0000319458 Enservco Corporation false --12-31 Q2 2021 731 892 249 485 0.005 0.005 10,000,000 10,000,000 0 0 0 0 0.005 0.005 100,000,000 100,000,000 11,439,633 6,307,868 6,907 6,907 11,432,726 6,300,961 815 100 100 100 100 100 0 0 0 0 0 0 0 0 2017 2018 2019 2020 2016 2017 2018 2019 2020 0 44,350 5 5 0 8.25 8.25 5.25 5.25 3 3 10 10 October 15, 2022 October 15, 2022 21 21 21 1 1 5 1 5 1 1 5 1 1 3 0 0 0 0 322,000 358,000 574 Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). Includes the D-J Basin/Niobrara field (northeastern Colorado and southeastern Wyoming), the San Juan Basin (southeastern Colorado and northeastern New Mexico, the Powder River and Green River Basins (northeastern and southwestern Wyoming), the Bakken area (western North Dakota and eastern Montana). Includes the Eagle Ford Shale in Southern Texas and the East Texas Oil Field beginning during the second quarter of 2021. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

or

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-36335

ensvlogo.jpg

 

ENSERVCO CORPORATION

(Exact Name of registrant as Specified in its Charter)

 

 

Delaware

 

84-0811316

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

   

14133 Country Road 9 1/2

Longmont, CO

 

 

80504

(Address of principal executive offices)

 

(Zip Code)

 

 

Registrant’s telephone number: (303) 333-3678

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Enservco was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☒ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit files).   Yes ☒ No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐                                                                             Accelerated filer 

Non-accelerated filer                                                                               Smaller reporting company 

Emerging growth company 

 

If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No ☒

 

Indicate the number of shares outstanding of each of the Issuer's classes of common stock as of the latest practicable date.

 

Class

Outstanding at July 29, 2021

Common stock, $.005 par value

11,432,726

 

1

 

 

TABLE OF CONTENTS 

 

 

 

Page

   

Part I – Financial Information

 
   

Item 1. Financial Statements

 
   

Condensed Consolidated Balance Sheets

3

   

Condensed Consolidated Statements of Operations

4

   
Condensed Consolidated Statements of Stockholders' Equity

5

   
Condensed Consolidated Statements of Cash Flows 6
   
Notes to the Condensed Consolidated Financial Statements 7
   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

42

   

Item 4. Controls and Procedures

42

   
   

Part II

 
   

Item 1. Legal Proceedings

43

   

Item 1A.  Risk Factors

43

   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

44

   

Item 3. Defaults Upon Senior Securities

44

   

Item 4. Mine Safety Disclosures

44

   

Item 5. Other Information

44

   

Item 6. Exhibits

45

   

 

2

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

  

June 30,

  

December 31,

 

ASSETS

 

2021

  

2020

 

Current Assets

        

Cash and cash equivalents

 $3,806  $1,467 

Accounts receivable, net

  1,575   1,733 

Prepaid expenses and other current assets

  2,240   858 

Inventories

  290   295 

Assets held for sale

  527   527 

Total current assets

  8,438   4,880 
         

Property and equipment, net

  18,173   20,317 
Goodwill  546   546 
Intangible assets, net  508   617 
Right-of-use asset - finance, net  58   129 
Right-of-use asset - operating, net  2,495   2,918 
Other assets  434   423 

Non-current assets of discontinued operations

  -   353 
         

TOTAL ASSETS

 $30,652  $30,183 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current Liabilities

        

Accounts payable and accrued liabilities

 $1,623  $1,931 
Senior revolving credit facility, related party (including future interest payable of $731 and $892, respectively - see Note 6)  1,664   1,593 
Lease liability - finance, current  33   65 
Lease liability - operating, current  841   854 
Current portion of long-term debt  56   100 

Current liabilities of discontinued operations

  -   31 

Total current liabilities

  4,217   4,574 
         

Long-Term Liabilities

        
Senior revolving credit facility, related party (including future interest payable of $249 and $485, respectively - see Note 6)  13,316   17,485 
Subordinated debt, related party  -   1,180 

Long-term debt, less current portion

  2,023   2,052 
Lease liability - finance, less current portion  36   55 
Lease liability - operating, less current portion  1,782   2,185 
Other liabilities  48   88 
Long-term liabilities of discontinued operations  -   9 

Total long-term liabilities

  17,205   23,054 

Total liabilities

  21,422   27,628 
         

Commitments and Contingencies (Note 8)

          
         

Stockholders' Equity

        

Preferred stock, $.005 par value, 10,000,000 shares authorized, no shares issued or outstanding

  -   - 

Common stock. $.005 par value, 100,000,000 shares authorized; 11,439,633 and 6,307,868 shares issued as of June 30, 2021 and December 31, 2020, respectively; 6,907 shares of treasury stock as of June 30, 2021 and December 31, 2020, respectively; and 11,432,726 and 6,300,961 shares outstanding as of June 30, 2021 and December 31, 2020, respectively

  57   32 

Additional paid-in capital

  40,481   30,052 

Accumulated deficit

  (31,308)  (27,529)

Total stockholders' equity

  9,230   2,555 
         

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $30,652  $30,183 

 

 

See notes to condensed consolidated financial statements.

 

3

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands except per share amounts)

(Unaudited)

 

  

For the Three Months Ended

  For the Six Months Ended 
  

June 30,

  June 30, 
  

2021

  

2020

  2021  2020 
                 

Revenues

                

Production services

 $2,229  $1,383  $4,073  $4,585 

Completion and other services

  858   758   4,157   6,942 

Total revenues

  3,087   2,141   8,230   11,527 
                 

Expenses

                

Production services

  2,346   1,814   4,313   5,308 

Completion and other services

  1,349   1,516   4,491   6,487 

Sales, general, and administrative expenses

  992   1,247   1,997   3,009 
Severance and transition costs  -   139   -   139 
Loss on disposal of assets  19   23   70   38 

Depreciation and amortization

  1,337   1,310   2,673   2,706 

Total operating expenses

  6,043   6,049   13,544   17,687 
                 

Loss from Operations

  (2,956)  (3,908)  (5,314)  (6,160)
                 

Other (expense) income

                

Interest expense

  (11)  (547)  (44)  (1,188)

Other income

  1,361   76   1,587   96 

Total other income (expense)

  1,350   (471)  1,543   (1,092)
                 
Loss from continuing operations before taxes  (1,606)  (4,379)  (3,771)  (7,252)

Income tax expense

  -   (9)  -   (9)

Loss from continuing operations

  (1,606)  (4,388)  (3,771)  (7,261)
Income (loss) from discontinued operations (Note 5)  -   31   (8)  67 
Net loss $(1,606) $(4,357) $(3,779) $(7,194)
                 
                 

Loss from continuing operations per common share - basic and diluted

 $(0.14) $(1.19) $(0.37) $(1.96)
Income from discontinued operations per common share - basic and diluted  -   0.01   -   0.01 
Net loss per share - basic and diluted $(0.14) $(1.18) $(0.37) $(1.95)
                 

Weighted average number of common shares outstanding - basic and diluted

  11,433   3,690   10,316   3,696 

 

See notes to condensed consolidated financial statements.

 

4

 

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

 

   

Common

Shares

   

Common

Stock

   

Additional

Paid-in

Capital

   

Accumulated

Deficit

   

Total

Stockholders’

Equity (Deficit)

 
                                         

Balance at January 1, 2020

    3,703     $ 19     $ 22,325     $ (25,020 )   $ (2,676

)

Stock-based compensation

    -       -       39       -       39  
Restricted share cancellation     (2 )     -       -       -       -  
Net loss     -       -       -       (2,837 )     (2,837 )

Balance at March 31, 2020

    3,701     $ 19     $ 22,364     $ (27,857 )   $ (5,474

)

                                         
Stock-based compensation, net of issuance costs     -       -       322       -       322  
Restricted share issuance     7       -       -       -       -  
Restricted share cancellation     (45 )     -       -       -       -  
Restricted share vested     -       -       5       -       5  
Net loss     -       -             (4,357 )     (4,357 )
Balance at June 30, 2020     3,663     $ 19     $ 22,691     $ (32,214 )   $ (9,504 )

 

 

   

Common

Shares

   

Common

Stock

   

Additional

Paid-in

Capital

   

Accumulated

Deficit

   

Total

Stockholders’

Equity

 
                                         

Balance at January 1, 2021

    6,301     $ 32     $ 30,052     $ (27,529 )   $ 2,555  

Stock-based compensation

    -       -       24       -       24  
Shares issued in offering, net of issuance costs     4,200       21       8,824       -       8,845  
Shares issued to Cross River Partners, L.P. in subordinated debt and accrued interest conversion, net of discount     602       3       1,246       -       1,249  
Restricted share issuances     330       1       310       -       311  
Net loss     -       -       -       (2,173 )     (2,173 )

Balance at March 31, 2021

    11,433     $ 57     $ 40,456     $ (29,702 )   $ 10,811  
                                         
Stock-based compensation     -       -       25       -       25  
Net loss     -       -       -       (1,606 )     (1,606 )
Balance at June 30, 2021     11,433     $ 57     $ 40,481     $ (31,308 )   $ 9,230  

 

See accompanying notes to consolidated financial statements.

 

5

 

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

   

For the Six Months Ended

 
   

June 30,

 
   

2021

   

2020

 

OPERATING ACTIVITIES

               

Net loss

  $ (3,779 )   $ (7,194 )
    Net (loss) income from discontinued operations     (8 )     67  

Net loss from continuing operations

    (3,771 )     (7,261 )

Adjustments to reconcile net loss to net cash used in operating activities

               

Depreciation and amortization

    2,673       2,706  
Loss on disposal of equipment     70       38  
Board compensation issued in equity     311       -  

Stock-based compensation

    49       361  

Amortization of debt issuance costs and discount

    8       95  

Provision for bad debt expense

    3       298  

Changes in operating assets and liabilities

               

Accounts receivable

    156       4,674  

Inventories

    5       85  

Prepaid expense and other current assets

    (1,382 )     68  
Income taxes receivable     -       (14 )
Amortization of operating lease assets     422       416  

Other assets

    46       320  

Accounts payable and accrued liabilities

    (260 )     (2,365 )
Operating lease liabilities     (416 )     (416 )
Other liabilities     (40 )     (21 )
   Net cash used in operating activities - continuing operations     (2,126 )     (1,016 )
   Net cash provided by operating activities - discontinued operations     4       134  
Net cash used in operating activities     (2,122 )     (882 )
                 

INVESTING ACTIVITIES

               

Purchases of property and equipment

    (195 )     (306 )
Proceeds from insurance claims     -       294  
Proceeds from disposals of property and equipment     65       335  
   Net cash (used in) provided by investing activities - continuing operations     (130 )     323  
   Net cash provided by investing activities - discontinued operations     -       681  
Net cash (used in) provided by investing activities     (130 )     1,004  
                 

FINANCING ACTIVITIES

               
Gross proceeds from stock issuance     9,660       -  
Stock issuance costs and registration fees     (815)       -  
Term loan repayment     (3,000 )     -  

Net line of credit (repayments) borrowings 

    (701 )     (2,001 )
Proceeds from PPP loan     -       1,940  
TDR accrued future interest payments     (397 )     -  

Repayment of long-term debt

    (72 )     (49 )
Payments of finance leases     (83 )     (245 )
Net cash provided by (used in) financing activities - continuing operations     4,592       (355 )
Net cash used in financing activities - discontinued operations     (1 )     (1 )
Net cash provided by (used in) financing activities     4,591       (356 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents     2,339       (234 )
                 
Cash and Cash Equivalents, beginning of period     1,467       663  
                 

Cash and Cash Equivalents, end of period

  $ 3,806     $ 429  
                 
                 

Supplemental Cash Flow Information:

               

Cash paid for interest

  $ 413     $ 1,026  

Supplemental Disclosure of Non-cash Investing and Financing Activities:

               
Non-cash conversion of subordinated debt and accrued interest to common stock   $ 1,312     $ -  
Non-cash conversion of unamortized subordinated debt discount     61       -  

 

See notes to condensed consolidated financial statements.

 

6

 

ENSERVCO CORPORATION AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

 

Note 1 – Basis of Presentation

 

Enservco Corporation (“Enservco”) through its wholly-owned subsidiaries (collectively referred to as the “Company”, “we” or “us”) provides various services to the domestic onshore oil and natural gas industry. These services include frac water heating (completion and other services) and hot oiling and acidizing (production services).

 

The accompanying unaudited condensed consolidated financial statements have been derived from the accounting records of Enservco Corporation, Heat Waves Hot Oil Service LLC (“Heat Waves”), Dillco Fluid Service, Inc. (“Dillco”), Heat Waves Water Management LLC (“HWWM”), and Adler Hot Oil Service, LLC ("Adler") (collectively, the “Company”) as of June 30, 2021 and December 31, 2020 and the results of operations for the three and six months ended June 30, 2021 and 2020.

 

The below table provides an overview of the Company’s current ownership hierarchy:

 

Name

State of

Formation

Ownership

Business

Heat Waves Hot Oil Service LLC 

Colorado

100% by Enservco

Oil and natural gas well services, including logistics and stimulation.

    
Adler Hot Oil Service, LLC Delaware100% by Enservco

Operations integrated into Heat Waves during 2019. Adler Hot Oil Service, LLC was dissolved during the second quarter of 2021.

    

Heat Waves Water Management LLC 

Colorado

100% by Enservco

Discontinued operations in 2019. Heat Waves Water Management LLC was dissolved during the second quarter of 2021.

    
Dillco Fluid Service, IncKansas100% by Enservco

Discontinued operations in 2018. Dillco Fluid Service, Inc was dissolved during the second quarter of 2021.

    

HE Services LLC 

Nevada

100% by Heat Waves

No active business operations. Owned construction equipment used by Heat Waves. HE Services LLC was dissolved on December 23, 2020.

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all normal and recurring adjustments necessary to fairly present the interim financial information set forth herein have been included. The results of operations for interim periods are not necessarily indicative of the operating results of a full year or of future years.

 

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and follow the same accounting policies and methods of their application as the most recent annual financial statements. These interim financial statements should be read in conjunction with the financial statements and related footnotes included in the Annual Report on Form 10-K of Enservco Corporation for the year ended December 31, 2020. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

 

 

 

Note 2 - Summary of Significant Accounting Policies

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments purchased with an original maturity of three months or less 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 one financial institution, 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 for 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 status of existing receivables. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of June 30, 2021 and December 31, 2020, the Company had an allowance for doubtful accounts of approximately $213,000 and $322,000, respectively. For the three and six months ended June 30, 2021, the Company recorded approximately ($35,000) and $3,000 to bad debt (recovery) expense, respectively. For the three and six months ended June 30, 2020, the Company recorded approximately ($2,000) and $298,000 to bad debt (recovery) expense, respectively.

 

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. For the three and six months ended June 30, 2021 and 2020, the Company did not recognize any write-downs or write-offs of inventory.

 

Property and Equipment

 

Property and equipment consist of (i) trucks, trailers and pickups; (ii) water transfer pumps, pipe, lay flat hose, trailers, and other support equipment; (iii) real property which includes land and buildings used for office and shop facilities and wells used for the disposal of water; (iv) other equipment such as tools used for maintaining and repairing vehicles, and (v) 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 did not capitalize any interest during the three and six months ended June 30, 2021 or 2020. 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 5 to 30 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 12 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 major 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 finance 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 payable; there were no  rent escalation terms associated with these equipment leases. The Company records amortization expense on equipment under finance 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. During both the first and second quarters of 2021, the Company concluded that there were no further triggering events which could indicate impairment of its long-lived assets. During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its long-lived assets. The Company reviewed 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 long-lived assets have been impaired. The Company determined that there was no impairment of its long-lived assets during the three and six months ended June 30, 2021.

 

 

Assets Held for Sale

 

The Company classifies long-lived assets to be sold as held for sale in the period in which all of the following criteria are met: (1) management, having the authority to approve the action, commits to a plan to sell the asset or disposal group; (2) the asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; (3) an active program to locate a buyer and other actions required to complete the plan to sell the asset or disposal group have been initiated; (4) the sale of the asset or disposal group is probable, and transfer of the asset or disposal group is expected to qualify for recognition as a completed sale within one year, except if events or circumstances beyond our control extend the period of time required to sell the asset or disposal group beyond one year; (5) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (6) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. We assess the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. During the three and six months ended June 30, 2021 and 2020, the Company recorded no impairment charges on its held for sale assets.

 

Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line items assets held for sale in our consolidated balance sheets.

 

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.

 

During the first six months of 2021, the Company concluded that there were no further triggering events which could indicate impairment of its goodwill and other intangible assets. During the first quarter of 2020, the combination of the COVID-19 pandemic and actions taken by the OPEC+ countries caused oil and gas commodity demand to decrease significantly. The Company determined that these were triggering events which could indicate impairment of its goodwill and other intangible assets. The Company reviewed both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company uses both the fair value and discounted future cash flows in its assessment of whether goodwill and other intangible assets have been impaired. The Company determined that there was no impairment of its goodwill and other intangible assets during the three and six months ended June 30, 2021 and 2020.

 

Revenue Recognition 

 

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 30 to 60 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 11 - Segment Reporting for disaggregation of revenue.

 

Employee Retention Credits

 

The Employee Retention Credits, a provision of the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), was extended through December 31, 2021, through the American Rescue Plan Act. For 2021, the Employee Retention Credits are up to $7,000 per employee per quarter on qualified wages. During the second quarter of 2021, the Company amended payroll tax returns originally filed for the third and fourth quarters of 2020 in order to claim refundable Employee Retention Credits for those periods. For the three and six months ended June 30, 2021, the Company recorded $1.3 million and $1.5 million, respectively.

 

Earnings (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 weighted 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, restricted stock and warrants.

 

As of June 30 2021 and 2020, there were outstanding stock options, unvested restricted stock awards and warrants to acquire an aggregate of 1,377,516 and 173,166 shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of June 30, 2021 and 2020, the outstanding stock options and warrants had no aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on June 30, 2021 and 2020, and the exercise price, multiplied by the number of in-the-money instruments). 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 three and six months ended June 30, 2021 and 2020.

 

 

Income Taxes 

 

The Company recognizes deferred tax liabilities and assets 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 period 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 2017 through 2020 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2016 to 2020.

 

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"). Specific inputs used in the Lattice are the underlying stock price, the exercise price of the warrant, expected dividends, historical volatility, term to expiration and risk-free interest rates. The Company did not have any transfers between hierarchy levels during the three and six months ended June 30, 2021. 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 1:

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

 

Level 2:

Quoted prices in active markets for similar assets and liabilities that are observable for the asset or liability; or

 

Level 3:

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 2018 and 2019. Stock based compensation is updated quarterly based on actual forfeitures. The Company used either a Lattice model or the Black-Scholes pricing model to determine the fair value of market-based restricted stock awarded in 2021 and 2020.

 

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 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 no effect on the Company’s consolidated statement of operations.

 

Accounting Pronouncements 

 

In 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, 2022. The Company does not expect the adoption of ASU 2016-13 to have a material impact on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles of Topic 740, and improves consistent application by clarifying and amending existing guidance. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements. The standard is effective for fiscal years beginning after December 15, 2020. The Company adopted ASU 2019-12 on January 1, 2021, and the adoption did not have a material impact on its consolidated financial statements.

 

 

 

Note 3 - Property and Equipment

 

Property and equipment consist of the following (amounts in thousands):

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 
         

Trucks and vehicles

 $57,030  $57,224 

Other equipment

  1,924   1,319 

Buildings and improvements

  3,191   3,176 

Land

  378   378 

Total property and equipment

  62,523   62,097 

Accumulated depreciation

  (44,350)   (41,780)

Property and equipment, net

 $18,173  $20,317 

  

 

For the three and six months ended June 30, 2021, the Company recorded depreciation expense of approximately $1.2 million and $2.5 million, respectively. For the three and six months ended June 30, 2020, the Company recorded depreciation expense of approximately $1.1 million and $2.5 million, respectively.

 

 

Note 4 – Intangible Assets 

 

The components of our intangible assets are as follows (in thousands):

 

  

June 30, 2021

  

December 31, 2020

 

Customer relationships

 $626  $626 

Patents and trademarks

  441   441 

Total intangible assets

  1,067   1,067 

Accumulated amortization

  (559)  (450)

Net carrying value

 $508  $617 

 

 

The useful lives of our intangible assets are estimated to be five years. For the three and six months ended June 30, 2021, amortization expense was approximately $54,000 and $109,000, respectively. For the three and six months ended June 30, 2020, amortization expense was approximately $51,000 and $102,000, respectively. 

 

The following table represents the amortization expense for the next five years for the twelve months ending June 30 (in thousands): 

 

  

2022

  

2023

  

2024

  

2025

  

2026

 

Customer relationships

 $125  $125  $41  $-  $- 

Patents and trademarks

  93   93   31   -   - 

Total intangible asset amortization expense

 $218  $218  $72  $-  $- 

 

 

 

Note 5 – Discontinued Operations 

 

Heat Waves Water Management

 

During December 2019, the Heat Waves Water Management business ceased operations. The decision to discontinue HWWM was made due to its history of net losses, declining revenues, and its failure to generate positive operating cash flow. In early 2020, the Company began disposing of the HWWM assets and plans on selling the remaining HWWM assets during the remainder of 2021. The HWWM entity was dissolved during the second quarter of 2021, and the remaining assets and liabilities were transferred to our Heat Waves entity.

 

Dillco

 

Effective November 1, 2018, the Dillco water hauling business ceased operations for customers. The Dillco entity was dissolved during the second quarter of 2021.

 

The following table represents a reconciliation of the carrying amounts of major classes of assets and liabilities disclosed as discontinued operations in the Balance Sheets:

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 

Carrying amount of major classes of assets included as part of discontinued operations:

        

Property and equipment, net

  -   321 
Other assets  -   32 

Total major classes of assets of the discontinued operation

 $-  $353 
         

Carrying amounts of major classes of liabilities included as part of discontinued operations:

        

Accounts payable and accrued liabilities

  -   6 
Other liabilities  -   34 

Total liabilities included as part of discontinued operations

 $-  $40 

 

 

The following table represents a reconciliation of the major classes of line items constituting pretax loss of discontinued operations that are disclosed as discontinued operations in the Statements of Operations:  

 

  Three Months Ended June 30, 
  

2021

  

2020

 
         

Revenue

 $-  $- 

Cost of sales

  -   (11)

Sales, general, and administrative expenses

  -   - 

Depreciation and amortization

  -   (7)

Other expense items that are not major

  -   11 

Pretax loss of discontinued operations related to major classes of pretax profit

  -   (7)
Gain on disposal  -   38 

Total income on discontinued operations that is presented in the Statements of Operations

 $-  $31 

 

 

  

Six Months Ended June 30,

 
  

2021

  

2020

 
         

Revenue

 $-  $- 

Cost of sales

  (1)  (11)

Sales, general, and administrative expenses

  -   - 

Depreciation and amortization

  (6)  (13)

Other expense items that are not major

  (1)  (1)

Pretax loss of discontinued operations related to major classes of pretax profit

  (8)  (25)

Gain on disposal

  -   92 

Total (loss) income on discontinued operations that is presented in the Statements of Operations

 $(8) $67 

 

 

 

Note 6 – Debt

 

East West Bank Revolving Credit Facility
 

On August 10, 2017, the Company entered into a Loan and Security Agreement, as amended, with East West Bank (the "2017 Amended Credit Agreement" or "Credit Facility"). The 2017 Amended Credit Agreement originally allowed us to borrow up to 85% of our eligible receivables and up to 85% of the appraised value of our eligible equipment. The Fifth Amendment to the 2017 Amended Credit Agreement dated September 23, 2020 (the "Fifth Amendment") restructured the loan and provided for a loan forgiveness of $16.0 million and converts the remaining principal balance to a $17.0 million equipment term loan and a revolver to provide the Company with a maximum $1.0 million line of credit. The Sixth Amendment to the 2017 Amended Credit Agreement dated February 1, 2021 (the "Sixth Amendment") further extended the maturity date and modified the financial covenants effective January 1, 2021. The Seventh Amendment to the Credit Facility dated April 26, 2021 (the "Seventh Amendment") provided for amortization of the loan on a 10-year straight-line basis commencing on November 15, 2021 and continuing until maturity on October 15, 2022. Interest on the Credit Facility is fixed at 8.25%. Interest on the first 5.25% is calculated monthly and paid in arrears, while the remaining 3.00% is accrued to the loan balance through October 15, 2022, and due with all remaining outstanding principal on the maturity date. Additionally, the Credit Facility is subject to an unused credit line fee of 0.5% per annum multiplied by the amount by which total availability exceeds the average monthly balance of the Credit Facility, payable monthly in arrears. The Credit Facility is collateralized by substantially all our assets and subject to financial covenants.

 

On February 11, 2021, the Company made a $3.0 million payment of principal on the equipment term loan. As of June 30, 2021, we had an outstanding principal loan balance under the Credit Facility of approximately $14.0 million with a weighted average interest rates of 8.25% per year. As of June 30, 2021, our availability under the 2017 Amended Credit Agreement was $1.0 million. The Credit Facility balance of $15.0 million at June 30, 2021 includes $1.0 million of future interest payable due over the remaining term of the Credit Facility in accordance with ASC 470-60, Troubled Debt Restructuring by Debtors.

 

Under the  2017 Amended Credit Agreement, we are subject to the following financial covenants, with which we were in compliance as of June 30, 2021:
 

(1)  On December 31, 2020, we were required to maintain liquidity of not less than $1.5 million; and

 

(2)  For each trailing three-month period, commencing with the three-month period ending March 31, 2021, we are required to achieve gross revenue of at least seventy percent (70%) of our projected gross revenue; and

 

( 3)  We are limited to a capital expenditures cap of $1.2 million for any fiscal year that the loan remains outstanding.
 

In connection with amending the 2017 Amended Credit Agreement on September 23, 2020, the Company issued to East West Bank 533,334 shares of Company common stock, and a five-year warrant to purchase up to 1,000,000 additional shares of Company common stock at an exercise price of $3.75 per share. The 533,334 shares of Company common stock were valued at a price of $2.0775 per share, or a total value of $1.1 million. The 533,334 common shares issued to East West Bank could not be sold or transferred prior to March 23, 2021. The warrant for 1,000,000 shares is exercisable beginning September 23, 2021 until September 23, 2025. The fair value of the warrant was determined to be $1.4 million and were recorded in additional paid-in capital. The Company recorded a total gain on the debt restructuring of $11.9 million during the third quarter of 2020, which was calculated by subtracting from the $16.0 million loan forgiveness, a) the future interest payable on the Credit Facility; b) the value of the Company common stock issued; and c) the fair value of the warrant.

 

Debt Issuance Costs

 

We capitalized certain debt issuance costs incurred in connection with the Credit Facility discussed above and these costs were amortized to interest expense over the term of the facility on a straight-line basis. There were no remaining unamortized debt issuance costs as of June 30, 2021 and December 31, 2020. During the three and six months ended June 30, 2020, the Company amortized approximately $24,000 and $58,000, respectively, of these costs to Interest Expense. 

 

Paycheck Protection Program

 

On April 10, 2020, the Company, entered into a promissory note (the “Note”) with East West Bank in the aggregate amount of $1,939,900, pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the CARES Act, which was enacted March 27, 2020, and is administered by the United States Small Business Administration ("SBA").

 

On November 9, 2020, the Company submitted the initial loan forgiveness application to East West Bank for review and approval. On July 8, 2021, the SBA approved our loan forgiveness application in full, which includes forgiveness of the total principal balance of $1.9 million, as well as approximately $24,000 in accrued interest. The total amount forgiven will be recorded in other income (expense) during the third quarter of 2021.

 

 

Notes Payable

 

Long-term debt consists of the following (in thousands):

 

  

June 30,

  

December 31,

 
  

2021

  

2020

 
         
Senior Revolving Credit Facility with related party. All future interest through October 15, 2021 accrued to loan pursuant to the Fifth Amendment. Interest at 8.25%, 5.25% is paid monthly while 3% is accrued and paid upon maturity. Amortization of the loan on a 10-year straight-line basis will commence on November 15, 2021. Matures October 15, 2022. $14,980 $ 19,078 
         
Paycheck Protection Loan. Interest is at 1% with payments deferred until October 10, 2020. Matures April 10, 2022. Loan and accrued interest forgiven in full on July 8, 2021.  1,940   1,940 
         
Subordinated Promissory Note with related party. Interest is at 10% and is paid quarterly. Balance converted to equity in February 2021.  -   1,250 
         

Real Estate Loan for a facility in North Dakota, interest at 5.75%, and monthly principal and interest payment of $5,255 until October 3, 2023. Collateralized by land and property purchased with the loan. 

  139   167 
         
Vehicle loans for three pickups, interest at 8.59% monthly principal and interest payments of $3,966. Loans paid in full in June 2021.  -   31 
         
Note payable to the seller of Heat Waves. The note was garnished by the Internal Revenue Service (“IRS”) in 2009 and is due on demand; paid in annual installments of $36,000 per agreement with the IRS. Loan paid in full in June 2021.  -   14 

Total

  17,059   22,480 
Less debt discount  -   (70)

Less current portion

  (1,720)  (1,693)

Long-term debt, net of debt discount and current portion

 $15,339  $20,717 

 

Aggregate maturities of debt are as follows (in thousands):

 

Twelve Months Ending June 30,

    

2022

 $1,720 

2023

  15,316 

2024

  

23

 

Thereafter

  - 

Total

 $17,059 

 

 

 

Note 7 – Income Taxes 

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the three and six months ended June 30, 2021 and 2020 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% to pre-tax income primarily because of state income taxes and estimated permanent differences.

 

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

 

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

 

Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management recorded a valuation allowance to reduce its net deferred tax assets to zero.

 

During the six months ended June 30, 2021 and 2020, the Company's tax benefit of $0.4 million and $1.8 million, respectively, were adjusted by the valuation allowance which resulted in a net tax provision of zero.

 

 

 

Note 8 – Commitments and Contingencies 

 

As of June 30, 2021, 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 June 30,

 Operating Leases  Finance Leases 

2022

 $933  $36 

2023

  644   14 

2024

  613   14 

2025

  358   5 
2026  359   - 

Thereafter

  -   - 
Total future lease commitments  2,907   69 
Impact of discounting  (284)  - 
Discounted value of lease obligations $2,623  $69 

 

  

 

The following table summarizes the components of our gross operating lease costs incurred during the three and six months ended June 30, 2021 and 2020 (in thousands):

 

  

Three Months Ended June 30,

  Six Months Ended June 30, 
  2021  2020  2021  2020 

Operating lease expense:

                
Current lease cost $19  $288  $33  $579 
Long-term lease cost  241   23   512   43 

Total operating lease cost

 $260  $311  $545  $622 
Finance lease expense:                
Amortization of right-of-use assets $22  $37  $47  $95 
Interest on lease liabilities  1   5   3   12 

Total lease cost

 $23  $42  $50  $107 

 

 

Our weighted-average lease term and discount rate used during the six months ended June 30, 2021 and 2020 are as follows:

 

  Six Months Ended June 30, 
  2021  2020 
Operating        

Weighted-average lease term (years)

  3.73   4.46 

Weighted-average discount rate

  6.09%  6.08%
Finance        
Weighted-average lease term (years)  2.45   1.78 
Weighted-average discount rate  5.76%  6.10%

 

 

Self-Insurance

 

In 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 $97,000 and $150,000 as of June 30, 2021 and December 31, 2020, respectively, for insurance claims that it anticipates paying in the future related to claims that occurred prior to December 31, 2020. Effective January 1, 2021, the Company moved onto a traditional Employee Group Medical Plan and was no longer self-insured for claims occurring after that date.

 

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 June 30, 2021, 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 June 30, 2021, 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. In September 2020, the claim was officially denied by the Kansas Division of Workers Compensation Judicial Unit. As of June 30, 2021, no appeal has been made and the Company expects to collect the remaining $189,000 on deposit with the underwriter. Effective  April 1, 2018, we entered into a new workers’ compensation policy with a fixed premium amount determined annually, and therefore are no longer partially self-insured for workers' compensation and employer's liability.

 

 

 

Note 9– Stockholders’ Equity

 

 Conversion of Subordinated Debt to Equity

 

On August 13, 2020, the Company's Board of Directors approved a transaction to exchange 50%, or $1.25 million, of our subordinated debt with Cross River Partners, L.P., a related party, as well as $265,000 in accrued interest, for 403,602 shares of Company common stock. The total common stock fair value consideration was $963,000 and the Company recognized a gain of $552,000 in the consolidated statements of stockholders’ equity.

 

In a separate transaction on February 11, 2021, the Company exchanged the remaining 50%, or $1.25 million, of our subordinated debt with Cross River Partners, L.P., as well as $62,000 in accrued interest, for 601,674 shares of Company common stock, which was based on the price of Company common stock at market close on the date of the conversion. In addition, the Company awarded a warrant to Cross River Partners, L.P. to purchase up to 150,418 shares of the Company's common stock at an exercise price of $2.507 per share. The warrants had a grant-date fair value $2.02 per share and are exercisable beginning one-year from the issuance date on February 11, 2022 until February 11, 2026. The total fair value of the warrant and loss on extinguishment of the subordinated debt was $304,000, which was immaterial to the Company's consolidated financial statements.

 

Warrants

 

On November 11, 2019, in connection with a subordinated loan agreement, the Company granted Cross River one five-year warrant to buy an aggregate total of 41,667 shares of the Company's common stock at an exercise price of $3.00 per share. The warrants had a grant-date fair value $2.40 and were fully vested upon issuance and remain outstanding and exercisable until November 11, 2024.

 

On September 23, 2020, in connection with the Fifth Amendment, the Company granted East West Bank one five-year warrant to buy an aggregate total of 1,000,000 shares of the Company's common stock at an exercise price of $3.75 per share. The warrants had a grant-date fair value of $1.42, were fully vested upon issuance and remain outstanding and are exercisable beginning one-year from the issuance date on September 23, 2021 until September 23, 2025.

 

On February 11, 2021, in connection with the conversion of the subordinated loan agreement to Company common stock, the Company granted Cross River one five-year warrant to buy an aggregate total of 150,418 shares of the Company's common stock at an exercise price of $2.507 per share. The warrants had a grant-date fair value $2.02 and are exercisable beginning one-year from the issuance date on February 11, 2022 until February 11, 2026.

 

Each grant of warrants granted to Cross River was reviewed and approved by the independent directors of the Company.

 

On April 12, 2021, the SEC issued a Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies ("SPACs") (the "Staff Statement"). The SEC highlighted accounting considerations which could, in certain circumstances, indicate that warrants should be accounted for as liabilities rather than equity instruments, in which case the warrants would be subject to fair value adjustments during each reporting period. Although the Staff Statement focused on SPACs, the same accounting considerations may apply to warrants issued by non-SPAC entities. Upon issuance of the Staff Statement, the Company performed further analysis on its population of warrants, which are listed above, giving consideration to the areas of concern noted in the Staff Statement. Upon this further review of its warrant agreements, the Company determined that it has correctly accounted for its warrants as equity instruments.

 

 

A summary of warrant activity for the six months ended June 30, 2021 is as follows (amounts in thousands): 

 

          

Weighted

 
      

Weighted

  

Average

 
      

Average

  

Remaining

 
      

Exercise

  

Contractual

 

Warrants

 

Shares

  

Price

  

Life (Years)

 
             

Outstanding at December 31, 2020

  1,043,667  $3.73   4.7 

Issued

  150,418   2.51   4.2 
Expired  (2,000)  10.50   - 

Outstanding at June 30, 2021

  1,192,085  $3.57   4.3 
             

Exercisable at June 30, 2021

  41,667  $3.00   3.4 

 

 

Note 10 – Stock Options and Restricted Stock

 

Stock Options

 

On July 27, 2010, the Company’s Board of Directors adopted the 2010 Stock Incentive Plan (the “2010 Plan”). The aggregate number of shares of common stock that could be granted under the 2010 Plan was reset at the beginning of each year based on 15% of the number of shares of common stock then outstanding. As such, on January 1, 2016, the number of shares of common stock available under the 2010 Plan was reset to 381,272 shares based upon 2,541,809 shares outstanding on that date. Options were typically granted with an exercise price equal to the estimated fair value of the Company's common stock at the date of grant with a vesting schedule of one to three years and a contractual term of 5 years. As discussed below, the 2010 Plan has been replaced by a new stock option plan and no additional stock option grants will be granted under the 2010 Plan. As of June 30, 2021, there were no options to purchase shares under the 2010 Plan.

 

On July 18, 2016, the Board of Directors unanimously approved the adoption of the Enservco Corporation 2016 Stock Incentive Plan (the “2016 Plan”), which was approved by the stockholders on September 29, 2016. The aggregate number of shares of common stock that may be granted under the 2016 Plan is 533,334 shares plus authorized and unissued shares from the 2010 Plan totaling 159,448 for a total reserve of 692,782 shares. As of June 302021, there were outstanding options to purchase 2,934 shares and we had granted restricted stock shares of 182,497 sares of restricted stock that remained outstanding under the 2016 Plan.

 

During the six months ended June 30, 2021 and 2020, no options were granted or exercised. 

 

 

The following is a summary of stock option activity for all equity plans for the six months ended June 30, 2021:

 

  

Shares

  

Weighted Average

Exercise Price

  

Weighted Average

Remaining

Contractual Term

(Years)

 
             

Outstanding at December 31, 2020

  11,569  $5.87   0.53 

Forfeited or Expired

  8,635   5.98   - 

Outstanding at June 30, 2021

  2,934  $5.55   0.92 
             

Vested at June 30, 2021

  2.934  $5.55   0.92 

Exercisable at June 30, 2021

  2,934  $5.55   0.92 

 

There was no aggregate intrinsic value (the difference between the estimated fair value of the Company’s common stock on June 30, 2021, and the exercise price, multiplied by the number of in-the-money options) of our outstanding options.

 

During the three and six months ended June 30, 2021, the Company recognized no stock-based compensation costs for stock options. During the three and six months ended June 30, 2020, the Company recognized stock-based compensation costs for stock options of approximately $1,000 and $3,000, respectively, in sales, general, and administrative expenses.

 

As of June 30, 2021, there was no remaining unrecognized compensation costs related to non-vested shares under the Company's stock option plans.

 

 

Restricted Stock

 

Restricted shares issued pursuant to restricted stock awards under the 2016 Stock Plan are restricted as to sale or disposition. These restrictions lapse periodically generally over a period of three years. Restrictions may also lapse for early retirement and other conditions in accordance with our established policies. Upon termination of employment, shares on which restrictions have not lapsed must be returned to us, resulting in restricted stock forfeitures. The fair market value on the date of the grant of the stock with a service condition is amortized and charged to income on a straight-line basis over the requisite service period for the entire award. The fair market value on the date of the grant of the stock with a performance condition shall be accrued and recognized when it becomes probable that the performance condition will be achieved. Restricted shares that contain a market condition are amortized and charged over the life of the award.

 

A summary of the restricted stock activity is presented below:

 

  

Number of Shares

  

Weighted-Average Grant-

Date Fair Value

 
         

Restricted shares at December 31, 2020

  24,393  $7.32 

Granted

  165,000   1.05 

Vested

  (5,673)  8.11 

Forfeited

  (1,223)  9.99 

Restricted shares at June 30, 2021

  182,497  $1.61 

 

During the three months ended June 30, 2021 and 2020, the Company recognized stock-based compensation costs for restricted stock of approximately $25,000 and $322,000, respectively, in sales, general, and administrative expenses. During the six months ended June 30, 2021 and 2020, the Company recognized stock-based compensation costs for restricted stock of approximately $49,000 and $358,000, respectively, in sales, general, and administrative expenses. Compensation cost is revised if subsequent information indicates that the actual number of restricted stock vested due to service is likely to differ from previous estimates.

 

The following table sets forth the weighted average outstanding of potentially dilutive instruments for the three and six months ended June 30, 2021 and 2020: 

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2021  2020  2021  2020 

Stock options

  3,471   103,503   4,845   110,840 
Restricted stock  1,193,887   43,667   1,159,082   43,667 

Warrants

  184,150   67,799   177,282   90,983 

Weighted average

  1,381,508   214,969   1,341,209   245,489 

 

On January 4, 2021, the Company awarded Company common stock to members of its Board of Directors with an award date fair value of approximately $311,000 based on the closing price of the Company's stock reported on the NYSE American on the date of the award. As of December 31, 2020, the Company accrued Board of Director fees of approximately $221,000 for services rendered from October 2019 through December 2020. During the six months ended June 30, 2021, the Company issued 118,184 shares to settle the outstanding accrual. During the six months ended June 30, 2021, the Company awarded 48,129 restricted shares for 2021 Board of Director fees and has recognized expense of approximately $45,000 related to the award of these shares. The Company will expense the remaining $45,000 related to the award of these shares during the third and fourth quarters of 2021.

 

 

 

Note 11- Segment Reporting

 

Enservco’s reportable business segments are Production Services and Completion and Other Services. These segments have been selected based on management’s resource allocation and performance assessment in making decisions regarding the Company.

 

The following is a description of the segments.

 

Production Services: This segment utilizes a fleet of hot oil trucks and acidizing units to provide maintenance services to the domestic oil and gas industry. These services include hot oil services and acidizing services.

 

Completion and Other Services: This segment utilizes a fleet of frac water heating units to provide frac water heating services to the domestic oil and gas industry. These services also include other services, which consists primarily of hauling and transport of materials for customers.

 

Unallocated includes general overhead expenses and assets associated with managing all reportable operating segments which have not been allocated to a specific segment.

 

The following tables set forth certain financial information with respect to Enservco’s reportable segments (in thousands):

 

  

Production

Services

  

Completion and Other

Services

  

Unallocated

  

Total

 

Three Months Ended June 30, 2021:

                

Revenues

 $2,229  $858  $-  $3,087 

Cost of Revenue

  2,346   1,349   -   3,695 

Segment (Loss) Profit

 $(117) $(491) $-  $(608)
                 

Depreciation and Amortization

 $572  $661  $104  $1,337 
                 

Capital Expenditures

 $70  $80  $-  $150 
                 
    Identifiable assets (1) $10,592  $12,242  $718  $23,552 
                 

Three Months Ended June 30, 2020:

                

Revenues

 $1,383  $758  $-  $2,141 

Cost of Revenue

  1,814   1,516   -  $3,330 

Segment (Loss) Profit

 $(431) $(758) $-  $(1,189)
                 

Depreciation and Amortization

 $647  $567  $96  $1,310 
                 

Capital Expenditures

 $76  $66  $-  $142 
                 
    Identifiable assets (1) $13,228  $15,085  $1,135  $29,448 

 

 

(1)

Identifiable assets is calculated by summing the balances of accounts receivable, net; inventories; property and equipment, net; and other assets.

 

  

Production

Services

  

Completion and Other

Services

  

Unallocated

  

Total

 

Six Months Ended June 30, 2021:

                

Revenues

 $4,073  $4,157  $-  $8,230 

Cost of Revenue

  4,313   4,491   -   8,804 

Segment (Loss) Profit

 $(240

)

 $(334) $-  $(574) 
                 

Depreciation and Amortization

 $1,100  $1,373  $200  $2,673 
                 

Capital Expenditures

 $89  $106  $-  $195 
                 

Identifiable assets (1)

 $10,592  $12,242  $718  $23,552 
                 

Six Months Ended June 30, 2020:

                

Revenues

 $4,585  $6,942  $-  $11,527 

Cost of Revenue

  5,308   6,487   -  $11,795 

Segment (Loss) Profit

 $(723

)

 $455     $(268)
                 

Depreciation and Amortization

 $1,317  $1,214  $175  $2,706 
                 

Capital Expenditures

 $159  $147  $-  $306 
                 

Identifiable assets (1)

 $13,228  $15,085  $1,135  $29,448 

 

 

The following table reconciles the segment profits reported above to the income from operations reported in the consolidated statements of operations (in thousands): 

 

  

Three Months Ended June 30,

 
  

2021

  

2020

 
         

Segment profit

 $(608) $(1,189)

Sales, general, and administrative expenses

  (992)  (1,247)
Severance and transition costs  -   (139)
Loss on disposals of equipment  (19)  (23)

Depreciation and amortization

  (1,337)  (1,310)

Loss from operations

 $(2,956) $(3,908)

 

  

Six Months Ended June 30,

 
  

2021

  

2020

 
         

Segment profit

 $(574) $(268)

Sales, general, and administrative expenses

  (1,997)  (3,009)
Severance and transition costs      (139)

Loss on disposals of equipment

  (70)  (38)

Depreciation and amortization

  (2,673)  (2,706)

Loss from operations

 $(5,314) $(6,160)

 

 

Geographic Areas

 

The Company only does business in the United States, in what it believes are three geographically diverse regions. The following table sets forth revenue from operations for the Company’s three geographic regions (amounts in thousands):

 

  

Three Months Ended June 30,

 
  

2021

  

2020

 

BY GEOGRAPHY

        
Production Services:        

Rocky Mountain Region (1)

 $588  $348 

Central USA Region (2)

  1,414   943 

Eastern USA Region (3)

  227   92 
Total Production Services  2,229   1,383 
         
Completion and Other Services:        
Rocky Mountain Region(1)  755   711 
Central USA Region(2)  -   (2)
Eastern USA Region(3)  103   49 
Total Completion and Other Services  858   758 

Total Revenues

 $3,087  $2,141 

 

 
  

Six Months Ended June 30,

 
  

2021

  

2020

 

BY GEOGRAPHY

        

Production Services:

        

Rocky Mountain Region (1)

 $1,032  $