10-Q 1 ensv20230930c_10q.htm FORM 10-Q ensv20230930c_10q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2023

 

or

 

 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 001-36335

 

ensvlogo.jpg

 

ENSERVCO CORPORATION

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

84-0811316

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

   

14133 Country Road 9 1/2

Longmont, CO

 

 

80504

(Address of principal executive offices)

 

(Zip Code)

 

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of exchange on which registered

Common stock

 

ENSV

 

NYSE American

 

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.   Yes ☒ No 

 

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

 

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

 

Large accelerated filer          ☐                                                                               Accelerated filer                   

Non-accelerated filer                                                                                           Smaller reporting company 

Emerging growth company  

 

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

 

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

 

As of November 10, 2023 there were 26,585,730 shares of common stock, par value $0.005 per share, issued and outstanding.

 

 

 

TABLE OF CONTENTS 

 

 

 

Page

Part I – Financial Information

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets

3

Condensed Consolidated Statements of Operations

4

Condensed Consolidated Statements of Stockholders' Equity

5

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

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

19

Item 3. Quantitative and Qualitative Disclosures about Market Risk

27

Item 4. Controls and Procedures

27

   

Part II

 

Item 1. Legal Proceedings

28

Item 1A.  Risk Factors

28

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

28

Item 3. Defaults Upon Senior Securities

28

Item 4. Mine Safety Disclosures

28

Item 5. Other Information

28

Item 6. Exhibits

29

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

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

 $300  $35 

Accounts receivable, net

  1,363   4,463 

Prepaid expenses and other current assets

  1,664   989 

Inventories

  237   320 
    Note receivable  75   75 

Assets held for sale

  1,314   78 

Total Current Assets

  4,953   5,960 
         

Property and equipment, net

  7,652   

11,236

 
Goodwill  546   546 
Intangible assets, net  18   182 
Note receivable, less current portion  163   225 
Right-of-use asset - finance, net  12   22 
Right-of-use asset - operating, net  999   1,476 
Other assets  182   191 
         

Total Assets

 $14,525  $19,838 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current Liabilities:

        

Accounts payable and accrued liabilities

 $4,506  $4,868 

Utica Facility 

  1,468   1,250 
LSQ Facility   836   2,945 
March 2022 Convertible Note, related party  -   100 
July 2022 Convertible Note, related party  -   60 
Lease liability - finance  12   

13

 
Lease liability - operating  467   597 
Current portion of long-term debt  8   54 

Other current liabilities 

  200   354 

Total Current Liabilities

  7,497   10,241 
         
Utica Facility, less current portion  2,523   3,963 
March 2022 Convertible Note, related party, less current portion  -   1,100 
July 2022 Convertible Note, related party, less current portion  -   1,140 
November 2022 Convertible Note, related party  975   818 
September 2023 Convertible Notes, related party  1,089   - 
Utica Residual Liability  220   110 
Lease liability - finance, less current portion  3   11 
Lease liability - operating, less current portion  618   991 
Deferred tax liabilities  257   273 
Other non-current liabilities  101   22 
         

Total Liabilities

  13,283   18,669 
         

Commitments and Contingencies 

          
         

Stockholders' Equity:

        

Preferred stock, $0.005 par value, 10,000,000 shares authorized, no shares issued or outstanding

  -   - 

Common stock, $0.005 par value, 100,000,000 shares authorized; 25,592,637 and 11,835,753 shares issued as of September 30, 2023 and December 31, 2022, respectively; 6,907 shares of treasury stock as of September 30, 2023 and December 31, 2022; and 25,585,730 and 11,828,846 shares outstanding as of September 30, 2023 and December 31, 2022, respectively

  128   59 

Additional paid-in capital

  48,844   42,266 

Accumulated deficit

  (47,730)  (41,156)

Total Stockholders' Equity

  1,242   1,169 
         

Total Liabilities and Stockholders' Equity

 $14,525  $19,838 

 

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:

                               

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  
                                 

Expenses:

           

 

                 

Production services

    3,151      

2,599

      7,341       7,976  

Completion and other services

    435      

890

      7,058       6,724  

Sales, general, and administrative expenses

    979      

1,094

      3,364       3,763  
Severance and transition costs     -       2       1       301  
Loss (gain) on disposal of assets     67       93       (109 )     258  
Impairment loss     -       -       250       -  

Depreciation and amortization

    905      

1,069

      2,821       3,317  

Total operating expenses

    5,537      

5,747

      20,726       22,339  
                                 

Loss from operations

    (2,600 )     (2,638 )     (5,148 )     (7,197 )
                                 

Other (expense) income:

                               

Interest expense

    (476 )     (448 )     (1,584 )     (1,053)  
   Gain on debt extinguishment     -       -       -       4,277  

Other income

    60       10       142       102  

Total other (expense) income, net

    (416 )     (438)       (1,442 )     3,326  
                                 
Loss before taxes     (3,016 )     (3,076 )     (6,590 )     (3,871 )

Deferred income tax benefit 

    -       -       16       -  
Net loss   $ (3,016 )   $ (3,076 )   $ (6,574 )   $ (3,871 )
                                 
Net loss per share - basic and diluted   $ (0.13 )   $ (0.27 )   $ (0.35 )   $ (0.34 )
                                 

Weighted average number of common shares outstanding - basic and diluted

    23,063       11,536       18,654       11,494  

 

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

    11,432     $ 57     $

40,866

    $ (35,581 )   $ 5,342  

Stock-based compensation

    -       -       21       -       21  
Restricted share issuance     70       -       62       -       62  
Net income     -       -       -       3,140       3,140  

Balance at March 31, 2022

    11,502     $ 57     $ 40,949     $ (32,441 )   $ 8,565  
                                         
Stock-based compensation     -      

-

      475       -       475  
Restricted share issuance     50       -       110       -       110  
Restricted share cancellations     (61 )     -       -       -       -  
Net loss     -       -       -       (3,935 )     (3,935 )
Balance at June 30, 2022     11,491     $ 57     $ 41,534     $ (36,376 )   $ 5,215  
                                         
  Stock-based compensation      -       -       159       -       159  
  Restricted share issuances      345       -       -       -       -  
  Restricted share cancellations     (7)       -       -       -       -  
  Net loss     -       -       -       (3,076 )     (3,076 )
Balance at September 30, 2022     11,829     $ 57     $ 41,693     $ (39,452 )   $ 2,298  

 

 

   

Common Shares

   

Common Stock

   

Additional

Paid-in Capital

   

Accumulated Deficit

   

Total Stockholders’

Equity

 

Balance at January 1, 2023

    11,829     $ 59     $ 42,266     $ (41,156 )   $ 1,169  

Stock-based compensation

    -       -       44       -       44  
Restricted share issuance     60       -       92       -       92  
Restricted share cancellation     (25 )     -       -       -       -  
Shares issued to Cross River Partners, L.P. in connection with partial conversion of March 2022 Convertible Note     2,275       11       1,040       -       1,051  
Shares issued in February 2023 Offering, net of offering costs     3,900       20       964       -       984  
Warrants issued in February 2023 Offering, net of offering costs     -       -       1,968       -       1,968  
Net loss     -       -       -       (1,004 )     (1,004 )

Balance at March 31, 2023

    18,039     $ 90     $ 46,374     $

(42,160

)   $ 4,304  
                                         
Stock-based compensation     -       -       44       -       44  
Restricted share issuances     79       -       82       -       82  
Exercise of pre-funded warrants associated with February 2023 Offering     600       3       -       -       3  
Shares issued to Cross River Partners, L.P. in connection with conversion of outstanding balance of March 2022 Convertible Note     323       2       147       -       149  
Shares issued to Cross River Partners, L.P. in connection with conversion of July 2022 Convertible Note     2,400       12       847       -       859  
Warrants issued to Cross River Partners, L.P. in connection with conversion of July 2022 Convertible Note     -       -       341       -       341  
Net loss     -       -       -       (2,554 )     (2,554 )
Balance at June 30, 2023     21,441     $ 107     $ 47,835     $ (44,714 )   $ 3,228  
                                         
    Stock-based compensation     -       -       71       -       71  
Exercise of pre-funded warrants associated with February 2023 Offering     1,500       8       -       -       8  
Acquisition of assets of OilServ, LLC through issuance of common stock     2,645       13       938       -       951  
   Net loss     -       -       -       (3,016 )     (3,016 )
Balance at September 30, 2023     25,586     $ 128     $ 48,844     $ (47,730 )   $ 1,242  

 

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

 $(6,574) $(3,871)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

        

Depreciation and amortization

  2,821   3,317 

(Gain) loss on disposal of equipment

  (109)  258 
Impairment loss  250   - 
Board compensation issued in equity  82   60 
Write-off of inventories  53   52 
Gain on debt extinguishment  -   

(4,277

)
Interest paid-in-kind on line of credit  -   119 

Stock-based compensation

  251   655 

Amortization of debt issuance costs and discount

  208   46 
       Severance cost incurred through issuance of restricted shares  -   112 
       Deferred income tax benefit  (16)  - 
Bad debt recovery  (100)  - 

Changes in operating assets and liabilities:

        

Accounts receivable

  3,201   1,577 

Inventories

  31   44 

Prepaid expense and other current assets

  1,098   950 
Amortization of operating lease assets  430   543 

Other assets

  22   (160)

Accounts payable and accrued liabilities

  (1,223)  1,581 
Operating lease liabilities  (455)  (552)
Other liabilities  (70)  (304)
Net cash (used in) provided by operating activities  (100)  150 
         

Investing Activities:

        

Purchases of property and equipment

  (115)  (220)
Proceeds from disposals of property and equipment  681   361 
Collections on note receivable  62   - 
Net cash provided by investing activities  628   141 
         

Financing Activities:

        
Proceeds from February 2023 Offering, net   2,952   - 
Proceeds from exercise of pre-funded warrants  11   - 
Term loan contractual repayments  -   (350)
Term loan repayment consummated in conjunction with Refinance  -   (8,400)

Establishment of LSQ Facility consummated in conjunction with Refinance 

  -   2,400 
Establishment of Utica Facility consummated in conjunction with Refinance, net   -   6,000 
Net LSQ Facility repayments  (2,109)  (1,550)
Utica Facility repayments  (1,273)  (480)
Troubled debt restructuring accrued future interest payments  -   (176)
March 2022 Convertible Note proceeds, net, related party  -   963 
July 2022 Convertible Note proceeds, net, related party  -   1,200 
September 2023 Convertible Notes, net, related parties  1,088   - 
Cross River Revolver Note proceeds  -   225 

Repayments of long-term debt

  (46)  (43)
       Payments on financed insurance  (876)  - 
Payments of finance leases  (10)  (18)
Net cash used in financing activities  (263)  (229)
         
Net Increase in Cash and Cash Equivalents  265   62 
         
Cash and Cash Equivalents, beginning of period  35   149 
         

Cash and Cash Equivalents, end of period

 $300  $211 
         
         

Supplemental Cash Flow Information:

        

Cash paid for interest

 $1,404  $846 

Non-Cash Investing and Financing Activities:

        
Establishment of EWB Obligation in conjunction with the Refinance  $-  $1,000 
Transfer of North Dakota property to assets held for sale  1,236   - 
Acquisition of assets of OilServ, LLC through issuance of common stock  1,058   - 
Financed insurance consummated with insurance renewals  1,773   532 
Conversion of March 2022 Convertible Note to equity  1,200   - 
Conversion of July 2022 Convertible Note to equity  1,200   - 

 

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 $3.0 million and $6.6 million, respectively. Our loss from operations decreased to approximately $2.6 million and $5.1 million for the three and nine months ended September 30, 2023, respectively, compared with a loss from operations of approximately $2.6 million and $7.2 million for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, we had cash and cash equivalents of $300,000 and a working capital deficit of approximately $2.5 million.

 

The Company received net proceeds of $3.0 million from the February 2023 Offering (see Note 8 - Stockholders' Equity). Recent conversions of convertible debt to equity (see Note 5 - Debt) by Cross River Partners, L.P. ("Cross River"), a related party entity controlled by Richard Murphy, the Company's CEO and Chairman, have reduced our indebtedness and associated interest costs, which has substantially improved our financial position.

 

In addition, the Company closed on and received $1.1 million of convertible debt financing in September 2023 (see Note 5 - Debt), to strengthen its financial position heading into the 2023-2024 heating season. As part of such convertible debt financing, the Company received an additional $562,500 of convertible debt financing in October 2023. Nonetheless, the Company plans to continue 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.

 

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 $50,000. For the three and nine months ended September 30, 2023, the Company recorded $0 and $100,000 to bad debt recovery, respectively. For the three and nine months ended September 30, 2022, the Company recorded $0 to bad debt expense, while writing off $237,000 in uncollectible accounts.

 

Concentrations 

 

For the three months ended September 30, 2023, revenues from one customer represented 20% of the Company's total revenues. For the nine months ended September 30, 2023, revenues from two customers represented 28% and 12%, respectively, of the Company's total revenues. For the three months ended September 30, 2022, revenues from two customers represented 16% and 11%, respectively, of the Company's total revenues. For the nine months ended September 30, 2022, revenues from one customer represented 26% of the Company's total revenues. As of September 30 2023, no customers represented more than 10% of the Company's accounts receivable. As of December 31, 2022, one customer represented 55% of the Company's accounts receivable.

 

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 $53,000 of inventories. For the three and nine months ended September 30, 2022, the Company wrote-off approximately $52,000 of inventories.

 

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 5 to 30 years.

 

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 $250,000 for the nine months ended September 30, 2023. Further, as of September 30, 2023 it was determined that the criteria laid out below for held for sale balance sheet classification had been met as of September 30, 2023 for this long-lived asset group and therefore were reclassified as "Assets held for sale" on the condensed consolidated balance sheet as of September 30, 2023.

 

8

 

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 no impairment charges on its held for sale assets.

 

Upon determining that a long-lived asset or disposal group meets the criteria to be classified as held for sale, the Company ceases depreciation and reports long-lived assets and/or the assets and liabilities of the disposal group, if material, in the line 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 115,000 unvested restricted shares with service conditions included in the computation for basic and diluted earnings per share since they are participating share-based awards and are considered outstanding as of the grant date. For the three and nine months ended September 30, 2023, there were zero and 25,000 unvested restricted shares with performance conditions, respectively, included in the computation for basic and diluted earnings per share and these shares are also participating share-based awards and are considered outstanding as of the grant date. For the three and nine months ended  September 30, 2022, there were 242,500 unvested restricted shares included in the computation for basic and diluted earnings per share and these shares were also participating share-based awards and were considered outstanding as of the grant date. For the three and nine months ended  September 30, 2022, there were 25,000 unvested restricted shares that had performance conditions and these shares were also participating share-based awards and were considered outstanding as of the grant date.

 

Outstanding warrants totaling 12,568,414 and 9,978,021 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 warrants totaling 1,192,085 have been excluded from the computation of earnings per share for the three and nine months ended September 30, 2022 as they would have been antidilutive.

 

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 500,000 shares of Company common stock 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.

 

9

 

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

 $49,364  $53,312 

Other equipment

  1,979   2,059 

Buildings and improvements

  501   2,600 

Land

  -   190 

Total property and equipment

  51,844   58,161 

Accumulated depreciation

  (44,192)  (46,925)

Property and equipment, net

 $7,652  $11,236 

 

 

For the three and nine months ended September 30, 2023, the Company recorded depreciation expense of approximately $0.9 million and $2.8 million, respectively. For the three and nine months ended September 30, 2022, the Company recorded depreciation expense of approximately $1.0 million and $3.1 million, respectively.

 

 

Note 4  Intangible Assets 

 

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

 

  

September 30, 2023

  

December 31, 2022

 

Customer relationships

 $626  $626 

Patents and trademarks

  441   441 

Total intangible assets

  1,067   1,067 

Accumulated amortization

  (1,049)  (885)

Intangible assets, net

 $18  $182 

 

 

The useful lives of our intangible assets were estimated to be five years at inception. For the three and nine months ended September 30, 2023 and 2022, amortization expense was approximately $54,000 and $163,000, respectively. The intangible assets are expected to be fully amortized within the next three months.

 

 

 

Note 5  Debt

 

Notes Payable

 

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

 

  

September 30, 2023

  

December 31, 2022

 
Utica Facility  4,106   5,379 
LSQ Facility  836   2,945 
March 2022 Convertible Note with related party  -   1,200 
July 2022 Convertible Note with related party  -   1,200 
November 2022 Convertible Note with related party  1,200   1,200 
September 2023 Convertible Notes with related party  1,113   - 
Real Estate Loan for a facility in North Dakota. Interest is at 5.75% with monthly principal and interest payment of $5,255 until October 3, 2023. Collateralized by land and property purchased with the loan.  8   54 
Total long-term debt  7,263   11,978 
Less debt discount and debt issuance costs  (364)  (548)

Less current portion

  (2,312)  (4,409)

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

 $4,587  $7,021 

 

 

Aggregate contractual principal maturities of debt for the twelve months ending September 30 are as follows (in thousands):

 

2024

 $2,312 

2025

  4,032 

2026

  

919

 

Total

 $7,263 

 

 

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 $13.8 million at the time of extinguishment. Pursuant to the pay-off letter dated as of  March 18, 2022 by the Company, certain wholly-owned subsidiary of the Company and East West Bank, in full satisfaction of the Company’s obligations under the 2017 Amended Credit Facility, the Company paid East West Bank $8.4 million in cash and agreed to pay East West Bank 5% of the net proceeds that the Company receives under the Receivables Financing (as defined below), up to a maximum of $1.0 million (the "EWB Obligation"). The Company paid off and satisfied the $1.0 million EWB Obligation in April 2023.

 

As part of the Refinancing, Heat Waves entered into a Master Lease Agreement (the "Utica Facility") with Utica Leaseco, LLC ("Utica"), pursuant to which Utica provided an equipment-collateralized loan to the Company in the amount of $6.2 million. Under the Utica Facility, the Company is required to make 51 monthly payments with initial payments beginning at $168,075 each and a surcharge of 1% of the monthly payment amount per month for every 0.25% that the prime rate of Comerica Bank exceeds 3.25%. The Company's current minimum payment as of September 30, 2023 under the Utica Facility is $202,000 per month and the loan bears interest at 15.5% per annum. The aforementioned surcharge is discretionary on the part of Utica and was calculated on July 1, 2022 and January 1, 2023, and on each July 1 and January 1 thereafter. This surcharge is added to the monthly Basic Rent (as such term is defined in the Master Lease Agreement) due under the Utica Facility, and is due and payable with the next regularly scheduled Basic Rent payment under such schedule and on each payment date thereafter. Upon its maturity on June 24, 2026, the Company is required to make a residual payment to Utica between 1% and 10% of the initial principal amount, or between $62,250 and $622,500 depending upon the Company’s ratio of EBITDA to the sum of interest payments, cash paid for taxes and current debt and capital lease payments during the period. The Utica Facility is secured by all the Company’s equipment and proceeds from such equipment should the encumbered equipment be sold. The Company also has the option to prepay $1.0 million of the Utica Facility in exchange for a reduced payment schedule. The Company guarantees the obligations of Heat Waves under the Utica Facility.

 

Further, as part of the Refinancing, Heat Waves entered into an Invoice Purchase Agreement (the "Receivables Financing" or "LSQ Facility," and together with the Utica Facility, the "2022 Financing Facilities") with LSQ Funding Group, LLC ("LSQ") pursuant to which LSQ provides receivables factoring to Heat Waves. Under the Receivables Financing, LSQ advances up to 85% on accounts receivable factored by Heat Waves, up to a maximum of $10.0 million. LSQ receives fees equal to 0.1% of the receivables purchased in addition to a funds usage daily fee of 0.021% of the outstanding balance purchased. The Receivables Financing initially had an 18-month term that can be terminated upon payment of certain fees. The Receivables Financing is secured by a security interest in Heat Wave’s accounts receivables and proceeds from such accounts receivable. Heat Wave’s obligations under the Receivables Financing are guaranteed by the Company.

 

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 $1.2 million convertible subordinated note (the "March 2022 Convertible Note") to Cross River. The March 2022 Convertible Note had a six-year term and accrued interest at 7% per annum.

 

As a result of the Refinancing, the Company recorded a $4.3 million gain on this transaction, as recorded in the line item "Gain on debt extinguishment" in the condensed consolidated statement of operations for the three months ended March 31, 2022.

 

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 $220,000, which amount was subsequently reduced to $162,000 and then fully repaid in 2022.

 

On July 15, 2022, the Company entered a convertible subordinated promissory note (the "July 2022 Convertible Note") with Cross River whereby the Company received $1.2 million of capital for general working capital purposes. The July 2022 Convertible Note was set to mature six years from the date of issuance and carried interest at the rate of 7.75% per annum. The Company was required to make quarterly interest-only payments for the first year starting September 30, 2022, followed by principal and interest payments for the remaining five years based upon a ten-year amortization schedule. The July 2022 Convertible Note was unsecured and junior and subordinate to indebtedness which the Company may now or at any time hereafter owe to any lender. Subject to any required stockholder approval, all or some of the outstanding principal and accrued but unpaid interest under the July 2022 Convertible Note was convertible at the option of Cross River into (i) common stock of the Company at a conversion price of $1.69 per share; or (ii) equity securities issued by the Company in an equity offering with minimum offering proceeds to the Company (net of any related placement agent or underwriting fees) of $1.2 million at the conversion price per equity security issued in such equity offering.

 

On September 22, 2022, the Company entered a revolving credit facility with Cross River pursuant to which the Company issued a $750,000 revolving promissory note to Cross River (the "Cross River Revolver Note"). On November 3, 2022, the Company entered into a note exchange agreement with Cross River, pursuant to which Cross River loaned an additional $450,000 to the Company and exchanged the Cross River Revolver Note for a $1.2 million convertible secured subordinated promissory note (the "November 2022 Convertible Note") and received a five-year warrant to acquire 568,720 shares of Company common stock at $2.11 per share. These warrants are subject to limitation such that the number of shares that may be issued shall not exceed obligations under rules of regulations of the principal market. The November 2022 Convertible Note has a two-year term and accrues interest at 10.00% per annum, payable quarterly starting March 30, 2023 at the option of the Company in cash or the Company’s common stock. Subject to any shareholder approval required by any exchange upon which the Company’s common stock is then listed, the principal and accrued interest of the November 2022 Convertible Note is convertible into the Company’s common stock at a conversion price equal to the lower of $2.11 per share or the price and terms the Company receives on its next public offering, which was indexed with the completion of the Company's February 2023 Offering (see Note 8 - Stockholders' Equity). The November 2022 Convertible Note is secured by two Company-owned parcels of real property located in North Dakota. On December 13, 2022, the Company sold one of these two parcels for a combination of cash and a promissory note/mortgage totaling $550,000. As consideration for Cross River releasing its security interest on such parcel, the Company agreed that it will enter a collateral assignment of the security on such parcel back to Cross River in the event the buyer defaults on their promissory note/mortgage to the Company.

 

On 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 13, 2023, the stockholders approved at the Company's 2023 Annual Meeting of Stockholders the issuance to Cross River of up to 5,122,402 additional shares of Company common stock, including 2,400,000 shares of common stock issuable upon exercise of a five-year warrant, issuable to Cross River upon its conversion of certain convertible notes pursuant to a Note Conversion Agreement dated March 28, 2023 between the Company and Cross River.

 

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.

 

If the Company closes on a new offering of equity securities (the “Equity Financing”) of a minimum of $5,000,000 before the maturity date mentioned above, then, subject to any NYSE American shareholder approval requirements, the principal amount, together with all accrued but unpaid interest of the New Convertible Notes, will automatically convert into shares of the same class and type at the same price and on the same terms and provisions as the securities issued to the other participants in the Equity Financing on the closing date of such Equity Financing; provided, however, at the option of the holder, the New Convertible Notes may convert into such equity, (a) at $0.50 per share if the security sold in the Equity Financing is common stock or (b) at a share price which is 25% less than the lowest price per share of shares sold in the Equity Financing. Subject to any NYSE American shareholder approval requirements, the holders may convert their Convertible Notes at any time into the Company’s common stock at a conversion price of $0.50 per share.

 

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 25% of the principal amount or (ii) the right to convert the principal amount plus accrued but unpaid interest into the Company’s common stock at a conversion price equal to a 25% discount to the five (5) day moving average of the closing sales price of the common stock on the NYSE American immediately prior to the transaction which results in a change of control of the Company.

 

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.

 

During the nine months ended September 30, 2023, the Company renewed certain of its insurance policies. As part of this renewal, the Company financed $1.8 million of the insurance payments to be made over future periods. This financed insurance liability is contained in the line item "Accounts payable and accrued liabilities," with a corresponding financed insurance asset contained in the line item "Prepaid expenses and other current assets," both presented on our condensed consolidated balance sheet as of September 30, 2023.

 

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 $364,000 as of September 30, 2023. For the three and nine months ended September 30, 2023, the Company amortized approximately $69,000 and $208,000, respectively, of these costs to "Interest expense" in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2022, the Company amortized approximately $20,000 and $41,000, respectively, of these costs to "Interest expense" in the condensed consolidated statements of operations.

 

 

 

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 21% 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 $257,000. Due to this, the Company recognized a $16,000 deferred tax benefit for the nine months ended September 30, 2023. For the nine months ended September 30, 2022, the Company's income tax benefit of $0.9 million was adjusted by the valuation allowance which resulted in a net tax provision of zero.

 

 

 

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

 $523  $14 

2025

  384   2 

2026

  269   - 
Total future lease payments  1,176   16 
Less: imputed interest  (91)  (1)
Discounted value of lease obligations $1,085  $15 

 

 

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 $24  $13  $72  $62 
Long-term lease cost  176   183   507   637 

Total operating lease cost

 $200  $196  $579  $699 
                 
Finance lease cost:                
Amortization of right-of-use assets $3  $3  $10  $16 
Interest on lease liabilities  -   -   1   1 

Total finance lease cost

 $3  $3  $11  $17 

 

 

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)

  2.22   3.07 

Weighted-average discount rate

  6.40%  6.38%
         
Finance:        
Weighted-average lease term (years)  0.98   1.99 
Weighted-average discount rate  5.59%  5.59%

 

 

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) 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 "February 2023 Offering"). 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. Offering expenses totaling $534,000 were charged to stockholders' equity and are recorded as a reduction of the proceeds from the February 2023 Offering. The Company used the net proceeds for general corporate purposes.

 

Conversion of Subordinated Debt to Equity (see Note 5 - Debt)

 

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.

 

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 2,939,133 shares of the Company's common stock, valued at $1,057,500. The total shares issued at closing was 2,645,220 shares of Company common stock, and the remaining shares will be issued upon satisfaction of the indemnification provisions.

 

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

  1,760,805  $3.10   3.43 

Issued

  12,500,000   0.41   4.52 
Exercised  (2,100,000)  0.005   - 

Outstanding as of September 30, 2023

  12,160,805  $0.87   4.22 
                                                          
Exercisable as of September 30, 2023  12,160,805  $0.87   4.22 

 

 

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.

 

15

 

 

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

  267,500  $2.44 

Granted

  

139,262

   1.26 

Vested

  (266,762)  1.86 

Forfeited

  (25,000)  1.02 

Restricted shares as of September 30, 2023

  115,000  $2.68 

 

 

For the three and nine months ended September 30, 2023, the Company recognized stock-based compensation expense for restricted stock of approximately $44,000 and $224,000, respectively, in "Sales, general, and administrative expenses" in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2022, the Company recognized stock-based compensation costs for restricted stock of approximately $159,000 and $655,000, respectively, in "Sales, general, and administrative expenses" in the condensed consolidated statements of operations. Compensation cost is revised if subsequent information indicates that the actual number of restricted stock vested due to service is likely to differ from previous estimates.

 

As of September 30, 2023, there is $44,000 of unamortized stock-based compensation expense for restricted stock to be amortized over the next three months.

 

The Company awarded 79,262 restricted shares for the 2023 Board of Directors fees and recognized expense of $21,000 and $62,000 related to the award of these shares for the three and nine months ended September 30, 2023, respectively.

 

The Company issued 50,000 restricted shares during the nine months ended September 30, 2022 as part of the severance agreement related to the resignation of a former Chief Financial Officer. This issuance had a grant date fair value of approximately $112,000 and the expense for this issuance was recognized within the line item "Severance and transition costs" in the condensed consolidated statement of operations for the nine months ended September 30, 2022. Unvested restricted performance share-based awards totaling 61,000 shares were forfeited as part of the severance agreement.

 

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 533,334 shares plus authorized and unissued shares from the 2010 Plan totaling 159,448, for a total reserve of 692,782 shares. As of September 30, 2023, there were 250,000 options and 15,000 shares of restricted stock that remained outstanding under the 2016 Plan. 

 

On September 11, 2023, the Company granted stock options to certain key employees to acquire 500,000 shares of the Company's common stock at an exercise price of $0.41 per share with 50% of such options vesting January 1, 2024, and the remaining balance vesting January 1, 2025. In connection with the stock options issuance, the Company recognized stock-based compensation costs of $27,000 respectively, for the three and nine months ended September 30, 2023. As of September 30, 2023, there is $148,000 of unamortized stock-based compensation expense for stock options to be amortized over the next fifteen months.

 

 

 

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

 $2,623  $314  $-  $2,937 

Cost of revenues

  3,151   435   -   3,586 

Segment loss

 $(528)  $(121) $-  $(649)
                 

Depreciation and amortization

 $663  $57  $185  $905 

Capital expenditures

 $29  $3  $-  $32 
    Identifiable assets(1) $10,788  $928  $43  $11,759 
                 

For the Three Months Ended September 30, 2022:

                

Revenues