2021 and 2020, respectively. The effective tax expense 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, estimated permanent differences and the recorded valuation allowance.

 

 

Adjusted EBITDA*

 

Management believes that, for the reasons set forth below, Adjusted EBITDA (a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in Enservco's industry.

 

The following table presents a reconciliation of our net income to our Adjusted EBITDA for each of the periods indicated (in thousands):

 

   

Three Months Ended March 31,

 
   

2021

   

2020

 

Adjusted EBITDA*

               

Net loss

  $ (2,173 )   $ (2,837 )

Add back

               
Interest expense (including discontinued operations)     33       642  

Depreciation and amortization (including discontinued operations)

    1,343       1,403  
EBITDA*     (797 )     (792 )
Add back (deduct)                
Stock-based compensation     24       39  
Severance and transition costs     7       -  
(Gain) loss on disposal of equipment     51       (39 )
Other (income) expense     (226 )     279  
EBITDA related to discontinued operations     1       10  

Adjusted EBITDA*

  $ (940 )   $ (503 )

 

*Note: See below for discussion of the use of non-GAAP financial measurements.

 

Use of Non-GAAP Financial Measures: Non-GAAP results are presented only as a supplement to the financial statements and for use within management’s discussion and analysis based on U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information is provided to enhance the reader's understanding of the Company’s financial performance, but no non-GAAP measure should be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.

 

EBITDA is defined as net (loss) income, before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA excludes stock-based compensation from EBITDA and, when appropriate, other items that management does not utilize in assessing the Company’s ongoing operating performance as set forth in the next paragraph. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure.

 

All of the items included in the reconciliation from net income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, impairment losses, etc.) or (ii) items that management does not consider to be useful in assessing the Company’s ongoing operating performance (e.g., income taxes, gain or losses on sale of equipment, severance and transition costs, other expense (income), EBITDA related to discontinued operations, etc.). In the case of the non-cash items, management believes that investors can better assess the company’s operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company’s ability to generate free cash flow or invest in its business.

 

We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired. Additionally, our fixed charge coverage ratio covenant associated with our Loan and Security Agreement with East West Bank require the use of Adjusted EBITDA in specific calculations.

 

 

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

 

Changes in Adjusted EBITDA*

 

Adjusted EBITDA for the three months ended March 31, 2021 decreased by approximately $436,000 due primarily to the decrease in outside professional services incurred during the first quarter of 2020 related to our attempt to restructure our Credit Facility, as well as the increase in the CARES Act payroll tax credits recognized during the first quarter of 2021. 

 

LIQUIDITY AND CAPITAL RESOURCES 

 

As of March 31, 2021, we had an outstanding principal loan balance under the amended Credit Facility of approximately $14.0 million with a weighted average interest rate of 8.25% per year. 
 

The following table summarizes our statements of cash flows for the three months ended March 31, 2021 and 2020 (in thousands):

 

   

For the Three Months Ended

March 31,

 
   

2021

   

2020

 
                 

Net cash used in operating activities

  $ (2,622 )   $ (969 )

Net cash provided by (used in) investing activities

    (32 )     14  

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  

 

 

The following table sets forth a summary of certain aspects of our balance sheet at March 31, 2021 and December 31, 2020:

 

   

March 31,

2021

   

December 31,

2020

 
                 

Current Assets

  $ 8,704     $ 4,880  

Total Assets

  $ 32,434     $ 30,183  

Current Liabilities

  $ 3,668     $ 4,574  

Total Liabilities

  $ 21,623     $ 27,628  

Working Capital (Current Assets net of Current Liabilities)

  $ 5,036     $ 306  

Stockholders’ Equity

  $ 10,811     $ 2,555  

 

 Overview:

 

We have accomplished several capitalization initiatives in the past year that have positioned us into a much more favorable liquidity situation. We successfully completed two equity offerings during late 2020 and early 2021 that provided aggregate net proceeds of $12.3 million. Additionally, we entered into two amendments to our Credit Facility during the third quarter of 2020 and the first quarter of 2021 that provided us with significant relief under our Credit Facility, including a $16.0 million principal reduction, and two extensions of the debt which now matures on October 15, 2022. Upon closing on our second equity offering on February 11, 2021, we made a $3.0 million principal payment on our Credit Facility.

 

We have relied on cash flow from operations and borrowings under the $1.0 million line of credit under our Credit Facility to satisfy our liquidity needs. Due to the funding from the two equity offerings and the restructuring and further extension of the Credit Facility, we have ample capital resources to fund operational requirements beyond the next twelve months. At March 31, 2021, in addition to cash of $3.7 million, we had $1.0 million available under the Credit Facility. Our capital requirements for the remainder of 2021 are anticipated to include, but are not limited to, operating expenses, debt servicing, and capital expenditures, including maintenance of our existing fleet of assets. Under our Amended 2017 Credit Agreement, we are restricted to capital expenditures of $1.2 million during 2021.

 

 

Liquidity:

 

As of March 31, 2021, our available liquidity was $4.7 million which represented our cash balance of $3.7 million and $1.0 million availability on the line of credit under our 2017 Credit Facility. We utilize the line of credit under our 2017 Credit Facility to fund working capital requirements and investments, and during the three months ended March 31, 2021, we repaid net cash borrowings from our line of credit of approximately $701,000. 

 

Working Capital:

 

As of March 31, 2021, we had working capital of approximately $5.0 million, compared to working capital of $306,000 as of December 31, 2020. The $4.7 million increase in working capital was primarily attributable to the closing of our February 2021 Public Offering which provided net proceeds of approximately $8.8 million, partially offset by the $3.0 principal paydown of our long-term Credit Facility.

 

Deferred Tax Asset, net:

 

As of March 31, 2021, the Company had recorded a valuation allowance to reduce its net deferred tax assets to zero. 

 

 

Cash flow from Operating Activities:

 

For the three months ended March 31, 2021, cash used in operating activities was approximately $2.6 million compared to $969,000 during the comparable period in 2020. The increase in cash used was attributable to the decrease in cash provided by the monetization of accounts receivable and an increase in the cash used for prepaid expenses and other current assets during the current year period, partially offset by the decrease in net loss and the increase in cash flows related to the change in accounts payable balances.

 

Cash flow from Investing Activities:

 

Cash used in investing activities during the three months ended March 31, 2021 was approximately $32,000, compared to cash provided by $14,000 during the comparable period in 2020, primarily due to proceeds received from the sale of equipment related to our discontinued operations during the prior year period, partially offset by the decrease in capital expenditures during the current year period.

 

Cash flow from Financing Activities:

 

Cash provided by financing activities for the three months ended March 31, 2021 was approximately $4.9 million, compared to $509,000 for the comparable period in 2020. The change is due to the net proceeds from our February 2021 Public Offering, partially offset by line of credit repayments and the paydown of our long-term Credit Facility during the first quarter of 2021.

 

Outlook: 

 

Over the past three years we have invested significantly in process improvement initiatives designed to make the Company operate more efficiently and take better advantage of our expanded fleet and national leadership position in frac water heating. We face a very difficult operating environment in 2021 with exploration and production companies significantly cutting back their drilling and completions plans and exerting significant pressure on us to reduce our prices for the services we provide. In order to position us in a more sustainable liquidity situation, we successfully completed two equity offerings during late 2020 and early 2021 that provided us with aggregate net proceeds of $12.3 million. Additionally, we entered into two amendments to our Credit Facility during the in late third quarter 2020 and the first quarter of 2021 that provided us with significant relief under our Credit Facility, including a $16.0 million principal reduction, and two extensions of the debt which now matures on October 15, 2022. Upon closing on our second equity offering, which occurred on February 11, 2021, we made a $3.0 million principal payment on our Credit Facility. Our business is heavily dependent on exploration and production activity levels, which fluctuate based on commodity prices, capital budgets and other factors. Activity levels significantly declined throughout 2020 due to the depression of commodity prices, the decrease in active rigs and the impacts of the COVID-19 pandemic. The economic impacts of the pandemic and the significantly lower rig counts have continued into 2021. We continue to seek opportunities to expand our business operations through organic growth, including increasing the volume of current services offered to our new and existing customers and relocating more of our equipment to increase utilization. We will also continue to expand our customer relationships while maintaining an appropriate balance between recurring maintenance work and drilling and completion related services.

 

Capital Commitments and Obligations:

 

Our capital obligations as of March 31, 2021 consist primarily the 2017 Credit Agreement which matures October 15, 2022. In addition, we also have scheduled principal payments under certain term loans, finance leases and operating leases. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the financial statements.

 

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of March 31, 2021, we had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

 

There have been no changes in our critical accounting policies since December 31, 2020. 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

  

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act, as of March 31, 2021. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

 

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

 

Changes in Internal Control over Financial Reporting

 

There has been no change in the Company's internal control over financial reporting, as such term is defined under Rule 13a-15(f) of the Exchange Act, during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

 

 

PART II

 

ITEM 1.     LEGAL PROCEEDINGS 

 

None.

 

ITEM 1A. RISK FACTORS

 

See the Company’s risk factors set forth in the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed on March 23, 2021, which is incorporated herein by reference.

 

 

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

 

None.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

ITEM 5. OTHER INFORMATION

 

None.

 

 

ITEM 6. EXHIBITS 

 

Exhibit No.

 

Title

4.1*   Warrant to purchase shares of common stock issued by the Company to Cross River Partners, L.P. on February 3, 2021
10.1   Sixth Amendment to the Loan and Security Agreement and Waiver, dated as of February 1, 2021, by and among Enservco Corporation, a Delaware corporation, Dillco Fluid Service, Inc., a Kansas corporation, Heat Waves Hot Oil Service LLC, a Colorado limited liability company, Heat Waves Water Management LLC, a Colorado limited liability company, and Adler Hot Oil Service, LLC, a Delaware limited liability company, and East West Bank (1)
10.2   Note Conversion Agreement dated February 3, 2021 by and between Enservco Corporation and Cross River Partners L.P. (2)
10.3   Seventh Amendment to the Loan and Security Agreement and Waiver, dated as of April 20, 2021, by and among Enservco Corporation, a Delaware corporation, Dillco Fluid Service, Inc., a Kansas corporation, Heat Waves Hot Oil Service LLC, a Colorado limited liability company, Heat Waves Water Management LLC, a Colorado limited liability company, and Adler Hot Oil Service, LLC, a Delaware limited liability company, and East West Bank. (3)

31.1

 

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

31.2

 

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

32

 

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

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Schema Document

101.CAL

 

XBRL Calculation Linkbase Document

101.LAB

 

XBRL Label Linkbase Document

101.PRE

 

XBRL Presentation Linkbase Document

101.DEF

 

XBRL Definition Linkbase Document

 

* Filed herewith.

(1) Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 2, 2021.

(2) Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on February 3, 2021.

(3) Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on April 30, 2021.

 

 

 

SIGNATURES

 

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

 

 

ENSERVCO CORPORATION

 

 

 

 

 

 

 

 

 

Date: May 13, 2021

 

/s/ Richard A. Murphy

 

 

 

Director and Executive Chairman (Principal Executive Officer)

 

 

 

 

 

       
Date: May 13, 2021   /s/ Marjorie Hargrave  
   

President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

45