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

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Form 10-Q for ENSERVCO CORP


13-Aug-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 and six months ended June 30, 2013 and 2012, and our financial condition, liquidity and capital resources as of June 30, 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, 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.

OVERVIEW

Enservco Corporation provides fluid management and well enhancement services to the domestic onshore oil and natural gas industry. These services include frac heating, hot oiling, acidizing, water hauling, fluid disposal, frac tank rental and other general oilfield services. The Company owns and operates a fleet of more than 230 specialized trucks, trailers, frac tanks and related well-site equipment and serves customers in several major domestic oil and gas fields including the DJ Basin/Niobrara field in Colorado, the Bakken field in North Dakota, the Marcellus and Utica Shale fields in Pennsylvania and Ohio, and the Mississippi Lime and Hugoton Fields in Kansas and Oklahoma.

RESULTS OF OPERATIONS



The following table shows selected financial data and operating results for the
periods noted. Please see information following the table for management's
discussion of significant changes.



                                        For the Three Months Ended          For the Six Months Ended
                                                 June 30,                           June 30,
                                           2013              2012             2013             2012
FINANCIAL RESULTS:
Revenues                              $    7,947,635     $  5,511,219     $ 26,516,027     $ 15,039,173
Cost of Revenue                            5,639,686        4,385,096       16,031,978       10,964,524
Gross Profit                               2,307,949        1,126,123       10,484,049        4,074,649
Gross Margin                                      29 %             20 %             40 %             27 %

Income (Loss) From Operations                551,964         (382,996 )      7,247,080          338,374
Net Income (Loss)                     $      190,907     $   (439,701 )   $  4,124,938     $   (161,816 )
Earnings per Common Share - Diluted   $         0.01     $      (0.02 )   $       0.12     $      (0.01 )
Diluted weighted average number of
common shares outstanding                 35,688,552       21,778,866       35,407,183       21,778,866

OTHER:
Adjusted EBITDA* from continuing
operations                            $    1,398,383     $    326,236     $  8,726,086     $  2,416,038
Adjusted EBITDA* Margin                           18 %              6 %             33 %             16 %

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

Overview:

For the three months ended June 30, 2013, the Company recorded a net income of $191,000 or $0.01 per share (diluted), compared to a net loss of $440,000 or $(0.02) per share (diluted) for the comparable period last year (an improvement for the three month period of almost $640,000). Revenues for the quarter increased by $2.4 million or 44% and gross profits increased $1.2 million or 105% over the same quarter last year. Adjusted EBITDA from continuing operations increased $1.1 million or 329% from the comparable quarter last year. These improvements were primarily driven by higher well enhancement service revenue in the Rocky Mountain and Eastern USA regions as compared to the same quarter last year.

For the six months ended June 30, 2013, the Company recorded a net income of $4.1 million or $0.12 per share (diluted), compared to a net loss of $162,000 or $(0.01) per share (diluted) for the comparable period last year (an improvement for the six month period of almost $4.3 million). Revenues and gross profits for the six months ended June 30, 2013 increased $11.5 million or 76% and $6.4 million or 157%, respectively over the comparable period last year. Adjusted EBITDA from continuing operations increased $6.3 million or 261% from the comparable six months last year. Increased heating capacity from the addition of new equipment combined with strong customer demand for frac heating services in the Rocky Mountain and Eastern USA regions were the primary reasons for these improvements.. Also contributing to the increase was lower than expected frac heating revenues during the comparable period last year due to the unseasonably warmer weather which reduced customer demand.

Revenues:

Although Enservco does not have segmented business operations, which would require segment reporting within the notes of its financial statements, we believe that revenue by service offering and revenue by geographic regions are important to understanding our business operations. The following tables set forth revenue from continuing operations by service offering and geographic region during the three and six months ended June 30, 2013 and 2012:

                                        For the Three months Ended           For the Six months Ended
                                                 June 30,                            June 30,
                                           2013              2012             2013              2012
BY SERVICE OFFERING:
Fluid Management (1)                  $    2,112,064      $ 2,172,038     $   4,148,808     $  4,309,198

Well Enhancement Services (2)              5,766,948        3,237,077        22,187,843       10,537,691

Well Site Construction and
Roustabout Services(6)                        68,623          102,104           179,376          192,284

Total Revenues                        $    7,947,635      $ 5,511,219     $  26,516,027     $ 15,039,173




                              For the Three months Ended          For the Six months Ended
                                       June 30,                           June 30,
                                 2013              2012             2013             2012
BY GEOGRAPHY:
Eastern USA Region (3)      $      893,505      $   241,112     $  5,217,701     $  1,539,222

Rocky Mountain Region (4)        4,448,288        2,772,413       14,959,949        8,283,411

Central USA Region (5)           2,605,842        2,497,694        6,338,377        5,216,540

Total Revenues              $    7,947,635      $ 5,511,219     $ 26,516,027     $ 15,039,173

Notes to tables:

(1) Services include water hauling/disposal and frac tank rental.

(2) Services include 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 Company' only subsidiary operating in this region.

(4) Consists of operations and services performed in the D-J Basin/Niobrara Field (northeastern Colorado and southeastern Wyoming) and Williston Basin/Bakken field (western North Dakota and eastern Montana). Heat Waves is the Company's only 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 this report for more details.

Revenues:

Revenues from continuing operations for the three months ended June 30, 2013 were $7.9 million, which represents a $2.4 million or 44% increase over the same period last year. The primary reason for this increase was higher well enhancement services in the Rocky Mountain and Eastern USA regions. Colder spring weather in 2013 combined with several customers requesting warmer water temperatures to ensure frac quality resulted in a $2.0 million increase in frac heating services over the comparable period last year. Hot oil service revenues also increased over the comparable quarter last year due to the addition of two new hot oil trucks in late 2012.

Revenues from continuing operations for the six months ended June 30, 2013 were $26.5 million, representing an increase of $11.5 million or 76% over the comparable period last year. Approximately $9.0 million of this increase was attributable to revenue growth in the first quarter of 2013 as compared to the first quarter of 2012. Increased heating capacity combined with the impact of cooler winter temperatures across our service territories during the six month period resulted in an increase in well enhancement revenue in all regions as compared to the same period last year with the most significant increase of $6.7 million occurring in the Rocky Mountain region.

Specific factors that increased revenues during the three and six months ended June 30, 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) Increased horizontal drilling and completion activity in the Niobrara Shale/DJ Basin by several customers resulted in higher frac heating service during 2013 as compared to the same period last year.

(3) During the first quarter of 2012, the Company's Well Enhancement services of frac heating and hot oiling were affected by higher-than-average temperatures which reduced customer demand for heating services. During 2013, temperature and weather patterns were more in line with historical averages, thus increasing the demand for our frac heating and hot oiling services; and

(4) Revenues in the Eastern USA region (the southern Marcellus Shale formation covering southwestern Pennsylvania and northern West Virginia) increased by approximately $3.7 million during the six months ended June 30, 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 was primarily due to our expansion into the Utica shale market (located in eastern Ohio) where exploration and production activity and demand for our services increased over 2012.

Specific factors that decreased revenues during the three and six months ended June 30, 2013, as compared to 2012:

(1) Fluid Management services within our Dillco Fluid Service, Inc. operations (part of our Central USA region) decreased by approximately $850,000 during the six months ended June 30, 2013, as compared to the same period last year. The loss of a member of our Dillco Fluid Service, Inc. operations management team combined with continued competitive pressures to reduce water hauling rates has resulted in the loss of certain lower margin water hauling business. The Company has tried to maintain it's pricing in this competitive market to prevent further dilution to its existing gross margins. The Company is attempting to replace all or a majority of this lost revenue by securing contracts with new customers.

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:

Cost of revenues for the three months ended June 30, 2013 increased $1.3 million or 28% from the comparable period last year. However, cost of revenues as a percent of revenues for the same three months declined approximately nine percentage points to 71% of revenues as compared to 80% of revenues during the comparable period last year. As a result, gross profit for the three months ended in June 30, 2013 increased to $2.3 million or 29% of revenues as compared to $1.1 million or 20% of revenues during the comparable period last year. As discussed in more detail below, increased revenue from higher margin well enhancement services resulted in higher gross margins for 2013 as compared to the same period last year.

Cost of revenues for the six months ended June 30, 2013 increased $5.1 million or 46% from the comparable period last year. Similar to the quarterly results above, cost of revenues as a percentage of revenues for the six months ended June 30, 2013 also declined from 73% of revenues during comparable period last year to 60% of revenues for the six months ended June 30, 2013. Gross profit for the six months ended in June 30, 2013 increased $6.4 million or 157% from the comparable period last year and gross margins improved from 27% for the six months last year to 40% for the six months ended June 30, 2013. Increased revenues from higher margin well enhancement services contributed to the overall increase in gross margin and gross profits.

Specific factors that increased gross margin during three and six months ended June 30, 2013 as compared to 2012:

(1) Well enhancement service revenues, which typically generate a higher gross profit margin than other services, increased to 73% and 84% of consolidated revenues for the three and six months ended June 30, 2013 as compared to 59% and 70% during the comparable periods last year. As a result, the overall gross margin increased due to more revenue generated from the higher margin well enhancement service revenues;

(2) Labor costs as a percentage of revenue was higher during the comparable periods last year due to unseasonably warm which resulted in lower utilization of field personnel ; and.

(2) In prior periods, the Company realized a reduction in costs 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 six months 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 and six months ended June 30, 2013, general and administrative expenses increased approximately $225,000 or 24% and $239,000 or 13%, respectively, as compared to the same periods last year. Higher stock based compensation costs related to the issuance of options combined with higher legal and accounting costs associated with preparing a registration statement related to the Company's private placement transaction in November of 2012 were the primary reasons for the increase in costs over the comparable period last year. As a percentage of revenues, general and administrative expenses decreased two percentage points and four percentage points for the three and six months ended June 30, 2013 as compared to the same periods last year.

Depreciation and Amortization:

For the three months ended June 30, 2013, depreciation and amortization expenses increased $22,000 or 4% from the comparable period last year. Lower depreciation from recent asset sales mitigated most of the increased depreciation from asset additions in 2013 and late 2012.

For the six months ended June 30, 2013, depreciation and amortization expense decreased $738,000 or 39% from the comparable period last year. During the second quarter of 2012, the Company reassessed the estimated useful lives of its property and equipment and increased the estimated useful lives of its trucks and equipment and of its disposal wells. This change in accounting estimate reduced depreciation and amortization expense by approximately $860,000 for the six months ended June 30, 2013 as compared to the same period last year. This decrease was partially offset by an increase in depreciation due to property and equipment additions during 2012 and 2013.

Results of Operations:

For the six months ended June 30, 2013, income from continuing operations increased $6.9 million to $7.2 million as compared to $338,000 for the comparable period last year. As discussed above, increased revenue from well enhancement services contributed to an $11.5 million increase in revenues and a 13 percentage point improvement in gross margins (27% to 40%) as compared to the same period last year. Lower depreciation and amortization expense due to the change in useful lives discussed above also contributed to the improvement in income from continuing operations.

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 at the beginning of 2013. 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 and six months ended June 30, 2013, the Company recognized income from continuing operations before taxes of approximately $311,000 and $7.0 million, respectively. The Company recognized a tax expense on this income from continuing operations of approximately $118,000 and $2.7 million, respectively. The effective tax rate on income from continuing operations was approximately 40% for the six months ended June 30, 2013. This high effective tax rate, as compared to a generally expected federal corporate tax rate of 34%, is primarily due to 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:

                                        For Three Months Ended           For Six Months Ended
                                               June 30,                        June 30,
                                          2013            2012           2013            2012
EBITDA* from continuing operations:
Income (Loss) from continuing
operations                            $    192,081     $ (347,112 )   $ 4,198,653     $    31,645
Add Back (Deduct)
Interest Expense                           251,655        217,841         565,707         426,833
Provision for income taxes                 118,443       (242,576 )     2,814,004         (38,730 )
Depreciation and amortization              586,365        564,581       1,150,200       1,888,377
EBITDA* from continuing operations       1,148,544        192,734       8,728,564       2,308,125
Add Back (Deduct)
Stock-based compensation                   260,054        144,651         328,776         189,287
(Gain) on sale and disposal of
equipment                                        -         (1,536 )      (306,457 )        (1,536 )
Interest and other income                  (10,215 )       (9,613 )       (24,827 )       (79,838 )
Adjusted EBITDA* from continuing
operations                            $  1,398,383     $  326,236     $ 8,726,056     $ 2,416,038

EBITDA* from discontinued
operations:
Income (Loss) from discontinued
operations                                  (1,174 )      (92,589 )       (73,715 )      (193,461 )
Add Back (Deduct)
Interest Expense                                 -            421             963           1,171
Income tax benefit                            (753 )      (59,197 )       (47,130 )      (123,686 )
Depreciation and amortization                    -         16,669               -          94,064
EBITDA* and Adjusted EBITDA* from
discontinued operations               $     (1,927 )   $ (134,696 )   $  (119,882 )   $  (221,912 )

*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 in assessing the Company's operating performance (see list of these items to follow below). None of these non-GAAP financial measures are recognized terms under GAAP and do not purport to be an alternative to net income as an indicator of operating performance or any other GAAP measure. Management uses these non-GAAP measures in its operational and financial decision-making, believing that it is useful to eliminate certain items in order to focus on what it deems to be a more reliable indicator of ongoing operating performance and the Company's ability to generate cash flow from operations. Management also believes that investors may find non-GAAP financial measures useful for the same reasons, although investors are cautioned that non-GAAP financial measures are not a substitute for GAAP disclosures.

All of the items included in the reconciliation from Net Income to EBITDA and from EBITDA to Adjusted EBITDA are either (i) non-cash items (e.g., depreciation, amortization of purchased intangibles, stock-based compensation, etc.) or (ii) items that management does not consider to be useful in assessing the Company's operating performance (e.g., income taxes, gain on sale of investments, loss on disposal of assets, etc.). In the case of the non-cash items, management believes that investors can better assess the Company's operating performance if the measures are presented without such items because, . . .

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