Attached files
| file | filename |
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| EX-32 - EXHIBIT 32 - Energy Services of America CORP | ex32.htm |
| EX-31.2 - EXHIBIT 31.2 - Energy Services of America CORP | ex31-2.htm |
| EX-23.1 - EXHIBIT 23.1 - Energy Services of America CORP | ex23-1.htm |
| EX-31.1 - EXHIBIT 31.1 - Energy Services of America CORP | ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
xANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the Fiscal Year Ended September 30, 2009
OR
oTRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ___________________
to ___________________
Commission
File Number: 001-32998
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Energy
Services of America Corporation
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(Exact
Name of Registrant as Specified in its
Charter)
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Delaware
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20-4606266
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification Number)
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100
Industrial Lane, Huntington, West Virginia
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25702
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(Address
of Principal Executive Office)
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(Zip
Code)
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304-399-6300
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(Registrant’s
Telephone Number including area code)
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Securities
Registered Pursuant to Section 12(b) of the Act:
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Name
of Each Exchange
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Title
of Class
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On
Which Registered
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Common
Stock, par value $0.0001 per share
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NYSE
Amex Equities
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Units
(each Unit consisting of one share of
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NYSE
Amex Equities
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Common
Stock and two Warrants)
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Warrants
(each Warrant is exercisable
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NYSE
Amex Equities
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for
one share of Common Stock)
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Securities
Registered Pursuant to Section 12(g) of the Act:
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None
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(Title
of Class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES o NO x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. YES o NO x
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 12 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 o.
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 (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). YES o NO o.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or
information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form
10-K. x.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definition of “large accelerated filer, accelerated
filer and smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filer o Accelerated
Filer o
Non-Accelerated Filer o Smaller
Reporting Company x
(Do not check if a Smaller reporting Company)
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). YES o NO x
The aggregate market value of the
voting and non-voting common equity held by non-affiliates of the Registrant,
computed by reference to the last sale price on March 31, 2009, as reported by
the NYSE Amex Equities, was $12,065,505.
As of December 21, 2009, there were
issued and outstanding 12,092,307 shares of the Registrant’s Common
Stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Energy
Services of America Corporation
Annual
Report On Form 10-K
For
The Fiscal Year Ended
September
30, 2009
Table
Of Contents
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Forward
Looking Statements
This
Annual Report contains certain “forward-looking statements” which may be
identified by the use of words such as “believe,” “expect,” “anticipate,”
“should,” “planned,” “estimated” and “potential.” Examples of
forward-looking statements include, but are not limited to, estimates with
respect to our financial condition, results of operations and business that are
subject to various factors which could cause actual results to differ materially
from these estimates and most other statements that are not historical in
nature. These factors include, but are not limited to, general and
local economic conditions, changes in interest rates, deposit flows, demand for
mortgage, and other loans, real estate values, competition, changes in
accounting principles, policies, or guidelines, changes in legislation or
regulation, and other economic, competitive, governmental, regulatory, and
technological factors affecting our operations, pricing products and
services.
Overview
On
September 6, 2006, we completed 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. After deducting the underwriting discounts and
commissions and the offering expenses, the total net proceeds to us from the
public offering that were deposited into a trust fund were approximately
$48,972,000.
Until
August 15, 2008, we operated as a blank check company. On August 15,
2008, we completed our acquisitions of ST Pipeline, Inc. and C.J. Hughes
Construction Company, Inc. Each of ST Pipeline and C.J. Hughes are
held as separate subsidiaries of Energy Services.
Energy Services of America (ESA) is a
provider of contracting services to America’s energy providers, primarily the
gas and electricity providers. The Company’s services
include:
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●
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The
installation, replacement and repairs of pipelines for the oil and natural
gas industries.
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General electrical
services for both power companies and various other
industrial applications.
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The
installation of water and sewer lines for various governmental
agencies.
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●
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Various
other ancillary services related to the other
services.
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Our Consolidated Revenues for the year
ended September 30, 2009 were approximately $107 million of which 74% was
attributable to gas work, 22% to electrical services, and 4% to water and sewer
installations and other ancillary services.
ESA operates primarily in the Mid Atlantic region of the country though our
projects can be nationwide. The work includes a combination of both
interstate and intrastate pipelines that move natural gas from the producing
regions to consumption regions. The Company also offers other
services indicated above. The Company does not own or is not directly involved
in the exploration, transportation or refinement of oil and natural gas nor any
of the facilities used for transporting electricity. The Company has
established relationships with numerous customers which includes
many of the leading companies in the industries we
serve.
Representative Customer
list
Spectra Energy
Dominion Resources
Columbia Gas Transmission
Columbia Gas of Ohio and
Pennsylvania
Nisource
Marathon Ashland Petroleum
LLC
American Electric Power
Toyota
Hitachi
Kentucky American Water
Equitable Resources
Markwest Energy
Range Resources
Various State, County and municipal
public service districts.
1
Energy Services’ sales force consists
of industry professionals with significant relevant sales experience who utilize
industry contacts and available public data to determine how to most
appropriately market ESA’s line of products. We rely on direct
contact between our sales force and our customers’ engineering and contracting
departments in order to obtain new business. Due to the occurrence of
inclement weather during the winter months, certain parts of
the Company business, i.e., the construction of pipelines, is somewhat seasonal
in that most of the work is performed during the non-winter months.
Backlog/New
Business
Our Company’s backlog represents
contracts for services that have been entered into but which have not yet been
processed. At September 30, 2009, Energy Services had a backlog of
work to be completed on contracts of $144 million. At September 30,
2008, the Company had a backlog of work to be completed on contracts of $40.7
million. Due to the timing of ESA’s construction contracts and the
long-term nature of some of our projects, portions of our backlog may not be
completed in the current fiscal year. Most projects the Company
performs can be completed in a short period of time, typically two to five
months. Larger projects usually take seven to eighteen months to be
completed. As a general rule, work starts shortly after the signing
of the contract.
Types
of Contracts
Energy Services contracts are usually
awarded on a competitive and negotiated basis. While contracts may be of a
lump sum for a project or one that is based upon time and materials, most of the
work is bid based upon unit prices for various portions of the work with a total
agreed-upon price based on estimated units. The actual revenues
produced from the project will be dependent upon how accurate the customer
estimates are as to the units of the various items.
Raw
Materials and Suppliers
The principal raw materials that the
Company uses are metal plate, structural steel, pipe, wire, fittings and
selected engineering equipment such as pumps, valves and
compressors. For the most part, the largest portion of these
materials are supplied by the customer. The materials that ESA purchases would
predominately be those of a consumable nature on the job, such as small tools
and environmental supplies. We anticipate
being able to obtain these materials for the foreseeable future.
Industry
Factors
Energy Services revenues,
cash flows and earnings are substantially dependent upon, and affected by, the
level of natural gas exploration development activity and the levels of work on
existing pipelines as well as the level of demand for our electrical
services. Such activity and the resulting level of demand for
pipeline construction and related services and electrical services are directly
influenced by many factors over which the Company has no
control. Such factors include the market prices of natural gas and
electricity, market expectations about future prices, the volatility of such
prices, the cost of producing and delivering natural gas and electricity,
government regulations and trade restrictions, local and international political
and economic conditions, the development of alternate energy sources and the
long-term effects of worldwide energy conservation
measures. Substantial uncertainty exists as to the future level of
natural gas exploration and development activity as well as the demand for the
our electrical services.
Energy Services cannot predict the
future level of demand for its construction services, future conditions in the
pipeline or electrical construction industry or future pipeline and electrical
construction rates.
2
Energy Services maintains banking
relationships with three financial institutions and has lines of credit and
borrowing facilities with these institutions. While there is no
reason to believe that such lines won’t be available, any delays getting them
established could create difficulties for the Company. The Company’s
facilities have been sufficient to provide the working capital necessary to
complete their ongoing projects. At September 30, 2009, the Company
had an irrevocable standby letter of credit in the amount of
$950,542. One of the keys to maintaining the company’s growth
will be the establishment and maintenance of sufficient lines of credit to
provide cash flow to fund the Company’s projects.
Competition
The pipeline construction industry is a
highly competitive business characterized by high capital and maintenance
costs. Pipeline contracts are usually awarded through a competitive
bid process and, while the Company believes that operators consider factors such
as quality of service, type and location of equipment, or the ability to provide
ancillary services, price and the ability to complete the project in a timely
manner are the primary factors in determining which contractor is awarded a
job. There are a number of regional and national competitors that
offer services similar to Energy Services. Certain of the Company’s
competitors have greater financial and human resources than Energy Services,
which may enable them to compete more efficiently on the basis of price and
technology. The Company’s largest competitors are Otis Eastern,
Miller pipeline, Green Electric, Summit Electric and Apex Pipeline.
Operating
Hazards and Insurance
Energy Services operations
are subject to many hazards inherent in the pipeline construction business,
including, for example, operating equipment in mountainous terrain, people
working in deep trenches and people working in close proximity to large
equipment. These hazards could cause personal injury or death,
serious damage to or destruction of property and equipment, suspension of
drilling operations, or substantial damage to the environment, including damage
to producing formations and surrounding areas. Energy Services seeks
protection against certain of these risks through insurance, including property
casualty insurance on its equipment, commercial general liability and commercial
contract indemnity, commercial umbrella and workers’ compensation
insurance.
The Company’s insurance coverage for
property damage to its equipment is based on estimates of the cost of comparable
used equipment to replace the insured property. There is a deductible
per occurrence on rigs and equipment of $2,500 and $2,500 for miscellaneous
tools. The Company also maintains third party liability insurance and
a commercial umbrella policy. Energy Services believes that it is
adequately insured for public liability and property damage to others with
respect to its operations. However, such insurance may not be
sufficient to protect Energy Services against liability for all consequences of
well disasters, extensive fire damage or damage to the environment.
Government
Regulation and Environmental Matters
General. Energy
Services’ operations are affected from time to time in varying degrees by
political developments and federal, state and local laws and regulations. In
particular, natural gas production, operations and economics are or have been
affected by price controls, taxes and other laws relating to the natural gas
industry, by changes in such laws and by changes in administrative regulations.
Although significant capital expenditures may be required to comply with such
laws and regulations, to date, such compliance costs have not had a material
adverse effect on the earnings or competitive position of Energy Services. In
addition, Energy Services ‘ operations are vulnerable to risks
arising from the numerous laws and regulations governing the discharge of
materials into the environment or otherwise relating to environmental
protection.
Environmental Regulation. Energy Services’ activities are subject to existing federal, state and local laws and regulations governing environmental quality, pollution control and the preservation of natural resources. Such laws and regulations concern, among other things, the containment, disposal and recycling of waste materials, and reporting of the storage, use or release of certain chemicals or hazardous substances. Numerous federal and state environmental laws regulate drilling activities and impose liability for discharges of waste or spills, including those in coastal areas. The Company has conducted pipeline construction in or near ecologically sensitive areas, such as wetlands and coastal environments, which are subject to additional regulatory requirements. State and federal legislation also provide special protections to animal and marine life that could be affected by the Company’s activities. In general, under various applicable environmental programs, The Company may potentially be subject to regulatory enforcement action in the form of injunctions, cease and desist orders and administrative, civil and criminal penalties for violations of environmental laws. Energy Services may also be subject to liability for natural resource damages and other civil claims arising out of a pollution event. The Company would be responsible for any pollution event that was caused by its actions. It has insurance that it believes is adequate to cover any such occurrences.
3
Environmental regulations that affect
Energy Services’ customers also have an indirect impact on Energy Services.
Increasingly stringent environmental regulation of the natural gas industry has
led to higher drilling costs and a more difficult and lengthy well permitting
process.
The primary environmental statutory and
regulatory programs that affect Energy Services’ operations include the
following: Department of Transportation regulations, regulations set
forth by agencies such as Federal Energy Regulatory Commission and various
environmental agencies including state, federal and local
government.
Health And Safety
Matters. Energy Services’ facilities and operations are also governed by
various other laws and regulations, including the federal Occupational Safety
and Health Act, relating to worker health and workplace safety. As an example,
the Occupational Safety and Health Administration have issued the Hazard
Communication Standard. This standard applies to all private-sector employers,
including the natural gas exploration and producing industry. The
Hazard Communication Standard requires that employers assess their chemical
hazards, obtain and maintain certain written descriptions of these hazards
develop a hazard communication program and train employees to work safely with
the chemicals on site. Failure to comply with the requirements of the standard
may result in administrative, civil and criminal penalties. Energy Services
believes that appropriate precautions are taken to protect employees and others
from harmful exposure to materials handled and managed at its facilities and
that it operates in substantial compliance with all Occupational Safety and
Health Act regulations. While it is not anticipated that Energy Services will be
required in the near future to make material expenditures by reason of such
health and safety laws and regulations, Energy services is unable to predict the
ultimate cost of compliance with these changing regulations.
Research
and Development/Intellectual Property
Energy Services has not made any
material expenditure for research and development. Energy
Services does not own any patents, trademarks or licenses.
Legal
Proceedings
Energy Services is not a party to any
legal proceedings, other than in the ordinary course of business, that if
decided in a manner adverse to the Company would be materially adverse to Energy
Services’ financial condition or results of operations. At September 30, 2009,
the Company was not involved in any material legal proceedings, the outcome of
which would have a material adverse effect on its financial condition or results
of operations.
Facilities
and Other Property
The Company and its subsidiaries own
the property where its subsidiary C J Hughes is located. All other
facilities are leased including the corporate headquarters. The
total amount of the lease payments for the various locations is $12,500 per
month.
4
Employees
As of September 30, 2009, the Company
had approximately 393 employees including management. A number of the Company’s
employees are represented by trade unions represented by various collective
bargaining units. Energy Services’ management believes that the
Company’s relationship with its employees is good.
Item
1A. Risk
Factors
Our business is subject to a variety of
risks and uncertainties, including, but not limited to, the risk and
uncertainties described below. The risks and uncertainties described
below are not the only ones facing our company. Additional risks and
uncertainties not known to us or not described below also may impair our
business operations. If any of the following risks actually occur,
our business financial condition and results of operations could be harmed and
we may not be able to achieve our expectations, projections, intentions or
beliefs about future events that are intended as “forward-looking statements”
under Private Securities Litigation Reform Act of 1995 and should be read in
conjunction with the section entitled “Forward looking statements”.
Our
operating results may vary significantly from quarter to quarter.
We typically experience lower volumes
and lower margins during the winter months due to lower demand for our pipeline
services and more difficult operating conditions. Also, other items
that can materially affect our quarterly results include:
Variations in the mix of our work in
any particular quarter
Unfavorable regional, national or
global economic and market conditions
A reduction in the demand for our
services
Changes in customer spending
patterns
Unanticipated increases in construction
and design costs
Timing and volume of work we
perform
Termination of existing
agreements
Losses experienced not covered by
insurance
Payment risks associated with customer
financial condition
Changes in bonding requirements of
agreements
Interest rate variations
Changes in accounting
pronouncements
Acquisitions and the
integration of them and the costs associated with such
integration.
Credit
facilities to fund our operations and growth might not be
available.
Our business relies heavily on having
lines of credit in place to fund the various projects we are working
on. Should acceptable funding not be available, it could
severely curtail our operations and the ability to generate
profits.
Economic downturns and financial
crisis can impact the level of volumes of our customers
spending.
The severe recession that occurred in
the U.S. during the 2008 and 2009 calendar years resulted in many of our
customers, delaying, cancelling or modifying many projects in 2008 and
2009. While the severity of the recession has moderated there
can be no assurance that the recovery will include a large number of
construction projects for the Company or that any recovery will be
sustained.
An
economic downturn in the industries we serve could lead to less demand for our
services.
In addition to the effects of the
economic recession there could be industry specific reductions in the industries
that we serve. If the demand for natural gas should drop
dramatically, or the demand for electrical services drop dramatically, these
would in turn result in less demand for our services.
5
Project
delays or cancellations may result in additional costs to us, reductions in
revenues or the payment of liquidated damages.
In certain circumstances, we guarantee
project completion by a scheduled acceptance date or have achievement of certain
acceptance and performance testing levels. Failure to meet any of
these requirements could result in additional costs or penalties which could
exceed the expected project profits.
We
may be unsuccessful at generating internal growth.
Our ability to generate internal growth
will be affected by our ability to:
Attract new customers
Expand our relationships with existing
customers
Hire and maintain qualified
employees
Expand geographically
Adjust quickly to changes in our
industry
Also, as experienced in 2008-2009,
economic crisis could significantly limit the number and size of projects that
we have the opportunity to bid on. Many of the factors that could
limit our internal growth may be beyond our control and therefore limit our
ability to grow.
Our
industry is highly competitive.
Our industry has been and remains very
competitive with competitors ranging from small owner operated companies to
large public companies. Within that group there may be companies with
lower overheads that therefore are able to price their services at lower levels
than we can. Accordingly, if that occurs, our volume levels
could be severely limited.
The
type of contracts we obtain could adversely affect our business.
We enter into various types of
contracts, some fixed price, some variable pricing. On fixed price
contracts our profits could be curtailed or eliminated by unanticipated pricing
increases associated with the contract.
Changes by the government in laws
regulating the industries we serve could reduce our volumes.
If the government enacts legislation
that has serious impacts on the industries we serve, it could lead to the
curtailment of any capital projects in those industries and therefore lead to
lower volumes for our company.
Many
of our contracts can be cancelled or delayed or may not be renewed upon
completion.
If our customers should cancel or delay
many projects, our revenues could be reduced if we are unable to replace these
contracts with others. Also, we have contracts that expire and are
rebid periodically. If we are unsuccessful in rebidding those
contracts, that could curtail our revenue as well.
Our
business requires a skilled labor force and if we are unable to attract and
retain qualified employees, our ability to maintain our productivity could be
impaired.
Our productivity depends upon our
ability to employ and maintain skilled personnel to meet our
requirements. Should some of our key managers leave us, it
could limit our productivity. Also, many of our labor personnel are
trades union members. Should we encounter problems with the unions or
there be a problem with enough available operators, welders, etc., it could
curtail our production significantly.
6
Our
backlog may not be realized.
Our backlog could be reduced due to
cancellation of projects by customers and/or reductions in scope of the
projects. Should this occur, our anticipated revenues would be
reduced unless we were able to replace those contracts.
We
extend credit to customers for purchases of our services and therefore have risk
that they may not be able to pay us.
While we have not had any significant
problems with collections of accounts receivables historically, should there be
an economic crisis that would result in our customers’ inability pay it could
certainly curtail our operations and ability to operate.
Our
financial condition could be impacted by goodwill impairment.
We are required annually under General
Accepted Accounting Principals to test our goodwill for
impairment. Goodwill is the asset that represents the excess amount
we pay for a business including liabilities assumed over the fair value of the
tangible and intangible assets of the business we acquire.. We
have recorded on our books at September 30, 2009 a total of $38,469,163 of
goodwill. We had the required testing done as of July
2009 by an outside party and the findings were that the goodwill we
have recorded was not impaired. However, should the acquired
companies experience downturns which would indicate a lesser value, future tests
could indicate goodwill impairment which would result in a write down of the
goodwill asset and a reduction in equity and therefore the book value
of the Company.
We
may incur liabilities or suffer negative financial or reputational impacts
relating to occupational health and safety matters.
Our operations are subject to extensive
laws and regulations relating to the maintenance of safe conditions in the
workplace. While we are constantly monitoring our health and safety
programs, our industry involves a high degree of operating risk and there can be
no assurance given that we will avoid significant liability exposure and/or be
precluded from working for various customers due to high incident
rates. We believe we are taking the appropriate precautions in
this area, but can not be certain of that.
Our
dependence on suppliers, subcontractors and equipment manufacturers could expose
us to risk of loss in our operations.
On
certain projects, we rely on suppliers to obtain the necessary materials and
subcontractors to perform portions of our services. We also rely on
equipment manufacturers to provide us with the equipment needed to conduct our
operations. Any limitations on availability of materials or equipment
or failure to complete work on a timely basis by subcontractors in a quality
fashion, could lead to added costs and therefore lower profitability for the
Company.
During
the ordinary course of business, we may become subject to lawsuits or indemnity
claims, which could materially and adversely affect our business and results of
operations.
From time to time, we may in the
ordinary course of business be named as a defendant in lawsuits, claims and
other legal proceedings. These actions may seek, among other things,
compensation for alleged personal injury, worker’s compensation, employment
discrimination, breach of contract, property damages, civil penalties and other
losses of injunctive or declaratory relief. Also, we often
indemnify our customers for claims related to the services we provide and
actions we take under our contract with them. Because our services in
certain instances may be integral to the operation and performance of our
customer’s infrastructure, we may become subject to lawsuits or claims for any
failure of the systems we work on. While we insure against such
claims, the outcomes of any of the lawsuits, claims or legal
proceedings could result in significant costs and diversion of management’s
attention to the business. Payments of significant amounts, even if
reserved, could adversely affect our reputation, liquidity and results of
operations.
7
A
portion of our business depends on our ability to provide surety
bonds. We may be unable to compete for our work on certain projects
if we are not able to obtain the necessary Surety bonds.
Current or future market conditions, including losses in the construction
industry or as a result of large corporate bankruptcies, as well as changes in
our sureties’ assessment of our operating and financial risk, could cause our
surety providers to decline to issue or renew, or substantially reduce the
amount of bonds for our work and could increase our bonding
costs. These actions could be taken on short notice. Since
a growing number of our customers require such bonding, should our surety
providers limit or eliminate our access to bonding, our performance could be
negatively impacted if we were unable to replace the bonded business with work
that does not require bonding or come up with other means of securing the jobs
performance such as with letters of credit or cash.
We
may not be successful in continuing to meet the requirements of the
Sarbanes-Oxley Act of 2002.
The Sarbanes –Oxley Act of 2002 has
many requirements applicable to us regarding corporate governance and financial
reporting. If we are unable to establish and maintain appropriate
controls as required in the act, the failure to do so could result in a decrease
in the market value of our stock and result in reduced ability to obtain
financing, the potential loss of customers and the additional expenditures to
meet the requirements.
Our
failure to comply with environmental laws could result in significant
liabilities.
Our operations are subject to various
environmental laws and regulations, including those dealing with the handling
and disposal of waste products, PCB’s, fuel storage, etc. We
also work around and under bodies of water. We spend a great
deal of time and money to make sure that we are compliant with the appropriate
laws and regulations. However, if we should inadvertently cause
contamination of waters or soils, liabilities for our company relating to
cleanup and remediation could be substantial and could exceed any insurance
coverage we might have and result in a negative impact to the company’s ability
to operate.
The Form
10-K for 2008 and the Form 10-Q for the quarter ended December31 2008, were
reviewed by the SEC staff and comments issued. The Company has
responded to the Staff comments and included in this document where appropriate,
information requested by the staff and agreed to by the Company. The
SEC Staff has not yet completed their review of our response, but we feel our
response addressed their comments in all material respects.
We
maintain our executive offices at 100 Industrial Lane, Huntington, West Virginia
25702. We consider our current office space adequate for our current
operations.
At
September 30, 2009, we were not involved in any legal proceedings, the outcome
of which would be material to our financial condition or results of
operations.
No
matters were submitted during the fourth quarter of the year ended September 30,
2009 to a vote of security holders.
8
PART
II
(a) Our
units, common stock and warrants are listed on the NYSE Amex Equities under the
symbols ESA.U, ESA and ESA.WS, respectively. The following table sets
forth the range of high and low sales prices for the units, common stock and
warrants during each of the last two fiscal years.
Units
|
Fiscal
2009
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter
ended December 31, 2008
|
$ | 8.60 | $ | 3.00 | $ | - | ||||||
|
Quarter
ended March 31, 2009
|
5.64 | 2.79 | - | |||||||||
|
Quarter
ended June 30, 2009
|
4.60 | 1.20 | - | |||||||||
|
Quarter
ended September 30, 2009
|
4.70 | 3.21 | - | |||||||||
|
Fiscal
2008
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter
ended December 31, 2007
|
$ | 6.92 | $ | 6.57 | $ | - | ||||||
|
Quarter
ended March 31, 2008
|
7.46 | 6.15 | - | |||||||||
|
Quarter
ended June 30, 2008
|
7.45 | 6.70 | - | |||||||||
|
Quarter
ended September 30, 2008
|
9.09 | 6.50 | - | |||||||||
9
Common
Stock
|
Fiscal
2009
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter
ended December 31, 2008
|
$ | 7.25 | $ | 3.70 | $ | — | ||||||
|
Quarter
ended March 31, 2009
|
6.00 | 2.45 | — | |||||||||
|
Quarter
ended June 30, 2009
|
3.45 | 2.60 | — | |||||||||
|
Quarter
ended September 30, 2009
|
3.44 | 2.28 | — | |||||||||
|
Fiscal
2008
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter
ended December 31, 2007
|
$ | 5.85 | $ | 5.60 | $ | — | ||||||
|
Quarter
ended March 31, 2008
|
6.24 | 5.55 | — | |||||||||
|
Quarter
ended June 30, 2008
|
5.95 | 5.28 | — | |||||||||
|
Quarter
ended September 30, 2008
|
5.98 | 5.18 | — | |||||||||
Warrants
|
Fiscal
2009
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter
ended December 31, 2008
|
$ | 1.03 | $ | .25 | $ | — | ||||||
|
Quarter
ended March 31, 2009
|
.70 | .30 | — | |||||||||
|
Quarter
ended June 30, 2009
|
.70 | .21 | — | |||||||||
|
Quarter
ended September 30, 2009
|
.69 | .44 | — | |||||||||
|
Fiscal
2008
|
High
|
Low
|
Dividends
|
|||||||||
|
Quarter
ended December 31, 2007
|
$ | 0.68 | $ | 0.58 | $ | — | ||||||
|
Quarter
ended March 31, 2008
|
0.92 | 0.20 | — | |||||||||
|
Quarter
ended June 30, 2008
|
0.89 | 0.35 | — | |||||||||
|
Quarter
ended September 30, 2008
|
1.27 | 0.54 | — | |||||||||
As of
September 30, 2009, there were two holders of record of our units, twenty
holders of record of our common stock and seven holders of record of our
warrants.
We have
not paid any cash dividends on our common stock to date. The payment of cash
dividends in the future will be contingent upon our revenues and earnings, if
any, capital requirements and general financial condition subsequent to
completion of a business combination. The payment of any dividends will be
within the discretion of our then board of directors. It is the present
intention of our board of directors to retain all earnings, if any, for use in
our business operations and, accordingly, our board does not anticipate
declaring any dividends in the foreseeable
future.
10
(c) Energy
Services of America Corp. did not repurchase any shares of its common stock
during the relevant period.
Not
required for smaller reporting company filer.
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 annual
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’ consolidated 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 that 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.
11
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.
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 ST
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 for the year ended September 30, 2008. The
Company acquired ST Pipeline for $16.2 million in cash and $3.0 million in a
promissory note. The C J Hughes purchase price totaled $34 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 the providing of contracting
services for energy related companies. Currently Energy Services
primarily services to 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 had consolidated operating revenues of $107
million for the year ended September 30, 2009 of which 74% was attributable to
gas work, 22% to electrical services customers, and 4% for water and sewer
installation and other ancillary services.
Energy
Services’ customers include many of the leading companies in the industries it
serves, including Marathon Ashland Petroleum LLC, Spectra Energy, Equitable
Resources, Hitachi and Nisource. 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.
12
Seasonality:
Fluctuation of Results
Our
revenues and results of operations can and usually are subject to seasonal
variations. These variations are the result of weather, customer
spending patterns, bidding seasons and holidays. The first quarter of
the calendar year is typically the lowest in terms of revenues because inclement
weather conditions causes delays in production and customers usually do not plan
large projects during that time. While usually better than the first
quarter, the second quarter often has some inclement weather which can cause
delays in production, reducing the revenues the Company receives and/or
increasing the production costs. The third quarter usually is least
impacted by weather and usually has the largest number of projects
underway. The fourth quarter is usually lower than the third due to
the various holidays. Many projects are completed in the fourth
quarter and revenues are often impacted by customers seeking to either spend
their capital budget for the year or scale back projects due to capital budget
overruns.
In
addition to the fluctuations discussed above, the pipeline industry can be
highly cyclical, reflecting variances in capital expenditures in proportion to
energy price fluctuations. As a result, our volume of business may be
adversely affected by where our customers are in the cycle 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 costs 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 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 as 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.
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 our
industry, but can make comparability to other companies difficult.
13
Margins on
job. Failure to properly execute a job including failure to
properly manage and supervise a job could decrease the profit
margin.
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
The
following table sets forth the Pro Forma consolidated Statement of Operations
for the year ended September 30, 2008 and the consolidated statement of
operations for the year ended September 30, 2009. 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.”
|
Year
ended September 30, 2009
|
Percent
|
Year
ended September 30, 2008
|
Percent
|
|||||||||||||
|
Contract
Revenues
|
$ | 106,766 | 100.0 | % | $ | 208,240 | 100.0 | % | ||||||||
|
Cost
of
Revenues
|
106,536 | 99.8 | % | 176,166 | 84.6 | % | ||||||||||
|
Gross
Profit
|
230 | 0.2 | % | 32,074 | 15.4 | % | ||||||||||
|
General
and administrative expenses
|
7,405 | 6.9 | % | 6,914 | 3.3 | % | ||||||||||
|
Income
(loss) from operations before taxes
|
(7,175 | ) | (6.7 | %) | 25,160 | 12.1 | % | |||||||||
|
Interest
Income
|
57 | 0.1 | % | 349 | 0.2 | % | ||||||||||
|
Interest
Expense
|
(1,624 | ) | 1.5 | % | (1,662 | ) | (0.8 | )% | ||||||||
|
Other
Income
(Expense)
|
(50 | ) | 0.0 | % | 1,233 | 0.6 | % | |||||||||
|
Income
(loss) before Income taxes
|
(8,792 | ) | (8.2 | %) | 25,080 | 12.0 | % | |||||||||
|
Income
taxes
|
(2,870 | ) | (2.7 | %) | 10,078 | 4.8 | % | |||||||||
|
Net
Income
(loss)
|
$ | (5,922 | ) | (5.5 | %) | $ | 15,002 | 7.2 | % | |||||||
|
Earnings
(loss) Per Share – Basic
|
$ | (0.49 | ) | $ | 1.24 | |||||||||||
|
Earning
(loss) Per Share – Diluted
|
$ | (0.49 | ) | $ | 1.03 | |||||||||||
14
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The
following table set forth summary financial information for our pro forma
consolidated results for the year ended September 30, 2008. The
information is presented to show what the consolidated income statement would
have looked like had the transactions with ST Pipeline and CJ Hughes been
completed at the beginning of the year. 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.
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 of America Corporation
ST
Pipeline, Inc. / CJ Hughes
Pro
Forma Combined, Condensed, Consolidated Statement of Income
Year
ended September 30, 2008
(Unaudited)
|
Energy
Services of America Corporation
|
ST
Pipeline January 1 – August 15, 2008
|
ST
Pipeline October 1 – December 31, 2007
|
ST
Pipeline Pro Forma Adjustments
|
CJ
Hughes January 1 – August 15, 2008
|
CJ
Hughes December 31, 2007
|
CJ
Hughes Pro Forma Adjustments
|
Redemption
Adjustments
|
Pro
Forma Combined
|
||||||||||||||||||||||||||||
|
(Audited)
|
(Audited)
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||||||||||||||||||
|
Contract
Revenues
|
$ | 28,517,688 | $ | 37,410,877 | $ | 37,520,704 | $ | 79,217,380 | $ | 25,573,278 | $ | $ | 208,239,927 | |||||||||||||||||||||||
|
Cost
of Revenues
|
23,830,404 | 30,676,571 | 22,409,225 | $ | 1,210,813 | (1) | 74,794,447 | 22,428,832 | $ | 816,113 | (1) | 176,166,405 | ||||||||||||||||||||||||
|
Gross
Profit
|
4,687,284 | 6,734,306 | 15,111,479 | (1,210,813 | ) | 4,422,933 | 3,144,446 | (816,113 | ) | — | 32,073,522 | |||||||||||||||||||||||||
|
General
and administrative expenses
|
1,350,246 | 996,049 | 419,290 | 3,473,283 | 674,345 | 6,913,213 | ||||||||||||||||||||||||||||||
|
Net
income (loss) from operations
|
3,337,038 | 5,738,257 | 14,692,189 | (1,210,813 | ) | 949,650 | 2,470,101 | (816,113 | ) | — | 25,160,309 | |||||||||||||||||||||||||
|
Interest
Income
|
1,585,074 | 34,675 | — | (513,160 | )(2) | — | 91,897 | (543,081 | )(2) | (306,545 | )(5) | 348,860 | ||||||||||||||||||||||||
|
Interest
Expense
|
(220,274 | ) | (142,940 | ) | — | (225,000 | )(3) | (707,622 | ) | (366,488 | ) | — | (1,662,324 | ) | ||||||||||||||||||||||
|
Other
Income (Expense)
|
111,301 | 932,101 | 204,133 | 164,709 | (178,747 | ) | 1,233,497 | |||||||||||||||||||||||||||||
|
Income
before income taxes
|
4,813,139 | 6,562,093 | 14,896,322 | (1,948,973 | ) | 406,737 | 2,016,763 | (1,359,194 | ) | (306,545 | ) | 25,080,342 | ||||||||||||||||||||||||
|
Income
taxes
|
2,001,981 | — | — | 7,803,777 | (4) | — | — | 395,109 | (4) | (122,618 | )(6) | 10,078,249 | ||||||||||||||||||||||||
|
Net
Income
|
$ | 2,811,158 | $ | 6,562,093 | $ | 14,896,322 | $ | (9,752,750 | ) | $ | 406,737 | $ | 2,016,763 | $ | (1,754,303 | ) | $ | (183,927 | ) | $ | 15,002,093 | |||||||||||||||
|
Weighted
average shares outstanding – basic
|
10,750,000 | 2,964,763 | (1,622,456 | ) | 12,092,307 | |||||||||||||||||||||||||||||||
|
Weighted
average shares – diluted
|
13,160,643 | 2,964,763 | (1,622,456 | ) | 14,502,950 | |||||||||||||||||||||||||||||||
|
Net
income per share – basic
|
$ | 0.26 | $ | 1.24 | ||||||||||||||||||||||||||||||||
|
Net
income per share – diluted
|
$ | 0.21 | $ | 1.03 | ||||||||||||||||||||||||||||||||
16
Notes
to pro forma income statements
|
(1)
|
These
adjustments represent the added depreciation created from the mark to
market of the fixed assets of ST Pipeline ($6.1 million) and CJ Hughes
($4.1 million) as required by purchase accounting. The added
depreciation is based upon a 5 year useful
life.
|
|
(2)
|
These
adjustments reflect the interest income lost from the cash payments made
to the shareholders of ST Pipeline ($16.3 million) and CJ 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 were used in the calculation
(3.15%).
|
|
(3)
|
This
adjustment is to reflect the added interest cost that would
have occurred relating to the $3 million of notes at 7.5%
issued to the shareholders of ST Pipeline had the transaction
been in place for the period.
|
|
(4)
|
ST
Pipeline and CJ 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 during the respective period. The combined 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 had been redeemed
at the beginning of the period. The interest rate used were the
actual rates received by Energy Services during the period
(3.15%).
|
|
(6)
|
These
entries are to reflect the tax savings related to the interest income lost
on the payments to redeem shares. The combined tax rate was
40%.
|
2009
compared to 2008 – Pro Forma basis
Revenues. Revenue
decreased by $101.5 million or 48.7% to $106.8 million for the year ended
September 30, 2009. The
decrease was primarily driven by the recessionary times we experienced in 2009
which lead to the
Company not being awarded any large projects similar in size to the
ones completed in previous years. Many of
our customers reduced, delayed or cancelled projects because of the uncertain
economy.
Costs of Revenues. Cost of revenues decreased by $69.6 million or 39.5% to $106.5 million for the year ended September 30, 2009. Cost of revenues decreased at a smaller percentage than revenue due to losses we incurred on two major jobs. There was a combination of events that resulted in the losses on to these jobs. First, the Customer had several other projects that were supposed to start in the quarter that they decided to delay. The pricing had 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. 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 is not indicative of future performance.
Gross
Profit. Gross profits decreased by $31.8 million or 99.3% for
the year ended September 30, 2009. Gross margins
decreased from 15.4% to .2% for the year ended September 30,
2009. This was a result of the losses mentioned
above and the decrease in volume. The Company’s average gross margin
runs in the twelve to fifteen
percent range.
Selling, general and administrative
expenses. Selling, general and administrative expenses
increased by 492,706
or 7.1% for the year ended September 30, 2009. The increase was
driven primarily by the addition of
administrative personnel needed to support our informational and regulatory
compliance needs.
Income from
Operations. Income from operations decreased by $32.3 million
or 128.5% for the year ended September
30, 2009. This decrease was due to the aforementioned
reductions.
17
Interest
Income. Interest income decreased $291,330 or 83.5%
for the year ended September 30, 2009 as excess
cash was used to pay down long term debt.
Interest
expense. Interest expense decreased $38,512 or 2.3% for the
year ended September 30, 2009.
Other
Income. Other income decreased $1,283,748 or104.1% for the
year ended September 30, 2009. This decrease
was due to a reclassification of equipment rental income in 2009 to Construction
Revenues.
Net Income. Net
income decreased by $20.9 million or139.5% to a loss of $5.9 million for the
year ended September
30, 2009. The decrease was driven by the decreases listed
above.
2009
for Energy Services
Energy
Services for 2009 had sales of $107 million, a net loss of $5.9 million which
resulted in a loss per share of $.49 basic and $.49 fully diluted.
Comparison
of Financial Condition
The
Company had total assets of $103 million at September 30, 2009 down $33.6
million from the prior fiscal year end balance. Some primary
components of the balance sheet were accounts receivable which totaled $16.6
million down $21.9 million from the prior year end balances of the operating
companies. Other major categories of assets at September 30, 2009
included cash of $2.8 million down $11 million from the prior year balance as
well as fixed assets of $28.9 million down $4.4 million from prior year
balance.
Liabilities
totaled $48.7 million down from $76.4 million from the prior year balance.
Current maturities of long-term debt was reduced by $7.7
million. This reduction was primarily due to the payment of a note to
the former shareholders of one of the acquired companies for outstanding
receivables collected. Accounts payable and accrued expenses decreased by $9.6
million as a result of the decrease in expenses discussed above. Income taxes
payable was reduced by $1.5 million due to the loss the Company incurred for the
period ending September 30, 2009. Stockholders’ equity was
$54.3million down $5.9 million from prior year due to the losses sustained by
the Company in 2009.
Liquidity
and Capital Resources
Cash
Requirements
We
anticipate that our cash and cash equivalents on hand at September 30, 2009
which totaled $2.8 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 current backlog and
the increased demand for our services, we could be faced with needing
significant additional working capital. We are currently working with our
primary bank to ensure adequate working capital to cover our expected
needs. Limited access to additional working capital could limit the
company’s ability to grow.
Sources
and uses of Cash
As of
September 30, 2009, we had $2.8 million in cash, working capital of $9.4 million
and long term debt net of current maturities of $16 million. The
maturities of the total long term debt is as follows
|
2010
|
$
|
7,254,624
|
||
|
2011
|
10,479,925
|
|||
|
2012
|
2,124,690
|
|||
|
2013
|
1,628,424
|
|||
|
2014
|
344,153
|
|||
|
There
after
|
1,520,651
|
|||
|
Total
|
$
|
23,352,468
|
18
Line
of Credit
The
Company entered into a fifteen million dollar ($15,000,000) Line of Credit
agreement with a regional bank on August 20, 2009. Interest will
accrue on the new line of credit at an annual rate based on “Wall Street
Journal” Prime Rate (the Index) with a floor of six percent
(6.0%). Cash available under the line is calculated based on a
percentage of the Company’s accounts receivable with certain
exclusions. Major items excluded from calculation are receivables
from bonded jobs, retainage, and items greater than one hundred twenty (120)
days old. At September 30, 2009 the Company had $433,000 available on
the line. A portion of the line of credit was used to repay other
outstanding loan balances.
The
following are the major covenants of the line:
|
1.
|
Current
Ratio must be not less than 1.1 in the first year. As of
September 30, 2009 our current ratio was 1.36 to
1.
|
|
2.
|
Debt
to tangible net worth must not exceed 3.5 during the first
year. Our debt to tangible net worth at September 30, 2009 was
3.07 to 1.
|
|
3.
|
Capital
Expenditures (CAPEX) must not exceed $7.5 million. CAPEX from
the loan date was approximately
$400,000.
|
|
4.
|
Dividends
shall not exceed 50% of taxable income without prior bank
approval. No dividends have been
declared.
|
We were in compliance with all loan covenants as of the period ending
September 30, 2009.
19
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 at times we may enter into longer term leases when
warranted. 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 pieces 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
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. The second agreement calls for a monthly
rental of $7,500 per month.
Letters
of Credit
Certain
of our 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
September 30, 2009, the Company was contingently liable on an irrevocable Letter
of Credit for $950,542 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 will 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 September 30, 2009, we had $80
million in performance 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
only two customers that exceeded ten percent of revenues for the year ended
September 30, 2009. This was Markwest and Spectra which accounted for
16% and 21% respectfully 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.
20
Related
Party Transactions
In the
normal course of business, we enter into transactions from time to time with
related parties. These transactions typically would not be material
in nature and would usually relate to real estate, vehicle or equipment
rentals.
Inflation
Due to
relatively low levels of inflation during the years ended September 30, 2009 and
2008, inflation did not have a significant effect on our results.
New
Accounting Pronouncements
During December 2007, revised accounting standards for business
combinations were promulgated by The Financial Accounting Standards Board (FASB)
to become effective for fiscal years beginning after December 15,
2008. Earlier application is prohibited. Assets and
liabilities that arose from business combinations which occurred prior to the
adoption of these standards should not be adjusted upon their
adoption. These standards require the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the business combination; establishes the acquisition date as the
measurement date to determine the fair value of all assets acquired and
liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. As it
relates to recognizing all (and only) the assets acquired and liabilities
assumed in a business combination, costs an acquirer expects but is not
obligated to incur in the future to exit an activity of an acquiree or to
terminate or relocate an acquiree’s employees are not liabilities at the
acquisition date but must be expensed in accordance with other applicable
generally accepted accounting principles. Additionally, during the
measurement period, which should not exceed one year from the acquisition date,
any adjustments that are needed to assets acquired and liabilities assumed to
reflect new information obtained about facts and circumstances that existed as
of that date will be adjusted retrospectively. The acquirer will be
required to expense all acquisition- related costs in the periods such costs are
incurred other than costs to issue debt or equity securities. These
standards will have no impact on our consolidated financial position, results of
operations or cash flows at the date of adoption, but it could have a material
impact on our consolidated financial position, results of operations or cash
flows in the future when it is applied to acquisitions which occur in the fiscal
year beginning October 1, 2009.
In May
2009, The FASB established general standards of accounting for the disclosure of
events that occur after the balance sheet date but before financial statements
are issued. In particular, the FASB set 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.
This
standard is effective for interim or annual periods ending after June 15, 2009,
and is to be applied prospectively.
In June
2009, the FASB established the 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, and is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company has adopted the
Codification for the quarter ending September 30, 2009.
21
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.
Income Taxes
The
Company and all subsidiaries file a consolidated income tax return on a fiscal
year basis. The Company began filing tax returns for the year ended
September 30, 2006 and therefore all prior Company tax returns are still subject
to audit. Both C J Hughes and S T Pipeline filed as S Corporations
prior to their acquisition by the Company, therefore any audits of those
companies tax returns would result in an adjustment to the pass-through income
to the shareholders at the time, and would not create any liability to the
Company.
The
Company follows the liability method of accounting for income taxes in
accordance with the Income Taxes topic of the FASB ASC. Under
this method, deferred tax assets and liabilities are recorded for future tax
consequences of temporary differences between financial reporting and tax bases
of assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the underlying assets or liabilities are
recovered or settled. GAAP prescribes a comprehensive model for how
companies should recognize, measure, present and disclose in their financial
statements uncertain tax positions taken or to be taken on a tax
return.
Goodwill
The
Company has selected July 1 as the date of the annual goodwill impairment
evaluation, which is the first day of our fourth fiscal
quarter. Goodwill was assigned to the operating units at the time of
acquisition. The reporting units to which goodwill was
assigned are CJ Hughes (“CJ”) and its subsidiary
Contractors Rental Corp (“CRC”) as one unit, Nitro Electric(a subsidiary of CJ
Hughes-”Nitro”) and to ST Pipeline. The assignment to CJ
consolidated and ST Pipeline was based on the purchase price of each
company. Both purchases were supported by fairness
opinions. The allocation of the goodwill arising from the purchase of
CJ was allocated between CJ/CRC and Nitro based on an internally prepared
analysis of the relative fair values of each unit.
CJ Hughes
and its subsidiary CRC are considered one reporting unit because CRC almost
exclusively provides labor for CJ as a subcontractor. There have
been no material operational changes to any reporting units since the
date of acquisition. Although the Company uses a centralized management
approach, the reporting units have continued to perform similar services to
those performed prior to the acquisition. There have been no sales of
equipment, other than in the ordinary course of business, or dispositions of
lines of business by any of the operating units.
A
discounted cash flow model requires estimates and judgments about such factors
as the projected free cash flows, weighted average cost of capital (WACC) and
terminal value assumptions. Projected free cash flows require
assumptions about projected revenues, profitability and capital
expenditures. Significant assumptions relating to the pricing
multiple or market approach to value include multiples of price and enterprise
value to various metrics including earnings and cash flows. These estimates
and judgments about the future can be difficult to predict with certainty, and
changes in these assumptions may result in a different conclusion of fair
value.
The
carrying value of the reporting units at September 30, 2008 was relatively close
to the fair value of the reporting units, since the purchase at fair value only
occurred six weeks before that date. The July 1, 2009 annual
impairment testing indicates that the fair value of each of the operating units
is at least 32% higher than the carrying value at that date, therefore no
reporting unit will be specifically addressed for more detailed disclosure at
this time.
22
Revenue
Recognition
Revenues
from fixed price contracts are recognized using the percentage-of-completion
method, measured by the percentage of costs incurred to date to total estimated
costs for each contract. These contracts provide for a fixed amount
of revenues for the entire project. Such contracts provide that the
customer accept completion of progress to date and compensate us the services
rendered, measured in terms of units installed, hours expended or some other
measure of progress. Contract costs include all direct
material, labor and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, tools and
expendables. The cost estimates are based on the professional
knowledge and experience of the Company’s engineers, project managers and
financial professionals. Changes in job performance, job conditions,
and others all affect the total estimated costs at
completion. The effects of these changes are recognized
in the period in which they occur. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. The current asset “Costs and estimated
earnings in excess of billings on uncompleted contracts” represents revenues
recognized in excess of amounts billed for fixed price contracts. The
current liability “Billings in excess of costs and estimated earnings on
uncompleted contracts” represents billings in excess of revenues recognized for
fixed price contracts.
Revenue
on all costs plus and time and material contracts are recognized when services
are performed or when units are completed.
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 September 30, 2009, the management review deemed that
the allowance for doubtful accounts was adequate to cover any anticipated
losses.
Outlook
The
following statements are based on current expectations. These
statements are forward looking, and actual results may differ
materially.
Prior to
the general economic crisis that severely impacted demand in 2009, our customers
were experiencing high demands for their products, particularly natural
gas. Currently, we are seeing the increased demand for our services
and accordingly, we would expect to see projected spending for our customers on
their transmission and distribution systems increasing dramatically over the
next few years. However, with the current uncertainty in the economy
the demand for the customer’s project could wane and also their ability to fund
planned projects could be reduced. The Company’s backlog at September
30, 2009 was $144 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 anticipated in fiscal 2010 continues, we believe that the
Company will 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.
23
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 2010, the Company’s needed capital expenditures will be between
$2 and $5 million dollars. However, if the customer demands continue
to 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.
We are
exposed to market risks, primarily related to increases in fuel prices and
adverse changes in interest rates.
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.
Financial
Statements are included as Exhibit 13 to this Annual Report on Form
10-K.
We
engaged Arnett & Foster, Certified Public Accountants, P.L.L.C. (“Arnett
& Foster”) as our independent registered public accounting firm, effective
October 1, 2008.
In
connection with the audits of the two fiscal years ended September 30, 2008 and
2009, there were (1) no disagreements with Arnett & Foster on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which disagreements, if not resolved to the satisfaction of
Arnett & Foster, would have caused them to make reference to the subject
matter of the disagreements in connection with their opinion and (2) no
reportable events.
Arnett
& Foster was engaged by the Company on October 1, 2008 to audit the
consolidated financial statements of the Company as of and for the year ending
September 30, 2008.
(a) Evaluation
of Disclosure 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.
(b) Management’s
Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting for the Company. Internal control over financial reporting
refers to the process designed by, or under the supervision of, our Chief
Executive Officer and Chief Financial Officer, and effected by our Board of
Directors, management and other personnel, 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 principles, and includes those policies and procedures
that:
24
(1)
Pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
(2)
Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and
(3)
Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the Company’s financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
has used the framework set forth in the report entitled “Internal Control –
Integrated Framework” published by the Committee of Sponsoring Organizations of
the Treadway Commission to evaluate the effectiveness of the Company’s internal
control over financial reporting. Management has not indentified any
material weakness in the Company’s internal control over financial
reporting. Management has concluded that the Company’s internal
control over financial reporting was effective as of the end of the most recent
fiscal year.
This
Annual Report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s registered public accounting firm pursuant to temporary rules of the
SEC that permit the Company to provide only Management’s report in this Annual
Report.
|
|
/s/
Edsel Burns
|
|
|
|
Edsel
R. Burns
|
|
|
|
Chief
Executive Officer
|
|
| /s/ Larry A. Blount | ||
| Larry A. Blount | ||
| Chief Financial Officer |
The
report set forth under this Item 9AT (b) shall not have been deemed filed for
the purposes of Section 18 of the Exchange Act or otherwise subject to the
liabilities of Section 18.
(c) Changes
in Internal Controls over Financial Reporting
There has
been no change in Energy Services of America Corp.’s internal control over
financial reporting during Energy Services of America Corporation’s fourth
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.
None.
PART
III
The principal occupation during the
past five years of each director and executive officer is set forth
below. All directors and executive officers have held their present
positions since our inception unless otherwise stated.
25
Marshall T.
Reynolds has served as Chairman of the Board of Directors since our
inception. Mr. Reynolds has served as Chief Executive Officer and Chairman
of the Board Directors of Champion Industries, Inc., a commercial printer,
business form manufacturer and supplier of office products and furniture, from
1992 to the present, and sole stockholder from 1972 to 1993; President and
General Manager of The Harrah & Reynolds Corporation, from 1964 (and
sole stockholder since 1972) to present; Chairman of the Board of Directors of
Portec Rail Products, Inc.; Chairman of the Board of Directors of the Radisson
Hotel in Huntington, West Virginia; and Chairman of the Board of Directors of
McCorkle Machine and Engineering Company in Huntington, West Virginia.
Mr. Reynolds also serves as a Director of the Abigail Adams National
Bancorp, Inc. in Washington, D.C.; Chairman of the Board of Directors of
First Guaranty Bank in Hammond, Louisiana; and Chairman of the Board of
Directors of Premier Financial Bancorp, Inc. in Huntington, West Virginia.
Mr. Reynolds is the father of Jack Reynolds and Douglas
Reynolds.
Jack M.
Reynolds served as President,
Chief Financial Officer and a member of our Board of Directors since our
inception to September 2008. Mr. Reynolds has been a Vice President
of Pritchard Electric Company since 1998. Pritchard is an electrical
contractor providing electrical services to both utility companies as well as
private industries. Mr. Reynolds also serves as a Director of
Citizens Deposit Bank of Vanceburg, Kentucky. Mr. Reynolds is the son
of Marshall Reynolds and the brother of Douglas Reynolds.
Edsel R.
Burns has
been a Director since our inception. Mr. Burns became President of
the Company in November 2008. Mr. Burns became Chief Executive
Officer in December 2009. Mr. Burns was President and Chief Executive
Officer of C. J. Hughes Construction Company, Inc. from September of 2002 to
November 2008. C. J. Hughes is an underground utility construction
company specializing in gas and water line replacement as well as utility
environmental issues. From January 2002 to September of 2002, Mr.
Burns was self-employed as an independent financial consultant to banks. From
June of 2001 to December 2001, Mr. Burns was the Chief Financial Officer for
Genesis Health Systems, a holding company for a collaborative group of three
hospitals, two in Huntington, West Virginia and one in Point Pleasant, West
Virginia. Mr. Burns is a Certified Public Accountant and is a member
of the American Institute of Certified Public Accountants as well as the West
Virginia and Ohio societies of CPAs. He also is on the Board of
Directors of Premier Financial Bancorp, Inc.
Neal W. Scaggs
has been a Director since our inception. Mr. Scaggs has been
president of Baisden Brothers, Inc. (retail and wholesale hardware) from 1963 to
the present. Mr. Scaggs is on the Boards of Directors of Premier
Financial Bancorp, Inc., Champion Industries, Inc. and Portec Rail Products,
Inc.
Joseph L.
Williams has been a Director since our inception. Mr. Williams
is the Chairman and Chief Executive Officer of Basic Supply Company, Inc., which
he founded in 1977. Mr. Williams was one of the organizers and is a
Director of First Sentry Bank, Huntington, West Virginia. Mr.
Williams also serves as a Director of Abigail Adams National Bancorp, Inc., in
Washington, D.C. Mr. Williams is a member of the West Virginia
Governor’s Workforce Investment Council. He is a former Director of Unlimited
Future, Inc. (a small business incubator) and a former Member of the National
Advisory Council of the U.S. Small Business Administration. Mr.
Williams is a former Mayor and City Councilman of the City of Huntington, West
Virginia. He is a graduate of Marshall University with a degree in
finance and is a member of its Institutional Board of Governors.
Richard M. Adams,
Jr. was appointed to the Board of Directors on August 15, 2008. Mr. Adams
has been the President of United Bank, Inc., a subsidiary of United Bankshares,
Inc. since 2007. Prior to his appointment as President, Mr. Adams was
the Executive Vice President of United Bank, Inc. He is also
Executive Vice President of United Bankshares, Inc., a multi-state bank holding
company doing business in Ohio, West Virginia, Virginia, Maryland, and
Washington, D.C.
Keith
Molihan was appointed to the Board of Directors on August 15, 2008. Mr.
Molihan is a retired executive director of the Lawrence County Community Action
Organization. Mr. Molihan has served as Chairman of the Board of
Directors of Ohio River Bank, Chairman of the Board of Directors of Farmers Bank
of Eminence Kentucky and Chairman of the Board EMEGA Turbine Technology, as well
as President of the Lawrence County Ohio Port Authority and President of the
Southeast Ohio Emergency Medical organization.
Eric Dosch
is the Chief Credit Officer of First Guaranty Bank located in Hammond,
Louisiana. Mr. Dosch has worked for First Guaranty Bank since
2003. Prior to his association with First Guaranty, Mr. Dosch was a
financial analyst with Livingston & Jefferson, a private asset management
firm located in Cincinnati, Ohio. Mr. Dosch is a CFA Charterholder
and a graduate from The Graduate School of Banking at Louisiana State
University. Mr. Dosch obtained his undergraduate degree from Duke
University.
26
Douglas V.
Reynolds is an attorney for Reynolds & Brown, PLLC. Mr.
Reynolds is the President of the Transylvania Corporation and a director of The
Harrah and Reynolds Corporation, and Portec Rail Products, Inc. Mr.
Reynolds is a graduate of Duke University and holds a law degree from West
Virginia University. Mr. Reynolds is the son of Director Marshall T.
Reynolds and brother of Jack M. Reynolds.
Larry A. Blount
was appointed as Chief Financial Officer and Secretary of the Company in
August, 2008. Mr. Blount graduated from West Virginia State
University with a Bachelor of Science degree in Business Administration and
Accounting. He is also a Certified Public Accountant. Mr.
Blount was employed by Union Boiler Company, in various capacities, including
Staff Accountant, Internal Auditor, Chief Accountant and Controller, from
1980-1996. From 1996-2003 he was Controller and Vice-President of
Accounting and Finance for Williams Group International. He served as
Divisional Accounting Manager for Alberici Constructors from 2003-2005. From
2005-2007, Mr. Blount served as Vice President, Chief Financial Officer,
Secretary and Treasurer for Nitro Electric Company.
James
Shafer is
the president, and until its sale to Energy Services was the owner, of ST
Pipeline.
Section
16(a) Beneficial Ownership Reporting Compliance
Our common stock is registered with the
Securities and Exchange Commission pursuant to Section 12(b) of the Securities
Exchange Act of 1934. The officers and directors and beneficial
owners of greater than 10% of our common stock are required to file reports on
Forms 3, 4 and 5 with the Securities and Exchange Commission disclosing
beneficial ownership and changes in beneficial ownership of the common
stock. Securities and Exchange Commission rules require disclosure in
our Proxy Statement or Annual Report on Form 10-K of the failure of an officer,
director or 10% beneficial owner of our common stock to file a Form 3, 4 or 5 on
a timely basis. Based on our review of ownership reports required to
be filed for the fiscal year ended September 30, 2009, all of our directors,
officers and owners of more than 10% of our common stock filed these reports on
a timely basis.
Meetings
of the Board of Directors
During
fiscal 2009, the Board of Directors held twelve regular meetings and one special
meeting. No director attended fewer than 75% in the aggregate of the
total number of board meetings held. All directors serving on our
committees attended more than 75% of the total number of committee meetings on
which they served during fiscal 2009. Although not required,
attendance of Board members at the Annual Meeting of Stockholders is
encouraged. All members of our Board of Directors attended the 2009
Annual Meeting of Stockholders except Eric Dosch.
Board
Committees
The Board of Directors has an audit
committee. The Board of Directors has adopted a charter for this committee,
which was filed as Appendix A to the proxy statement for our 2007 Annual Meeting
of Stockholders. The charter has not been amended.
Audit
Committee. The audit committee consisted of Messrs. Scaggs,
Williams, Adams and Molihan with Mr. Scaggs acting as chairman of the committee
in fiscal 2009. The audit committee met six times during the fiscal
year ended September 30, 2009. The independent directors appointed to
the audit committee are independent members of the board of directors, as
defined by Securities and Exchange Commission rules and the NYSE Amex Equities
corporate governance listing standards. Each member of the audit committee is
financially literate, and the Board of Directors has determined that Messrs.
Adams and Molihan qualify as audit committee financial experts, as such term is
defined by Securities and Exchange Commission rules.
The audit
committee reviews the professional services and independence of our independent
registered public accounting firm and our accounts, procedures and internal
controls. The audit committee also recommends the firm selected to be our
independent registered public accounting firm, reviews and approves the scope of
the annual audit, reviews and evaluates with the independent public accounting
firm our annual audit and annual consolidated financial statements, reviews with
management the status of internal accounting controls, evaluates problem areas
having a potential financial impact on us that are brought to the committee’s
attention by management, the independent registered public accounting firm or
the board of directors, and evaluates all of our public financial reporting
documents.
27
The audit
committee approved the appointment of Arnett & Foster P.L.L.C. to be our
independent registered public accounting firm for the 2009 fiscal
year. A representative of Arnett & Foster P.L.L.C. is not
expected to attend the Annual Meeting.
Other
Committees. The Board has
determined that the independent members of the Board of Directors will perform
the duties of the nominating committee and the compensation committee of the
Board of Directors and neither committee has a written charter. The independent
directors will (i) identify individuals qualified to become members of the Board
of Directors and recommend to the Board of Directors the nominees for election
to the Board of Directors, (ii) recommend director nominees for each committee
to the Board of Directors, (iii) identify individuals to fill any vacancies on
the Board of Directors, (iv) discharge the Board of Directors’ responsibilities
relating to compensation of our directors and officers and (v) review and
recommend to the Board of Directors, compensation plans, policies and benefit
programs, as well as approve chief executive officer compensation. The
independent members of the Board of Directors met two times as the nominating
committee during the fiscal year ended September 30, 2009.
The
independent directors of the Board identify nominees by first evaluating the
current members of the Board of Directors willing to continue in
service. Current members of the Board of Directors with skills and
experience that are relevant to our business and who are willing to continue in
service are first considered for re-nomination, balancing the value of
continuity of service by existing members of the Board of Directors with that of
obtaining a new perspective. If any member of the Board of Directors
does not wish to continue in service, or if the Board decides not to re-nominate
a member for re-election, or if the size of the Board of Directors is increased,
the independent directors would solicit suggestions for director candidates from
all board members. The independent directors would seek to identify a candidate
who at a minimum satisfies the following criteria:
|
●
|
has
the highest personal and professional ethics and integrity and whose
values are compatible with ours;
|
|
●
|
has
experiences and achievements that have given him or her the ability to
exercise and develop good business
judgment;
|
|
●
|
is
willing to devote the necessary time to the work of the Board of Directors
and its committees, which includes being available for board and committee
meetings;
|
|
●
|
is
familiar with the communities in which we operate and/or is actively
engaged in community activities;
|
|
●
|
is
involved in other activities or interests that do not create a conflict
with his or her responsibilities to us and our stockholders;
and
|
|
●
|
has
the capacity and desire to represent the balanced, best interests of our
stockholders as a group, and not primarily a special interest group or
constituency.
|
The
independent directors will also take into account whether a candidate satisfies
the criteria for “independence” under Securities and Exchange Commission rules
and the American Stock Exchange and, if a nominee is sought for service on the
audit committee, the financial and accounting expertise of a candidate,
including whether an individual qualifies as an “audit committee financial
expert.”
28
Procedures
for the Nomination of Directors by Stockholders
The Board
of Directors has adopted procedures for the submission of director nominees by
stockholders. If a determination is made that an additional candidate
is needed for the Board of Directors, the independent members of the Board of
Directors will consider candidates submitted by our stockholders. Stockholders
can submit the names of qualified candidates for director by writing to our
Corporate Secretary at 100 Industrial Lane, Huntington, West Virginia 25702. The
Corporate Secretary must receive a submission not less than forty-five (45) days
prior to the date of our proxy materials for the preceding year’s annual
meeting. The submission must include the following
information:
|
●
|
a
statement that the writer is a stockholder and is proposing a candidate
for consideration by our independent
directors;
|
|
●
|
the
name and address of the stockholder as they appear on the our books and
number of shares of our common stock that are owned beneficially by such
stockholder (if the stockholder is not a holder of record, appropriate
evidence of the stockholder’s ownership will be
required);
|
|
●
|
the
name, address and contact information for the candidate, and the number of
shares of our common stock that are owned by the candidate (if the
candidate is not a holder of record, appropriate evidence of the
stockholder’s ownership should be
provided);
|
|
●
|
a
statement of the candidate’s business and educational
experience;
|
|
●
|
such
other information regarding the candidate as would be required to be
included in the proxy statement pursuant to Securities and Exchange
Commission Regulation 14A;
|
|
●
|
a
statement detailing any relationship between the candidate and Energy
Services of America Corporation;
|
|
●
|
a
statement detailing any relationship between the candidate and any
customer, supplier or competitor of Energy Services of America
Corporation;
|
|
●
|
detailed
information about any relationship or understanding between the proposing
stockholder and the candidate; and
|
|
●
|
a
statement that the candidate is willing to be considered and willing to
serve as a director if nominated and
elected.
|
A
nomination submitted by a stockholder for presentation by the stockholder at an
annual meeting of stockholders will also need to comply with any additional
procedural and informational requirements adopted in the future.
Code
of Ethics
We have
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions. The Code of Ethics was
previously filed as an exhibit to our Registration Statement on Form
S-1. A copy of the Code will be furnished without charge upon written
request to the Corporate Secretary, Energy Services of America Corporation, 100
Industrial Lane, Huntington, West Virginia.
Executive
and Director Compensation
During
fiscal 2009 no compensation has been paid directly or indirectly to any
executive officer or director. Consequently, we have not formulated any policies
on executive compensation. However, we plan to adopt compensation standards and
policies during fiscal 2010.
No
compensation of any kind, including finder’s and consulting fees, has been paid
to any of our initial stockholders, officers or directors, or any of their
respective affiliates, for services rendered prior to or in connection with the
business combination.
29
Summary
Compensation Table. The following table shows the compensation
of Marshall T. Reynolds, our principal executive officer, and the two highest
compensated executive officers who received total compensation of $100,000
during the past fiscal year for services to the company or any of its
subsidiaries during the year ended September 30, 2009. During the
year ended September 30, 2009, we did not make any stock awards or option
grants, nor did we make any non-equity incentive plan awards.
|
Summary
Compensation Table
|
|||||||
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Non-equity
incentive plan compensation ($)
|
Non-qualified
deferred compensation earnings (1) ($)
|
All
other
compensation (2)($) |
Total
($)
|
|
Marshall
T. Reynolds, Chairman and former Chief Executive Officer
|
2008
2009
|
$ —
—
|
$ —
—
|
$
—
—
|
$
—
—
|
$ —
10,000(1)
|
$
—
10,000
|
|
Edsel
R. Burns
President
and current Chief Executive Officer
|
2008
2009
|
$
15,411
125,000
|
$ —
—
|
$
—
—
|
$
—
—
|
$ —
12,871(1)(2)
|
$
15,411
137,571
|
|
Larry
Blount
Secretary/Treasurer
and Chief Financial Officer
|
2008
2009
|
$
13,564
110,000
|
$ —
23,000
|
$
—
—
|
$
—
—
|
$ —
1,961(2)
|
$
13,564
134,961
|
(1) Director’s
fees.
(2) 401(k)
Plan matching contribution.
Benefit
Plans
Energy Services 401(k)
Plan
401(k)
Retirement Plans
C. J. Hughes Construction Company, Inc
maintains two tax-qualified 401(k) retirement plans, one for union employees and
one for non-union employees. Employees who have attained age 18 and
completed 1,000 hours of service during a 12-month period are eligible to
participate. Employees can contribute up to 15% of eligible wages, provided the
compensation deferred for a plan year does not exceed the indexed dollar amount
set by the Internal Revenue Service, which was $16,500 for 2009. C.
J. Hughes will match $0.25 on each dollar contributed up to 6% of eligible
wages. In addition, participants who are age 50 or older by the end
of the plan year may elect to defer up to an additional $5,000 into the 401(k)
plan. Additionally, each plan year, C. J. Hughes may make
discretionary profit-sharing contributions for participants who are actively
employed on the last day of the plan year. The discretionary
contributions made by C. J. Hughes will be allocated to a qualifying
participant’s individual account based on the ratio of his or her compensation
to the total compensation of all qualifying participants for the Plan Year. No
discretionary profit sharing contribution was made for
2009. Participants direct the investment of their account in the
Plan, selecting from investment funds provided under the Plan, as determined by
C. J. Hughes. Participants receive quarterly benefit statements and
have immediate access to their plan accounts through an Interactive Voice
Response System and the Internet. Plan benefits are paid as soon as
administratively possible following the participant’s termination of
employment. Lump sums, partial payments and installment payments are
available in the non-union plan if the participant’s account balance exceeds
$1,000. Lump sums and partial payments are available in the union
plan if the participant’s account balance exceeds $1,000.
Nitro Electric maintains a
tax-qualified 401(k) retirement plan for all non-union
employees. Employees are eligible to participate upon date of
hire. Employees may contribute eligible wages up to the maximum
indexed dollar amount set by the Internal Revenue Service, which was $16,500 for
2009. In addition, participants who are age 50 or older by the end of
the plan year may elect to defer up to an additional $5,000 into the 401(k)
plan. Nitro Electric may make annual discretionary matching
contributions and/or profit sharing contributions to the plan. The matching
contribution formula for the 2009 plan year was $.25 on each dollar contributed
up to 6% of eligible wages. No profit sharing contributions were made.
Participants direct the investment of their account in the Plan, selecting from
investment funds provided under the Plan, as determined by Nitro Electric.
Participants receive quarterly benefit statements that provide information on
their account balances and have immediate access to their account through an
Interactive Voice Response System and the Internet. Benefits are paid in the
form of a single lump sum cash payment as soon as administratively possible
following the participant’s termination of employment.
30
Energy Services of America
Corporation 2009 Employee Stock Purchase Plan
The plan enables eligible employees
to purchase common stock through payroll deductions. The plan is intended to
qualify under Section 423 of the Internal Revenue Code and its regulations. If
Code Section 423 is amended in any way, the Compensation Committee of our Board
may amend the plan to conform to such changes.
Shares
Reserved For Issuance Under the Plan. Up to 1,200,000 shares
of common stock, subject to adjustments for stock dividends, splits and other
events that affect the number of shares of common stock outstanding, may be
issued under the plan. Stock subject to purchase under the plan will be shares
of common stock that have been authorized but unissued, or have been previously
issued and reacquired by us, or both.
Maximum
purchase. The plan is open to eligible employees of Energy
Services of America Corporation and participating subsidiaries. A participant’s
stock purchases during a calendar year may not exceed the lesser of: (a) a
percentage of the participant’s compensation or a total dollar amount as
specified by the committee, or (b) $25,000.
Benefits. Since
participation in the plan is voluntary, future benefits to be allocated to any
individual or group of individuals under the plan cannot be determined at this
time.
Stock
purchase agreement. Participants will enter into a stock
purchase agreement with us. The agreement will state the number of shares of
common stock to be purchased and will authorize us, during the offering period,
to withhold from the participant’s pay amounts that, together with accrued
interest, will equal the purchase price of the shares. Energy Services of
America Corporation or the appropriate participating subsidiary will credit
these amounts to a plan account, and this account will bear interest at a rate
determined by the Compensation Committee.
Types
of offering. The plan provides for both fixed price and
variable price offerings. In a fixed price offering, the purchase price of a
share of common stock will be at least 85% of its fair market value on the date
of the agreement. In a variable price offering, the purchase price of a share of
common stock will be at least 85% of its fair market value on the date of
purchase. Offering periods will be established by the committee, but may not
exceed 27 months for a fixed price offering and five years for a variable price
offering. The Compensation Committee determines which type of offerings it will
make.
Purchase
of shares. At the end of the offering period, if the fair
market value of a share of common stock is equal to or greater than the purchase
price specified in the agreement, the shares covered by the agreement
automatically will be purchased by the participant with the funds held on behalf
of the participant in the plan account. However, the participant may elect not
to purchase any shares or to purchase fewer than all of the shares covered by
the agreement. Any balance in the plan account held on behalf of the participant
after purchase of the shares, including accrued interest, will be paid to the
participant. If a participant does not purchase any shares, all funds in the
plan account held on his or her behalf, including accrued interest, will be paid
to the participant.
The Compensation Committee may permit
a participant to purchase all or part of the shares before the end of the
offering period. If the participant elects to purchase stock before the end of
the offering period, but does not have enough funds held on his or her behalf in
the plan account, the participant must pay the balance in a manner approved by
the Compensation Committee.
Termination
of agreement. A participant may terminate the agreement before
the end of the offering period and receive a cash refund of his or her funds in
the plan account, including accrued interest. The Compensation Committee will
determine how long a participant must wait before he or she may participate in
the plan again.
Termination
of employment. The Compensation Committee will determine the
effects of a participant’s retirement, death, disability, leave of absence or
any other termination of employment during the offering period.
Change
of control. In the event of or in anticipation of a change in
control of Energy Services of America Corporation, the Compensation Committee
may at any time adjust the terms of outstanding agreements as it deems
appropriate to reflect the change of control, or may cause the surviving
corporation in the change of control to assume the outstanding agreements or
enter into substitute agreements.
31
Amendments. The Compensation Committee may amend, suspend or discontinue the plan or amend outstanding agreements made under the plan as long as such action is not prohibited by Code Section 423.
Directors’
Compensation
Cash
Compensation. Other than as
set forth below, members of the Board of Directors did not receive any
compensation during
the year ended September 30, 2009.
Directors’
Summary Compensation Table. The table set forth below the
compensation received by directors for the fiscal year ended September 30,
2009. No stock awards, option grants or non-equity incentive plan
compensation awards was made to directors during 2009.
|
Director
Compensation
|
|||||
|
Name
|
Fees
earned
or paid in cash ($) |
Non-equity
incentive plan compensation ($) |
Non-qualified
deferred compensation earnings ($) |
All
other
compensation ($) |
Total
($) |
|
Jack
M. Reynolds
|
$10,000
|
—
|
—
|
—
|
$10,000
|
|
Neal
W. Scaggs
|
$10,000
|
—
|
—
|
—
|
$10,000
|
|
Joseph
L. Williams
|
$10,000
|
—
|
—
|
—
|
$10,000
|
|
Richard
M. Adams, Jr.
|
$ 9,000
|
—
|
—
|
—
|
$ 9,000
|
|
Keith
Molihan
|
$10,000
|
—
|
—
|
—
|
$10,000
|
|
Douglas
Reynolds
|
$10,000
|
—
|
—
|
—
|
$10,000
|
|
Eric
Dosch
|
$10,000
|
—
|
—
|
—
|
$10,000
|
|
James
Shafer
|
$ 9,000
|
—
|
—
|
—
|
$ 9,000
|
Compensation
Committee Interlocks and Insider Participation
The compensation committee is comprised
of our independent directors. Under the board’s policies, Mr.
Marshall Reynolds, Mr. Edsel Burns, and any other director who is also an
executive officer, will not participate in the Board of Directors’ determination
of compensation for their respective offices in the future if compensation is
given to executive officers.
Compensation
Committee Report
As of the
end of fiscal 2009, the compensation paid to officers was paid at the same rates
as they had been paid by the subsidiaries prior to the
acquisition. Consequently, the independent members of the Board of
Directors have not met in their capacity as the Compensation Committee and have
not formulated any policies on executive compensation. We plan to
adopt standards and policies to govern compensation moving
forward. During 2009, the compensation paid to our President and our
Chief Financial Officer consisted of salaries paid by our
subsidiaries.
Persons
and groups who beneficially own in excess of five percent of our common stock
are required to file certain reports with the Securities and Exchange Commission
regarding such ownership. The following table sets forth, as of
October 30, 2009, the shares of common stock beneficially owned by each person
who was the beneficial owner of more than five percent of our outstanding shares
of common stock, as well as the shares owned by our directors and executive
officers as a group.
32
|
Name
and Address of
Beneficial
Owners
|
Amount
of Shares
Owned
and Nature
of
Beneficial
Ownership(1)
|
Percent
of Shares
of
Common Stock
Outstanding
|
|||||
|
All
Directors, Nominees and Executive Officers
as
a Group (11 persons)
|
7,931,857
|
50.39
|
%
|
||||
|
Principal Stockholders:
|
|||||||
|
Marshall
T. Reynolds
|
4,661,864
|
(2) |
30.20
|
%
|
|||
|
100
Industrial Lane,
|
|||||||
|
Huntington,
West Virginia 25702
|
|||||||
|
Edsel
R. Burns
|
861,415
|
(3) |
7.08
|
%
|
|||
|
100
Industrial Lane,
|
|||||||
|
Huntington,
West Virginia 25702
|
|||||||
|
Douglas
V. Reynolds
|
1,284,815
|
(4) |
10.56
|
%
|
|||
|
100
Industrial Lane,
|
|||||||
|
Huntington,
West Virginia 25702
|
|||||||
|
(1)
|
In
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table of
any shares of common stock if he has sole or shared voting or investment
power with respect to such security, or has a right to acquire beneficial
ownership at any time within 60 days from the date as of which beneficial
ownership is being determined. As used herein, “voting power” is the power
to vote or direct the voting of shares and “investment power” is the power
to dispose or direct the disposition of shares. Includes all shares held
directly as well as by spouses and minor children, in trust and other
indirect ownership, over which shares the named individuals effectively
exercise sole or shared voting and investment
power.
|
|
(2)
|
Based
upon Schedule 13D/A, dated August 8, 2008, filed on behalf of
Marshall T. Reynolds.
|
|
(3)
|
Based
upon Schedule 13D/A, dated August 8, 2008, filed on behalf of Edsel
R. Burns.
|
Based
upon Schedule 13D, dated August 8, 2008, filed on behalf of Douglas V.
Reynolds.
33
The table
below sets forth certain information regarding our Board of Directors, including
the terms of office of board members.
|
Names
and Address (1)
|
Age(2)
|
Positions
Held
|
Director
Since
|
Current
Term
to Expire |
Shares
of Common
Stock Beneficially Owned on October 30, 2009 (3) |
Percent
of Class
|
|||||||
|
Directors:
|
|||||||||||||
|
Marshall
T. Reynolds
|
73
|
Chairman
|
2006
|
2010
|
4,661,864
|
(4)
|
30.20%
|
||||||
|
Edsel
R. Burns
|
58
|
Chief
Executive Officer and Director
|
2006
|
2010
|
861,415
|
(6)
|
7.08%
|
||||||
|
Larry
A. Blount
|
60
|
Secretary/Treasurer,
Chief Financial Officer
|
n/a
|
2010
|
—
|
—
|
|||||||
|
Jack
M. Reynolds
|
44
|
Director
|
2006
|
2010
|
506,924
|
(5)
|
4.17%
|
||||||
|
Neal
W. Scaggs
|
73
|
Director
|
2006
|
2010
|
431,415
|
(7)
|
3.55%
|
||||||
|
Joseph
L. Williams
|
64
|
Director
|
2006
|
2010
|
184,424
|
(8)
|
1.52%
|
||||||
|
Richard
M. Adams, Jr.
|
41
|
Director
|
2008
|
2010
|
2,500
|
—
|
|||||||
|
Keith
Molihan
|
67
|
Director
|
2008
|
2010
|
—
|
—
|
|||||||
|
Douglas
Reynolds
|
33
|
Director
|
2008
|
2010
|
1,284,815
|
10.56%
|
|||||||
|
Eric
Dosch
|
31
|
Director
|
2008
|
2010
|
150
|
—
|
|||||||
|
James
Shafer
|
66
|
Director
|
2008
|
2010
|
9,800
|
—
|
|||||||
|
All
Directors and Executive Officers as a Group
(11 persons) |
7,931,857
|
(9)
|
65.6%
|
||||||||||
|
(1)
|
The
mailing address for each person listed is 100 Industrial Lane, Huntington,
West Virginia 25702.
|
|
|
(2)
|
As
of October 30, 2009.
|
|
(3)
|
In
accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table of
any shares of common stock if he has sole or shared voting or investment
power with respect to such security, or has a right to acquire beneficial
ownership at any time within 60 days from the date as of which beneficial
ownership is being determined. As used herein, “voting power” is the power
to vote or direct the voting of shares and “investment power” is the power
to dispose or direct the disposition of shares. Includes all shares held
directly as well as by spouses and minor children, in trust and other
indirect ownership, over which shares the named individuals effectively
exercise sole or shared voting and investment
power.
|
|
(4)
|
Includes
3,342,303 shares underlying warrants exercisable within 60 days from the
record date.
|
|
(5)
|
Includes
76,924 shares underlying warrants exercisable within 60 days from the
record date.
|
|
(6)
|
Includes
76,924 shares underlying warrants exercisable within 60 days from the
record date.
|
|
(7)
|
Includes
76,924 shares underlying warrants exercisable within 60 days from the
record date.
|
|
(8)
|
Includes
76,924 shares underlying warrants exercisable within 60 days from the
record date.
|
|
(9)
|
Includes
shares underlying warrants exercisable within 60 days from the record
date.
|
The Board
of Directors consists of a majority of “independent directors” within the
meaning of the NYSE Amex Equities corporate governance listing
standards. The Board of Directors has determined that Messrs. Scaggs,
Williams, Adams, Molihan and Dosch are “independent directors” within the
meaning of such standards. There were no transactions not required to be
reported under “—Certain Relationships and Related Transactions” that were
considered in determining the independence of our directors.
The Board
of Directors has adopted a policy that the independent directors of the Board of
Directors shall meet in executive sessions periodically, which meetings may be
held in conjunction with regularly scheduled board meetings. One
executive session was held during the fiscal year ended September 30,
2009.
34
Certain
Relationships and Related Transactions
On August
30, 2006, we issued 2,150,000 shares of our common stock to the parties set
forth below for $25,000 in cash, as follows:
|
Name
|
Number
of
Shares |
Relationship
to Us
|
||
|
Marshall
T. Reynolds
|
537,500
|
Chairman
of the Board, Chief Executive Officer and Secretary(1)
|
||
|
Jack
M. Reynolds
|
430,000
|
Director,
President and Chief Financial Officer(1)
|
||
|
Edsel
R. Burns
|
537,500
|
Director
|
||
|
Neal
W. Scaggs
|
107,500
|
Director
|
||
|
Joseph
L. Williams
|
107,500
|
Director
|
||
|
Douglas
Reynolds
|
430,000
|
Director
nominee (1)
|
|
(1)
|
Douglas
Reynolds is the son of Marshall T. Reynolds and the brother of Jack M.
Reynolds.
|
The
holders of the majority of these shares may request that we register these
shares pursuant to an agreement signed on September 6, 2006. We will use our
best efforts to prepare and file such registration statement, although we are
not obligated to do so. The holders of the majority of these shares may elect to
exercise these registration rights at any time after the date on which these
shares of common stock are released from escrow. In addition, these stockholders
may request certain “piggy-back” registration rights on registration statements
filed subsequent to the date on which these shares of common stock are released
from escrow. We will use our best efforts to prepare and file such registration
statements although we are not obligated to do so. We will bear the expenses
incurred in connection with the filing of any such registration
statements.
Five of
our directors as well as Douglas Reynolds and as agreed with Ferris, Baker
Watts, Incorporated, purchased in the aggregate 3,076,923 warrants in a private
placement that occurred prior to our initial public offering at a price of $0.65
per warrant. In no event shall we be obligated to settle these
warrants, in whole or in part, for cash. Therefore any and all such warrants can
expire unexercised or unredeemed.
Audit
Fees
We
incurred fees from our principal accountant of $197,830 and $137,136 for the
services they have performed in connection with the audit of our financial
statements included in our Annual Report for fiscal 2009 and 2008,
respectively.
Audit-Related
fees
During
fiscal 2009 we incurred fees invoiced from our principal accountant of $5,875
associated with reviews of comment letters from the Security and Exchange
Commission, the Company’s response thereto, and their affect on the Company’s
audited financial statements for the year ended September 30, 2008.
Tax
Fees
For the
fiscal year ended September 30, 2009, we expect to incur fees of $53,200 from
our principal accountant for tax compliance services. During the fiscal year
ended September 30, 2008, we incurred fees from our principal accountant of
$50,000 for tax compliance services.
All
Other Fees
During
fiscal 2009 and 2008, there were no fees billed for products and services
provided by our independent registered public accounting firm other than those
set forth above.
35
Policy
on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent
Registered Public Accounting Firm
The Audit Committee’s policy is to
pre-approve all audit and non-audit services provided by the independent
registered public accounting firm. These services may include audit services,
audit-related services, tax services and other services. Pre-approval
is generally provided for up to one year and any pre-approval is detailed as to
particular service or category of services and is generally subject to a
specific budget. The Audit Committee has delegated pre-approval
authority to its Chairman when expedition of services is
necessary. The independent registered public accounting firm and
management are required to periodically report to the full Audit Committee
regarding the extent of services provided by the independent registered public
accounting firm in accordance with this pre-approval, and the fees for the
services performed to date. All of the fees paid in the
audit-related, tax and all other categories were approved per the pre-approval
policies.
Changes
in Independent Registered Public Accountants
We
engaged Arnett & Foster, Certified Public Accountants, P.L.L.C. (“Arnett
& Foster”) as our new independent registered public accounting firm,
effective October 1, 2008.
In
connection with the audits of the two fiscal years ended September 30, 2008 and
2009, there were (1) no disagreements with Arnett & Foster on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure which disagreements, if not resolved to the satisfaction of
Arnett & Foster, would have caused them to make reference to the subject
matter of the disagreements in connection with their opinion and (2) no
reportable events.
Arnett
& Foster was engaged by the Company on October 1, 2008 to audit the
consolidated financial statements of the Company as of and for the year ending
September 30, 2008, and continues to be engaged for the year ended September 30,
2009. During the period beginning October 1, 2006 through October 1,
2008, the Company did not consult with Arnett & Foster regarding any of the
matters set forth in Item 304(a)(2)(i) or (ii) of Regulation S-K
PART
IV
|
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
|
(a)(1) Financial
Statements
Energy
Services of America Corporation
|
●
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
●
|
Balance
Sheets, September 30, 2008 and September 30, 2009
|
F-2
|
|
|
●
|
Statements
of Income, Period Ended September 30, 2008 and September 30,
2009
|
F-3
|
|
|
●
|
Statements
of Shareholders’ Equity, Period Ended September 30, 2008 and September 30,
2009
|
F-4
|
|
|
●
|
Statements
of Cash Flows, Period Ended September 30, 2008 and September 30,
2009
|
F-5
|
|
|
●
|
Notes
to Financial Statements.
|
F-6
|
|
|
(a)(2)
|
Financial Statement
Schedules
|
|
|
No
financial statement schedules are filed because the required information
is not applicable or is included in the consolidated financial statements
or related notes.
|
36
(a)(3) Exhibits
|
Exhibit No.
|
Description |
|
||
|
3.1
|
Amended
and Restated Certificate of Incorporation.*
|
|||
|
3.2
|
Bylaws.*
|
|||
|
3.3
|
Certificate
of Amendment to the Registrant’s Certificate of
Incorporation.*
|
|||
|
4.1
|
Specimen
Unit Certificate.*
|
|||
|
4.2
|
Specimen
Common Stock Certificate.*
|
|||
|
4.3
|
Specimen
Warrant Certificate.*
|
|||
|
4.4
|
Form
of Unit Purchase Option.*
|
|||
|
4.5
|
Form
of Warrant Agreement between Continental Stock Transfer & Trust
Company and the Registrant.*
|
|||
|
10.1
|
Letter
Agreements among the Registrant, Ferris, Baker Watts, Incorporated, and
Officers and Directors.*
|
|||
|
10.2
|
Form
of Investment Management Trust Agreement between Continental Stock
Transfer & Trust Company and the Registrant.*
|
|||
|
10.3
|
Form
of Stock Escrow Agreement between the Registrant, Continental Stock
Transfer & Trust Company and the Initial
Stockholders.*
|
|||
|
10.4
|
Form
of Letter Agreement between Chapman Printing Co. and the Registrant
regarding administrative support.*
|
|||
|
10.5
|
Advance
Agreement between the Registrant and Marshall T. Reynolds, dated March 31,
2006.*
|
|||
|
10.6
|
Form
of Amended Registration Rights Agreement among the Registrant and the
Initial Stockholders.*
|
|||
|
10.7
|
Warrant
Placement Agreement between Marshall T. Reynolds, Edsel Burns, Douglas
Reynolds, Jack Reynolds, Neal Scaggs, Joseph Williams and Ferris, Baker
Watts, Incorporated.*
|
|||
|
14
|
Code
of Ethics.*
|
|||
| 23.1 | Auditors Consent. | |||
|
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.
|
|||
|
|
|
|
*
|
Incorporated
by reference to the Registration Statement on Form S-1 of Energy Services
of America Corp. (file no. 333-133111), originally filed with the
Securities and Exchange Commission on April 7, 2006, as
amended.
|
(b) The
exhibits listed under (a)(3) above are filed herewith.
(c) Not
applicable.
37
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:
December 23, 2009
|
By:
|
/s/ Edsel R. Burns | |
| Edsel R. Burns | |||
| Chief Executive Officer | |||
| (Duly Authorized Representative) | |||
Pursuant
to the requirements of the Securities Exchange of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
|
Name
|
Position |
|
Date
|
||
|
By:
|
/s/ Marshall T. Reynolds |
Chairman
of the Board
|
December
23, 2009
|
||
|
Marshall
T. Reynolds
|
|||||
|
By:
|
/s/ Jack R. Reynolds |
Director
|
December
23, 2009
|
||
|
Jack
R. Reynolds
|
|||||
|
By:
|
/s/ Edsel R. Burns |
Chief
Executive Officer
(Principal
Executive Officer)
|
December
23, 2009
|
||
|
Edsel
R. Burns
|
|||||
|
By:
|
/s/ Larry A. Blount |
Secretary/Treasurer,
Chief
Financial
Officer
|
December
23, 2009
|
||
|
Larry
A. Blount
|
|||||
|
By:
|
/s/ Neal W. Scaggs |
Director
|
December
23, 2009
|
||
|
Neal
W. Scaggs
|
|||||
|
By:
|
/s/ Joseph L. Williams |
Director
|
December
23, 2009
|
||
|
Joseph
L. Williams
|
|||||
|
By:
|
/s/ Richard M. Adams, Jr. |
Director
|
December
23, 2009
|
||
|
Richard
M. Adams, Jr.
|
|||||
|
By:
|
/s/ Keith Molihan |
Director
|
December
23, 2009
|
||
|
Keith
Molihan
|
|||||
|
By:
|
/s/ Douglas Reynolds |
Director
|
December
23, 2009
|
||
|
Douglas
Reynolds
|
|||||
|
By:
|
Eric Dosch |
Director
|
December
23, 2009
|
||
|
Eric
Dosch
|
|||||
|
By:
|
/s/ James Shafer |
Director
|
December
23, 2009
|
||
|
James
Shafer
|
|||||
38
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors
Energy
Services of America Corporation
Huntington,
West Virginia
We have
audited the accompanying consolidated balance sheets of Energy Services of
America Corporation and subsidiaries as of September 30, 2009 and 2008, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the two years in the period ended September 30,
2009. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Energy Services of America
Corporation and subsidiaries as of September 30, 2009 and 2008, and the results
of their operations and their cash flows for each of the two years in the period
ended September 30, 2009, in conformity with U.S. generally accepted accounting
principles.
We were
not engaged to examine management's assessment of the effectiveness of Energy
Services of America Corporation's internal control over financial reporting as
of September 30, 2009, included in the accompanying Management’s Report on
Internal Control over Financial Reporting, and, accordingly, we do not express
an opinion thereon.
|
ARNETT
& FOSTER, P.L.L.C.
|
||
 |
Charleston,
West Virginia
December
23, 2009
Innovation
With Results
AF Center
Ÿ 101 Washington
Street, East Ÿ P.O.
Box 2629 Ÿ
Charleston, West Virginia 25329
304/346-0441
Ÿ
800/642-3601
www.afnetwork.com
F-1
ENERGY
SERVICES OF AMERICA CORPORATION
CONSOLIDATED
BALANCE SHEETS
As
of September 30, 2009 and 2008
|
|
2009
|
2008
|
||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 2,829,988 | $ | 13,811,661 | ||||
|
Accounts
receivable-trade
|
16,636,095 | 38,578,810 | ||||||
|
Allowance
for doubtful accounts
|
(283,207 | ) | (363,819 | ) | ||||
|
Retainages
receivable
|
3,135,461 | 6,303,690 | ||||||
|
Other
receivables
|
141,530 | 182,598 | ||||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
7,870,120 | 5,272,669 | ||||||
|
Deferred
tax asset
|
2,991,173 | - | ||||||
|
Prepaid
expenses and other
|
2,320,679 | 1,121,101 | ||||||
|
Total
Current Assets
|
35,641,839 | 64,906,710 | ||||||
|
Property,
plant and equipment, at cost
|
35,350,004 | 33,851,552 | ||||||
|
less
accumulated depreciation
|
(6,424,355 | ) | (548,089 | ) | ||||
| 28,925,649 | 33,303,463 | |||||||
|
Goodwill
|
38,469,163 | 38,469,163 | ||||||
|
Total
Assets
|
$ | 103,036,651 | $ | 136,679,336 | ||||
|
Liabilities
and Stockholders’
Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Current
maturities of long-term debt
|
$ | 7,254,624 | $ | 15,040,033 | ||||
|
Lines
of credit
|
7,885,579 | 9,796,208 | ||||||
|
Accounts
payable
|
5,375,962 | 11,336,680 | ||||||
|
Accrued
expenses and other current liabilities
|
5,717,730 | 9,364,341 | ||||||
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
4,501 | 509,227 | ||||||
|
Income
taxes payable
|
- | 1,461,461 | ||||||
|
Total
Current Liabilities
|
26,238,396 | 47,507,950 | ||||||
|
Long-term
debt, less current maturities
|
10,497,844 | 18,272,186 | ||||||
|
Long-term
debt, payable to shareholder
|
5,600,000 | 6,000,000 | ||||||
|
Deferred
income taxes payable
|
6,364,968 | 4,641,983 | ||||||
|
Total
Liabilities
|
48,701,208 | 76,422,119 | ||||||
|
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
|
(1,642,134 | ) | 4,279,640 | |||||
|
Total
Stockholders’
equity
|
54,335,443 | 60,257,217 | ||||||
|
Total
liabilities and stockholders’ equity
|
$ | 103,036,651 | $ | 136,679,336 | ||||
The Accompanying Notes are an Integral Part of
These Financial Statements
F-2
ENERGY
SERVICES OF AMERICA CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
For
the years ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
Revenue
|
$ | 106,766,096 | $ | 28,517,688 | ||||
|
Cost
of revenues
|
106,535,805 | 23,830,404 | ||||||
|
Gross
profit
|
230,291 | 4,687,284 | ||||||
|
Selling
and administrative expenses
|
7,405,706 | 1,350,246 | ||||||
|
Income
(loss) from operations
|
(7,175,415 | ) | 3,337,038 | |||||
|
Other
income (expense)
|
||||||||
|
Interest
income
|
57,670 | 1,585,074 | ||||||
|
Other
nonoperating income (expense)
|
(32,225 | ) | 111,352 | |||||
|
Interest
expense
|
(1,623,488 | ) | (220,274 | ) | ||||
|
Gain
(loss) on sale of equipment
|
(18,523 | ) | (51 | ) | ||||
| (1,616,566 | ) | 1,476,101 | ||||||
|
Income
(loss) before income taxes
|
(8,791,981 | ) | 4,813,139 | |||||
|
Income
tax expense (benefit)
|
(2,870,207 | ) | 2,001,981 | |||||
|
Net
income (loss)
|
$ | (5,921,774 | ) | $ | 2,811,158 | |||
|
Weighted
average shares outstanding-basic
|
12,092,307 | 10,917,788 | ||||||
|
Weighted
average shares-diluted
|
12,092,307 | 13,368,960 | ||||||
|
Net
income (loss) per share basic
|
$ | (0.49 | ) | $ | 0.26 | |||
|
Net
income (loss) per share diluted
|
$ | (0.49 | ) | $ | 0.21 | |||
The Accompanying Notes are an Integral Part of
These Financial Statements
F-3
ENERGY
SERVICES OF AMERICA CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
For
the years ended September 30, 2009 and 2008
|
Additional
Paid
in Capital |
Retained Earnings |
Total Stockholders’ Equity |
||||||||||||||||||
| Common Stock | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||
|
Balance
at September 30, 2007
|
9,030,860 | $ | 903 | $ | 38,564,710 | $ | 1,468,482 | $ | 40,034,095 | |||||||||||
|
Issuance
of Common Stock in CJ Hughes purchase
|
2,964,763 | 296 | 16,999,655 | - | 16,999,951 | |||||||||||||||
|
Accretion
related to common stock subject to possible
redemption
|
- | - | (138,642 | ) | - | (138,642 | ) | |||||||||||||
|
96,684
shares reclassed from “Subject to Redemption” 1,622,456 of a
possible 1,719,140 redeemed
|
96,684 | 10 | 550,645 | 550,655 | ||||||||||||||||
|
Net
Income (Loss)
|
- | - | - | 2,811,158 | 2,811,158 | |||||||||||||||
|
Balance
at September 30, 2008
|
12,092,307 | $ | 1,209 | $ | 55,976,368 | $ | 4,279,640 | $ | 60,257,217 | |||||||||||
|
Net
Income (Loss)
|
- | - | - | (5,921,774 | ) | (5,921,774 | ) | |||||||||||||
|
Balance
at September 30, 2009
|
12,092,307 | $ | 1,209 | $ | 55,976,368 | $ | (1,642,134 | ) | $ | 54,335,443 | ||||||||||
F-4
ENERGY
SERVICES OF AMERICA CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended September 30, 2009 and 2008
|
|
2009
|
2008
|
||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income (loss)
|
$ | (5,921,774 | ) | $ | 2,811,158 | |||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
||||||||
|
Depreciation
expense
|
5,907,150 | 548,089 | ||||||
|
Provision
for bad debts
|
93,731 | - | ||||||
|
(Gain)
loss on sale/disposal of equipment
|
18,523 | 51 | ||||||
|
Provision
for deferred taxes
|
(1,268,188 | ) | 25,520 | |||||
|
(Increase)
decrease in contracts receivable
|
21,768,372 | 252,748 | ||||||
|
(Increase)
decrease in retainage receivable
|
3,168,229 | (3,099,778 | ) | |||||
|
(Increase)
decrease in other receivables
|
41,068 | (79,105 | ) | |||||
|
(Increase)
decrease in cost and estimated earnings in excess of billings on
uncompleted contracts
|
(2,597,451 | ) | (1,029,139 | ) | ||||
|
(Increase)
decrease in prepaid expenses
|
(274,239 | ) | (516,397 | ) | ||||
|
Increase
(decrease) in accounts payable
|
(5,960,718 | ) | 1,716,035 | |||||
|
Increase
(decrease) in accrued expenses
|
(3,421,611 | ) | 489,363 | |||||
|
Increase
(decrease) in billings in excess of cost and estimated earnings on
uncompleted contracts
|
(504,726 | ) | (613,161 | ) | ||||
|
Increase
(decrease) in income taxes payable
|
(1,461,461 | ) | 1,338,836 | |||||
|
Net
cash (used in) provided by operating activities
|
9,586,905 | 1,844,220 | ||||||
|
Cash
flows from investing activities:
|
||||||||
|
Purchase
of investments held in trust fund
|
- | (21,000,000 | ) | |||||
|
Proceeds
from maturites of investments held in trust
|
- | 71,743,430 | ||||||
|
Investment
in property & equipment
|
(1,227,057 | ) | (182,440 | ) | ||||
|
Proceeds
from sales of property and equipment
|
38,432 | - | ||||||
|
Cash
paid in excess of cash received in acquisition
|
- | (28,901,591 | ) | |||||
|
Net
cash (used in) provided by investing activities
|
(1,188,625 | ) | 21,659,399 | |||||
|
Cash
flows from financing activities:
|
||||||||
|
Payment
of deferred fee to underwriter
|
- | (1,032,000 | ) | |||||
|
Repayment
of loans from shareholders
|
(400,000 | ) | (150,000 | ) | ||||
|
Borrowings
on lines of credit, net of (repayments)
|
(1,910,629 | ) | 1,343,512 | |||||
|
Principal
payments on long term debt
|
(16,333,423 | ) | (879,265 | ) | ||||
|
Principal
payments on short term debt
|
(735,901 | ) | - | |||||
|
Cash
paid for redemption of shares
|
- | (9,730,987 | ) | |||||
|
Net
cash (used in) provided by financing activities
|
(19,379,953 | ) | (10,448,740 | ) | ||||
|
Increase
(decrease) in cash and cash equivalents
|
(10,981,673 | ) | 13,054,879 | |||||
|
Cash
beginning of year
|
13,811,661 | 756,782 | ||||||
|
Cash
end of year
|
$ | 2,829,988 | $ | 13,811,661 | ||||
|
Supplemental
schedule of noncash investing and financing activities:
|
||||||||
|
Insurance
premiums financed
|
$ | 925,339 | - | |||||
|
Purchases
of property & equipment under financing agreements
|
$ | 359,234 | $ | 438,938 | ||||
| Common Stock issued for subsidiary acquisition | $ | - | $ | 16,999,951 | ||||
| Notes Payable incurred for subsidiary acquisition | $ | - | $ | 3,000,000 | ||||
|
Supplemental
disclosures of cash flow information:
|
||||||||
|
Cash
paid during the year for:
|
||||||||
|
Interest
|
$ | 1,562,921 | $ | 220,274 | ||||
|
Income
taxes
|
$ | 1,766,055 | $ | 671,500 | ||||
The Accompanying Notes are an Integral Part of These Financial
Statements
F-5
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 operate as wholly owned subsidiaries of the
Company.
S.T.
Pipeline, Inc. (S.T) was incorporated in May 1990 under the laws of the State of
West Virginia. S.T. engages in the construction of natural gas pipelines for
utility companies in various states, mostly in the mid-Atlantic area of the
country. S.T.’s contracts are primarily fixed price contract with some cost-plus
service work performed as requested. All of the Company’s production personnel
are union members of the various related construction trade unions and are
subject to collective bargaining agreements that expire at varying time
intervals.
C.J.
Hughes Construction Company, Inc. (C.J. Hughes) is a general contractor
primarily engaged in pipeline construction for utility companies. C.J. Hughes
operates primarily in the mid-Atlantic region of the country. Nitro Electric
Company, Inc., a wholly owned subsidiary of C. J. Hughes, is involved in
electrical contracting providing its services to the power and refining
industry. Nitro Electric operates primarily in the mid-Atlantic region of the
country. Contractors Rental Corporation, Inc. a wholly owned subsidiary of C.J.
Hughes is involved in main line pipeline installation and repairs in the
mid-Atlantic region of the country as well. All of the C.J. Hughes, Nitro
Electric, and Contractors Rental production personnel are union members of
various related construction trade unions and are subject to collective
bargaining agreements that expire at varying time intervals
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
F-6
Reclassifications
Certain
reclassifications have been made in prior years’ financial statements to conform
to classifications used in the current year.
Use of Estimates and
Assumptions
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of income and loss during the
reporting period. Actual results could differ from those estimates.
Cash and Cash
Equivalents
Energy
Services considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Fair Value
Measurements
The
carrying values of cash equivalents, accounts receivable (including retainage
receivable), accounts payable and accrued expenses approximate fair value due to
the short-term nature of those instruments. Categorization for disclosure
purposes is required for qualifying assets and liabilities into three broad
levels based on the priority of the inputs used to determine the fair values.
The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). All of the Company’s cash
equivalents that require categorization are categorized as Level 1 assets at
September 30, 2009 as all fair values are based on unadjusted quoted prices for
identical assets in an active market that the Company has the ability to
access.
The
carrying amount for borrowings under the Company’s revolving credit facility
approximates fair value because of the variable market interest rate charged to
the Company for these borrowings. The fair value of the Company’s long term
fixed rate debt to unrelated parties was estimated using a discounted cash flow
analysis and a yield rate that was estimated based on the borrowing rates
currently available to the Company for bank loans with similar terms and
maturities, which is a level 3 input. It was not practicable to estimate the
fair value of notes payable to related parties, The fair value of the aggregate
principal amount of the Company’s fixed-rate debt of $14.5 million at September
31, 2009 was $14.8 million.
The
Company uses fair value measurements on a non-recurring basis in its assessment
of assets classified as goodwill and long-lived assets held and used. In
accordance with its annual impairment test during the quarter ended September
30, 2009, the carrying amount of goodwill was compared to its fair value. No
changes in carrying amount resulted. The level of inputs used for fair value
measurements for goodwill and long-lived assets held and used, are the lowest
level (Level 3) inputs for which the Company uses the assistance of third party
specialists to develop valuation assumptions.
F-7
Accounts Receivable and Allowance for
Doubtful Accounts
The
Company provides an allowance for doubtful accounts when collection of an
account or note receivable is considered doubtful, and receivables are written
off against the allowance when deemed uncollectible. Inherent in the assessment
of the allowance for doubtful accounts are certain judgments and estimates
including, among others, the customer’s access to capital, the customer’s
willingness or ability to pay, general economic conditions and the ongoing
relationship with the customer. Retainage billed but not paid pursuant to
contract provisions will be due upon completion of the contracts. Based on the
Company’s’ past experience management considers all amounts classified as
retainage receivable to be collectible. All retainage receivable amounts are
expected to be collected within the next fiscal year.
Property and
Equipment
Property
and equipment are recorded at cost. Costs which extend the useful lives or
increase the productivity of the assets are capitalized, while normal repairs
and maintenance that does not extend the useful life or increase productivity of
the asset are expensed as incurred. Plant and equipment are depreciated
principally on the straight- line method over the estimated useful lives of the
assets: buildings 39 years; operating equipment and vehicles 5-7 years; and
office equipment, furniture and fixtures 5-7 years.
Goodwill and other
intangibles
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 U.S. Generally Accepted Accounting Principals 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 annual impairment test did not
indicate impairment at any of the Company’s operating units. No impairment loss
has been recognized for the years ended September 30, 2009 or 2008.
Impairment of Long-Lived
Assets
A
long-lived asset shall be tested for recoverability whenever events or changes
in circumstances indicate that its carrying amount may not be recoverable. If an
evaluation is required, the estimated future undiscounted cash flows associated
with the asset would be compared to the asset’s carrying amount to determine if
a write-down to market value is required.
F-8
Revenue
Recognition
Revenues
from fixed price contracts are recognized using the percentage-of-completion
method, measured by the percentage of costs incurred to date to total estimated
costs for each contract. These contracts provide for a fixed amount of revenues
for the entire project. Such contracts provide that the customer accept
completion of progress to date and compensate us the services rendered, measured
in terms of units installed, hours expended or some other measure of progress.
Contract costs include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
tools and expendables. The cost estimates are based on the professional
knowledge and experience of the Company’s engineers, project managers and
financial professionals. Changes in job performance, job conditions, and others
all affect the total estimated costs at completion. The effects of these changes
are recognized in the period in which they occur. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. The current asset “Costs and estimated earnings in excess
of billings on uncompleted contracts” represents revenues recognized in excess
of amounts billed for fixed price contracts. The current liability “Billings in
excess of costs and estimated earnings on uncompleted contracts” represents
billings in excess of revenues recognized for fixed price
contracts.
Revenue
on all costs plus and time and material contracts are recognized when services
are performed or when units are completed.
Advertising
All
advertising costs are expensed as incurred. Total advertising expense was
$24,524 and $2,200 for the years ended September 30, 2009 and 2008,
respectively.
Income Taxes
The
Company and all subsidiaries file a consolidated income tax return on a fiscal
year basis. The Company began filing tax returns for the year ended September
30, 2006 and therefore all prior Company tax returns are still subject to audit.
Both C J Hughes and S T Pipeline filed as S Corporations prior to their
acquisition by the Company, therefore any audits of those companies tax returns
would result in an adjustment to the pass-through income to the shareholders at
the time, and would not create any liability to the Company.
The
Company follows the liability method of accounting for income taxes in
accordance with U.S. Generally Accepted Accounting Principals. Under this
method, deferred tax assets and liabilities are recorded for future tax
consequences of temporary differences between financial reporting and tax bases
of assets and liabilities, and are measured using the enacted tax rates and laws
that are expected to be in effect when the underlying assets or liabilities are
recovered or settled. U.S. GAAP also prescribes a comprehensive model for how
companies should recognize, measure, present and disclose in their financial
statements uncertain tax positions taken or to be taken on a tax
return.
Earnings Per Common
Share
Basic
earnings per share is computed using the weighted average number of common
shares outstanding during the year, and diluted earnings per share is computed
using the weighted average number of common shares outstanding during the year
adjusted for all potentially dilutive common stock equivalents, except in cases
where the effect of the common stock equivalent would be antidilutive. Potential
common shares that may be issued by the Company relate to the warrants issued to
the initial shareholders and as part of the units in the Company’s initial
public offering.
F-9
Collective Bargaining
Agreements
Certain
Energy Services subsidiaries are party to collective bargaining agreements with
unions representing certain of their employees. The agreements require such
subsidiaries to pay specified wages and provide certain benefits to the union
employees. These agreements expire at various times and have typically been
renegotiated and renewed on terms that are similar to the ones contained in the
expiring agreements.
Under
certain collective bargaining agreements, the applicable Energy Services
subsidiary is required to make contributions to multi-employer pension plans. If
the subsidiary were to cease participation in one or more of these plans, a
liability could potentially be assessed related to any underfunding of these
plans. The amount of such assessment, were one to be made, cannot be reasonably
estimated.
Litigation Costs
The
Company reserves when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. Litigation costs are expensed as
incurred.
Segments
The
Company has determined that its three operating units, CJ Hughes/Contractors
Rental, Nitro Electric and S.T. Pipeline, qualify for aggregation under the
Segment Reporting topic of the FASB ASC due the similar nature of the their
operating characteristics.
New Accounting
Pronouncements
During
December 2007, revised accounting standards for business combinations were
promulgated by The Financial Accounting Standards Board (FASB) to become
effective for fiscal years beginning after December 15, 2008. Earlier
application is prohibited. Assets and liabilities that arose from business
combinations which occurred prior to the adoption of these standards should not
be adjusted upon their adoption. These standards require the acquiring entity in
a business combination to recognize all (and only) the assets acquired and
liabilities assumed in the business combination; establishes the acquisition
date as the measurement date to determine the fair value of all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. As it relates to
recognizing all (and only) the assets acquired and liabilities assumed in a
business combination, costs an acquirer expects but is not obligated to incur in
the future to exit an activity of an acquiree or to terminate or relocate an
acquiree’s employees are not liabilities at the acquisition date but must be
expensed in accordance with other applicable generally accepted accounting
principles. Additionally, during the measurement period, which should not exceed
one year from the acquisition date, any adjustments that are needed to assets
acquired and liabilities assumed to reflect new information obtained about facts
and circumstances that existed as of that date will be adjusted retrospectively.
The acquirer will be required to expense all acquisition- related costs in the
periods such costs are incurred other than costs to issue debt or equity
securities. These standards will have no impact on our consolidated financial
position, results of operations or cash flows at the date of adoption, but it
could have a material impact on our consolidated financial position, results of
operations or cash flows in the future when it is applied to acquisitions which
occur in the fiscal year beginning October 1, 2009.
F-10
In May
2009, The FASB established general standards of accounting for the disclosure of
events that occur after the balance sheet date but before financial statements
are issued. In particular, the FASB set 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.
|
This
standard is effective for interim or annual periods ending after June 15, 2009,
and is to be applied prospectively. The Company adopted this standard as of June
30, 2009.
In June
2009, the FASB established the Accounting Standards Codification (Codification),
which officially commenced July 1, 2009, to become the single source of
authoritative U.S. GAAP to be applied nongovernmental entities. Rules and
interpretive releases 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, and is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. The Company has adopted the Codification for the quarter ending September
30, 2009.
3.
CORRECTION OF AN ERROR
During
2009, the Company discovered an error related to the calculation of the deferred
tax liability attributable to the acquisition of C J Hughes. The error involved
the use of an incorrect tax basis in computing the initial deferred tax
liability recorded as a purchase accounting adjustment. The error had no effect
on net income or retained earnings for the current year or any prior year. The
error resulted in an understatement of goodwill and of long term deferred tax
liability of $2,979,520 each. The September 30, 2008 balance sheet has been
restated to correct the error.
F-11
4.
ACQUISITIONS
S.T. PIPELINE
Inc.
On August
16, 2008 the Company acquired ST Pipeline. The merger agreement called for the
stockholders of ST to receive total consideration of $19 million, reduced by the
book value of certain assets to be distributed to the stockholders of the
Company. All except $3 million was to be paid to the stockholders at closing.
The remaining $3 million consists of deferred payments to the stockholders over
three years with an interest at a simple rate of 7.5% per annum.
The
purchase price paid by Energy Services for S.T. Pipeline consisted of cash of
$16,216,000 and a note payable of $3,000,000.
The
acquisition was accounted for as a purchase with the purchase price, including
acquisition costs of $322,738, allocated as follows:
|
Current
Assets
|
$
|
23,713,942
|
||
|
Non-Current
Assets
|
103,493
|
|||
|
Property
and Equipment
|
11,580,000
|
|||
|
Goodwill
|
4,177,363
|
|||
|
Total
Assets acquired
|
39,574,798
|
|||
|
Current
Liabilities
|
17,554,830
|
|||
|
Long-Term
liabilities
|
2,481,230
|
|||
|
Total
liabilities assumed
|
20,036,060
|
|||
|
Total
Purchase Price
|
$
|
19,538,738
|
Goodwill
represents the excess of the purchase price over the fair value of the acquired
net assets. Energy Services anticipates to continue to realize meaningful
operational and cost synergies, such as enhancing the combined service
offerings, expanding the geographic reach and resource base of the combined
company, improving the utilization of personnel and fixed assets. Energy
Services believes these opportunities contribute to the recognition of the
substantial goodwill.
F-12
C.J.
HUGHES CONSTRUCTION COMPANY, INC.
On August
16, 2008 the Company acquired C.J. Hughes Construction Company, Inc. C.J. Hughes
is underground utility service company located in Huntington, West Virginia. The
merger agreement called for a total purchase price of approximately $34.0
million which would be paid as follows: each share of C.J. Hughes Class A voting
stock and Class B non-voting stock would be converted into the right to receive
$36,896 in cash and 6,434.70 shares of Energy Services common stock. The stock
and cash portions of the transaction each total approximately $17.0
million.
The
acquisition was accounted for as a purchase with the purchase price, including
acquisition costs of $322,577, allocated as follows:
|
Current
Assets
|
$
|
27,738,924
|
||
|
Property
and Equipment
|
21,566,588
|
|||
|
Goodwill
|
34,291,800
|
|||
|
Total
Assets acquired
|
83,597,312
|
|||
|
Current
Liabilities
|
26,311,989
|
|||
|
Long-Term
liabilities
|
18,346,628
|
|||
|
Deferred
Tax Liability
|
4,616,463
|
|||
|
Total
liabilities assumed
|
49,275,080
|
|||
|
Total
Purchase Price
|
$
|
34,322,232
|
Goodwill
represents the excess of the purchase price over the fair value of the acquired
net assets. Energy Services anticipates to continue to realize meaningful
operational and cost synergies, such as enhancing the combined service
offerings, expanding the geographic reach and resource base of the combined
company, improving the utilization of personnel and fixed assets. Energy
Services believes these opportunities contribute to the recognition of the
substantial goodwill.
The
results of operations of the acquired companies subsequent to the acquisition
dates are included in the Company’s consolidated statements of income. The
following unaudited pro forma information for the year ended September 30, 2008
reflects the Company’s estimated consolidated results of operations as if the
acquisition occurred on the first day of the fiscal year.
|
Pro
Forma
|
||||
|
2008
|
||||
|
Contract
Revenues
|
$
|
208,240,000
|
||
|
Net
Income
|
$
|
15,002,000
|
||
|
Earnings
per share basic
|
$
|
1.24
|
||
|
Earnings
per share diluted
|
$
|
1.03
|
||
F-13
5.
GOODWILL AND INTANGIBLE ASSETS
A summary
of changes in the Company’s goodwill is as follows:
|
Year
Ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
at beginning of year
|
$ | 38,469,163 | $ | - | ||||
|
Impairment
|
- | - | ||||||
|
Acquisition
of ST Pipeline
|
4,177,363 | |||||||
|
Acquisition
of CJ Hughes Construction
|
34,291,800 | |||||||
|
Balance
at end of year
|
$ | 38,469,163 | $ | 38,469,163 | ||||
6.
ACCOUNTS RECEIVABLE:
Activity
in the Company’s allowance for doubtful accounts consists of the
following:
| Year Ended September 30, | ||||||||
|
2009
|
2008
|
|||||||
|
Balance
at beginning of year
|
$ | 363,819 | $ | |||||
|
Charged
to expense
|
93,731 | - | ||||||
|
Deductions
for uncollectible receivables written off, net of
recoveries
|
(174,343 | ) | (286 | ) | ||||
|
Current
year additions from acquisitions
|
-0- | 364,105 | ||||||
|
Balance
at end of year
|
$ | 283,207 | $ | 363,819 | ||||
7.
UNCOMPLETED CONTRACTS
Costs,
estimated earnings, and billings on uncompleted contracts are summarized as
follows:
|
Year
Ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Costs
incurred on contracts in progress
|
$ | 37,568,730 | $ | 57,723,456 | ||||
|
Estimated
earnings, net of estimated losses
|
7,102,334 | 6,562,540 | ||||||
| 44,671,066 | 64,285,996 | |||||||
|
Less
Billings to date
|
36,805,447 | 59,522,554 | ||||||
| $ | 7,865,619 | $ | 4,763,442 | |||||
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
$ | 7,870,120 | $ | 5,272,669 | ||||
|
Less
Billings in excess of costs and estimated earnings on uncompleted
contracts
|
4,501 | 509,227 | ||||||
| $ | 7,865,619 | $ | 4,763,442 | |||||
F-14
8.
PROPERTY AND EQUIPMENT
Property
and Equipment consists of the following:
|
Year
Ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Land
|
$ | 702,000 | $ | 702,000 | ||||
|
Buildings
and leasehold improvements
|
255,570 | 253,944 | ||||||
|
Operating
equipment and vehicles
|
34,027,594 | 32,859,797 | ||||||
|
Office
equipment, furniture and fixtures
|
364,840 | 35,811 | ||||||
| 35,350,004 | 33,851,552 | |||||||
|
Less
Accumulated Depreciation and Amortization
|
6,424,355 | 548,089 | ||||||
|
Property
and equipment net
|
$ | 28,925,649 | $ | 33,303,463 | ||||
9.
SHORT-TERM DEBT
Short-term
debt consists of the following:
A line of
credit of $15 million has been established with a local bank. The interest rate
on the Line of Credit is the “Wall Street Journal” Prime Rate (the index) with a
floor of 6.0%. Cash available under the line is calculated based on a percentage
of the Company’s accounts receivable with certain exclusions. Major items
excluded from calculation are receivables from bonded jobs, retainage, and items
greater than one hundred twenty (120) days old. At September 30, 2009 the
Company had $433,000 available on the line.
F-15
10.
LONG-TERM DEBT
A summary
of long-term debt as of September 30, 2009 and 2008 is as follows:
|
2009
|
2008
|
|||||||
|
Note
payable to a Bank, payable in monthly installments of $9,217, including
interest at 8%, maturity date of June 10, 2010, secured by equipment
acquired with the proceeds of this note.
|
$ | 79,999 | $ | 179,769 | ||||
|
Note
payable to a finance company, payable in monthly installments of $2,180,
including interest at 8.375%, maturity date of September 14, 2009, secured
by equipment acquired with this note.
|
-0- | 25,052 | ||||||
|
Notes
payable to various finance companies, payable in monthly installments
totaling $9,672, including interest at rates ranging between 0% and 8%,
with varying maturity dates from March, 2008, through December, 2008,
secured by vehicles and equipment acquired with the notes.
|
978,535 | 1,343,586 | ||||||
|
Notes
payable to finance company, payable in monthly installments of $94,719.11,
including interest at 4.19%, maturity date of December
2009.
|
189,438 | -0- | ||||||
|
Notes
payable to banks and credit unions, payable in monthly installments
totaling $11,925, including interest at rates ranging between 4.5% and
8.0%, maturity dates varying between June, 2008, through March, 2009,
secured by vehicles acquired with the notes.
|
1,336,928 | 2,171,384 | ||||||
|
Notes
payable to former shareholders of acquired company, payable at 0% Interest
as accounts receivables outstanding at the date of purchase are
collected
|
-0- | 10,934,813 | ||||||
|
Note
payable to bank, due in monthly installments of $5,000, including Interest
at 6.75%, final payment due September 2012, secured by real estate,
vehicles, and equipment
|
366,147 | 398,016 | ||||||
|
Notes
payable to finance companies, due in monthly installments totaling
$132,444, including interest ranging from 1.0% to 7.92%, final payments
due January 2008 through December 2012, secured by
equipment
|
8,134,683 | 10,799,191 | ||||||
|
Notes
payable to banks, due in monthly installments totaling $108,497, including
interest at prime plus .5% to 8.75%, final payments due April 2010 through
July 2011, secured by equipment, receivables, and
intangibles
|
3,413,338 | 4,432,008 | ||||||
|
Notes
payable to Individuals, due in annual installments of $1 Million dollars
with interest at 7.5%
|
3,253,400 | 3,028,400 | ||||||
|
Notes
payable to shareholder, interest rate at prime, note matures in August of
2011
|
5,600,000 | 6,000,000 | ||||||
| 23,352,468 | 39,312,219 | |||||||
|
Less
Current Maturities
|
7,254,624 | 15,040,033 | ||||||
|
Total
Long term debt
|
$ | 16,097,844 | $ | 24,272,186 | ||||
Maturities
of long-term debt for the next five years are as follows:
|
2010
|
$
|
7,254,624
|
|||
|
2011
|
10,479,925
|
||||
|
2012
|
2,124,690
|
||||
|
2013
|
1,628,424
|
||||
|
2014
|
344,153
|
||||
|
Thereafter
|
1,520,652
|
||||
|
$
|
23,352,468
|
F-16
11.
INCOME TAXES
The
components of income taxes are as follows:
|
Year
Ended September 30,
|
|||||||||
|
2009
|
2008
|
||||||||
|
Federal
|
Current
|
$ | (3,628,177 | ) | $ | 1,654,414 | |||
|
Deferred
|
1,151,488 | 21,692 | |||||||
|
Total
|
(2,476,689 | ) | 1,676,106 | ||||||
|
State
|
Current
|
(640,266 | ) | 322,047 | |||||
| Deferred | 246,748 | 3,828 | |||||||
| Total | (393,518 | ) | 325,875 | ||||||
|
Total
income tax expense (benefit)
|
$ | (2,870,207 | ) | $ | 2,001,981 | ||||
The
provision for income taxes differs from the amount computed by applying the
federal statutory rate of 34 percent on income from operations as indicated in
the following analysis:
|
Year
Ended September 30,
|
||||||
|
2009
|
2008
|
|||||
|
Statutory
rate
|
34.0
|
%
|
34.0
|
%
|
||
|
Effect
of state income taxes
|
6.0
|
7.6
|
||||
|
Effective
tax rate
|
40.0
|
%
|
41.6
|
%
|
||
Deferred
income taxes are provided for significant difference between the basis of assets
and liabilities for financial reporting and income tax reporting. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount expected to be realized.
The
income tax effects of temporary differences giving rise to the deferred tax
liabilities are as follows:
| Year Ended September 30, | ||||||||
|
Current
Deferred Tax Assets
|
2009
|
2008
|
||||||
|
Net
operating loss carryforward
|
$ | 2,666,424 | - | |||||
|
Other
deferred assets
|
324,749 | - | ||||||
| 2,991,173 | - | |||||||
|
Long
Term Deferred Tax Liabilities
|
||||||||
|
Property,
Plant and Equipment
|
$ | 6,364,968 | $ | 4,641,983 | ||||
The
deferred tax asset valuation allowance recognized at September 30, 2009 is zero
($0.0). The Company does not believe that it has any unrecognized tax benefits
included in its consolidated financial statements that require recognition under
U.S. Generally Accepted Accounting Principals. The Company has not had any
settlements in the current period with taxing authorities, nor has it recognized
tax benefits as a result of a lapse of the applicable statute of
limitations.
F-17
The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits, if applicable, in general and administrative expenses. During the
years ended September 30, 2009 and 2008 the Company did not did not recognize
any interest or penalties related to income taxes in its consolidated financial
statements, nor has it recorded an accrued liability for interest or penalty
payments.
The
Company has a net operating loss carryover for income tax purposes at September
30, 2009 of $5,720,282 available to offset future taxable income. The carryover
expires at September 30, 2024.
12.
EARNINGS PER SHARE
The
amounts used to compute the basic and diluted earnings per share for the years
ended 2009, and 2008 is illustrated below:
|
Year
Ended September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
Income (loss) from continuing operations available to common
shareholders
|
$ | (5,921,774 | ) | $ | 2,811,158 | |||
|
Weighted
average shares outstanding basic
|
12,092,307 | 10,917,788 | ||||||
|
Effect
of dilutive warrants
|
- | 2,451,172 | ||||||
|
Weighted
average shares outstanding diluted
|
12,092,307 | 13,368,960 | ||||||
|
Net
Income (loss) per share-basic
|
$ | (0.49 | ) | $ | .26 | |||
|
Net
Income (loss) per share-diluted
|
$ | (0.49 | ) | $ | .21 | |||
13.
WARRANTS AND UNIT PURCHASE OPTION
On
September 6, 2006, the Company sold 8,600,000 units (“Units”) in the Public
Offering at a price of $6.00 per Unit. Each Unit consists of one share of the
Company’s common stock, $.0001 par value, and two Redeemable Common Stock
Purchase Warrants (“Warrants”). Each Warrant entitles the holder to purchase
from the Company one share of common stock at an exercise price of $5.00 per
share commencing on the later of the consummation by the Company of a Business
Acquisition or one year after the Effective Date and terminating on the fifth
anniversary of the date of the Public Offering. The Company may redeem the
Warrants for a redemption price of $0.01 per Warrant at any time if notice of
not less than 30 days is given and the last sale price of the Common Stock has
been at least $8.50 on 20 of the 30 trading days ending on the third day prior
to the day on which notice is given. A total of 17,200,000 warrants were issued
in the IPO and all are still outstanding and unexercised.
Preceding
the public offering the initial shareholders of the Company purchased an
aggregate of 3,076,923 warrants at $.65 per warrant from the Company in a
private placement offering. The warrants sold in the Private Placement were
identical to the warrants sold in the public offering, except that the private
placement warrants are not registered at this time. The 3,076,923 warrants are
all still outstanding and unexercised.
F-18
The
Company issued to the underwriter at the time of closing of the Offering a unit
purchase option, for $100, to purchase up to 450,000 units at an exercise price
of $7.50. The unit purchase option shall be exercisable any time, in whole or in
part, between the first anniversary date and the fifth anniversary date of the
Public Offering.
For
the public warrants and the unit purchase option, the Company is only required
to use its best efforts to cause a registration statement covering the resale of
the public warrants, units and the securities comprising the units and, once
effective, only to use its best efforts to maintain the effectiveness of the
registration statement. There are no contractual penalties for failure to effect
the registration of the public warrants, units and the securities comprising the
units. Additionally, in no event, is the Company obligated to settle the public
warrants, the option, the units or the warrants included in the units, in whole
or in part, for cash in the event it is unable to effect the registration of the
public warrants, units and the securities comprising the units. The holder or
holders of the public warrants or options do not have the rights or privileges
of holders of common stock, including any voting rights, until such holder or
holders exercise the options and receive shares of the Company’s common
stock.
14.
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 as prescribed by U.S.
Generally Accepted Accounting Principles for share-based payments. 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.
F-19
There
have been no agreements with any employees made under this plan as of and for
the year ended September 30, 2009.
15.
RELATED PARTY TRANSACTIONS
The
Companies have advances from a stockholder of $5,600,000. The unsecured advance
bears interest at prime, resulting in interest expense of $202,533 and $38,763
for the year ended September 30, 2009 and 2008 respectively. Certain Energy
Services subsidiaries routinely engage in transactions in the normal course of
business with each other, including sharing employee benefit plan coverage,
payment for insurance and other expenses on behalf of other affiliates, and
other services incidental to business of each of the affiliates. All revenue and
related expense transactions, as well as the related accounts payable and
accounts receivable, have been eliminated.
16.
LEASE OBLIGATIONS
The
Company leases various equipment and office space under operating lease
agreements with terms up to 60 months, with renewal options of up to an
additional 60 months. The Company also leases vehicles from certain stockholders
and spouses under non-cancelable operating leases.
The
future minimum lease payments under operating leases as of September 30, 2009,
are as follows:
|
2010
|
305,039 | ||||
|
2011
|
261,381 | ||||
|
2012
|
160,747 | ||||
|
2013
|
25,316 | ||||
17.
MAJOR CUSTOMERS
Revenues
for the period ending September 30, 2009 were $107 million. Two major customers
made up 22% and 16% respectively of the total. Receivables from major customers
at September 30, 2009 was $10 million, which represented 60% of the total
receivables at September 30, 2009. Virtually all work performed for major
customers was awarded under competitive bid fixed price or unit price
arrangements. During the period ended September 30, 2009 the Company’s major
customers operated within the natural gas transmission and distribution industry
within the Company’s market area. The loss of a major customer could have a
severe impact on the profitability of operations of the Company. However, due to
the nature of the Company’s operations, the major customers and sources of
revenues may change from year to year.
18.
RETIREMENT AND EMPLOYEE BENEFIT PLANS
C.J.
Hughes has a 401-K retirement plan for union employees under which the employees
can contribute up to 15% of eligible wages and C.J. Hughes will match $.25 for
each dollar contributed up to 6% of eligible wages. CJ Hughes contributed
$14,000 for the fiscal year ended September 30, 2009 to this plan.
F-20
Additionally,
C.J. Hughes and Nitro Electric have a 401-K retirement plan for all
administrative employees under which the employees can contribute up to 15% of
eligible wages and C.J. Hughes and Nitro Electric will match $.25 for each
dollar contributed up to 6% of eligible wages. C.J. Hughes and its subsidiary
Nitro Electric contributed $49,000 for the fiscal year ended September 30, 2009
to this plan.
19.
CREDIT RISK
Financial
instruments which potentially subject the Companies to credit risk consist
primarily of cash, cash equivalents and contract receivables. The Companies
place their cash with high quality financial institutions. At times, the
balances in such institutions may exceed the FDIC insurance limit of $250,000.
As of September 30, 2009, the Companies uninsured bank balances totaled $3.46
million. The Companies perform periodic credit evaluations of its customer’s
financial condition and generally does not require collateral. Credit losses
consistently have been within managements expectations.
20.
COMMITMENTS AND CONTINGENCIES
During
the normal course of operations, the companies are subject to certain
subcontractor claims, mechanic’s liens, and other litigation. Management is of
the opinion that no material obligations will arise from any pending legal
proceedings. Accordingly, no provision has been made in the financial statements
for such litigation.
21.
SUBSEQUENT EVENTS
Subsequent
events have been evaluated through December 23, 2009, the date of the issuance
of these financial statements.
F-21
22.
CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Energy
Services of America Corporation (Parent Only)
Balance
Sheets
As
of September 30, 2009 and 2008
|
Year
Ended
September
30,
2009
|
Year
Ended
September
30,
2008
|
|||||||
|
Assets
|
||||||||
|
Current
Assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 315,697 | $ | 7,125,033 | ||||
|
Other
Receivables
|
1,300 | - | ||||||
|
Deferred
Tax Asset
|
8,415 | - | ||||||
|
Prepaid
expenses and other
|
1,801,847 | 210,907 | ||||||
|
Total
Current Assets
|
2,127,259 | 7,335,940 | ||||||
|
Property
and equipment
|
275,433 | 19,944 | ||||||
|
Less
accumulated depreciation
|
(45,612 | ) | - | |||||
| 229,821 | 19,944 | |||||||
|
Due
from Affiliates
|
11,608,163 | - | ||||||
|
Investment
in Subsidiaries
|
50,790,016 | 55,954,071 | ||||||
|
Total
Assets
|
$ | 64,755,259 | $ | 63,309,955 | ||||
|
Liabilities
and Stockholders’ Equity
|
||||||||
|
Current
Liabilities
|
||||||||
|
Current
maturities of long-term debt
|
$ | 2,253,400 | $ | 1,028,400 | ||||
|
Lines
of credit
|
7,085,579 | - | ||||||
|
Accounts
Payable-Trade
|
33,931 | - | ||||||
|
Accrued
Expenses and other Current Liabilites
|
- | 24,338 | ||||||
|
Total
Current Liabilities
|
9,372,910 | 1,052,738 | ||||||
|
Long-term
debt, net of current portion
|
||||||||
|
Debt
to banks and finance companies
|
1,000,000 | 2,000,000 | ||||||
|
Deferred
Income Taxes Payable
|
46,905 | - | ||||||
|
Total
Liabilities
|
1,046,905 | 2,000,000 | ||||||
|
Stockholders’
equity
|
||||||||
|
Common
Stock
|
1,209 | 1,209 | ||||||
|
Additional
paid-in capital
|
55,976,368 | 55,976,368 | ||||||
|
Retained
Earnings (deficit)
|
(1,642,133 | ) | 4,279,640 | |||||
|
Total
stockholders’ equity
|
54,335,444 | 60,257,217 | ||||||
|
Total
liabilities and stockholders’ equity
|
64,755,259 | 63,309,955 | ||||||
F-22
Energy
Services of America Corporation (Parent Only)
Statements
of Income
For
the years ended September 30, 2009 and 2008
|
2009
|
2008
|
|||||||
|
General
and Administrative Expenses
|
$ | 853,313 | $ | 341,140 | ||||
|
Net
loss from operations before taxes
|
(853,313 | ) | (341,140 | ) | ||||
|
Income
from trust fund investments
|
- | 1,574,211 | ||||||
|
Other
nonoperating income (expense)
|
(38,432 | ) | - | |||||
|
Interest
income (expense)
|
(298,373 | ) | - | |||||
|
Net
Income (loss) before tax
|
(1,190,118 | ) | 1,233,071 | |||||
|
Income
tax expense (benefit)
|
(432,400 | ) | 515,000 | |||||
|
Equity
in undistributed income (loss) of subsidiaries
|
(5,164,055 | ) | 2,093,087 | |||||
|
Net
Income (loss)
|
$ | (5,921,773 | ) | $ | 2,811,158 | |||
|
Weighted
average shares outstanding- basic
|
12,092,307 | 10,917,788 | ||||||
|
Weighted
average shares- diluted
|
12,092,307 | 13,368,960 | ||||||
|
Net
income per share- basic
|
$ | (0.49 | ) | $ | 0.26 | |||
|
Net
income per share- diluted
|
$ | (0.49 | ) | $ | 0.21 | |||
F-23
|
Energy
Services of America Corporation (Parent Only)
|
||||||||
|
Statements
of Cash Flows
|
||||||||
|
For
the years ended September 30, 2009 and
2008
|
| 2009 | 2008 | |||||||
|
Cash
flow from operating activities
|
||||||||
|
Net
Income
|
$ | (5,921,773 | ) | $ | 2,811,158 | |||
|
Adjustment
to reconcile net income to net cash provided by (used)
|
||||||||
|
in
operating activities:
|
||||||||
|
Provision
for current tax (benefit)
|
(470,890 | ) | - | |||||
|
Provision
for deferred income tax
|
38,490 | - | ||||||
|
Depreciation
expense
|
45,612 | - | ||||||
|
Equity
in undistributed (income) loss of subsidiaries
|
5,164,055 | (2,093,087 | ) | |||||
|
Changes
in:
|
||||||||
|
Other
receivables
|
(1,300 | ) | - | |||||
|
Prepaid
expenses
|
(1,120,050 | ) | (184,460 | ) | ||||
|
Accounts
payable
|
33,931 | - | ||||||
|
Accrued
expenses and other current liabilities
|
(24,338 | ) | (143,226 | ) | ||||
|
Net
Cash provided (used) in operating activities
|
(2,256,263 | ) | 390,385 | |||||
|
Cash
flows from Investing Activities
|
||||||||
|
Purchase
of investments held in trust funds
|
- | (21,000,000 | ) | |||||
|
Proceeds
from maturities of investments held in trust
|
- | 71,743,430 | ||||||
|
Purchase
of investments in subsidiaries
|
- | (33,861,033 | ) | |||||
|
Investment
in property & equipment
|
(255,489 | ) | (19,944 | ) | ||||
|
Advances
to subsidiaries
|
(11,608,163 | ) | - | |||||
|
Net
Cash (used) by Investing Activities
|
(11,863,652 | ) | 16,862,453 | |||||
|
Cash
Flows from Financing Activities
|
||||||||
|
Proceeds
of assuance of debt
|
225,000 | 28,400 | ||||||
|
Borrowings
on lines of credit, net of (repayments)
|
7,085,579 | - | ||||||
|
Payment
of deferred fee to underwriter
|
- | (1,032,000 | ) | |||||
|
Payment
of loan from stockholder
|
- | (150,000 | ) | |||||
|
Cash
paid for redemption of shares
|
- | (9,730,987 | ) | |||||
|
Net
Cash (used) provided by Financing Activities
|
7,310,579 | (10,884,587 | ) | |||||
|
Net
increase in cash and cash equivalents
|
(6,809,336 | ) | 6,368,251 | |||||
|
Cash
and cash equivalents at beginning of period
|
7,125,033 | 756,782 | ||||||
|
Cash
and Cash Equivalents at end of Period
|
$ | 315,697 | $ | 7,125,033 | ||||
|
Supplemental
disclosure of cash flow information:
|
||||||||
|
Cash
paid during the year for:
|
||||||||
|
Income
taxes
|
$ | 1,766,055 | $ | 861,000 | ||||
|
Interest
|
$ | 325,363 | $ | - | ||||
|
Noncash
investing and financing activities:
|
||||||||
|
Common
stock issued for subsidiary acquisitions
|
$ | - | $ | 16,999,951 | ||||
|
Note
payable incurred for subsidiary acquisition
|
$ | - | $ | 3,000,000 | ||||
F-24