Note

– Commitments and Contingencies

Operating Leases

January 1, 2019,

we adopted ASC

842,

Leases. Results for reporting periods beginning

January 1, 2019

are presented in accordance with ASC

842,

while prior period amounts are reported in accordance with ASC

840.

January 1, 2019,

we recognized

$2.4

million in right-of-use assets and

$2.4

million in lease liabilities, representing the present value of minimum payment obligations associated with leased facilities and certain equipment with non-cancellable lease terms in excess of

one

year. During the year ended

December 31, 2019,

we entered into several finance leases related to equipment. We recognized approximately

$845,000

in right-of-use assets and lease liabilities. We made a cumulative-effect adjustment to retained earnings of approximately

$98,000

January 1, 2019.

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

months or less, and expense is recognized on a straight-line basis over the lease term. Leases with an initial term of

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

December 31, 2019,

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 December 31,		Operating Leases			Financing Leases
2020	$	1,011		$	259
2021		964			232
2022		774			75
2023		641			-
2024		473			-
Thereafter		534			-
		4,397			566
Impact of discounting		(16	)		(100	)
Discounted value of lease obligations	$	4,381		$	466

The following table summarizes the components of our gross operating lease costs incurred during the year ended

December 31, 2019 (

in thousands):

	Year Ended
		December 31, 2019
Operating lease expense:
Current lease cost		$	954
Long-term lease cost			411
Total operating lease cost		$	1,365
Finance lease expense:
Amortization of right-of-use assets		$	219
Interest on lease liabilities			28
Total lease cost		$	247

Our weighted-average lease term and discount rate used during the year ended

December 31, 2019

are as follows:

	Year Ended December 31, 2019
Operating
Weighted-average lease term (years)		4.60
Weighted-average discount rate		6.08	%
Financing
Weighted-average lease term (years)		2.16
Weighted-average discount rate		6.10	%

Self-Insurance

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

$68,000

and

$60,000

as of

December 31, 2019

and

December 31, 2018,

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

December 31, 2019.

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

December 31, 2019,

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

December 31, 2018,

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. We recorded the remaining approximately

$189,000

in payments made under the policy as a long-term asset, which we expect will either be recorded as expense in future periods, or refunded to us by the insurance carrier, depending on the outcome of the individual claim described above, and the final cost of any additional open claims incurred under the policy. As of

December 31, 2019,

we believe we have paid all amounts contractually due under the policy. Effective

April 1, 2018,

we entered into a new workers’ compensation policy with a fixed premium amount determined annually, and therefore are

longer partially self-insured for workers' compensation and employer's liability.

Litigation

Enservco and Heat Waves were defendants in a civil lawsuit in federal court in Colorado, Civil Action

No.

1:15

-cv-

00983

-RBJ (“Colorado Case”), that alleged 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”)-

i.e.

, the

‘993

Patent and the

‘875

Patent. In

March

2019,

the parties moved to dismiss the Colorado Case. On

March 15, 2019,

the Colorado Case was dismissed in its entirety without any finding of wrongdoing by Enservco or Heat Waves.

HOTF dismissed its claims with regard to the

‘993

Patent with prejudice and its claims with regard to the

‘875

Patent without prejudice. However, HOTF agreed

not

to sue Enservco or Heat Waves in the future for infringement of the

‘875

Patent based on the same type of frac water heating services offered by Heat Waves prior to and through

March 13, 2019.

Heat Waves dismissed its counterclaims against HOTF without prejudice in order to preserve its defenses.

While the Colorado Case was pending, HOTF was issued

two

additional patents, which were related to the

‘993

and

‘875

Patents, but were

not

part of the Colorado Case. However, in

March

2015,

a North Dakota federal court determined in an unrelated lawsuit (

not

involving Enservco or Heat Waves) that the

‘993

Patent was invalid. The same court also found that the

‘993

Patent was unenforceable due to inequitable conduct by the patent owner and/or the inventor. The Federal Circuit Court of Appeals later confirmed, among other things, the North Dakota court’s findings of inequitable conduct. In light of the foregoing, 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 these additional HOTF patents.