Notes to the Financial Statements
1. Organization, Business Operations and Significant Policies
Nature of Business
Energy Services Acquisition Corp. (the "Company") was incorporated in
Delaware on March 31, 2006 as a blank check company whose objective is to
acquire a operating business or businesses.
Activity through September 30, 2006 relates to the Company's formation and
the public offering described below. The Company has selected September 30 as
its fiscal year-end. Activity from September 30, 2006 through December 31, 2007
has been limited to the identification and analysis of potential acquisition
candidates for the Company.
The registration statement for the Company's initial public offering (the
"Public Offering") (as described in note 2) was declared effective August 29,
2006. The Company completed the Public Offering on September 6, 2006. Preceding
the completion of the Public Offering certain officers, directors and initial
shareholders of the Company purchased an aggregate of 3,076,923 warrants at
$0.65 per warrant from the Company in a private placement (the "Private
Placement"). The warrants sold in the Private Placement were identical to the
warrants sold in the public offering, except that the Private Placement warrants
are not registered at this time. The Company received net proceeds from the
Private Placement and the Offering of approximately $48,698,494 (note 2).
The Company's management has broad discretion with respect to the specific
application of the net proceeds of this Public Offering, although substantially
all of the net proceeds of this Public Offering are intended to be generally
applied toward consummating a business combination with an operating business
("Business Combination"). Furthermore, there is no assurance that the company
will be able to successfully affect a Business Combination. Upon the closing of
the Public Offering, $50,004,000 (including $1,032,000 for the Underwriters
non-accountable expense allowance) was deposited in a trust account ("Trust
Account") and invested in United States Government Securities defined as any
Treasury Bill issued by the United States having a maturity of one hundred and
eighty days or less or in money market funds meeting certain conditions under
Rule 2a-7 promulgated under the Investment Company Act of 1940. Such funds will
be invested in the manner outlined until the earlier of (i) the consummation of
its first Business Combination or (ii) liquidation of the Company. The placing
of the funds in the Trust Account may not protect those funds from third party
claims against the Company. Although the Company will seek to have all vendors,
prospective target businesses or other entities it engages, execute agreements
with the Company waiving any right, title, interest or claim of any kind in or
to any monies held in the Trust Account, there is no guarantee that they will
execute such agreements. If the Company liquidates prior to the consummation of
a Business Acquisition, the officers and directors shall under certain customary
circumstances, be personally liable to pay any debts, obligations and
liabilities of the Company to various vendors, prospective target businesses or
other entities that are owed money by it for services rendered or contracted for
or products sold to it in excess of the working capital not held in the Trust
Fund. Interest or earnings from funds invested in the Trust Account up to
$1,200,000 net of taxes may be used to pay for business, legal and accounting
due diligence on prospective acquisitions, continuing general and administrative
expenses, and income taxes. The Company, after signing a definitive agreement
for the acquisition of a target business, is required to submit such transaction
for stockholder approval. In the event that stockholders owning 20% or more of
the shares sold in the Public Offering vote against the Business Combination and
exercise their conversion rights described below, the Business Combination will
not be consummated. All of the Company's stockholders prior to the public
offering, including all of the officers and directors of the Company ("Initial
Stockholders"), have agreed to vote their 2,150,000 founding shares of common
stock in accordance with the vote of the majority in interest of all other
stockholders of the Company ("Public Stockholders") with respect to any Business
Combination. After consummation of a Business Combination, these voting
safeguards will no longer be applicable.
7
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
With respect to a Business Combination which is approved and consummated,
any public stockholder presented with the right to approve a Business
Acquisition can instead demand that his stock be converted into his pro rata
share of the Trust Fund upon the consummation of the transaction if he votes
against such transaction. Such Public Stockholders are entitled to receive their
per share interest in the Trust Account computed without regard to the shares
held by the Initial Stockholders.
The Company's Certificate of Incorporation provides for mandatory
liquidation of the Company in the event that the Company does not consummate a
Business Combination within 18 months from the date of the consummation of the
Public Offering, or 24 months from the consummation of the Public offering if
certain extension criteria have been satisfied. In the event of liquidation, it
is likely that the per share value of the residual assets remaining available
for distribution (including Trust Fund assets) will be less than the initial
public offering price per share in the Public Offering.
We have neither engaged in any business operations nor generated any
operating revenue to date. Our only activities since inception have been
organizational activities and those necessary to prepare for our public
offering, and thereafter, pursuing potential acquisitions of target businesses.
We will not generate any operating revenues until after completion of a business
combination. We have generated non-operating income in the form of interest
income on our cash and cash equivalents and short term investments.
Interim Financial Statements
The accompanying unaudited financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
and should be read in conjunction with the Company's audited financial
statements and footnotes thereto for the year ended September 30, 2007 and for
the periods from inception (March 31, 2006) through September 30, 2007 and 2006
included in the Company's Form 10-K filed December 19, 2007. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been omitted pursuant to such rules and regulations. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The financial statements reflect all adjustments
(consisting primarily of normal recurring adjustments) that are, in the opinion
of management necessary for a fair presentation of the Company's financial
position and results of operations. The operating results for the period ended
December 31, 2007 are not necessarily indicative of the results to be expected
for any other interim period of any future year.
Investments Held in Trust
The Company's restricted investments held in the Trust Fund at December 31,
2007 are comprised of an institutional money fund and a United States Treasury
Bill with a maturity of January 31, 2008 in the amounts of $40,887,273 and
$10,470,760, respectively.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109
("SFAS No. 109), "Accounting for Income Taxes" which establishes financial
accounting and reporting standards for the effects of income taxes that result
from an enterprise's activities during the current and preceding years. It
8
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
requires an asset and liability approach for financial accounting and reporting
for income taxes.
Earnings Per Share
Net income per share is computed on the basis of the weighted average
number of common shares outstanding during the period.
Basic net income per share is computed by dividing income available to
common shareholders by the weighted average common shares outstanding for the
period including shares subject to possible redemption. Diluted earnings per
share reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then share in the earnings of the
entity.
Fair Value of Financial Instruments
The fair values of the Company's assets and liabilities that qualify as
financial instruments under SFAS No. 107 approximate their carrying amounts at
September 30, 2007 and at December 31, 2007.
Use of Estimates
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of presentation in the financial statements, cash and cash
equivalents are defined as cash, interest bearing deposits and non interest
bearing demand deposits at financial institutions and trust companies with
maturities of less than one year.
Recently Issued Accounting Pronouncements
Energy Services Acquisition Corp. does not expect the adoption of recently
issued accounting pronouncements to have a significant impact on the Company's
results of operations, financial position or cash flows.
2. Public Offering
On September 6, 2006, the Company sold 8,600,000 units ("Units") in the
Public Offering at a price of $6.00 per Unit. Each Unit consists of one share of
the Company's common stock, $.0001 par value, and two Redeemable Common Stock
Purchase Warrants ("Warrants"). Each Warrant entitles the holder to purchase
from the Company one share of common stock at an exercise price of $5.00 per
share commencing on the later of the consummation by the Company of a Business
Acquisition, as defined below, or one year after the Effective Date and
terminating on the fifth anniversary of the date of the Public Offering. The
Company may redeem the Warrants for a redemption price of $0.01 per Warrant at
any time if notice of not less than 30 days is given and the last sale price of
the Common Stock has been at least $8.50 on 20 of the 30 trading days ending on
9
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
the third day prior to the day on which notice is given. Separate trading of the
warrants and the share of common stock began on or about October 3, 2006.
For the warrants, the Company is only required to use its best efforts to
cause a registration statement covering issuance of the shares of common stock
underlying the warrants to be declared effective and, once effective, only to
use its best efforts to maintain the effectiveness of the registration
statement. The Company will not be obligated to deliver securities, and there
are no contractual penalties for failure to deliver securities, if a
registration statement is not effective at the time of exercise. Additionally,
in no event is the Company obligated to settle any warrant, in whole or in part,
for cash in the event it is unable to deliver registered shares of common stock
and, if it is unable to do so, the warrants could expire unexercised. The
holders of warrants do not have the rights or privileges of holders of common
stock, including any voting rights, until such holders exercise their warrants
and receive shares of the Company's common stock.
In connection with the offering, the Company paid the underwriters of the
Public Offering an underwriting discount of 6% of the gross proceeds of the
Public Offering ($3,096,000) and a non-accountable expense allowance of 2% of
the gross proceeds ($1,032,000). However, the underwriters have agreed that the
expense allowance amount will be placed in the Trust Account until the earlier
of the completion of a business combination or the liquidation of the Trust
Account. In the event that the business combination is not consummated, the
underwriter will forfeit the 2.0% being deferred.
The Company also issued to the underwriter at the time of closing of the
Offering a unit purchase option, for $100, to purchase up to 450,000 units at an
exercise price of $7.50. The unit purchase option shall be exercisable any time,
in whole or in part, between the first anniversary date and the fifth
anniversary date of the Public Offering.
For the option, the Company is only required to use its best efforts to
cause a registration statement covering the resale of the units and the
securities comprising the units and, once effective, only to use its best
efforts to maintain the effectiveness of the registration statement. There are
no contractual penalties for failure to effect the registration of the units and
the securities comprising the units. Additionally, in no event, is the Company
obligated to settle the option, the units or the warrants included in the units,
in whole or in part, for cash in the event it is unable to effect the
registration of the units and the securities comprising the units. The holder or
holders of the options do not have the rights or privileges of holders of common
stock, including any voting rights, until such holder or holders exercise the
options and receive shares of the Company's common stock.
The Company accounted for the fair value of the unit purchase option,
inclusive of the receipt of $100 cash payment, as an expense of the Public
Offering resulting in a charge directly to stockholders' equity. The Company
estimated the fair value of this unit purchase option at $1,642,500 ($3.65 Per
Unit) using a Black-Scholes option pricing model. The fair value of the unit
purchase option granted to the underwriter is estimated as of the date of grant
using the following assumptions: (1) expected volatility of 75.7 %, (2) risk
free interest rate of 5.1 % and (3) expected life of 5 years.
3. Commitments
The Company presently occupies office space provided by an affiliate of one
of the Company's executive officers. Such affiliate has agreed that until the
Company consummates a Business Combination, it will make such office space, as
well as certain office and secretarial services available to the Company, as may
be required by the Company from time to time. The Company has agreed to pay such
affiliate up to $5,000 per month for reimbursement of expenses expended on
behalf of the Company commencing on the date of the effective date of the Public
Offering. Energy Services Acquisition Corp. (A Development Stage Enterprise)
Notes to the Financial Statements
10
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
Pursuant to letter agreements with the Company and the Underwriter, the
Initial Stockholders have waived their right to receive distributions with
respect to their founding shares upon the Company's liquidation.
The Company's Initial Stockholders purchased in the aggregate, 3,076,923 of
the Warrants from the Company at a purchase price of $.65 per Warrant
($2,000,000 in the aggregate) in a private placement. These warrants, and the
warrants issued as part of the Units in the Public Offerings, do not have any
liquidation rights.
The Initial Stockholders are entitled to registration rights with respect
to their founding shares pursuant to an agreement signed on the effective date
of the Public Offering. The Holders of the majority of these shares are entitled
to make up to two demands that the Company register these shares at any time and
from time to time, commencing with the date the initial shares are disbursed
from the escrow account. In addition, the Initial Stockholders have certain
"piggyback" registration rights on the registration statements filed subsequent
to the release date from escrow.
At any time and from time to time after the release date from escrow and
prior to the fifth anniversary date hereof, the holders of at least 51% of the
Registrable Securities initially held by the underwriters may make two written
demands for a Demand Registration.
4. Note Payable
Prior to the offering, the Company issued an unsecured non-interest bearing
promissory note for $150,000 to Marshall T. Reynolds, Chairman and Chief
Executive Officer. The note was repaid on September 6, 2006 from the proceeds of
the Public Offering. On September 6, 2006, Mr. Reynolds loaned the Company
$150,000. The loan will be repaid without interest from working capital and is
also unsecured.
5. Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be determined
from time to time by the Board of Directors.
6. Common Stock
On March 31, 2006, the Company issued 2,500,000 shares to the initial
stockholders. On August 30, 2006 the Company entered into an underwriting
agreement with respect to the public sale of up to 8,600,000 units, reflecting a
reduction in the size of the Public Offering from 10,000,000 units as previously
contemplated to 8,600,000 units. In connection with such modification, and in
order to maintain the percentage ownership of its stockholders prior to the
Public Offering, the Company's initial stockholders surrendered for cancellation
an aggregate of 350,000 shares of common stock. On the date the shares were
surrendered, management determined the fair value of the Company's common stock
to be $4.70 per share.
7. Concentration of Credit Risk
At December 31, 2007, the Company maintained a checking account at a
financial institution, the balance of which exceeded the federally insured limit
by $664,395 at September 30, 2007 and by $609,117 at December 31, 2007.
11
Energy Services Acquisition Corp.
(A Development Stage Enterprise)
Notes to the Financial Statements
8. Income Taxes
Energy Services Acquisition Corp. (ESA) uses the liability method, where
deferred tax assets and liabilities are determined based on the expected future
tax consequences of temporary differences between the carrying amounts of assets
and liabilities for financial and income tax reporting purposes. There are no
timing differences and therefore no deferred tax asset or liability at December
31, 2007. There are no net operating loss carry forwards at December 31, 2007.
At December 31, 2007, income tax expense consisted of the following:
Three months Three months March 31, 2006-
ended December 31, ended December 31, December 31,
2007 2006 2007
Taxes currently payable
Federal $166,000 $ 43,000 $ 893,000
State 40,000 200,000 200,000
------------ ---------- -----------
Total $206,000 $243,000 $1,093,000
============ ========== ===========
|
The Company is incorporated in Delaware and is subject to franchise taxes, which
are shown as a component of operating expenses.
9. Subsequent Event
On January 24, 2008 Energy Services Acquisition Corp. (ESA) announced
separate agreements to acquire two companies, S.T. Pipeline and GasSearch
Drilling Services (GDS). Pursuant to the agreement to acquire S.T. Pipeline,
shareholders of S.T. Pipeline shall have a right to receive up to $15,200 per
share in cash, or $19.0 million in the aggregate, subject to a reduction to
reflect the book value of certain assets and a further reduction of $3.0 million
that will be paid to S.T. Pipeline shareholders on a deferred basis. The
agreement to Acquire GDS calls for the Shareholder of GDS to receive Stock
valued at $3.5 million based upon the arithmetic average of the closing price of
Energy Services common stock as reported on the American Stock Exchange for the
five consecutive trading days beginning three trading days before the
announcement of the GDS Acquisition, $2.5 million dollars in cash and $17.5
million in cash to pay GDS' current debt and capital expenditures. The
transactions closing is conditioned on receipt of ESA shareholders approval and
holders of less than 20% of the shares of Energy Services common stock voting
against the transaction and electing to convert their Energy Services common
stock into cash from the trust fund established in connection with Energy
Services initial public offering, among other conditions.
On February 12, 2008, ESA was advised that COG Finance Corporation elected
to exercise an option to acquire GDS pursuant to a provision in a finance
agreement between COG Finance and GDS. Energy Services is currently assessing
the viability of proceeding with this transaction.
On February 13, 2008, ESA entered into a letter of intent to acquire C.J.
Hughes Construction Company, Inc. C.J. Hughes is an underground utility services
company located in Huntington, West Virginia. C.J. Hughes may be considered an
affiliate of ESA since Marshall T. Reynolds and Neal Scaggs are shareholders,
and Edsel R. Burns is the President and a shareholder of C.J. Hughes. Mr.
Reynolds is the Chairman of the Board, Chief Executive Officer and Secretary of
ESA. Mr. Scaggs and Mr. Burns are directors of ESA.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward looking Statements
The statements discussed in this Report include forward looking statements that
involve risks and uncertainties, including the timely delivery and acceptance of
the Company's products and the other risks detailed from time to time in the
Company's reports filed with the Securities and Exchange Commission.
The following discussion should be read in conjunction with the Company's
unaudited financial statements and footnotes thereto contained in this quarterly
report filed on Form 10-Q and the Company's audited financial statements and the
footnotes thereto for the year ended September 30, 2007 and for the periods from
inception (March 31, 2006) to September 30, 2007 and 2006 included in the
Company's Annual Report on Form 10-K filed on December 19, 2007.
The Company was formed on March 31, 2006 to serve as a vehicle to effect a
merger, capital stock exchange, asset acquisition or other similar business
combination with an entity or entities that have operating businesses. We
completed our initial public offering ("IPO") on September 6, 2006. Our entire
activity from inception through consummation of the IPO on September 6, 2006 was
to prepare for and complete our IPO. Since the consummation of our IPO on
September 6, 2006, our activity has been limited to the identification and
analysis of potential acquisition candidates for the Company.
We are currently in the process of evaluating and identifying targets for a
business combination. We intend to utilize cash derived from the proceeds of our
IPO, our capital stock, debt or a combination of cash, capital stock and debt in
effecting a business combination.
Results of Operations
Net income for the year to date and quarter ended December 31, 2007 was $354,786
, which consisted of interest from the trust fund totaling $619,160 offset by
$58,374 of expenses, $44,790 of which related to formation and operating cost,
$2,379 of which related to due diligence expenses relating to potential
acquisitions, $11,205 relating to Delaware franchise tax and income taxes of
$206,000. This income compares to an income of $348,312 for the same period the
prior year which consisted of interest from the trust fund totaling $654,819
offset by $63,507 of expenses, $30,170 of which related to formation and
operating cost, $18,400 of which related to due diligence expenses relating to
potential acquisitions, $14,937 relating to Delaware franchise tax and income
taxes of $243,000.
Net income from inception (March 31, 2006) to December 31, 2007 was $1,823,268,
which consisted of interest income from the trust fund and other interest
totaling $3,409,168 which was offset by $492,900 of expenses. $307,567 of the
expenses related to formation and operating costs, $95,576 related to due
diligence expenses relating to potential acquisitions, $89,757 related to
Delaware franchise tax and income taxes of $1,093,000.
Financial Condition
From September 30, 2007 to December 31, 2007, the assets of Energy Services grew
from $51,526,659 to $51,850,606. This growth was driven primarily by the
increase in Cash and Cash Equivalents held in trust which increased from
$49,711,430 at September 30, 2007 to $50,326,033 at December 31, 2007 due to
income earned on the funds held in trust. Liabilities decreased slightly from
$1,349,564 at September 30, 2007 to $1,318,725 due to a pay down of accrued
liabilities. The Common Stock subject to possible redemption increased from
$10,143,000 at September 30, 2007 to $10,263,000 at December 31, 2007. This
increase was due to the increase in the value per share of the funds held in
trust. Equity increased from $40,034,095 at September 30, 2007 to $40,268,881 at
December 31, 2007.
13
Liquidity and Capital Resources
We consummated our initial public offering on September 6, 2006. Gross proceeds
from our initial public offering were $51,600,000. We paid a total of $4,128,000
in underwriting discounts and commissions, and approximately $789,000 was paid
for costs and expenses related to the offering. After deducting the underwriting
discounts and commissions and the offering expenses, the total net proceeds to
us from the offering that were deposited into a trust fund were $48,972,000, (or
approximately $5.69 per unit sold in the offering). An additional $1,032,000,
representing the underwriter's non-accountable expense allowance, was also
placed in the trust account. As of December 31, 2007, approximately
$50,326,033(or approximately $5.85 per share sold in the offering) is being held
in the trust account. We intend to use substantially all of the net proceeds of
the offering to acquire a target business. To the extent that our capital stock
is used in whole or in part as consideration to effect a business combination,
the proceeds held in the trust fund as well as any other net proceeds not
expended will be used to finance the operations of the target business. Our
working capital will be generated solely from interest earned on the amount held
in trust. We are limited to $1,200,000 of such interest (net of taxes) to fund
working capital. We believe the interest earned on the amount held in trust will
be sufficient to fund our operations. From September 6, 2006 through September
6, 2008, we anticipate approximately $350,000 of expenses for legal, accounting
and other expenses attendant to the due diligence investigations, structuring
and negotiating of a business combination, $240,000 for expenses for the due
diligence and investigation of a target business, $120,000 in reimbursement
expenses to Chapman Printing Co. ($5,000 per month for two years), $110,000 of
expenses in legal and accounting fees relating to our SEC reporting obligations
and $305,000 for general working capital that will be used for tax payments,
miscellaneous expenses and reserves, including approximately $100,000 (through
January 1, 2008) for director and officer liability insurance premiums. We do
not believe we will need to raise additional funds following this offering in
order to meet the expenditures required for operating our business. However, we
may need to raise additional funds through a private offering of debt or equity
securities if such funds are required to consummate a business combination that
is presented to us. We would only consummate such a financing simultaneously
with the consummation of a business combination.
In connection with our initial public offering, we issued to the underwriters,
for $100, an option to purchase up to a total of 450,000 units. The units
issuable upon exercise of this purchase option are identical to the units we
sold in our initial public offering except that the warrants included in the
option have an exercise price of $6.25. We estimated that the fair value of this
option was approximately $1,642,500 ($3.65 per unit underlying such option)
using a Black-Scholes option-pricing model. The fair value of the option granted
to the underwriter was estimated as of the date of grant using the following
assumptions: (1) expected volatility of 75.7%, (2) risk-free interest rate of
5.1% and (3) expected life of five years.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign
exchanges, commodity prices, equity prices, and other market-driven rates or
prices. We are not presently engaged in and, if a suitable business target is
not identified by us prior to the prescribed liquidation date of the trust fund,
we may not engage in, any substantive commercial business. Accordingly, we are
not and, until such time as we consummate a business combination, we will not
be, exposed to risks associated with foreign exchange rates, commodity prices,
equity prices or other market-driven rates or prices. The net proceeds of our
initial public offering held in the trust fund have been invested only in money
market funds meeting certain conditions under Rule 2a-7 promulgated under the
Investment Company Act of 1940. Given our limited risk in our exposure to money
market funds, we do not view the interest rate risk to be significant.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
14
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed in the reports that Energy Services Acquisition Corp. files or submits
under the Securities Exchange Act of 1934, is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
There has been no change in Energy Services Acquisition Corp.'s internal control
over financial reporting during Energy Services Acquisition Corp.'s first
quarter of fiscal year 2008 that has materially affected, or is reasonably
likely to materially affect, Energy Services Acquisition Corp.'s internal
control over financial reporting.
15
PART II
OTHER INFORMATION
ITEM 1A. Risk Factors
Please see the information disclosed in the "Risk Factors" section of our Form
10-K as filed with the Securities and Exchange Commission on December 19, 2007,
and which is incorporated herein by reference.