UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
or
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number
ENSERVCO CORPORATION
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number: (
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
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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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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).
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 ☐
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
As of December 20, 2022 there were
ENSERVCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
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| September 30, 2022 | December 31, 2021 | ||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Inventories | ||||||||
| Assets held for sale | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | | |||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right-of-use asset - finance, net | ||||||||
| Right-of-use asset - operating, net | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Senior revolving credit facility, related party (including future interest payable of $ and $, respectively - see Note 5) | ||||||||
| Utica Facility (Note 5) | ||||||||
| LSQ Facility (Note 5) | ||||||||
| March 2022 Convertible Note, related party (Note 2 and Note 5) | ||||||||
| July 2022 Convertible Note, related party (Note 2 and Note 5) | ||||||||
| Cross River Revolver Note, related party (Note 2 and Note 5) | ||||||||
| Subordinated debt, related party (Note 2 and Note 5) | ||||||||
| Lease liability - finance, current | | |||||||
| Lease liability - operating, current | ||||||||
| Current portion of long-term debt | ||||||||
| Other current liabilities | ||||||||
| Total current liabilities | ||||||||
| Non-Current Liabilities: | ||||||||
| Senior revolving credit facility, related party | ||||||||
| Utica Facility, less current portion (Note 5) | ||||||||
| March 2022 Convertible Note, related party (Note 2 and Note 5) | ||||||||
| July 2022 Convertible Note, related party (Note 2 and Note 5) | ||||||||
| Utica Residual Liability | ||||||||
| Long-term debt, less current portion (Note 5) | ||||||||
| Lease liability - finance, less current portion | ||||||||
| Lease liability - operating, less current portion | ||||||||
| Deferred tax liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total non-current liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and Contingencies (Note 7) | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued or outstanding | ||||||||
| Common stock, $ par value, shares authorized; and shares issued as of September 30, 2022 and December 31, 2021, respectively; shares of treasury stock as of September 30, 2022 and December 31, 2021; and and shares outstanding as of September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
See accompanying notes to the condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
| For the Three Months Ended |
For the Nine Months Ended | |||||||||||||||
| September 30, |
September 30, | |||||||||||||||
| 2022 |
2021 |
2022 | 2021 | |||||||||||||
| Revenues: |
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| Production services |
$ | $ | $ | $ | ||||||||||||
| Completion and other services |
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| Total revenues |
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| Expenses: |
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| Production services |
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| Completion and other services |
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| Sales, general, and administrative expenses |
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| Severance and transition costs | ||||||||||||||||
| Loss on disposal of assets | ||||||||||||||||
| Depreciation and amortization |
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| Total operating expenses |
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| Loss from operations |
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| Other (expense) income: |
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| Interest expense |
( |
) | ( |
) | ( |
) | ) | |||||||||
| Gain on debt extinguishment (Note 5) | ||||||||||||||||
| Other income |
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| Total other (expense) income |
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) | ||||||||||||||
| Loss from continuing operations before taxes | ( |
) | ( |
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) | ( |
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| Deferred income tax benefit (expense) |
-
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-
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( |
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| (Loss) income from continuing operations |
( |
) | ( |
) | ( |
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| Loss from discontinued operations | ( |
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| Net (loss) income | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||
| (Loss) income from continuing operations per common share - basic and diluted |
$ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||
| Loss from discontinued operations per common share - basic and diluted | ||||||||||||||||
| Net (loss) income per share - basic and diluted | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | ||||||
| Weighted average number of common shares outstanding - basic and diluted |
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See accompanying notes to the condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
| Common Shares |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
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| Balance at January 1, 2021 |
$ | $ | |
$ | ( |
) | $ | |||||||||||||
| Stock-based compensation |
- | |||||||||||||||||||
| Shares issued in offering, net of issuance costs | ||||||||||||||||||||
| Shares and warrant issued to Cross River Partners, L.P. in subordinated debt and accrued interest conversion, net of discount | ||||||||||||||||||||
| Restricted share issuances | ||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at March 31, 2021 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | - |
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| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | - |
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| Restricted share cancellation | ( |
) | - | - | - | - | ||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Common Shares |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
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| Balance at January 1, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation |
- | |||||||||||||||||||
| Restricted share issuances | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Restricted share issuances | ||||||||||||||||||||
| Restricted share cancellations | ( |
) | ||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Restricted share issuances |
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- | - | - | - | |||||||||||||||
| Restricted share cancellations |
( |
) | - | - | - | - | ||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at September 30, 2022 |
|
$ | $ | $ | ( |
) | $ | |||||||||||||
See accompanying notes to the condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| For the Nine Months Ended |
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| September 30, |
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| 2022 |
2021 |
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| OPERATING ACTIVITIES: |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Net loss from discontinued operations | ( |
) | ||||||
| Net loss from continuing operations |
( |
) | ( |
) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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| Depreciation and amortization |
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| Deferred income tax expense | ||||||||
| Loss on disposal of equipment |
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| Board compensation issued in equity | ||||||||
| Write-off of inventories | ||||||||
| Gain on debt extinguishment | ( |
) | - |
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| Interest paid-in-kind on line of credit | ||||||||
| Fair value of warrant issued upon conversion of subordinated debt to equity | ||||||||
| Stock-based compensation |
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| Severance cost incurred through issuance of restricted shares | ||||||||
| Amortization of debt issuance costs and discount |
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| Gain on forgiveness of PPP loan | ( |
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| Provision for bad debt recovery |
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| Changes in operating assets and liabilities: |
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| Accounts receivable |
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| Inventories |
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| Prepaid expense and other current assets |
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| Amortization of operating lease assets | ||||||||
| Other assets |
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| Accounts payable and accrued liabilities |
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| Operating lease liabilities | ( |
) | ( |
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| Other liabilities | ( |
) | ( |
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| Net cash provided by (used in) operating activities - continuing operations | ( |
) | ||||||
| Net cash provided by operating activities - discontinued operations | ||||||||
| Net cash provided by (used in) operating activities | ( |
) | ||||||
| INVESTING ACTIVITIES: |
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| Purchases of property and equipment |
( |
) | ( |
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| Proceeds from disposals of property and equipment | ||||||||
| Net cash provided by (used in) investing activities - continuing operations | ( |
) | ||||||
| Net cash provided by investing activities - discontinued operations | ||||||||
| Net cash provided by (used in) investing activities | ( |
) | ||||||
| FINANCING ACTIVITIES: |
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| Gross proceeds from stock issuance | ||||||||
| Stock issuance costs and registration fees | ( |
) | ||||||
| Term loan contractual repayments | ( |
) | ( |
) | ||||
| Term loan repayment consummated in conjunction with Refinance (Note 5) | ( |
) | ||||||
| Establishment of LSQ Facility consummated in conjunction with Refinance (Note 5) |
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| Establishment of Utica Facility consummated in conjunction with Refinance, net (Note 5) | ||||||||
| Net LSQ Facility repayments | ( |
) | ||||||
| Repayments of Utica Facility | ( |
) | ||||||
| Net line of credit repayments |
( |
) | ||||||
| Troubled debt restructuring accrued future interest payments | ( |
) | ( |
) | ||||
| March 2022 Convertible Note proceeds, net, related party | ||||||||
| July 2022 Convertible Note proceeds, related party | ||||||||
| Cross River Revolver Note proceeds |
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| Repayments of long-term debt |
( |
) | ( |
) | ||||
| Payments of finance leases | ( |
) | ( |
) | ||||
| Net cash (used in) provided by financing activities - continuing operations | ( |
) | ||||||
| Net cash used in financing activities - discontinued operations | ( |
) | ||||||
| Net cash (used in) provided by financing activities | ( |
) | ||||||
| Net Increase in Cash and Cash Equivalents | ||||||||
| Cash and Cash Equivalents, beginning of period | ||||||||
| Cash and Cash Equivalents, end of period |
$ | $ | ||||||
| Supplemental Cash Flow Information: |
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| Cash paid for interest |
$ | $ | ||||||
| Supplemental Disclosure of Non-cash Investing and Financing Activities: |
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| Non-cash establishment of EWB Obligation consummated in conjunction with the Refinance (Note 5) | $ | $ | ||||||
| Non-cash conversion of subordinated debt and accrued interest to Company common stock | ||||||||
| Non-cash conversion of unamortized subordinated debt discount | ||||||||
See accompanying notes to the condensed consolidated financial statements.
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 hot oiling and acidizing ("Production Services") and frac water heating ("Completion and Other 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 September 30, 2022 and December 31, 2021 and the results of operations for the three and nine months ended September 30, 2022 and 2021.
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 |
| Oil and natural gas well services, including logistics and stimulation. |
| Adler Hot Oil Service, LLC | Delaware | 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 |
| Discontinued operations in 2019. Heat Waves Water Management LLC was dissolved during the second quarter of 2021. |
| Dillco Fluid Service, Inc | Kansas | Discontinued operations in 2018. Dillco Fluid Service, Inc was dissolved during the second quarter of 2021. |
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 of America ("GAAP") 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 expected operating results of a full year or of future years.
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with 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, 2021. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.
Note 2 – Summary of Significant Accounting Policies
Liquidity and Capital Resources
On August 10, 2017, the Company entered into a Loan and Security Agreement, as amended, with East West Bank (the "2017 Amended Credit Agreement") which provided for a -year, $
On November 12, 2021, we entered into the Eighth Amendment to Loan and Security Agreement with East West Bank (the "Eighth Amendment") which, among other things, provided for a waiver of default of the revenues covenant based upon our October trailing three-month period gross revenues and a reforecasting of our November and December revenues from what was previously provided to East West Bank. Per the Eighth Amendment, the revenues covenant utilizing October’s revenues was waived and would not be used in any future three-month period gross revenues covenant calculation. For the month ended November 30, 2021, covenant compliance was measured at
In March 2022, the Company entered into a new financing arrangement with lenders which replaced the 2017 Amended Credit Facility in its entirety. The new facilities consist of a term debt facility, a receivables factoring agreement, as well as a convertible subordinated promissory note (the "March 2022 Convertible Note"), the latter of which was issued by Cross River Partners, LP ("Cross River"), an entity controlled by Richard Murphy, the Company’s CEO and Chairman. Upon entry into these facilities, East West Bank agreed to forgive approximately $
Our condensed consolidated 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. For the three and nine months ended September 30, 2022, we generated net losses of approximately $
Although the Company believes the Refinancing, recent debt financing from Cross River, and cash from operations will provide sufficient liquidity for at least the next twelve months, the Company may need to raise additional capital for its growth and ongoing operations. As the Company seeks additional sources of financing, there can be no assurance that such financing would be available to the Company on favorable terms, or at all. The Company’s ability to obtain additional financing in the debt and equity capital markets, whether public or private, is subject to several factors including market and economic conditions, the Company’s performance, and investor sentiment with respect to the Company and its industry. See Note 5 - Debt for a description of events that have occurred subsequent to the balance sheet date that impact our liquidity position as of the date of this filing.
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 potential future losses. This 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 this allowance. As of September 30, 2022 and December 31, 2021, the Company had an allowance for doubtful accounts of approximately $
Inventories
Inventories consist primarily of propane, diesel fuel and chemicals that are used in the servicing of oil wells and are carried at the lower of cost or net realizable value in accordance with the first in, first out method of accounting ("FIFO"). The Company periodically reviews the value of items in inventories and provides write-downs or write-offs of inventories based on its assessment of market conditions. Write-downs and write-offs are charged to cost of goods sold. For the three and nine months ended September 30, 2022, the Company wrote-off approximately $
Property and Equipment
Property and equipment consists 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 capitalize any interest for the three and nine months ended September 30, 2022 or 2021. The Company charges repairs and maintenance against income when incurred and capitalizes renewals and betterments which extend the remaining useful life or expand the capacity or efficiency of the assets. Depreciation is recorded on a straight-line basis over estimated useful lives ranging from
Any difference between the net book value of the property and equipment and the proceeds of an asset’s sale, or settlement of an insurance claim, is recorded as a gain or loss in the Company’s condensed consolidated statements of operations.
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 lease 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 projected life of the improvements.
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. For the three and nine months ended September 30, 2022 and 2021, the Company concluded that there were no triggering events which could indicate potential impairment of its long-lived assets.
Assets Held for Sale
The Company classifies long-lived assets intended 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 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. For the three and nine months ended September 30, 2022 and 2021, the Company recorded
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 item "Assets held for sale" in our condensed 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.
For the three and nine months ended September 30, 2022 and 2021, the Company concluded that there were no triggering events which could indicate potential impairment of its goodwill and other intangible assets.
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 thirty to sixty days. Due to the nature of our business, the Company has no 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 as 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 Revenues
SeeNote 10 - Segment Reporting for disaggregation of revenues.
Earnings (Loss) Per Share
Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net income (loss) by the diluted weighted average number of common shares outstanding for the period. The diluted weighted average number of common shares outstanding for the period is computed using the treasury stock method for Company common stock that may be issued for outstanding stock options or warrants and is computed using the if-converted method for convertible securities and convertible debt.
As of September 30, 2022 and 2021, the Company had unvested restricted stock awards with service and performance conditions. For the three and nine months ended September 30, 2022, there were
As of September 30, 2022, there were warrants to acquire an aggregate of
Further, as of September 30, 2022, the Company has two $
As of September 30, 2021, there were outstanding stock options and warrants to acquire an aggregate of
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 condensed 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 condensed consolidated balance sheets and condensed consolidated statements of operations. The result of the reassessment of the Company’s tax positions did not have an impact on the condensed consolidated financial statements.
Interest and penalties associated with tax positions are recorded in the period assessed as "Other expense" in the condensed consolidated statements of operations. The Company files income tax returns in the United States of America ("USA") and in the states in which it conducts its business operations. The Company’s USA federal income tax filings for tax years through 2021 remain open to examination. In general, the Company’s various state tax filings remain open for tax years to 2021.
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 non-recurring 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 ("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 for the three and nine months ended September 30, 2022. The financial and non-financial 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 USA 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 zero as we have historically 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 USA 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 common 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 condensed consolidated financial statements in conformity with GAAP 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 provisions and the valuation of deferred taxes. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts may have been reclassified for comparative purposes to conform to the current presentation. These reclassifications have no effect on the Company’s condensed consolidated statements of operations.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 Company adopted ASU 2019-12 on January 1, 2021, and the adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
Note 3 – Property and Equipment
Property and equipment consist of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Trucks and vehicles | $ | $ | ||||||
| Other equipment | ||||||||
| Buildings and improvements | ||||||||
| Land | ||||||||
| Total property and equipment | ||||||||
| Accumulated depreciation | ) | ( | ) | |||||
| Property and equipment, net | $ | $ | ||||||
For the three and nine months ended September 30, 2022, the Company recorded depreciation expense of approximately $
Note 4 – Intangible Assets
The components of our intangible assets are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Customer relationships | $ | $ | ||||||
| Patents and trademarks | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Net carrying value | $ | $ | ||||||
The useful lives of our intangible assets are estimated to be years at inception. For the three and nine months ended September 30, 2022 and 2021, amortization expense was approximately $
The following table represents the amortization expense for the twelve months ending September 30 (in thousands):
| 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | |||||||||||||||
| Patents and trademarks | ||||||||||||||||||||
| Total intangible asset amortization expense | $ | $ | $ | $ | $ | |||||||||||||||
Note 5 – Debt
On August 10, 2017, the Company entered into the 2017 Amended Credit Agreement with East West Bank. The 2017 Amended Credit Agreement originally allowed us to borrow up to
(1) On December 31, 2021, we were required to maintain liquidity of not less than $
(2) For each trailing three-month period, commencing with the three-month period ending March 31, 2022, we were required to achieve gross revenues of at least seventy percent (
(3) We were limited to a capital expenditures cap of $
In connection with amending the 2017 Amended Credit Agreement on September 23, 2020, the Company issued to East West Bank
The Refinancing
On March 24, 2022, the Company completed a refinancing transaction (the “Refinancing”) in which it terminated its existing, aforementioned 2017 Amended Credit Facility with the East West Bank, which had an outstanding principal balance of $
As part of the Refinancing, Heat Waves entered into a Master Lease Agreement (the “Utica Facility”) with Utica Leaseco, LLC (“Utica”), pursuant to which Utica provided an equipment-collateralized loan to the Company in the amount of $
Additionally, as part of the Refinancing and in accordance with ASC 470-10-45, the Company classified approximately $
Further, as part of the Refinancing, Heat Waves entered into an Invoice Purchase Agreement (the “Receivables Financing” or “LSQ Facility,” and together with the Utica Facility, the “2022 Financing Facilities”) with LSQ Funding Group, LLC (“LSQ”) pursuant to which LSQ provides receivables factoring to Heat Waves. Under the Receivables Financing, LSQ advances up to
The Utica Facility and the LSQ Facility are subject to an Intercreditor Agreement dated on or about March 24, 2022 by and among Utica, LSQ, Heat Waves, and the Company (the “Intercreditor Agreement”).
Lastly, as part of the Refinancing, the Company issued a $
In accordance with ASC 470-60, the Company assessed whether or not the Refinancing met the criteria of a troubled debt restructuring ("TDR"). Management's assessment of TDR accounting treatment for the Refinancing determined that the 2017 Amended Credit Agreement was extinguished as the result of a TDR; however, TDR accounting did not apply to the 2022 Financing Facilities as the 2017 Amended Credit Facility was settled in full and therefore accounted for as a debt extinguishment.
Subordinated Debt with Related Party
On December 21, 2021, the Company issued a subordinated non-convertible promissory note to Cross River, a related party, for $
During the nine months ended September 30, 2022, the Company and the potential lender agreed that they could not reach amenable terms, and the deal was canceled. Upon cancellation, total payments of approximately $
On July 15, 2022, the Company entered into a convertible subordinated promissory note (the “July 2022 Convertible Note”) with Cross River whereby the Company received $
On September 22, 2022, the Company entered into a revolving credit facility with Cross River pursuant to which the Company issued a $
Debt Issuance Costs
We capitalized certain debt issuance costs incurred in connection with the 2017 Amended Credit Facility and the Utica Facility discussed above and these costs were amortized to interest expense over the terms of the facilities on a straight-line basis. There was approximately $
Notes Payable
Long-term debt consists of the following (in thousands):
| September 30, 2022 | December 31, 2021 | |||||||
| Senior Revolving Credit Facility with related party. All future interest through October 15, 2021 accrued to loan pursuant to the Fifth Amendment. Refinanced March 24, 2022. | $ | $ | ||||||
| Utica Facility. Interest at 15.5% with monthly principal and interest payments on a fifty-one month amortization schedule. Additional elective interest rate surcharge. Collateralized by equipment of Heat Waves. Matures June 24, 2026. | ||||||||
| LSQ Facility. Upfront 0.1% invoice purchase fee on all invoices submitted. Funds daily usage fee of 0.021%. Maximum availability set at $10 million. | ||||||||
| March 2022 Convertible Note with related party. Interest at 7% with quarterly interest only payments until March 2023 followed by quarterly principal and interest payments on a ten-year amortization schedule. Matures March 22, 2028. | ||||||||
| July 2022 Convertible Note with related party. Interest at 7.75% with quarterly interest only payments until June 2023 followed by quarterly principal and interest payments on a ten-year amortization schedule. Matures July 15, 2028. | ||||||||
| Cross River Revolver Note with related party. Interest at 8% with principal payments due upon demand with thirty days notice. Matures September 22, 2023. | ||||||||
| Subordinated Promissory Note with related party. Non-interest bearing. $10,000 flat fee paid to consummate loan. Matured June 21, 2022. | ||||||||
| Real Estate Loan for a facility in North Dakota. Interest is at 5.75% with monthly principal and interest payment of $5,255 until October 3, 2023. Collateralized by land and property purchased with the loan. | ||||||||
| Total long-term debt | ||||||||
| Less debt discount and debt issuance costs | ( | ) | ( | ) | ||||
| Less current portion | ( | ) | ( | ) | ||||
| Long-term debt, net of debt discount and current portion | $ | $ | ||||||
Aggregate contractual principal maturities of debt for the twelve months ending September 30 are as follows (in thousands):
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total | $ |
Subsequent Events
On November 3, 2022, the Company entered into a note exchange agreement with Cross River pursuant to which Cross River loaned an additional $
Note 6 – 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 nine months ended September 30, 2022 and 2021 differs from the amount that would be provided by applying the statutory USA federal income tax rate of
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.
During the first quarter of 2021, the Company experienced a change in control pursuant to the issuance of
Note 7 – Commitments and Contingencies
As of September 30, 2022, the Company leases facilities and certain equipment under lease commitments that expire through September 2026. Future minimum lease payments for these operating and finance lease commitments for the twelve months ending September 30 are as follows (in thousands):
|
| Operating Leases | Finance Leases | ||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Total future lease payments | ||||||||
| Impact of discounting | ( | ) | ) | |||||
| Discounted value of lease obligations | $ | $ | ||||||
The following table summarizes the components of our gross operating and finance lease costs incurred for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost: | ||||||||||||||||
| Current lease cost | $ | $ | $ | $ | ||||||||||||
| Long-term lease cost | ||||||||||||||||
| Total operating lease cost | $ | $ | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | $ | $ | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total finance lease cost | $ | $ | $ | $ | ||||||||||||
Our weighted-average lease term and discount rate used for the nine months ended September 30, 2022 and 2021 are as follows:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Operating: | ||||||||
| Weighted-average lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
| Finance: | ||||||||
| Weighted-average lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
Self-Insurance
In June 2015, the Company became self-insured under its Employee Group Medical Plan, and under that plan was responsible to pay the first $
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 $
Litigation
On November 8, 2021, a plaintiff who is a Texas resident, filed a complaint in Texas State Court in Atascosa County, against the Company, its wholly owned subsidiary, Heat Waves Hot Oil Service, LLC, and two individual former Company employees alleging negligence by the Company and its subsidiary in connection with a traffic accident sustained by the plaintiff on November 19, 2019. On August 9, 2022, the Company, its insurance carriers, and the plaintiff entered into a mediated settlement of all claims against all parties in the matter of the auto liability claim. The $
On May 22, 2022, Ali Safe, acting individually and on behalf of others, filed a class action complaint in United States District Court for the District of Colorado alleging that the Company and certain of its officers violated securities laws in relation to certain of its SEC Form 10-Q filings in 2021 which required amendments and restatements to such filings. On November 28, 2022, the plaintiff amended their complaint primarily to add Jan Lambert as lead plaintiff and to include Cross River Partners, L.P. and Cross River Capital Management, LLC as defendants.
We believe the claims are without merit and have engaged counsel to vigorously defend the Company against such claims. The Company has Director’s and Officer’s insurance coverage to defend against such claims and the Company's insurance carriers have been notified about the lawsuit. While we believe the claims are without merit, there can be no assurances that a favorable final outcome will be obtained, and defending any lawsuit can be costly and can impose a significant burden on management and employees. Any litigation to which we are a party may result in an unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle such lawsuit on similarly unfavorable terms, either of which could materially adversely affect our business, financial condition, or results of operations. Furthermore, there can be no assurances that our insurance coverage will be available in sufficient amounts to cover such claim, or at all.
Note 8 – Stockholders’ Equity
Conversion of Subordinated Debt to Equity
On February 11, 2021, the Company exchanged $
Warrants
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
The issuance of warrants to Cross River was reviewed and approved by the independent directors of the Company.
On April 12, 2021, the Securities and Exchange Commission ("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 nine months ended September 30, 2022 is as follows (in thousands):
|
| Weighted Average | |||||||||||
| Weighted Average | Remaining | |||||||||||
|
| Shares | Exercise Price | Contractual Life (Years) | |||||||||
| Outstanding as of December 31, 2021 | $ | |||||||||||
| Issued | - | |||||||||||
| Expired | - | |||||||||||
| Outstanding as of September 30, 2022 | $ | |||||||||||
| Exercisable as of September 30, 2022 | $ | |||||||||||
Note 9 – 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 Company common stock that could be granted under the 2010 Plan was reset at the beginning of each year based on
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 Company common stock that may be granted under the 2016 Plan is
For the nine months ended September 30, 2022 and 2021,
The following is a summary of stock option activity for all equity plans for the nine months ended September 30, 2022:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | ||||||||||
| Outstanding as of December 31, 2021 | $ | |||||||||||
| Forfeited or expired | ( | ) | - | |||||||||
| Outstanding as of September 30, 2022 | $ | - | ||||||||||
| Vested as of September 30, 2022 | $ | - | ||||||||||
| Exercisable as of September 30, 2022 | $ | - | ||||||||||
For the three and nine months ended September 30, 2022 and 2021, the Company recognized
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:
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Restricted shares as of December 31, 2021 | $ | |||||||
| Granted | |
| ||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Restricted shares as of September 30, 2022 | $ | |||||||
For the three and nine months ended September 30 2022, the Company recognized stock-based compensation costs for restricted stock of approximately $
As of September 30, 2022, there is approximately $
The following table sets forth the weighted average outstanding of potentially dilutive instruments for the three and nine months ended September 30, 2022 and 2021:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Stock options | ||||||||||||||||
| Warrants | ||||||||||||||||
| Weighted average | ||||||||||||||||
The Company awarded
The Company issued
The Company granted Mark Patterson, the Company's Chief Financial Officer, a
Note 10 – Segment Reporting
Enservco’s reportable operating 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 oiling trucks and acidizing units to provide maintenance services to the domestic oil and gas industry. These services include hot oiling services and acidizing services. Hot oiling is utilized by customers to remove paraffins from wellbores, pipes and vessels. Acidizing services are utilized by customers to clean reservoir surfaces and increase flow rates.
Completion and Other Services
This segment utilizes a fleet of frac water heating units to provide frac water heating services and related support services to the domestic oil and gas industry. These services also include other services for other industries, which consist primarily of hauling and transport of materials and heat treating for customers. Frac water heating is utilized by customers during the completion of oil and gas wells.
Unallocated
This segment 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 | |||||||||||||
| For the Three Months Ended September 30, 2022: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | | |||||||||||||||
| Segment profit (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| Identifiable assets(1) | $ | $ | $ | $ | ||||||||||||
| For the Three Months Ended September 30, 2021: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment loss | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
|
Identifiable
assets
(1)
| $ | $ | $ | $ | ||||||||||||
| Production Services | Completion and Other Services | Unallocated | Total | |||||||||||||
| For the Nine Months Ended September 30, 2022: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment profit (loss) | $ | $ | ( | ) | $ | $ | ||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| Identifiable assets(1) | $ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended September 30, 2021: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment loss | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| Identifiable assets(1) | $ | $ | $ | $ | ||||||||||||
Note to tables:
| (1) | Identifiable assets is calculated by summing the balances of accounts receivable, net; inventories; property and equipment, net; net right-of-use lease assets; assets held for sale; and other assets. |
The following table reconciles the segment losses reported above to the loss from operations reported in the condensed consolidated statements of operations (in thousands):
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Segment loss | $ | ( | ) | $ | ( | ) | ||
| Sales, general, and administrative expenses | ( | ) | ( | ) | ||||
| Severance and transition costs | ( | ) | ||||||
| Loss on disposal of equipment | ( | ) | ||||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Segment profit (loss) | $ | $ | ( | ) | ||||
| Sales, general, and administrative expenses | ( | ) | ( | ) | ||||
| Severance and transition costs | ( | ) | ( | ) | ||||
| Loss on disposal of equipment | ( | ) | ( | ) | ||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
Geographic Areas
The Company only conducts business in the USA, in what it believes are three geographically diverse regions. The following tables set forth revenues from operations for the Company’s three geographic regions (in thousands):
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| BY GEOGRAPHY | ||||||||
| Production Services: | ||||||||
| Rocky Mountain Region(1) | $ | $ | ||||||
| Central USA Region(2) | ||||||||
| Eastern USA Region(3) | ||||||||
| Total Production Services | ||||||||
| Completion and Other Services: | ||||||||
|
Rocky Mountain Region
(1)
| ||||||||
| Central USA Region(2) | ||||||||
| Eastern USA Region(3) | ||||||||
| Total Completion and Other Services | ||||||||
| Total Revenues | $ | $ | ||||||
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| BY GEOGRAPHY | ||||||||
| Production Services: | ||||||||
| Rocky Mountain Region(1) | $ | $ | ||||||
| Central USA Region(2) | ||||||||
| Eastern USA Region(3) | ||||||||
| Total Production Services | ||||||||
| Completion and Other Services: | ||||||||
| Rocky Mountain Region(1) | ||||||||
| Central USA Region(2) | ||||||||
| Eastern USA Region(3) | ||||||||
| Total Completion and Other Services | ||||||||
| Total Revenues | $ | $ | ||||||
Notes to tables:
| (1) | Includes the DJ 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). |
| (2) | Includes the Eagle Ford Shale in Southern Texas and the East Texas Oil Field beginning during the second quarter of 2021. |
| (3) | Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information regarding the results of operations for the three and nine months ended September 30, 2022 and 2021, as well as our financial condition, liquidity and capital resources as of September 30, 2022 and December 31, 2021. The condensed consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Cautionary Note Regarding Forward-Looking Statements
The information discussed in this Quarterly Report on Form 10-Q ("Quarterly Report") includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as "may," "expect," "estimate," "project," "plan," "believe," "intend," "achievable," "anticipate," "will," "continue," "potential," "should," "could," and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:
| ● |
Our ability to obtain working capital on a timely basis under our 2022 Financing Facilities in order to accommodate our business demands during our busiest periods during the winter heating season (see Note 5 - Debt to the condensed consolidated financial statements); |
| ● | Our capital requirements and uncertainty of obtaining additional funding, whether equity or debt, on terms acceptable to us, especially during our slowest periods during the late spring through early fall; | |
| ● | Constraints on us as a result of our indebtedness, including restrictions imposed on us under the terms of our Utica Facility agreement and our ability to generate sufficient cash flows to repay our debt obligations; | |
| ● |
Excessive fluctuations in the prices for crude oil and natural gas and uncertainties in global crude markets caused in part by the war in Ukraine which could likely result in exploration and production companies cutting back their capital expenditures for oil and gas well drilling which in turn would result in significantly reduced demand for our drilling completion services, thereby negatively affecting our revenues and results of operations; |
| ● |
Competition for the services we provide in our areas of operations, which has increased significantly due to the recent increases in prices for crude oil and natural gas; |
| ● | Weather and environmental conditions, including the potential of abnormally warm winters in our areas of operations that adversely impact demand for our completion services; |
| ● | The impact of general economic conditions and supply chain shortages on the demand for oil and natural gas and the availability of capital which may impact our ability to perform services for our customers; | |
| ● | The geographical diversity of our operations which adds significantly to our costs of doing business; | |
| ● | Our history of losses and working capital deficits which, at times, have been significant; | |
| ● |
Our ability to retain key members of our senior management and key technical employees; |
| ● | Our ability to attract and retain employees, especially in our critical heating season, given tight labor markets; | |
| ● |
The impact of environmental, health and safety and other governmental regulations, and of current or pending legislation or regulations, including pandemic related mandates, with which we and our customers must comply; |
| ● | Reductions of leased federally owned property for oil exploration and production in addition to increased state and local regulations on drilling activity; | |
| ● |
Developments in the global economy as well as any further pandemic risks and resulting demand and supply for oil and natural gas; |
| ● |
Risks relating to any unforeseen liabilities; |
| ● |
Federal and state initiatives relating to the regulation of hydraulic fracturing; |
| ● |
The price and volume volatility of our common stock; | |
| ● | Litigation, including the current class action lawsuit, which could lead us to incur significant liabilities and costs or harm our reputation; and | |
| ● | Other risks and uncertainties, including those listed under the section "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2021. |
Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.
Recent Developments
On September 22, 2022, the Company entered into a revolving credit facility with Cross River pursuant to which the Company issued a $750,000 revolving promissory note to Cross River (the “Cross River Revolver Note”). The Cross River Revolver Note is structured as a revolving credit facility to the Company with advances to be made on an ad hoc basis by Cross River to the Company. The Cross River Revolver Note has a one-year term and accrues interest at 8.00% per annum. Prior to the September 22, 2023 maturity date, the Company is required to make principal payments to Cross River upon demand with thirty (30) days’ notice. The Cross River Revolver Note is not convertible into the Company’s equity and is secured by certain of the Company’s owned real property located in North Dakota. As of September 30, 2022, $225,000 was outstanding under this Cross River Revolver Note.
On November 3, 2022, the Company entered into a note exchange agreement with Cross River pursuant to which Cross River loaned an additional $450,000 to the Company, exchanged the $750,000 Cross River Revolver Note for a $1.2 million convertible secured subordinated promissory note (the “November 2022 Convertible Note”) and received a five-year warrant to acquire 568,720 shares of Company common stock at $2.11 per share. The November 2022 Convertible Note has a two-year term and accrues interest at 10.00% per annum, payable quarterly starting March 30, 2023 at the option of the Company in cash or the Company’s common stock. Subject to any shareholder approval required by any exchange upon which the Company’s common stock is then listed, the principal and accrued interest of the November 2022 Convertible Note is convertible into the Company’s common stock at a conversion price of $2.11 per share. The November 2022 Convertible Note is secured by two Company-owned parcels of real property located in North Dakota. On December 13, 2022, the Company sold one of these two parcels for a combination of cash and a promissory note/mortgage totaling $550,000. As consideration for Cross River releasing its security interest on such parcel, the Company has agreed that it will enter into a collateral assignment of the security on such parcel back to Cross River in the event the buyer defaults on their promissory note/mortgage to the Company.
On December 9, 2022, the Company received an official notice of noncompliance from the NYSE Regulation (“NYSE”) stating that the Company’s stockholders’ equity as reported in its Quarterly Report on Form 10-Q for the period ended June 30, 2022 (“Q2 2022 Form 10-Q”) was not in compliance with the NYSE American’s continued listing standards under Section 1003(a)(iii) which requires that a listed company’s stockholders’ equity be at least $6.0 million if it has reported losses from continuing operations and/or net losses in its five most recent fiscal years. As reported in its Q2 2022 Form 10-Q, the Company’s stockholders’ equity was approximately $5.2 million. The Company has until January 9, 2023, to submit a plan (the “Plan”) advising of actions it has taken or will take to regain compliance with the continued listing standards by June 9, 2024. If NYSE accepts the Plan, the Company will have an eighteen (18) month cure period to comply with the Plan and will be subject to periodic reviews including quarterly monitoring for compliance with the Plan. The NYSE notice has no immediate effect on the listing or trading of the Company’s common stock on the NYSE American. The Company intends to consider available options to regain compliance with the stockholders’ equity requirement, but no decisions have been made at this time. There can be no assurance that the Company will ultimately regain compliance with all applicable NYSE American listing standards.
On December 13, 2022, the Company closed upon a sale agreement for its physical property located in Tioga, North Dakota. The sales price was $550,000, with $250,000 of proceeds (net of fees and commissions) being delivered upon closing by the purchaser along with a forty-eight-month finance agreement for the balance of $300,000, payable in equal monthly principal installments together with interest on the outstanding balance calculated at the rate of 7.00% per annum. A security interest in the real estate secures the Cross River Revolver Note. In order to facilitate the transaction, Cross River released its previously recorded security interest in this real property to the benefit of the Company. The Cross River security interest had been previously granted by the Company as an inducement for Cross River establishing the $750,000 Cross River Revolver Note in September 2022, as discussed above.
Recent Market Conditions
The recovery of the economy from the impact of COVID-19, coupled with global demand for energy products due to international conflicts, has had a positive impact on oil prices and hence our business for the nine months ended September 30, 2022. For the nine months ended September 30, 2022, WTI crude oil price averaged approximately $98 per barrel, versus an average of approximately $60 per barrel in the comparable period last year, which resulted in an increase in rig count within the markets we serve. However, we continue to feel the impact of the pandemic, domestic political actions and international activities (including the war in Ukraine) which have continued to impact domestic oil and gas industries. While there has been a slow rebound in active USA domestic rig count beginning in the fourth quarter of 2020, rig count as of September 30, 2022 still remains below pre-pandemic active rigs. During this same period, the Company has experienced increased demand and micro and macro-economic conditions have continued to improve, allowing the Company to expect further improvement compared to the prior year.
The Company's expectations for improved activity are somewhat offset by the change in political environment and its uncertain impact on oil exploration and production, as well as increased inflation and rising interest costs. Reductions or limitations in leasing federal property for oil exploration in addition to other measures impacting oil and gas supply and demand have had an impact on the oil exploration and production industry. Finally, to the extent that state and local governments increase regulations, there can be a negative impact to the oil exploration and production industry.
The full extent of the impact of the COVID-19 pandemic, OPEC+ actions, USA governmental actions and oil price changes on our operations and financial performance depends on future developments that are uncertain and unpredictable, including any potential resurgence restrictions related to the pandemic, its impact on capital and financial markets, any new information that may emerge concerning the severity of other strains of the virus, its spread to other regions as well as the actions taken to contain it, production response of domestic oil producers to lower oil prices, and the adherence to any actions by OPEC+.
OVERVIEW
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 hot oiling and acidizing ("Production Services") and frac water heating ("Completion and Other Services").
We and our wholly owned subsidiaries provide well enhancement and fluid management services to the domestic onshore oil and natural gas industry. These services include hot oiling and acidizing and frac water heating. We own and operate a fleet of specialized trucks, trailers, frac tanks and other well-site related equipment and serve customers in several major domestic oil and gas areas, including the DJ Basin/Niobrara area in Colorado and Wyoming, the Bakken area in North Dakota, the San Juan Basin in northwestern New Mexico, the Marcellus and Utica Shale areas in Pennsylvania and Ohio, the Jonah area, Green River and Powder River Basins in Wyoming, and the Eagle Ford Shale and East Texas Oilfield in Texas.
The Company’s corporate offices are located at 14133 County Road 9 1/2, Longmont, CO 80504. Our telephone number is (303) 333-3678. Our website is www.enservco.com.
RESULTS OF OPERATIONS
Executive Summary
Our business is highly seasonal, with most of our revenues being generated in the colder seasons of each year (winter and spring). Accordingly, the second and third quarters of each year are traditionally the slow season for our services, as water heating activities are mostly unnecessary for our customers during the warmer months of each year.
Revenues for the three months ended September 30, 2022 increased by approximately $82,000, or 3%, as compared to the same period in 2021. Revenues for the nine months ended September 30, 2022 increased by approximately $3.9 million, or 35%, as compared to the same period in 2021, due to significant increases in completions activity in Colorado and production services in Texas. Average USA domestic rig count increased by 58% from 448 average rigs in operation during the first three quarters of 2021 to 702 average rigs in operation during the first three quarters of 2022.
Segment loss for the three months ended September 30, 2022 decreased by approximately $271,000, or 42%, as compared to the same period in 2021. Segment profit for the nine months ended September 30, 2022 increased by approximately $1.7 million, or 136%, as compared to the segment loss incurred for the same period in 2021. These increases to segment profit were primarily due to the factors noted above for revenues for their respective periods, combined with stricter control over variable costs during our historically slower third quarter.
Sales, general, and administrative expenses for the three months ended September 30, 2022 increased by approximately $187,000, or 21%, as compared to the same period in 2021. Sales, general, and administrative expenses for the nine months ended September 30, 2022 increased by approximately $866,000, or 30%, as compared to the same period in 2021. These increases were primarily due to increases in professional fees associated with the Company's restatement of its Form 10-Qs for all three quarters of 2021 as well as additional work relating to the 2021 year end audit and Form 10-K, coupled with a significant period-over-period increase in stock-based compensation expense resulting from the severance agreement with the Company's former President and Chief Financial Officer and equity awards issued to our current Chief Financial Officer.
Other expense for the three months ended September 30, 2022 was approximately $438,000 compared to Other income of approximately $2.7 million for the same period in 2021. This decrease was primarily due to the non-recurrence of Employee Retention Credits recognized by the Company during the third quarter of 2021, as well as a $2.0 million gain on forgiveness of PPP loan for the three months ended September 30, 2021. Other income for the nine months ended September 30, 2022 was approximately $3.3 million compared to Other income of approximately $3.6 million for the same period in 2021. This decrease was primarily due to the non-recurrence of Employee Retention Credits recognized by the Company during the first three quarters of 2021, as well as a $2.0 million gain on forgiveness of PPP loan for the nine months ended September 30, 2021, partially offset by the gain on debt extinguishment related to the Refinancing as discussed in Note 5 - Debt to the condensed consolidated financial statements.
Net loss for the three months ended September 30, 2022 was approximately $3.1 million, or a loss of $0.27 per basic and diluted share, compared to net income of approximately $369,000, or $0.03 per basic and diluted share, for the same period in 2021. This increase to net loss was primarily due to the reasons mentioned above for Other income, a period-over-period increase of $442,000 of interest expense resulting from the Refinancing as discussed in Note 5 - Debt to the condensed consolidated financial statements, and the non-recurrence of a deferred income tax benefit recognized during the prior period.
Net loss for the nine months ended September 30, 2022 was approximately $3.9 million, or a loss of $0.34 per basic and diluted share, compared to a net loss of approximately $5.0 million, or a loss of $0.46 per basic and diluted share, for the same period in 2021. This decrease to net loss was primarily due to a $1.0 million improvement to our loss from operations and a $4.3 million gain on debt extinguishment recognized during the first quarter of 2022, partially offset by a $1.0 million period-over-period increase to interest expense resulting from the Refinancing as discussed in Note 5 - Debt to the condensed consolidated financial statements, as well as the reasons mentioned above for Other income.
Adjusted EBITDA for the three months ended September 30, 2022 was a loss of approximately $1.3 million, compared to a loss of approximately $1.5 million for the same period in 2021. Adjusted EBITDA for the nine months ended September 30, 2022 was a loss of approximately $2.7 million compared to a loss of approximately $4.1 million for the same period in 2021. The approximately $1.4 million period-over-period improvement in Adjusted EBITDA for the nine month period was primarily due to a $1.7 million improvement to our segment profit, partially offset by an $281,000 increase to our sales, general, and administrative expenses (net of stock-based compensation expense). See the section below titled "Adjusted EBITDA*" within this Item 2 for our definition of Adjusted EBITDA.
Industry Overview
For the nine months ended September 30, 2022, WTI crude oil price averaged approximately $98 per barrel, versus an average of approximately $60 per barrel in the comparable period last year. The USA domestic rig count increased to 763 rigs in operation as of September 30, 2022, compared to 521 rigs at the same time a year ago. Given the increased activity levels and a significant jump in rig count in the first three quarters of 2022 compared to 2021, we have been able to continue to grow our customer base and allocate resources to the most active basins. We are focused on increasing utilization levels and optimizing the deployment of our equipment and workforce while maintaining high standards for service quality and safe operations. We compete on the basis of the quality and breadth of our service offerings, as well as price. As much of our completion services segment of our business is seasonal, some of the aforementioned utilization and allocation activities are limited during the warmer months of each year.
Segment Overview
Segment Results
Enservco’s reportable operating 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 oiling trucks and acidizing units to provide maintenance services to the domestic oil and gas industry. These services include hot oiling services and acidizing services.
Completion and Other Services
This segment utilizes a fleet of frac water heating units to provide frac water heating services and related support services to the domestic oil and gas industry. These services also include other services for other industries, which consist primarily of hauling and transport of materials and heat treating for customers.
Unallocated
This segment 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 revenues from operations and segment profits (losses) for our business segments for the three and nine months ended September 30, 2022 and 2021 (in thousands):
| For the Three Months Ended |
For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 |
2021 |
2022 | 2021 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Production services |
$ | 2,788 | $ | 2,483 | $ | 8,645 | $ | 6,556 | ||||||||
| Completion and other services |
321 | 544 | 6,497 | 4,701 | ||||||||||||
| Total revenues |
$ | 3,109 | $ | 3,027 | $ | 15,142 | $ | 11,257 | ||||||||
| For the Three Months Ended |
For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 |
2021 |
2022 | 2021 | |||||||||||||
| SEGMENT PROFIT (LOSS): | ||||||||||||||||
| Production services |
$ | 189 | $ | (6 | ) | $ | 669 | $ | (246 | ) | ||||||
| Completion and other services | (569 | ) | (645 | ) | (227 | ) | (979 | ) | ||||||||
| Total segment (loss) profit |
$ | (380 | ) | $ | (651 | ) | $ | 442 | $ | (1,225 | ) | |||||
Production Services
Production Services revenues, which accounted for 90% of total revenues for the three months ended September 30, 2022, increased by approximately $305,000, or 12%, to $2.8 million compared to $2.5 million for the same period in 2021. Production Services revenues, which accounted for 57% of total revenues for the nine months ended September 30, 2022, increased by approximately $2.1 million, or 32%, to $8.6 million compared to $6.6 million for the same period in 2021. These increases were primarily due to significant increases in hot oiling activity in our Central USA Region, partially offset by slight decreases in hot oiling activity in our Rocky Mountain Region.
Hot oiling revenues for the three months ended September 30, 2022 increased by approximately $295,000, or 13%, as compared to the same period in 2021, from approximately $2.3 million to approximately $2.6 million. Hot oiling revenues for the nine months ended September 30, 2022 increased by approximately $1.8 million, or 29%, as compared to the same period in 2021, from approximately $6.2 million to approximately $8.0 million. These increases were primarily due to increased domestic oil and gas activity combined with elevated price levels thus far in 2022. As a result of the higher crude oil prices during the first nine months of 2022, we have worked with our customers and have been successful in implementing price increases for our hot oiling services that are reflected in our near term operating results.
Acidizing revenues for the three months ended September 30, 2022 increased by approximately $10,000, or 5%, to approximately $219,000 from approximately $209,000. Acidizing revenues for the nine months ended September 30, 2022 increased by approximately $274,000, or 79%, to approximately $620,000 from approximately $345,000. These increases were due to increased activity levels and demand for this service line as well as our continued efforts to pursue new customers and partner with chemical suppliers to develop the most cost-effective acid programs available.
Segment profit for Production Services for the three months ended September 30, 2022 increased by $195,000, to a profit of $189,000, as compared to a segment loss of $6,000 for the same period in 2021. Segment profit for Production Services for the nine months ended September 30, 2022 increased by $915,000, or 372%, to a profit of $669,000, as compared to a segment loss of $246,000 for the same period in 2021. These increases were primarily the result of cost saving measures that were implemented to offset the adverse industry conditions that existed throughout 2021, coupled with the uptick in industry activity in 2022 and price levels discussed above.
Completion and Other Services
Completion and Other Services revenues, which accounted for 10% of total revenues for the three months ended September 30, 2022, decreased by approximately $223,000, or 41%, to $321,000 compared to $544,000 for the same period in 2021. This decrease was primarily due to changes in the product mix of our "other services" offerings, whereby period-over-period we experienced a significant decrease in construction and roustabout services, which was partially offset by an uptick in water hauling services. Completion activity revenues period-over-period were comparable. This segment's revenues, which accounted for 43% of total revenues for the nine months ended September 30, 2022, increased by approximately $1.8 million, or 38%, to $6.5 million compared to $4.7 million for the same period in 2021. This increase was primarily due to strong completion activity volume realized during the first quarter of 2022 resulting from the continued increase in domestic oil and gas activity, especially in our Rocky Mountain Region, partially offset by warmer than usual weather early in the second quarter of 2022 coupled with the aforementioned net decline in "other services" revenues.
Segment loss for Completion and Other Services for the three months ended September 30, 2022 was approximately $569,000, as compared to a segment loss of approximately $645,000 for the same period in 2021. This quarter-over-quarter decrease in segment loss was primarily related to stricter control over variable costs during our historically slower third quarter. Segment loss for Completion and Other Services for the nine months ended September 30, 2022 was approximately $227,000, as compared to a segment loss of approximately $979,000 for the same period in 2021. This year-over-year decrease in segment loss was primarily related to the reasons discussed above for nine month segment revenues, coupled with stricter control over variable costs during our historically slower third quarter.
Geographic Areas
The Company only conducts business in the USA, in what it believes are three geographically diverse regions. The following table sets forth revenues from operations for the Company’s three geographic regions (in thousands):
| For the Three Months Ended |
For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 |
2021 |
2022 | 2021 | |||||||||||||
| BY GEOGRAPHY |
||||||||||||||||
| Production Services: | ||||||||||||||||
| Rocky Mountain Region(1) |
$ | 325 | $ | 676 | $ | 1,494 | $ | 1,708 | ||||||||
| Central USA Region(2) |
2,249 | 1,651 | 6,587 | 4,304 | ||||||||||||
| Eastern USA Region(3) |
214 | 156 | 564 | 544 | ||||||||||||
| Total Production Services | 2,788 | 2,483 | 8,645 | 6,556 | ||||||||||||
| Completion and Other Services: | ||||||||||||||||
|
Rocky Mountain Reg
ion(1)
|
52 | 435 | 4,932 | 3,142 | ||||||||||||
| Central USA Region(2) | 233 | 38 | 481 | 38 | ||||||||||||
| Eastern USA Region(3) | 36 | 71 | 1,084 | 1,521 | ||||||||||||
| Total Completion and Other Services | 321 | 544 | 6,497 | 4,701 | ||||||||||||
| Total Revenues |
$ | 3,109 | $ | 3,027 | $ | 15,142 | $ | 11,257 | ||||||||
Notes to tables:
| (1) |
Includes the DJ 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). |
| (2) |
Includes the Eagle Ford Shale in Southern Texas and the East Texas Oil Field beginning during the second quarter of 2021. |
| (3) |
Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). |
Production Services segment revenues in the Rocky Mountain Region for the three months ended September 30, 2022 decreased by approximately $351,000, or 52%, as compared to the same period in 2021. Production Services segment revenues in the Rocky Mountain Region for the nine months ended September 30, 2022 decreased by approximately $214,000, or 13%, as compared to the same period in 2021. These decreases were primarily due to decreases in hot oiling activity in both the Powder River and Green River Basins as well as the Bakken area.
Production Services segment revenues in the Central USA Region for the three months ended September 30, 2022 increased by approximately $598,000, or 36%, as compared to the same period in 2021. Production Services segment revenues in the Central USA Region for the nine months ended September 30, 2022 increased by approximately $2.3 million, or 53%, as compared to the same period in 2021. This quarter-over-quarter increase was primarily due to increases in hot oiling activity, which were largely the result of increases in oil prices, and acidizing services in the Eagle Ford Shale, while the year-over-year increase included the addition of and continued improvement of results in the East Texas Oilfield.
Production Services segment revenues in the Eastern USA Region for the three months ended September 30, 2022 increased by approximately $58,000, or 37%, as compared to the same period in 2021. Production Services segment revenues in the Eastern USA Region for the nine months ended September 30, 2022 increased by approximately $20,000, or 4%, as compared to the same period in 2021. These increases were due to increases in hot oiling activity in the Marcellus and Utica Shale formations.
Completion and Other Services segment revenues in the Rocky Mountain Region for the three months ended September 30, 2022 decreased by approximately $383,000, or 88%, as compared to the same period in 2021 primarily due to decreases in completion activity in both the DJ Basin and Bakken area as a result of unseasonably warmer weather late in the third quarter of 2022, coupled with changes in the product mix of our "other services" offerings, whereby period-over-period we experienced a significant decrease in construction and roustabout services, which was partially offset by an uptick in water hauling services. Completion and Other Services segment revenues in the Rocky Mountain Region for the nine months ended September 30, 2022 increased by approximately $1.8 million, or 57%, as compared to the same period in 2021 primarily due to increases in completions activity, which were largely the result of increases in oil prices, during the first quarter of 2022 in the same areas mentioned above.
Completion and Other Services segment revenues in the Central USA Region for the three months ended September 30, 2022 increased by approximately $195,000, or 513%, as compared to the same period in 2021. Completion and Other Services segment revenues in the Central USA Region for the nine months ended September 30, 2022 increased by approximately $443,000, as compared to the same period in 2021. These increases were due to significant increases in water hauling activities in the region during the first three quarters of 2022 compared to the same period in 2021.
Completion and Other Services segment revenues in the Eastern USA Region for the three months ended September 30, 2022 decreased by approximately $35,000, or 49%, as compared to the same period in 2021. Completion and Other Services segment revenues in the Eastern USA Region for the nine months ended September 30, 2022 decreased by approximately $437,000, or 29%, as compared to the same period in 2021. These decreases were due to decreases in completion activities in the Marcellus Shale formation during the first three quarters of 2022 compared to the same period in 2021.
Historical Seasonality of Revenues
Because of the seasonality of our frac water heating business and, to a lesser extent, our hot oiling business, revenues generated during the cooler first and fourth quarters of our fiscal year, which constitute our "heating season," and are typically significantly higher than revenues during the second and third quarters of our fiscal year. In addition, the revenues mix of our service offerings changes outside our heating season as our Completion and Other Services (which includes frac water heating) typically decrease as a percentage of total revenues and our Production Services increase as a percentage of total revenues. Thus, the revenues recognized in our quarterly financial statements in any given period are not indicative of the annual or quarterly revenues through the remainder of that fiscal year.
As an illustration of this quarter-to-quarter revenue seasonality, the Company generated 60% of its 2021 revenues (75% of 2020 revenues) during the first and fourth quarters compared to 40% of its 2021 revenues (25% of 2020 revenues) during the second and third quarters.
Direct Operating Expenses
Direct operating expenses, which include labor costs, propane, fuel, chemicals, truck repairs and maintenance, supplies, insurance, and site overhead costs for our operating segments, decreased by approximately $189,000, or 5%, for the three months ended September 30, 2022, as compared to the same period in 2021. The decrease in direct operating expenses in the third quarter of 2022 compared to 2021 was primarily due to decreases in Completion Services activities performed in the third quarter of 2022, partially offset by a period-over-period increase in Production Services direct operating expenses which were the result of higher activity levels for this service offering in the current quarter. Direct operating expenses for the nine months ended September 30, 2022 increased by approximately $2.2 million, or 18%, as compared to the same period in 2021. This increase was primarily due to the increased activity levels across both service offerings that the Company experienced primarily during the first quarter of 2022, as compared to the first quarter in 2021.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses for the three months ended September 30, 2022 increased by approximately $187,000, or 21%, to $1.1 million, as compared to the same period in 2021. Sales, general, and administrative expenses for the nine months ended September 30, 2022 increased by approximately $866,000, or 30%, to $3.8 million, as compared to the same period in 2021. These increases were primarily due to increases in professional fees associated with the Company's restatement of its Form 10-Qs for all three quarters of 2021, as well as additional work relating to the 2021 year end audit and Form 10-K filing, coupled with a significant period-over-period increase in stock-based compensation expense resulting from the severance agreement with the Company's former President and Chief Financial Officer and equity awards issued to our current Chief Financial Officer.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended September 30, 2022 decreased by approximately $233,000, or 18%, to $1.1 million, as compared to the same period in 2021. Depreciation and amortization expense for the nine months ended September 30, 2022 decreased by $658,000, or 17%, to $3.3 million, as compared to the same period in 2021. These decreases were primarily due to the selling and disposing of certain idle trucks and vehicles within our property and equipment during the first three quarters of 2022, creating a smaller depreciable base on which our depreciation expense is calculated.
Loss from Operations
For the three months ended September 30, 2022, the Company recognized a loss from operations of $2.6 million compared to a loss from operations of $2.9 million for the same period in 2021. This decreased loss of approximately $222,000 was due primarily to a period-over-period decrease in segment losses. For the nine months ended September 30, 2022, the Company recognized a loss from operations of $7.2 million compared to a loss from operations of $8.2 million for the same period in 2021. This decreased loss of approximately $977,000 was primarily due to the $1.7 million increase in segment profits for the first three quarters of 2022, as compared to 2021, partially offset by a period-over-period increase in our sales, general, and administrative expenses.
Interest Expense
Interest expense for the three months ended September 30, 2022 increased by approximately $442,000 as compared to the same period in 2021. Interest expense for the nine months ended September 30, 2022 increased by approximately $1.0 million as compared to the same period in 2021. These increases were due to increased interest associated with the 2022 Financing Facilities. There was no interest expense on our pre-existing primary debt obligation (2017 Amended Credit Facility) recorded during 2021 in the first three quarters due to the accounting for it as a troubled debt restructuring during the third quarter of 2020.
Other Income
Other income for the three months ended September 30, 2022 was approximately $10,000, as compared to approximately $2.7 million for the same period in 2021. Other income for the nine months ended September 30, 2022 was approximately $102,000, as compared to approximately $3.7 million for the same period in 2021. These decreases were primarily due to the non-recurrence of Employee Retention Credits recognized by the Company during the first three quarters of 2021, as well as a $2.0 million gain on forgiveness of PPP loan for the three and nine months ended September 30, 2021.
Income Taxes
During the first quarter of 2021, the Company experienced a change in control pursuant to the issuance of 4,199,998 shares of common stock. As a result of this change in control, and in accordance with Internal Revenue Service Code Section 382, the realizability of the Company's deferred tax assets became limited. Based on management's judgment, the Company estimated that as of September 30, 2021, $0.4 million of deferred tax liabilities could reverse without an offsetting deferred tax asset. Due to this, the Company recognized $0.4 million of deferred income tax expense for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the Company's income tax benefit of $0.9 million was adjusted by the valuation allowance which resulted in a net tax provision of zero.
The effective tax expense for the three and nine months ended September 30, 2022 and 2021 differs from the amount that would be provided by applying the statutory USA federal income tax rate of 21% to pre-tax income primarily because of state income taxes, estimated permanent differences and the recorded valuation allowance.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA*
Management believes that, for the reasons set forth below, Adjusted EBITDA (a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in Enservco's industry.
The following tables present a reconciliation of our net income (loss) to our Adjusted EBITDA for each of the periods indicated (in thousands):
| For the Three Months Ended September 30, |
||||||||
| 2022 |
2021 |
|||||||
| Reconciliation from Net (Loss) Income to Adjusted EBITDA* |
||||||||
| Net (loss) income |
$ |
(3,076 | ) | $ |
369 | |||
| Add back: |
||||||||
| Interest expense |
448 | 6 | ||||||
| Deferred income tax benefit |
- | (546 | ) | |||||
| Depreciation and amortization (including discontinued operations) |
1,069 | 1,302 | ||||||
| EBITDA* (non-GAAP) |
(1,559 | ) | 1,131 | |||||
| Add back (deduct): |
||||||||
| Stock-based compensation |
159 | 21 | ||||||
| Severance and transition costs | 2 | - | ||||||
| Loss on disposal of assets (including discontinued operations) |
93 | - | ||||||
| Other income |
(10 | ) | (2,689 | ) | ||||
| Adjusted EBITDA* (non-GAAP) |
$ |
(1,315 | ) | $ |
(1,537 | ) | ||
| For the Nine Months Ended September 30, |
||||||||
| 2022 | 2021 |
|||||||
| Reconciliation from Net Loss to Adjusted EBITDA* |
||||||||
| Net loss |
$ | (3,871 |
) | $ |
(4,966 | ) | ||
| Add back: |
||||||||
| Interest expense |
1,053 | 51 | ||||||
| Deferred income tax expense |
- | 402 | ||||||
| Depreciation and amortization (including discontinued operations) |
3,317 | 3,981 | ||||||
| EBITDA* (non-GAAP) |
499 | (532 | ) | |||||
| Add back (deduct): |
||||||||
| Stock-based compensation |
655 | 70 | ||||||
| Severance and transition costs |
301 | 7 | ||||||
| Loss on disposal of assets (including discontinued operations) |
258 | 70 | ||||||
| Gain on debt extinguishment(1) | (4,277 | ) | - | |||||
| Other income |
(102 | ) | (3,668 | ) | ||||
| EBITDA related to discontinued operations |
- | 1 | ||||||
| Adjusted EBITDA* (non-GAAP) |
$ | (2,666 |
) | $ |
(4,052 | ) | ||
_________________________
(1) Relates to the Refinancing, as defined and described in Note 5 - Debt in the condensed consolidated financial statements.
Use of Non-GAAP Financial Measures
Non-GAAP results are presented only as a supplement to the financial statements and for use within management’s discussion and analysis based on GAAP. The non-GAAP financial information is provided to enhance the reader's understanding of the Company’s financial performance, but no non-GAAP measure should be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.
EBITDA is defined as net income (loss), before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA excludes stock-based compensation expense from EBITDA and, when appropriate, other items that management does not utilize in assessing the Company’s ongoing operating performance as set forth in the next paragraph. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income (loss) as an indicator of operating performance or any other GAAP measure.
All of the items included in the reconciliation from net income (loss) to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation expense, impairment losses, etc.) or (ii) items that management does not consider to be useful in assessing the Company’s ongoing operating performance (e.g., income taxes, gain or losses on sale of assets, severance and transition costs, other expense (income), EBITDA related to discontinued operations, etc.). In the case of the non-cash items, management believes that investors can better assess the company’s operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company’s ability to generate free cash flow or invest in its business.
We use, and we believe investors benefit from the presentation of, EBITDA and Adjusted EBITDA in evaluating our operating performance because it provides us and our investors with an additional tool to compare our operating performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our core operations. We believe that EBITDA is useful to investors and other external users of our financial statements in evaluating our operating performance because EBITDA is widely used by investors to measure a company’s operating performance without regard to items such as interest expense, taxes, and depreciation and amortization, which can vary substantially from company to company depending upon accounting methods and book value of assets, capital structure and the method by which assets were acquired.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes our statements of cash flows for the nine months ended September 30, 2022 and 2021 (in thousands):
| For the Nine Months Ended September 30, |
||||||||
| 2022 |
2021 |
|||||||
| Net cash provided by (used in) operating activities |
$ | 150 | $ | (3,883 | ) | |||
| Net cash provided by (used in) investing activities |
141 | (283 | ) | |||||
| Net cash (used in) provided by financing activities |
(229 | ) | 4,372 | |||||
| Net increase in cash and cash equivalents |
62 | 206 | ||||||
| Cash and cash equivalents, beginning of period |
149 | 1,467 | ||||||
| Cash and cash equivalents, end of period |
$ | 211 | $ | 1,673 | ||||
Cash Flows from Operating Activities
Cash provided by operating activities for the nine months ended September 30, 2022 was approximately $150,000 compared to cash used in operating activities of approximately $3.9 million for the same period in 2021. This increase in cash provided by operating activities of approximately $4.1 million was primarily due to a $5.8 million period-over-period improvement in net working capital, partially offset by period-over-period increases in sales, general, and administrative expenses and severance and transition costs.
Cash Flows from Investing Activities
Cash provided by investing activities for the nine months ended September 30, 2022 was approximately $141,000 compared to cash used in investing activities of approximately $283,000 for the same period in 2021. This increase in cash provided by investing activities of approximately $424,000 was primarily due to current year proceeds from disposals of property and equipment exceeding that of the prior year, as well as period-over-period reductions in purchases of property and equipment.
Cash Flows from Financing Activities
Cash used in financing activities for the nine months ended September 30, 2022 was approximately $229,000 compared to cash provided by financing activities of approximately $4.4 million for the same period in 2021. This decrease in cash provided by financing activities of approximately $4.6 million was primarily due to the non-recurrence of approximately $8.8 million of net cash generated through the February 2021 Public Offering from the prior year, as well as approximately $2.0 million of current year principal payments on the 2022 Financing Facilities that did not occur on these debt instruments in the prior year. This was partially offset by net proceeds from the current year March 2022 Convertible Note in the amount of $963,000, proceeds from the current year July 2022 Convertible Note in the amount of $1.2 million, proceeds from the current year Cross River Revolver Note in the amount of $225,000, as well as a $3.4 million period-over-period reduction in term loan and line of credit repayments.
The following table sets forth a summary of certain aspects of our condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021:
| September 30, 2022 |
December 31, 2021 |
|||||||
| Current assets |
$ | 3,638 | $ | 5,593 | ||||
| Total assets |
18,583 | 25,148 | ||||||
| Current liabilities |
7,914 | 12,532 | ||||||
| Total liabilities |
16,285 | 19,806 | ||||||
| Working capital deficit (current assets net of current liabilities) |
(4,276 | ) | (6,939 | ) | ||||
| Stockholders’ equity |
2,298 | 5,342 | ||||||
Overview
On March 24, 2022, the Company completed a refinancing transaction (the “Refinancing”) in which it terminated its pre-existing 2017 Amended Credit Facility with East West Bank. Pursuant to the pay-off letter dated as of March 18, 2022 by the Company, certain wholly owned subsidiaries of the Company and East West Bank, in full satisfaction of the Company’s obligations under the East West Bank 2017 Amended Credit Facility, the Company paid East West Bank $8.4 million in cash and agreed to pay East West Bank 5.00% of the net proceeds that the Company receives under the Receivables Financing (as defined below), up to a maximum of $1.0 million.
As part of the Refinancing, Heat Waves entered into a Master Lease Agreement (the “Utica Facility”) with Utica Leaseco, LLC (“Utica”), pursuant to which Utica provided an equipment-collateralized loan to the Company in the amount of $6.225 million. Under the Utica Facility, the Company is required to make 51 monthly payments with initial payments beginning at $168,075 each and a surcharge of 1.00% of the monthly payment amount per month for every 0.25% that the prime rate of Comerica Bank exceeds 3.25%. The aforementioned surcharge is discretionary on the part of Utica and will be calculated on July 1, 2022 and January 1, 2023, and on each July 1 and January 1 thereafter. This surcharge will be added to the monthly Basic Rent (as such term is defined in the Master Lease Agreement) due under the Utica Facility, and be due and payable with the next regularly scheduled Basic Rent payment under such schedule and on each payment date thereafter. At the end of the fifty-one month term, the Company is required to make a residual payment to Utica between 1% and 10% of the initial principal amount, or between $62,250 and $622,500 depending upon the Company’s ratio of EBITDA to the sum of interest payments, cash paid for taxes and current debt and capital lease payments during the period. The Company also has the option, after twelve months, to prepay $1.0 million of the Utica Facility in exchange for a reduced payment schedule.
Further, as part of the Refinancing, Heat Waves entered into an Invoice Purchase Agreement (the “Receivables Financing” or “LSQ Facility,” and together with the Utica Facility, the “2022 Financing Facilities”) with LSQ Funding Group, LLC (“LSQ”) pursuant to which LSQ provides receivables factoring to Heat Waves. Under the Receivables Financing, LSQ advances up to 85% on accounts receivable factored by Heat Waves, up to a maximum of $10.0 million. The Receivables Financing initially has an 18-month term that can be terminated upon payment of certain fees.
Additionally, as part of the Refinancing, the Company issued a $1.2 million convertible subordinated note (the “March 2022 Convertible Note”) to Cross River Partners, LP (“Cross River”). The March 2022 Convertible Note has a six-year term and accrues interest at 7% per annum. The Company is required to make quarterly interest only payments under the March 2022 Convertible Note for the first year starting June 30, 2022, followed by principal and interest payments for the remaining five years based upon a ten-year amortization schedule. Subject to any required stockholder approval, outstanding principal and accrued but unpaid interest under the March 2022 Convertible Note is convertible at the option of Cross River into common stock of the Company at a conversion price equal to the average closing price of the Company’s common stock on the five days prior to the date of any such conversion.
On July 15, 2022, the Company entered into a convertible subordinated promissory note (the “July 2022 Convertible Note”) with Cross River whereby the Company received $1.2 million of capital for general working capital purposes. The July 2022 Convertible Note matures six years from the date of issuance and carries interest at the rate of 7.75% per annum. The Company is required to make quarterly interest-only payments for the first year starting September 30, 2022, followed by principal and interest payments for the remaining five years based upon a ten-year amortization schedule. The July 2022 Convertible Note is unsecured and junior and subordinate to indebtedness which the Company may now or at any time hereafter owe to any lender. Subject to any required stockholder approval, all or some of the outstanding principal and accrued but unpaid interest under the July 2022 Convertible Note is convertible at the option of Cross River into (i) common stock of the Company at a conversion price of $1.69 per share; or (ii) equity securities issued by the Company in an equity offering with minimum offering proceeds to the Company (net of any related placement agent or underwriting fees) of $1.2 million at the conversion price per equity security issued in such equity offering.
On September 22, 2022, the Company entered into a revolving credit facility with Cross River pursuant to which the Company issued a $750,000 revolving promissory note to Cross River (the “Cross River Revolver Note”). The Cross River Revolver Note is structured as a revolving credit facility to the Company with advances to be made on an ad hoc basis by Cross River to the Company. The Cross River Revolver Note has a one-year term and accrues interest at 8.00% per annum. Prior to the September 22, 2023 maturity date, the Company is required to make principal payments to Cross River upon demand with thirty (30) days’ notice. The Cross River Revolver Note is not convertible into the Company’s equity and is secured by certain of the Company’s owned real property located in North Dakota. As of September 30, 2022, $225,000 was outstanding under this Cross River Revolver Note.
On November 3, 2022, the Company entered into a note exchange agreement with Cross River pursuant to which Cross River loaned an additional $450,000 to the Company, exchanged the $750,000 Cross River Revolver Note for a $1.2 million convertible secured subordinated promissory note (the “November 2022 Convertible Note”) and received a five-year warrant to acquire 568,720 shares of Company common stock at $2.11 per share. The November 2022 Convertible Note has a two-year term and accrues interest at 10.00% per annum, payable quarterly starting March 30, 2023 at the option of the Company in cash or the Company’s common stock. Subject to any shareholder approval required by any exchange upon which the Company’s common stock is then listed, the principal and accrued interest of the November 2022 Convertible Note is convertible into the Company’s common stock at a conversion price of $2.11 per share. The November 2022 Convertible Note is secured by two Company-owned parcels of real property located in North Dakota. On December 13, 2022, the Company sold one of these two parcels for a combination of cash and a promissory note/mortgage totaling $550,000. As consideration for Cross River releasing its security interest on such parcel, the Company has agreed that it will enter into a collateral assignment of the security on such parcel back to Cross River in the event the buyer defaults on their promissory note/mortgage to the Company.
Prior to the 2022 Financing Facilities and the recent Cross River convertible note financings and revolver, we have relied on cash flow from operations as well as borrowings under the $1.0 million line of credit under our pre-existing 2017 Amended Credit Facility to satisfy our liquidity needs. As of September 30, 2022, the Company had cash and cash equivalents totaling $211,000 as well as $525,000 of unused availability through the Cross River Revolver Note.
Our capital requirements for the remainder of 2022 are anticipated to include, but are not limited to, operating expenses, debt servicing, and capital expenditures, including maintenance of our existing fleet of assets.
Liquidity
As of September 30, 2022, our available liquidity was $736,000, which represented our cash and cash equivalents balance of $211,000 as well as $525,000 of unused availability through the Cross River Revolver Note. Although the Company believes the Refinancing, recent convertible note financings and revolver from Cross River, and cash from operations will provide sufficient liquidity for at least the next twelve months, the Company may need to raise additional capital for its growth and ongoing operations. If the Company seeks additional sources of financing, there can be no assurance that such financing would be available to the Company on favorable terms, or at all, including further financing from Cross River. The Company’s ability to obtain additional financing in the debt and equity capital markets, whether public or private, is subject to several factors including market and economic conditions, the Company’s performance, and investor sentiment with respect to the Company and its industry.
Working Capital
As of September 30, 2022, we had a working capital deficit of approximately $4.3 million, compared to a working capital deficit of approximately $6.9 million as of December 31, 2021. This $2.6 million decrease in working capital deficit was primarily attributable to the Refinancing, as described in Note 5 - Debt of the condensed consolidated financial statements, partially offset by the $1.6 million increase in our accounts payable and accrued liabilities, the period-over-period increase to our Other current liabilities, and the period-over-period reductions in our accounts receivable and prepaid expenses.
Outlook
Our revenues are primarily derived from the performance of services within the domestic oil and natural gas industry, most specifically hot oiling and acidizing services as well as frac water heating. Supplemental to these services, we also perform hauling and labor services for our client base which typically occur during the slower revenues generating seasons of late spring, summer and early fall. As a service provider within the energy sector, we are subject to geopolitical influences, demand variances and the drilling activities of the industry. In addition, our frac water heating services are further impacted by the extent of cold weather during winter months. The price of crude oil and natural gas greatly impacts the levels of activities of our clients, which in turn impacts our business. Unforeseen disruptions such as the worldwide COVID-19 pandemic also influence demand, thereby impacting our business. The change in the federal government administration and the governmental shift, both at the federal and state level, to move away from fossil fuels and towards cleaner energy alternatives has weakened demand for our services over the past few years; whereas, the invasion of Ukraine and the resulting impact of the war on worldwide energy prices has led to a rebound in the number of domestic oil rigs in operation and has positively impacted demand for some of our services. We believe the swings in the demand for our services will continue to be cyclical, in addition to the annual seasonal swings our Company has historically experienced.
As alluded to above, over the past three years we have witnessed significant variances in demand for our services. The price of crude oil decreased from $52 per barrel in December 2019 to $24 per barrel in March 2020, subsequently rebounding to $55 per barrel in March 2021 and continued its upward trajectory to $98 per barrel as of September 30, 2022. The number of rigs in operation in the domestic USA also followed this trend. In December 2019, the USA domestic rig count was at 805 rigs in operation. This number fell to 728 in March 2020, 417 in March 2021, and has since rebounded to 763 as of September 30, 2022. The rig count has continued to rise to 780 rigs in operation through the filing date of this report. As previously indicated, we believe there historically has been a significant correlation between rig count and the demand for our services. While the increases to rig counts and to energy demand in turn increases demand for some of our services, much of our revenues, specifically completion services revenues, are seasonal and there is no measurable way to anticipate the activity levels for these services or the impact of current warmer month demand on the upcoming winter months and heating season.
Our team has worked diligently to better position the Company to navigate some of the seasonal and demand swings within our industry. We have strengthened our balance sheet through the Refinancing. Our new LSQ Facility has given us access to a significant portion of the revenues generated on each completed job through cash advances that are generally received within a few days of job completion. Our team has been strengthened by the addition of some key executives and elevation of top performers into roles that better leverage their skills for the benefit of the organization. While we are still navigating some legacy obligations, events of the past few years of decline, and delays related to our financial restatements and resultant staff changes, we believe we are better positioning our Company to enjoy success within the markets we serve and control our costs during our slower revenues generating seasons than in the recent past. While there may be a long-term trend away from fossil fuels, we believe that there is also a realization that with supply chain shortages, fluctuations in semi-conductor and battery availability, and the process of infrastructure development, that there will be a continued demand for fossil fuels and our services which improve operating efficiencies of oil wells. Barring a sudden and unexpected decline in the price per barrel of crude oil or a substantial reduction in the number of domestic rigs in operation within the USA, we believe our Company is positioning itself to enjoy improved operational results in the near future.
Capital Commitments and Obligations
Our capital obligations as of September 30, 2022 consist primarily of our 2022 Financing Facilities which mature through 2027, $2.4 million aggregate principal amount of convertible notes issued to Cross River, as well as our Cross River Revolver Note (which increased to $1.2 million in aggregate principal amount as of November 3, 2022). In addition, we also have scheduled principal payments under our finance and operating leases. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the condensed consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2022, we had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes in our critical accounting policies since we filed our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined in Rule 12b-2 of the Exchange Act and are not required to provide the information under this Item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of the end of the fiscal quarter ended September 30, 2022, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on this evaluation, our principal executive officer and principal financial and accounting officer concluded that, during the period covered by this report, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective due to material weaknesses in internal controls over financial reporting related to the following: (i) the Company’s application of the accounting for a warrant issued to a related party in connection with a conversion of subordinated debt to equity during the first quarter of 2021; (ii) the Company's eligibility to receive certain Employee Retention Credits through the CARES Act of 2020 which were recorded during the second quarter of 2021; and (iii) the Company's accounting for income taxes in connection with a change in control that occurred pursuant to the issuance of 4,199,998 shares of Company common stock during the first quarter of 2021. Notwithstanding the identified material weaknesses, as of September 30, 2022, management, including our principal executive officer and principal financial and accounting officer, believes that the unaudited condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal period presented in conformity with GAAP.
We are in the process of continuing to implement measures to improve our internal control over financial reporting to remediate these material weaknesses. We have identified additional processes and procedures and are working to appropriately apply applicable accounting requirements, and believe these enhanced processes should alleviate past deficiencies over complex accounting standards that apply to our financial statements and complex financial transactions. We have obtained enhanced access to accounting standards literature, research materials, and documents, and have increased communication among our personnel and third-party professionals with whom we consult regarding complex accounting applications. The elements of our remediation plan can only be accomplished over time. We can offer no assurance that the measures we implement will be sufficient to remediate the material weaknesses we have identified or avoid potential future material weaknesses.
Changes in Internal Control over Financial Reporting
During the nine months ended September 30, 2022, we have made progress toward achieving the effectiveness of our internal controls and disclosure controls. The actions that we are taking are subject to ongoing management and executive level review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will fully remediate the material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting, which may necessitate further action.
On November 8, 2021, a plaintiff who is a Texas resident, filed a complaint in Texas State Court in Atascosa County, against the Company, our wholly owned subsidiary, Heat Waves Hot Oil Service, LLC, and two individual former Company employees alleging negligence by our Company and subsidiary in connection with a traffic accident sustained by the plaintiff on November 19, 2019. On August 9, 2022, the Company, its insurance carriers and the plaintiff entered into a mediated settlement of all claims against all parties in the matter of the auto liability claim. The $9.3 million settlement agreement was executed by all parties in September 2022. The insurance claim payment to the plaintiff was covered by the Company’s insurance policies.
On May 22, 2022, Ali Safe, acting individually and on behalf of others, filed a class action complaint in United States District Court for the District of Colorado alleging that the Company and certain of its officers violated securities laws in relation to certain of its SEC Form 10-Q filings in 2021 which required amendments and restatements to such filings. On November 28, 2022, the plaintiff amended their complaint primarily to add Jan Lambert as lead plaintiff and to include Cross River Partners, L.P. and Cross River Capital Management, LLC as defendants.
We believe the claims are without merit and have engaged counsel to vigorously defend the Company against such claims. The Company has Director’s and Officer’s insurance coverage to defend against such claims and the Company's insurance carriers have been notified about the lawsuit. While we believe the claims are without merit, there can be no assurances that a favorable final outcome will be obtained, and defending any lawsuit can be costly and can impose a significant burden on management and employees. Any litigation to which we are a party may result in an unfavorable judgment that may not be reversed upon appeal or in payments of substantial monetary damages or fines, or we may decide to settle such lawsuit on similarly unfavorable terms, either of which could materially adversely affect our business, financial condition, or results of operations. Furthermore, there can be no assurances that our insurance coverage will be available in sufficient amounts to cover such claim, or at all.
There have been no material changes to the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed on July 7, 2022, which is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| Exhibit No. |
Title |
|
| 10.1 | Convertible Subordinated Promissory Note dated July 15, 2022 of Enservco Corporation issued to Cross River Partners, LP (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on July 20, 2022). | |
| 10.2 | Revolving Promissory Note dated September 22, 2022 of Enservco Corporation issued to Cross River Partners, LP (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K filed on September 28, 2022). | |
| 31.1* |
||
| 31.2* | Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32** |
||
| 101.INS |
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded with the Inline XBRL document) |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ENSERVCO CORPORATION |
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| Date: December 23, 2022 |
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/s/ Richard A. Murphy |
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Director and Executive Chairman (Principal Executive Officer) |
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| Date: December 23, 2022 | /s/ Mark K. Patterson | ||
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||