Enservco(ENSV) - 2019 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This part contains the unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements of Enservco Corporation and its subsidiaries, including balance sheets, statements of operations, statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining significant accounting policies, business combinations, debt, equity, and segment performance for the periods ended June 30, 2019, and December 31, 2018 Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Condensed Consolidated Balance Sheet Summary | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Total Assets | $48,672 | $49,021 | | Total Liabilities | $42,699 | $44,419 | | Total Stockholders' Equity | $5,973 | $4,602 | | Current Assets | $10,629 | $13,530 | | Current Liabilities | $4,148 | $7,452 | - Right-of-use assets for financing ($777k) and operating ($4,899k) were recognized as of June 30, 2019, reflecting the adoption of new lease accounting standards[11][67][114] Condensed Consolidated Statements of Operations This section outlines the company's revenues, expenses, and net income or loss over specific reporting periods Condensed Consolidated Statements of Operations Summary | Metric (Six Months Ended June 30) | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Revenues | $33,446 | $28,214 | | (Loss) Income from Operations | $1,524 | $698 | | Net (Loss) Income | $1,094 | $(1,241) | | Net (Loss) Income per Share - Basic | $0.02 | $(0.02) | - Discontinued operations resulted in a loss of $(390)k for the six months ended June 30, 2018, but had no impact in 2019[15][90][191] Condensed Consolidated Statements of Stockholders' Equity This section details changes in equity, including common shares, accumulated deficit, and other equity components Condensed Consolidated Statements of Stockholders' Equity Summary | Metric | June 30, 2019 (in thousands) | June 30, 2018 (in thousands) | | :----- | :--------------------------- | :--------------------------- | | Total Stockholders' Equity | $5,973 | $9,023 | | Accumulated Deficit | $(16,264) | $(12,842) | | Common Shares Outstanding | 55,329 | 54,426 | - An opening balance adjustment of $108k was made to accumulated earnings (deficit) at January 1, 2019[19][114][227] Condensed Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Summary | Cash Flow Activity (Six Months Ended June 30) | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------------------- | :------------------ | :------------------ | | Net cash provided by operating activities | $5,854 | $6,525 | | Net cash provided by (used in) investing activities | $439 | $(1,203) | | Net cash used in financing activities | $(6,044) | $(5,478) | | Net Increase (Decrease) in Cash and Cash Equivalents | $249 | $(156) | | Cash and Cash Equivalents, end of period | $506 | $235 | - Cash provided by investing activities significantly improved in 2019, moving from a net use of $1.2 million in 2018 to a net provision of $439k, primarily due to proceeds from equipment sales related to discontinued operations and reduced investment in water transfer equipment[22][221] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, business combinations, debt, equity, and segment performance Note 1 – Basis of Presentation This note describes the company's business, services, and the basis for preparing the unaudited interim financial statements - Enservco provides frac water heating, hot oiling, acidizing (well enhancement), and water transfer/treatment services to the domestic onshore oil and natural gas industry[26] - The financial statements are unaudited and prepared in accordance with GAAP for interim financial information, derived from subsidiaries including Heat Waves, Adler, and Heat Waves Water Management[27][28][29] Note 2 - Summary of Significant Accounting Policies This note outlines the key accounting principles and policies applied, including revenue recognition and lease accounting - The Company adopted ASC 842, Leases, on January 1, 2019, resulting in the recognition of approximately $2.4 million in new right-of-use assets and lease liabilities on the consolidated balance sheet[67][114] - An impairment charge of approximately $127k was recorded related to salt water disposal wells expected to be divested in 2019[41] - Revenue recognition follows ASC Topic 606, with revenue recognized when services are provided, typically for short-term contracts without multiple performance obligations[43][44] Note 3 - Property and Equipment This note details the composition and net carrying value of the company's property and equipment Property and Equipment Details | Category | December 31, 2018 (in thousands) | | :------- | :------------------------------- | | Trucks and vehicles | $59,535 | | Water transfer equipment | $4,952 | | Other equipment | $961 | | Buildings and improvements | $2,822 | | Land | $378 | | Disposal wells | $400 | | Total property and equipment | $69,048 | | Accumulated depreciation | $(35,991) | | Property and equipment, net | $33,057 | Note 4 – Business Combinations This note describes the acquisition of Adler Hot Oil Service and related settlement agreements - Enservco acquired Adler Hot Oil Service, LLC on October 26, 2018, for a gross purchase price of $12.5 million, plus working capital adjustments, to expand frac water heating and hot oiling services[72] - A Settlement Agreement on April 4, 2019, resolved disputes related to the Adler acquisition, waiving earn-out and indemnity holdback payments and reducing the Seller Subordinated Note from $4.8 million to $4.5 million[74] - Gains totaling approximately $1.25 million from the changes in fair value of the Indemnity Holdback Payment, Earn-Out Payment, and reduction in the Subordinated Note were recorded in Other Income (Expense)[76] Note 5 – Intangible Assets This note provides information on the company's intangible assets, including customer relationships and patents Intangible Assets Summary | Intangible Asset | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :--------------- | :--------------------------- | :------------------------------- | | Customer relationships | $626 | $626 | | Patents and trademarks | $441 | $441 | | Total intangible assets | $1,067 | $1,067 | | Accumulated amortization | $(136) | $(34) | | Net carrying value | $931 | $1,033 | - Amortization expense for intangible assets was approximately $102k for the six months ended June 30, 2019, with useful lives estimated at five years[86] Note 6 – Discontinued Operations This note details the financial impact and assets/liabilities related to discontinued business segments - The Dillco water hauling business ceased operations effective November 1, 2018, and its fixed assets were auctioned, resulting in a gain of $129k[88] - An impairment charge of $130k was recorded related to land and building sold subsequent to December 31, 2018[88] Discontinued Operations Financials | Metric (Discontinued Operations) | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :------------------------------- | :--------------------------- | :------------------------------- | | Total major classes of assets | $37 | $1,041 | | Total liabilities | $0 | $44 | - Loss from discontinued operations for the six months ended June 30, 2018, was $(390)k, with no loss reported for the same period in 2019[90] Note 7 – Debt This note outlines the company's debt obligations, including credit facilities and maturity schedules - The Company has a $37 million senior secured revolving credit facility with East West Bank, maturing August 10, 2020, with an outstanding principal balance of approximately $31.9 million at June 30, 2019[92][93] - A payment default occurred on July 1, 2019, due to borrowing in excess of available credit, which was subsequently waived via a Third Amendment that also increased interest rates and reduced allowable capital expenditures[93] Debt Maturity Schedule | Debt Maturity (excluding Credit Facility) | Amount (in thousands) | | :---------------------------------------- | :-------------------- | | 2020 | $144 | | 2021 | $98 | | 2022 | $2,064 | | 2023 | $60 | | 2024 | $24 | | Thereafter | $0 | | Total | $2,390 | Note 8 – Fair Value Measurements This note describes the fair value hierarchy and measurements for financial instruments like interest rate swaps Fair Value Measurements of Financial Instruments | Financial Instrument | June 30, 2019 (Fair Value, in thousands) | December 31, 2018 (Fair Value, in thousands) | | :------------------- | :--------------------------------------- | :--------------------------------------- | | Interest rate swap liability | $18 (Level 2) | $75 (asset, Level 2) | | Earn-Out Payment liability | - | $44 (Level 3) | | Indemnity Holdback Payment liability | - | $887 (Level 3) | - The fair value of the interest rate swap is estimated using a discounted cash flow model with market-based observable inputs, classified as Level 2[103] Note 9 – Income Taxes This note explains the company's income tax position, including deferred tax assets and effective tax rates - Management recorded a full valuation allowance to reduce its net deferred tax assets to zero[111] - Income tax expense for the six months ended June 30, 2019, was approximately $314k, which reduced the gross deferred tax asset and a like amount from the valuation allowance[112] - The effective tax rate was approximately 5% for the six months ended June 30, 2019, compared to -3% in 2018, primarily due to state income taxes, permanent differences, and the valuation allowance[194] Note 10 – Commitments and Contingencies This note details lease commitments, legal proceedings, and other contingent liabilities - The Company adopted ASC 842, Leases, on January 1, 2019, recognizing $2.4 million in right-of-use assets and lease liabilities, with a cumulative-effect adjustment to retained earnings of $108k[114] Lease Commitments Schedule | Lease Commitments (Twelve Months Ending June 30) | Operating Leases (in thousands) | Financing Leases (in thousands) | | :----------------------------------------------- | :------------------------------ | :------------------------------ | | 2020 | $1,096 | $275 | | 2021 | $1,041 | $239 | | 2022 | $933 | $191 | | 2023 | $644 | - | | 2024 | $613 | - | | Thereafter | $717 | - | | Discounted value of lease obligations | $4,902 | $638 | - A civil lawsuit regarding patent infringement (Colorado Case) against Enservco and Heat Waves was dismissed on March 15, 2019, without any finding of wrongdoing[124][235] Note 11 – Stockholders' Equity This note provides information on warrants and other components of stockholders' equity Warrants Activity Summary | Warrants Activity (June 30, 2019) | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | | :-------------------------------- | :----- | :------------------------------ | :-------------------------------------------------- | | Outstanding | 30,000 | $0.70 | 2.0 | | Exercisable | 30,000 | $0.70 | 2.0 | - Cross River exercised 1,612,902 warrants on June 29, 2018, for $500k, which was used to reduce subordinated debt[128][212] Note 12 – Stock Options and Restricted Stock This note details stock option and restricted stock activity and related compensation costs Stock Option Activity Summary | Stock Option Activity (June 30, 2019) | Shares | Weighted Average Exercise Price | | :------------------------------------ | :----- | :------------------------------ | | Outstanding | 2,173,499 | $0.73 | | Exercisable | 2,098,998 | $0.74 | - No stock options were granted during the three and six months ended June 30, 2019 or 2018[132] - Stock-based compensation costs for stock options were $71k for the six months ended June 30, 2019, and for restricted stock were $97k for the same period[135][139] Restricted Stock Activity Summary | Restricted Stock Activity (June 30, 2019) | Number of Shares | Weighted Average Grant Date Fair Value | | :---------------------------------------- | :--------------- | :------------------------------------- | | Restricted shares at December 31, 2018 | 836,667 | $0.98 | | Granted | 1,123,000 | $0.27 | | Restricted shares at June 30, 2019 | 1,857,166 | $0.51 | Note 13- Segment Reporting This note presents financial information by reportable business segments, including revenues and profit/loss - Enservco operates in two reportable business segments: Well Enhancement Services (frac water heating, hot oiling, acidizing) and Water Transfer Services (moving water for well completion)[141][142][143] Segment Revenues | Segment Revenues (Six Months Ended June 30) | 2019 (in thousands) | 2018 (in thousands) | | :------------------------------------------ | :------------------ | :------------------ | | Well Enhancement Services | $31,151 | $26,290 | | Water Transfer Services | $2,295 | $1,924 | | Total Revenues | $33,446 | $28,214 | Segment Profit (Loss) | Segment Profit (Loss) (Six Months Ended June 30) | 2019 (in thousands) | 2018 (in thousands) | | :----------------------------------------------- | :------------------ | :------------------ | | Well Enhancement Services | $9,789 | $7,299 | | Water Transfer Services | $(1,177) | $(12) | | Unallocated & Other | $(442) | $(326) | - Well Enhancement Services revenue in the Rocky Mountain Region increased by $4.7 million (29%) for the six months ended June 30, 2019, primarily due to the Adler acquisition[177] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective and analysis of Enservco Corporation's financial condition and results of operations for the three and six months ended June 30, 2019 and 2018, covering an executive summary, industry overview, detailed segment results, liquidity, capital resources, and critical accounting policies Forward-Looking Statements This section highlights forward-looking statements and associated risks regarding future financial performance and operations - The report contains forward-looking statements regarding planned capital expenditures, future cash flows, borrowings, acquisitions, financial position, and business strategy[153] - Key risks include capital requirements, indebtedness, volatility of oil and natural gas prices, adverse weather, reliance on limited customers, and regulatory changes[153] OVERVIEW This section provides a general description of the company's oil field services and operational footprint - Enservco provides oil field services, including Well Enhancement (frac water heating, hot oiling, acidizing) and Water Transfer services, through its subsidiaries[155] - The Company operates a fleet of over 450 specialized trucks and equipment, serving major domestic oil and gas areas across multiple regions[155] RESULTS OF OPERATIONS This section analyzes the company's financial performance, including revenue, net income, and segment results - Revenues for the six months ended June 30, 2019, increased by $5.2 million (19%) to $33.4 million, driven by an 18% increase in Well Enhancement revenue and a 19% increase in Water Transfer revenue[156] - Net income for the six months ended June 30, 2019, was $1.1 million ($0.02 per share), a significant improvement from a net loss of $1.2 million ($0.02 per share) in the prior year, partly due to a $1.2 million gain on settlement related to the Adler acquisition[158] - Adjusted EBITDA for the six months ended June 30, 2019, increased by $726k to $5.3 million, compared to $4.6 million in the same period last year, primarily due to improved segment profit[159][203] - The Water Transfer segment experienced a loss of approximately $1.2 million for the six months ended June 30, 2019, primarily due to a severe cold weather event in Wyoming that caused crew downtime and significant cost overruns[172] - Interest expense increased by $531k (53%) for the six months ended June 30, 2019, due to higher average borrowings related to the Adler acquisition and increased interest rates on floating rate debt[190] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's ability to meet its financial obligations and fund operations through cash flow and credit facilities - The Company relies on cash flow from operations, revolving credit agreements, and equity/debt offerings to meet liquidity needs[210] - At June 30, 2019, the outstanding principal loan balance under the Credit Facility was approximately $31.9 million, and the Company had borrowed $753k in excess of the maximum available, leading to a payment default that was subsequently waived[205][211] Balance Sheet Summary | Balance Sheet Summary | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :-------------------- | :--------------------------- | :------------------------------- | | Working Capital | $6,481 | $6,078 | | Stockholders' Equity | $5,973 | $4,602 | - Available liquidity at June 30, 2019, was $506k, comprised entirely of cash, with zero availability on the Credit Facility due to borrowing exceeding collateral[216] - The Company is optimistic about increasing cash flows through asset utilization and deployment in high-demand areas, aiming for organic growth and diversified high-margin services[223] OFF-BALANCE SHEET ARRANGEMENTS This section discloses any significant off-balance sheet arrangements impacting the company's financial position - As of June 30, 2019, the Company had no significant off-balance sheet arrangements that materially affect its financial condition or results of operations[226] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section outlines key accounting policies and estimates that require significant management judgment - The Company adopted ASC Topic 842, Leases, on January 1, 2019, which required the recognition of $2.4 million in right-of-use assets and lease liabilities on the balance sheet[227] - A cumulative-effect adjustment of approximately $108k was made to retained earnings at January 1, 2019, due to the adoption of the new lease accounting standard[227] - There have been no other changes in the Company's critical accounting policies since December 31, 2018[228] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Enservco Corporation is exempt from providing detailed quantitative and qualitative disclosures about market risk in this report - The Company is a smaller reporting company and is not required to provide quantitative and qualitative disclosures about market risk[229] ITEM 4. CONTROLS AND PROCEDURES This section outlines the evaluation of the company's disclosure controls and procedures, concluding their effectiveness as of June 30, 2019, and discusses changes in internal control related to the adoption of new lease accounting standards Disclosure Controls and Procedures This section evaluates the effectiveness of the company's disclosure controls and procedures - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2019[230] Changes in Internal Control over Financial Reporting This section reports on any material changes in internal control over financial reporting during the period - Changes were implemented to processes and internal controls related to accounting for leases due to the adoption of ASC 842, Leases, effective January 1, 2019[232] - No other material changes in internal control over financial reporting occurred during the quarter covered by the report[233] PART II This part includes legal proceedings, risk factors, and other information required for the quarterly report ITEM 1. LEGAL PROCEEDINGS This section reports on the dismissal of a civil lawsuit against Enservco and Heat Waves regarding patent infringement, with no finding of wrongdoing - A civil lawsuit (Colorado Case) alleging patent infringement against Enservco and Heat Waves was dismissed in its entirety on March 15, 2019, without any finding of wrongdoing[235] - Heat-On-The-Fly, LLC (HOTF) dismissed claims with prejudice for one patent and without prejudice for another, agreeing not to sue Enservco or Heat Waves in the future for the latter based on prior services[236] ITEM 1A. RISK FACTORS This section incorporates by reference the risk factors from the company's latest annual report and adds an additional risk factor concerning the reliance on key management personnel - The Company's risk factors are primarily set forth in its Annual Report on Form 10-K for the year ended December 31, 2018[238] - An additional risk factor highlights the Company's dependence on key members of senior management (Ian Dickinson, Kevin Kersting, Marjorie Hargrave), whose loss could disrupt business operations[238][239] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[241] ITEM 3. DEFAULTS UPON SENIOR SECURITIES This section states that there were no defaults upon senior securities to report - No defaults upon senior securities to report[242] ITEM 4. MINE SAFETY DISCLOSURES This section states that there are no mine safety disclosures to report - No mine safety disclosures to report[243] ITEM 5. OTHER INFORMATION This section states that there is no other information to report - No other information to report[244] ITEM 6. EXHIBITS This section lists the exhibits filed with the quarterly report, including certifications, amendments to loan agreements, and XBRL documents - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, the Third Amendment to Loan and Security Agreement and Waiver, and various XBRL documents[246] SIGNATURES This section contains the signatures of the Principal Executive Officer and Chief Executive Officer, Ian Dickinson, and the Principal Financial Officer and Chief Financial Officer, Marjorie Hargrave, certifying the report - The report was signed on August 14, 2019, by Ian Dickinson, Principal Executive Officer and Chief Executive Officer, and Marjorie Hargrave, Principal Financial Officer and Chief Financial Officer[249]