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ENSV > SEC Filings for ENSV > Form 10-Q on 13-Nov-2012All Recent SEC Filings

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Form 10-Q for ENSERVCO CORP


13-Nov-2012

Quarterly Report


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 and nine month periods ended September 30, 2012 and 2011, and our financial condition, liquidity and capital resources as of September 30, 2012, and December 31, 2011. 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, increases in oil and gas production, the number of anticipated wells to be drilled after the date hereof, 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:

a $595,000 working capital deficit at September 30, 2012 ($2.7 million deficit at December 31, 2011); however, due to the November 2, 2012 refinancing, discussed in Footnote 10 to the Condensed Financial Statements as disclosed within this Form 10Q, this deficit improved to positive working capital of $650,000 (on a pro forma basis);

our ability to generate sufficient cash flows or other sources of liquidity to repay our debt obligations as they become due;

future capital requirements and uncertainty of obtaining additional funding on terms acceptable to us;

availability of borrowings under our credit facility;

historical incurrence of losses;

our ability to retain key members of our senior management and key technical employees, and conflicts of interests with respect to our directors;

effect of seasonal factors on our business operations;

a decline in oil or natural gas production or oil or natural gas prices, the impact of price volatility in the oil and natural gas industries and the impact of general economic conditions on the demand for the services we offer to the oil and natural gas industries;

activities of our competitors, many of whom have greater financial resources than we have;

geographical diversity of our operations and the difficulties inherent in managing such geographically diverse operations;

ongoing U.S. and global economic uncertainty;

unanticipated increases in the cost of our operations;

reliance on limited number of customers and creditworthiness of our customers;

increases in interest rates and our failure to hedge against possible interest rate increases;

impact of environmental, health and safety, and other governmental regulations, and of current or pending legislation;

further sales or issuances of common stock and the potentially dilutive impact such sales or issuances may have on our stockholders; and

our common stock's high price volatility in the public market and low trading volume.

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, 2011. 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.

Company Overview and Overview of the Information Presented

The Company was incorporated as Aspen Exploration Corporation under the laws of the State of Delaware on February 28, 1980 for the primary purpose of acquiring, exploring and developing oil and natural gas and other mineral properties. On June 30, 2009, Aspen disposed of all of its remaining oil and natural gas producing assets and as a result was no longer engaged in active business operations. On June 24, 2010, Aspen entered into an Agreement and Plan of Merger and Reorganization with Dillco Fluid Service, Inc. ("Dillco") which set forth the terms by which Dillco became a wholly owned subsidiary of Aspen on July 27, 2010 (the "Merger Transaction").

On December 30, 2010, Aspen changed its name to "Enservco Corporation." As such, throughout this report the terms the "Company" and/or "Enservco" are intended to refer to the Company on a post Merger Transaction basis and as a whole, with respect to both historical and forward looking contexts. As a result of the Merger Transaction, the Company's fiscal year was modified to be the calendar year.

Going forward, and subject to the availability of adequate equity and/or debt financing, 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. 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.

Discussion of Operations for the Three and Nine Months ended September 30, 2012 and 2011

The following table shows the results of operations for the periods noted. Please see information following the table for management's discussion of significant changes.

                                                            For the Three Months Ended
                                                                  September 30,
                                                               % of                             % of
                                               2012          Revenue            2011          Revenue
                                           (Unaudited)                      (Unaudited)

Revenues                                   $  5,494,134            100 %    $  4,532,274            100 %
Cost of Revenue                               5,208,900             95 %       3,952,923             87 %
Gross Profit                                    285,234              5 %         579,351             13 %

Operating Expenses
General and administrative expenses             727,097             13 %       1,058,602             23 %
Depreciation and amortization                   544,659             10 %       1,215,524             27 %
Total operating expenses                      1,271,756             23 %       2,274,126             50 %

Loss from Operations                           (986,522 )          (18 )%     (1,694,775 )          (37 )%
Other Income (Expense)                           25,403              1 %        (162,368 )           (4 )%
Loss Before Income Tax Benefit                 (961,119 )          (17 )%     (1,857,143 )          (41 )%

Income Tax Benefit                              488,915              9 %         726,719             16 %
Net Loss                                   $   (472,204 )           (8 )%   $ (1,130,424 )          (25 )%

EBITDA*:
Net Loss                                   $   (472,204 )                   $ (1,130,424 )
Add (Deduct):
Interest Expense                                211,708                          161,642
Provision for income taxes                     (488,915 )                       (726,719 )
Depreciation and amortization                   544,659                        1,215,524
EBITDA*                                        (204,752 )                       (479,977 )
Add (Deduct):
Stock-based compensation                         59,198                          345,219
Gain on disposal of equipment                  (251,875 )                              -
Other expense                                    14,764                              726
Adjusted EBITDA*                           $   (382,665 )                   $   (134,032 )

Income Per Common Share:
Basic                                      $      (0.02 )                   $      (0.05 )
Diluted                                    $      (0.02 )                   $      (0.05 )

Weighted average number of common shares
outstanding   (used to calculate basic
and diluted income per share)
Basic                                        21,778,866                       21,778,866
Diluted                                      21,778,866                       21,778,866

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

                                                            For the Nine Months Ended
                                                                  September 30,
                                                               % of                             % of
                                               2012          Revenue            2011          Revenue
                                           (Unaudited)                      (Unaudited)

Revenues                                   $ 20,659,509            100 %    $ 18,265,614            100 %
Cost of Revenue                              16,521,539             80 %      13,619,711             75 %
Gross Profit                                  4,137,970             20 %       4,645,903             25 %

Operating Expenses
General and administrative expenses           2,574,995             12 %       2,450,153             13 %
Depreciation and amortization                 2,527,101             12 %       3,410,063             19 %
Total operating expenses                      5,102,096             24 %       5,860,216             32 %

Loss from Operations                           (964,126 )           (4 )%     (1,214,313 )           (7 )%
Other Expense                                  (321,226 )           (2 )%       (596,640 )           (3 )%
Loss Before Income Tax Benefit               (1,285,352 )           (6 )%     (1,810,953 )          (10 )%

Income Tax Benefit                              651,332              3 %         715,313              4 %
Net Loss                                   $   (634,020 )           (3 )%   $ (1,095,640 )           (6 )%

EBITDA*:
Net Loss                                   $   (634,020 )                   $ (1,095,640 )
Add (Deduct):
Interest Expense                                639,712                          513.918
Provision for income taxes                     (651,332 )                       (715,313 )
Depreciation and amortization                 2,527,101                        3,410,063
EBITDA*                                       1,881,461                        2,113,028
Add (Deduct):
Stock-based compensation                        248,459                          454,084
Warrants issued                                       -                           46,353
(Gain) loss on disposal of equipment           (253,411 )                         44,286
Gain on sale of investments                     (24,653 )                              -
Other (income) expense                          (40,422 )                         38,436
Adjusted EBITDA*                           $  1,811,434                     $  2,696,187

Income Per Common Share:
Basic                                      $      (0.03 )                   $      (0.05 )
Diluted                                    $      (0.03 )                   $      (0.05 )

Weighted average number of common shares
outstanding  (used to calculate basic
and diluted income per share)
Basic                                        21,778,866                       21,778,866
Diluted                                      21,778,866                       21,778,866

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

Although Enservco does not have segmented business operations, which would require segment reporting within the notes of its financial statements per general accounting standards, we believe that revenue by service offering may be useful to readers of our financials. The following tables set forth revenue information for the Company's three service offerings during the three and nine month periods ending September 30, 2012 and 2011:

                                                    For the Three Months Ended
                                                          September 30,
                                                      2012               2011
                                                  (Unaudited)        (Unaudited)
BY SERVICE OFFERING:
Fluid Management (1)                             $    2,872,566      $  2,482,076
Well Enhancement Services (2)                         2,199,425         1,538,040
Well Site Construction and Roustabout Services          422,143           512,158
Total Revenues                                   $    5,494,134      $  4,532,274




                                                   For the Nine Months Ended
                                                         September 30,
                                                     2012              2011
                                                  (Unaudited)      (Unaudited)
BY SERVICE OFFERING:
Fluid Management (1)                             $   7,085,439     $  7,149,638
Well Enhancement Services (2)                       12,847,253       10,019,303
Well Site Construction and Roustabout Services         726,817        1,096,673
Total Revenues                                   $  20,659,509     $ 18,265,614

Enservco has also determined that an understanding of the diversity of its operations by geography is important to an understanding of its business operations. Enservco only does business in the United States, in what it believes are three geographically diverse regions. The following table sets forth revenue information for the Company's three geographic regions during the three and nine month periods ending September 30, 2012 and 2011:

                               For the Three Months Ended
                                     September 30,
                                 2012               2011
                             (Unaudited)        (Unaudited)
BY GEOGRAPHY:
Eastern USA Region (3)      $      429,974      $    449,183
Rocky Mountain Region (4)        1,914,770         1,159,582
Central USA Region (5)           3,149,390         2,923,509
Total Revenues              $    5,494,134      $  4,532,274




                              For the Nine Months Ended
                                    September 30,
                                2012              2011
                             (Unaudited)      (Unaudited)
BY GEOGRAPHY:
Eastern USA Region (3)      $   1,969,196     $  5,776,057
Rocky Mountain Region (4)      10,322,346        3,957,670
Central USA Region (5)          8,367,967        8,531,887
Total Revenues              $  20,659,509     $ 18,265,614

Notes to tables:

(1) Water hauling/disposal and frac tank rental.

(2) Services such as frac heating, acidizing, hot oil services, and pressure testing.

(3) Consists of operations and services performed in the southern region of the Marcellus Shale formation (southwestern Pennsylvania and northern West Virginia). Heat Waves is the only Company subsidiary operating in this region.

(4) Consists of western Colorado, northeastern Utah, southeastern Wyoming, western North Dakota, and eastern Montana. Heat Waves is the only Company subsidiary operating in this region.

(5) Consists of southwestern Kansas, northwestern Oklahoma, and northern New Mexico. Both Dillco and Heat Waves engage in business operations in this region.

Revenues

For the three and nine months ended September 30, 2012

For the three months ended September 30, 2012, revenues increased by approximately $960,000, or 21%, as compared to the same period in 2011. For the nine months ended September 30, 2012, revenues increased by approximately $2.4 million, or 13%, as compared to the same period in 2011.

On a service offering basis, this included increases for the three month period in revenues from fluid management services and during the three and nine month periods from well enhancement services, and a reduction in revenues for both periods in well site construction services. (Revenues from fluid management services remained approximately the same during the nine month period.)

On a geographical basis, revenues from the eastern USA region decreased significantly during the three and nine months ended September 30, 2012, while revenues from operations in the Rocky Mountain region increased significantly during both periods. Revenues from operations in the Central USA region we slightly down during the three and nine month periods ended September 30, 2012 as compared to the prior year.

Factors that increased revenues during the three and nine months ended September 30, 2012, as compared to 2011:

(1) Opening two new operation centers during September 2011 in a) Cheyenne, Wyoming (to expand service coverage within the D-J Basin and Niobrara formation), and b) Killdeer, North Dakota (to provide new service coverage within the Bakken formation of western North Dakota and eastern Montana). These two new operation centers (located within our Rocky Mountain region), which resulted in additional customers and contracts for our operations Company-wide and throughout each of our service offerings, accounted for the majority of the approximate $1.9 million and $10.3 million of revenues generated in our Rocky Mountain region during the three and nine months ended September 30, 2012, respectively, and the approximately $760,000 and $6.4 million increase, in revenues for the Rocky Mountain region during the same periods in 2011;

(2) Though the Company was affected by higher-than-average temperatures and moderate weather during the first quarter of 2012 (within the regions where the Company performs Well Enhancement services, primarily as it relates to our frac heating and hot oiling services), due to our expansion and organic growth within our Rocky Mountain region we were able to realize a longer heating season during the summer of 2012 as compared to prior years. As such, the Company realized revenues from its Well Enhancement services of approximately $2.2 million and $12.8 million during the three and nine months ended September 30, 2012, respectively. This accounted for an increase of approximately $660,000 and $2.8 million of revenues generated from our Well Enhancement services during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011;

(3) Due to our expansion and organic growth within our Rocky Mountain and Central USA regions we were also able to pick up additional Fluid Management contracts with key customers during 2012. This accounted for an increase of approximately $800,000 and $1.1 million of revenues generated from our Fluid Management services during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011.

Factors that decreased revenues during the three and nine months ended September 30, 2012 as compared to 2011:

(1) Revenues in the Eastern USA region (the southern Marcellus Shale formation covering southwestern Pennsylvania and northern West Virginia) decreased by approximately $3.8 million during the nine months ended September 30, 2012, as compared to the same period in 2011. Of the decrease during the nine months ended September 30, 2012, approximately $3.2 million relates to Well Enhancement services and $600,000 relates to Fluid Management services;

a. Due to higher-than-average temperatures and moderate weather during the 2011 - 2012 winter season (what has been called one of the warmest winters on record), starting late in the fourth quarter of 2011 and continuing through the first quarter of 2012, we redeployed a majority of the assets from our operation center in the Eastern USA region. As a result, revenues in this region for the nine months ended September 30, 2012 decreased significantly, as noted above;

(2) In spite of the expansion and organic growth within our Rocky Mountain and Central USA regions, resulting in additional Fluid Management contracts with key customers during 2012 as explained above, Fluid Management services within our Dillco Fluid Service, Inc. operations (part of our Central USA region) decreased by approximately $380,000 and $570,000 during the three and nine months ended September 30, 2012, respectively, as compared to the same periods in 2011;

a. The decrease in Fluid Management service revenues during the three and nine months ended September 30, 2012 was largely due to losing a member of our Dillco Fluid Service, Inc. operations management team who took his small number of fluid service trucks and equipment and certain small, independent-customers to explore his own business opportunities.

Historical Seasonality of Revenues. Because of the seasonality of our frac heating and hot oiling business, the second and third quarters are historically our lowest revenue generating periods of our fiscal year. In addition, the revenue mix of our service offerings also changes as our Well Enhancement services (which includes frac heating and hot oiling) decrease as a percentage of total revenues and Fluid Management services and other services increase. The first and fourth quarters of our fiscal year, covering the months during what is known as our "heating season", have historically made up approximately 60% or more of our total fiscal year revenues, with the remaining 40% historically split evenly between the second and third quarters. 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 our fiscal years.

As an indication of this quarter-to-quarter seasonality, the Company earned approximately $5.6 million and $5.5 million of its 2012 revenues during the second and third quarters of 2012, respectively, while earning approximately $9.5 million during the first quarter of 2012. The 2011 comparison was similar; $4.5 million and $4.5 million in revenues during the second and third quarters of 2011, respectively, as compared to approximately $9.3 million during the first quarter of 2011. 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.

Costs of Revenues and Gross Profit

For the three months ended September 30, 2012

For the three months ended September 30, 2012, cost of revenue as a percentage of revenues increased by approximately 8%, as compared to the same period in 2011. This resulted in a decreased gross profit margin of approximately $290,000, or 51%, for the third quarter in 2012 when compared to the same period in 2011. This increase in the cost of revenue as a percentage of revenues, and resulting decrease in our profitability rate, for the three month period ending September 30, 2012, was primarily due to the following factors:

(1) As discussed within the Revenues section above, we opened two new operation centers during September 2011 in Cheyenne, Wyoming and Killdeer, North Dakota. As such, for the third quarter 2012 we incurred three months worth of costs associated with keeping these locations fully staffed and operating at capacity, compared to the same period in 2011 in which we only incurred one month of costs (September 2011, upon opening the two new locations); which would explain the increased cost of revenue as a percentage of revenues and decreased gross profit margins during the third quarter 2012 as compared to the same period in 2011;

(2) In addition, during the end of third quarter 2012 we began hiring more operators and drivers throughout the Company's operation centers in order to prepare for the increased demand during the upcoming heating season. Though this hiring phase also took place in the third quarter of 2011, the demand for operators and drivers increased significantly during third quarter 2012 due to expansion and organic growth within our Rocky Mountain and Central USA regions, which was far beyond the growth and demand experienced in the prior period; which would explain the increased cost of revenue as a percentage of revenues and decreased gross profit margins during the third quarter 2012 as compared to the same period in 2011.

(3) In order to secure equipment for contracts entered into for our Well Site Construction and Roustabout services, and to prepare for a growing market for these services as a result of opening new operating centers as noted above, the Company entered into several construction equipment operating leases during the period;

(4) An overall increase in the price of fuel and other transportation costs during the period; and

(5) An increase in costs for repairs and general maintenance during the period due to the increased truck and equipment fleet; the Company has purchased over $7.5 million of truck and equipment within the last seven quarters.

For the nine months ended September 30, 2012

Although revenues increased by approximately $2.4 million, or 13%, during the nine months ended September 30, 2012 as compared to the same period of 2011, cost of revenue as a percentage of revenues increased by approximately 5%. This resulted in a decreased gross profit margin of approximately $510,000, or 11%, for the third quarter in 2012 when compared to the same period in 2011. This increase in the cost of revenue as a percentage of revenues and resulting declining profitability rate for the nine months ending September 30, 2012 is primarily due to the following factors:

(1) The Company relies heavily on the ability to generate the majority of its revenues and gross profit during the heating season (during the first and fourth quarters of our fiscal year), when temperatures are generally colder through its frac heating and hot oiling services. During the start of the 2011-2012 heating season, the Company fully staffed its operational centers with drivers and operators in order to meet the expected demand during the heating season. However, due to higher-than-expected temperatures in all Company locations, the expected demand for our heating services (frac heating and hot oiling) did not begin to materialize until midway through the first quarter of 2012, which still did not meet our projections. As such, the Company experienced significant operation costs during the first three to four months within the nine month period ended September 30, 2012 without achieving the expected revenues, resulting in increased cost of revenues as a percentage of revenues, thereby decreasing gross margins;

(2) An increase in labor costs (salary and wages, benefits, etc,) and site overhead during the first three to four months within the nine month period ended September 30, 2012 due to the opening in September 2011 of two new operation centers in Cheyenne, WY and Killdeer, ND. We hired and trained employees at these and each of our locations to meet expected demand in . . .

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