Note

– Commitments and Contingencies

Operating Leases

As of

June 30, 2017,

the Company leases facilities and certain equipment under lease commitments that expire through

June 2022.

Future minimum lease commitments for these operating lease commitments are as follows:

Twelve Months Ending June 30,
2018	$	622,242
2019		562,518
2020		569,194
2021		381,370
2022		290,046
Thereafter		-
Total	$	2,425,370

Rent expense under operating leases, including month-to-month leases, for the

three

and

six

months ended

June 30, 2017

were approximately

$191,000

and

$405,000,

respectively. Rent expense under operating leases, including month-to-month leases, for the

three

and

six

months ended

June 30, 2016

were

$200,000

and

$404,000

respectively.

HydroFLOW Agreement

Pursuant to a Sales Agreement with HydroFLOW USA, HWWM has the exclusive right to sell or rent patented hydropath devices in connection with bacteria deactivation and scale treatment services for treating injection and disposal wells, fracking water and recycled water in the oil and gas industry to HWWM customers in the United States. Pursuant to the sales agreement, HWWM is required to pay

3.5%

royalties of its gross revenues on certain rental transactions and, in order to maintain the exclusivity provision under the agreement, the Company

is required to purchase approximately

$655,000

of equipment per year commencing in

2016

and ending

2025.

November 2016,

the Company and HydroFLOW USA agreed to allocate

$220,000

of the

2016

commitment to

2017,

thereby increasing the minimum purchase requirement for

2017

$875,000.

During the

six

months ended

June 30, 2017,

the Company completed the purchase of

$280,000

of equipment to fulfill its

2016

purchase commitment for exclusivity. During the

three

and

six

months ended

June 30, 2017

and

2016,

the Company did

not

accrue or pay any royalties to HydroFLOW.

The Company has negotiated a release of all

2016

and

2017

purchase commitments, while leaving intact the exclusive right to sell or rent the patented hydropath devices through

2017.

Self-Insurance

June 2015,

the Company became self-insured under its Employee Group Medical Plan for the

first

$75,000

per individual participant. The Company had an accrued liability of approximately

$63,000

and

$23,000

as of

June 30, 2017

and

December 31, 2016,

respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to quarter end.

Effective

April 1, 2015,

the Company 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 is required to pay premiums in addition to a portion of the cost of any claims made by our employees, subject to a maximum of approximately

$1.5

million over the term of the policy. In

June, 2017,

an employee of

one

of our subsidiaries sustained bodily injury while in the course of employment, and the projected cost of the claim exceeded the amount we had previously paid in under the policy. As a result, subsequent to

June 30, 2017,

we made a payment of approximately

$612,000

under the terms of the policy. The amount was based on an estimate of the total cost of the claim, including costs that have

not

yet been incurred in connection with the claim. During the

three

and

six

months ended

June 30, 2017,

we recorded an accrual based on our estimate of amounts incurred under the claim of approximately

250,000

and recorded the remaining

$362,000

of the payment as a long-term asset, which will be recognized as expense as claim costs are incurred in connection with the claim. As a result, expense of

$250,000

is included within

Expenses, Water hauling services

in the accompanying statement of operations. Per the terms of our policy, subsequent to

June 30, 2017,

we had paid in approximately

$1.4

million of the projected maximum plan cost of

$1.5

million. Therefore, our contnued exposure to this and other workers' compensation claims through the term of our policy and additional policy premiums is approximately

$163,000.

Litigation

Enservco Corporation (“Enservco”) and its subsidiary Heat Waves Hot Oil Service LLC (“Heat Waves”) are defendants in a civil lawsuit in federal court in Colorado, Civil Action

No.

1:15

-cv-

00983

-RBJ (“Colorado Case”), that alleges that Enservco and Heat Waves, in offering and selling frac water heating services, infringed and induced others to infringe

two

patents owned by Heat-On-The-Fly, LLC (“HOTF”). The complaint relates to only a portion of the frac water heating services provided by Heat Waves. The Colorado Case is now stayed pending resolution of appeal by HOTF of a North Dakota court’s ruling that the primary patent (“the

‘993

Patent”) in the Colorado Case was invalid. Neither Enservco nor Heat Waves is a party to the North Dakota Case, which involves other energy companies.

The

‘993

Patent has undergone several reexaminations by the USPTO and in

February 2015,

the USPTO rejected all

claims of the

‘993

Patent in the latest reexamination. However, in

May 2016,

the USPTO reversed its decision and confirmed all

claims as being patentable over the cited prior art in the reexamination proceeding. Further, in

September 2016

and

February 2017,

HOTF was issued

two

additional patents, both of which could be asserted against the Company. Management believes that final findings of invalidity and/or unenforceability of the

‘993

Patent based on inequitable conduct could serve as a basis to affect the validity and/or enforceability of each of HOTF’s patents. If these Patents are ultimately held to be invalid and/or enforceable, the Colorado Case would become moot.

In the event that HOTF’s appeal is successful and the

‘993

Patent is found to be valid and/or enforceable in the North Dakota Case, the Colorado Case

may

resume. To the extent that Enservco and Heat Waves are unsuccessful in their defense of the Colorado Case, they could be liable for enhanced damages/attorneys’ fees (both of which

may

be significant) and Heat Waves could possibly be enjoined from using any technology that is determined to be infringing. Either result could negatively impact Heat Waves’ business and operations. At this time, the Company is unable to predict the outcome of this case, and accordingly has

not

recorded an accrual for any potential loss.