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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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| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
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| (Address of principal executive offices) | (Zip Code) |
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 November 10, 2023 there were
ENSERVCO CORPORATION AND SUBSIDIARY
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
|
| September 30, 2023 | December 31, 2022 | ||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Inventories | ||||||||
| Note receivable | ||||||||
| Assets held for sale | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | | |||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Note receivable, less current portion | ||||||||
| 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 | $ | $ | ||||||
| Utica Facility | ||||||||
| LSQ Facility | ||||||||
| March 2022 Convertible Note, related party | ||||||||
| July 2022 Convertible Note, related party | ||||||||
| Lease liability - finance | | |||||||
| Lease liability - operating | ||||||||
| Current portion of long-term debt | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Utica Facility, less current portion | ||||||||
| March 2022 Convertible Note, related party, less current portion | ||||||||
| July 2022 Convertible Note, related party, less current portion | ||||||||
| November 2022 Convertible Note, related party | ||||||||
| September 2023 Convertible Notes, related party | ||||||||
| Utica Residual Liability | ||||||||
| Lease liability - finance, less current portion | ||||||||
| Lease liability - operating, less current portion | ||||||||
| Deferred tax liabilities | ||||||||
| Other non-current liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| 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, 2023 and December 31, 2022, respectively; shares of treasury stock as of September 30, 2023 and December 31, 2022; and and shares outstanding as of September 30, 2023 and December 31, 2022, 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 SUBSIDIARY
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, | |||||||||||||||
| 2023 | 2022 |
2023 | 2022 | |||||||||||||
| 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 (gain) on disposal of assets | ( |
) | ||||||||||||||
| Impairment loss | ||||||||||||||||
| Depreciation and amortization |
|
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| Total operating expenses |
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| Loss from operations |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other (expense) income: |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ||||||||||
| Gain on debt extinguishment | ||||||||||||||||
| Other income |
||||||||||||||||
| Total other (expense) income, net |
( |
) | ( |
) | ||||||||||||
| Loss before taxes | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Deferred income tax benefit |
||||||||||||||||
| Net loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per share - basic and diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average number of common shares outstanding - basic and diluted |
||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
| Common Shares |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
||||||||||||||||
| Balance at January 1, 2022 |
$ | $ | |
$ | ( |
) | $ | |||||||||||||
| Stock-based compensation |
- | |||||||||||||||||||
| Restricted share issuance | ||||||||||||||||||||
| Net income | - | |||||||||||||||||||
| Balance at March 31, 2022 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | - |
||||||||||||||||||
| Restricted share issuance | ||||||||||||||||||||
| Restricted share cancellations | ) | |||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Restricted share issuances | ||||||||||||||||||||
| Restricted share cancellations | ||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Common Shares |
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Total Stockholders’ Equity |
||||||||||||||||
| Balance at January 1, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation |
- | |||||||||||||||||||
| Restricted share issuance | ||||||||||||||||||||
| Restricted share cancellation | ) | |||||||||||||||||||
| Shares issued to Cross River Partners, L.P. in connection with partial conversion of March 2022 Convertible Note | ||||||||||||||||||||
| Shares issued in February 2023 Offering, net of offering costs | ||||||||||||||||||||
| Warrants issued in February 2023 Offering, net of offering costs | - | |||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at March 31, 2023 |
$ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Restricted share issuances | ||||||||||||||||||||
| Exercise of pre-funded warrants associated with February 2023 Offering | ||||||||||||||||||||
| Shares issued to Cross River Partners, L.P. in connection with conversion of outstanding balance of March 2022 Convertible Note | ||||||||||||||||||||
| Shares issued to Cross River Partners, L.P. in connection with conversion of July 2022 Convertible Note | ||||||||||||||||||||
| Warrants issued to Cross River Partners, L.P. in connection with conversion of July 2022 Convertible Note | - | |||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||
| Exercise of pre-funded warrants associated with February 2023 Offering | ||||||||||||||||||||
| Acquisition of assets of OilServ, LLC through issuance of common stock | ||||||||||||||||||||
| Net loss | - | ( |
) | ( |
) | |||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( |
) | $ | ||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| (Gain) loss on disposal of equipment | ( | ) | ||||||
| Impairment loss | ||||||||
| Board compensation issued in equity | ||||||||
| Write-off of inventories | ||||||||
| Gain on debt extinguishment | ( | ) | ||||||
| Interest paid-in-kind on line of credit | ||||||||
| Stock-based compensation | ||||||||
| Amortization of debt issuance costs and discount | ||||||||
| Severance cost incurred through issuance of restricted shares | ||||||||
| Deferred income tax benefit | ( | ) | ||||||
| Bad debt recovery | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ||||||||
| Prepaid expense and other current assets | ||||||||
| Amortization of operating lease assets | ||||||||
| Other assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Other liabilities | ( | ) | ( | ) | ||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposals of property and equipment | ||||||||
| Collections on note receivable | ||||||||
| Net cash provided by investing activities | ||||||||
| Financing Activities: | ||||||||
| Proceeds from February 2023 Offering, net | ||||||||
| Proceeds from exercise of pre-funded warrants | ||||||||
| Term loan contractual repayments | ( | ) | ||||||
| Term loan repayment consummated in conjunction with Refinance | ( | ) | ||||||
| Establishment of LSQ Facility consummated in conjunction with Refinance | ||||||||
| Establishment of Utica Facility consummated in conjunction with Refinance, net | ||||||||
| Net LSQ Facility repayments | ( | ) | ( | ) | ||||
| Utica Facility repayments | ( | ) | ( | ) | ||||
| Troubled debt restructuring accrued future interest payments | ( | ) | ||||||
| March 2022 Convertible Note proceeds, net, related party | ||||||||
| July 2022 Convertible Note proceeds, net, related party | ||||||||
| September 2023 Convertible Notes, net, related parties | ||||||||
| Cross River Revolver Note proceeds | ||||||||
| Repayments of long-term debt | ( | ) | ( | ) | ||||
| Payments on financed insurance | ( | ) | ||||||
| Payments of finance leases | ( | ) | ( | ) | ||||
| Net cash used in 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: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Non-Cash Investing and Financing Activities: | ||||||||
| Establishment of EWB Obligation in conjunction with the Refinance | $ | $ | ||||||
| Transfer of North Dakota property to assets held for sale | ||||||||
| Acquisition of assets of OilServ, LLC through issuance of common stock | ||||||||
| Financed insurance consummated with insurance renewals | ||||||||
| Conversion of March 2022 Convertible Note to equity | ||||||||
| Conversion of July 2022 Convertible Note to equity | ||||||||
See accompanying notes to the condensed consolidated financial statements.
ENSERVCO CORPORATION AND SUBSIDIARY
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
Note 1 – Basis of Presentation
Enservco Corporation ("Enservco") through its wholly-owned subsidiary (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 and its wholly-owned subsidiary, Heat Waves Hot Oil Service LLC ("Heat Waves"), (collectively, the "Company").
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 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, 2022. 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
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, 2023, we generated net losses of approximately $
The Company received net proceeds of $
In addition, the Company closed on and received $
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 maintains its deposits. 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 credit 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 status of existing receivables and the creditworthiness of its underlying customers. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining this allowance. As of September 30, 2023 and December 31, 2022, the Company had an allowance for doubtful accounts of approximately $
Concentrations
For the three months ended September 30, 2023, revenues from customer represented
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, 2023, the Company wrote-off approximately $
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. 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 conducts a major part of its operations from leased facilities. Each of these leases is accounted for as an operating lease. The Company leases trucks and equipment in the normal course of business, which may be recorded as operating or finance leases, depending on the term of the lease.
Lease assets and liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at the lease start date. When 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 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. Lease expense for operating leases is recognized on a straight-line basis over the lease term. The Company recognizes depreciation expense and interest expense for finance leases.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. During the nine months ended September 30, 2023, the Company ceased operations in North Dakota and began the process to sell its remaining property there. As a result of this, the Company concluded that triggering events which could indicate potential impairment of this long-lived asset group were present. The resulting analysis for impairment of this long-lived asset group ultimately determined that an impairment charge was appropriate. As such, the Company recognized an impairment loss of $
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, 2023 and 2022, 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.
Business Combinations
The Company follows the guidance provided for under ASC 805 Business Combinations (“ASC 805”) when evaluating the appropriate recording treatment of acquisition transactions. Initial steps included evaluating whether the Company obtains control of activities and assets of a business which accounts for the allocation of the purchase consideration to the assets and liabilities acquired at fair value, or if it is an asset acquisition which follows the purchase accounting method. The Company carefully evaluates specific facts and circumstances when applying the guidance in ASC 805.
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, 2023 and 2022, 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. Most 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 based on 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.
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.
For the three and nine months ended September 30, 2023, there were
Outstanding warrants totaling
Common shares issuable under terms of outstanding convertible notes have been excluded from the computation of earnings per share for the three and nine months ended September 30, 2023, respectively, as they would have been antidilutive.
Outstanding stock options 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.
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 2020 through 2022 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2019 to 2022.
Fair Value
The fair value of an asset in considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability's fair value in defined as the amount that would be paid to transfer the liability to a new obligor, rather than the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. 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. |
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 Company did not have any transfers between hierarchy levels for the three and nine months ended September 30, 2023 and 2022.
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 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 not historically paid dividends, nor do we anticipate paying any dividends in the foreseeable future.
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.
Classification and Valuation of Warrants
The Company analyzes warrant instruments to determine the classification of the warrants as liabilities or equity. The Company's issued warrants are all classified as permanent equity.
The Company uses a Black-Scholes 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 United States government securities with a remaining term equal to the contractual term of the warrants. The dividend yield is assumed to be zero.
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 adoption of this standard on January 1, 2023 did not have a material impact on our consolidated financial statements.
Note 3 – Property and Equipment
Property and equipment consist of the following (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| 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, 2023, the Company recorded depreciation expense of approximately $
Note 4 – Intangible Assets
The components of our intangible assets are as follows (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Customer relationships | $ | $ | ||||||
| Patents and trademarks | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
The useful lives of our intangible assets were estimated to be years at inception. For the three and nine months ended September 30, 2023 and 2022, amortization expense was approximately $
Note 5 – Debt
Notes Payable
Long-term debt consists of the following (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Utica Facility | ||||||||
| LSQ Facility | ||||||||
| March 2022 Convertible Note with related party | ||||||||
| July 2022 Convertible Note with related party | ||||||||
| November 2022 Convertible Note with related party | ||||||||
| September 2023 Convertible Notes with related party | ||||||||
| Real Estate Loan for a facility in North Dakota. Interest is at % with monthly principal and interest payment of $ until . 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):
| 2024 | $ | |||
| 2025 | ||||
| 2026 | | |||
| Total | $ |
Refinancing
On March 24, 2022, the Company completed a refinancing transaction (the "Refinancing") in which it terminated an existing 2017 Amended Credit Facility with 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 $
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 $
As a result of the Refinancing, the Company recorded a $
In accordance with ASC 470-60, the Company assessed whether 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 Facility 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.
Debt with Related Parties
On December 21, 2021, the Company issued a subordinated non-convertible promissory note to Cross River for $
On July 15, 2022, the Company entered a convertible subordinated promissory note (the "July 2022 Convertible Note") with Cross River whereby the Company received $
On September 22, 2022, the Company entered a revolving credit facility with Cross River pursuant to which the Company issued a $
On March 28, 2023, Cross River converted approximately $
On June 30, 2023, Cross River: 1) converted the remaining $
On September 1, 2023, the Company issued a convertible promissory note in the amount of $
On September 11, 2023, pursuant to a Note Purchase Agreement (the "Note Purchase Agreement"), Cross River and Chesser exchanged the previously issued September 1, 2023 convertible promissory notes in the aggregate principal amounts of $
If the Company closes on a new offering of equity securities (the “Equity Financing”) of a minimum of $
If a change of control of the Company or a sale of a substantial portion of any of its assets occurs prior to the maturity date mentioned above, the holder may elect to receive either (i) the principal amount plus accrued interest plus a premium that is equal to
In October 2023, pursuant to the September 2023 Note Purchase Agreement, Cross River purchased an additional $
During the nine months ended September 30, 2023, the Company renewed certain of its insurance policies. As part of this renewal, the Company financed $
Debt Discount and Debt Issuance Costs
We capitalized certain debt discount and debt issuance costs incurred in connection with the various debt facilities executed by the Company. These costs were amortized to interest expense over the terms of the facilities on a straight-line basis. The remaining balance of the unamortized debt discount and debt issuance costs was $
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 nine months ended September 30, 2023 and 2022 differs from the amount that would be provided by applying the statutory USA federal income tax rate of to pre-tax income primarily because of state income taxes and estimated permanent differences.
Based on management's judgement, the Company estimated that as of September 30, 2023 the amount of deferred tax liabilities that could reverse without an offsetting deferred tax asset was $
Note 7 – Commitments and Contingencies
As of September 30, 2023, 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 | ||||||
| 2024 | $ | $ | ||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Total future lease payments | ||||||||
| Less: imputed interest | ( | ) | ( | ) | ||||
| Discounted value of lease obligations | $ | $ | ||||||
The following table summarizes the components of our gross operating and finance lease costs (in thousands):
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| 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 leases were as follows:
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Operating: | ||||||||
| Weighted-average lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
| Finance: | ||||||||
| Weighted-average lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
Litigation
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.
On February 10, 2023, the Company filed a motion in the United States District Court of Colorado to dismiss the class action complaint, citing a lack of specific facts and evidence brought by the plaintiffs in alleging the Company and certain of its officers committed securities fraud. As described in the motion requesting dismissal, the Company cites a lack and failure by the plaintiffs to bring significant and specific evidence in claiming that the Company and certain of its officers acted in an intentionally fraudulent or misleading manner, in connection with the Company restating its Form 10-Q financial filings for the first, second, and third fiscal quarters of 2021, due to errors relating to complex and technical tax and accounting issues, which did not have an impact on revenue, operating expenses, operating loss, or adjusted EBITDA for the three 2021 quarterly financial restatements.
We believe the class action complaint is baseless and without merit and have engaged counsel to vigorously defend the Company against the claim. 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 claim is 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
February 2023 Offering of Common Stock and Warrants
On February 22, 2023, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell to the investors in a best-efforts public offering (i)
Conversion of Subordinated Debt to Equity (see Note 5 - Debt)
On March 28, 2023, Cross River converted approximately $
September 2023 Oilfield Equipment Asset Purchase Agreement
On September 11, 2023, the Company completed an asset purchase agreement (the "Asset Purchase Agreement"), acquiring all of the oilfield equipment assets of oilfield services providers Rapid Hot Flow LLC and Rapid Pressure Services, LLC, from OilServ, LLC (collectively, "OilServ, LLC"), in exchange for
Warrants
A summary of warrant activity for the nine months ended September 30, 2023 is as follows (in thousands):
|
| Weighted Average | |||||||||||
| Weighted Average | Remaining | |||||||||||
|
| Shares | Exercise Price | Contractual Life (Years) | |||||||||
| Outstanding as of December 31, 2022 | $ | |||||||||||
| Issued | ||||||||||||
| Exercised | ( | ) | - | |||||||||
| Outstanding as of September 30, 2023 | $ | |||||||||||
| Exercisable as of September 30, 2023 | $ | |||||||||||
NYSE Regulation Notice of Noncompliance
On May 2, 2023, the Company received notice from the NYSE that its equity balance as of December 31, 2022 had fallen below $2.0 million and therefore the Company was not in compliance with the NYSE American's continued listing standards under Section 1003(a)(i) in the NYSE American Company Guide (the "Company Guide"). As previously reported, the Company is also noncompliant with Section 1003(a)(ii) and Section 1003(a)(iii) of the Company Guide, as a result of its stockholder’s equity being less than the required thresholds for each of the particular sections. The Company is now subject to the procedures and requirements set forth in Section 1009 of the Company Guide. The Company has until June 9, 2024 to regain compliance with the stockholders' equity continued listing standards or NYSE will initiate delisting proceedings. On January 10, 2023, the Company submitted a plan (the "Plan") in response to an earlier notice from the NYSE advising of actions the Company is taking to regain compliance with the continued listing standards by June 9, 2024, which Plan was accepted by the NYSE on February 14, 2023. If the Company is not in compliance with all stockholders’ equity standards by June 9, 2024 or does not make progress consistent with the plan during the plan period, NYSE may initiate delisting proceedings as it deems appropriate.
The Company is taking steps to achieve compliance with the stockholders' equity standards of Section 1003(a) of the Company Guide by June 9, 2024. These steps include the conversions of convertible notes into equity as discussed in Note 5 - Debt. The Company anticipates being in compliance with the stockholders' equity continued listing standards of the NYSE American; however, there can be no assurance that the Company will ultimately regain compliance with all applicable NYSE American listing standards.
Note 9 – Restricted Stock and Stock Options
Restricted Stock
Restricted shares issued pursuant to restricted stock awards 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, 2022 | $ | |||||||
| Granted | | |||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Restricted shares as of September 30, 2023 | $ | |||||||
For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation expense for restricted stock of approximately $
As of September 30, 2023, there is $
The Company awarded
The Company issued
Stock Options
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
On September 11, 2023, the Company granted stock options to certain key employees to acquire
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 specialized 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, 2023: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment loss | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| Identifiable assets(1) | $ | $ | $ | $ | ||||||||||||
| For the Three Months Ended September 30, 2022: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment profit (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
|
Identifiable
assets
(1)
| $ | $ | $ | $ | ||||||||||||
| Production Services | Completion and Other Services | Unallocated | Total | |||||||||||||
| For the Nine Months Ended September 30, 2023: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment profit | $ | $ | $ | $ | ||||||||||||
| Depreciation and amortization | $ | $ | $ | $ | ||||||||||||
| Capital expenditures | $ | $ | $ | $ | ||||||||||||
| Identifiable assets(1) | $ | $ | $ | $ | ||||||||||||
| For the Nine Months Ended September 30, 2022: | ||||||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Segment profit (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 segment profit (loss) reported above to the loss from operations reported in the condensed consolidated statements of operations (in thousands):
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| 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, | ||||||||
| 2023 | 2022 | |||||||
| Segment profit | $ | $ | ||||||
| Sales, general, and administrative expenses | ( | ) | ( | ) | ||||
| Severance and transition costs | ( | ) | ( | ) | ||||
| Gain (loss) on disposal of equipment | ( | ) | ||||||
| Impairment loss | ( | ) | ||||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Loss from operations | $ | ( | ) | $ | ( | ) | ||
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, 2023 and 2022, as well as our financial condition, liquidity and capital resources as of September 30, 2023 and December 31, 2022. 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 from various sources, including from our 2022 Financing Facilities, in order to accommodate our business demands during our busiest periods during the winter heating season; |
| ● | 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 and other payables; | |
| ● |
Excessive fluctuations in the prices for crude oil and natural gas and uncertainties in global crude markets 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; | |
| ● | Our ability to implement price increases to maintain or improve operating margins, which are dependent upon market and other factors beyond our control including the increased cost of labor, services, supplies, and materials due to persistent inflation; | |
| ● | Continued interest rate increases could increase the cost of our variable rate indebtedness; |
| ● | 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, 2022. |
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, 2022. 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 due to new information, subsequent events or circumstances, changes in expectations or otherwise.
Recent Developments
On September 1, 2023, the Company issued a convertible promissory note in the amount of $750,000 to Cross River and a convertible promissory note in the amount of $50,000 to Kevin Chesser (“Chesser”), a director of the Company.
On September 11, 2023, pursuant to a Note Purchase Agreement (the "Note Purchase Agreement"), Cross River and Chesser exchanged the previously issued September 1, 2023 convertible promissory notes in the aggregate principal amounts of $750,000 and $50,000, respectively, for new convertible promissory notes (the “September 2023 Convertible Notes”) with the same principal amounts. On the same date, pursuant to the Note Purchase Agreement, the Company also issued September New Convertible Notes in the aggregate principal amount of $125,000 to Angel Capital Partners, LP ("Angel Capital"), and in aggregate principal amount of $187,500 to Equigen, II, LLC ("Equigen"), an entity owned by Steven A. Weyel, a director of the Company. The September 2023 Convertible Notes have an eighteen-month term and accrue interest at 16.00% annually.
In October 2023, pursuant to the September 2023 Note Purchase Agreement, Cross River purchased an additional $150,000 of New Convertible Notes and Richard Murphy, our Chief Executive Officer and Chair, purchased $100,000 of New Convertible Notes. Also in October 2023, Equigen and Angel Capital contemporaneously invested $187,500 and $125,000, respectively, in aggregate principal amount of New Convertible Notes.
Recent Market Conditions
The recovery of the economy from the trough created during the pandemic, coupled with geopolitical events of the past eighteen months, had a positive impact on oil prices and demand for our business services throughout 2022, which softened during the first nine months of 2023. For the nine months ended September 30, 2023, WTI crude oil price averaged $77 per barrel, versus an average of $98 per barrel for the comparable period last year. Despite a decline in total domestic rigs in operation, which was 623 domestic rigs in operation as of September 30, 2023 compared to 765 domestic rigs in operation as of September 30, 2022, we believe that demand for our services remains relatively strong although the domestic rigs in operation count as of September 30, 2023 remains below pre-pandemic domestic rigs in operation. The Company has continued to experience consistent demand and micro and macro-economic conditions have continued to stabilize, 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 future external influences such as those recently experienced from the pandemic, OPEC+ actions, and US governmental positions on our operations and financial performance depends on future developments that are uncertain and unpredictable. External events such as these and others can have a dramatic impact on our business and operations.
OVERVIEW
Enservco Corporation ("Enservco") through its wholly-owned subsidiary (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 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 Denver-Julesburg Basin ("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 more than half 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 slow seasons for our services, as frac water heating activities are mostly unnecessary for our customers during the warmer months of each year.
Revenues for the three months ended September 30, 2023 decreased by $172,000, or 6%, as compared to the same period in 2022. Revenues for the nine months ended September 30, 2023 increased by $436,000, or 3%, as compared to the same period in 2022. The year-over-year decrease for the three months ended was primarily due to decreases in hot oiling and other warmer season activities within our Pennsylvania and Colorado regions, coupled with the elimination of activities within the North Dakota region. These activities consisted of water hauling, hot oiling and occasional roustabout work. The decreases from these activities from within these regions were mostly offset by increases within the Texas regions for hot oiling and acidizing services. While these operational decisions led to a nominal decrease in revenues in the current period, the Company expects these to be a positive for the Company in future periods. The year-over-year increase for the nine months ended was primarily due to overall increased demand for our services within our markets, as well as earlier than usual completions activity occurring in Colorado in the current year.
Segment profit for the three months ended September 30, 2023 decreased by $269,000, or 71%, as compared to the same period in 2022. Segment profit for the nine months ended September 30, 2023 increased by $737,000, or 167%, as compared to the same period in 2022. The decline in segment profit for the three months ended was primarily the result of the reasons discussed above for revenues. The increase in segment profit for the nine months ended was primarily the result of elections to focus on more profitable activities, as well as the increased demand for our services within our markets.
Sales, general, and administrative expenses for the three and nine months ended September 30, 2023 were similar to the same periods in 2022.
Net loss for the three months ended September 30, 2023 was $3.0 million, or a loss of $0.13 per basic and diluted share, compared to a net loss of $3.1 million, or a loss of $0.27 per basic and diluted share, for the same period in 2022. Net loss for the nine months ended September 30, 2023 was $6.6 million, or a loss of $0.35 per basic and diluted share, compared to a net loss of $3.9 million, or a loss of $0.34 per basic and diluted share, for the same period in 2022. Absent the non-recurring $4.3 million gain on debt extinguishment recognized in the first quarter of 2022, net loss improved in the nine months ended September 30, 2023 as compared to the prior year. This improvement was attributable to a year-over-year decrease in our loss from operations resulting from improvements in almost every operating expense category for the current year.
Adjusted EBITDA for the three months ended September 30, 2023 was a loss of $1.5 million compared to a loss of $1.3 million for the same period in 2022. Adjusted EBITDA for the nine months ended September 30, 2023 was a loss of $1.5 million compared to a loss of $2.6 million for the same period in 2022. These year-over-year changes were primarily attributable to the year-over-year changes in our segment profits and losses, coupled with year-over-year changes in our sales, general, and administrative expenses (net of stock-based compensation and non-recurring legal expense) for both periods presented. See the section below titled "Adjusted EBITDA" within this Item 2 for our definition of Adjusted EBITDA.
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 specialized 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 (losses) profits for our business segments for the three and nine months ended September 30, 2023 and 2022 (in thousands):
| For the Three Months Ended |
For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 |
2022 |
2023 | 2022 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Production services |
$ | 2,623 | $ | 2,788 | $ | 8,375 | $ | 8,645 | ||||||||
| Completion and other services |
314 | 321 | 7,203 | 6,497 | ||||||||||||
| Total revenues |
$ | 2,937 | $ | 3,109 | $ | 15,578 | $ | 15,142 | ||||||||
| For the Three Months Ended |
For the Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 |
2022 |
2023 | 2022 | |||||||||||||
| SEGMENT (LOSS) PROFIT: | ||||||||||||||||
| Production services |
$ | (528 | ) | $ | 189 | $ | 1,034 | $ | 669 | |||||||
| Completion and other services | (121 | ) | (569 | ) | 145 | (227 | ) | |||||||||
| Total segment (loss) profit |
$ | (649 | ) | $ | (380 | ) | $ | 1,179 | $ | 442 | ||||||
Production Services
Production Services revenues, which accounted for 89% of total revenues for the three months ended September 30, 2023 and 54% of total revenues for the nine months ended September 30, 2023, were similar to the same periods in 2022.
Hot oiling revenues for the three and nine months ended September 30, 2023 were similar to the same periods in 2022.
Acidizing revenues for the three months ended September 30, 2023 were similar to the same period in 2022. Acidizing revenues for the nine months ended September 30, 2023 increased by $152,000, or 25%, as compared to the same period in 2022. This increase for the nine months ended was due to increased activity levels and demand for this service line in Texas, where the Company is focusing more of its efforts during the non-heating season to maximize revenue opportunities in that region of the country.
Segment profit for Production Services for the three months ended September 30, 2023 decreased by $717,000, or 380%, as compared to the same period in 2022. Segment profit for Production Services for the nine months ended September 30, 2023 increased by $365,000, or 55%, as compared to the same period in 2022. These year-over-year changes were primarily the result of the reasons discussed above for segment revenues, as well as the revenues and segment profit discussion within our "Executive Summary" section above.
Completion and Other Services
Completion and Other Services revenues, which accounted for 11% of total revenues for the three months ended September 30, 2023, were similar to the same period in 2022. This segment's revenues, which accounted for 46% of total revenues for the nine months ended September 30, 2023, increased by $706,000, or 11%, as compared to the same period in 2022. This increase for the nine months ended was primarily due to earlier than usual completions activity occurring in Colorado in the current year.
Segment profit for Completion and Other Services for the three months ended September 30, 2023 increased by $448,000, or 79%, as compared to the same period in 2022. Segment profit for Completion and Other Services for the nine months ended September 30, 2023 improved by $372,000, or 164%, as compared to the same period in 2022. These year-over-year changes were primarily the result of the reasons discussed above for segment revenues, as well as the revenues and segment profit discussion within our "Executive Summary" section above.
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," 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 seasonality, the Company generated 70% of its 2022 revenues (60% of 2021 revenues) during the first and fourth quarters compared to 30% of its 2022 revenues (40% of 2021 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, for the three and nine months ended September 30, 2023 were similar to the same periods in 2022.
Sales, General, and Administrative Expenses
Sales, general, and administrative expenses for the three and nine months ended September 30, 2023 were similar to the same periods in 2022.
Depreciation and Amortization
Depreciation and amortization expense for the three months ended September 30, 2023 decreased by $164,000, or 15%, as compared to the same period in 2022. Depreciation and amortization expense for the nine months ended September 30, 2023 decreased by $496,000, or 15%, as compared to the same period in 2022. These decreases were primarily due to the selling and disposing of certain idle trucks and vehicles within our property and equipment, which began in the second half of 2022 and continues to be assessed, as well as the sale of our Tioga property and building which occurred in the fourth quarter of 2022, both of which resulted in a smaller depreciable base in 2023 on which our depreciation expense is calculated. Depreciation expense related to the equipment brought on through the Asset Purchase Agreement with OilServ, LLC has yet to be recognized in the current year given the timing of the transaction.
Loss from Operations
Loss from operations for the three months ended September 30, 2023 was similar to the same period in 2022. Loss from operations for the nine months ended September 30, 2023 improved by $2.0 million, or 28%, as compared to the same period in 2022. The improvement in loss from operations for the nine months ended was the result of improvements in almost every operating expense category for the current year as compared to the prior year.
Interest Expense
Interest expense for the three months ended September 30, 2023 was similar to the same period in 2022. Interest expense for the nine months ended September 30, 2023 increased by $531,000, or 50%, as compared to the same period in 2022. This increase was due to the combination of interest expense associated with the 2022 Financing Facilities brought on through the Refinancing, the interest costs associated with certain of our convertible promissory notes that we maintained throughout the current year periods, and the rising rate environment that currently exists at the macro level.
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 losses to our Adjusted EBITDA for each of the periods indicated (in thousands):
| For the Three Months Ended September 30, |
||||||||
| 2023 |
2022 |
|||||||
| Reconciliation from Net Loss to Adjusted EBITDA |
||||||||
| Net loss |
$ |
(3,016 | ) | $ |
(3,076 | ) | ||
| Add back: |
||||||||
| Interest expense |
476 | 448 | ||||||
| Depreciation and amortization |
905 | 1,069 | ||||||
| EBITDA (non-GAAP) |
(1,635 | ) | (1,559 | ) | ||||
| Add back (deduct): |
||||||||
| Stock-based compensation |
71 | 159 | ||||||
| Severance and transition costs | - | 2 | ||||||
| Non-recurring legal expense | 1 | 23 | ||||||
| One-time software implementation cost | 28 | - | ||||||
| Loss on disposal of assets |
67 | 93 | ||||||
| Other income |
(60 | ) | (10 | ) | ||||
| Adjusted EBITDA (non-GAAP) |
$ |
(1,528 | ) | $ |
(1,292 | ) | ||
| For the Nine Months Ended September 30, |
||||||||
| 2023 |
2022 |
|||||||
| Reconciliation from Net Loss to Adjusted EBITDA |
||||||||
| Net loss |
$ | (6,574 |
) | $ |
(3,871 | ) | ||
| Add back: |
||||||||
| Interest expense |
1,584 | 1,053 | ||||||
| Deferred income tax benefit |
(16 | ) | - | |||||
| Depreciation and amortization |
2,821 | 3,317 | ||||||
| EBITDA (non-GAAP) |
(2,185 | ) | 499 | |||||
| Add back (deduct): |
||||||||
| Stock-based compensation |
251 | 655 | ||||||
| Severance and transition costs |
1 | 301 | ||||||
| Non-recurring legal expense | 364 | 23 | ||||||
| One-time software implementation cost | 28 | - | ||||||
| (Gain) loss on disposal of assets |
(109 | ) | 258 | |||||
| Impairment loss | 250 | - | ||||||
| Gain on debt extinguishment(1) | - | (4,277 | ) | |||||
| Other income |
(142 | ) | (102 | ) | ||||
| Adjusted EBITDA (non-GAAP) |
$ | (1,542 |
) | $ |
(2,643 | ) | ||
_________________________
(1) Relates to the Refinancing, as defined and described in Note 5 - Debt to 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), non-recurring legal expense, 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
Cash Flows
The following table summarizes our statements of cash flows for the nine months ended September 30, 2023 and 2022 (in thousands):
| For the Nine Months Ended September 30, |
||||||||
| 2023 |
2022 |
|||||||
| Net cash (used in) provided by operating activities |
$ | (100 | ) | $ | 150 | |||
| Net cash provided by investing activities |
628 | 141 | ||||||
| Net cash used in financing activities |
(263 | ) | (229 | ) | ||||
| Net increase in cash and cash equivalents |
$ | 265 | $ | 62 | ||||
Cash Flows from Operating Activities
Cash used in operating activities for the nine months ended September 30, 2023 was $100,000 compared to cash provided by operating activities of $150,000 for the same period in 2022. This decrease in cash provided by operating activities of $250,000 was primarily due to a year-over-year reduction in net working capital changes, partially offset by year-over-year improvements in our segment profits.
Cash Flows from Investing Activities
Cash provided by investing activities for the nine months ended September 30, 2023 was $628,000 compared to cash provided by investing activities of $141,000 for the same period in 2022. This increase in cash provided by investing activities of $487,000 was primarily due to a year-over-year increase in net proceeds from disposals and purchases of property and equipment.
Cash Flows from Financing Activities
Cash used in financing activities for the nine months ended September 30, 2023 was $263,000 compared to cash used in financing activities of $229,000 for the same period in 2022. This increase in cash used in financing activities of $34,000 was primarily due to an increase in year-over-year net repayments on our 2022 Financing Facilities, partially offset by current year net proceeds resulting from the February 2023 Offering and September 2023 Convertible Notes.
The following table sets forth a summary of certain aspects of our condensed consolidated balance sheet as of September 30, 2023 and December 31, 2022:
| September 30, 2023 |
December 31, 2022 |
|||||||
| Current assets |
$ | 4,953 | $ | 5,960 | ||||
| Total assets |
14,525 | 19,838 | ||||||
| Current liabilities |
7,497 | 10,241 | ||||||
| Total liabilities |
13,283 | 18,669 | ||||||
| Working capital deficit (current assets net of current liabilities) |
(2,544 | ) | (4,281 | ) | ||||
| Stockholders’ equity |
1,242 | 1,169 | ||||||
Overview
We have funded our operations primarily with proceeds from borrowings under our credit facilities as well as debt financing arrangements with related parties, proceeds from sales of our equity securities, and cash generated from operations. As of September 30, 2023, we had outstanding principal loan balances on our outstanding indebtedness of $7.3 million with a weighted average interest rate of 13.08%.
On February 22, 2023, the Company entered into a Securities Purchase Agreement with certain investors, pursuant to which the Company agreed to issue and sell to the investors in a best-efforts public offering (i) 3,900,000 shares of Company common stock, (ii) pre-funded warrants to purchase 3,100,000 shares of Company common stock and (iii) common warrants to purchase 7,000,000 shares of Company common stock. The shares of common stock, or pre-funded warrants in lieu thereof, and the common warrants were sold in units, with each unit consisting of one share of common stock or one pre-funded warrant in lieu thereof and one common warrant. Each unit comprised of common stock and common warrants were sold at a per unit price of $0.50. Each unit comprised of pre-funded warrants and common warrants were sold at a per unit price of $0.495, which represents the same per unit price less the $0.005 per share exercise price of the pre-funded warrants. The common warrants are exercisable at a price of $0.55 per share, and have a five-year term. The net proceeds from the offering were $3.0 million, after deducting Placement Agent fees and other offering expenses payable by the Company. The Company used the net proceeds for general corporate purposes.
On March 28, 2023, Cross River converted approximately $1.1 million principal amount of the March 2022 Convertible Note into 2,275,000 shares of Company common stock. On June 30, 2023, Cross River: 1) converted the remaining $148,950 principal balance of the March 2022 Convertible Note into 322,402 shares of Company common stock; 2) converted the entire $1,200,000 principal balance of the July 2022 Convertible Note into 2,400,000 shares of Company common stock; and 3) received a five-year warrant to acquire 2,400,000 shares of Company common stock with an exercise price of $0.55 per share.
On September 1, 2023, the Company issued a convertible promissory note in the amount of $750,000 to Cross River and a convertible promissory note in the amount of $50,000 to Kevin Chesser (“Chesser”), a director of the Company.
On September 11, 2023, pursuant to a Note Purchase Agreement (the "Note Purchase Agreement"), Cross River and Chesser exchanged the previously issued September 1, 2023 convertible promissory notes in the aggregate principal amounts of $750,000 and $50,000, respectively, for new convertible promissory notes (the “September 2023 Convertible Notes”) with the same principal amounts. On the same date, pursuant to the Note Purchase Agreement, the Company also issued September New Convertible Notes in the aggregate principal amount of $125,000 to Angel Capital Partners, LP ("Angel Capital"), and in aggregate principal amount of $187,500 to Equigen, II, LLC ("Equigen"), an entity owned by Steven A. Weyel, a director of the Company. The September 2023 Convertible Notes have an eighteen-month term and accrue interest at 16.00% annually. The Company is required to make interest only payments on a quarterly basis at the end of each calendar quarter, beginning with the quarter ending December 31, 2023. The first quarterly interest payment is payable in shares of the Company’s common stock based on the five (5) day moving average of the closing sales price of the common stock on the NYSE American immediately prior to December 31, 2023. For calendar quarters beginning March 31, 2024, the Company is required to make quarterly interest payments in cash within ten (10) days of the close of the quarter. The September 2023 Convertible Notes may not be prepaid by the Company. The Note Purchase Agreement contains certain covenants, including a covenant that, without the written approval of the holders of greater than 75% of the principal amount of the September 2023 Convertible Notes, restricts the Company’s ability to (a) incur any debt which is senior or pari-passu to the September 2023 Convertible Notes, or (b) issue any new securities subject to certain exceptions.
In October 2023, pursuant to the September 2023 Note Purchase Agreement, Cross River purchased an additional $150,000 of New Convertible Notes and Richard Murphy, our Chief Executive Officer and Chair, purchased $100,000 of New Convertible Notes. Also in October 2023, Equigen and Angel Capital contemporaneously invested $187,500 and $125,000, respectively, in aggregate principal amount of New Convertible Notes.
Our capital requirements for the remainder of 2023 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, 2023, our available liquidity was comprised of our cash and cash equivalents balance of $300,000. Recent convertible notes (see Note 5 - Debt to the condensed consolidated financial statements) have injected fresh sources of financing into the Company, which have improved our cash and overall financial position. Nonetheless, the Company will need to raise additional capital for its 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.
Working Capital
As of September 30, 2023, we had a working capital deficit of $2.5 million, compared to a working capital deficit of $4.3 million as of December 31, 2022. This $1.8 million decrease in working capital deficit was primarily attributable to reductions of our short-term debt obligations under the 2022 Financing Facilities.
Outlook
Our revenues are primarily derived from the performance of services within the domestic oil and natural gas industry, most specifically hot oiling, acidizing services, and frac water heating. Supplemental to these services, we occasionally 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 within the worldwide ecosystem 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. 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.
Over the past three years, we have experienced significant fluctuations in the 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 $77 per barrel as of September 30, 2023. The number of domestic rigs in operation has followed this trend. In December 2019, the domestic rigs in operation count was at 805 domestic rigs in operation. This number fell to 728 in March 2020, 417 in March 2021, and has since rebounded to 623 as of September 30, 2023. The domestic rigs in operation count has continued steady at around 625 domestic rigs in operation through the filing date of this report. As previously indicated, we believe there historically has been a significant correlation between domestic rigs in operation and the demand for our services. While increases to total domestic rigs in operation 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 of these completion 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 and the February 2023 Offering. Our 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. We have worked diligently to reduce the costs absorbed with the slower months for labor, overhead and related expenses. The team is and has been focused on controlling general and administrative expenses, including those for wages, benefits and insurance, as well as costs related to operating as a public company. While we are still navigating some legacy obligations and the events of the past few years, 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, 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, 2023 consist primarily of our 2022 Financing Facilities, the November 2022 Convertible Note and various September 2023 Convertible Notes. In addition, we also have scheduled principal payments under certain term loans, debt obligations, finance leases 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, 2023, 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, 2022.
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, 2023, 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, 2023, 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, 2023, 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 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.
On February 10, 2023, the Company filed a motion in the United State District Court of Colorado to dismiss the class action complaint, citing a lack of specific facts and evidence brought by the plaintiffs in alleging the Company and certain of its officers committed securities fraud. As described in the motion requesting dismissal, the Company cites a lack and failure by the plaintiffs to bring significant and specific evidence in claiming that the Company and certain of its officers acted in an intentionally fraudulent or misleading manner, in connection with the Company restating its Form 10-Q financial filings for the first, second, and third fiscal quarters of 2021, due to errors relating to complex and technical tax and accounting issues, which did not have an impact on revenue, operating expenses, operating loss, or adjusted EBITDA for the three 2021 quarterly financial restatements.
We believe the class action complaint is baseless and without merit and have engaged counsel to vigorously defend the Company against the claim. 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 claim is 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 a 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, 2022, filed on March 31, 2023, which is incorporated herein by reference.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
All recent sales of unregistered securities have been previously reported.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
* 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: November 14, 2023 |
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/s/ Richard A. Murphy |
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Director and Executive Chairman (Principal Executive Officer) |
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| Date: November 14, 2023 | /s/ Mark K. Patterson | ||
| Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | |||
