Note

- Summary of Significant Accounting Policies

Going Concern

Our financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activities and the realization of assets and settlement of liabilities in the normal course of business. We incurred a net loss of

$7.7

million for the year ended

December 31, 2019.

As of the balance sheet date of this report we had total current liabilities of

$39.7

million, which exceeded our total current assets of

$8.7

million by

$31.0

million. We are in breach of

two

of our covenants and have failed to pay an overadvance that has continued through the date of this report related to the

2017

Credit Agreement (as discussed in Note

of the accompanying Notes to the Condensed Consolidated Financial Statements), resulting in our borrowings payable of

$34.0

million being classified in current liabilities.

Our ability to continue as a going concern is dependent on the renegotiation of the

2017

Credit Agreement and/or raising further capital. These factors raise substantial doubt over our ability to continue as a going concern and whether we will realize our assets and extinguish our liabilities in the normal course of business and at the amounts stated in the financial statements.

We are also currently negotiating and working with East West Bank in an effort to obtain a waiver for our breaches of the

2017

Credit Agreement. Our ability to continue as a going concern is dependent on our renegotiation of the

2017

Credit Agreement and our ability to further reduce costs and raise further capital, of which there can be

assurance. Further, there can be

assurance that we will successfully obtain a waiver from the East West Bank or maintain or increase our cash flows from operations. Given our current financial situation we

may

be required to accept terms on the transactions that we are seeking that are onerous to us.

Cash and Cash Equivalents

The Company considers all highly liquid instruments purchased with an original maturity of

three

months or l

ess 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 fo

r 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 s

tatus of existing receivables. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of

December 31, 2019,

and

December 31, 2018,

the Company had an allowance for doubtful accounts of approximately

$246,000

and

$116,000,

respectively. For the years ended

December 31, 2019

and

2018,

the Company recorded approximately

$160,000

and

$31,000,

spectively to bad debt expense.

Concentrations

As of

December 31, 2019,

two

customers represented more than

10%

of the Company's accounts receivable balance at

16%

and

11%

respectively. Revenues from

one

customer represented approximately

11%

of total revenues for the year ended

December 31, 2019.

As of

December 31, 2018,

single customer comprised more than

10%

of the Company's accounts receivable balance. Revenues from

one

customer represented approximately

% of total revenues for the year ended

December 31, 2018.

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. During the years ended

December 31, 2019

and

2018,

the Company did

not

recognize any write-downs or write-offs of inventory.

Property and Equipment

Property and equipment consists of (

) trucks, trailers and pickups; (

) water transfer pumps, pipe, lay flat hose, trailers, and other support equipment; (

) real property which includes land and buildings used for office and shop facilities and wells u

sed for the disposal of water; and (

) other equipment such as tools used for maintaining and repairing vehicles, and 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 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

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

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 m

ajor 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 financing 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 payab

le; there were

rent escalation terms associated with these equipment leases.

The Company records amortization expense on equipment under financing 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. The Company reviews 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 or

not

long-lived assets have been impaired. The Company

recorded impairment charges of approximately

$127,000

related to its salt water disposal wells which it expects to divest during

2020.

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.

Revenue Recognition

We have adopted Accounting Standards Update

2014

09,

Revenue - Revenue from Contracts with Customers, Accounting Standards Codification ("ASC") Topic

606,

beginning

January 1, 2018,

using the modified retrospective approach, which we have applied to contracts within the scope of the standard. There was

material impact on the Company's condensed consolidated financial statements from adoption of this new standard. 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

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

- Segment Reporting for disaggregation of revenue.

Earning

s (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 weigh

ted 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 and warrants.

As of

December 31, 2019,

and

2018,

there

were outstanding stock options and warrants to acquire an aggregate of

2,600,333

and

2,574,665

shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of

December 31, 2019, these outstanding stock options and warrants had no

aggregate intrinsic value

(the difference between the estimated fair value of the Company’s common stock on

December 31, 2019,

and the exercise price, multiplied by the number of in-the-money instruments)

. As of

December 31, 2019,

the outstanding stock options and warrants had

intrinsic value.

As of

December 31, 2018,

the aggregate intrinsic value of outstanding stock options and warrants was approximately

$93,000.

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 years ended

December 31, 2019

and

2018.

Loan Fees and Other Deferred Costs

In the normal course of business, the Company enters into loan agreements and amendments thereto with its primary lending institutions. The majority of these lending agreements and amendments require origination fees and other fees in the course of execut

ing the agreements. For all costs associated with the execution of the lending agreements, the Company recognizes these as capitalized costs and amortizes these costs over the remaining term of the loan agreement. All other costs

not

associated with the execution of the loan agreements are expensed as incurred. As of

December 31, 2019,

we had approximately $

82,000

in unamortized loan fees and other deferred costs associated with the

2017

Credit Agreement, which we expect to charge to expense ratably over the

three

-year term of that agreement.

Der

ivative Instruments

From time to time, the Company has interest rate swap agreements in place to hedge against changes in interest rates. The fair value of the Company’s derivative instruments are reflected as assets or liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. Transactions related to the Company’s derivative instruments accounted for as hedges are classified in the same category as the item hedged in the consolidated statement of cash flows. The Company did

not

hold derivative instruments at

December 31, 2019

2018,

for trading purposes.

February 23, 2018,

we entered into an interest rate swap agreement with East West Bank in order to hedge against the variability in cash flows from future interest payments related to the

2017

Credit Agreement. The terms of the interest rate swap agreement included an initial notional amount of

$10.0

million, a fixed payment rate of

2.52%

paid by us and a floating payment rate equal to LIBOR paid by East West Bank. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations. The fair value of the interest rate swap agreement is recorded in Other Liabilities and changes to the fair value are recorded to Other Expense.

Income Taxes

The Company recognizes deferred tax liabilities and assets (Note

)

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 peri

od 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

2016

through

2019

remain open to examination. In general, the Company’s various state tax filings remain open for tax years

2015

2019.

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"). The Company did

not

have any transfers between hierarchy levels during the years ended

December 31, 2019 or 2018.

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

Quoted prices are available in active markets for identical assets or liabilities;

Level

Quoted prices in active

markets for similar assets and liabilities that are observable for the asset or liability; or

Level

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

2019

and

2018.

The fair-value is updated quarterly based on actual forfeitures.

The Company used a Lattice model to determine the fair value of market-based restricted stock awarded in

2019

and

2018.

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, the valuation of warrant liability and the Company’s interest rate swaps, 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

effect on the Company’s consolidated statement of operations.

Business Combinations

We recognize and measure the assets acquired and liabilities assumed in a business combination based on their estimated fair values at the acquisition date, with any remaining difference recorded as goodwill or gain from a bargain purchase. For material acquisitions, management typically engages an independent valuation specialist to assist with the determination of fair value of the assets acquired, liabilities assumed, noncontrolling interest, if any, and goodwill, based on recognized business valuation methodologies. If the initial accounting for the business combination is incomplete by the end of the reporting period in which the acquisition occurs, an estimate will be recorded. Subsequent to the acquisition, and

not

later than

one

year from the acquisition date, we will record any material adjustments to the initial estimate based on new information obtained about facts and circumstances that existed as of the acquisition date. An income, market or cost valuation method

may

be utilized to estimate the fair value of the assets acquired, liabilities assumed, and noncontrolling interest, if any, in a business combination. The income valuation method represents the present value of future cash flows over the life of the asset using: (i) discrete financial forecasts, which rely on management’s estimates of volumes, commodity prices, revenue and operating expenses; (ii) long-term growth rates; and (iii) appropriate discount rates. The market valuation method uses prices paid for a reasonably similar asset by other purchasers in the market, with adjustments relating to any differences between the assets. The cost valuation method is based on the replacement cost of a comparable asset at prices at the time of the acquisition reduced for depreciation of the asset. See Note

– Business Combinations

for additional information regarding our business combinations.

Recently Adopted Accounting Pronouncements

February 2016,

the FASB issued ASU

2016

02,

Leases, which introduces the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The update is effective for annual reporting periods beginning after

December 15, 2018,

including interim periods within those reporting periods, with early adoption permitted. The original guidance required application on a modified retrospective basis with the earliest period presented. In

August 2018,

the FASB issued ASU

2018

11,

Targeted Improvements to ASC

842,

Leases, which includes an option to

not

restate comparative periods in transition and elect to use the effective date of ASC

842,

Leases, as the date of initial application of transition. Based on the effective date, the Company adopted this ASU beginning on

January 1, 2019

and elected the transition option provided under ASU

2018

11.

This standard had a material effect on our consolidated balance sheet with the recognition of new right of use assets and lease liabilities for all operating leases, as these leases typically have a non-cancelable lease term of greater than

one

year. Upon adoption, both assets and liabilities on our consolidated balance sheets increased by approximately

$2.4

million. The Company elected a package of transition practical expedients which include

not

reassessing whether any expired or existing contracts are or contain leases,

not

reassessing the lease classification of expired or existing leases, and

not

reassessing initial direct costs for existing leases. The Company also elected a practical expedient to

not

separate lease and non-lease components. The Company did

not

elect the practical expedient to use hindsight in determining the lease terms or assessing impairment of the Right-of-Use (‘ROU”) assets. See Note

- Commitments and Contingencies for more information.

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, 2019.

The Company does

not

expect the adoption of ASU

2016

to have a material impact on its consolidated financial statements.