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ENSV > SEC Filings for ENSV > Form 10-Q on 13-May-2013All Recent SEC Filings

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Form 10-Q for ENSERVCO CORP


13-May-2013

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 months ended March 31, 2013 and 2012, and our financial condition, liquidity and capital resources as of March 31, 2013, and December 31, 2012. 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:

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

price volatility of oil and natural gas prices, and the effect that lower prices may have on our customer's demand for our services, the result of which may adversely impact our revenues and stockholders' equity;

a decline in oil or natural gas production, and the impact of general economic conditions on the demand for oil and natural gas and the availability of capital which may impact our ability to perform services for our customers;

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 significantly to our costs of doing business;

constraints on us as a result of our substantial indebtedness, including restrictions imposed on us under the terms of our credit facility agreement and our ability 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;

reliance on a limited number of customers;

our ability to retain key members of our senior management and key technical employees;

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 effect of seasonal factors;

further sales or issuances of our common stock and the price and volume volatility of our common stock; and

our common stock's limited trading history.

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, 2012. 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.

As discussed in more detail below, the Company completed a refinancing of its debt and raised some additional equity capital in a private placement in November 2012. 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 any additional outside capital or have access to additional outside funding on reasonable terms, if at all.

Discussion of Operations for the Three Months ended March 31, 2013 and 2012



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.



                                                         Three Months Ended March 31,
                                                            % of                              % of
                                            2013           Revenue            2012           Revenue

Revenues                                $ 18,567,166             100 %    $  9,527,955             100 %
Cost of Revenue                           10,401,143              56 %       6,579,429              69 %
Gross Profit                               8,166,023              44 %       2,948,526              31 %

Operating Expenses
General and administrative expenses          907,073               5 %         903,360               9 %
Depreciation and amortization                563,836               3 %       1,323,797              14 %
Total operating expenses                   1,470,909               8 %       2,227,157              23 %

Income from Operations                     6,695,114              36 %         721,369               8 %
Other Income (Expense)                         6,518               0 %        (138,765 )            (2 )%

Income From Continuing Operations
Before Tax Expense                         6,701,632              36 %         582,604               6 %
Income Tax Expense                        (2,695,061 )           (14 )%       (203,847 )            (2 )%
Income From Continuing Operations          4,006,571              22 %         378,757               4 %

Discontinued Operations
Loss from discontinued operations           (118,918 )            (1 )%       (165,361 )            (2 )%
Income tax benefit                            46,378               0 %          64,491               1 %
Loss on discontinued operations, net
of tax                                       (72,540 )            (1 )%       (100,870 )            (1 )%

Net Income                              $  3,934,031              21 %    $    277,887               3 %

Earnings per Common Share - Basic
Income from continuing operations       $       0.12                      $       0.01
Discontinued operations                            -                                 -
Net Income                              $       0.12                      $       0.01

Earnings per Common Share - Diluted
Income from continuing operations       $       0.11                      $       0.01
Discontinued operations                            -                                 -
Net Income                              $       0.11                      $       0.01

Basic weighted average number of
common shares outstanding                 31,825,294                        21,778,866
Add: Dilutive shares assuming
exercise of options and warrants           3,172,940                         1,240,747
Diluted weighted average number of
common shares outstanding                 34,998,234                        23,019,613

Although Enservco does not have segmented business operations, which would require segment reporting within the notes of its financial statements per accounting standards, we believe that revenue by service offering may be useful to readers of our financials. The following tables set forth revenue from continuing operations for the Company's three service offerings during the three months ending March 31, 2013 and 2012:

                                                      Three Months Ended March 31,
                                                          2013               2012
BY SERVICE OFFERING:
Fluid Management (1)                                $      1,928,595      $ 2,111,226

Well Enhancement Services (2)                             16,529,380        7,333,854

Well Site Construction and Roustabout Services(6)            109,191           82,875

Total Revenues                                      $     18,567,166      $ 9,527,955

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 from continuing operations for the Company's three geographic regions during the three months ending March 31, 2013 and 2012:

                              Three Months Ended March 31,
                                  2013               2012
BY GEOGRAPHY:
Eastern USA Region (3)      $      4,324,196      $ 1,298,110

Rocky Mountain Region (4)         10,510,435        5,517,073

Central USA Region (5)             3,732,535        2,712,772

Total Revenues              $     18,567,166      $ 9,527,955

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) and the Utica Shale formation (eastern Ohio). Heat Waves is the only Company subsidiary operating in this region.

(4) Consists of western Colorado, 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, Texas panhandle, and northern New Mexico. Both Dillco and Heat Waves engage in business operations in this region.

(6) Amounts herein represent our Dillco construction and roustabout services. During 2012, the Heat Waves' construction and roustabout service line was discontinued. See Note 3 to our consolidated financial statements accompanying the Form 10K within this report for more details.

Revenues:

The approximately $9.0 million or 95% increase in our revenues from continuing operations for the three months ended March 31, 2013, as compared to the same period in 2012, is primarily due to (i) a normal winter season during the 2012-2013 heating season (as compared to the higher-than-average temperatures and moderate weather during the prior year's winter), and (ii) due to increased heating capacity through the purchase and fabrication of additional trucks and equipment to service our well enhancement services. These factors are discussed in detail throughout this section; this section focuses on key increases in our revenues from continuing operations from our service line offerings and geographical regions, with additional discussions for any offsetting decreases.

In general, on a service offering basis, the increase in revenues during the first quarter of 2013 included significant increases within our well enhancement services, and a slight reduction in revenues during the same period in our fluid management services. Revenues from well site construction services remained approximately the same during the three month period.

In general, on a geographical basis, revenues from the Rocky Mountain region increased significantly during the first quarter of 2013, as did revenues from operations in the eastern USA region. Revenues from operations in the Central USA region showed a slight increase during the three month period.

Specific factors that increased revenues during the three months ended March 31, 2013, as compared to 2012:

(1) During 2012 and the beginning of 2013, the Company expanded its heating capacity by investing in additional trucks and equipment to meet the growing demand for our frac heating and hot oiling services. As part of this expansion of trucks and equipment, the Company purchased and fabricated two new hot oil units and five double-burner frac heating units which were deployed into our Rocky Mountain region;

(2) Though the Company's Well Enhancement services of frac heating and hot oiling were affected by higher-than-average temperatures and moderate weather during the first quarter of 2012, weather patterns returned to normal during the first quarter of 2013, which is in the middle of the 2012-2013 heating season, thus increasing the demand for our frac heating and hot oiling services;

(3) Revenues in the Eastern USA region (the southern Marcellus Shale formation covering southwestern Pennsylvania and northern West Virginia) increased by approximately $3.0 million during the first quarter of 2013, as compared to the same period in 2012, with the majority of this increase associated with Well Enhancement services (more specifically, frac heating and hot oiling). This increase is due weather patterns in this area returning to normal during the winter of 2012-2013, and is also due to our expansion into the Utica shale (located in northern West Virginia) where exploration and production in this oil-field play is beginning to see increased activity and demand for our services; and

(4) Due to our expansion and organic growth within our Rocky Mountain and Central USA regions we were also able to execute additional Fluid Management agreements with key customers during 2012, continuing these services through the beginning of 2013. These new agreements resulted in the Company investing in additional water transports. In total, the Company purchased and fabricated two new water transports, and also leased an additional seven water transports, which were deployed into our Rocky Mountain and Central USA regions during 2012. See below for a discussion around the decreases in Fluid Management services within our Dillco Fluid Service, Inc operations which offset the increase in revenues from our Rocky Mountain and other Central USA operations.

Specific factors that decreased revenues during the three months ended March 31, 2013, as compared to 2012:

(1) In spite of the expansion and organic growth within our Rocky Mountain and Central USA regions as explained above, Fluid Management services within our Dillco Fluid Service, Inc. operations (part of our Central USA region) decreased by approximately $500,000 during the first quarter of 2013, as compared to the same period in 2012. This decrease was due to losing a member of our Dillco Fluid Service, Inc. operations management team near the end of the first quarter of 2012; this member 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 that fiscal year.

As an indication of this quarter-to-quarter seasonality, the Company earned approximately $5.5 million and $5.2 million of its 2012 revenues during the second and third quarters of 2012, respectively, while earning approximately $9.5 million and $11.3 million during the first and fourth quarters of 2012, respectively. The 2011 comparison was similar; $4.2 million and $4.3 million in revenues during the second and third quarters of 2011, respectively, as compared to approximately $9.1 million and $6.3 million during the first and fourth quarters of 2011, respectively. 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:

Although revenues from continuing operations increased during the three months ended March 31, 2013, as compared to the same period in 2012, cost of revenues from continuing operations as a percentage of revenues decreased by approximately fifteen percentage points. This resulted in an increased gross profit margin of approximately $5.2 million or 177% for the first quarter in 2013, when compared to the same period in 2012.

The decrease in cost of revenues and increased profitability rate for the period is primarily due to the following factors:

(1) Historically, our revenue mix has consisted of approximately 55% of our consolidated revenues generated through our Well Enhancement services and approximately 40% from our Fluid Management services; the remaining 5% of consolidated revenues has historically been generated from Well Site Construction and other services. During the first quarter of 2013, our revenue mix consisted of approximately 90% of consolidated revenues from Well Enhancement services. This significant change to our revenue mix is due to new frac heating and hot oiling customers in our Rocky Mountain, Eastern USA, and Central USA regions. To address this increase in demand, during the first quarter of 2013 we allocated all available resources (resulting in parking of water transports and redeploying water transport operators) to meet the demand of our Well Enhancement services; specifically our frac heating and hot oiling service. As we have historically experienced higher gross profit margins for Well Enhancement services, this change in revenue mix through focusing on our core heating services significantly increased our gross profit margins and our overall gross profit during the first quarter of 2013; and

(2) In prior periods the Company has benefited from a reduction in cost of revenues through the implementation and maintenance of several cost-reduction programs and policies. Due to the significant increase in revenues from continuing operations during the first quarter of 2013, the Company was able to benefit from these cost-reduction programs and policies and our gross profit margins from each incremental dollar of revenue showed a significant increase in profitability.

General and Administrative Expenses:

For the three months ended March 31, 2013, general and administrative expenses as a percentage of revenues decreased by four percentage points, as compared to the same period 2012, due to the substantial increase in revenues. However, the dollar amount spent on our general and administrative expenses remained relatively consistent during the period as there have not been any significant changes in general and administrative expenses, period-over-period.

Going forward, we anticipate that our general and administrative expenses will continue to be consistent, or may in certain periods have a slight increase, as we maintain efforts to appropriately invest in the infrastructure and overhead needed to support operations, as our operations continue to grow. We expect to be able to maintain our general and administrative expenses as a reasonable and consistent percentage of revenues.

Depreciation and Amortization:

Our depreciation and amortization expenses decreased as a percentage of revenues for the three months ended March 31, 2013, as compared to the same period in 2012, by approximately eleven percentage points, or a decrease in depreciation and amortization expense of approximately $760,000 or 57%. During the second quarter of 2012, the Company reassessed the estimated useful lives of its trucks and equipment (including its well servicing units and equipment, fluid services equipment, construction equipment, and other vehicles) as well as the estimated useful lives of its disposal wells. Through this assessment, the Company increased the useful lives of its trucks and equipment and of its disposal wells. This change in accounting estimate decreased depreciation for the three months ended March 31, 2013 by approximately $860,000 (pre-tax difference), as compared to the same period in 2012. This decrease in depreciation due to the change in accounting estimate noted above was offset by an increase in depreciation by approximately $100,000 due to property and equipment purchases during fiscal year 2011 of approximately $5.6 million and another $4.2 million in purchases during 2012 (purchase amounts include leases of approximately $282,000 and $438,000, respectively).

Results of Operations:

For the three months ended March 31, 2013, the Company recognized income from operations of approximately $6.7 million. For the same period in 2012, the Company recognized income from operations of approximately $720,000. As discussed within the Cost of Revenues and Gross Profit, General and Administrative Expenses, and Depreciation and Amortization sections above, the approximate $6.0 million positive swing in our results from operations during the first quarter of 2013, as compared to 2012, was primarily a result of an approximate $9.0 million or 95% increase in revenues, with the cost of revenues from continuing operations as a percentage of revenues decreasing by approximately 15% (or an increased gross profit margin of approximately $5.2 million or 177%) period-over-year, and an approximate $760,000 or 57% decrease in depreciation expense.

Management believes that this improvement in our results of operations reflects the beneficial effect of our expanded and increased operations (as discussed throughout this report), a focus on obtaining profitability, and the benefit of a normal winter and increased heating capacity in the first quarter of the year. We believe that as long as we are able to control our costs and increase our revenues as a result of our expanding geographical regions and service areas, our financial performance will continue to improve over the long run, although 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.

Income Taxes:

For the three months ended March 31, 2013, the Company recognized income from continuing operations before taxes of approximately $6.7 million. The Company recognized a tax expense on this income from continuing operations of approximately $2.7 million. This resulted in an effective tax rate on income from continuing operations of approximately 40%. This high effective tax rate, as compared to a generally expected federal corporate tax rate of 34%, is primarily due to permanent book income vs. taxable income differences and state and local income tax.

Adjusted EBITDA*

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

                                                               Three Months Ended March 31,
                                                                  2013                2012
EBITDA* From Continuing Operations:
Income From Continuing Operations                            $     4,006,571       $   378,757
Add (Deduct):
Interest expense                                                     314,052           208,991
Income tax expense                                                 2,695,061           203,847
Depreciation and amortization                                        563,836         1,323,797
EBITDA* From Continuing Operations                                 7,579,520         2,115,392
Add (Deduct):
Stock-based compensation                                              38,696            44,636
Warrants issued                                                       30,023                 -
Gain on disposal of equipment                                       (306,457 )               -
Gain on sale of investments                                                -           (11,762 )
Other income                                                         (14,113 )         (58,464 )
Adjusted EBITDA* From Continuing Operations                  $     7,327,669       $ 2,089,802

EBITDA* From Discontinued Operations:
Loss From Discontinued Operations                            $       (72,540 )     $  (100,870 )
Add (Deduct):
Interest expense                                                         963               750
Income tax benefit                                                   (46,378 )         (64,491 )
Depreciation and amortization                                              -            77,395
EBITDA* and Adjusted EBITDA* From Discontinued Operations    $      (117,955 )     $   (87,216 )

*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 plus or minus net interest plus taxes, depreciation and amortization. Adjusted EBITDA excludes from EBITDA stock-based compensation and, when appropriate, other items that management does not utilize . . .

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