ensv20240331

ensv20240331_10q.htm

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 March 31, 2024

☐ 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

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 May 13, 2024, there were 27,636,500 shares of the registrant's common stock outstanding.

Table of Contents

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

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENSERVCO CORPORATION AND SUBSIDIARY

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	March 31, 2024			December 31, 2023
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	474		$	201
Accounts receivable, net		4,248			4,190
Prepaid expenses and other current assets		870			1,047
Inventories		219			209
Note receivable		75			75
Total Current Assets		5,886			5,722

Property and equipment, net		6,235			6,923
Intangible assets, net		67			-
Right-of-use asset - finance, net		6			9
Right-of-use asset - operating, net		759			891
Note receivable, less current portion		125			144
Other assets		182			183

Total Assets	$	13,260		$	13,872

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued liabilities	$	3,104		$	4,285
Utica Facility		1,684			1,595
LSQ Facility		2,739			2,472
November 2022 Convertible Note, related party		1,079			1,027
September and October 2023 Convertible Notes, related parties		1,660			-
Lease liability - finance		6			10
Lease liability - operating		395			441
Other current liabilities		200			198
Total Current Liabilities		10,867			10,028

Utica Facility, less current portion		1,075			1,690
September and October 2023 Convertible Notes, related parties, less current portion		-			1,656
Utica Residual Liability		293			256
Lease liability - finance, less current portion		10			6
Lease liability - operating, less current portion		436			528
Deferred tax liabilities		222			222
Other non-current liabilities		7			58

Total Liabilities		12,910			14,444

Commitments and Contingencies

Stockholders' Equity (Deficit):
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; 27,362,742 and 26,592,637 shares issued as of March 31, 2024 and December 31, 2023, respectively; 6,907 shares of treasury stock as of March 31, 2024 and December 31, 2023; and 27,355,835 and 26,585,730 shares outstanding as of March 31, 2024 and December 31, 2023, respectively		135			131
Additional paid-in capital		49,148			48,970
Accumulated deficit		(48,933	)		(49,673	)
Total Stockholders' Equity (Deficit)		350			(572	)

Total Liabilities and Stockholders' Equity (Deficit)	$	13,260		$	13,872

See accompanying notes to the condensed consolidated financial statements.

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ENSERVCO CORPORATION AND SUBSIDIARY

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

	For the Three Months Ended
	March 31,
	2024			2023
Revenues:
Production services	$	2,485		$	2,863
Completion and other services		7,307			6,049
Total revenues		9,792			8,912

Expenses:
Production services		2,121			2,317
Completion and other services		4,410			4,580
Sales, general, and administrative		1,232			1,503
Severance and transition		-			1
Gain on disposal of assets		-			(1	)
Depreciation and amortization		767			971
Total operating expenses		8,530			9,371

Income (loss) from operations		1,262			(459	)

Other (expense) income:
Interest expense		(578	)		(590	)
Other income		56			29
Total other expense, net		(522	)		(561)

Income (loss) before taxes		740			(1,020	)
Deferred income tax benefit		-			16
Net income (loss)	$	740		$	(1,004	)

Net income (loss) per share:
Basic	$	0.03		$	(0.07	)
Diluted	$	0.03		$	(0.07	)

Weighted average number of common shares outstanding:
Basic		26,934			14,808
Diluted		30,284			14,808

See accompanying notes to the condensed consolidated financial statements.

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ENSERVCO CORPORATION AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity (Deficit)

(In thousands)

(Unaudited)

	Common Shares			Common Stock		Additional Paid-in Capital		Accumulated Deficit			Total Stockholders' Equity (Deficit)
Balance at January 1, 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

Balance at January 1, 2024	26,586	$	131	$	48,970	$	(49,673	)	$	(572	)
Stock-based compensation	-		-		16		-			16
Restricted share issuance	476		2		58		-			60
Shares issued through release of OilServ, LLC indemnification provisions	294		2		104		-			106
Net income	-		-		-		740			740
Balance at March 31, 2024	27,356	$	135	$	49,148	$	(48,933	)	$	350

See accompanying notes to the condensed consolidated financial statements.

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ENSERVCO CORPORATION AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	For the Three Months Ended
	March 31,
	2024			2023
Operating Activities:
Net income (loss)	$	740		$	(1,004	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		767			971
Gain on disposal of equipment		-			(1	)
Stock-based compensation		76			196
LSQ Facility interest paid-in-kind		126			-
Amortization of debt issuance costs and discount		77			70
Deferred income tax benefit		-			(16	)
Changes in operating assets and liabilities:
Accounts receivable		(58	)		243
Inventories		(10	)		(1	)
Prepaid expense and other current assets		178			481
Amortization of operating lease assets		132			139
Other assets		1			17
Accounts payable and accrued liabilities		(924	)		(1,189	)
Operating lease liabilities		(138	)		(143	)
Other liabilities		92			(242	)
Net cash provided by (used in) operating activities		1,059			(479	)

Investing Activities:
Purchases of property and equipment		(77	)		(49	)
Proceeds from disposals of property and equipment		-			9
Purchase of intangible		(67	)		-
Collections on note receivable		19			25
Net cash used in investing activities		(125	)		(15	)

Financing Activities:
Proceeds from February 2023 Offering, net		-			2,952
Net LSQ Facility borrowings (repayments)		140			(334	)
Utica Facility repayments		(545	)		(294	)
Repayments of long-term debt		-			(15	)
Payments on financed insurance		(256	)		(79	)
Net cash (used in) provided by financing activities		(661	)		2,230

Net Increase in Cash and Cash Equivalents		273			1,736

Cash and Cash Equivalents, beginning of period		201			35

Cash and Cash Equivalents, end of period	$	474		$	1,771


Supplemental Cash Flow Information:
Cash paid for interest	$	256		$	312
Non-Cash Investing and Financing Activities:
Partial conversion of March 2022 Convertible Note to equity	$	-		$	1,051

See accompanying notes to the condensed consolidated financial statements.

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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 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 for the year ended December 31, 2023. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

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Note 2 – Summary of Significant Accounting Policies

Going Concern

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 months ended March 31, 2024, we generated income from operations of $1.3 million and net income of $740,000. For the three months ended March 31, 2023, we generated a loss from operations of $459,000 and a net loss of $1.0 million. As of March 31, 2024, we had cash and cash equivalents of $474,000 and a working capital deficit of $5.0 million. Beginning in the latter part of 2022, hiring practices and headcount were significantly modified and reduced, and unprofitable locations were closed. We also disposed of non-core or underperforming assets, generating proceeds totaling $2.0 million since the beginning of 2023. Despite the recent developments and the contributing improvements to our financial position noted above, we believe that substantial doubt exists over our ability to continue as a going concern for twelve months after the date of issuance of this Quarterly Report on Form 10-Q.

We utilize a cash forecast model to evaluate the ability of future cash flows to fund continuing operations. We analyze projected cash flows to determine if they are sufficient to fund the operations and obligations of the Company for a period of time that extends twelve months or more from the date of the applicable filing. We may need to raise additional capital for our growth and ongoing operations. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms, or at all. Our ability to obtain additional financing through debt and equity capital markets, whether public or private, is subject to several factors including market and economic conditions, our performance, and investor sentiment with respect to us and our industry.

Pending Acquisition of Buckshot Trucking LLC

On March 19, 2024, Enservco entered into a membership interest purchase agreement (the "Buckshot Purchase Agreement") with Tony Sims, an individual resident of Colorado; Jim Fate, an individual resident of Colorado (together the “Sellers”), and Buckshot Trucking LLC, a Wyoming limited liability company (“Buckshot Trucking”), pursuant to which Enservco agreed to acquire from the Sellers all of the issued and outstanding membership interests of Buckshot Trucking (the “Buckshot Acquisition”) for $5,000,000 (the “Base Amount”), subject to a net working capital adjustment, plus up to $500,000, in the form of Enservco common stock, contingent upon satisfaction of certain conditions set forth in the Buckshot Purchase Agreement. The Base Amount consists of $3,750,000 in cash and $1,250,000 in shares of Enservco common stock based on the volume-weighted average of Enservco common stock for the 10-day period immediately preceding the closing date.

The issuance of the Enservco common stock pursuant to the Buckshot Purchase Agreement is subject to the prior approval or consent of the holders of a majority of the outstanding shares of Enservco common stock. On May 9, 2024 the Company filed a preliminary proxy statement with the SEC for the solicitation of proxies in connection with the Company’s upcoming annual meeting to consider and vote on the stock issuance pursuant to the Buckshot Purchase Agreement, among other matters.

Additional information about the pending Buckshot Acquisition is set forth in our Current Report on Form 8-K filed with the SEC on March 25, 2024.

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 two separate financial institutions; however, 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 credit losses. We make estimates of expected credit and collectability trends for the allowance for credit losses based upon our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, reasonable and supportable forecasts of future economic conditions, and other factors that may affect our ability to collect from customers. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of March 31, 2024 and December 31, 2023, the Company had an allowance for credit losses of $100,000. For the three months ended March 31, 2024 and 2023, the Company did not record any bad debt expense or bad debt recovery.

Concentrations

Revenues from two customers represented 10% or more of total revenues, at 33% and 23%, respectively, for the three months ended March 31, 2024. Revenues from one customer represented 10% or more of total revenues, at 45%, for the three months ended March 31, 2023. As of March 31, 2024, two customers represented more than 10% of the Company's accounts receivable balance at 32% and 24%, respectively. As of December 31, 2023, two customers represented more than 10% of the Company's accounts receivable balance at 50% and 18%, respectively.

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 months ended March 31, 2024 and 2023, the Company did not recognize any write-downs or write-offs 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 five to thirty years.

When property and equipment is either sold or disposed of, the cost and related accumulated depreciation of the property and equipment sold or disposed is removed from the accounting records. Any difference between the net book value of the property and equipment and the proceeds of the assets' 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. For the three months ended March 31, 2024 and 2023, the Company concluded that there were no triggering events which could indicate potential impairment of its long-lived assets.

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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 months ended March 31, 2024 and 2023, 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 Accounting Standards Codification ("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.

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 common stock options and warrants and is computed using the if-converted method for convertible securities and convertible debt instruments.

For the three months ended March 31, 2024, the Company had common stock options, warrants, and convertible debt instruments that are considered common stock equivalents that are considered in the computations of basic and diluted earnings per share. Due to the Company having net income for the three months ended March 31, 2024, shares issuable upon the conversion of all September and October 2023 Convertible Notes (as defined in Note 5 - Debt to the condensed consolidated financial statements) are included in the computation of diluted earnings per share. For the three months ended March 31, 2023, the Company had warrants, pre-funded warrants, and convertible debt instruments that are considered common stock equivalents that are considered in the computations of basic and diluted earnings per share. For the three months ended March 31 2023, due to the Company having a net loss for the period, shares issuable upon the exercise of outstanding warrants and convertible debt instruments are excluded from the computation of diluted earnings per share because their impact would be anti-dilutive. However, in accordance with ASC 260-10-45-13, the pre-funded warrants issued by the Company during the three months ended March 31, 2023 are included in the weighted average number of common shares outstanding used in the computation for basic and diluted earnings per share for that period.

The following table presents the reconciliation of basic to diluted weighted average number of common shares outstanding used in computing earnings per common share for the period presented (in thousands):

	For the Three Months Ended
	March 31,
	2024
Weighted average number of common shares outstanding, basic		26,934
Add:
September and October 2023 Convertible Notes common stock equivalents		3,350
Weighted average number of common shares outstanding, diluted		30,284

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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 2023 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2019 to 2023.

Fair Value

The fair value of an asset is 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 is 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 months ended March 31, 2024 and 2023.

As of March 31, 2024 and 2023, the Company had no assets or liabilities that were required to be measured at fair value on a recurring basis.

When an assessment for impairment is required for its long-lived assets, the Company assesses the recoverability using the lowest level of cash flows taking into consideration timing and appropriate discount rates. When appropriate, market comparables may be used to determine if an asset may not be recoverable.

The Company valued its warrants and stock options using the Black-Scholes model for prior reporting periods. The Company did not have any warrants or stock options that required valuation during the three months ended March 31, 2024.

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, 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, useful lives of long-lived assets, 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.

Contingent Liabilities

From time-to-time, the Company will have contingent liabilities that arise in the course of business, usually as it pertains to certain lawsuits in which the Company is involved. When a future contingent liability becomes both probable and estimable, the Company will record a liability for the estimated amount, as well as any offsetting receivables in the event the claim is probable to be covered by an insurance policy. In the event there is a range of outcomes and no amount is determined to be most probable, the Company will record a liability and, if applicable due to likelihood of insurance coverage, a receivable for the low end of the range. In the event the Company makes a firm offer in order to settle a lawsuit, the Company will record a liability for the amount of the offer at that time.

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 used a Black-Scholes model to determine the fair value of certain warrants. The expected term used was the remaining contractual term. Expected volatility was based upon historical volatility over a term consistent with the remaining term. The risk-free interest rate was derived from the yield on zero-coupon USA government securities with a remaining term equal to the contractual term of the warrants. The dividend yield was 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.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-13, Financial Statements - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to ascertain credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2022. The Company adopted ASU 2016-13 in fiscal year 2023 and the adoption of this ASU did not have a material impact on its condensed consolidated financial statements.

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Note 3 – Property and Equipment

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

	March 31, 2024			December 31, 2023
Trucks and vehicles	$	48,099		$	48,036
Other equipment		1,859			1,859
Buildings and improvements		632			619
Total property and equipment		50,590			50,514
Accumulated depreciation		(44,355	)		(43,591	)
Property and equipment, net	$	6,235		$	6,923

For the three months ended March 31, 2024 and 2023, the Company recorded depreciation expense of $764,000 and $914,000, respectively.

Note 4 – Intangible Assets

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

	March 31, 2024			December 31, 2023
Customer relationships	$	626		$	626
Patents and trademarks		441			441
Software		67			-
Total intangible assets		1,134			1,067
Accumulated amortization		(1,067	)		(1,067	)
Net carrying value	$	67		$	-

The useful lives of our intangible assets were estimated to be between three and five years at inception. Amortization expense for intangible assets for the three months ended March 31, 2024 and 2023 was $0 and $54,000, respectively.

The following table represents the amortization expense for the next twelve months ending March 31 (in thousands):

	2025		2026		2027		2028
Customer relationships	$	-	$	-	$	-	$	-
Patents and trademarks		-		-		-		-
Software		11		22		22		12
Total intangible asset amortization expense	$	11	$	22	$	22	$	12

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Note 5 – Debt

Notes Payable

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

	March 31, 2024			December 31, 2023
Utica Facility	$	2,840		$	3,388
LSQ Facility		2,739			2,472
November 2022 Convertible Note with related party		1,200			1,200
September and October 2023 Convertible Notes with related parties		1,675			1,675
Total long-term debt		8,454			8,735
Less debt discount and debt issuance costs		(217	)		(295	)
Less current portion		(7,298	)		(5,267	)
Long-term debt, net of debt discount, debt issuance costs and current portion	$	939		$	3,173

Aggregate contractual principal maturities of debt for the twelve months ending March 31 are as follows (in thousands):

2025	$	7,298
2026		1,156
Total	$	8,454

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. Pursuant to the pay-off letter dated as of March 18, 2022 by the Company, its certain wholly-owned subsidiary 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 five percent 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 $6.225 million. Under the Utica Facility, the Company is required to make fifty-one 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 March 31, 2024 under the Utica Facility is $203,000 per month. The aforementioned surcharge is discretionary on the part of Utica and is calculated twice yearly, each on January 1 and July 1, beginning on July 1, 2022. 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. At the end of the fifty-one month term, the Company is required to make a residual payment to Utica between 1% and 10% of the initial principal amount, or between $62,250 and $622,500 depending upon the Company’s ratio of EBITDA to the sum of interest payments, cash paid for taxes and current debt and capital lease payments during the period. The Utica Facility is secured by all the Company’s equipment and proceeds from sale of such equipment. 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 eighteen-month term and automatically renews for successive one-year periods after the initial term; however, it can be terminated upon giving proper notice and the 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").

Subordinated Debt with Related Parties

On September 22, 2022, the Company entered into a revolving credit facility with Cross River pursuant to which the Company issued a $750,000 revolving promissory note to Cross River (the "Cross River Revolver Note"). 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 in the next subsequent equity offering in excess of $2.0 million. The November 2022 Convertible Note was 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 entered into a collateral assignment of the security on such parcel back to Cross River in the event the buyer defaults on their promissory note/mortgage to the Company. On November 22, 2023, the Company sold the second parcel that was acting as collateral to Cross River, which was located in Killdeer, North Dakota, with Cross River releasing its security interest in the parcel in conjunction with the sale.

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 and October 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 former director of the Company. The September and October 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 and October 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 and October 2023 Convertible Notes, restricts the Company’s ability to (a) incur any new debt which is senior or pari-passu to the September and October 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 September and October 2023 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 September and October 2023 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 the September and October 2023 Convertible Notes and Richard Murphy, our Chief Executive Officer and Chair, purchased $100,000 of the September and October 2023 Convertible Notes. Also in October 2023, Equigen and Angel Capital contemporaneously invested $187,500 and $125,000, respectively, in aggregate principal amount of the September and October 2023 Convertible Notes.

In April 2024, the Company renewed certain insurance policies. As part of this renewal, the Company financed $1.5 million of the insurance payments to be made over future periods. The related down payment on the April 2024 financed insurance policy renewal was made in March 2024 in the amount of $373,000 and is recognized within the line item "Prepaid expenses and other current assets" as presented on our consolidated balance sheet as of March 31, 2024.

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 $217,000 as of March 31, 2024. For the three months ended March 31, 2024 and 2023, the Company amortized approximately $77,000 and $70,000, respectively, of these costs to "Interest expense" in the condensed consolidated statements of operations.

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Note 6 – Income Taxes

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The provision for income taxes for the three months ended March 31, 2024 and 2023 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 March 31, 2024 the amount of deferred tax liabilities that could reverse without an offsetting deferred tax asset was $222,000. Due to this, the Company did not recognize a deferred tax benefit or expense for the three months ended March 31, 2024. For the three months ended March 31, 2023, the Company recognized a $16,000 deferred tax benefit.

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Note 7 – Commitments and Contingencies

As of March 31, 2024, the Company leases facilities and certain office equipment under lease commitments that expire through June 2026. Future minimum lease payments for these operating and finance lease commitments for the twelve months ending March 31 are as follows (in thousands):

	Operating Leases			Finance Leases
2025	$	435		$	16
2026		364			-
2027		90			-
Total future lease payments		889			16
Less: imputed interest		(58	)		-
Discounted value of lease obligations	$	831		$	16

The following table summarizes the components of our gross operating and finance lease costs (in thousands):

	For the Three Months Ended
	March 31,
	2024		2023
Operating lease cost:
Current lease cost	$	65	$	24
Long-term lease cost		146		163
Total operating lease cost	$	211	$	187

Finance lease cost:
Amortization of right-of-use assets	$	3	$	3
Interest on lease liabilities		-		-
Total finance lease cost	$	3	$	3

Our weighted-average lease term and discount rate used for leases were as follows:

	For the Three Months Ended
	March 31,
	2024			2023
Operating:
Weighted-average lease term (years)		2.09			2.72
Weighted-average discount rate		6.40	%		6.39	%

Finance:
Weighted-average lease term (years)		0.59			1.48
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 USA 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 USA 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. On March 4, 2024, the USA District Court of Colorado dismissed the May 2022 class action complaint filed against the Company and two current or former officers. On March 21, 2024, the Company was informed by the plaintiff's attorney that no appeal will be filed and the class action complaint is considered dismissed without prejudice as of that date.

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Note 8 – Stockholders’ Equity

Warrants

A summary of warrant activity for the three months ended March 31, 2024 is as follows (in thousands):

					Weighted Average
			*Weighted Average*		*Remaining*
	*Shares*		*Exercise Price*		*Contractual Life (Years)*
Outstanding as of December 31, 2023		11,160,805	$	0.95		3.95
Outstanding as of March 31, 2024		11,160,805	$	0.95		3.70

Exercisable as of March 31, 2024

SEC Form 10-Q filed by Enservco Corporation