10-Q 1 form10q_081209.txt FORM 10-Q 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 June 30, 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 Identification Number) of Incorporation or Organization) 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 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 ____ 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 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 August 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_
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 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures about Market Risk 25 Item 4. Controls and Procedures 26 Part II: Other Information Item 1A. Risk Factors 26 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26 Item 4T. Submission of Matters to a vote of Security Holders 27 Item 6. Exhibits 27 Signatures 28
ENERGY SERVICES OF AMERICA CORPORATION CONSOLIDATED BALANCE SHEETS
June 30, September 30, Assets 2009 2008 ------------ ------------ (Unaudited) (Audited) Current Assets Cash and cash equivalents $ 4,034,532 $ 13,811,661 Accounts receivable-trade 12,853,698 38,578,810 Allowance for doubtful accounts (366,585) (363,819) Retainages receivable 4,437,716 6,303,690 Other receivables 274,999 182,598 Costs and estimated earnings in excess of billings on uncompleted contracts 6,069,341 5,272,669 Prepaid expenses and other 3,521,006 1,121,101 ------------ ------------ Total Current Assets 30,824,707 64,906,710 ------------ ------------ Property, plant and equipment, at cost 35,221,631 33,851,552 less accumulated depreciation (4,931,270) (548,089) ------------ ------------ 30,290,361 33,303,463 Goodwill 35,489,643 35,489,643 ------------ ------------ Total Assets $ 96,604,711 $133,699,816 ============ ============ Liabilities and Stockholders' Equity Current Liabilities Current maturities of long-term debt $ 7,096,694 $ 15,040,033 Lines of credit 5,375,000 9,796,208 Accounts payable 3,830,796 11,336,680 Accrued expenses and other current liabilities 5,606,610 9,364,341 Billings in excess of costs and estimated earnings on uncompleted contracts 74,190 509,227 Income taxes payable - 1,461,461 ------------ ------------ Total Current Liabilities 21,983,290 47,507,950 ------------ ------------ Long-term debt, less current maturities 13,038,292 18,272,186 Long-term debt, payable to shareholder 5,800,000 6,000,000 Deferred income taxes payable - 1,662,463 ------------ ------------ Total Liabilities 40,821,582 73,442,599 ------------ ------------ Stockholders' equity Preferred stock, $.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 (194,448) 4,279,640 ------------ ------------ Stockholders' equity 55,783,129 60,257,217 ------------ ------------ Total liabilities and stockholders' equity $ 96,604,711 $133,699,816 ============ ============
1 The Accompanying Notes are an Integral Part of These Financial Statements ENERGY SERVICES OF AMERICA CORPORATION CONSOLIDATED STATEMENTS OF INCOME Unaudited
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ----------------- ----------------- ---------------- ------------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue $ 24,795,918 $ - $ 77,419,585 $ - Cost of revenues 22,060,934 - 78,538,479 - ------------ ------------ ------------ ------------- Gross profit (loss) 2,734,984 - (1,118,894) - Selling and administrative expenses 1,561,876 38,500 5,229,510 237,574 ------------ ------------ ------------ ------------ Income (loss) from operations 1,173,108 (38,500) (6,348,404) (237,574) Other income (expense) Interest income (loss) (16,521) 329,609 33,289 1,412,193 Other nonoperating income (expense) (37,717) - (282,802) - Interest expense (392,473) - (1,265,442) - Gain (loss) on sale of equipment (3,902) - (12,999) - ------------ ------------ ------------ ------------ (450,613) 329,609 (1,527,954) 1,412,193 Income (loss) before income taxes 722,495 291,109 (7,876,358) 1,174,619 Income tax expense (benefit) 134,032 113,000 (3,402,270) 457,000 ------------ ------------ ------------ ------------ Net income (loss) $ 588,463 $ 178,109 $ (4,474,088) $ 717,619 ============ ============ ============ ============ Weighted average shares outstanding-basic 12,092,307 10,750,000 12,092,307 10,750,000 Weighted average shares-diluted 12,092,307 12,970,892 12,092,307 13,160,643 Net income (loss) per share basic $ 0.05 $ 0.02 $ (0.37) $ 0.07 ============ ============ ============ ============ Net income (loss) per share diluted $ 0.05 $ 0.01 $ (0.37) $ 0.05 ============ ============ ============ ============
2 The Accompanying Notes are an Integral Part of These Financial Statements ENERGY SERVICES OF AMERICA CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Nine Months Ended Nine Months Ended June 30, June 30, Operating activities 2009 2008 ---------------- ------------------ Net income (loss) $ (4,474,088) $ 717,619 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation expense 4,402,801 - (Gain) loss on sale/disposal of equipment 12,999 - Accrued income and accretion of investments in trust - (690,496) (Increase) decrease in contracts receivable 25,727,878 (Increase) decrease in retainage receivable 1,865,974 - (Increase) decrease in other receivables (92,401) - (Increase) decrease in cost and estimated earnings in excess of billings on uncompleted contracts (796,672) - (Increase) decrease in prepaid expenses (1,474,566) (530,578) Increase (decrease) in accounts payable (7,505,884) - Increase (decrease) in accrued expenses (4,231,327) - Increase (decrease) in billings in excess of cost and estimated earnings on uncompleted contracts (435,037) - Increase (decrease) in income taxes payable (1,461,461) - Increase (decrease) in deferred income taxes payable (1,662,463) - ------------- ------------- Net cash (used in) provided by operating activities 9,875,753 (503,455) ------------- ------------- 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 (1,090,832) - Proceeds from sales of property and equipment 20,032 - ------------- ------------- Net cash (used in) provided by investing activities (1,070,800) - ------------- ------------- Financing activities Loans from (repayments to) shareholder (200,000) - Borrowings on lines of credit, net of (repayments) (4,421,208) - Principal payments on long term debt (13,509,131) - Principal payments on short term borrowings (451,743) - ------------- ------------- Net cash (used in) provided by financing activities (18,582,082) - ------------- ------------- Increase (decrease) in cash and cash equivalents (9,777,129) (503,455) Cash beginning of period 13,811,661 756,782 ------------- ------------- Cash end of period $ 4,034,532 $ 253,327 ============= ============= Supplemental schedule of noncash investing and financing activities Insurance premiums financed, short term $ 925,338 Purchases of property & equipment under financing agreements $ 331,898 $ - ============= ============= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 1,278,344 $ - ============= ============= Income taxes $ 1,500,000 $ 671,500 ============= =============
3 The Accompanying Notes are an Integral Part of These Financial Statements ENERGY SERVICES OF AMERICA CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For Nine Months Ended June 30, 2009 Unaudited
Common Stock Total ------------------- 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 - - (138,642) - (138,642) Net Income (Loss) - - - 717,619 717,619 ---------- -------- ------------ ----------- ------------ Balance at June 30, 2008 9,030,860 $ 903 $ 38,426,068 $ 2,186,101 $ 40,613,072 ========== ======== ============ =========== ============ Balance at September 30, 2008 12,092,307 $ 1,209 $ 55,976,368 $ 4,279,640 $ 60,257,217 Net Income (Loss) - - - (4,474,088) (4,474,088) ---------- -------- ------------ ----------- ------------ Balance at June 30, 2009 12,092,307 $ 1,209 $ 55,976,368 $ (194,448) $ 55,783,129 ========== ======== ============ =========== ============
4 The Accompanying Notes are an Integral Part of These Financial Statements ENERGY SERVICES OF AMERICA CORPORATION NOTES TO UNAUDITED 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 June 30, 2009 and 2008 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. Stock Purchase Plan At the annual meeting of the shareholders on November 19, 2008 the shareholders approved the establishment of an employee stock purchase plan. 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 5 to the stock purchase plan will be reflected in net income as part of "Salaries and employee benefits" on the Consolidated Statements of Income. 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 cause reduced cash flows and losses in excess of our current reserves. At June 30, 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. 6 2. UNCOMPLETED CONTRACTS Costs, estimated earnings, and billings on uncompleted contracts as of June 30, 2009 and September 30, 2008 are summarized as follows:
June 30, 2009 September 30, 2008 Costs incurred on contracts in progress $ 50,169,499 $ 57,723,456 Estimated earnings, net of estimated losses 1,646,478 6,562,540 -------------- --------------- 51,815,977 64,285,996 Less Billings to date 45,820,826 59,522,554 -------------- --------------- $ 5,995,151 $ 4,763,442 =============== =============== Costs and estimated earnings in excess of billings on uncompleted contracts 6,069,341 5,272,669 Less Billings in excess of costs and estimated earnings on uncompleted Contracts 74,190 509,227 --------------- --------------- $ 5,995,151 $ 4,763,442 =============== ===============
3. PROPERTY AND EQUIPMENT
June 30, 2009 September 30, 2008 Property and Equipment consists of the following: Land $ 702,000 $ 702,000 Buildings and leasehold Improvements 248,044 253,944 Operating equipment and vehicles 33,944,636 32,859,797 Office equipment, furniture and fixtures 326,951 35,811 ----------- ----------- 35,221,631 33,851,552 Less Accumulated Depreciation and Amortization 4,931,270 548,089 ----------- ----------- Property and equipment net $30,290,361 $ 33,303,463 =========== =============
4. RELATED PARTY DEBT Total long-term debt at June 30, 2009 was $25.9 million, of which, $9.9 million was payable to certain directors, officers and former owners of an acquired company. The related party debt consist of a $5.8 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 $1.1 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 $16 million consists of debt incurred for capital acquisitions made by the subsidiaries. 7 5. EARNINGS PER SHARE The amounts used to compute the basic and diluted earnings per share for the three months ended June 30, 2009 and 2008 and for the nine months ended June 30, 2009 and 2008.
Three Months Ended Nine Months Ended June 30, June 30, 2009 2008 2009 2008 Net Income (Loss) from continuing operations available to common shareholders $ 588,463 $ 178,109 $ (4,474,088) $ 717,619 Weighted average shares outstanding basic 12,092,307 10,750,000 12,092,307 10,750,000 Effect of dilutive warrants -0- 2,220,892 -0- 2,410,643 ------------ ------------ ------------ ------------ Weighted average shares outstanding diluted 12,092,307 12,970,892 12,092,307 13,160,643 ============ ============ ============ ============ Net Income (Loss) per share-basic $ .05 $ 0.02 $ (0.37) $ 0.07 ============ ============ ============ ============ Net Income (Loss) per share-diluted $ .05 $ 0.01 $ (0.37) $ 0.05 ============ ============ ============ ============
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 June 30, 2009. 8 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. 8. SUBSEQUENT EVENTS Subsequent events have been evaluated through August 12, 2009, the date of the issuance of these financial statements. 9. RECENT ACCOUNTING PRONONCEMENTS In April 2009, the FASB issued FSP FAS No. 107-1 and APB Opinion No. 28-1, "Interim Disclosures About Fair Value of Financial Instruments," which requires quarterly fair value disclosures for financial instruments that are not reflected on the Company's Consolidated Balance Sheet at fair value in interim financial statements effective for interim periods ending after June 15, 2009. The Company adopted the new standard for the quarter ended June 30, 2009. Adoption had no impact on the Company's financial position or results of operations. In May 2009, the FASB issued SFAS No. 165, "Subsequent Events," which establishes general standards of accounting for the disclosure of events that occur after the balance sheet date but before financial statements are issued. In particular, SFAS No. 165 sets forth: The period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; and The circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and The disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual periods ending after June 15, 2009, and is to be applied prospectively. The Company adopted SFAS NO. 165 as of June 30, 2009. For evaluation of subsequent events, see Note 8-Subsequent Events of this Form 10-Q. In June 2009, the FASB issued SFAS NO. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles." SFAS No. 168 establishes the FASB Accounting Standards Codification (Codification), which officially commenced July 1, 2009, to become the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive release of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature excluded from the Codification will be considered nonauthoritative. The subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. SFAS NO. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company will adopt SFAS NO. 168 for the quarter ending September 30, 2009. The Company is currently evaluating the effect of the standard on its financial statement disclosures, as all future references to authoritative accounting literature will be referenced in accordance with the Codification. 9 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 $34.0 million, one half of which was in cash and one half 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 10 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. Third Quarter Overview The following is an overview for the three months ended June 30, 2009: Sales $24.8 million Cost of Revenues 22.1 million Gross Profit (Loss) 2.7 million Selling & Adm. 1.6 million Net Income(Loss) 0.6 million The third and fourth fiscal quarters for the Company are typically very active periods for our business line. As the economy starts to improve the Company is seeing many projects coming out for bid. Revenue increased from $18.9 million for the quarter ending March 31, 2009 to $24.8 million for the quarter ending June 30, 2009. Selling and Administrative expenses were down $0.4 million from the previous quarter. Net income was $0.6 million for the quarter. Fourth quarter sales are expected to be strong. The Company's cash and cash equivalents decreased by $6.4 million, with working capital increasing by $0.5 million during this quarter. Accounts receivable and retainage receivable decreased by $1.7 million during the quarter, and long-term debt was reduced by $3.5 million. 11 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 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. 12 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 and Administrative Expenses Selling 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 nine months ended June 30, 2008 the information set forth below for the three and nine months ended June 30, 2008 and the corresponding analysis of the comparative three and nine months ended June 30, 2009 and June 30, 2008 is based on actual results for the three and nine months ended June 30, 2009 and pro forma results for the three and nine months ended June 30, 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." 13 Energy Services of America Corporation Consolidated Statement of Income for Three and Nine Months Ended June 30, 2009 and 2008
(Unaudited) Pro Forma (Unaudited) Pro Forma Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended 6/30/2009 6/30/2008 6/30/2009 6/30/2008 Contract Revenues $ 24,795,918 $ 54,330,340 $ 77,419,585 $ 149,820,472 Cost of Revenues 22,060,934 48,262,514 78,538,479 123,033,288 Gross Profit (Loss) 2,734,984 6,067,826 (1,118,894) 26,787,184 Selling and administrative expenses 1,561,876 1,119,746 5,229,510 4,883,201 Income ( Loss) from operations before taxes 1,173,108 4,948,080 (6,348,404) 21,903,983 Interest Income (16,521) 40,359 33,289 338,080 Interest Expense (392,473) (380,180) (1,265,442) (1,245,286) Other Income (Expense) (41,619) (9,163) (295,801) 459,166 Income (Loss) before tax 722,495 4,599,096 (7,876,358) 21,455,943 Income taxes (Benefit) 134,032 1,888,078 (3,402,270) 8,723,200 Income (Loss) before variable interest entity 588,463 2,711,018 (4,474,088) 12,732,743 Income(Loss) attributable to variable interest entity - (50,479) - (15,818) Net Income (Loss) $ 588,463 $ 2,660,539 $ (4,474,088) $ 12,716,925 Weighted average shares outstanding- basic 12,092,307 12,092,307 12,092,307 12,092,307 Weighted average shares- diluted 12,092,307 14,313,199 12,092,307 14,502,950 Net income (Loss) per share- basic $ 0.05 $ 0.22 $ (0.37) $ 1.05 Net income (Loss) per share- diluted $ 0.05 $ 0.19 $ (0.37) $ 0.88
Three Months Nine Months Ended Ended Contract Revenues $(29,534,422) -54.4% $ (72,400,887) -48.3% Cost of Revenues $(26,201,580) -54.3% $ (44,494,809) -36.2% Gross Profit (Loss) $(3,332,842) -54.9% $ (27,906,078) -104.2% Selling and administrative expenses $ 442,130 39.5% $ 346,309 7.1% Income ( Loss) from operations before taxes $(3,774,972) -76.3% $ (28,252,387) -129.0% Interest Income $ (56,880) -140.9% $ (304,791) -90.2% Interest Expense $ (12,293) 3.2% $ (20,156) 1.6% Other Income (Expense) $ (32,456) 354.2% $ (754,967) -164.4% Income (Loss) before tax $(3,876,601) -84.3% $ (29,332,301) -136.7% Income taxes (Benefit) $(1,754,046) -92.9% $ (12,125,470) -139.0% Income (Loss) before variable interest entity $(2,122,555) -78.3% $ (17,206,831) -135.1% Net Income (Loss) $ 50,479 -100.0% $ 15,818 -100.0% Net income (Loss) per share- diluted $(2,072,076) -77.9% $ (17,191,013) -135.2%
14 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION The following tables set forth summary financial information for our pro forma consolidated results for the three and nine months ended June 30, 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. 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 Three Months Three Months Three Months Ended Ended ST Pipeline Ended C J Hughes June 30, June 30, Pro Forma June 30, Pro Forma 2008 2008 Adjustments 2008 Adjustments -------------- -------------------------------------------- ----------------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Contract Revenues $ 15,417,197 $ 38,913,143 3 Cost of Revenues 12,752,746 $ 397,389(1) 34,832,889 $ 279,490 (1) -------------- -------------- ------------ ------------- ------------- Gross Profit - 2,664,451 (397,389) 4,080,254 (279,490) Selling and administrative expenses $ 38,500 341,746 0 739,500 0 -------------- -------------- ------------ ------------- ------------- Income( Loss) from operations before taxes (38,500) 2,322,705 (397,389) 3,340,754 (279,490) Interest Income 329,609 11,845 (100,999)(2) 41,043 (110,635)(2) Interest Expense - (39,850) (56,250)(3) (284,080) - Other Income (Expense) - 11,401 - (20,564) - -------------- -------------- ------------ ------------- ------------- Income before tax 291,109 2,306,101 (554,638) 3,077,153 (390,125) Income taxes (Benefit) 113,000 - 700,586 (4) 24,968 1,074,811 (4) -------------- -------------- ------------ ------------- ------------- Income (Loss) before variable interest entity 178,109 2,306,101 (1,255,224) 3,052,185 (1,464,936) Income(Loss) attributable to variable interest entity - - - (50,479) - -------------- -------------- ------------ ------------- ------------- Net Income (Loss) $ 178,109 $ 2,306,101 $ (1,255,224) $ 3,001,706 $(1,464,936) ============== ============== ============ ============= ============= Weighted average shares outstanding- basic 10,750,000 2,964,763 -------------- ------------- Weighted average shares- diluted 12,970,892 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 $ - $ 54,330,340 Cost of Revenues - 48,262,514 -------------- ------------ Gross Profit - 6,067,826 Selling and administrative expenses - 1,119,746 -------------- ------------ Income( Loss) from operations before taxes - 4,948,080 Interest Income (130,504) 40,359 Interest Expense - (380,180) Other Income (Expense) - (9,163) -------------- ----------- Income before tax (130,504)(5) 4,599,096 Income taxes (Benefit) (25,287)(6) 1,888,078 -------------- ------------ Income (Loss) before variable interest entity (105,217) 2,711,018 Income(Loss) attributable to variable interest entity - (50,479) -------------- ------------- Net Income (Loss) $ (105,217) $ 2,660,539 ============== ============= Weighted average shares outstanding- basic (1,622,456) 12,092,307 -------------- ------------- Weighted average shares- diluted (1,622,456) 14,313,199 -------------- ------------- Net Income (Loss) per share- basic $ 0.22 ============= Net Income (Loss) per share- diluted $ 0.19 =============
16
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 Nine months Nine months Nine months Ended Ended ST Pipeline Ended C J Hughes June 30, June 30, Pro Forma June 30, Pro Forma 2008 2008 Adjustments 2008 Adjustments ------------- -------------------------------------------- ------------ (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Contract Revenues $ - $ 64,359,881 - $ 85,460,591 1 Cost of Revenues - 45,604,470 $ 697,389(1) 76,044,002 $ 687,427 ------------- -------------- ------------ ------------- ------------ Gross Profit - 18,755,411 (697,389) 9,416,589 (687,427) Selling and administrative expenses $ 237,574 1,349,480 3,296,147 ------------- -------------- ------------ ------------- ------------ Income( Loss) from operations before taxes (237,574) 17,405,931 (697,389) 6,120,442 (687,427) Interest Income 1,412,193 41,739 (450,554)(2) 80,672 (476,824) Interest Expense - (170,713) (168,750)(3) (905,823) - Other Income (Expense) - 397,040 - 62,126 - ------------- -------------- ------------ ------------- ------------ Income (Loss) before tax 1,174,619 17,673,997 (1,316,693) 5,357,417 (1,164,251) Income taxes (Benefit) 457,000 - 6,542,922 (4) 102,415 1,701,607 ------------- -------------- ------------ ------------- ------------ Income (Loss) before variable interest entity 717,619 17,673,997 (7,859,615) 5,255,002 (2,865,858) Income (Loss) attributable to variable interest entity - (15,818) ------------- -------------- ------------ ------------- ------------ Net Income (Loss) $ 717,619 $ 17,673,997 $ (7,859,615) $ 5,239,184 $(2,865,858) ============= ============== ============ ============= ============ Weighted average shares outstanding- basic 10,750,000 2,964,763 ------------- ------------ Weighted average shares- diluted 13,160,643 2,964,763 ============= ------------ Net Income (Loss) per share- basic $ 0.07 ============= Net income (Loss) per share- diluted $ 0.05 =============
C J Hughes Redemption Pro Forma Adjustments Combined --------------------------- (Unaudited) (Unaudited) Contract Revenues $ - $ 149,820,472 Cost of Revenues - 123,033,288 ------------- ------------- Gross Profit - 26,787,184 Selling and administrative expenses - 4,883,201 ------------- ------------- Income( Loss) from operations before taxes - 21,903,983 Interest Income (269,146) 338,080 Interest Expense - (1,245,286) Other Income (Expense) - 459,166 ------------- ------------- Income (Loss) before tax (269,146)(5) 21,455,943 Income taxes (Benefit) (80,744)(6) 8,723,200 ----------- ------------- Income (Loss) before variable interest entity (188,402) 12,732,743 Income (Loss) attributable to variable interest entity (15,818) ------------ ------------- Net Income (Loss) $ (188,402) $ 12,716,925 ============= ============= Weighted average shares outstanding- basic (1,622,456) 12,092,307 ------------- ------------- Weighted average shares- diluted (1,622,456) 14,502,950 ------------- ------------- Net Income (Loss) per share- basic $ 1.05 ============= Net income (Loss) per share- diluted $ 0.88 =============
17 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 5 year useful 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) had the transaction been completed at the beginning of each period and therefore not earning interest. The rates of interest actually received for each of the periods was used in the calculation (3.15 % for 2008). (3) This adjustment is to reflect the added interest cost that would have occurred relating to the $3 .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 or state income taxes. These entries are to reflect the estimated taxes for these companies had they been a part of Energy Services for 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. These entries reflect the lost interest income from the purchase of those shares so redeemed assuming they has been redeemed at the beginning of the respective periods. The interest rates used were the actual rates received by Energy Services during the respective periods (3.15% for 2008). (6) These entries are to reflect the tax savings related to the interest income lost on the payments to redeem shares ($130,504 and $269,146 for the three month and none month periods ended June 30, 2008). 2009 Actual compared to 2008 Pro Forma Revenues. Revenues decreased by $29.5 million (54.4%) to $24.8 million for the three months ended June 30, 2009, and by $72.4 million (48.3%) to $77.4 million for the nine months ended June 30, 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 $26.2 million (54.3%) to $22.1 million for the three months ended June 30, 2009 and by $44.5 million (36.2%) to $78.5 million for the nine months ended June 30, 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 $3.3 million (54.9%) for the three months ended June 30, 2009 to a profit of $2.7 million, and by $27.9 million (104.2%) to a loss of $1.1 million for the nine months ended June 30, 2009 compared to the pro forma gross profit for the same periods in 2008. Total revenues decreased $72.4 million (48.3%) for the nine months ended June 30, 2009 which was a major factor in the reduction of gross margin. Contributing to the loss for the nine months ended June 30, 2009 were 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 had been 18 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. 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. Selling and administrative expenses. Selling and administrative expenses increased by $442,000 (39.5%) for the three months ended June 30, 2009 and by $346,000 (7.1%) for the nine months ended June 30, 2009 compared to the pro forma selling and administrative expenses for the same periods in 2008. These increases 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 $4.0 million (77.4%) to a profit of $1.2 million for the three months ended June 30, 2009 and decreased by $28.5 million (128.7%) to a loss of $6.3 million for the nine months ended June 30, 2009. This is a function of the previous categories. Interest Income. Interest income decreased by $57,000 (140.9%) for the three months ended June 30, 2009 and decreased by $305,000 (90.2%) for the nine months ended June 30, 2009. As a result of decreased revenues and cash collections, the Company used a larger portion of its cash reserves during the nine month period causing interest income to decrease. Interest Expense Interest Expense increased by $12,000 (3.2%) for the three months ended June 30, 2009 and increased by $20,000 (1.6%) for the nine months ended June 30, 2009. Interest expense increased as result of the Company having to make draws on their line of credit. Other Income(Expenses). Other expenses increased by $32,000 (354.2%) for the three months ended June 30, 2009 and other income decreased by $755,000 (164.4%) for the nine months ended June 30, 2009. This quarters increase was a primarily the result of a tax penalty. The overall nine month decrease was driven by the reduction of rental of equipment to outside parties and tax penalties incurred during the second quarter of 2009. Net Income(Loss). Net Income decreased by $2.1 million (77.9%) to a net profit of $588,000 for the three months ended June 30, 2009. The company had a net loss of $4.5 million for the nine months ended June 30, 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 Energy Services of America Corporation (Standalone) The company was a blank check company for the nine month period ending June 30, 2008 and had no operations. Net income for the Company for the quarter ended June 30, 2008 was $178,109, which consisted of interest from the trust fund totaling $329,609 offset by $151,500 of expenses, $27,295 of which related to formation and operating cost, $11,205 relating to Delaware franchise tax and income taxes of $113,000. Net income for the nine months ended June 30, 2008 was $717,619, which consisted of interest from the trust fund totaling $1,412,193 offset by $694,574 of expenses, $193,080 of which related to formation and operating cost, $10,879 of which related to due diligence expenses relating to potential acquisitions, $33,615 relating to Delaware franchise tax and income taxes of $457,000. 19 S.T. Pipeline Net income for the three months ended June 30, 2008 was $2.3 million which consisted of contract revenues of $15.4 million and $12,000 of interest income offset by $12.5 million of cost of revenues, $342,000 of general and administrative expenses, $40,000 of interest expense, and $238,000 of other expenses. Net income for the nine months ended June 30, 2008 was $17.7 million which consisted of contract revenues of $64.4 million, $42,000 of interest income and $148,000 of other income offset by $45.4 million of cost of revenues, $1.3 million of general and administrative expenses and $171,000 of interest expense. C.J. Hughes Construction Inc. Net income for the three months ended June 30, 2008 was $3.0 million which consisted of contract revenues of $38.9 million and $41,000 of interest income offset by $34.8 million of cost of revenues, $740,000 of selling and administrative expenses, $284,000 of interest expense, $21,000 of other expenses, $50,000 of expenses attributable to variable interest entity, and $25,000 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 nine months ended June 30, 2008 was $5.2 million which consisted of contract revenues of $85.5 million, $81,000 of interest income, and $62,000 of other income offset by $76.0 million of cost of revenues, $3.3 million of general and administrative expenses, $906,000 of interest expense, 16,000 of expenses attributable to variable interest entity, and $102,000 of income taxes. Contract revenues for the nine months ended June 30, 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 June 30, 2009 of $96.6 million, a decrease from $133.7 million at September 30, 2008. Some of the primary components of the balance sheet were accounts receivable which totaled $12.9 million a decrease from $38.6 million at September 30, 2008. This reduction reflected the collection of accounts receivable on the large contracts completed in the prior year and by the economic downturn experienced during the nine month period. As economic conditions improve we are bidding on several significant projects. Other major categories of assets at June 30, 2009 included cash of $4.0 million and fixed assets less accumulated depreciation of $30.3 million. Liabilities totaled $40.8 million, a decrease from $73.4 million at September 30, 2008. This decrease was primarily due to reductions in accounts payable and debt which were paid down with the collections on accounts receivable. Stockholders' Equity. Stockholders' equity decreased from $60.3 million at September 30, 2008 to $55.8 million at June 30, 2009. This decrease was due to the net loss of $4.5 million for the nine months ended June 30, 2009. We have not paid any dividends on our common stock. 20 Liquidity and Capital Resources Cash Requirements We anticipate that our cash and cash equivalents on hand at June 30, 2009 which totaled $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 nine months ended June 30, 2009 was $4.5 million. The depreciation expense was $4.4 million. Contracts and other receivables provided $27.5 million while accounts payable, accrued expenses, and prepaid expenses consumed $13.2 million. Net cash provided by operating activities was $9.9 million. Financing activities consumed $18.6 million. The lines of credit were reduced by $4.4 million and long term debt was reduced by $13.5 million during this period. As of June 30, 2009, we had $4 million in cash, working capital of $8.8 million and long term debt, net of current maturities of $18.8 million. Loan Covenants Two of the Company's subsidiaries have lines of credit with regional banks. The interest rate of these lines range from prime plus 1/2 % to prime plus 1%. The following are the major restrictive covenants on those lines: C.J. Hughes Construction Inc. and Nitro Electric Company 1. Interest payments on the $6 million loan from shareholder may be made by the Borrower, but principal payments may be made only with the Bank's permission. 2. The Company may not sell, transfer, lease, pledge, mortgage, encumber, convey, or assign any of Borrower's assets, other than in the ordinary course of business, without Bank's prior written consent. 3. A "Borrowing Base" consisting of 80% of accounts receivable of 90 days or less will be used to authorize draws on the line. 4. No additional debt without permission of the Bank. 5. Maintain working capital in excess of $100,000. Working capital for these companies was $9,431,187 at June 30, 2009. 6. Current ratio must be in excess of 1.00 to 1.00. The current ratio at June 30, 2009 was 1.66 to 1.00. 7. Maintain a minimum tangible net worth of not less than $350,000. Tangible net worth was $2,746,579 at June 30, 2009. 21 Non compliance with the covenants of these agreements can cause an Event of Default. If an Event of Default were to occur all commitments and obligations of Lender under these agreements immediately will terminate and, at the Lender's option, all indebtedness immediately will become due and payable, all without notice of any kind to the Borrower. Management believes that under current conditions and with the anticipated establishment of a larger line of credit, cash flows should be adequate. However, if the line of credit does not get established or if the work load changes dramatically, the Company could experience some cash challenges. As a hedge against such an occurrence, the Company is aggressively pursuing collections of past due accounts as well as offering cash discounts for early payments in an effort to improve its cash position. The Company is also negotiating reductions in retainage withheld on lump sum projects which will improve cash flow as well. In order to further ensure adequate cash is available to meet our debt service requirements as well as our operating capital needs Management is in discussions currently with certain banks and other financing groups to restructure our debt. 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 first 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 and is rented from a corporation in which two of the Company's directors are shareholders. The second agreement began November 1, 2008 and runs through 2011 with options to renew. This second agreement provides for a monthly rental of $7,500. 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 June 30, 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. 22 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 June 30, 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 nine months ended June 30, 2009. At June 30, 2009 those companies were Spectra Texas Eastern and Markwest, which accounted for 33% 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. Related Party Transactions Total long-term debt at June 30, 2009 was $25.9 million, of which, $9.9 million was payable to certain directors, officers and former owners of an acquired company. The related party debt consist of a $5.8 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 $1.1 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 nine months ended June 30, 2008 and 2009, inflation did not have a significant effect on our results. 23 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 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 June 30, 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(R) 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. 24 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. 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. We expect to see spending from our customers on their transmission and distribution systems increasing over the next few years as demand returns to normalized levels. The Company's backlog at June 30, 2009 was $49.6 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. 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, 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 be significantly higher. Significantly higher capital expenditure requirements could impair our 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. 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. 25 ITEM 4T. 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 third 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. 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)
-------------------------- (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. 26 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, 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: August 12, 2009 By: /s/ Marshall T. Reynolds ------------------------------------- Marshall T. Reynolds Chairman and Chief Executive Officer (Principal Executive Officer) Date: August 12, 2009 By: /s/ Edsel R. Burns ------------------------------------- Edsel R. Burns President Date: August 12,2009 By: /s/ Larry A. Blount ----------------------------- Larry A. Blount Chief Financial Officer 28 Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Marshall T. Reynolds, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Energy Services of America Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 12, 2009 /s/ Marshall T. Reynolds --------------- --------------------------------------- Date Marshall T. Reynolds Chairman and Chief Executive Officer Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Larry A. Blount, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Energy Services of America Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principals; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. August 12, 2009 /s/ Larry A. Blount --------------- --------------------------------------- Date Larry A. Blount Chief Financial Officer Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Marshall T. Reynolds, Chairman and Chief Executive Officer and Larry A. Blount, Chief Financial Officer of Energy Services of America Corporation (the "Company") each certify in their capacity as officers of the Company that they have reviewed the Quarterly report of the Company on Form 10-Q for the quarter ended June 30, 2009 and that to the best of their knowledge: 1. the report fully complies with the requirements of Sections 13(a) of the Securities Exchange Act of 1934; and 2. the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company. August 12, 2009 /s/ Marshall T. Reynolds --------------- -------------------------------------- Date Marshall T. Reynolds Chairman and Chief Executive Officer August 12, 2009 /s/ Larry A. Blount --------------- -------------------------------------- Date Larry A. Blount Chief Financial Officer