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ENSV > SEC Filings for ENSV > Form 10-Q on 13-Aug-2014All Recent SEC Filings

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Form 10-Q for ENSERVCO CORP


13-Aug-2014

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 month periods ended June 30, 2014 and 2013, and our financial condition, liquidity and capital resources as of June 30, 2014, and December 31, 2013. 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, 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 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.


BUSINESS OVERVIEW

Enservco Corporation provides well enhancement and fluid management services to the domestic onshore oil and natural gas industry. These services include frac water heating, hot oiling and acidizing (well enhancement services), and water hauling, fluid disposal, frac tank rental (fluid management services) and other general oilfield services. The Company owns and operates a fleet of more than 230 specialized trucks, trailers, frac tanks and other well-site related 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, the Green River and Powder River Basins in Wyoming 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. Following the table, please see management's discussion of
significant changes.



                                             For the Three Months Ended          For the Six Months Ended
                                                      June 30,                           June 30,
                                                2014              2013             2014             2013
FINANCIAL RESULTS:
Revenues                                   $    7,294,856     $  7,947,635     $ 32,536,901     $ 26,514,802
Cost of Revenue                                 6,449,925        5,702,716       22,741,942       16,262,539
Gross Profit                                      844,931        2,244,919        9,794,959       10,252,263
Gross Margin                                           12 %             28 %             30 %             39 %

(Loss) Income From Operations                  (1,153,989 )        550,038        5,958,590        7,127,198
Net (Loss) Income                          $     (851,019 )   $    190,907     $  3,334,937     $  4,124,938
(Loss) Earnings per Common Share -         $        (0.02 )   $       0.01     $       0.09     $       0.12
Diluted
Diluted weighted average number of
common shares outstanding                      36,514,889       35,668,552       38,592,699       35,407,183

OTHER:
Adjusted EBITDA*                           $     (355,629 )   $  1,396,457     $  7,510,757     $  8,606,174
Adjusted EBITDA* Margin                                -5 %             18 %             23 %             32 %

* 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:

As has been the Company's history, revenues, gross margins, and EBITDA margins for the second quarter tend to decrease considerably from the first quarter as the demand for frac water heating services declines resulting in a larger portion of revenues being derived from recurring maintenance services such as hot oiling, acidizing and water hauling.

In addition to the seasonal decrease in frac water heating services, the second quarter of 2014 was impacted by a well site incident in the DJ basin which halted frac water services for one of our largest customers. Although it was determined that the accident was a result of a failure of equipment owned by another service provider, the work stoppage significantly impacted our revenues towards the end of the heating season. Further, the labor costs we incurred to retain our work force during this stoppage in anticipation of returning to work also impacted our profitability. On a positive note, hot oil revenues for the quarter continued to grow significantly as compared to the same quarter last year as a result of increased equipment utilization, geographic expansion, and additional heating capacity (over the last two years, the Company has focused a greater portion of its CAPEX programs on its recurring, less seasonal maintenance services of hot oiling and acidizing). We anticipate that the this positive comparative trend in hot oiling and acidizing services will continue in future quarters.


Despite the impact of the decline in frac water heating revenues during the second quarter, revenues for the six months ended June 30, 2014 were significantly higher than the comparable period last year due to record revenues achieved during the first quarter of 2014. Additional frac water heating and hot oiling equipment, increased utilization of hot oiling equipment, and the impact of sharp increases in propane prices during the first quarter of this year all contributed to the six month revenue increase. Although showing a decline in 2014 as a percentage of revenues, gross profit and Adjusted EBITDA margins remain comparable to the prior year when adjusted for the impact of the increase in propane prices. This is due primarily to the mathematical impact of higher propane costs being passed along to customers with minimal markup thereby increasing revenues with no corresponding significant increase in profit.

Revenue Details:

Although the Company 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 by service offering and geographic region during the three and six months ended June 30, 2014 and 2013:

                                             For the Three months Ended          For the Six months Ended
                                                      June 30,                           June 30,
                                                2014              2013             2014             2013
BY SERVICE OFFERING:
Well Enhancement Services (1)              $    4,925,674      $ 5,766,948     $ 27,998,805     $ 22,187,843

Fluid Management (2)                            2,223,988        2,112,064        4,262,748        4,148,808

Other (3)                                         145,194           68,623          275,348          178,151

Total Revenues                             $    7,294,856      $ 7,947,635     $ 32,536,901     $ 26,514,802

The Company only does business in the United States, in what it believes are three geographically diverse regions. The following table sets forth revenue for the Company's three geographic regions during the three and six months ending June 30, 2014 and 2013:

                              For the Three months Ended          For the Six months Ended
                                       June 30,                           June 30,
                                 2014              2013             2014             2013
BY GEOGRAPHY:
Rocky Mountain Region (4)   $    4,218,372      $ 4,448,288     $ 18,453,330     $ 14,959,949

Eastern USA Region (5)             390,691          893,505        7,333,732        5,217,701

Central USA Region(6)            2,685,793        2,605,842        6,749,839        6,337,152

Total Revenues              $    7,294,856      $ 7,947,635     $ 32,536,901     $ 26,514,802

Notes to tables:

(1) Includes frac water heating, acidizing, hot oil services, and pressure testing.

(2) Includes water hauling, fluid disposal and frac tank rental.

(3) Includes construction and roustabout services.

(4) Includes the D-J Basin/Niobrara field (northern Colorado and southeastern Wyoming), the Powder River and Green River Basins (central Wyoming), the Bakken Field (western North Dakota and eastern Montana). Heat Waves is the only Company subsidiary operating in this region.

(5) Consists of 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.

(6) Includes the Mississippi Lime and Hugoton Field in Kansas, Oklahoma, and Texas. Both Dillco and Heat Waves engage in business operations in this region.


Revenues:

Service Offerings:

Well Enhancement Services: Well enhancement service revenues for the quarter ended June 30, 2014 declined $841,000 (15%) from the comparable period last year primarily due to a $1.8 million decline in frac water heating revenues. A halt in frac water heating services by a large customer in the DJ Basin described above was the primary reason for the decline. In addition, customer demand for frac water heating services in the Eastern USA region was lower than the comparable period last year as one customer suspended its drilling program and another customer modified its frac design to reduce heating requirements during the spring season. The decrease in frac water heating revenue was partially mitigated by an $876,000 (52%) increase in hot oil service revenue and $58,000 (11%) increase in acidizing services over the same quarter last year. The increase in these revenues was primarily attributable to (i) four hot trucks added at the end of 2013, (ii) increased utilization of existing equipment, and
(iii) expansion into Rock Springs, Wyoming which is a market with high demand for hot oiling and acidizing services.

For the six months ended June 30, 2014, well enhancement service revenues increased $5.8 million or 26% over the comparable period last year. With the addition of new frac water heating and hot oiling equipment we were able to meet increased customer demand during the first quarter of 2014 in the Rocky Mountain and Eastern USA Regions and therefore offset the second quarter decline described above. In addition, during the first quarter of 2014, due to a sudden and sharp increase in propane prices resulting in a change in billing for propane in our Rocky Mountain region that resulted in propane revenues increasing approximately $2.4 million from the comparable period last year

Fluid Management: Fluid management service revenues, which represent approximately 13% of our consolidated revenues for the six months ended June 30, 2014, remained relatively flat at $2.2 million for the quarter ended June 30, 2014 and $4.3 million for the six months ended June 30, 2014.

Other: Other revenues consist of well site construction and roustabout services, which represent less than 2% of revenues for the six months ended June 30, 2014, continue to remain an insignificant part of our business and are provided as ancillary services with our other services.

Geographic Areas:

For the quarter ended June 30, 2014, revenues in the Rocky Mountain Region, which primarily consist of well enhancement services, decreased $230,000 or 5% primarily due to the well-site accident described above which was partially offset by an increase in hot oil service revenue from the addition hot oil trucks and expansion of services into Rock Springs, Wyoming. For the six months ended June 30, 2014, revenues in this region increased $3.5 million or 23% from the comparable period last year due to several factors in the first quarter including (i) increased propane revenues from changing to a "cost plus" billing method, (ii) increased drilling and completion activity by several new and existing customers in the Niobrara Shale/DJ Basin, and (iii) revenues generated from the recent expansion of service into Rock Springs, WY.

Revenues in the Eastern USA region decreased $503,000 or 56% from the second quarter of last year primarily due to lower frac water heating demand from two customers. One customer suspended its drilling activities in the Utica shale to focus its resources in other locations and the other customer modified its frac design so that less water heating was required during the spring months. Despite the decline in the second quarter, revenues in the Eastern USA region increased $2.1 million or 41% for the six months ended June 30, 2014 as compared to the same period last year primarily due to continued expansion of our services into the Utica Shale market where exploration and production activity and demand for our services increased over the comparable period last year. During the first quarter of 2014, the Company added two new sizable customers in addition to experiencing revenue growth with its largest customer. Additionally, since propane costs are billed to customers, higher propane prices during the first quarter as compared to the prior year also contributed to the revenue increase during the six months ended June 30, 2014.


For the quarter ended June 30, 2014, revenues in the Central USA region increased $80,000 or 3% from the comparable period last year primarily due to a slight increase in fluid management revenue. For the six months ended June 30, 2014, revenues in the Central USA region increased $413,000 or 7% from the comparable period last year primarily due to increased frac water heating revenues generated from a customer in the Texas Panhandle during the first quarter.

Historical Seasonality of Revenues:

Because of the seasonality of our frac water heating and hot oiling business, revenues generated during the first and fourth quarters of our fiscal year, covering the months during what is known as our "heating season", are significantly higher than revenues earned during the second and third quarters of our fiscal year. In addition, the revenue mix of our service offerings also changes among quarters as our Well Enhancement services (which includes frac water heating and hot oiling) decrease as a percentage of total revenues and Fluid Management services and other services increase. 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 generated revenues of $33.7 million (73%) during the first and fourth quarters of 2013 compared to $12.7 million (27%) during the second and third quarters of 2013. In 2012, the Company earned revenues of $20.8 million (66%) during the first and fourth quarters of 2012, compared to $10.7 million (34%) during the second and third quarters of 2012. 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.

Cost of Revenues:

Cost of revenues for the quarter ended June 30, 2014 increased $747,000 or 13% from the comparable period last year primarily due to increased labor costs, higher fleet costs and expenses related to geographic expansion. As the Company's fleet of trucks has expanded, employee headcount and expenses such as insurance and repairs and maintenance have increased correspondingly.

Cost of revenues for the six months ended June 30, 2014 increased $6.5 million or 40% from the comparable period last year due to the same reasons as mentioned above for the first quarter but also were impacted by significantly higher propane costs from the same period last year.

Gross Profit:

Gross profit for the quarter ended June 30, 2014 decreased to 12% of revenues as compared to 28% of revenues for the comparative quarter last year. The decline in gross profit percentage was primarily due to lost revenues in the 2014 quarter relating to the well-site accident (as discussed in the Overview section above) coupled with expenses of retaining employees while waiting for operations to resume and increases in expenses related to fleet expansion at same time revenues were negatively impacted by the well-site incident and a revenue decrease in the Company's Eastern USA region.

Gross profit as a percentage of revenue declined to 30% for the six months June 30, 2014 as compared to 39% for the comparable period last year. In addition the factors mentioned above in the second quarter discussion, the largest impact on the gross profit percentage decline was due to the mathematical impact of higher propane costs experienced in the first quarter (see "Propane Impact Discussion" below). In addition, lower operating margins in our fluid management business contributed to the overall decline in our gross profit percentage from the same period last year.


Propane Impact Discussion:

Prior to January 2014, many of our frac water heating customers in the DJ Basin were billed on a "per barrel of water heated" basis which included the price of propane. As result, our gross profit percentage was immediately impacted once propane prices started to rise in December 2013 and was further impacted as prices continued to rise significantly in January 2014. In late January and early February, the Company was able to renegotiate pricing for propane with customers in the DJ Basin to a cost plus basis which is similar to the billing method we use in our other regions. Under this method, propane is billed at cost plus a fixed dollar per gallon mark-up. This change in pricing eliminated the negative impact on gross profit and gross profit percentage due to increases in propane prices. Management estimates that the impact to gross profit from the increase in propane prices under the old per barrel billing prior to price renegotiations was approximately $500,000 for the six months ended June 30, 2014.

Higher propane prices also tend to reduce gross profit percentages on frac heating customers which bill propane on a cost plus basis. Typically, our mark-up on propane is a fixed dollar amount per gallon. Therefore, as propane prices increase, this fixed dollar mark-up becomes a smaller percentage of the billed propane costs resulting in a lower gross profit percentages. The increase in propane prices also causes propane revenues to become a larger portion of total revenues. As a result, the lower propane margins tend to dilute our overall gross profit percentage. We estimate that the higher propane prices and corresponding impact diluted our overall gross profit percentage in 2014 by approximately 4% to 5% of revenues.

The Company anticipates that propane prices will continue to fluctuate in the future based on the relative demand and availability of propane in different geographic areas across the United States. Since the Company passes along the cost of propane to its customers on a cost plus mark-up basis, fluctuations in the price of propane will continue to impact revenues, cost of revenues and gross profit percentages. Decreases in propane prices will tend to reduce well enhancement revenues and costs of revenues and may increase our overall gross profit percentage as the dollar value of lower margin propane revenue and cost of revenue becomes a lower percentage of total revenue. Conversely, increases in propane prices similar to what the Company experienced during this quarter, will tend to increase well enhancement revenues and costs of revenues and may decrease our gross profit percentage, as the dollar value of lower margin propane revenue and cost of revenue becomes a higher percentage of total revenue.

General and Administrative Expenses:

For the quarter ended June 30, 2014, general and administrative expenses increased approximately $164,000 or 15% as compared to the same period last year. Costs associated with the Company's listing on the NYSE MKT national stock exchange and higher personnel costs related to the Company's expansion contributed to the increase. These increases in expenses were partially offset by a decrease in stock-based compensation costs during the quarter as compared to the prior year's quarter.

As a percentage of revenues, general and administrative expenses remained consistent at 7% for the six months ended June 30, 2014 as compared to the same period last year. For the six months ended June 30, 2014, there was an increase of approximately $458,000 or 23% as compared to the same period last year. Higher personnel costs to support the Company's growth including a CFO in April 2013 and the addition of two regional operations managers in the Company's Heat Waves operations in October 2013 and June 2014 were the primary reasons. Costs associated with the Company's listing on the NYSE MKT national stock exchange also contributed to the increase. Stock-based compensation costs were lower during the six months ended June 30, 2014 as compared to the six months ended June 30, 2013. In addition, during the 2013 period, franchise taxes were $121,000 lower due to a credit received.

Depreciation and Amortization:

For the three and six months ended June 30, 2014, depreciation and amortization expenses increased $140,000 or 24%, and $254,000 or 22%, respectively, from the comparable periods last year. The increase in depreciation expense was due to new equipment placed into service over the previous 12 months, which includes six bobtail frac water heaters, two double burner frac heaters, and eight hot oilers.


Income Taxes:

For the three months ended June 30, 2014, the Company recognized an income tax benefit of $543,000 on a pre-tax loss of $1.4 million as compared to $118,000 of income tax expense on pre-tax income of $309,000 for the comparable period last year. For the six months ended June 30, 2014, the Company recognized an income tax expense of $2.2 million on pre-tax income of $5.5 million as compared to $2.8 million of income tax expense on pre-tax income of $6.9 million for the comparable period last year.

The effective tax rate on income from operations was approximately 39% for the three and six months ended June 30, 2014. This 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,
                                                   2014            2013            2014            2013
EBITDA*
(Loss) Income                                   $  (851,019 )   $   190,907     $ 3.334.937     $ 4,124,938
Add Back (Deduct)
Interest Expense                                    241,903         251,655         495,428         566,670
Provision for income taxes (benefit) expense       (542,952 )       117,691       2,151,412       2,766,874
. . .
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