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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

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

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.)
501 South Cherry St., Ste. 1000 Denver, CO		80246
(Address of principal executive offices)		(Zip Code)

 

 

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

 

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 Enservco was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes X No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes X No ☐ 

 

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

 

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company X

 

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

 

Indicate the number of shares outstanding of each of the Issuer's classes of common stock as of the latest practicable date.

 

Class		Outstanding at May 5, 2016
Common stock, $.005 par value		38,130,160

 

 

TABLE OF CONTENTS

 

 

 

		Page
Part I – Financial Information
Item 1. Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 3. Quantitative and Qualitative Disclosures about Market Risk		32
Item 4. Controls and Procedures		33
Part II
Item 1. Legal Proceedings		33
Item 1A. Risk Factors		34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34
Item 3. Defaults Upon Senior Securities		34
Item 4. Mine Safety Disclosures		34
Item 5. Other Information		34
Item 6. Exhibits		35

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ENSERVCO CORPORATION

Condensed Consolidated Balance Sheets

 

 

See notes to condensed consolidated financial statements.

 

  

ENSERVCO CORPORATION

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

 

 

See notes to condensed consolidated financial statements.

 

  

ENSERVCO CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

See notes to condensed consolidated financial statements.

 

 

ENSERVCO CORPORATION

Notes to the Condensed Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion provides information regarding the results of operations for the three-month periods ended March 31, 2016 and 2015, and our financial condition, liquidity and capital resources as of March 31, 2016, and December 31, 2015. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.

 

Forward-Looking Statements

 

The information discussed in this Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). All statements, other than statements of historical facts, included herein concerning, among other things, planned capital expenditures, future cash flows and borrowings, pursuit of potential acquisition opportunities, our financial position, business strategy and other plans and objectives for future operations, are forward-looking statements. These forward-looking statements are identified by their use of terms and phrases such as “may,” “expect,” “estimate,” “project,” “plan,” “believe,” “intend,” “achievable,” “anticipate,” “will,” “continue,” “potential,” “should,” “could,” and similar terms and phrases. Although we believe that the expectations reflected in these forward-looking statements are reasonable, they do involve certain assumptions, risks and uncertainties. Our results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, among others:      

 

	●	Our capital requirements and the uncertainty of being able to obtain additional funding on terms acceptable to us;
	●	The volatility of domestic and international oil and natural gas prices and the resulting impact on production and drilling activity, and the effect that lower prices may have on our customers’ demand for our services, the result of which may adversely impact our revenues and financial performance;
	●	The broad geographical diversity of our operations which, while expected to diversify the risks related to a slow-down in one area of operations, also adds to our costs of doing business;
	●	The financial constraints imposed as a result of our indebtedness, including restrictions imposed on us under the terms of our credit facility agreement and our need to generate sufficient cash flows to repay our debt obligations;
	●	Our history of losses and working capital deficits which, at times, were significant;
	●	Adverse weather and environmental conditions;
	●	Our reliance on a limited number of customers;
	●	Our ability to retain key members of our senior management and key technical employees;
	●	The potential impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation with which we and our customers must comply;
	●	Developments in the global economy;
	●	Changes in tax laws;
	●	The effects of competition;
	●	The risks associated with the use of intellectual property that may be claimed by others and actual or potential litigation related thereto;
	●	The effect of seasonal factors; and
	●	The effect of further sales or issuances of our common stock and the price and volume volatility of our common stock.

 

Finally, our future results will depend upon various other risks and uncertainties, including, but not limited to, those detailed in our filings with the SEC and in Part II, Item 1A of this Quarterly Report. For additional information regarding risks and uncertainties, please read our filings with the SEC under the Exchange Act and the Securities Act, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Quarterly Report. Other than as required under securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new information, subsequent events or circumstances, changes in expectations or otherwise.

 

  

BUSINESS OVERVIEW  

 

The Company, through its subsidiaries, provides well enhancement and fluid management services to the domestic onshore oil and natural gas industry. These services include frac water heating, hot oiling and acidizing (well enhancement services), and water transfer, water treatment, water hauling, fluid disposal, frac tank rental (fluid management services) and other general oilfield services. The Company owns and operates through its subsidiaries a fleet of more than 340 specialized trucks, trailers, frac tanks and other well-site related equipment and serves customers in several major domestic oil and gas fields including the DJ Basin/Niobrara field in Colorado, the Bakken field in North Dakota, the Marcellus and Utica Shale fields in Pennsylvania and Ohio, the Jonah Field, Green River and Powder River Basins in Wyoming, the Eagle Ford Shale in Texas and the Mississippi Lime and Hugoton Fields in Kansas and Oklahoma.

 

In January 2016, the Company took advantage of the recent industry downturn and acquired various water transfer assets and other equipment from two companies - WET Oil Services, LLC (“WET”) and HII Technologies, Inc. and its affiliates (“HIIT”) for approximately $4 million dollars. These assets, which include high and low volume pumps, piping, manifolds, and other support equipment, as well as the exclusive U.S. rights to an environmentally friendly, innovative technology for the treatment of bacteria and scaling in the oil and gas industry, were purchased at an average of approximately 20% to 25% of their original cost. These strategic acquisitions, funded through our PNC credit facility, gave us the opportunity to acquire a sizable amount of assets that enabled us to launch a new water management division that can provide water transfer services in several markets. We believe the opportunity to bundle these services with our existing services including our frac water heating services will give us a competitive advantage over our competitors. Although we believe our ability to launch this division and enter into new markets will be challenging in the near term due to the current industry downturn, we believe these acquisitions will position us for substantial growth once commodity prices recover and well completion activity picks up.

 

The Company expects to continue to pursue its growth strategies of exploring additional acquisitions, potentially expanding the geographic areas in which it operates, and diversifying the products and services it provides to customers, as well as making further investments in its assets and equipment provided it can do so on reasonable terms and conditions. The Company will most likely require additional debt or equity financing to fund the costs necessary to expand the services it offers. There can be no assurance that the Company will be able to raise outside capital or have access to outside funding on reasonable terms, if at all.

 

RESULTS OF OPERATIONS

 

The following table shows selected financial data and operating results for the periods noted. Following the table, please see management’s discussion of significant changes.

 

		For the Three Months Ended March 31,
		2016				2015
FINANCIAL RESULTS:
Revenues		$	8,307,059			$	19,139,497
Cost of Revenue			6,770,085				11,264,286
Gross Profit			1,536,974				7,875,211
Gross Margin			19	%			41	%
Income (Loss) From Operations		$	(1,273,739	)		$	4,992,907
Net Income (Loss)		$	(1,075,569	)		$	2,891,880
Earnings (Loss) per Common Share – Diluted		$	(0.03	)		$	0.07
Diluted weighted average number of common shares outstanding			38,129,660				39,210,195
OTHER:
Adjusted EBITDA*		$	660,832			$	6,745,918
Adjusted EBITDA* Margin			8	%			35	%

 

*

Management believes that, for the reasons set forth below, Adjusted EBITDA (even though a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in Enservco's industry. See further discussion of our use of EBITDA, the risks of non-GAAP measures, and the reconciliation to Net Income, below.

  

  

Executive Summary 

 

We experienced many of the same challenges during our fiscal 2016 first quarter that we experienced during our preceding fourth quarter. Unseasonably warm weather in our two largest heating markets and a continued decline in drilling, completion and service activities throughout the industry due to low crude oil and natural gas prices continued to negatively impact demand for our services during the quarter. We continued to offer pricing concessions/discounts to a number of customers with the intent to maintain existing service volumes and offset the drop in demand. The combination of these factors resulted in a decline in first quarter revenues of $10.8 million, or 57%, as compared to same quarter last year. The year-over-year percentage decline in revenues for the quarter was similar to that which we experienced during our preceding quarter. Incremental revenues from our geographic expansion into the Eagle Ford Shale helped to offset some of the decline in revenues.

 

Management continued to take actions to reduce variable operating costs in line with the decrease in revenues and to reduce fixed expenses where possible. However, the decline in higher margin well enhancement services, price concessions, and the fixed operating costs portion of cost of sales resulted in margins being squeezed as reflected in gross profit declining $6.3 million, or 80%, and Adjusted EBITDA declining $6.1 million, or 90%, as compared to the same quarter last year. For further details on the calculation of Adjusted EBITDA see Adjusted EBITDA section below.

 

Declines in general and administrative costs and patent litigation costs of 16% and 89%, respectively reduced operating costs by almost $500,000 during the quarter as compared to the same quarter last year, These declines were partially offset by a $425,000, or 32%, increase in noncash depreciation and amortization expense during the quarter related to the purchase of approximately $4 million of water transfer assets in January 2016.

 

Net loss for the quarter was $1.1 million or ($0.03 per share) as compared to net income of $2.9 million or $0.07 per diluted share for the comparable quarter last year.

 

Industry Overview

 

Crude oil prices continued to decline during the first quarter, dipping below $30 per barrel twice. The decline in crude oil prices since July 2014 has resulted in our customers scaling back drilling and completion programs, shifting capital resources to higher margin basins, requesting pricing concessions from vendors, and reducing or delaying certain maintenance related work to save costs. Further, the overall reduction in drilling, completion and service work has resulted in more service vendors chasing fewer jobs putting even further downward pressure on the pricing of services. Some competitors have responded by pricing work at negative margins. The Company has been able to partially mitigate the impact of these decisions by deploying resources to more active customers and basins. Price concessions granted to customers were approximately 6.3% of total revenues for the quarter ended March 31, 2016 as compared to 3.0% for the comparative quarter a year ago.

 

Many customers have announced reduced capital spending programs for 2016 and some customers have suspended drilling and completion programs altogether until oil and natural gas prices recover and stabilize at an economical price for continuing such operations. In addition, some customers are delaying their routine hot oiling and acidizing maintenance work. Similar to the last down cycle, once prices stabilize at a profitable level we anticipate a rebound in routine hot oiling and acidizing maintenance as the deferred maintenance needs to be done to maintain production levels and protect the integrity of a well.   

 

 

Revenues 

 

Although the Company does not have segmented business operations, which would require segment reporting within the notes of its financial statements per accounting standards, we believe that revenues by service offering may be useful to readers of our financial statements. The following tables set forth revenue by service offering and geographic region during the three months ended March 31, 2016 and 2015:

 

		For the Three months Ended March 31,
		2016				2015
BY SERVICE OFFERING:
Well Enhancement Services (1)		$	7,143,073			$	17,169,340
Fluid Management and Other (2)			1,163,986				1,970,157
Total Revenues		$	8,307,059			$	19,139,497

 

 

The Company has also determined that an understanding of the diversity of its operations by geography is important to an understanding of its business operations. The Company only does business in the United States in three geographically diverse regions. The following tables set forth revenue by service offering and geographic region during the three months ended March 31, 2016 and 2015:

 

		For the Three months Ended March 31,
		2016				2015
BY GEOGRAPHY:
Rocky Mountain Region (3)		$	5,087,449			$	11,839,591
Eastern USA Region (4)			883,104				4,428,569
Central USA Region(5)			2,336,506				2,871,337
Total Revenues		$	8,307,059			$	19,139,497

 

 

Notes to tables:

	(1)	Includes frac water heating, acidizing, hot oil services, and pressure testing.
	(2)	Includes water hauling, fluid disposal, frac tank rental, and construction and roustabout services.
	(3)	Includes the D-J Basin/Niobrara field (northern Colorado and southeastern Wyoming), the Powder River and Green River Basins (central Wyoming), the Bakken Field (western North Dakota and eastern Montana). Heat Waves is the only Company subsidiary operating in this region.
	(4)	Consists of the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia) and the Utica Shale formation (eastern Ohio). Heat Waves is the only Company subsidiary operating in this region.
	(5)	Includes the Eagle Ford Shale (South Texas), Mississippi Lime and Hugoton Field (Kansas, Oklahoma, and Northern Texas). Both Dillco and Heat Waves engage in business operations in this region.

 

 

Well Enhancement Services

 

For the three months ended March 31, 2016, well enhancement service revenue declined $10.0 million, or 58%, to $7.1 million. A significant decline in demand for our frac water heating services due to unseasonably warm weather in our two largest frac water heating markets (D-J/Niobrara and Marcellus/Utica) and the overall decline in drilling and completions activity related to falling oil and natural gas price were the primary reason for the decline in revenues. These declines were offset by incremental revenues from our geographic expansion into the Eagle Ford Shale basin in Texas.

 

  

The following table details the change in our heating capacity for the three months ended March 31, 2016:

 

		Frac Water Heater Burner Boxes (1)				Hot Oil Trucks
		Q1 2016				Q1 2016
Net Additions			-				-
Ending Units			81				57
Average Equivalent Units (2)			81.0				57.0
Average Equivalent Units – Last Year			81.0				45.2
Change from same period last year			0.0				11.8
Increase in Equivalent Heating Capacity (3)			0%				26%

 

Notes to table:

(1)

The Company’s bobtail frac heaters are equal to one burner box whereas the Company’s double burner frac heaters and mega frac heaters are the equivalent of 2 burner boxes.

(2)

Average equivalent units represent the average number of trucks or burner boxes in service during the period represented.

(3)

The increase in equivalent heating capacity represents the percentage change in equivalent units during the period over the equivalent units for the same period last year.

 

Frac water heating revenues for the three months ended March 31, 2016 declined 68%, or $8.7 million, from 2015. Industry wide declines in drilling and completion programs due to low energy prices and (for the second year) unseasonably warm weather in the DJ Basin and Marcellus/Utica Basin during our 2016 first quarter significantly reduced demand for our frac water heating services in these markets. In 2016, our Eastern USA region was hit particularly hard as cold temperatures never materialized resulting in a $3.7 million, or 88%, decline in heating revenues in the Marcellus/Utica Shale Basin.

 

Hot oil revenues for the three months ended March 31, 2016 decreased 28% to $2.9 million as compared to $4.1 million in 2015. Incremental hot oil service revenues from our geographic expansion into Texas offset lower equipment utilization and price concessions in several markets. Hot oil equipment utilization fell from last year as customers in several locations scaled back frequency of service and reduced service hours in an effort to reduce costs. During 2016, the Company granted pricing concessions of up to 17% to customers in several markets in order to retain or increase market share. These price concessions amounted to approximately 6.7% of overall hot oil revenues for 2016 as compared to 4.6% in the first quarter last year.

 

Acidizing revenues for the three months ended March 31, 2016 declined $300,000, or 70%, from the same period last year. Revenues continue to be hampered by low crude oil and natural gas prices which have resulted in the reduction or postponement of recurring maintenance acidizing programs. The Company continues to aggressively pursue customers and partner with chemical suppliers to develop new cost effective acid programs, but we have had limited success to date in generating new business due to the challenging industry conditions.

 

Fluid Management and Other:

 

Fluid management services and other revenues, which represent approximately 14% of first quarter revenues, declined $806,000, or 41%, during the quarter ended March 31, 2016 as compared to same quarter last year. The decline was primarily attributable to lower water hauling revenues in our Central US region due to scaled back service work, pricing concessions and loss of certain low margin business. In addition, the Company scaled back or elected not to provide certain low margin water hauling services in the DJ Basin.  

 

 

Geographic Areas:

 

Revenues in the Rocky Mountain Region decreased $6.8 million, or 57%, for the three months ended March 31, 2016 due to several factors including (i) decreased frac water heating activity in the Niobrara Shale/DJ Basin and Bakken Field because of the continuation of unseasonably warm weather and reduced drilling activity in the region as discussed above and (ii) decreased hot oiling, acidizing, and water hauling revenues due to delayed maintenance programs by customers.

 

Revenues in the Eastern USA region decreased $3.5 million, or 80%, to $883,000 for the three months ended March 31, 2016 primarily due to lower frac water service activity in the Marcellus and Utica shale basins. Similar to our most recent fourth quarter, the unseasonably warm weather throughout the quarter essentially eliminated most of our frac water heating revenue during the first quarter. In addition, price concessions and reduced drilling and completion activities due to falling prices also contributed to the overall decline in revenues.

 

Revenues in the Central USA region decreased $535,000, or 19%, to $2.3 million for the three months ended March 31, 2016. Incremental revenues from our geographic expansion into the Eagle Ford Shale of $550,000 were offset by a decline in well enhancement and fluid management service activity within the Hugoton Basin. Scaled back service work, price concessions and elimination of certain low margin water hauling business were the primary reasons for decline in fluid management business in the Hugoton Basin.

 

Historical Seasonality of Revenues:

 

Because of the seasonality of our frac water heating and hot oiling business, revenues generated during the first and fourth quarters of our fiscal year, covering the months during what we call our “heating season”, are significantly higher than revenues earned during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings also changes outside our heating season as our Well Enhancement services (which includes frac water heating and hot oiling) decrease as a percentage of total revenues and Fluid Management services and other services increase. Thus, the revenues recognized in our quarterly financials in any given period are not indicative of the annual or quarterly revenues through the remainder of that fiscal year.

 

As an indication of this quarter-to-quarter seasonality, the Company generated 72% of its 2015 revenues during the first and fourth quarters of 2015 compared to 28% during the second and third quarters of 2015. In 2014, the Company earned 77% of its 2014 revenues during the first and fourth quarters of 2014, compared 23% during the second and third quarters of 2014. While the Company is pursuing various strategies to lessen these quarterly fluctuations by increasing non-seasonal business opportunities, there can be no assurance that we will be successful in doing so.

 

Cost of Revenues:

 

Cost of revenues for the quarter ended March 31, 2016 decreased $4.5 million, or 40%, from the comparable quarter last year primarily due to management’s efforts to reduce operating costs such as equipment repairs and maintenance, direct labor and supplies in order to minimize the negative impact of reduced revenues. Managements’ efforts included reducing overtime and non-billable time, reducing indirect labor to correspond with lower activity, negotiating supplier discounts and implementing cost management tools. In addition, lower propane and fuel costs also contributed to the decline in cost of revenues. The decline in cost of revenue above was partially offset by startup costs from our new water management division and increased costs from our expanded operations in Texas.

 

Gross Profit:

 

Gross profit decreased $6.3 million, or 80%, to $1.5 million during the quarter ended March 31, 2016 as compared to the same quarter last year. The decline in gross profits was due primarily due to the decline in our higher margin well enhancement service revenues of approximately $10.0 million as discussed above. Managements’ efforts to reduce operating costs and lower propane and diesel costs helped to mitigate some of the revenue impact on gross profits. Price concessions, which totaled $521,000, or 6.3%, of revenue, and start-up costs for our new water management division also contributed to the decline in gross profits during the quarter.

 

  

Gross profit as a percentage of revenues decreased to 19% of revenues for the three months ended March 31, 2016 as compared to 41% for same quarter last year primarily due to the aforementioned impact from price concessions, start-up costs for our new water management division, and fixed cost components in our cost of revenues.

 

Propane Impact Discussion:

 

In connection with our frac water heating services and hot oil services, the Company provides propane to certain customers on a cost plus basis. Since the Company passes along the cost of propane to its customers on a cost plus mark-up basis, fluctuations in the price of propane will impact our revenues, cost of revenues and gross profit percentages. In general, decreases in propane prices will tend to reduce well enhancement revenues and cost of revenues and may increase our overall gross profit percentage as the dollar value of propane revenues and cost of revenue becomes a lower percentage of total revenues. Conversely, increases in propane prices will tend to increase well enhancement revenues and cost of revenues and may decrease our gross profit percentage, as the dollar value of lower margin propane revenues and cost of revenue becomes a higher percentage of total revenues. Propane prices during our first quarter declined approximately 33% from the comparable quarter last year and contributed to the overall decline in revenues, cost of revenues and gross profits discussed above. However, due to the significant decline in frac water heating services, the decline in propane prices, had a relatively minor impact on gross profit as a percentage of revenue.

 

The Company anticipates that propane prices will continue to fluctuate in the future based on the relative demand and availability of propane in different geographic areas across the United States and that more customers may utilize our bi-fuel capabilities.

 

General and Administrative Expenses:

 

For the quarter ended March 31, 2016, general and administrative expenses decreased $194,000, or 16%, from the comparable quarter last year primarily due to lower personnel costs attributable to reduction in staff and a $275,000 net decrease due to the timing of an annual bonus paid to management and key employees during the first quarter of 2015 which were delayed in 2016. Additional cost reductions including scaled back investor relations and lower corporate travel were mitigated by a $59,000 increase in noncash stock-based compensation costs, higher medical claims, and office rent from the comparable quarter last year.

 

Management plans to continuously monitor costs and look for ways to further reduce general and administrative expenses.

 

Patent Litigation and Defense Costs: 

 

Patent litigation and defense costs for the quarter ended March 31, 2016 declined $304,000 to $36,000 as compared to $340,000 for last year. As discussed in Item 3. – Litigation, the U.S. District Court for the District of Colorado issued a decision on July 20, 2015 to stay the Company’s case with HOTF pending an appeal of a recent judgement by a North Dakota Court invalidating the ‘993 Patent. As a result of the stay, legal costs have been minimal since July 2015.

 

Enservco and Heat Waves deny that they are infringing upon any valid, enforceable claim of the asserted HOTF patents, and intend to continue to vigorously defend themselves in the Colorado Case and challenge the validity of these patents should the lawsuit resume. The Company expects associated legal fees to be minimal going forward until or if such time as the Colorado Case is resumed.

 

Depreciation and Amortization:

 

Depreciation and amortization expense for the three months ended March 31, 2016 increased $425,000, or 32%, from the comparable period last year primarily due to the additional depreciation expense related to the $4.0 million purchase of water transfer assets from WET and HIIT and the completion of the 2014 capex program at the end of the first quarter of 2015. 

 

 

Income from operations:

 

For the quarter ended March 31, 2016, the Company recognized a loss from operations of $1.3 million compared to an income from operations of $5.0 million for the same quarter last year. The decline was primarily due to the $6.3 million decline in gross profit discussed above.

 

Management believes that the decline in results of operations during 2016, particularly the decline in well enhancement revenues and gross profit, reflects a number of factors including the unseasonably warm weather in the DJ Basin and Marcellus/Utica shale play and decreased drilling, completion and service activity attributable to lower crude oil and natural gas prices should improve over time. We believe that as long as we are able to control our costs and increase our revenues as a result of our expanded fleet and service areas as well as being able to quickly deploy our equipment from places of lesser utilization to places where they will be better utilized, our financial performance will improve over the long run. On a quarter-to-quarter basis, there may still be periods of loss due to the seasonality of our operations, as discussed several times herein.

 

Interest Expense:

 

Interest expense for the quarter ended March 31, 2016 increased 47% to $373,000 as compared to the same quarter last year. The increase was primarily due to additional interest expense of $98,000 related to the fair market adjustment on the PNC interest rate swap agreement. Higher interest rates attributable to the increase in one-month LIBOR rates and higher applicable margin on LIBOR based loans under the PNC facility contributed to the increase in interest expense and were partially mitigated by lower average borrowings as the Company utilized excess cash during 2015 to reduce its outstanding balance with PNC.

 

Interest expense is likely to continue to increase in 2016 due to the increase in our interest rates under the Sixth Amendment to our loan agreement, with PNC Bank, by 175 basis points effective March 29, 2016.

 

Income Taxes:

 

For the quarter ended March 31, 2016, the Company recognized an income tax benefit of $569,000 on pre-tax net loss of approximately $1.6 million as compared to an income tax expense of $1.9 million on pre-tax net profit of $4.7 million in 2015. The effective tax rate on income from operations was 35% for the quarter ended March 31, 2016.  

 

 

Adjusted EBITDA*

 

Management believes that, for the reasons set forth below, Adjusted EBITDA (a non-GAAP measure) is a valuable measurement of the Company's liquidity and performance and is consistent with the measurements offered by other companies in Enservco's industry.

 

The following table presents a reconciliation of our net income to our Adjusted EBITDA for each of the periods indicated:

 

		For Three Months Ended March 31,
		2016				2015
Net Income (Loss)		$	(1,075,569	)		$	2,891,880
Add Back (Deduct)
Interest Expense			372,668				253,210
Provision for income taxes (benefit) expense			(568,842	)			1,854,717
Depreciation and amortization			1,747,972				1,322,934
EBITDA*			476,229				6,322,741
Add Back (Deduct)
Stock-based compensation			150,433				91,060
Patent litigation and defense costs			36,166				339,017
Interest and other income			(1,996	)			(6,900	)
Adjusted EBITDA*		$	660,832			$	6,745,918

  

*Note: See below for discussion of the use of non-GAAP financial measurements.

 

Use of Non-GAAP Financial Measures: Non-GAAP results are presented only as a supplement to the financial statements and for use within management’s discussion and analysis based on U.S. generally accepted accounting principles (GAAP). The non-GAAP financial information is provided to enhance the reader's understanding of the Company’s financial performance, but no non-GAAP measure should be considered in isolation or as a substitute for financial measures calculated in accordance with GAAP. Reconciliations of the most directly comparable GAAP measures to non-GAAP measures are provided herein.

 

EBITDA is defined as net income (earnings), before interest expense, income taxes, and depreciation and amortization. Adjusted EBITDA excludes stock-based compensation from EBITDA and, when appropriate, other items that management does not utilize in assessing the Company’s ongoing operating performance as set forth in the next paragraph. None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure.

 

All of the items included in the reconciliation from net income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, warrants issued, etc.) or (ii) items that management does not consider to be useful in assessing the Company’s ongoing operating performance (e.g., income taxes, gain on sale of investments, loss on disposal of assets, patent litigation and defense costs, etc.). In the case of the non-cash items, management believes that investors can better assess the company’s operating performance if the measures are presented without such items because, unlike cash expenses, these adjustments do not affect the Company’s ability to generate free cash flow or invest in its business.

 

Because not all companies use identical calculations, the Company’s presentation of non-GAAP financial measures may not be comparable to other similarly titled measures of other companies. However, these measures can still be useful in evaluating the Company’s performance against its peer companies because management believes the measures provide users with valuable insight into key components of GAAP financial disclosures.  

 

 

Changes in Adjusted EBITDA*

 

Adjusted EBITDA from operations declined $6.1 million to $661,000 for the quarter ended March 31, 2016 as compared to $6.7 million for the same quarter last year. This increase was primarily due to the $6.3 million decline in gross profit discussed above.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

The following table summarizes our statements of cash flows for the three months ended March 31, 2016 and 2015:  

 

		For the Three Months Ended March 31,
		2016				2015
Net cash provided by operating activities		$	2,932,766			$	6,171,867
Net cash used in investing activities			(4,504,676	)			(2,352,379	)
Net cash provided by (used in) financing activities			2,355,952				(3,995,100	)
Net Increase (Decrease) in Cash and Cash Equivalents			784,042				(175,612	)
Cash and Cash Equivalents, Beginning of Period			804,737				954,058
Cash and Cash Equivalents, End of Period		$	1,588,779			$	778,446

 

 

The following table sets forth a summary of certain aspects of our balance sheet at March 31, 2016 and December 31, 2015 and (combined with the working capital table and discussion below) is important for understanding our liquidity:

 

		March 31, 2016				December 31, 2015
Current Assets		$	6,949,333			$	9,445,379
Total Assets			46,682,515				46,421,857
Current Liabilities			2,789,009				3,354,122
Total Liabilities			29,719,121				28,535,041
Stockholders’ equity			16,963,394				17,886,816
Working Capital (Current Assets net of Current Liabilities)			4,160,324				6,091,257
Long-term debt to Equity			1.36 to 1				1.16 to 1

 

 

Overview:

 

We have relied on cash flow from operations, borrowings under our revolving credit facilities, and equipment financing to satisfy our liquidity needs. Our ability to fund operating cash flow shortfalls, fund capital expenditures, and make acquisitions will depend upon our future operating performance and on the availability of equity and debt financing. At March 31, 2016, we had approximately $1.6 million of cash and cash equivalents and approximately $5.4 million available under our asset based senior revolving credit facility.

 

In September 2014, the Company entered into an Amended and Restated Revolving Credit and Security Agreement (the “2014 Credit Agreement”) with PNC Bank, National Association (“PNC”) which provides for a five-year $30 million senior secured revolving credit facility. The facility allows the Company to borrow up to 85% of eligible receivables, 85% of the appraised value of trucks and equipment, and up to 90% of the cost of new equipment. The Company had the option to pay variable interest rate based on (a) 1, 2 or 3 month LIBOR plus applicable margin ranging from 2.75% to 3.75% for LIBOR Rate Loans or (b) interest at PNC Base Rate plus applicable margin of 1.25% to 2.25% for Domestic Rate Loans. The interest rate at March 31, 2016 was 4.9% for the $23,147,722 of outstanding LIBOR Rate Loans and 6.5% for the $0 of outstanding Domestic Rate Loans. As a result of the Sixth Amendment entered into in March 2016, the interest rates we will be paying on our loans for the balance of 2016 and through the end of the term in September 2019 have increased by 1.75%.

 

  

The PNC credit facility has certain customary financial covenants which have been amended from time to time and consisted of following as of December 31, 2015 although, as described below, these covenants have changed as a result of the Sixth Amendment which became effective March 29, 2016:

 

(i)

a minimum fixed charge coverage ratio (as defined, not less than 1.25 to 1.00, measured as of the last day of each fiscal quarter based on trailing twelve-month information.);

 

(ii)

a maximum leverage ratio of funded debt to adjusted EBITDA (as defined, not more than 4.25 to 1.0 as of December 31, 2015, measured as of the last day of each fiscal quarter with adjusted EBITDA determined based on trailing twelve-month information); and

 

(iii)

a limit on capital expenditures of $7,800,000 for the period commencing October 1, 2015 through June 30, 2016.

 

Although the Company was not in default of its covenants as of December 31, 2015, subsequent to year-end, the Company determined based upon current industry conditions that it may not be able, in 2016, to meet some of the financial covenants outlined above and therefore met with PNC to discuss an amendment to the 2014 credit facility. As a result, on March 29, 2016, the Company entered into the Sixth Amendment to the 2014 Credit Agreement which among other things (i) reduced the revolving line of credit commitment from $40 million back to its original $30 million; (ii) reset the fixed charge coverage ratio to build to a trailing four quarters beginning with the quarter ended December 31, 2015; (iii) added a new covenant which establishes a minimum monthly availability requirement for the period of March 2016 through March 2017 ranging from $1.5 million to $8.0 million; (iv) converted the leverage and fixed charge coverage ratios to springing covenants which would only be triggered upon failure to meet the new availability covenant until it expires in February 2017; thereafter they will be individually tested quarterly; (v) increased the applicable margins on advances by 175 basis points; and (vi) reinstated a full cash dominion requirement. As a result of this amendment and the Company’s projections for its operations and the industry in general, the Company believes it will remain in compliance with the PNC covenants, as amendment for at least the remainder of 2016.

 

As of March 31, 2016, the Company had an outstanding loan balance of $23.1 million and approximately $2.2 million available under the revolving credit facility ($5.4 million gross availability less a minimum monthly availability requirement for March 2016 of $3.2 million) and was in compliance with applicable terms of the credit facility above.

 

As specified above, the Company’s borrowing availability is determined, in a large part, based upon periodic appraisals of our equipment. On April 29, 2016, a periodic appraisal of equipment was completed which resulted in a redetermination of our borrowing base. After consideration of the new appraisal and based upon an outstanding loan balance of $22.1 million as of April 30, 2016, the Company had a net borrowing availability of $2.75 million (gross availability of $6.88 million less a minimum monthly availability requirement for April 2016 of $4.13 million). The Company believes that it will have sufficient availability through the remainder of 2016 to meet its liquidity requirements.

 

The Company intends to continue to use the PNC facility to fund working capital needs and supplement future capital expenditures. The financial covenants outlined above could restrict our ability to secure additional debt financing or access funds under our revolving credit facility.

 

Working Capital:

 

As of March 31, 2016, the Company had working capital of approximately $4.2 million, a decrease in working capital of approximately $1.9 million as compared to our 2015 fiscal year end. The decrease in working capital was primarily attributable to a decrease in accounts receivable of $3.3 million which was partially offset by an increase in cash and cash equivalents and decrease in accounts payable and accrued liabilities due to timing of customer receipts and vendor payments.

 

  

Cash flow from Operating Activities:

 

Cash flow from operating activities during the quarter ended March 31, 2015 was $2.9 million as compared to $6.2 million during the comparable quarter last year. The decrease in cash flow from operations is primarily attributable to the overall decline in revenues and gross profits during the quarter as discussed above. This decline was partially offset by an increase in cash flows from changes in operating assets and liabilities including a $3.2 million collection of outstanding receivables during 2016.

 

Cash flow from Investing Activities:

 

Cash flow used in investing activities during the quarter ended March 31, 2016 was $4.5 million as compared to $2.4 million during the comparable quarter last year. The increase in cash used in investing activities was primarily due to the $4.2 million purchase of water transfer assets and patented hydropath technology assets from WET and HIIT. The $2.4 million of capital expenditures for the comparable quarter last year included equipment purchases and payments for trucks in process under the Company’s 2014 CAPEX program.

 

Cash flow from Financing Activities:

 

Cash provided by financing activities for the quarter ended March 31, 2016 was $2.4 million as compared cash used in financing activities of $4.0 million for the comparable period last year. The change was primarily due additional borrowings to fund the $4.2 million of new water management and patented hydropath technology assets mentioned above whereas in the same quarter last year, the Company utilized cash flow from operations to pay down its revolving credit facility with PNC.

 

Outlook:

 

The Company plans to continue to look for opportunities to expand its business operations through organic growth such as geographic expansion and increasing the volume and scope of services offered to our existing customers as capital permits. The Company will also look to expand its business operations through acquisitions. The Company will continue to focus on adding high margin services that reduce our seasonality, diversify our service offerings, and maintain a good balance between recurring maintenance work and drilling and completion related services.

 

As discussed above and as a result of the changes negotiated in the Sixth Amendment, the Company believes that it will have sufficient capital resources and availability under the PNC revolving credit facility through the remainder of 2016 to fund working capital needs and future capital expenditures.

 

On April 16, 2014, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission (SEC) that was declared effective by the SEC on April 30, 2014. The Form S-3 provides for the sale of common stock by named selling security holders, and further provides the Company with the flexibility to offer and sell from time to time, up to $50 million of the Company’s common stock in order to supplement our cash flows from operations and financing activities. The Company currently does not have any immediate plans to sell securities under the shelf registration statement, but plans to maintain the registration statement in the event there is a need to supplement its existing capital resources.

 

Capital Commitments and Obligations:

 

The Company’s capital obligations as of March 31, 2016 consist primarily of scheduled principal payments under certain term loans and operating leases.  The Company does not have any scheduled principal payments under its five-year, $30 million revolving credit facility with PNC Bank. However, the Company may need to make future principal payments based upon collateral availability and to maintain required availability and leverage ratios. General terms and conditions for amounts due under these commitments and obligations are summarized in the notes to the financial statements.    

 

Pursuant to a Sales Agreement with HydroFLOW USA, HWWM has the exclusive right to sell or rent patented hydropath devices in connection with bacteria deactivation and scale treatment services for treating injection and disposal wells, fracking water and recycled water in the oil and gas industry to HWWM customers in the United States. Pursuant to the sales agreement, HWWM is required to pay royalties on certain rental transactions and, in order to maintain the exclusivity provision under the agreement, the Company must meet certain annual purchase commitments of approximately $655,000 per year commencing in 2016 of which $155,000 has been paid as of March 31, 2016.

 

  

OFF-BALANCE SHEET ARRANGEMENTS

 

Other than the guarantees made by Enservco (as the parent Company) on various loan agreements and operating leases disclosed in Note 8 to the Condensed Consolidated Balance Sheet, the Company had no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

 

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements in conformity with U. S. generally accepted accounting principles requires management to make a variety of estimates and assumptions that affect (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods covered by the financial statements.

 

Our management routinely makes judgments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the future resolution of the uncertainties increase, these judgments become even more subjective and complex. Although we believe that our estimates and assumptions are reasonable, actual results may differ significantly from these estimates. Changes in estimates and assumptions based upon actual results may have a material impact on our results of operation and/or financial condition. Our significant accounting policies are disclosed in Note 2 to the Condensed Consolidated Financial Statements included in this Form 10-Q.

 

While all of the significant accounting policies are important to the Company’s financial statements, the following accounting policies and the estimates derived there from have been identified as being critical.

 

Accounts Receivable 

 

Accounts receivable are stated at the amount billed to customers, net of allowance for uncollectible accounts. The Company provides an allowance for doubtful accounts based on a review of outstanding receivables, historical collection information and existing economic conditions. The provision for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management's best estimate of uncollectible amounts and is determined based on historical performance that is tracked by the Company on an ongoing basis. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance.

 

Revenue Recognition

 

The Company recognizes revenue when evidence of an arrangement exists, the fee is fixed determinable, services are provided, and collection is reasonably assured. Due to the seasonality of the Company’s operations, a significant portion of revenues are recognized during the colder, winter months of the year. Therefore, the Company believes that, the revenues recognized for the three-month periods ended March 31, 2016 and 2015 are not indicative of quarterly revenues through the remainder of the fiscal year.

 

Property and Equipment

 

Property and equipment consists of (1) trucks, trailers and pickups; (2) trucks that are in various stages of fabrication; (3) water transfer pumps, pipe, lay flat hose, trailers, and other support equipment, (4) real property which includes land and buildings used for office and shop facilities and wells used for the disposal of water; and (5) other equipment such as tools used for maintaining and repairing vehicles, office furniture and fixtures, and computer 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 that extend the remaining useful life or expands the capacity or efficiency of the assets. Depreciation is recorded on a straight-line basis over estimated useful lives of 5 to 30 years.

 

  

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. The Company looks primarily to the discounted future cash flows in its assessment of whether or not long-lived assets have been impaired.

 

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 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 it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized in the financial statements from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous.  As such, the Company is required to make many subjective assumptions and judgments regarding income tax exposures. Interpretations of and guidance surrounding income tax law and regulations change over time and may result in changes to the Company’s subjective assumptions and judgments which can materially affect amounts recognized in the consolidated balance sheets and consolidated statements of income. The result of the reassessment of the Company’s tax positions did not have an impact on the consolidated financial statements.

 

Interest and penalties associated with tax positions are recorded in the period assessed as general and administrative expenses. The Company files tax returns in the United States and in the states in which it conducts its business operations. The tax years 2012 through 2015 remain open to examination in the taxing jurisdictions to which the Company is subject.

 

Stock-based Compensation

 

The Company uses the Black-Scholes pricing model as a method for determining the estimated grant date fair value for all stock options awarded to employees, independent consultants, officers, and directors. The expected term of the options is based upon evaluation of historical and expected further exercise behavior. The risk-free interest rate is based upon U.S. 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 none as we have not paid dividends nor do we anticipate paying any dividends in the foreseeable future.

 

We also use the Black-Scholes valuation model to determine the fair value of warrants. Expected volatility is based upon the weighted average of historical volatility over the contractual term of the warrant and implied volatility. The risk-free interest rate is basis upon implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the contractual term of the warrants. The dividend yield is assumed to be none.

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable. 

 

 

ITEM 4. CONTROLS AND PROCEDURES 

 

Disclosure Controls and Procedures

 

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”), as of March 31, 2016, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and our Chief Financial Officer (our principal financial officer). Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the 1934 Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. 

 

Changes in Internal Control over Financial Reporting

 

There were not any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated by the SEC under the 1934 Act) during the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

ITEM 1.     LEGAL PROCEEDINGS 

 

In October 2014, the Company was served with a complaint filed in the United States District Court for the Northern District of Texas, Dallas Division (Civil Action No. 3:14-cv-03631) by Heat-On-The-Fly, LLC (“HOTF”), naming Enservco Corporation (“Enservco”) and its subsidiary Heat Waves Hot Oil Service LLC (“Heat Waves”) as defendants. The complaint alleges that Enservco and Heat Waves, in offering and selling frac water heating services, infringed and induced others to infringe two patents owned by HOTF (U.S. Patent Nos. 8,171,993 (“the ‘993 Patent”) and 8,739,875 (“the ‘875 Patent”)). The complaint seeks various remedies including injunctive relief and unspecified damages and relates to only a portion of Heat Waves’ frac water heating services. In May 2015, the case was transferred to the U.S. District Court for the District of Colorado, Civil Action No. 1:15-cv-00983-RBJ (“Colorado Case”). Heat Waves has answered the complaint, denied HOTF’s allegations of infringement and asserted counterclaims asking the Court to find, among other things, that it does not infringe either patent and that both patents are invalid. HOTF has replied to and denied those counterclaims. In July 2015, the Company and HOTF jointly asked the Colorado Court to stay the case pending any appeal by HOTF of the partial summary judgment ruling invalidating the ‘993 Patent referenced below, and on July 20, 2015, the Court granted the parties’ joint request. The Colorado case is now stayed pending resolution of appeal by HOTF of the North Dakota Court’s invalidity ruling.

 

HOTF is currently involved in another litigation with a group of energy companies (which does not include Enservco or Heat Waves) that sought, among other things, to invalidate the ‘993 Patent (“North Dakota Case”). In March 2015, the North Dakota Court granted the energy companies’ partial summary judgment motion, finding that the ‘993 Patent was invalid and later entered a judgment on this issue. In September 2015, a jury trial was conducted. While it did not find that HOTF committed the tort of deceit, the jury found that HOTF represented to a customer of one of the accused energy companies that HOTF had a valid patent and this representation was made in bad faith. The jury also found, among other things, that HOTF unlawfully interfered with a contract and prospective business relationship with that customer and as such, awarded the energy company $750,000 in damages. Lastly, the Court also held a bench trial on the energy companies’ claim that the ‘993 Patent is unenforceable due to inequitable conduct by the inventor of the ‘993 Patent before the U.S. Patent and Trademark Office (“USPTO”). In January 2016, the Court ruled that the ‘993 Patent is unenforceable due to inequitable conduct by the inventor and/or HOTF. In February 2016, HOTF filed a notice of its intent to appeal to the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”) all judgments and adverse orders related to those judgments issued by the North Dakota Court.

 

  

Although the first 12 claims of the ‘993 Patent survived a prior reexamination, the USPTO granted a second request in July 2014 to reexamine the ‘993 Patent in its entirety (all 99 claims, including the prior 12 claims that survived the prior, limited reexamination) based on different reasoning. In February 2015, the USPTO issued initial findings in the second reexamination proceeding and rejected all 99 claims of the ‘993 Patent as being unpatentable. In April 2015, HOTF filed a response with the USPTO seeking to overcome these pending rejections. In May 2016, the USPTO reversed its decision and confirmed all 99 claims as being patentable over the prior art in the ‘993 Patent Reexamination proceeding. Further, HOTF has at least two additional pending patent applications based on the ‘993 and ‘875 Patents, which, if granted, could be asserted against the Company. As the ‘993 Patent and the ‘875 Patent are based on the same subject matter, management believes that a final finding of invalidity and/or unenforceability of the ‘993 Patent by the Federal Circuit could serve as a basis to affect the validity of the ‘875 Patent. If these Patents are ultimately held to be invalid, the Colorado Case would become moot.

 

As noted above, the Colorado Case has been stayed. However, in the event that HOTF’s appeal is successful and the ‘993 Patent is found to be valid and/or enforceable in the North Dakota Case, the Colorado Case may resume. To the extent that Enservco and Heat Waves are unsuccessful in their defense of the Colorado Case, they could be liable for damages (which may be significant) and Heat Waves could possibly be enjoined from using any technology that is determined to be infringing. Either result could negatively impact Heat Waves’ business and operations. At this time, the Company is unable to predict the outcome of this case, and accordingly has not recorded an accrual for any potential loss.

 

 

ITEM 1A. RISK FACTORS

 

See the risk factors set forth in the Company’s annual report on Form 10-K for the year ended December 31, 2015 filed on March 30, 2016, which is incorporated herein by reference. There have been no material changes to the risk factors set forth in that Form 10-K.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the period from March 19, 2016 through May 5, 2016, there were no sales of unregistered securities.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

 

ITEM 5. OTHER INFORMATION

 

None 

 

 

ITEM 6. EXHIBITS

 

Exhibit No.		Title
3.01		Second Amended and Restated Certificate of Incorporation. (1)
3.02		Certificate of Amendment of Second Amended and Restated Certificate of Incorporation (2)
3.03		Amended and Restated Bylaws. (3)
11.1		Statement of Computation of per share earnings (contained in Note 2 to the Condensed Consolidated Financial Statements).
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rick D. Kasch, Principal Executive Officer). Filed herewith.
31.2		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Robert J. Devers, Principal Financial Officer). Filed herewith.
32		Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Rick D. Kasch, Chief Executive Officer, and Robert J. Devers, Chief Financial Officer). Filed herewith.
101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document
101.DEF		XBRL Definition Linkbase Document

 

	(1)	Incorporated by reference from the Company’s Current Report on Form 8-K dated December 30, 2010, and filed on January 4, 2011.
	(2)	Incorporated by reference from the Company’s Current Report on Form 8-K dated June 20, 2014, and filed on June 25, 2014.
	(3)	Incorporated by reference from the Company’s Current Report on Form 8-K dated July 27, 2010, and filed on July 28, 2010.

 

 

SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, we have duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.

 

	ENSERVCO CORPORATION
Date: May 12, 2016		/s/ Rick D. Kasch
		Rick D. Kasch, Principal Executive Officer and Chief Executive Officer
Date: May 12, 2016		/s/ Robert J. Devers
		Robert J. Devers, Principal Financial Officer and Principal Accounting Officer

 

36