Enservco(ENSV) - 2023 Q4 - Annual Report

Cautionary Statement Regarding Forward-Looking Statements This report contains forward-looking statements that are subject to numerous risks and uncertainties - This Annual Report on Form 10-K contains forward-looking statements, which are predictions based on current expectations and projections about future events[13][14][15] - Key risk factors include the ability to obtain working capital, capital requirements and funding uncertainty, constraints from indebtedness, fluctuations in crude oil and natural gas prices, competition, ability to implement price increases, interest rate increases, weather conditions, general economic conditions, ability to diversify business, history of losses, ability to retain key personnel, environmental regulations, and risks of cyberattacks[15][17] PART I Item 1. Business Enservco Corporation provides well-site services to the US onshore oil and gas industry, focusing on production and completion services Overview The company offers hot oiling, acidizing, and frac water heating services across major US oil and gas basins - Enservco Corporation provides hot oiling and acidizing (Production Services) and frac water heating (Completion and Other Services) to the domestic onshore oil and natural gas industry[19] - The company operates a fleet of specialized trucks and equipment, serving customers in major domestic oil and gas producing areas including the DJ Basin/Niobrara, San Juan Basin, Marcellus and Utica Shale, Jonah area, Green River and Powder River Basins, and Eagle Ford Shale and East Texas Oilfield[20] Recent Developments The company recently completed a public offering, managed several convertible note transactions, and acquired assets to expand its footprint - In February 2023, the Company completed a public offering, issuing common stock and warrants, generating $3.2 million in net proceeds for general corporate purposes[22] - Cross River Partners, LP (controlled by CEO Richard Murphy) converted approximately $2.45 million in convertible notes into 4,997,402 shares of common stock and received a five-year warrant to acquire 2,400,000 shares in March and June 2023[23] - In September and October 2023, the Company issued new convertible promissory notes totaling $1.675 million to Cross River, Kevin Chesser (director), Angel Capital Partners, and Equigen (entity owned by director Steven A. Weyel), accruing interest at 16.00% annually[24][25][27] - On September 11, 2023, the Company acquired oilfield equipment assets from OilServ, LLC for 2,939,133 shares of common stock, valued at $1,057,500, to expand its footprint in the Pennsylvania Marcellus Shale[26][35] - On March 4, 2024, the United States District Court of Colorado dismissed a May 2022 class action complaint against the Company and certain officers without prejudice, with no appeal to be filed[28] Recent Market Conditions The company faces a market with lower crude oil prices and a decreased rig count compared to 2022, but maintains consistent service demand - WTI crude oil price averaged $77.58 per barrel in 2023, lower than $94.90 in 2022, but significantly higher than 2020-2021 pandemic years[29][171] - Domestic rig count decreased from 779 active rigs as of December 31, 2022, to 622 rigs as of December 31, 2023, but the Company still experiences consistent demand for services[29][171] - Expectations for consistent activity are offset by political environment changes, increased inflation, and rising interest costs, which impact oil exploration and production[31] Corporate Structure and Overview of Business Operations Enservco operates through its subsidiary Heat Waves, pursuing a growth strategy of strategic acquisitions and service expansion - Enservco operates through its wholly-owned subsidiary, Heat Waves Hot Oil Service LLC, providing Production Services (hot oiling, acidizing) and Completion and Other Services (frac water heating)[34] - The company's growth strategy includes strategic acquisitions and expansion of services and geographical territories, as demonstrated by the September 2023 acquisition of OilServ, LLC's assets[35] Operating Entities Heat Waves provides a range of well stimulation and maintenance services across key US oil and natural gas regions - Heat Waves provides well stimulation/maintenance services to oil and natural gas companies, including hot oiling, acidizing, frac water heating, water hauling, and well site construction[36] - Operations are in major oil and natural gas areas in Colorado, Ohio, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming[36] Areas of Operations The company's services are concentrated in several major US shale plays and basins - The company serves customers in the DJ Basin/Niobrara (CO/WY), San Juan Basin (NM), Marcellus and Utica Shale (PA/OH), Jonah area, Green River and Powder River Basins (WY), and Eagle Ford Shale and East Texas Oilfield (TX)[37] Operating Segments The company's operations are divided into Production Services and Completion and Other Services, with a near-even revenue split Revenue Contribution by Segment (2023 vs. 2022) | Segment | 2023 Revenue Contribution | 2022 Revenue Contribution | | :---------------------- | :------------------------ | :------------------------ | | Production Services | 48% | 52% | | Completion and Other Services | 52% | 48% | - Production Services include hot oiling (circulating heated fluid to remove paraffin) and acidizing (pumping acids to dissolve flow-blocking materials) and pressure testing[40][42][43] - Completion and Other Services primarily consist of frac water heating (heating water for hydraulic fracturing) and other hauling services[46][47] Ownership of Company Assets All company equipment is pledged as security under a master lease agreement - All of the Company's equipment is pledged as security under the 2022 Master Lease Agreement with Utica Leaseco, LLC[48] Competitive Business Conditions The company operates in a highly competitive market where price, service quality, and commodity price volatility are key factors - The company faces intense competition, with price being the primary factor in awarding work, alongside capacity, equipment quality/safety, and reputation[50] - Demand for services fluctuates with crude oil and natural gas commodity prices, which are volatile and difficult to predict[51] - The Company differentiates itself through its range, availability, and quality of services, and by serving a diverse group of major and independent oil and natural gas companies across multiple geographical areas[52] Dependence on Major Customers The company has a high concentration of revenue and accounts receivable from a small number of major customers Customer Concentration (2023) | Metric | Value | | :---------------------- | :------ | | Top 2 Customers (A/R) | 50% & 18% | | Top 2 Customers (Revenue) | 32% & 10% | | Top 5 Customers (Revenue) | 60% | - The loss of one or more significant customers or nonpayment could materially adversely affect the Company's business[55] Seasonality The company's revenues are highly seasonal, with the majority earned during the cooler first and fourth quarters - 70% of revenues in both fiscal years 2023 and 2022 were earned during the first and fourth fiscal quarters (cooler months) due to higher demand for frac water heating and hot oiling services[56][188] - Acidizing and pressure testing revenues are generally not significantly impacted by weather and are performed throughout the year[57] Raw Materials The company is not dependent on a single supplier but faces price volatility for key materials like propane - The Company purchases a wide variety of raw materials, parts, and components, but is not dependent on any single source of supply[58] - There are a limited number of vendors for propane and certain acids and chemicals, and propane prices have been volatile[58] Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts The company holds several US and Canadian patents related to its frac water heating processes - Heat Waves holds three United States patents and one Canadian patent, with two additional U.S. patents pending, related to frac water heating processes[59] Government Regulation The company is subject to extensive environmental, health, and transportation regulations that increase operating costs and potential liabilities - The Company is subject to extensive federal, state, and local regulations concerning environmental protection, health and safety (OSHA), and transportation (DOT)[61][71][72] - Compliance with these regulations increases operating costs, and potential violations can lead to substantial penalties or operational restrictions[61][72] - The Company may incur liabilities for hazardous material spills (CERCLA, RCRA, OPA) and could be impacted by new laws or regulations restricting hydraulic fracturing or targeting greenhouse gas emissions[62][63][68][69][73] Human Capital The company maintains a workforce of 86 full-time employees - As of March 14, 2024, the Company employed 86 full-time employees and may hire contractors[75] Available Information Corporate governance documents and SEC filings are publicly available on the company's website - The Company's website (www.enservco.com) provides access to SEC filings (10-K, 10-Q, 8-K) and corporate governance documents, including a Code of Business Conduct and Ethics and whistleblower procedures[76][77] Item 1A. Risk Factors The company faces significant risks related to liquidity, debt, industry cyclicality, operations, and potential stock delisting Liquidity and Debt Risks Significant debt obligations, financing challenges, and a history of losses raise substantial doubt about its going concern status - The Company has significant debt obligations, including a $204,000 minimum monthly payment under the Utica Equipment Financing agreement (as of Jan 1, 2024), subject to interest rate increases[81] - An inability to borrow from new receivables financing during peak work periods would negatively impact business and liquidity[80] - The Company has operated at a loss and has an accumulated deficit, raising substantial doubt about its ability to continue as a going concern[85] Acquisition and Operations Related Risks Operational success is challenged by seasonality, pricing pressures, labor costs, and dependence on volatile industry spending - The Company's growth strategy includes acquisitions, but success is uncertain due to funding availability, identifying suitable candidates, and integration challenges[86][87] - Operations are substantially impacted by seasonality and weather, with unseasonably warm winters reducing demand for frac heating services and increasing operating costs[88] - The Company may be unable to implement price increases to offset rising costs due to intense competition, potentially affecting operating margins[90] - Increased labor costs or unavailability of skilled workers could adversely affect operations, given the physically demanding nature of oilfield services and high employee turnover[93][95] - The business depends on domestic oil and natural gas industry spending, which is subject to significant price volatility, global conflicts, political pressures, and regulatory efforts (e.g., Inflation Reduction Act, Colorado legislation)[96][97][98] Risks Related to Our Common Stock Common stock risks include no dividend plans, potential dilution, price volatility, significant insider influence, and non-compliance with NYSE listing standards - The Company does not anticipate paying cash dividends in the foreseeable future, with future earnings intended to pay down debt and finance business expansion[129] - The Board can issue preferred stock without stockholder approval, which could adversely affect common stock holders by subordinating their rights or making takeovers more difficult[130] - The price of common stock may be volatile due to various factors, including operating performance, liquidity, capital raising, oil and natural gas prices, and general market conditions[131][132] - Richard Murphy, Executive Chairman and CEO, beneficially owns approximately 25.85% of common stock (34.50% including convertible debt and warrants), giving him significant influence over shareholder matters[134] - The Company is non-compliant with NYSE American listing standards regarding stockholders' equity (below $6.0 million and $2.0 million thresholds) and has until June 9, 2024, to regain compliance, or face delisting[136][137][138] General Risk Factors The company faces potential expenses from officer indemnification and significant regulatory costs as a public entity - Indemnification of officers and directors may result in unanticipated expenses for the Company[145] - As a public company, Enservco is subject to significant regulatory scrutiny and compliance costs under the 1934 Act and NYSE American rules, which can be a competitive disadvantage[146] Item 1B. Unresolved Staff Comments The Company has no unresolved staff comments from the SEC - There are no unresolved staff comments[148] Item 1C. Cybersecurity The company's cybersecurity program is overseen by the Board and managed with the support of a third-party IT firm - The Company's cybersecurity strategy prioritizes detection, analysis, and response, utilizing technical security controls, monitoring systems, and mandatory employee training on topics like phishing and password security[149] - The Board of Directors has overall responsibility for risk oversight, assessing cybersecurity and IT risks, and receiving regular updates from the Health, Safety, and Environmental Director[151] - A third-party information technology firm supports and evaluates the cybersecurity and informational security program, including product and software security for data protection and cyber defense[150] Item 2. Description of Properties Enservco leases several shop and office properties across its operating regions, with its corporate office lease ending in January 2024 Leased Properties as of December 31, 2023 | Location/Description | Approximate Size | Base Rent | Lease Expiration | | :------------------- | :--------------- | :-------- | :--------------- | | Longmont, CO (Shop & offices) | 18,400 sq. ft. / 5 acres | $28,367 | June 2026 | | Jourdanton, TX (Shop) | 5,850 sq. ft. / 2.3 acres | $8,500 | June 2024 | | Carmichaels, PA (Shop) | 15,000 sq. ft. / 12 acres | $7,500 | May 2024 | | Carrizo Springs, TX (Shop) | 3,220 sq. ft. / 2.83 acres | $3,500 | May 2025 | | Denver, CO (Corporate offices) | 4,021 sq. ft. | $8,880 | January 2024 | - All current leases have renewal clauses except for the Denver, CO corporate office lease, which ended in January 2024 and was not renewed[154] Item 3. Legal Proceedings A 2022 class action lawsuit against the company was dismissed in March 2024 with no appeal to be filed - A class action complaint filed in May 2022 alleging securities law violations was dismissed without prejudice by the United States District Court of Colorado on March 4, 2024[155][156] - The plaintiff's attorney confirmed on March 21, 2024, that no appeal would be filed, making the dismissal final[156] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[157] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Enservco's common stock trades on the NYSE American under "ENSV" and the company has no current plans to pay dividends - Enservco's common stock is traded on the NYSE American under the symbol "ENSV"[159] Common Stock Price Range (2023 vs. 2022) | Quarter | 2023 High | 2023 Low | 2022 High | 2022 Low | | :-------- | :-------- | :------- | :-------- | :------- | | First | $1.75 | $0.36 | $4.32 | $0.56 | | Second | $0.69 | $0.30 | $3.63 | $1.86 | | Third | $0.45 | $0.28 | $2.05 | $1.20 | | Fourth | $0.50 | $0.24 | $3.07 | $1.31 | - The closing sales price of the Company's common stock as reported on March 22, 2024, was $0.2121 per share[159] - As of March 18, 2024, there were 189 holders of record of Company common stock[160] - The Company did not declare or pay dividends during the years ended December 31, 2023 or 2022, and has no plans at present to declare or pay any dividends[160] Item 6. Selected Financial Data This item is reserved and no selected financial data is provided - This item is reserved[162] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The company's net loss increased despite comparable revenues and improved segment profit, while liquidity challenges raise going concern doubts Overview The company provides production and completion services to the onshore oil and gas industry across major US basins - Enservco provides Production Services (hot oiling, acidizing) and Completion and Other Services (frac water heating) to the domestic onshore oil and natural gas industry[165] - The Company operates in major domestic oil and gas producing areas, including the DJ Basin/Niobrara, San Juan Basin, Marcellus and Utica Shale, Jonah area, Green River and Powder River Basins, and Eagle Ford Shale and East Texas Oilfield[165] Results of Operations Revenues remained stable while net loss widened due to non-recurring items, though segment profit and Adjusted EBITDA improved Executive Summary Revenues were comparable year-over-year, but net loss increased due to a prior-year gain on debt extinguishment not recurring - Revenues for 2023 were comparable to 2022, with strong completions activity in Q1 and Q4 2023 due to favorable weather and price increases, offsetting decreases in production services[166] Key Financial Highlights (2023 vs. 2022) | Metric | 2023 (in thousands) | 2022 (in thousands) | Change (YoY) | | :-------------------------------- | :------------------ | :------------------ | :----------- | | Total Segment Profit | $2,285 | $1,415 | +61% | | Sales, General & Administrative Expenses | $4,454 | $4,875 | -9% | | Interest Expense | $2,121 | $1,383 | +53% | | Total Other (Expense) Income, net | ($2,000) | $2,800 | -$4,800 | | Net Loss | ($8,517) | ($5,575) | +$2,942 | | Net Loss Per Share | ($0.42) | ($0.48) | +$0.06 | | Adjusted EBITDA | ($1,480) | ($2,720) | +$1,240 | - The increase in net loss was primarily due to the non-recurrence of a prior-year $4.3 million gain on debt extinguishment and current year impairment losses of $796,000, partially offset by improved segment profits and lower depreciation/amortization and SG&A expenses[169] Industry Overview The company operated in a market with lower oil prices and a reduced domestic rig count compared to the prior year - WTI crude oil prices averaged $77.58 per barrel in 2023, down from $94.90 in 2022[171] - Average domestic rig count decreased by 5% from 723 in 2022 to 687 in 2023, and further decreased to 622 rigs by December 31, 2023, from 779 a year prior[171] - Demand for services remained strong in 2023, but has not returned to pre-pandemic levels[172][173] Segment Overview The company's business is structured into Production Services, Completion Services, and an unallocated corporate overhead segment - Production Services utilize hot oiling trucks and acidizing units for well maintenance (paraffin removal, flow rate increase)[177] - Completion and Other Services utilize specialized heating units for frac water heating and related support, including hauling and heat treating[178] - Unallocated segment includes general overhead expenses and assets not assigned to specific operating segments[179] Segment Results Total segment profit increased significantly, driven by strong performance in both Production and Completion services due to cost controls Segment Revenues and Profit (2023 vs. 2022, in thousands) | Segment | 2023 Revenues | 2022 Revenues | 2023 Segment Profit | 2022 Segment Profit | | :---------------------- | :------------ | :------------ | :------------------ | :------------------ | | Production Services | $10,526 | $11,211 | $1,320 | $677 | | Completion and Other Services | $11,532 | $10,433 | $965 | $738 | | Total | $22,058 | $21,644 | $2,285 | $1,415 | - Production Services revenues decreased by 6% to $10.5 million in 2023, primarily due to exiting the North Dakota region and decreased hot oiling activity in Colorado and Pennsylvania, partially offset by increases in Texas and successful price increases[181] - Production Services segment profit increased by 95% to $1.3 million in 2023, driven by improved cost control measures (labor, propane, fuel, overhead)[184] - Completion and Other Services revenues increased by 11% to $11.5 million in 2023, mainly due to strong completions activity in Q1 and price increases in Q4, particularly in the Colorado region[185] - Completion and Other Services segment profit increased by 31% in 2023, attributed to higher revenues and stricter cost control over variable costs[186] Historical Seasonality of Revenues Company revenues are highly concentrated in the first and fourth quarters due to seasonal demand for heating services - 70% of fiscal year 2023 and 2022 revenues were generated during the cooler first and fourth quarters (heating season) due to demand for frac water heating and hot oiling[187][188] Direct Operating Expenses Direct operating expenses remained consistent with the prior year - Direct operating expenses (labor, propane, fuel, chemicals, repairs, etc) were consistent year-over-year[189] Sales, General and Administrative Expenses SG&A expenses decreased by 9% year-over-year due to lower stock-based compensation costs - SG&A expenses decreased by $421,000 (9%) year-over-year, primarily due to a decrease in stock-based compensation costs related to a one-time equity award issued to the CFO in the prior year[190] Depreciation and Amortization Depreciation and amortization expense decreased by 16% due to a smaller depreciable asset base after asset disposals - Depreciation and amortization expense decreased by $693,000 (16%) year-over-year, due to the selling and disposing of certain idle trucks and vehicles in 2023, resulting in a smaller depreciable base[191] Severance and Transition Costs Severance costs were minimal in 2023 compared to the prior year - Minimal severance and transition costs were recognized in 2023, compared to $303,000 in 2022 due to a former CFO's resignation[192] Loss from Operations The loss from operations narrowed by $1.8 million due to higher segment profit and reduced expenses - Loss from operations decreased by $1.8 million to $6.6 million in 2023, compared to $8.4 million in 2022, primarily due to increased segment profit and other expense reductions[193] Interest Expense Interest expense increased significantly due to a full year of interest on new financing and rising rates - Interest expense increased to $2.1 million in 2023 from $1.4 million in 2022, due to a full year of interest from 2022 Financing Facilities and continued upward movement of interest rates[194] Income Taxes The company recognized a small deferred income tax benefit in 2023 - The Company recognized a $51,000 deferred income tax benefit in 2023, with no benefit or expense in the prior year[195] Adjusted EBITDA Adjusted EBITDA improved by $1.2 million, reflecting a smaller loss driven by better segment profits and lower SG&A Adjusted EBITDA Reconciliation (2023 vs. 2022, in thousands) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Net loss | ($8,517) | ($5,575) | | Add back: Interest expense | 2,121 | 1,383 | | Deferred income tax benefit | (51) | - | | Depreciation and amortization | 3,654 | 4,347 | | EBITDA (non-GAAP) | ($2,793) | $155 | | Add back (deduct): | | | | Stock-based compensation | 377 | 811 | | Severance and transition costs | 1 | 303 | | Non-recurring legal expense | 362 | 23 | | Bad debt recovery | (50) | (94) | | Impairment losses | 796 | - | | (Gain) loss on disposal of property and equipment | (16) | 300 | | Gain on debt extinguishment | - | (4,277) | | Other (income) expense | (157) | 59 | | Adjusted EBITDA (non-GAAP) | ($1,480) | ($2,720) | - Adjusted EBITDA improved by $1.2 million (46%) to a loss of $1.5 million in 2023, driven by increased segment profits and decreased SG&A expenses (net of stock-based compensation)[203] - Adjusted EBITDA is a non-GAAP measure used by management and investors to evaluate operating performance by excluding non-cash items and items not considered useful in assessing core operations[198][199][200][201] Liquidity and Capital Resources The company faces significant liquidity constraints with a working capital deficit and requires additional capital to fund operations Liquidity Available liquidity was minimal at year-end, necessitating the need to raise additional capital - As of December 31, 2023, available liquidity was $218,000, comprising $201,000 in cash and cash equivalents and $17,000 availability under the LSQ Facility[204] - The Company needs to raise additional capital for ongoing operations, with no assurance of favorable terms or availability[204] Working Capital The company maintained a working capital deficit of $4.3 million at the end of both 2023 and 2022 - As of December 31, 2023 and 2022, the Company had working capital deficits of $4.3 million[205] Cash Flow Cash from investing activities increased due to asset sales, while financing cash flow decreased despite a public offering Summary of Cash Flows (2023 vs. 2022, in thousands) | Activity | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Net cash used in operating activities | ($2,150) | ($2,246) | | Net cash provided by investing activities | $1,765 | $343 | | Net cash provided by financing activities | $551 | $1,789 | | Net increase (decrease) in cash and cash equivalents | $166 | ($114) | | Cash and cash equivalents, end of period | $201 | $35 | - Cash used in operating activities was consistent year-over-year[207] - Cash provided by investing activities increased by $1.4 million in 2023, primarily due to significantly higher proceeds from disposals of property and equipment[208] - Cash provided by financing activities decreased by $1.2 million in 2023, mainly due to a year-over-year decrease in convertible debt proceeds from related parties, partially offset by $3.0 million net cash from the February 2023 Public Offering[209] Overview (Capital Funding) Operations are funded through a mix of debt, equity, and asset sales, with significant related-party financing - Operations are funded primarily by borrowings under credit facilities, related-party debt financing, equity security sales, and asset disposals[211] - As of December 31, 2023, outstanding principal loan balances totaled $8.7 million with a weighted average interest rate of 14.80% per year[211] - The February 2023 Public Offering generated $3.0 million in net proceeds, used for general corporate purposes[212] - Cross River converted approximately $2.45 million of March and July 2022 Convertible Notes into common stock in 2023[213] - In September and October 2023, the Company issued $1.675 million in new convertible promissory notes to related parties (Cross River, Kevin Chesser, Angel Capital, Equigen) with an 18-month term and 16.00% annual interest[214][215][216] Class Action Litigation A class action lawsuit filed in 2022 was dismissed in March 2024 - A May 2022 class action complaint alleging securities law violations was dismissed without prejudice by the U.S. District Court of Colorado on March 4, 2024, with no appeal to be filed[217][218] Outlook The company's performance is tied to volatile industry conditions, with a focus on organic growth amid market uncertainties - The business is highly dependent on domestic oil and gas exploration and production activity, which fluctuates with commodity prices, weather, and capital budgets[219] - Management seeks organic growth by increasing service volume, relocating equipment, and expanding customer relationships, aiming to improve operating efficiency[219][220] - Despite sustained oil prices and a stable rig count in 2023, average domestic rig counts remain 25% below pre-pandemic levels, and E&P companies prioritize free cash flow and debt reduction over drilling activity[221] - Uncertainties regarding global political tensions, wars, inflation, and interest rates could negatively impact the Company's 2024 performance[222] Capital Commitments and Obligations Capital commitments primarily consist of debt facilities and lease obligations - As of December 31, 2023, capital commitments primarily consist of the 2022 Financing Facilities and various other promissory notes, along with scheduled principal payments under term loans, debt obligations, finance leases, and operating leases[223] Critical Accounting Policies and Estimates Key accounting estimates include asset impairment and warrant valuation, with a cash forecast indicating substantial doubt about its going concern status - Management makes significant estimates and assumptions affecting financial statements, including accounts receivable realization, long-lived asset impairment, stock-based compensation, income taxes, and warrant valuation[225][226][227] - Long-lived assets (property, equipment, goodwill) are reviewed for impairment when triggering events occur, using undiscounted future cash flows[228] - Revenue is recognized when services are provided, typically short-term, based on standalone selling prices in work orders or field tickets[229][230][231] - Warrants are classified as permanent equity and valued using a Black-Scholes model[232][233] - The Company's cash forecast model indicates substantial doubt about its ability to continue as a going concern for one year after the report's issuance date[234] Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Enservco is not required to provide these disclosures - The Company is a smaller reporting company and is not required to provide information under this item[235] Item 8. Financial Statements The consolidated financial statements highlight a working capital deficiency and recurring losses, raising going concern doubts from the auditor Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion but noted substantial doubt about the company's ability to continue as a going concern - The independent auditor, Pannell Kerr Forster of Texas, P.C., issued an unqualified opinion on the consolidated financial statements for 2023 and 2022[240] - The auditor noted substantial doubt about the Company's ability to continue as a going concern due to a significant working capital deficiency and recurring losses[241] - Critical audit matters included the impairment assessment over long-lived assets (due to subjectivity in future cash flow estimates) and accounting for complex debt and equity transactions (due to classification and fair value estimation)[245][247][250][251] Consolidated Balance Sheets The balance sheet shows a consistent working capital deficit of $4.3 million and a significant reduction in total assets Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------------ | :------------------ | | Total Current Assets | $5,722 | $5,960 | | Property and equipment, net | $6,923 | $11,236 | | Goodwill | $- | $546 | | Total Assets | $13,872 | $19,838 | | Total Current Liabilities | $10,028 | $10,241 | | Total Liabilities | $14,444 | $18,669 | | Total Stockholders' Equity (Deficit) | ($572) | $1,169 | - The Company reported a working capital deficit of $4.3 million as of December 31, 2023, consistent with the prior year[205][269] - Goodwill and intangible assets were fully impaired or amortized to zero by December 31, 2023[254][288][315] Consolidated Statements of Operations Net loss increased to $8.5 million in 2023 from $5.6 million in 2022, despite a slight increase in total revenues Consolidated Statements of Operations Highlights (in thousands, except per share) | Metric | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Total revenues | $22,058 | $21,644 | | Total operating expenses | $28,662 | $30,054 | | Loss from operations | ($6,604) | ($8,410) | | Total other (expense) income, net | ($1,964) | $2,835 | | Net loss | ($8,517) | ($5,575) | | Net loss per share – basic and diluted | ($0.42) | ($0.48) | | Weighted average common shares outstanding | 20,456 | 11,579 | - Total revenues increased slightly to $22.1 million in 2023 from $21.6 million in 2022[256] - Net loss increased to $8.5 million in 2023, primarily due to the absence of a $4.3 million gain on debt extinguishment recognized in 2022 and current year impairment losses[169][256] Consolidated Statements of Stockholders' Equity (Deficit) Stockholders' equity shifted to a deficit position due to the net loss, despite capital infusions from offerings and debt conversions Consolidated Stockholders' Equity (Deficit) Highlights (in thousands) | Metric | December 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------------ | :------------------ | | Common Shares Outstanding | 26,586 | 11,829 | | Common Stock | $131 | $59 | | Additional Paid-in Capital | $48,970 | $42,266 | | Accumulated Deficit | ($49,673) | ($41,156) | | Total Stockholders' Equity (Deficit) | ($572) | $1,169 | - Total stockholders' equity shifted from a surplus of $1.169 million in 2022 to a deficit of $572,000 in 2023, primarily due to the net loss incurred[259] - Significant increases in common shares outstanding and additional paid-in capital resulted from the February 2023 Public Offering, conversion of subordinated debt to equity by Cross River, and the acquisition of OilServ, LLC assets through stock issuance[259][348][349][350] Consolidated Statements of Cash Flows Cash from investing activities increased significantly due to asset sales, while financing cash flow decreased from the prior year Consolidated Cash Flow Summary (in thousands) | Activity | 2023 | 2022 | | :-------------------------------- | :----- | :----- | | Net cash used in operating activities | ($2,150) | ($2,246) | | Net cash provided by investing activities | $1,765 | $343 | | Net cash provided by financing activities | $551 | $1,789 | | Net Increase (Decrease) in Cash and Cash Equivalents | $166 | ($114) | | Cash and Cash Equivalents, end of period | $201 | $35 | - Net cash used in operating activities remained consistent at approximately $2.2 million for both years[207][262] - Net cash provided by investing activities significantly increased to $1.8 million in 2023 from $343,000 in 2022, primarily due to higher proceeds from property and equipment disposals[208][262] - Net cash provided by financing activities decreased to $551,000 in 2023 from $1.8 million in 2022, mainly due to lower convertible debt proceeds from related parties, partially offset by $3.0 million from the February 2023 Public Offering[209][262] Notes to Consolidated Financial Statements The notes detail accounting policies, debt, equity transactions, and reiterate substantial doubt about the company's going concern status Note 1 – Basis of Presentation The financial statements are prepared according to GAAP and consolidate the parent company and its subsidiary - The consolidated financial statements include Enservco Corporation and its wholly-owned subsidiary, Heat Waves Hot Oil Service LLC, and are prepared in accordance with GAAP[265][266][267] Note 2 – Summary of Significant Accounting Policies and Recent Developments Recurring losses and a working capital deficit raise substantial doubt about the company's ability to continue as a going concern - The financial statements are prepared on a going concern basis, but substantial doubt exists about the Company's ability to continue as a going concern due to recurring net losses ($8.5M in 2023, $5.6M in 2022) and a working capital deficit ($4.3M in 2023)[269] - The Company's ability to obtain additional financing is subject to market and economic conditions, performance, and investor sentiment[270] - Accounts receivable are stated net of an allowance for uncollectible accounts, which was $100,000 in 2023 and $150,000 in 2022[272] - Two customers represented 50% and 18% of accounts receivable and 32% and 10% of total revenues as of December 31, 2023[273] - Inventory, primarily propane, diesel fuel, and chemicals, is carried at the lower of cost or net realizable value using FIFO, with write-offs of $54,000 in 2023 and $52,000 in 2022[274] - Property and equipment are stated at cost less accumulated depreciation, with depreciation recorded on a straight-line basis over 5 to 30 years[275] - The Company recognized an impairment loss of $250,000 for a long-lived asset group in North Dakota during 2023, which was subsequently disposed of[282][284] - Goodwill impairment test resulted in a $546,000 impairment loss in 2023; no impairment loss for goodwill was recognized in 2022[288] - The Company has $45.8 million of federal and state net operating loss carryforwards (NOLs), with an estimated $18.6 million federal and $7.4 million state NOLs expiring unused due to Section 382 limitations[341] - The Company adopted ASU 2016-13 (Credit Losses) for fiscal year 2023, with no material impact on its consolidated financial statements[311] Note 3 – Property and Equipment Net property and equipment decreased significantly due to depreciation and asset disposals Property and Equipment, Net (in thousands) | Category | December 31, 2023 | December 31, 2022 | | :------------------- | :------------------ | :------------------ | | Trucks and vehicles | $48,036 | $53,473 | | Other equipment | $1,859 | $2,059 | | Buildings and improvements | $619 | $2,600 | | Land | $- | $190 | | Total property and equipment | $50,514 | $58,322 | | Accumulated depreciation | ($43,591) | ($47,086) | | Property and equipment, net | $6,923 | $11,236 | - Depreciation expense was $3.5 million in 2023 and $4.1 million in 2022[313] Note 4 – Intangible Assets, net Intangible assets were fully amortized by the end of 2023 Intangible Assets, Net (in thousands) | Category | December 31, 2023 | December 31, 2022 | | :------------------- | :------------------ | :------------------ | | Customer relationships | $626 | $626 | | Patents and trademarks | $441 | $441 | | Total intangible assets | $1,067 | $1,067 | | Accumulated amortization | ($1,067) | ($885) | | Net carrying value | $- | $182 | - Intangible assets, with estimated useful lives of five years, were fully amortized to zero by December 31, 2023[315] - Amortization expense for intangible assets was $182,000 in 2023 and $218,000 in 2022[315] Note 5 – Debt Total long-term debt decreased due to debt-to-equity conversions, though new convertible notes were issued to related parties Long-Term Debt (in thousands) | Debt Instrument | December 31, 2023 | December 31, 2022 | | :-------------------------------- | :------------------ | :------------------ | | Utica Facility | $3,388 | $5,379 | | LSQ Facility | $2,472 | $2,945 | | March 2022 Convertible Note | $- | $1,200 | | July 2022 Convertible Note | $- | $1,200 | | November 2022 Convertible Note | $1,200 | $1,200 | | September and October 2023 Convertible Notes | $1,675 | $- | | Real Estate Loan | $- | $54 | | Total long-term debt | $8,735 | $11,978 | | Less debt discount and issuance costs | ($295) | ($548) | | Less current portion | ($5,267) | ($4,409) | | Long-term debt, net | $3,173 | $7,021 | - Aggregate contractual principal maturities of debt are $5.267 million in 2024 and $3.468 million in 2025[317] - The 2022 Refinancing included terminating the 2017 Credit Facility, paying $8.4 million cash to East West Bank, and establishing the Utica Facility ($6.225 million equipment-collateralized loan) and LSQ Facility (receivables factoring up to $10.0 million)[318][319][320] - The Company recorded a $4.3 million gain on debt extinguishment from the Refinancing in 2022[323] - In 2023, Cross River converted approximately $2.45 million of March and July 2022 Convertible Notes into common stock and received warrants[329] - September and October 2023 Convertible Notes totaling $1.675 million were issued to related parties, accruing 16.00% annual interest, with quarterly interest payments in stock for Q4 2023 and cash thereafter[331][335] - Debt discount and issuance costs of $277,000 were amortized to interest expense in 2023[337] Note 6 – Income Taxes The company has significant NOL carryforwards, but their use is limited, resulting in a full valuation allowance against deferred tax assets Deferred Income Tax Benefit (in thousands) | Category | December 31, 2023 | December 31, 2022 | | :------------------- | :------------------ | :------------------ | | Federal | ($44) | $- | | State | ($7) | $- | | Total deferred income tax benefit | ($51) | $- | - The Company has $45.8 million of federal and state net operating loss carryforwards (NOLs), with an estimated $18.6 million federal and $7.4 million state NOLs expected to expire unused due to Section 382 limitations[341] - A valuation allowance of $11.0 million was recorded as of December 31, 2023, and $9.0 million as of December 31, 2022, to reduce deferred tax assets to the amount more likely than not to be realized[343] - The Company's federal income tax filings for tax years 2020-2023 and various state tax filings for 2019-2023 remain open to examination[346] Note 7 – Stockholders' Equity Stockholders' equity was impacted by a public offering, debt conversions, and an asset acquisition, while the company remains non-compliant with NYSE listing standards - The February 2023 Public Offering issued 3.9 million common shares and pre-funded warrants for 3.1 million shares, plus common warrants for 7.0 million shares, generating $3.0 million net proceeds[348] - Cross River converted approximately $2.45 million of March and July 2022 Convertible Notes into 4,997,402 shares of common stock and received warrants in 2023[349] - In September 2023, the Company acquired oilfield equipment assets from OilServ, LLC by issuing 2,939,133 shares of common stock valued at $1,057,500[350] Warrant Activity Summary (in thousands, except shares and price) | Metric | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | | :-------------------------- | :------- | :---------------------------- | :------------------------------------------------ | | Outstanding as of Jan 1, 2022 | 1,192 | $3.57 | 3.75 | | Issued (2022) | 569 | $2.11 | 4.84 | | Outstanding as of Dec 31, 2022 | 1,761 | $3.10 | 3.43 | | Issued (2023) | 12,500 | $0.41 | 4.32 | | Exercised (2023) | (3,100) | $0.005 | - | | Outstanding as of Dec 31, 2023 | 11,161 | $0.95 | 3.95 | - The Company received NYSE notices of noncompliance in December 2022 and May 2023 for stockholders' equity falling below required thresholds ($6.0 million and $2.0 million)[352][353] Note 8 – Stock Options and Restricted Stock The company utilized its stock incentive plan for employee grants and director fees, incurring related compensation costs - Under the 2016 Stock Incentive Plan, 250,000 options and 15,000 restricted shares remained outstanding as of December 31, 2023[355] - In September 2023, 500,000 stock options were granted to key employees at an exercise price of $0.41 per share, resulting in $109,000 in stock-based compensation costs for 2023[356] - Stock-based compensation costs for restricted stock were $268,000 in 2023 and $811,000 in 2022 (with $748,000 in 2022 related to the CFO)[358] - 79,262 restricted shares were awarded to the Board of Directors in 2023 to satisfy fees, resulting in $82,000 expense[359] Note 9 – Commitments and Contingencies Future minimum lease payments total just over $1 million, and a 2022 class action lawsuit has been dismissed Future Minimum Lease Payments (in thousands) | Year | Operating Leases | Finance Leases | | :--- | :--------------- | :------------- | | 2024 | $488 | $16 | | 2025 | $374 | $- | | 2026 | $179 | $- | | Total future lease payments | $1,041 | $16 | - Total operating lease cost was $805,000 in 2023 and $887,000 in 2022[361] - The class action complaint filed in May 2022 was dismissed without prejudice on March 4, 2024, with no appeal to be filed[362][364] Note 10 – Segment Reporting Segment profit increased to $2.3 million in 2023, driven by improved performance in both the Production and Completion services segments Segment Financial Information (2023 vs. 2022, in thousands) | Metric | Production Services (2023) | Completion and Other Services (2023) | Unallocated (2023) | Total (2023) | | :------------------- | :------------------------- | :----------------------------------- | :----------------- | :----------- | | Revenues | $10,526 | $11,532 | $- | $22,058 | | Cost of revenues | $9,206 | $10,567 | $- | $19,773 | | Segment profit | $1,320 | $965 | $- | $2,285 | | Depreciation and amortization | $1,464 | $1,500 | $690 | $3,654 | | Capital expenditures | $123 | $126 | $19 | $268 | | Identifiable assets | $6,121 | $6,271 | $12 | $12,404 | | | | | | | | Metric | Production Services (2022) | Completion and Other Services (2022) | Unallocated (2022) | Total (2022) | | :------------------- | :------------------------- | :----------------------------------- | :----------------- | :----------- | | Revenues | $11,211 | $10,433 | $- | $21,644 | | Cost of revenues | $10,534 | $9,695 | $- | $20,229 | | Segment profit | $677 | $738 | $- | $1,415 | | Depreciation and amortization | $2,303 | $1,678 | $366 | $4,347 | | Capital expenditures | $127 | $93 | $- | $220 | | Identifiable assets | $7,044 | $10,584 | $158 | $17,786 | - Segment profit increased from $1.415 million in 2022 to $2.285 million in 2023[369] Note 11 – Subsequent Events Subsequent to year-end, the company agreed to acquire Buckshot Trucking LLC for $5.0 million - On March 19, 2024, Enservco agreed to acquire Buckshot Trucking LLC for $5.0 million (Base Amount), consisting of $3.75 million cash and $1.25 million in Enservco common stock, plus up to $500,000 contingent common stock[370] - The Buckshot acquisition is subject to stockholder approval for common stock issuance and certain closing conditions, including Buckshot Trucking having a trailing twelve-month adjusted EBITDA of at least $2.0 million[371][374] - Tony Sims, a former owner of Buckshot Trucking, will serve as President of Buckshot Trucking and receive options to acquire 250,000 shares of Enservco common stock[375] - The May 2022 class action complaint against the Company was dismissed without prejudice on March 4, 2024, with no appeal to be filed as of March 21, 2024[376] Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure - None[378] Item 9A. Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were not effective due to un-remediated material weaknesses Evaluation and Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were not effective as of year-end - As of December 31, 2023, the CEO and CFO concluded that the Company's disclosure controls and procedures were not effective[379][380] - The Company faces challenges in balancing internal control improvements with operational activities due to financial and staffing constraints as a smaller reporting company[379] Management's Annual Report on Internal Control Over Financial Reporting Management concluded that internal control over financial reporting was not effective due to prior year material weaknesses - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2023, using COSO criteria and concluded it was not effective[383] - Prior year material weaknesses have not yet been fully remediated, requiring continuous monitoring and development[383] Remediation of Material Weaknesses The company is actively working to remediate material weaknesses through enhanced analysis, system upgrades, and additional resources - The Company is remediating prior period material weaknesses related to complex financial instruments and income tax accounting through enhanced analyses, third-party consultations, and improved internal oversight[384][385] - Initiatives include upgrading ERP and accounting systems, adding full-time resources with internal control expertise, and engaging a third-party consulting firm to document and test controls[385] Changes in Internal Control over Financial Reporting No significant changes were made to internal controls during the fourth quarter of 2023 - There have been no significant changes in internal control over financial reporting during the quarter ended December 31, 2023, that materially affected or are reasonably likely to materially affect it[386] Item 9B. Other Information No other information is reported under this item - None[388] PART III Item 10. Directors, Executive Officers and Corporate Governance This information is incorporated by reference from the 2024 Annual Meeting proxy statement - Information is incorporated by reference from the Company's definitive proxy statement for the 2024 Annual Meeting of Stockholders[391] Item 11. Executive Compensation This information is incorporated by reference from the 2024 Annual Meeting proxy statement - Information is incorporated by reference from the Company's definitive proxy statement for the 2024 Annual Meeting of Stockholders[392] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This information is incorporated by reference from the 2024 Annual Meeting proxy statement - Information is incorporated by reference from the Company's definitive proxy statement for the 2024 Annual Meeting of Stockholders[393] Item 13. Certain Relationships and Related Transactions, and Director Independence This information is incorporated by reference from the 2024 Annual Meeting proxy statement - Information is incorporated by reference from the Company's definitive proxy statement for the 2024 Annual Meeting of Stockholders[394] Item 14. Principal Accountant Fees and Services This information is incorporated by reference from the 2024 Annual Meeting proxy statement - Information is incorporated by reference from the Company's definitive proxy statement for the 2024 Annual Meeting of Stockholders[395] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the Form 10-K - The section lists various exhibits, including the Common Stock Sales Agreement, Asset Purchase Agreement, Certificate of Incorporation, Bylaws, Warrant to Purchase Common Stock, 2016 Stock Incentive Plan, Indemnification Agreement, debt agreements (Master Lease Agreement, Invoice Purchase Agreement, Convertible Subordinated Promissory Notes), and certifications (31.1, 31.2, 32.1, 32.2)[396][397] Item 16. Summary of Form 10-K No summary of Form 10-K is provided in this section - None[398]