ENSV ENSERVCO Corporation

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 and six months ended June 30, 2024, we generated a loss from operations of $1.1 million and income from operations of $157,000, respectively. For the three and six months ended June 30, 2024, we generated net losses of $2.3 million and $1.6 million, respectively. For the three and six months ended June 30, 2023, we generated losses from operations of $2.1 million and $2.5 million, respectively. For the three and six months ended June 30, 2023, we generated net losses of $2.6 million and $3.6 million, respectively. As of June 30, 2024, we had cash and cash equivalents of $332,000 and a working capital deficit of $105,000. 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. In the fourth quarter of 2023, we entered into a non-binding letter of intent to acquire Buckshot Trucking LLC ("Buckshot Trucking"), which is a Wyoming limited liability company and provider of logistics services to the oil and gas industry. In March of 2024, we executed a purchase agreement to complete the acquisition of Buckshot Trucking. During the second quarter of 2024, we began exploring options to exit our seasonal frac water heating business, and classified those related assets as "Assets held for sale" on the condensed consolidated balance sheet as of June 30, 2024. Despite these recent developments and the improvements to our financial position, 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. In the second quarter of 2024, we entered into a $10.0 million equity line of credit with a financial partner to assist with equity raises. While the equity line of credit is performing daily and generating cash through sales of shares of the Company's common stock, there can be no assurance that existing or new sources of financing will be available to us on favorable terms, or sufficient to resolve our cash needs. 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.

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, though no losses have been incurred related to these deposits.

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  June 30, 2024 and December 31, 2023, the Company had an allowance for credit losses of $75,000 and $100,000, respectively. For the three and six months ended June 30, 2024, the Company recorded bad debt recovery of $25,000. For the three and six months ended June 30, 2023, the Company recorded bad debt recovery of $100,000.

The Company follows the guidance of the Financial Accounting Standards Board's ("FASB") 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. 

Concentrations 

Revenues from four customers represented 10% or more of total revenues, at 16%, 11%, 11% and 11%, respectively, for the three months ended June 30, 2024. For the six months ended June 30, 2024, revenues from two customers represented 10% or more of the Company's total revenues, at 25% and 21%, respectively. For the three months ended June 30, 2023, revenues from two customers represented 10% or more of the Company's total revenues, at 17% and 14%, respectively. For the six months ended June 30, 2023, revenues from one customer represented 10% or more of the Company's total revenues at 34%. As of June 30, 2024, two customers represented 10% or more of the Company's accounts receivable balance, at 23% and 11%, respectively. As of December 31, 2023, two customers represented 10% or more 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 and six months ended June 30, 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 six months ended June 30, 2024 and 2023, the Company concluded that there were no triggering events which could indicate potential impairment of its long-lived assets.

Assets Held for Sale

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

We initially measure a long-lived asset or disposal group that is classified as held for sale at the lower of carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset or disposal group until the date of sale. We assess the fair value of a long-lived asset or disposal group less any costs to sell each reporting period it remains classified as held for sale and report any subsequent changes as an adjustment to the carrying value of the asset or disposal group, as long as the new carrying value does not exceed the carrying value of the asset at the time it was initially classified as held for sale. For the three and six months ended June 30, 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.

In the second quarter of 2024, the Company determined that an exit of its seasonal frac water heating business should be explored and began discussions with interested parties. Accordingly, the assets associated with these operations were moved into "Assets held for sale" on the condensed consolidated balance sheet as of June 30, 2024. On August 7, 2024, the Company completed a sales transaction with one buyer for most of its Colorado based frac water heating equipment. Additional information about the sale of the Colorado based frac water heating equipment is set forth in our Current Report on Form 8-K filed with the SEC on August 12, 2024. The Company continues to explore further options for the rest of its frac water heating assets and operations.

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. 

The Company has common stock options, warrants and convertible debt instruments that are considered common stock equivalents which are considered in the computations of basic and diluted earnings per share. The Company uses the treasury stock method for both common stock options and warrants and the if-converted method for convertible debt instruments. For the three and six months ended June 30, 2024 and 2023, due to the Company having a net loss for each period, common stock options, warrants and convertible debt, when considered in the computation of basic and diluted earnings per share, are antidilutive and have been excluded.

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 2021 through 2023 remain open to examination. In general, the Company’s various state tax filings remain open for tax years 2020 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:

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 six months ended June 30, 2024 and 2023.

As of June 30, 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 values its warrants and stock options using the Black-Scholes model. The Company did not have any warrants or stock options that required valuation during the six months ended June 30, 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 uses a Black-Scholes model to determine the fair value of its 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.