UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2009
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
act of 1934
For the transition period from _______________ to _________________
Commission File Number: 001-32998
Energy Services of America Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 20-4606266
--------- -------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
100 Industrial Lane, Huntington, West Virginia 25702
---------------------------------------------- -------
(Address of Principal Executive Office) (Zip Code)
(304) 399-6315
---------------
(Registrant's Telephone Number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
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required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO .
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes X No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Smaller Reporting Company [X]
As of May 10, 2009 there were issued and outstanding 12,092,307 shares of the
Registrant's Common Stock.
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
----- ----
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
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Part 1: Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Cash Flows 3
Consolidated Statements of Changes in Stockholders' Equity 4
Notes to Unaudited Consolidated Financial Statements 5
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
Part II: Other Information
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 4. Submission of Matters to a vote of Security Holders 26
Item 6. Exhibits 26
Signatures 27
ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, September 30,
Assets 2009 2008
------------- --------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 10,394,339 $ 13,811,661
Accounts receivable-trade 14,136,210 38,578,810
Allowance for doubtful accounts (366,585) (363,819)
Retainages receivable 4,840,592 6,303,690
Other receivables 175,232 182,598
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,526,326 5,272,669
Prepaid expenses and other 3,838,256 1,121,101
------------ ------------
Total Current Assets 35,544,370 64,906,710
------------ ------------
Property, plant and equipment, at cost 34,817,892 33,851,552
less accumulated depreciation (3,458,148) (548,089)
------------ ------------
31,359,744 33,303,463
Goodwill 35,489,643 35,489,643
------------ ------------
Total Assets $102,393,757 $133,699,816
============ ============
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt $ 9,418,614 $ 15,040,033
Lines of credit 6,550,000 9,796,208
Accounts payable 4,634,536 11,336,680
Accrued expenses and other current liabilities 6,159,399 9,364,341
Billings in excess of costs and estimated earnings
on uncompleted contracts 436,829 509,227
Income taxes payable - 1,461,461
------------ ------------
Total Current Liabilities 27,199,378 47,507,950
------------ ------------
Long-term debt, less current maturities 14,099,713 18,272,186
Long-term debt, payable to shareholder 5,900,000 6,000,000
Deferred income taxes payable - 1,662,463
------------ ------------
Total Liabilities 47,199,091 73,442,599
------------ ------------
Stockholders' equity
Preferred, $.0001 par value - -
Authorized 1,000,000 shares, none issued
Common stock, $.0001 par value
Authorized 50,000,000 shares
Issued and outstanding 12,092,307
shares 1,209 1,209
Additional paid in capital 55,976,368 55,976,368
Retained earnings (782,911) 4,279,640
------------ ------------
Stockholders' equity 55,194,666 60,257,217
------------ ------------
Total liabilities and stockholders' equity $102,393,757 $133,699,816
============ =============
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The Accompanying Notes are an integral Part of These Financial Statements
1
ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED INCOME STATEMENTS
Unaudited
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
2009 2008 2009 2008
------------------- ----------------- ---------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 18,944,621 $ - $ 52,623,667 $ -
Cost of revenues 21,202,424 - 56,477,545 -
------------------- ----------------- ---------------- ----------------
Gross profit (loss) (2,257,803) - (3,853,878) -
Selling and administrative expenses 1,952,884 140,645 3,667,634 199,019
------------------- ----------------- ---------------- ----------------
Income (loss) from operations (4,210,687) (140,645) (7,521,512) (199,019)
Other income (expense)
Interest income 13,537 463,425 49,810 1,082,585
Other nonoperating income (expense) (406,900) - (245,085) -
Interest expense (456,197) - (872,969) -
Gain (loss) on sale of equipment (1,533) - (9,097) -
------------------- ----------------- ---------------- ----------------
(851,093) 463,425 (1,077,341) 1,082,585
------------------- ----------------- ---------------- ----------------
Income (loss) before income taxes (5,061,780) 322,780 (8,598,853) 883,566
Income tax expense (benefit) (2,193,738) 138,000 (3,536,302) 344,000
------------------- ----------------- ---------------- ----------------
Net income (loss) $ (2,868,042) $ 184,780 $ (5,062,551) $ 539,566
=================== ================= ================ ================
Net income (loss) per share basic $ (0.24) $ 0.02 $ (0.42) $ 0.05
=================== ================= ================ ================
Net income (loss) per share diluted $ (0.24) $ 0.01 $ (0.42) $ 0.04
=================== ================= ================ ================
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The Accompanying Notes are an integral Part of These Financial Statements
2
ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended Six Months Ended
March 31, March 31,
Operating activities 2009 2008
----------------- ----------------
Net income (loss) $ (5,062,551) $ 539,566
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation expense 2,911,986 -
(Gain) loss on sale/disposal of equipment 9,097 -
Accrued income and accretion of investments in trust - (507,436)
(Increase) decrease in contracts receivable 24,445,366 -
(Increase) decrease in retainage receivable 1,463,098 -
(Increase) decrease in other receivables 7,366 -
(Increase) decrease in cost and estimated earnings in excess of billings
on uncompleted contracts 2,746,343 -
(Increase) decrease in prepaid expenses (2,717,154) (459,302)
Increase (decrease) in accounts payable (6,702,143) -
Increase (decrease) in accrued expenses (3,204,943) -
Increase (decrease) in billings in excess of cost and estimated earnings
on uncompleted contracts (72,398) -
Increase (decrease) in income taxes payable (1,461,461) -
Increase (decrease) in deferred income tax payable (1,662,463) -
----------- -----------
Net cash (used in) provided by operating activities 10,700,143 (427,172)
----------- -----------
Investing activities
Purchase of investments held in trust fund - (21,000,000)
Proceeds from maturites of investments held in trust - 21,000,000
Investment in property & equipment (984,596) -
Proceeds from sales of property and equipment 7,232 -
----------- -----------
Net cash (used in) provided by investing activities (977,364) -
----------- -----------
Financing activities
Loans from shareholder (100,000) -
Borrowings on lines of credit, net of (repayments) (3,246,209) -
Proceeds from long term debt 834,019 -
Principal payments on long term debt (10,627,911) -
----------- -----------
Net cash (used in) provided by financing activities (13,140,101) -
----------- -----------
Increase (decrease) in cash and cash equivalents (3,417,322) (427,172)
Cash beginning of period 13,811,661 756,782
----------- -----------
Cash end of period $10,394,339 $ 329,610
=========== ===========
Supplemental schedule of noncash investing and financing activities
Purchases of property & equipment under financing agreements $ 48,566 $ -
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid $ 916,326 $ -
=========== ===========
Income taxes paid $ 1,500,000 $ 567,500
=========== ===========
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The Accompanying Notes are an integral Part of These Financial Statements
3
ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For Six Months Ended March 31, 2008 and 2009
Unaudited
Total
Common Stock Additional Paid Retained Stockholders'
Shares Amount in Capital Earnings Equity
------------------- --------------- --------- --------------
Balance at September 30, 2007 9,030,860 $ 903 $38,564,710 $1,468,482 $40,034,095
Accretion related to common stock subject to
possible redemption - - (102,048) - (102,048)
Net Income (Loss) - - - 539,566 539,566
---------- ------- ----------- ---------- -----------
Balance at March 31, 2008 9,030,860 $ 903 $38,462,662 $2,008,048 $40,471,613
========== ======= =========== ========== ===========
Balance at September 30, 2008 12,092,307 $1,209 $55,976,368 $4,279,640 $60,257,217
Net Income (Loss) - - - (5,062,551) (5,062,551)
---------- ------- ----------- ---------- -----------
Balance at March 31, 2009 12,092,307 $1,209 $55,976,368 $ (782,911) $55,194,666
========== ======= =========== ========== ===========
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The Accompanying Notes are an integral Part of These Financial Statements
4
ENERGY SERVICES OF AMERICA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Energy Services of America Corporation, formerly known as Energy Services
Acquisition Corp., (the Company) was incorporated in Delaware on March 31, 2006
as a blank check company whose objective was to acquire an operating business or
businesses. On September 6, 2006 the Company sold 8,600,000 units in the public
offering at a price of $6.00 per unit. Each unit consisted of one share of the
Company's common stock and two common stock purchase warrants for the purchase
of a share of common stock at $5.00. The warrants could not be exercised until
the later of the completion of the business acquisition or one year from issue
date. The Company operated as a blank check company until August 15, 2008. On
that date the Company acquired S.T. Pipeline, Inc. and C.J. Hughes Construction
Company, Inc. with proceeds from the Company's Initial Public Offering. S. T.
Pipeline and C. J Hughes are operated as wholly owned subsidiaries of the
Company.
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 years ended September 30, 2008 and 2007
included in the Company's Form 10-K filed December 29, 2008. Certain information
and footnote disclosures normally included in annual financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been omitted pursuant to interim financial
reporting rules and regulations of the "SEC". 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 periods ended March 31, 2008 and 2007 are not
necessarily indicative of the results to be expected for the full year.
Principles of Consolidation
The consolidated financial statements of Energy Services include the
accounts of Energy Services and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Unless the context requires otherwise, references to Energy Services include
Energy Services and its consolidated subsidiaries.
Reclassifications
Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the current year.
5
Critical Accounting Policies
The preparation of these consolidated financial statements requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities known to exist at
the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting period. We evaluate our estimates on
an ongoing basis, based on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. There
can be no assurance that actual results will not differ from those estimates.
Management believes the following accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Revenue Recognition We recognize revenue for cost plus and unit price
contracts when services are performed or units are completed. These jobs are
typically billed at month end for revenue earned. Revenue from fixed price
contracts are recognized under the percentage of completion method, measured by
the percentage of costs incurred to date to total estimated costs for each
contract. Such contracts generally provide that the customer accept completion
of progress to date and compensate us for services rendered, measured typically
in terms of units installed, hours expended or some other measure of progress.
Contract costs typically include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the revisions
are determined.
Current and Non Current Accounts Receivable and Provision for Doubtful
Accounts The Company provides an allowance for doubtful accounts when collection
of an account is considered doubtful. Inherent in the assessment of the
allowance for doubtful accounts are certain judgments and estimates relating to,
among others, our customer's access to capital, our customer's willingness or
ability to pay, general economic conditions and the ongoing relationship with
the customer. While most of our Customers are large well capitalized companies,
should they experience material changes in their revenues and cash flows or
incur other difficulties and not be able to pay the amounts owed, this could
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cause reduced cash flows and losses in excess of our current reserves. At March
31, 2009, the management review deemed that the allowance for doubtful accounts
was adequate to cover any anticipated losses.
Goodwill The Company's goodwill was acquired in two separate purchase
transactions that were consummated on August 15, 2008. The Company has selected
July 1 for its annual impairment testing date which is the first day of the
fourth fiscal quarter. In accordance with paragraph 28 of SFAS 142 goodwill will
be tested for impairment between annual testing dates if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. The Company has not preformed a
goodwill impairment test in the current year.
2. UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts as of
March 31, 2009 and September 30, 2008 are summarized as follows:
March 31, 2009 September 30, 2008
Costs incurred on contracts in progress $24,615,270 $57,723,456
Estimated earnings, net of estimated losses 2,096,726 6,562,540
----------- -----------
26,711,996 64,285,996
Less Billings to date 24,622,499 59,522,554
----------- -----------
$ 2,089,497 $ 4,763,442
=========== ===========
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,526,326 5,272,669
Less Billings in excess of costs and estimated
earnings on uncompleted contracts 436,829 509,227
----------- -----------
$ 2,089,497 $ 4,763,442
=========== ===========
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3. PROPERTY AND EQUIPMENT
March 31, 2009 September 30, 2008
Property and Equipment consists of the following:
Land $ 702,000 $ 702,000
Buildings and leasehold improvements 248,043 253,944
Operating equipment and vehicles 33,543,415 32,859,797
Office equipment, furniture and fixtures 324,434 35,811
----------- ------------
34,817,892 33,851,552
Less Accumulated Depreciation and Amortization 3,458,148 548,089
Property and equipment net $31,359,744 $ 33,303,463
=========== ============
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7
4. RELATED PARTY DEBT
Total long-term debt at March 31, 2009 was $29.4 million, of which, $11.8
million was payable to certain directors, officers and former owners of an
acquired company. The related party debt consist of a $5.9 million note due in
August 2010, a $3 million note payable on August 15 each year at $1 million per
year over the next three years and a $2.9 million note payable as collections of
receivables that were outstanding at August 15, 2008, which are associated with
the receivables of an acquired subsidiary, are received. The remaining $17.6
million consists of debt incurred for capital acquisitions made by the
subsidiaries.
5. EARNINGS PER SHARE
The amounts used to compute the basic and diluted earnings per share for
the three months ended March 31, 2009 and and six months ended March 31, 2009
and the three months ended March 31, 2008 and the six months ended March 31,
2008 are illustrated below:
Three Months Ended Six Months Ended
March 31, March 31,
2009 2008 2009 2008
Net Income (Loss) from continuing operations available
to common shareholders $(2,868,042) $ 184,780 $(5,062,551) $ 539,566
Weighted average shares outstanding basic 12,092,307 10,750,000 12,092,307 10,750,000
Effect of dilutive warrants -0- 2,567,820 -0- 2,505,519
Weighted average shares outstanding diluted 12,092,307 13,317,820 12,092,307 13,255,519
=========== ========== ========== ==========
Net Income (Loss) per share-basic $ (0.24) $ 0.02 $ (0.42) $ 0.05
=========== ========== ========== ==========
Net Income (Loss) per share-diluted $ (0.24) $ 0.01 $ (0.42) $ 0.04
=========== ======
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6. STOCK PURCHASE PLAN
At the annual meeting of the shareholders on November 19, 2008 of the
shareholders approved the establishment of an employee stock purchase plan. The
stock purchase plan authorizes the issuance of up to 1,200,000 shares of common
stock for purchase by eligible employees. A participant's stock purchased during
a calendar year may not exceed the lesser of (a) a percentage of the
participant's compensation or a total amount as specified by the compensation
committee of the Board, or (b) $25,000. The stock will be offered at a purchase
price of at least 85% of its fair market value on the date of purchase.
The major plan provisions cover the purposes of the plan, effective date
and duration, administration, eligibility, stock type, stock purchase
limitations, price of stock, participation election, payroll deductions, payment
for stock, date of purchase, termination of agreement, termination of
employment, recapitalization, change of control, assignability, Stockholder
rights, compliance with code section 423, amendment and termination, application
of funds, tax withholdings, governing laws, employment at will and arbitration.
The Company accounts for its equity based compensation under SFAS No.
123(R), Share-Based Payments. Under the provisions of SFAS No. 123(R), the
Company has adopted a fair value based method of accounting for employee equity
based plans, whereby compensation cost is measured at the grant date based on
the value of the award (the discount on the stock purchase) and is recognized at
the purchase date, as there is no vesting period. As a result, compensation
expense relating to the stock purchase plan will be reflected in net income as
part of "Salaries and employee benefits" on the Consolidated Statements of
Income.
There have been no agreements with any employees made under this plan as of
the period ending March 31, 2009.
7. COMMITMENTS AND CONTINGENCIES
On February 6, 2009, the company filed with the SEC a registration
statement relating to the registration of 2,150,000 shares of common stock held
by initial shareholders of the Company and 2,964,763 shares issued in connection
with the acquisition of C.J. Hughes Construction Company, Inc. as well as
3,076,923 warrants to purchase shares of common stock held by initial
shareholders of the Company and the 3,076,923 shares underlying those warrants.
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion of the financial condition and
results of operations of Energy Services in conjunction with the "Unaudited Pro
Forma Consolidated Financial information " appearing in this section of this
report as well as the historical financial statements and related notes
contained elsewhere herein. Among other things, those historical consolidated
financial statements include more detailed information regarding the basis of
presentation for the following information.
Forward Looking Statements
Within Energy Services' financial statements and this discussion and
analysis of the financial condition and results of operations, there are
included statements reflecting assumptions, expectations, projections,
intentions or beliefs about future events that are intended as "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995. You can
identify these statements by the fact that they do not relate strictly to
historical or current facts. They use words such as "anticipate," "estimate,"
"project," "forecast," "may," "will," "should," "could," "expect," "believe,"
"intend" and other words of similar meaning.
These forward-looking statements are not guarantees of future performance
and involve or rely on a number of risks, uncertainties, and assumptions that
are difficult to predict or beyond Energy Services' control. Energy Services has
based its forward-looking statements on management's beliefs and assumptions
based on information available to management at the time the statements are
made. Actual outcomes and results may differ materially from what is expressed,
implied and forecasted by forward-looking statements and any or all of Energy
Services' forward-looking statements may turn out to be wrong. They can be
affected by inaccurate assumptions and by known or unknown risks and
uncertainties.
All of the forward-looking statements, whether written or oral, are
expressly qualified by these cautionary statements and any other cautionary
statements that may accompany such forward-looking statements or that are
otherwise included in this report. In addition, Energy Services does not
undertake and expressly disclaims any obligation to update or revise any
forward-looking statements to reflect events or circumstances after the date of
this report or otherwise.
Company Overview
Energy Services 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 operating business. It operated as a "Blank Check
Company" until August 15, 2008 at which time it completed the acquisitions of
S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. S.T. Pipeline and
C.J. Hughes are considered predecessor companies to Energy Services. The
discussion of financial condition and operating results include the results of
the two predecessors prior to the acquisition. This discussion is based in part
on pro-forma income statement information. The Company acquired S.T. Pipeline
for $16.2 million in cash and $3.0 million in a promissory note. The C.J. Hughes
purchase price totalled $34 million, one half of which was in cash and one half
9
in Energy Services common stock. The acquisitions are accounted for under
the purchase method and the financial results of both acquisitions are included
in the results of Energy Services from the date of acquisition.
Since the acquisitions, Energy Services has been engaged in one segment of
operations which is providing contracting services for energy related companies.
Currently Energy Services primarily services the gas, oil and electrical
industries though it does some other incidental work. For the gas industry, the
Company is primarily engaged in the construction, replacement and repair of
natural gas pipelines and storage facilities for utility companies and private
natural gas companies. Energy Services is involved in the construction of both
interstate and intrastate pipelines, with an emphasis on the latter. For the oil
industry the Company provides a variety of services relating to pipeline,
storage facilities and plant work. For the electrical industry, the Company
provides a full range of electrical installations and repairs including
substation and switchyard services, site preparation, packaged buildings,
transformers and other ancillary work with regards thereto. Energy Services'
other services include liquid pipeline construction, pump station construction,
production facility construction, water and sewer pipeline installations,
various maintenance and repair services and other services related to pipeline
construction. The majority of the Company's customers are located in West
Virginia, Virginia, Ohio, Kentucky and North Carolina. The Company builds, but
does not own, natural gas pipelines for its customers that are part of both
interstate and intrastate pipeline systems that move natural gas from producing
regions to consumption regions as well as building and replacing gas line
services to individual customers of the various utility companies.
The Company enters into various types of contracts, including competitive
unit price, cost-plus (or time and materials basis) and fixed price (lump sum)
contracts. The terms of the contracts will vary from job to job and customer to
customer though most contracts are on the basis of either unit pricing in which
the Company agrees to do the work for a price per unit of work performed or for
a fixed amount for the entire project. Most of the Company's projects are
completed within one year of the start of the work. On occasion, the Company's
customers will require the posting of performance and/or payment bonds upon
execution of the contract, depending upon the nature of the work performed.
The Company generally recognizes revenue on unit price and cost-plus
contracts when units are completed or services are performed. Fixed price
contracts usually results in recording revenues as work on the contract
progresses on a percentage of completion basis. Under this accounting method,
revenue is recognized based on the percentage of total costs incurred to date in
proportion to total estimated costs to complete the contract. Many contacts also
include retainage provisions under which a percentage of the contract price is
withheld until the project is complete and has been accepted by the customer.
Second Quarter Overview
The following is an overview for the three months ended March 31, 2009:
Sales $18.9 million
Cost of Revenues 21.2 million
Gross Profit (Loss) ( 2.3)million
Selling & Adm. 2.0 million
Net Income(Loss) (2.9) million
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The second quarter for the Company is typically a slow period for our
business line. The slower cycle of our business has been exacerbated by the
current recessionary economic conditions we find ourselves in. The Company
adjusted the estimated profit at completion on three projects during this
quarter resulting in a reduction in profits of $1.5 million. The Company also
experienced
10
excessive down time on its equipment fleet during this period. The Company used
this time to perform needed maintenance to ensure the equipment is in good
working order when our workflow increases. Equipment costs are charged to direct
costs and then typically allocated to the jobs. This quarter did not produce
enough job revenue to cover those costs resulting in a reduction in gross
margins of approximately $800,000. Selling and administrative costs for this
quarter remained at first quarter levels. We do not expect these costs to
increase in the remaining quarters for fiscal year ending September 30, 2009.
The Company's cash and cash equivalents decreased by $3 million, with
working capital decreasing by $4.9 million during this quarter. Accounts
receivable and retainage receivable decreased by $4.0 million during the
quarter, and long-term debt was reduced by $1.3 million.
Seasonality: Fluctuation of Results
Our revenues and results of operations can be and usually are subject to
seasonal variations. These variations are the result of weather, customer
spending patterns, bidding seasons and holidays. The second fiscal quarter of
the year is typically the slowest in terms of revenues because inclement weather
conditions cause delays in production and customers usually do not plan large
projects during that time. While usually better than the second fiscal quarter,
the first fiscal quarter often has some inclement weather which can cause delays
in production, reducing the revenues the Company receives and/or increasing the
production costs. Also in the first quarter there are holidays which can limit
production. The third fiscal quarter usually is least impacted by weather and
usually has the largest number of projects underway.
In addition to the fluctuations discussed above, the pipeline industry can
be highly cyclical, reflecting variances in capital expenditures in relation to
energy price fluctuations. As a result, our volume of business may be adversely
affected by where our customers' businesses are in relation to energy
infrastructure expenditures and thereby their financial condition as to their
capital needs and access to capital to finance those needs.
Accordingly, our operating results in any particular quarter or year may
not be indicative of the results that can be expected for any other quarter or
any other year. You should read "Understanding Gross Margins" and "Outlook"
below for discussions of trends and challenges that may affect our financial
condition and results of operations.
Understanding Gross Margins
Our gross margin is gross profit expressed as a percentage of revenues.
Cost of revenues consists primarily of salaries, wages and some benefits to
employees, depreciation, fuel and other equipment, equipment rentals,
subcontracted services, portions of insurance, facilities expense, materials and
parts and supplies. Various factors, some controllable, some not impact our
gross margin on a quarterly or annual basis.
Seasonal. As discussed above, seasonal patterns can have a significant
impact on gross margins. Usually, business is slower in the winter months when
construction is difficult to undertake versus the warmer months.
Weather. Adverse or favorable weather conditions can impact gross margin in
a given period. Periods of wet weather, snow or rainfall, as well severe
temperature extremes can severely impact production and therefore
11
negatively impact revenues and margins. Conversely, periods of dry weather with
moderate temperatures can positively impact revenues and margins due to the
opportunity for increased production and efficiencies.
Revenue Mix. The mix of revenues between customer types and types of work
for various customers will impact gross margins. Some projects will have more
margins while others that are extremely competitive in bidding may have narrower
margins.
Service and Maintenance versus installation. In general, installation work
has a higher gross margin than maintenance work. This is due to the fact that
installation work usually is more of a fixed price nature and therefore has
higher risks involved. Accordingly, a higher portion of the revenue mix from
installation work typically will result in higher margins.
Subcontract work. Work that is subcontracted to other service providers
generally has lower gross margins. Increases in subcontract work as a percentage
of total revenues in a given period may contribute to a decrease in gross
margin.
Materials versus Labor. Typically materials supplied on projects have
smaller margins than labor. Accordingly, projects with a higher material cost in
relation to the entire job will have a lower overall margin.
Depreciation. Depreciation is included in our cost of revenue. This is a
common practice in the energy services industry, but can make comparability to
other companies difficult.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
compensation and related benefits to management, administrative salaries and
benefits, marketing, communications, office and utility costs, professional
fees, bad debt expense, letter of credit fees, general liability insurance and
miscellaneous other expenses.
Results of Operations
Because the Company had no operations during the six months ended March 31,
2008 the information set forth below for the six months ended March 31, 2008 and
the corresponding analysis of the comparative six months ended March 31, 2009
and March 31, 2008 is based on actual results for the six months ended March 31,
2009 and pro forma results as of March 31, 2008. This information is based upon
and should be read in conjunction with the more detailed information included in
the section titled "Unaudited Pro Forma Consolidated Financial Information."
12
Energy Services of America Corporation
ST Pipeline,Inc/CJ Hughes
(Unaudited) Pro Forma (Unaudited) Pro Forma
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
3/31/2009 3/31/2008 3/31/2009 3/31/2008
Contract Revenues $ 18,944,621 $ 32,742,278 $ 52,623,667 $ 95,490,132
Cost of Revenues 21,202,424 29,605,895 56,477,545 74,770,774
Gross Profit (Loss) (2,257,803) 3,136,383 (3,853,878) 20,719,358
Selling and administrative expenses 1,952,884 2,334,798 3,667,634 3,763,400
Income ( Loss) from operations before taxes (4,210,687) 801,585 (7,521,512) 16,955,958
Interest Income 13,537 (130,978) 49,810 297,722
Interest Expense (456,197) (404,599) (872,969) (865,106)
Other Income (Expense) (408,433) 193,792 (254,182) 468,329
Income (Loss) before tax (5,061,780) 459,800 (8,598,853) 16,856,903
Income taxes (Benefit) (2,193,738) 270,255 (3,536,302) 6,835,122
Income (Loss) before variable interest entity (2,868,042) 189,545 (5,062,551) 10,021,781
Income(Loss) attributable to variable interest entity - 34,661 - 34,661
Net Income (Loss) $ (2,868,042) $ 224,206 $(5,062,551) $ 10,056,442
Weighted average shares outstanding- basic 12,092,307 12,092,307 12,092,307 12,092,307
Weighted average shares- diluted 12,092,307 14,660,127 12,092,307 14,597,834
Net income (Loss) per share- basic $ (0.24) $ 0.02 $ (0.42) $ 0.83
Net income (Loss) per share- diluted $ (0.24) $ 0.02 $ (0.42) $ 0.69
|
13
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary financial information for our pro
forma consolidated results for the six months ended March 31, 2008. The
information is presented to show what the consolidated income statements would
have looked like had the transactions with S.T. Pipeline and C.J. Hughes been
completed at the beginning of that period. The information includes such
adjustments as deemed necessary to reflect the transactions in a proper manner.
This information should be read in conjunction with the notes thereto as well as
the financial statements for the various entities included elsewhere in this
document.
The unaudited pro forma information is for informational purposes only and
is not intended to represent or be indicative of the consolidated results of
operations that we would have reported had the merger transactions been
completed as of the date presented and should not be taken as representative of
our future consolidated results of operations.
14
Energy Services Acquisition Corp.
ST Pipeline, Inc./C J Hughes
Pro Forma Combined, Condensed, Consolidated Statement of Income
(Unaudited)
ESA ST Pipeline C J Hughes
Three Months Three Months Three Months
Ended Ended ST Pipeline Ended C J Hughes
March 31, March 31, Pro Forma March 31, Pro Forma
2008 2008 Adjustments 2008 Adjustments
-------------- --------------- ------------ ------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Contract Revenues $ - $ 11,421,980 $ - $ 21,320,298 $ -
Cost of Revenues - 10,442,500 (2,703)(1) 18,962,190 203,909 (1)
-------------- -------------- ------------ ------------ ------------
Gross Profit - 979,480 2,703 2,358,108 (203,909)
Selling and administrative expenses 140,645 588,444 - 1,605,709 -
-------------- -------------- ------------ ------------ -------------
Income( Loss) from operations before taxes (140,645) 391,036 2,703 752,399 (203,909)
Interest Income 463,425 19,320 (299,557)(2) 18,283 (313,276)(2)
Interest Expense - (49,947) (56,250)(3) (298,402) -
Other Income (Expense) - 111,164 - 82,629 -
-------------- -------------- ------------ ----------- -------------
Income before tax 322,780 471,573 (353,104) 554,909 (517,185)
Income taxes (Benefit) 138,000 - 47,387 (4) 77,447 15,090 (4)
-------------- -------------- ------------ ----------- ------------
Income (Loss) before variable interest entity 184,780 471,573 (400,491) 477,462 (532,275)
Income(Loss) attributable to variable
interest entity - - - 34,661 -
-------------- -------------- ------------ ----------- ------------
Net Income (Loss) $ 184,780 $ 471,573 $ (400,491) $ 512,123 $ (532,275)
============== ============== ============ =========== ============
Weighted average shares outstanding- basic 10,750,000 2,964,763
-------------- ------------
Weighted average shares- diluted 13,317,820 2,964,763
============== ------------
Net Income (Loss) per share- basic $ 0.02
==============
Net Income (Loss) per share- diluted $ 0.01
==============
|
Redemption Pro Forma
Adjustments Combined
------------- --------------
(Unaudited) (Unaudited)
Contract Revenues $ - $ 32,742,278
Cost of Revenues - 29,605,895
-------------- --------------
Gross Profit - 3,136,383
Selling and administrative expenses - 2,334,798
-------------- --------------
Income( Loss) from operations before taxes - 801,585
Interest Income (19,173) (130,978)
Interest Expense - (404,599)
Other Income (Expense) - 193,792
-------------- --------------
Income before tax (19,173)(5 ) 459,800
Income taxes (Benefit) (7,669)(6) 270,255
-------------- --------------
Income (Loss) before variable interest entity (11,504) 189,545
Income(Loss) attributable to variable
interest entity - 34,661
-------------- --------------
Net Income (Loss) $ (11,504) $ 224,206
============== ==============
Weighted average shares outstanding- basic (1,622,456) 12,092,307
-------------- -------------
Weighted average shares- diluted (1,622,456) 14,660,127
-------------- -------------
Net Income (Loss) per share- basic $ 0.02
=============
Net Income (Loss) per share- diluted $ 0.02
==============
|
15
Energy Services Acquisition Corp.
ST Pipeline, Inc./C J Hughes
Pro Forma Combined, Condensed, Consolidated Statement of Income
(Unaudited)
ESA ST Pipeline C J Hughes
Six months Six months Six months
Ended Ended ST Pipeline Ended C J Hughes
March 31, March 31, Pro Forma March 31, Pro Forma
2008 2008 Adjustments 2008 Adjustments
------------- ------------------------------------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Contract Revenues $ 48,942,684 $ 46,547,448
Cost of Revenues 32,851,724 $ 300,000 (1) 41,211,113 $ 407,937 (1)
------------- -------------- ---------- ------------ -------------
Gross Profit 16,090,960 (300,000) 5,336,335 (407,937)
Selling and administrative expenses $ 199,019 1,007,734 2,556,647
------------- -------------- ----------- ------------ -------------
Income( Loss) from operations before taxes (199,019) 15,083,226 (300,000) 2,779,688 (407,937)
Interest Income 1,082,585 29,894 (349,555)(2) 39,629 (366,189)(2)
Interest Expense (130,863) (112,500)(3) (621,743)
Other Income (Expense) 385,639 82,690
------------- -------------- ----------- ----------- -------------
Income (Loss) before tax 883,566 15,367,896 (762,055) 2,280,264 (774,126)
Income taxes (Benefit) 344,000 - 5,842,336 (4) 77,447 626,796 (4)
------------- -------------- ----------- ----------- -------------
Income (Loss) before variable interest entity 539,566 15,367,896 (6,604,391) 2,202,817 (1,400,922)
Income (Loss) attributable to variable
interest entity 34,661 34,661
------------- -------------- ---------- ----------- -------------
Net Income (Loss) $ 539,566 $ 15,367,896 $(6,604,391) $ 2,237,478 $(1,400,922)
============= ============== =========== =========== =============
Weighted average shares outstanding- basic 10,750,000 2,964,771
------------- -------------
Weighted average shares- diluted 13,255,519 2,964,771
============= -------------
Net Income (Loss) per share- basic $ 0.05
=============
Net income (Loss) per share- diluted $ 0.04
=============
|
Redemption Pro Forma
Adjustments Combined
------------- -------------
(Unaudited) (Unaudited)
Contract Revenues $ - $ 95,490,132
Cost of Revenues - 74,770,774
------------- --------------
Gross Profit - 20,719,358
Selling and administrative expenses $ - 3,763,400
------------- --------------
Income( Loss) from operations before taxes - 16,955,958
Interest Income (138,642) 297,722
Interest Expense - (865,106)
Other Income (Expense) - 468,329
------------- --------------
Income (Loss) before tax (138,642)(5) 16,856,903
Income taxes (Benefit) (55,457)(6) 6,835,122
------------- --------------
Income (Loss) before variable interest entity (83,185) 10,021,781
Income (Loss) attributable to variable
interest entity 34,661
------------- --------------
Net Income (Loss) $ (83,185) $ 10,056,442
============= ==============
Weighted average shares outstanding- basic (1,622,456) 12,092,315
------------- --------------
Weighted average shares- diluted (1,622,456) 14,597,834
------------- --------------
Net Income (Loss) per share- basic $ 0.83
==============
Net income (Loss) per share- diluted $ 0.69
==============
|
16
Notes to pro forma income statement
(1) These adjustments represent the added depreciation created from the mark to
market of the fixed assets of S.T. Pipeline ($6.1 million) and C.J. Hughes
($4.1 million) as required by purchase accounting. The added depreciation
is based on a five year life.
(2) These adjustments reflect the interest income lost from the cash payments
made to the shareholders of S.T. Pipeline ($16.3 million) and C.J. Hughes
($17.2 million), etc. had the transaction been completed at the beginning
of each period and therefore not earning interest. The actual rates of
interest of 4.9 % and 4.25% for the three and six month periods,
respectfully, was used in the calculations.
(3) This adjustment is to reflect the added interest cost that would have
occurred relating to the $13 .0 million of notes at 7.5% interest issued to
the Shareholders of S.T. Pipeline had the transaction been in place for the
respective periods.
(4) S.T. Pipeline and C.J. Hughes were both Sub S corporations and therefore
had no Federal income taxes. These entries are to reflect the estimated
taxes for these companies had they been a part of Energy Services during
the respective periods. The combined tax rates used were 40%.
(5) In accordance with the bylaws of Energy Services, shareholders had the
right to vote against the transactions and request their shares be
redeemed. This entry reflects the lost interest income ($9.7 Million at
1.23%) from the purchase of those shares so redeemed, calculated using the
actual rates earned on the investment account for each period.
(6) This entry is to reflect the tax savings related to the interest income
lost on the payments to redeem shares. The combined tax rate is 40%.
2009 Actual compared to 2008 Pro Forma
Revenues. Revenues decreased by $13.8 million (42.1%) to $18.9 million for
the three months ended March 31, 2009, and by $42.9 million (44.9%) to $52.6
million for the six months ended March 31, 2009 compared to the pro-forma
revenue for the same periods ending in 2008. This decrease was primarily due to
major projects at S.T. Pipeline and C.J. Hughes completed in 2008 that did not
reoccur in 2009. Several projects with projected start dates in 2009 have been
delayed or cancelled due to current economic conditions.
Cost of Revenues. Costs of Revenues decreased by $8.4 million (28.4%) to
$21.2 million for the three months ended March 31, 2009 and by $18.3 million
17
(24.5%) to $56.5 million for the six months ended March 31, 2009 compared to the
pro-forma cost of revenue for the same periods ending in 2008. The major reason
for the decrease was due to the completion of some major projects in 2008 with
no new similar projects starting in 2009.
Gross Profit (Loss). Gross profit decreased by $5.3 million (172%) for the
three months ended March 31, 2009 to a loss of $2.3 million, and by $24.6
million (118.6%) to a loss of $3.9 million for the six months ended March 31,
2009 compared to the pro-forma gross profit for the same periods in 2008. The
loss was the result of two particular projects at one of the operating
subsidiaries which lost $3.2 million for the quarter ended December 31, 2008.
There was a combination of events that resulted in the losses on these jobs.
First, the customer has several other projects that were supposed to start in
the quarter that they decided to delay. The pricing has been established on
these projects under the assumption of getting the added work. When that did not
occur many costs that would have been spread over all the jobs then had to be
absorbed into these two existing jobs. Also, there were unplanned work stoppages
initiated by the customer for the Thanksgiving and Christmas holidays which
resulted in added payroll costs of approximately $450,000. These jobs have been
completed and since this was an unusual occurrence for portions of projects
linked together to get delayed and normally when planning a project you know of
scheduled work stoppages, we believe that the results of these jobs are not
indicative of future performance. Total revenues decreased $42.9 million (44.9%)
for the six months ended March 31, 2009 which was the other major factor in the
reduction of gross margin.
Selling and administrative expenses. Selling, general and administrative
expenses decreased by $382,000 (16.4%) for the three months ended March 31, 2009
and by $96,000 (2.5%) for the six months ended March 31, 2009 compared to the
pro-forma selling, general and administrative expenses for the same periods in
2008. These decreases were primarily due to the timing differences in certain
administrative expenses, such as bonuses, accounting and professional fees.
Income (Loss) from Operations. Income from operations decreased $5 million
(625.3%) to a loss of $4.2 million for the three months ended March 31, 2009 and
decreased by $24.5 million (144.4%) to a loss of $7.5 million for the six months
ended March 31, 2009. This is a function of the previous categories.
Interest Income. Interest income increased by $144,000 (110.3%) for the
three months ended March 31, 2009 and decreased by $248,000 (83.3%) for the six
months ended March 31, 2009. As a result of decreased revenues and cash
collections, the Company used more of its cash reserves than anticipated during
the period causing the interest income to go down.
Interest Expense Interest Expense decreased by $52,000 (12.8%) for the
three months ended March 31, 2009 and decreased by $8,000 (0.9%) for the six
months ended March 31, 2009. This decrease was primarily driven by the reduction
in the prime interest rate on which most of our financing is based as well as
reductions made on installment loans.
Other Income. Other income decreased by $602,000 (310.8%) for the three
months ended March 31, 2009 and decreased by $723,000 (154.3%) the six months
ended March 31, 2009. This decrease was driven by the reduction of rental of
equipment to outside parties.
Net Income(Loss). Net Income decreased by $3.1 million (1379.2%) to a net
loss of $2.9 million for the three months ended March 31, 2009 and decreased
$15.1 million (150.3%) to a net loss of $5.1 million for the six months ended
March 31, 2009. The decreases occurred due to the various changes as previously
discussed, principally the large decline in gross profit to a net loss on
contracts.
2008 Historical Operating Results
18
Energy Services of America Corporation (Standalone)
The company was a blank check company for the six month period ending March
31, 2008 and had no operations. Net income for the Company for the quarter ended
March 31, 2008 was $184,780, which consisted of interest from the trust fund
totaling $463,425 offset by $140,645 of expenses, $120,940 of which related to
formation and operating cost, $8,500 of which related to due diligence expenses
relating to potential acquisitions, $11,205 relating to Delaware franchise tax
and income taxes of $138,000. Net income for the six months ended March 31, 2008
was $539,566, which consisted of interest from the trust fund totaling
$1,082,585 offset by $199,019 of expenses, $165,730 of which related to
formation and operating cost, $10,879 of which related to due diligence expenses
relating to potential acquisitions, $22,410 relating to Delaware franchise tax
and income taxes of $344,000.
S.T. Pipeline
Net income for the three months ended March 31, 2008 was $471,573 which
consisted of contract revenues of $11.4 million, $19,320 of interest income and
$111,164 of other income offset by $10.4 million of cost of revenues, $588,444
of general and administrative expenses and $49,947 of interest expense.
Approximately $6.5 million of the contact revenue for this quarter was generated
from the completion of one large project in January 2008. Net income for the six
ended March 31, 2008 was $15.4 million which consisted of contract revenues of
$48.9 million, $29,894 of interest income and $385,639 of other income offset by
$32.9 million of cost of revenues, $1,007,734 of general and administrative
expenses and $130,863 of interest expense. Revenue of $39.6 million was
generated from the one large project during this six month ending period.
C.J. Hughes Construction Inc.
Net income for the three months ended March 31, 2008 was $512,123 which
consisted of contract revenues of $21.3 million, $18,283 of interest income,
$82,629 of other income and $34,661 of income attributable to variable interest
entity offset by $19 million of cost of revenues, $1.6 million of general and
administrative expenses, $298,402 of interest expense and $77,447 of income
taxes. Contract revenue for this period was generated from several contracts,
none exceeding 10% of the total revenue for the period. Net income for the six
months ended March 31, 2008 was $2.2 million which consisted of contract
revenues of $46.5 million, $39,629 of interest income, $82,690 of other income
and $34,661 of income attributable to variable interest entity offset by $41.2
million of cost of revenues, $2.6 million of general and administrative
expenses, $621,743 of interest expense and $77,447 of income taxes. Contract
revenues for the six months ended March 31, 2008 was generated from several
smaller projects, none exceeding 10% of total revenue for the period.
The above historical results are included in the pro-forma financial statements
discussed earlier.
Comparison of Financial Condition
The Company had total assets at March 31, 2009 of $102.4 million, down from
$133.7 million at September 30, 2008. Some of the primary components of the
balance sheet were accounts receivable which totaled $14.1 million down from
$38.6 million at September 30, 2008. This large reduction was driven by the
collections from two significant projects which were completed during the
19
current period. No significant projects have been contracted, at this point
in time, to replace that revenue stream. We are currently bidding on several
significant projects. Other major categories of assets at March 31, 2009
included cash of $10.4 million and fixed assets less accumulated depreciation of
$31.5 million. Liabilities totaled $47.2 million, down from $73.4 million at
September 30, 2008. This decrease was primarily due to reductions in accounts
payable and debt.
Stockholders' Equity. Stockholders' equity decreased from $60.3 million at
September 30, 2008 to $55.2 million at March 31, 2009. This decrease was due to
the net loss of $5.1 million for the six months ended March 31, 2009.
Liquidity and Capital Resources
Cash Requirements
We anticipate that our cash and cash equivalents on hand at March 31, 2009
which totaled $10.4 million along with our credit facilities available to us and
our anticipated future cash flows from operations will provide sufficient cash
to meet our operating needs. However, with the anticipated future energy
shortage nationwide and the increased demand for our services, we could be faced
with needing significant additional working capital. Also, current general
credit tightening resulting from the general banking and other economic
contraction that has occurred in the second half of 2008, has impaired the
availability of credit facilities for future operational needs. A prolonged
restriction in borrowing capacity may limit the growth of the Company.
Sources and uses of Cash
The net loss for the six months ended March 31, 2009 was $5.1 million. The
depreciation expense was $2.9 million. Contracts and other receivables provided
$26 million while accounts payable, accrued expenses, and prepaid expenses
consumed $12.6 million. Net cash provided by operating activities was $10.7
million. Financing activities consumed $13 million. The lines of credit was
reduced by $3.2 million and long term debt was reduced by $9.8 million during
this period.
As of March 31, 2009, we had $10.4 million in cash, working capital of $8.3
million and long term debt net of current maturities of $20 million.
Off-Balance Sheet transactions
Due to the nature of our industry, we often enter into certain off-balance
sheet arrangements in the ordinary course of business that result in risks not
directly reflected in our balance sheets. Though for the most part not material
in nature, some of these are:
Leases
Our work often requires us to lease various facilities, equipment and
vehicles. These leases usually are short term in nature, one year or less,
though when warranted we may enter into longer term leases. By leasing
equipment, vehicles and facilities, we are able to reduce our capital outlay
requirements for equipment vehicles and facilities that we may only need for
short periods of time. The Company currently rents two parcels of real estate
from stockholders-directors of the company under long-term lease agreements. The
one agreement calls for monthly rental payments of $5,000 and extends through
January 1, 2012. The second agreement is for the Company's headquarter offices
20
and is rented from a corporation in which two of the Company's directors
are shareholders. The agreement began November 1, 2008 and runs through 2011
with options to renew past that. It calls for a monthly rental of $7,500 per
month.
Letters of Credit
Certain customers or vendors may require letters of credit to secure
payments that the vendors are making on our behalf or to secure payments to
subcontractors, vendors, etc. on various customer projects. At March 31, 2009,
the Company was contingently liable on an irrevocable Letter of Credit for
$950,000 to guarantee payments of insurance premiums to the group captive
insurance company through which the Company obtains its general liability
insurance.
Performance Bonds
Some customers, particularly new ones, or governmental agencies require us
to post bid bonds, performance bonds and payment bonds. These bonds are obtained
through insurance carriers and guarantee to the customer that we will perform
under the terms of a contract and that we will pay subcontractors and vendors.
If we fail to perform under a contract or to pay subcontractors and vendors, the
customer may demand that the insurer make payments or provide services under the
bond. We must reimburse the insurer for any expenses or outlays it is required
to make. Depending upon the size and conditions of a particular contract, we may
be required to post letters of credit or other collateral in favor of the
insurer. Posting of these letters or other collateral reduce our borrowing
capabilities. Historically, the Company has never had a payment made by an
insurer under these circumstances and does not anticipate any claims in the
foreseeable future. At March 31, 2009, we had $43.4 million in bonds issued by
the insurer outstanding.
Concentration of Credit Risk
In the ordinary course of business the company grants credit under normal
payment terms, generally without collateral, to our customers, which include
natural gas and oil companies, general contractors, and various commercial and
industrial customers located within the United States. Consequently, we are
subject to potential credit risk related to business and economic factors that
would affect these companies. However, we generally have certain statutory lien
rights with respect to services provided. Under certain circumstances such as
foreclosure, we may take title to the underlying assets in lieu of cash in
settlement of receivables. The Company had two customers that exceeded ten
percent of revenues for the six months ended March 31, 2009. At March 31, 2009
those companies were Equitable Resources and Markwest, which accounted for 43%
of revenues.
Litigation
The Company is a party from time to time to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of business. These
actions typically seek, among other things, compensation for alleged personally
injury, breach of contract and/or property damages, punitive damages, civil
penalties or other losses, or injunctive or declaratory relief. With respect to
all such lawsuits, claims, and proceedings, we record reserves when it is
probable that a liability has been incurred and the amount of loss can be
reasonably estimated. We do not believe that any of these proceedings,
separately or in aggregate, would be expected to have a material adverse effect
on our financial position, results of operations or cash flows.
21
Related Party Transactions
Total long-term debt at March 31, 2009 was $29.4 million, of which, $11.8
million was payable to certain directors, officers and former owners of an
acquired company. The related party debt consist of a $5.9 million note due in
August 2010, a $3 million note payable on August 15 each year at $1 million per
year over the next three years and a $2.9 million note payable as collections of
receivables that were outstanding at August 15, 2008, which are associated with
the receivables of an acquired subsidiary, are received.
Inflation
Due to relatively low levels of inflation during the six months ended March
31, 2008 and 2009, inflation did not have a significant effect on our results.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations are based on our pro forma consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated
financial statements requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosures of contingent assets
and liabilities known to exist at the date of the consolidated financial
statements and reported amounts of revenues and expenses during the reporting
period. We evaluate our estimates on an ongoing basis, based on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances. There can be no assurance that actual results will not
differ from those estimates. Management believes the following accounting
policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements.
Revenue Recognition We recognize revenue for cost plus and unit price
contracts when services are performed or units are completed. These jobs are
typically billed at month end for revenue earned. Revenue from fixed price
contracts are recognized under the percentage of completion method, measured by
the percentage of costs incurred to date to total estimated costs for each
contract. Such contracts generally provide that the customer accept completion
of progress to date and compensate us for services rendered, measured typically
in terms of units installed, hours expended or some other measure of progress.
Contract costs typically include all direct material, labor and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the revisions
are determined.
Self Insurance The Company is insured at one subsidiary for general
liability insurance through a captive insurance company. While the Company
believes that this arrangement has been very beneficial in reducing and
stabilizing insurance costs, the Company does have to maintain a letter of
credit to guarantee payments of premiums. Should the Captive experience severe
losses over an extended period, it could have a detrimental affect on the
Company.
Current and Non Current Accounts Receivable and Provision for Doubtful
Accounts The Company provides an allowance for doubtful accounts when collection
22
of an account is considered doubtful. Inherent in the assessment of the
allowance for doubtful accounts are certain judgments and estimates relating to,
among others, our customer's access to capital, our customer's willingness or
ability to pay, general economic conditions and the ongoing relationship with
the customer. While most of our Customers are large well capitalized companies,
should they experience material changes in their revenues and cash flows or
incur other difficulties and not be able to pay the amounts owed, this could
cause reduced cash flows and losses in excess of our current reserves. At March
31, 2009, the management review deemed that the allowance for doubtful accounts
was adequate to cover any anticipated losses.
Goodwill The Company's goodwill was acquired in two separate purchase
transactions that were consummated on August 15, 2008. The Company has selected
July 1 for its annual impairment testing date, which is the first day of our
fourth quarter. In accordance with paragraph 28 of FAS 142 goodwill will be
tested for impairment between annual testing dates if an event occurs or
circumstances change that would more likely than not reduce the fair value of a
reporting unit below its carrying amount.
The Company believes that the current market price of its stock is caused
by the volatility, illiquidity and instability in the marketplace and is not
necessarily indicative of the fair value of the company. Management had informal
discussions with investment bankers that indicated that the fair value of the
operating companies had probably not changed materially from the fairness
opinions obtained in connection with the acquisitions. After consideration
management determined that the long term outlook for the Company had not changed
materially from the date of the fair value opinions and that, after
consideration of the change in stock price, a test of goodwill for impairment
was not needed.
23
Outlook
The following statements are based on current expectations. These
statements are forward looking, and actual results may differ materially.
Recently our customers have been experiencing reduced demand for their
products, particularly Natural Gas. Accordingly, we expect to see spending for
our customers on their transmission and distribution systems increasing over the
next few years as demand returns to expected levels. The Company's backlog at
March 31, 2009 was $34.8 million and while adding additional business projects
appears likely, no assurances can be given that the Company will be successful
in bidding on projects that become available. Moreover, even if the Company
obtains contracts, there can be no guarantee that the projects will go forward
if the current economic instability continues.
If the increased demand moves to expected levels in fiscal 2009 and beyond,
we believe that the Company will continue to have opportunities to continue to
improve both revenue volumes and the margins thereon. However, as noted above,
if the current economic conditions persist, growth could be limited.
If growth continues, we will be required to make additional capital
expenditures for equipment to keep up with that need. Currently, it is
anticipated that in fiscal 2009, the Company's capital expenditures will be
between $2.0 million and $4.0 million. However, if the customer demands grow,
this number could change dramatically. Significantly higher capital expenditure
requirements could of course put a strain on the Company's cash flows and
require additional borrowings.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily related to increases in fuel
prices and adverse changes in interest rates, as discussed below.
Fuel Prices. Our exposure to market risk for changes in fuel prices relates
to our consumption of fuel and the price we have to pay for it. As prices
rise, our total fuel cost rises. We do not feel that this risk is
significant due to the fact that we would be able to pass a portion of
those increases on to our customers.
24
Interest Rate. Our exposure to market rate risk for changes in interest
rates relates to our borrowings from banks. Some of our loans have variable
interest rates. Accordingly, as rates rise, our interest cost would rise.
We do not feel that this risk is 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
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 of America Corporation 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 of America Corporation's
internal control over financial reporting during Energy Services of America
Corporation's second quarter of fiscal year 2009 that has materially affected,
or is reasonably likely to materially affect, Energy Services of America
Corporation's internal control over financial reporting.
25
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 29,
2008, and which is incorporated herein by reference.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Prior to completing our public offering on September 6, 2006, we sold
the following shares of common stock without registration under the Securities
Act of 1933, as amended:
Name Number of Shares Relationship to Us
--------------------------------------------------------------------------------
Marshall T. Reynolds.......... 537,500 Chairman of the Board,
Chief Executive
Officer and Director
Jack M. Reynolds.............. 430,000 Director
Edsel R. Burns................ 537,500 President and Director
Neal W. Scaggs................ 107,500 Director
Joseph L. Williams............ 107,500 Director
Douglas Reynolds.............. 430,000 Director (1)
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(1) Douglas Reynolds is the son of Marshall T. Reynolds and the brother of Jack
M. Reynolds.
Such shares were issued in connection with our organization pursuant to the
exemption from registration contained in Section 4(2) of the Securities Act as
they were sold to sophisticated, wealthy individuals or entities. The shares
issued to the individuals and entities above were sold at a purchase price of
approximately $0.01 per share.
On April 5, 2006, we entered into a warrant placement agreement with our
initial stockholders for the sale of the following warrants without registration
under the Securities Act of 1933, as amended:
Number of
Name Warrants Relationship to Us
--------------------------------------------------------------------------------
Marshall T. Reynolds.............. 2,692,303 Chairman of the Board,
Chief Executive
Officer and Director
Jack M. Reynolds.................. 76,924 Director
Edsel R. Burns.................... 76,924 President and Director
Neal W. Scaggs.................... 76,924 Director
Joseph L. Williams................ 76,924 Director
Douglas Reynolds.................. 76,924 Director (1)
--------------
|
(1) Douglas Reynolds is the son of Marshall T. Reynolds and the brother of
Jack M. Reynolds.
The Company filed with the Securities and Exchange Commission (SEC) a
registration statement on February 6, 2009 with respect to the common stock and
warrants. As of the date of this report the registration statement had not been
declared effective by the SEC. On May 6, 2009 the Company filed an amended
registration statement to reflect suggested changes based on the SEC's review of
the documents originally submitted.
A total of 3,076,923 warrants at a price of $0.65 per warrant, generating
total gross proceeds of $2,000,000 were sold pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act as they were sold
to sophisticated, wealthy individuals or entities. Each warrant entitles the
holder to purchase from us one share of our common stock at an exercise price of
$5.00.
(b) On September 6, 2006, we closed our initial public offering of
8,600,000 units. Each unit consisted of one share of our common stock and two
warrants, each to purchase one share of our common stock at an exercise price of
$5.00 per share. The units were sold at an offering price of $6.00 per unit,
26
generating gross proceeds of $51,600,000. The managing underwriter in the
offering was Ferris, Baker Watts, Incorporated. The securities sold in the
offering were registered under the Securities Act of 1933 on a registration
statement on Form S-1 (No. 333-133111). The Securities and Exchange Commission
declared the registration statement effective on August 30, 2006.
We paid a total of $4,128,000 in underwriting discounts and commissions,
including $1,032,000 for the underwriters' non-accountable expense allowance of
2.0 % of the gross proceeds, and approximately $774,000 for other costs and
expenses related to the offering. After deducting the underwriting discounts and
commissions and the other offering expenses, the total net proceeds to us from
the offering that were deposited into a trust fund were $48,972,000. On August
15, 2008 the Company completed the acquisitions of S.T. Pipeline ($16 million
cash) and C.J. Hughes Construction ($17 million cash) with the remaining funds
in the trust being transferred to the general account of the Company.
Energy Services of America Corporation did not repurchase any shares of its
common stock during the relevant period.
ITEM 4. Submission of Matters to a vote of Security Holders
No matters were submitted to the security holders for vote this quarter.
ITEM 6. Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
27
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ENERGY SERVICES OF AMERICA CORPORATION
Date: May 13, 2009 By: /s/ Marshall T. Reynolds
---------------------------------
Marshall T. Reynolds
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2009 By: /s/ Edsel R. Burns
--------------------------------
Edsel R. Burns
President
Date: May 13,2009 By: /s/ Larry A. Blount
--------------------------------
Larry A. Blount
Chief Financial Officer
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28
Grafico Azioni Energy Services of America Corp. (AMEX:ESA)
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Grafico Azioni Energy Services of America Corp. (AMEX:ESA)
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