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ENSV > SEC Filings for ENSV > Form 10-K/A on 8-Oct-2013All Recent SEC Filings

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Form 10-K/A for ENSERVCO CORP


8-Oct-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion provides information regarding the results of operations for the years ended December 31, 2012 and 2011, and our financial condition, liquidity and capital resources as of December 31, 2012 and 2011. The financial statements and the notes thereto contain detailed information that should be referred to in conjunction with this discussion.

The following discussion and analysis should be read in conjunction with our historical consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K, as well as the Risk Factors included in our Form 10-K filed on March 28, 2013.

Cautionary Note Regarding Forward-Looking Statements

The information discussed in our annual report on Form 10-K and the Amendment 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 the section entitled "Risk Factors" included elsewhere in our annual report on Form 10-K, filed on March 28, 2013. 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 section and elsewhere in our annual report and the Amendment. 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 described below.

Going forward, and subject to the availability of adequate 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. The Company may require additional debt or equity financing to fund the costs necessary to expand the services it offers. There can be no assurance that the Company will be able to raise outside capital or have access to outside funding on reasonable terms, if at all.

Accounting Treatment of the Merger

The Merger Transaction, by which Dillco became a wholly-owned subsidiary of Enservco, was treated as a "reverse acquisition" for accounting purposes. In a reverse acquisition, although Aspen was considered to be the "legal acquirer" (that is, Aspen (now Enservco Corporation) survived as the parent corporation), Dillco was the "accounting acquirer" (that is because Dillco's and its subsidiaries' business was undeniably the more significant business).

Dillco's fiscal year end was December 31, whereas prior to the Merger Transaction Aspen's fiscal year end was June 30. Because Dillco was the accounting acquirer, the Merger Transaction resulted in the Company's fiscal year end being deemed to change to December 31. Thus, starting with its Form 10-Q filed for the quarter ended September 30, 2010, the Company began filing annual and quarterly reports based on the December 31 fiscal year end of Dillco rather than the former (pre-acquisition) June 30 fiscal year end of Aspen. Although not required to complete the change of the fiscal year, more than a majority of the Company's stockholders approved that change (as well as a change to the Company's tax year) by consent.

Because of the business combination by which Dillco became a wholly owned subsidiary of Enservco, no separate discussion regarding Aspen's financial condition or results of operations are included in this report.

Discussion of Operations for the years ended December 31, 2012 and 2011



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



                                                          Years Ended December 31,
                                         2012          % of Revenue          2011          % of Revenue

Revenues                            $ 31,497,787           100%         $ 23,904,384           100%
Cost of Revenue                       23,286,561           74%            17,828,834            75%
Gross Profit                           8,211,226           26%             6,075,550            25%

Operating Expenses
General and administrative
expenses                               3,550,438           11%             3,515,213            15%
Depreciation and amortization          2,960,153           10%             4,188,052            17%
Total operating expenses               6,510,591           21%             7,703,265            32%

Income (Loss) from Operations          1,700,635            5%            (1,627,715 )         (7%)
Other Expense                           (872,368 )         (3%)             (868,018 )         (4%)

Income (Loss) From Continuing
Operations Before Tax (Expense)
Benefit                                  828,267            2%            (2,495,733 )         (11%)
Income Tax (Expense) Benefit            (426,779 )         (1%)              897,923            4%
Income (Loss) From Continuing
Operations                          $    401,488            1%          $ (1,597,810 )         (7%)

Discontinued Operations
  Loss from discontinued
operations                              (797,636 )         (3%)             (605,650 )         (2%)
Income tax benefit                       311,078            1%               236,204            1%
 Loss on discontinued
operations, net of tax              $   (486,558 )         (2%)         $   (369,446 )         (1%)

Net Loss                            $    (85,070 )         (1%)         $ (1,967,256 )         (8%)

Earnings (Loss) per Common Share
- Basic
Income from continuing operations    $       0.02             $      (0.07 )
Discontinued operations              $      (0.02 )           $      (0.02 )
Net Loss                             $      (0.00 )           $      (0.09 )

Earnings (Loss) per Common Share
- Diluted
Income from continuing operations    $       0.02             $      (0.07 )
Discontinued operations              $      (0.02 )           $      (0.02 )
Net Loss                             $      (0.00 )           $      (0.09 )

Basic weighted average number of
common shares outstanding              23,389,151               21,778,866
Add: Dilutive shars assuming              927,718                       -
Diluted weighted average number of     24,316,869               21,778,866
common shares outstanding

Years Ended December 31, 2012 2011

EBITDA* From Continuing Operations:
  Income (Loss) From Continuing Operations      $   401,488     $ (1,597,810 )
  Add (Deduct):
  Interest expense                                  902,152          699,230
      Income tax expense (benefit)                  426,779         (897,923 )
      Depreciation and amortization               2,960,153        4,188,052
EBITDA* From Continuing Operations                4,690,572        2,391,549
Add (Deduct):
Stock-based compensation                            279,362          576,498
Warrants issued                                          -            46,353
Loss on disposal of equipment                         5,739          119,023
Gain on sale of investments                         (24,653 )             -
Other (income) expense                              (10,870 )         49,765
Adjusted EBITDA* From Continuing Operations     $ 4,940,150     $  3,183,188


EBITDA* From Discontinued Operations:
  Loss From Discontinued Operations             $  (486,558 )   $   (369,446 )
  Add (Deduct):
  Interest expense                                    1,770            7,714
      Income tax benefit                           (311,078 )       (236,204 )
      Depreciation and amortization                 128,935          511,588
EBITDA* From Discontinued Operations               (666,931 )        (86,348 )
Add (Deduct):
Stock-based compensation                                 -                -
Warrants issued                                          -                -
Loss on disposal of equipment                            -                -
Gain on sale of investments                              -                -
Other (income) expense                                   -                -
Adjusted EBITDA* From Discontinued Operations   $  (666,931 )   $    (86,348 )

*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 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 years ending December 31, 2012 and 2011 (for discussion around revenue from discontinued operations, see the Discontinued Operations section below as well as Note 3 to our consolidated financial statements within the Form 10K accompanying this report):

                                                       Years Ended December 31,
                                                         2012             2011
BY SERVICE OFFERING:
Fluid Management (1)                                $  9,503,952     $  9,568,718

Well Enhancement Services (2)                         21,601,870       13,776,450

Well Site Construction and Roustabout Services(6)        391,965          559,216

Total Revenues                                      $ 31,497,787     $ 23,904,384

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 years ending December 31, 2012 and 2011 (again, for discussion around revenue from discontinued operations, see the Discontinued Operations section below as well as Note 3 to our consolidated financial statements within the Form 10K accompanying this report):

                               Years Ended December 31,
                                 2012             2011
BY GEOGRAPHY:
Eastern USA Region (3)      $  3,566,082     $  6,690,568

Rocky Mountain Region (4)     16,299,862        6,837,628

Central USA Region (5)        11,631,843       10,376,188

Total Revenues              $ 31,497,787     $ 23,904,384

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 $7.6 million or 32% increase in our revenues from continuing operations in fiscal year 2012 as compared to fiscal year 2011 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 arediscussed 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. (See the Discontinued Operations section below for details of the revenues from discontinued operations.)

In general, on a service offering basis, the increase in revenues during 2012 included significant increases within our well enhancement services, and a slight reduction in revenues during the same period in our well site construction services. Revenues from fluid management services remained approximately the same during the twelve month period (though the revenues within this service line changed significantly on a regional level, as discussed further below).

In general, on a geographical basis, revenues from the eastern USA region decreased significantly during 2012, while revenues from operations in the Rocky Mountain region increased significantly during the same period. Revenues from operations in the Central USA region showed a slight increase during the twelve month period.

Specific factors that increased revenues during 2012, as compared to 2011:

(1) During September 2011 the Company opened two new operation centers 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);

(2) During 2012 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;

(3) 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 2011, weather patterns returned to normal during the end of the 2011-2012 heating season and again during the third and fourth quarters of 2012 which are the start of the 2012-2013 heating season. Also, due to our expansion and organic growth within our Rocky Mountain region where the winter season has a tendency to begin sooner in the fall and extend longer through the spring and summer, we were able to realize a longer heating season lasting into the summer of 2012 and we were also able to start the 2012 through 2013 heating season approximately two months sooner (beginning in mid-September 2012), as compared to prior years; 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. 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. This factor, standing on its own and not taking into account any other changes in revenues period-over-period, accounted for an increase of approximately $1.7 million of revenues generated from our Fluid Management services within these regions during 2012, as compared to 2011. 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 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 $3.1 million during 2012, as compared to 2011. Of the decrease in 2012, approximately $2.3 million relates to Well Enhancement services and $840,000 relates to Fluid Management services. These decreases are due to;

a. Higher-than-average temperatures and moderate weather during the 2011-2012 winter season (what has been called one of the warmest winters on record); and

b. A decrease in activity and demand due to low natural gas prices in the region.

Therefore, starting late in the fourth quarter of 2011 and continuing through the first quarter of 2012, we redeployed a majority of our equipment from our operation center in the Eastern USA region to operation centers within other regions.

(2) In spite of the expansion and organic growth within our Rocky Mountain and Central USA regions during 2012 as explained above, Fluid Management services within our Dillco Fluid Service, Inc. operations (part of our Central USA region) decreased by approximately $1.0 million during 2012, as compared to 2011, 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 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 fiscal year 2012, cost of revenues from continuing operations as a percentage of revenues remained relatively consistent when compared to the same period in 2011, resulting in consistent gross profit margins for both periods. (See the Discontinued Operations section below for details of the costs of revenues and gross profit from discontinued operations.)

This relatively consistent cost of revenues and consistent profitability rate for the two periods is primarily due to the following factors:

(1) Although historically we experience higher gross profit margins for Well Enhancement services and have historically derived approximately 55% of our consolidated revenues from this line of service, in 2012, due to new frac heating and hot oiling customers in our Rocky Mountain and Central USA regions, our Well Enhancement services consisted of approximately 65% of our 2012 consolidated revenues. The change in revenue mix increased our profitability in this service line during 2012; and

(2) Though new frac heating and hot oiling customers in our Rocky Mountain and Central USA regions provided for an increase to our revenue mix from Well Enhancement services during 2012, resulting in a positive swing in our profitability, this increased profitability was primarily realized only during the fourth quarter of 2012. As discussed throughout this report, 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 colder) through its frac heating and hot oiling services. As such, during the third and fourth quarters of 2011, in order to provide sufficient drivers and operators for the 2011-2012 heating season, the Company began fully staffing 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 during the 2011-2012 heating season, the expected demand for our heating services (frac heating and hot oiling) was delayed for several months. As such, during the first and second quarters of 2012, the lower-than expected revenues generated in those periods were not able to produce the same historical profit margins for those periods due to the increased direct costs incurred.

General and Administrative Expenses:

For the twelve months ended December 31, 2012, general and administrative expenses as a percentage of revenues decreased by 4%, as compared to the same period 2011. However, the dollar amount spent on our general and administrative expenses remained relatively consistent during the period. This consistency from 2012 to 2011 in dollars spent on general and administrative expenses is explained by the following factors:

Factors that increased general and administrative expenses during 2012, as compared to 2011:

(1) Professional fees and other expenses incurred in 2012 in connection with efforts to refinance our debt obligations;

(2) Costs incurred to hire outside consultants to manage and oversee our human resources and investor relations activities; and

(3) Costs incurred in order to employ and retain experienced personnel to meet corporate management and staff needs; which included increased salary, benefits, and bonus expenses during the period.

Factors that decreased general and administrative expenses during 2012, as compared to 2011:

(1) Termination of a key corporate employee during early 2012 which resulted in decreased salary and wages expense for 2012; and

(2) Elimination of non-cash expenses for stock options granted to terminated employees, primarily due to the termination of the key corporate employee noted above. (All future expenses associated with terminated employees were eliminated in the current period due to forfeiture or cancellation of the option agreements upon termination of the employees and all expenses related to any unvested stock options were reversed, resulting in a net decrease to general and administrative expense for 2012.)

Depreciation and Amortization:

Our depreciation and amortization expenses decreased as a percentage of revenues for 2012, as compared to 2011, by approximately 7%, or a decrease in depreciation and amortization expense of approximately $1.2 million or 29%. 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 2012 by approximately $2.6 million (pre-tax difference), as . . .

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