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 endedMarch 31 2017, 2018

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)

RegistrantRegistrant’s’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.

YesX 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). YesX 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.

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 ☐    NoX

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

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Note 1– Basis of Presentation

Enservco Corporation (“Enservco”) through its wholly-owned subsidiaries (collectively referred to as the “Company”, “we” or “us”) provideprovides various services to the domestic onshore oil and natural gas industry. These services include frac water heating, hot oiling and acidizing (well enhancement services); water transfer and water treatment services (water transfer services); and water hauling, fluid disposal, frac tank rental (water hauling services); and dirt hauling and other general oilfield services (construction services).

The accompanying unaudited condensed consolidated financial statements have been derived from the accounting records of Enservco Corporation, Heat Waves Hot Oil Service LLC (“Heat Waves”), Dillco Fluid Service, Inc. (“Dillco”), Heat Waves Water Management LLC (“HWWM”), HE Services LLC (“HES”), and Real GC LLC (“Real GC”) (collectively, the “Company”) as of March 31, 2017 2018 and December 31, 2016 2017 and the results of operations for the three months ended March 31, 2017 2018 and 2016.2017.

The below table provides an overview of the Company’sCompany’s current ownership hierarchy:

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-Q10-Q and Article 8 of Regulation S-X.S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, all of the 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 operating results of a full year or of future years.

The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“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-K10-K of Enservco Corporation for the year ended December 31, 2016. 2017. All inter-company balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

The accompanying unaudited condensed consolidated balance sheetssheet at December 31, 2016 2017 has been derived from the audited financial statements at that date but does not include all of the information and notes required by GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K10-K for the year ended December 31, 2016.

Note 2 – Liquidity and Managements’ Plans2017.

As of March 31, 2017, the Company’s available liquidity was $4.1 million, which was substantially comprised of $4.0 million of availability on the credit facility provided pursuant to the Amended and Restated Revolving Credit and Security Agreement (the “Credit Agreement”) and approximately $143,000 in cash. During the three months ended March 31, 2017, the Company borrowed a net $2.7 million under the PNC credit facility to fund working capital needs including a $5.2 million increase in accounts receivable. The Company plans to utilize cash receipts from collection of receivables to reduce the outstanding principal balance on our credit facility.     

On March 31, 2017, the Company entered into the Tenth Amendment to the 2014 Credit Agreement that among other things (i) required the Company to raise $1.5 million in subordinated debt or post a letter of credit in favor of the bank by March 31, 2017; (ii) raise an additional $1 million of subordinated debt by May 15, 2017; (iii) reduced the maturity date of the loan from September 12, 2019 to April 30, 2018; (iv) changed the definition of Adjusted EBITDA to include proceeds from subordinated debt; and (v) changed the calculation of fixed charge and leverage ratio from a trailing four-quarter basis to a quarterly build from the quarter ended December 31, 2016. On March 31, 2017, the Company’s largest shareholder, Cross River Partners, L.P. (whose managing member is our Chairman of the Board of Directors) posted a letter of credit in the amount of $1.5 million in accordance with the terms of the Tenth Amendment. It is expected that the letter of credit will be converted into subordinated debt with a maturity dated on or about April 15, 2022 with a stated interest rate of 10% per annum and a five-year warrant to purchase approximately 965,000 shares of our common stock at an exercise price of approximately $.31 per share. On May 10, 2017, Cross River Partners, L.P. also provided $1 million in subordinated debt to the Company as required under the terms of our Tenth Amendment to the PNC Credit Agreement. This subordinated debt has a stated annual interest rate of 10% and maturity date of May 10, 2022. In connection with this issuance of subordinated debt, Cross River Partners L.P. was granted a five-year warrant to purchase 645,161 shares of our common stock at an exercise price of $0.31 per share.

As a result of moving the maturity date to April 30, 2018, the entire loan balance (approximately $23.4 million as of April 30, 2017) will be classified as a current liability beginning in May 2017. The Company is exploring alternatives for other sources of capital to reduce, replace, or amend the PNC Credit Agreement and fund other obligations. The Company is working to improve its operating performance and its cash, liquidity and financial position. This includes: (i) improving labor and equipment utilization rates; (ii) selling certain assets of the Company; and (iii) exploring additional bank relationships. However, there can be no assurance that management’s plan to improve the Company’s operating performance and financial position will be successful or that the Company will be able to obtain additional financing or more favorable covenant requirements. As a result, the Company’s ability to pay its obligations and meet its covenant requirement could be adversely affected.

Note 32 - Summary of Significant Accounting Policies

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 invests. Enservco maintains its excess cash in various financial institutions, where deposits may exceed federally insured amounts at times.

Accounts Receivable 

Accounts Receivable

Accounts receivable are stated at the amounts billed to customers, net of an allowance for uncollectible accounts. The Company provides an allowance for uncollectableuncollectible accounts based on a review of outstanding receivables, historical collection information and existing economic conditions. The allowance for uncollectible amounts is continually reviewed and adjusted to maintain the allowance at a level considered adequate to cover future losses. The allowance is management's best estimate of uncollectible amounts and is determined based on historical collection experience related to accounts receivable coupled with a review of the current status of existing receivables. The losses ultimately incurred could differ materially in the near term from the amounts estimated in determining the allowance. As of March 31, 2017 2018, and December 31, 2016, 2017, the Company had an allowance for doubtful accounts of $63,371approximately $65,000 and $34,371,$70,000, respectively. For the three months ended March 31, 2017 2018 and 2016,2017, the Company recorded bad debt expense (net of recoveries) of $29,000approximately $33,000 and $39,159,$29,000, respectively.

Inventories

Inventories

Inventory consists primarily of propane, diesel fuel and chemicals that are used in the servicing of oil wells and is carried at the lower of cost or marketnet realizable value in accordance with the first in, first out method (FIFO). The Company periodically reviews the value of items in inventory and provides write-downs or write-offs, of inventory 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, 2017 2018 and 2016, 2017,no amounts were expensed for write-downs and write-offs.

Property and Equipment

Property and Equipment

Property and equipment consists of (1)(1) trucks, trailers and pickups; (2)(2) water transfer pumps, pipe, lay flat hose, trailers, and other support equipment; (3)(3) real property which includes land and buildings used for office and shop facilities and wells used for the disposal of water; and (4)(4) 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 capitalizes interest on certain qualifying assets that are undergoing activities to prepare them for their intended use. Interest costs incurred during the fabrication period are capitalized and amortized over the life of the assets. The Company charges repairs and maintenance against income when incurred and capitalizes renewals and betterments, which extend the remaining useful life, expand the capacity or efficiency of the assets. Depreciation is recorded on a straight-line basis over estimated useful lives of 5 to 30 years.

Any difference between net book value of the property and equipment and the proceeds of an assets’ sale or settlement of an insurance claim is recorded as a gain or loss in the Company’s earnings.

Leases

The Company conducts a major part of its operations from leased facilities. Each of these leases is accounted for as an operating leases.lease. Normally, the Company records rental expense on its operating leases over the lease term as it becomes payable. If rental payments are not made on a straight-line basis, per terms of the agreement, the Company records a deferred rent expense and recognizes the rental expense on a straight-line basis throughout the lease term. The majority of the Company’sCompany’s facility leases contain renewal clauses and expire through June 2022. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company amortizes leasehold improvements over the shorter of the life of the lease or the life of the improvements. As of March 31, 2018, and December 31, 2017, the Company had a deferred rent liability of approximately $93,000 and $96,000, respectively.

The Company has leased trucks and equipment in the normal course of business, which wereare recorded as an operating lease.leases. The Company recorded rental expense on equipment under operating leases over the lease term as it becomes payable; there were no rent escalation terms associated with these equipment leases. The equipment leases contained acontain purchase options that allowedallow the Company to purchase the leased equipment at the end of the lease term, based on the market price of the equipment at the time of the lease termination. There are no significant equipment leases outstanding as of March 31, 2017.2018.

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 reviews both qualitative and quantitative aspects of the business during the analysis of impairment. During the quantitative review, the Company reviews the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired.Noimpaired. No impairments were recorded during the quarterthree months ended March 31, 2017 2018 and 2016.

Revenue Recognition2017.

The Company recognizes revenue when evidence of an arrangement exists, the fee is fixed or determinable, services are provided, and collection is reasonably assured.Revenue Recognition

As described below, we adopted Accounting Standards Update 2014-09, Revenue - Revenue from Contracts with Customers, Accounting Standards Codification ("ASC") Topic 606, beginning January 1, 2018, using the modified retrospective approach, which we have applied to contracts within the scope of the standard. 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, which includes estimated amounts for services rendered but not invoiced at the end of each accounting period. The vast majority 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 30 to 60 days.

Revenue is not generated from contractual arrangements that include multiple performance obligations.  

Revenue is recognized for certain projects that take more than one day projects over time based on the amount of days during the reporting period and the agreed upon price as work progresses on each project. Revenue that has been earned but not yet invoiced at March 31, 2018 and December 31, 2017 was $1.4 million and $1.7 million, respectively. Such amounts are included within Accounts receivable, net in the Condensed Consolidated Balance Sheets.

Disaggregation of revenue

See Note 11 - Segment Reporting for disaggregation of revenue.

Earnings (Loss) Per Share

Earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted earnings per share is calculated by dividing net income (loss) by the diluted weighted average number of common shares. The diluted weighted average number of common shares is computed using the treasury stock method for common stock that may be issued for outstanding stock options and warrants.

As of March 31, 2017 2018, and 2016,2017, there were outstanding stock options and warrants to acquire an aggregateof 4,361,168aggregate of 5,467,334 and 3,730,6694,361,168 shares of Company common stock, respectively, which have a potentially dilutive impact on earnings per share. As of March 31, 2018, the aggregate intrinsic value of outstanding stock options and warrants was approximately $2.6 million. For the three months ended March 31, 2018, the incremental shares of options and warrants to be included in the calculation of diluted earnings per share had a dilutive impact on the Company's earnings per share of 1,793,237 shares. For the three months ended March 31, 2017, the diluteddilutive share instruments did not have an intrinsic value, as a result, were not included in the diluted share calculation. Dilution is not permitted if there are net losses during the period. As such, the Company does not show dilutive earnings per share for the three months ended March 31, 2016.

Loan Fees and Other Deferred Costs

In the normal course of business, the Company enters into loan agreements and amendments thereto with its primary lending institutions. The majority of these lending agreements and amendments require origination fees and other fees in the course of executing the agreements. For all costs associated with the execution of the lending agreements, the Company recognizes these as capitalized costs and amortizes these costs over the term of the loan agreement using the effective interest method.agreement. All other costs not associated with the execution of the loan agreements are expensed as incurred. As of March 31, 2018, we had approximately $224,000 in unamortized loan fees and other deferred costs associated with the 2017 Credit Agreement, which we expect to charge to expense ratably over the three-year term of that agreement. 

Derivative Instruments

From time to time, the Company has interest rate swap agreements in place to hedge against changes in interest rates. The fair value of the Company’s derivative instruments are reflected as assets or liabilities on the balance sheet. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative instrument and the resulting designation. Transactions related to the Company’s derivative instruments accounted for as hedges are classified in the same category as the item hedged in the consolidated statement of cash flows. The Company did not hold derivative instruments at March 31, 2018 or December 31, 2017, for trading purposes.

On February 23, 2018, we entered into an interest rate swap agreement with East West Bank in order to hedge against the variability in cash flows from future interest payments related to the 2017 Credit Agreement. The terms of the interest rate swap agreement included an initial notional amount of $10.0 million, a fixed payment rate of 2.52%. The purpose of the swap agreement is to adjust the interest rate profile of our debt obligations.

Income TaxesOn September 17, 2015, we entered into an interest rate swap agreement with PNC in order to hedge against the variability in cash flows from future interest payments related to the 2014 Credit Agreement. The terms of the interest rate swap agreement included an initial notional amount of $10.0 million, a fixed payment rate of 1.88% plus applicable a margin ranging from 4.50% to 5.50% paid by us and a floating payment rate equal to LIBOR plus applicable margin of 4.50% to 5.50% paid by PNC. The purpose of the swap agreement was to adjust the interest rate profile of our debt obligations and to achieve a targeted mix of floating and fixed rate debt.

In connection with the termination of the 2014 Credit Agreement, on August 10, 2017, we terminated the interest rate swap agreement with PNC. Changes in the fair value of the interest rate swap agreement were recorded in earnings. The Company was not party to any hedges as of December 31, 2017.

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 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. 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.income tax expense. The Company files income tax returns in the United States and in the states in which it conducts its business operations. The Company’s United States federal income tax filings for tax years 20122013 through 20162017 remain open to examination inexamination. In general, the taxing jurisdictionsCompany’s various state tax filings remain open for tax years 2013 to which the Company is subject.2017.

Fair Value

The Company follows authoritative guidance that applies to all financial assets and liabilities required to be measured and reported on a fair value basis. The Company also applies the guidance to non-financial assets and liabilities measured at fair value on a nonrecurring basis, including non-competition agreements and goodwill. The guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.  The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.

Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability based on the best information available in the circumstances.  Beginning in 2017 the Company valued its warrants using the Binomial Lattice model ("Lattice"). The Company did not change its valuation techniques nor were there have any transfers between hierarchy levels during the three months endedMarch-months ended March 31, 2017.2018 or 2017, respectively. The financial and nonfinancial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

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 stock options awarded to employees, independent contractors, 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.

The Company also uses the Black-Scholes valuationa Lattice model to determine the fair value of certain warrants. The expected term used was the remaining contractual term. Expected volatility is based upon the weighted average of historical volatility over a term consistent with the contractual term of the warrant and implied volatility.remaining term. The risk-free interest rate is based upon impliedderived from the yield on azero-coupon U.S. Treasury zero-coupon issuegovernment securities with a remaining term equal to the contractual term of the warrants. The dividend yield is assumed to be none.zero.

Management Estimates

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the realization of accounts receivable, stock basedstock-based compensation expense, income tax provision, the valuation of derivative financial instruments (warrants and interest rate swaps,swaps), and the valuation of deferred taxes. Actual results could differ from those estimates.

Reclassifications

Certain prior-period amounts have been reclassified for comparative purposes to conform to the fiscal 2017current presentation. These reclassifications have no effect on the Company’s consolidated statement of operations.

Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015 the FASB agreed to defer the effective date by one year, the new standard becomes effective for us on January 1, 2018. Early adoption is permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently determining the impact of the new standard on revenue from the services we provide. Our approach includes performing a detailed review of key contracts representative of our different businesses and comparing historical accounting policies and practices to the new standard. Our services are primarily short-term in nature, and our assessment at this stage is that we do not expect the new revenue recognition standard will have a material impact on our financial statements upon adoption. We currently intend to adopt the new standard as of January 1, 2018.

In February 2016, the FASB issued ASU 2016-022016-02 “Leases (Topic 842)842)”, which requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We continue to evaluate the impact of this new standard on our consolidated financial statementsstatements. Once adopted, the Company expects to recognize additional assets and liabilities on its consolidated balance sheet related to operating leases with terms longer than one year.

Recently Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued new revenue recognition guidance under Accounting Standards Update ("ASU") 2014-09 that superseded the existing revenue recognition guidance under GAAP. The new standard focuses on creating a single source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. In July 2015, the FASB deferred the effective date by one year (ASU 2015-14). This ASU is now effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. Since the issuance of the original standard, the FASB has issued several other subsequent updates including the following: 1) clarification of the implementation guidance on principal versus agent considerations (ASU 2016-08); 2) further guidance on identifying performance obligations in a contract as well as clarifications on the licensing implementation guidance (ASU 2016-10); 3) rescission of several SEC Staff Announcements that are codified in Topic 605 (ASU 2016-11); and 4) additional guidance and practical expedients in response to identified implementation issues (ASU 2016-12). The Company adopted the new guidance effective January 1, 2018 using the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. The adoption of this standard had no impact on our consolidated financial statements; however, our footnote disclosure was expanded.

In August 2016, the FASB issued ASU 2016-15,2016-15, “Statement of Cash Flows (Topic 230)230), Classification of Certain Cash Receipts and Cash Payments (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-15)2016-15)”, that clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. The guidance also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance will be effective for annual periods beginning after December 15, 2017 and interim periods within those annual periods. Early adoption is permitted. The Company is evaluatingadopted the effect of ASU 2016-15new guidance effective on its consolidated financial statements.

Recently Adopted

In March 2016, the FASB issued ASU 2016-09 “Compensation – Stock Compensation (Topic 718)”, which simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the thresholdJanuary 1, 2018 using a retrospective transition method to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes.each period presented. The adoption of this guidanceASU 2016-15 did not result in any impact to the Company’s consolidated financial position, resultspresentation of operations, orour statement of cash flows.

Note 43 - Property and Equipment

Property and equipment consists of the following:following (amounts in thousands):

Effective January 1, 2016, HWWM acquired various water transfer assets from WET Oil Services, LLC (“WET”) and HII Technologies, Inc. (“HIIT”) for approximately $4 million dollars. These assets include high and low volume pumps, aluminum pipe, manifolds, lay flat hose, generators, other support equipment including vehicles and trailers. As part of the HIIT acquisition, HWWM also acquired a new water treatment technology utilized in devices sold under the name of HydroFLOW. In accordance with FASB Accounting Standards Codification 805, Business Combinations, the Company has accounted for the transactions with both HIIT and WET as asset acquisitions.

Note 54 – PNCRevolving Credit FacilityFacilities

PNC Revolving Credit Facility

On March 31, 2017, the Companywe entered into the Tenth Amendment to the 2014Amended and Restated Revolving Credit and Security Agreement (the "2014 Credit Agreement") with PNC Bank, National Association ("PNC") that among other things (i) required the Companyus to raise $1.5$1.5 million in subordinated debt or post a letter of credit in favor of the bankPNC by March 31, 2017; (ii)(ii) raise an additional $1$1 million of subordinated debt by May 15, 2017; (iii)(iii) reduced the maturity date of the loan from September 12, 2019 to April 30, 2018; (iv)(iv) changed the definition of Adjusted EBITDA to include proceeds from subordinated debt; and (v) changed the calculation of fixed charge and leverage ratio from a trailing four-quarterfour-quarter basis to a quarterly build from the quarter ended December 31, 2016. On March 31, 2017, the Company’sour largest shareholder, and ChairmanCross River Partners, L.P. ("Cross River"), whose general partner's managing member is the chairman of our Board of Directors, posted a letter of credit in the amount of $1.5$1.5 million in accordance with the terms of the Tenth Amendment. It is expected thatAmendment to the2014 Credit Agreement. The letter of credit will bewas converted into subordinated debt with a maturity dated on or about April 15,date of June 28, 2022 with a stated interest rate of 10% per annumand a five-yearfive-year warrant to purchase approximately 965,000967,741 shares of our common stock at an exercise price of approximately $.31$.31 per share.

As On May 10, 2017, Cross River also provided $1.0 million in subordinated debt to us as required under the terms of our Tenth Amendment to the 2014 Credit Agreement. This subordinated debt has a stated annual interest rate of 10% and maturity date of June 28, 2022. In connection with this issuance of subordinated debt, Cross River was granted a five-year warrant to purchase 645,161 shares of our common stock at an exercise price of $0.31 per share. We accounted for the warrants issued in connection with the subordinated debt as a liability in the accompanying consolidated balance sheet as of March 31, 2017, the Company had an outstanding principal loan balance under the Credit Agreement of $25,870,836. The interest rate at March 31, 2017 ranged from 5.44% to 5.48% per year for the $24,750,000 of outstanding LIBOR Rate Loans and 7.00% per year for the $1,120,836 of outstanding Domestic Rate Loans. As of March 31, 2017, approximately $4.0 million was available under the Credit Agreement. As of March 31, 2017, the Company was in compliance with its covenants.2018.

As of December 31, 2016, the Company had an outstanding principal loan balance under the Credit Agreement of $23,180,514. The interest rate at December 31, 2016 ranged from 5.21% to 5.27% per year for the $21,250,000 of outstanding LIBOR Rate Loans and 6.75% per year for the $1,930,514 of outstanding Domestic Rate Loans.     

Debt Issuance Costs

The Company hasWe have capitalized certain debt issuance costs incurred in connection with the PNC senior revolving credit facilityagreements discussed aboveand these costs are being amortized to interest expense over the term of the credit facility using the effective interest method. As of March 31, 2017 and December 31, 2016, $162,174 and $170,746, respectively of unamortized debt issuance costs were included in Prepaid Expenses and Other Current assets in the accompanying consolidated balance sheet. on a straight-line basis. The remaining long-term portion of debt issuance costs of $12,237approximately $224,000 and $259,400$232,000 is included in Other Assets in the accompanying consolidated balance sheetsheets for March 31, 2017 2018 and December 31, 2016, 2017, respectively. During the three months ended March 31, 2017 2018 and 2016,2017, the Company amortized $255,734approximately $23,000 and $35,571$256,000 of these costs to Interest Expense. Due to the maturity date of the 2014 Credit Agreement moving from September 12, 2019 to April 30, 2018, the Company recognized an additional $217,000$217,000 of debt issuance amortization expenses during the three months ended March 31, 2017.

Interest Rate Swap

On September 17, 2015, the Company entered into an interest rate swap agreement with PNC which the Company designated as a fair value hedge against the variability in future interest payments related to its 2014 Credit Agreement. The terms of the interest rate swap agreement include an initial notional amount of $10 million, a fixed payment rate of 1.88% plus applicable a margin ranging from 4.50% to 5.50% paid by the Company and a floating payment rate equal to LIBOR plus applicable margin of 4.50% to 5.50% paid by PNC. The purpose of the swap agreement is to adjust the interest rate profile of the Company’s debt obligations and to achieve a targeted mix of floating and fixed rate debt.

The Company engaged a valuation expert firm to complete the value of the swap utilizing an income approach from a discounted cash flow model. The cash flows were discounted by the credit risk of the Company derived by industry and Company performance. As of March 31, 2017 and December 31, 2016, the annual discount rate was 13.40% for both periods.

During the three months ended March 31, 2017, the fair market value of the swap instrument increased by $30,000 and resulted in a decrease to the liability and a reduction in interest expense. During the three months ended March 31, 2016, the fair market value of the swap decreased by $98,000 and resulted in an increase in the liability and additional interest expense. The interest rate swap liability is included in accounts payable and accrued liabilities on the Company’s balance sheet. As of March 31, 2017 and December 31, 2016 the interest rate swap liability was $61,000 and $91,000, respectively.

Note 65 – Long-Term Debt

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

Note 76 – Fair Value Measurements

The following table presents the Company’sCompany’s financial assets and liabilities that were accounted for at fair value on a recurring basis by level within the fair value hierarchy:

Note 87 – 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 endedMarchended March 31, 2017 2018 and 20162017 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 21% and 34%, respectively to pre-tax income primarily because of state income taxes and estimated permanent differences.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management recorded a valuation allowance to reduce its net deferred tax assets to zero.

As of December 31, 2017, the Company had recorded a full valuation allowance on a net deferred tax asset of $1.5 million. Our income tax provision of $420,000 for the three months ended March 31, 2018 reduced the gross amount of the deferred tax asset and we reduced the valuation allowance by a like amount which resulted in a net tax provision of zero. During the three months ended March 31, 2017, the Company recorded an income tax expense of approximately $27,000.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation (the “Tax Act”), which significantly revises the ongoing U.S. corporate income tax law by lowering the U.S. federal corporate income tax rate from 35% to 21%, implementing a territorial tax system, imposing a one-time tax on foreign unremitted earnings and setting limitations on deductibility of certain costs, among other things.

The Company is subject to the provisions of the Financial Accounting Standards Board (“FASB”) ASC 740-10, Income Taxes, which requires that the effect on deferred tax assets and liabilities of a change in tax rates be recognized in the period the tax rate change was enacted. Due to the complexities involved in accounting for the recently enacted Tax Act, the U.S. Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 118 requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined.

Pursuant to the SAB118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The final impact on the Company from the Tax Act’s transition tax legislation may differ from the aforementioned estimates due to the complexity of calculating and supporting with primary evidence such U.S. tax attributes such as accumulated foreign earnings and profits, foreign tax paid, and other tax components involved in foreign tax credit calculations for prior years back to 1998. Such differences could be material, due to, among other things, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the transition tax's reasonable estimate. The Company will continue to evaluate the impact of the U.S. Tax Act and will record any resulting tax adjustments during 2018.