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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.   20549
FORM 10-Q
 
(Mark One)
     
 
x
Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
     
 
For the quarterly period ended March 31, 2013
     
 
¨
Transition report under Section 13 or 15(d) of the Securities Exchange act of 1934
     
 
For the transition period from _______________ to _________________
 
   Commission File Number: 001-32998  

 
Energy Services of America Corporation
 
(Exact Name of Registrant as Specified in its Charter)
 
Delaware     20-4606266  
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)  
 
100 Industrial Lane, Huntington, West Virginia    25702  
(Address of Principal Executive Office)      (Zip Code)  
 
 
(304) 399-6300
 
(Registrant’s Telephone Number including area code)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.  YES 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer o
 
Smaller Reporting Company x
 
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
 
As of May 10, 2013 there were issued and outstanding 14,458,836 shares of the Registrant’s Common Stock.
 
 
 

 
 
Part 1: Financial Information    
       
Item 1.
Financial Statements (Unaudited):
   
       
 
Consolidated Balance Sheets
 
1
       
 
Consolidated Statements of Income
 
2
       
 
Consolidated  Statements of Cash Flows
 
3
       
 
Consolidated Statements of Changes in Stockholders’ Equity
 
4
       
 
Notes to Unaudited Consolidated Financial Statements
 
5
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
10
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
21
       
Item 4.
Controls and Procedures
 
21
       
Part II:
Other Information
 
22
       
Item 1.
Legal Proceedings
 
22
       
Item 1A.
Risk Factors
 
22
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
22
       
Item 4.
Removed and Reserved
 
22
       
Item 6.
Exhibits
 
22
       
Signatures
 
24
 
 
 

 
 
ENERGY SERVICES OF AMERICA CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
 
   
March 31,
   
September 30,
 
Assets
 
2013
   
2012
 
   
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
  $ 5,857,984     $ 1,398,301  
Accounts receivable-trade
    9,071,070       15,632,300  
Allowance for doubtful accounts
    (240,071 )     (240,071 )
Retainages receivable
    1,014,447       1,713,702  
Other receivables
    484,424       277,933  
Costs and estimated earnings in excess of billings on uncompleted contracts
    9,645,515       10,856,769  
Deferred tax asset
    478,912       1,250,154  
Prepaid expenses and other
    3,676,825       2,005,233  
Assets of discontinued operations
    3,666,543       7,808,451  
Total Current Assets
    33,655,649       40,702,772  
                 
Property, plant and equipment, at cost
    28,369,154       29,060,709  
less accumulated depreciation
    (17,648,222 )     (16,485,112 )
Assets of discontinued operations, net
    5,815,519       6,477,380  
      16,536,451       19,052,977  
Total Assets
  $ 50,192,100     $ 59,755,749  
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Current maturities of long-term debt
  $ 8,957,242     $ 10,118,907  
Lines of credit and short term borrowings
    18,594,698       18,516,276  
Accounts payable
    2,858,850       8,171,650  
Accrued expenses and other current liabilities
    3,509,136       3,177,481  
Billings in excess of costs and estimated earnings on uncompleted contracts
    1,486,670       1,305,559  
Liabilities of discontinued operations
    1,459,754       2,149,435  
Total Current Liabilities
    36,866,350       43,439,308  
                 
Long-term debt, less current maturities
    1,300,867       1,623,771  
Long-term debt, payable to shareholder
    1,223,325       1,223,325  
Deferred income taxes payable
    3,632,394       4,426,751  
Liabilities of discontinued operations
    2,668,029       2,601,229  
Total Liabilities
    45,690,965       53,314,384  
                 
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 14,458,836
               
shares
    1,446       1,446  
                 
                 
Additional paid in capital
    56,126,639       56,107,650  
Retained earnings (deficit)
    (51,626,950 )     (49,667,731 )
                 
Total Stockholders’ equity
    4,501,135       6,441,365  
                 
Total liabilities and stockholders’ equity
  $ 50,192,100     $ 59,755,749  
 
The Accompanying Notes are an Integral Part of These Financial Statements
 
 
1

 
 
ENERGY SERVICES OF AMERICA CORPORATION
 
CONSOLIDATED STATEMENTS OF INCOME
 
Unaudited
 
 
   
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
   
March 31,
   
March 31,
 
   
2013
   
2012
   
2013
   
2012
 
                         
                         
Revenue
  $ 24,694,165     $ 26,607,948     $ 51,872,676     $ 51,732,426  
                                 
Cost of revenues
    22,815,614       25,146,637       47,052,084       47,627,014  
                                 
Gross profit
    1,878,551       1,461,311       4,820,592       4,105,412  
                                 
Selling and administrative expenses
    2,033,330       2,471,146       4,582,679       5,166,031  
Income (loss) from operations
    (154,779 )     (1,009,835 )     237,913       (1,060,619 )
                                 
Other income (expense)
                               
Interest income
    719       2,362       719       2,362  
Other nonoperating income (expense)
    (19,605 )     2,083       (17,007 )     2,400  
Interest expense
    (471,765 )     (449,398 )     (955,142 )     (956,136 )
Gain on sale of equipment
    -       6,636       294,251       21,521  
      (490,651 )     (438,317 )     (677,179 )     (929,853 )
                                 
Loss from continuing operations before income taxes
    (645,430 )     (1,448,152 )     (439,266 )     (1,990,472 )
                                 
Income tax benefit
    (343,047 )     (568,945 )     (23,115 )     (788,277 )
                                 
Loss from continuing operations
    (302,383 )     (879,207 )     (416,151 )     (1,202,195 )
                                 
Loss from discontinued operations
                               
     net of tax expense
    (896,626 )     (3,036,306 )     (1,543,068 )     (1,579,896 )
                                 
Net loss
  $ (1,199,009 )   $ (3,915,513 )   $ (1,959,219 )   $ (2,782,091 )
                                 
Weighted average shares outstanding-basic
    14,458,836       14,446,836       14,458,836       14,446,836  
                                 
Loss per share from continuing operations
  $ (0.021 )   $ (0.061 )   $ (0.029 )   $ (0.083 )
                                 
Loss per share
  $ (0.083 )   $ (0.271 )   $ (0.136 )   $ (0.193 )
                                 
 
The Accompanying Notes are an Integral Part of These Financial Statements
 
 
2

 
 
ENERGY SERVICES OF AMERICA CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
             
   
Six Months Ended
   
Six Months Ended
 
   
March 31,
   
March 31,
 
 
 
2013
   
2012
 
             
Cash flows from operating activities:
           
             
Net loss
  $ (1,959,219 )   $ (2,782,091 )
                 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
                 
    Depreciation expense
    2,356,078       2,924,657  
    Provision for bad debts
    300,000       -  
    Gain on sale/disposal of equipment
    (513,719 )     (41,979 )
    Provision for deferred taxes
    43,945       (1,495,440 )
    Share-based compensation expense
    18,989       35,868  
    Decrease in contracts receivable
    8,835,464       2,083,246  
    Decrease in retainage receivable
    1,172,768       3,331,441  
    Increase in other receivables
    (166,555 )     (22,761 )
    Decrease in cost and estimated earnings in excess of billings on uncompleted contracts
    1,614,739       2,042,888  
    Increase in prepaid expenses
    (1,654,035 )     (1,238,535 )
    Decrease in accounts payable
    (5,702,758 )     (580,247 )
    Increase in accrued expenses
    94,932       1,452,268  
    Increase in billings in excess of cost and estimated earnings on uncompleted contracts
    118,111       204,261  
Net cash provided by operating activities
    4,558,740       5,913,576  
                 
Cash flows from investing activities:
               
Investment in property & equipment
    (140,757 )     (641,236 )
Proceeds from sales of property and equipment
    841,324       183,594  
Net cash provided by (used in) investing activities
    700,567       (457,642 )
                 
Cash flows from financing activities:
               
Repayment of loans from shareholders
    -       (800,000 )
Borrowings on lines of credit and short term debt, net of (repayments)
    78,422       (284,480 )
Principal payments on long term debt
    (1,510,969 )     (2,747,725 )
Net cash used in financing activities
    (1,432,547 )     (3,832,205 )
                 
Increase in cash and cash equivalents
    3,826,760       1,623,729  
Cash beginning of period
    2,661,721       2,965,296  
Cash end of period
  $ 6,488,481     $ 4,589,025  
                 
Supplemental schedule of noncash investing and financing activities:
               
Purchases of property & equipment under financing agreements
  $ 26,400     $ 294,361  
Insurance premiums financed
  $ 2,784,193     $ 2,867,738  
                 
Supplemental disclosures of cash flows information:
               
                 
Cash paid during the year for:
               
Interest
  $ 927,192     $ 912,851  
Insurance premiums
  $ 1,775,083     $ 788,609  
 
The Accompanying Notes are an Integral Part of These Financial Statements
 
 
3

 
 
ENERGY SERVICES OF AMERICA CORPORATION
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
 
For the six months ended March 31, 2013 and 2012
 
Unaudited  
   
                           
Total
 
   
Common Stock
   
Additional Paid
   
Retained
   
Stockholders
 
   
Shares
   
Amount
   
in Capital
   
Earnings (Deficit)
   
Equity
 
                               
Balance at September 30, 2011
    14,446,836     $ 1,445     $ 56,059,825     $ (1,145,554 )   $ 54,915,716  
                                         
Share-based compensation expense
    -       -       35,868       -       35,868  
                                         
Net loss
    -       -       -       (2,782,091 )     (2,782,091 )
                                         
Balance at March 31, 2012
    14,446,836     $ 1,445     $ 56,095,693     $ (3,927,645 )   $ 52,169,493  
                                         
Balance at September 30, 2012
    14,458,836     $ 1,446     $ 56,107,650     $ (49,667,731 )   $ 6,441,365  
                                         
Share-based compensation expense
    -       -       18,989       -       18,989  
                                         
Net loss
    -       -       -       (1,959,219 )     (1,959,219 )
                                         
Balance at March 31, 2013
    14,458,836     $ 1,446     $ 56,126,639     $ (51,626,950 )   $ 4,501,135  
 
The Accompanying Notes are an Integral Part of These Financial Statements
 
 
4

 
 
ENERGY SERVICES OF AMERICA CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 
1.   BUSINESS AND ORGANIZATION:

Energy Services of America Corporation, formerly known as Energy Services Acquisition Corp., (the Company) was incorporated in Delaware on March 31, 2006 as a blank check company whose objective was to acquire an operating business or businesses.  On September 6, 2006, the Company sold 8,600,000 units in a 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 have operated 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 contracts with some cost-plus service work performed as requested.  All of the Company’s production personnel are union members of  various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.   On December 18, 2012, the Company committed to the closing and subsequent disposition of the assets of S.T. Pipeline under the terms of a Forbearance Agreement and the Company’s restructuring plan. A liquidation sale of the assets of S.T. Pipeline is expected to occur during the third fiscal quarter. The Forbearance Agreement, which was originally set to expire on May 31, 2013, was extended to May 31, 2014.  Please see the Company’s May 6, 2013 8-K filing for further information.  The financial position and results of operations of S.T. Pipeline, Inc. have been presented as discontinued operations in the accompanying financial statements for all presented periods.

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 United States.    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 industries.  Nitro Electric operates primarily in the mid-Atlantic region of the United States.   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.

The Company’s stock trades under the symbol “ESOA” on the Over-the-Counter market.

Interim Financial Statements

The accompanying unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the years ended September 30, 2012 and 2011 included in the Company’s Form 10-K filed December 28, 2012.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to interim financial reporting rules and regulations of the SEC.  The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management necessary for a fair presentation of the Company’s financial position and results of operations.  The operating results for the three and six month periods ended March 31, 2013 are not necessarily indicative of the results to be expected for the full year.

 
5

 
 
Principles of Consolidation

The consolidated financial statements of Energy Services include the accounts of Energy Services and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Unless the context requires otherwise, references to Energy Services include Energy Services and its consolidated subsidiaries.

Reclassifications

Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the current year.   The reclassifications primarily relate to the presentation of discontinued operations related to S.T. Pipeline, Inc.
 
2.  UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts as of March 31, 2013 and September 30, 2012 are summarized as follows:           

   
March 31, 2013
   
September 30, 2012
 
             
Costs incurred on contracts in progress
  $ 139,654,283     $ 177,189,987  
Estimated earnings, net of estimated losses
    11,474,203       10,229,134  
      151,128,486       187,419,121  
                 
Less: Billings to date
    142,969,641       177,867,911  
    $ 8,158,845     $ 9,551,210  
                 
Costs and estimated earnings in excess of billings on uncompleted contracts
  $ 9,645,515     $ 10,856,769  
Less: Billings in excess of costs and estimated earnings on uncompleted Contracts
    1,486,670       1,305,559  
    $ 8,158,845     $ 9,551,210  
 
Backlog at March 31, 2013 and September 30, 2012 was $54.9 million and $57.4 million respectively.

 
6

 
 
3.  CLAIMS

The Company reported $2.5 million of claim revenue for the period ended September 30, 2012.  This claim was a result of a combination of customer-caused delays, errors in specification and designs, and disputed or unapproved contract change orders.  Revenue from these claims was recorded only to the extent contract costs relating to the claim have been incurred and adjusted to reflect the probable amounts the Company anticipates to collect.

At March 31, 2013 the Company is seeking an arbitration proceeding to resolve the collection of the remaining amount.  Claims receivable is a component of cost and estimated earnings in excess of billing.  The Company considers collection of these claims highly probable.
 
4.  FAIR VALUE MEASUREMENTS

   The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

As noted above, there is a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.  The three levels are defined as follows:

Level 1 — Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
 
Level 2 — Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
 
Level 3 — Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 
7

 
 
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 for bank loans with similar terms and maturities.  The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $10.3 million at March 31, 2013 was $10.3 million.
  
The Company uses fair value measurements on a non-recurring basis in its assessment of goodwill and long-lived assets held and used. In accordance with its annual impairment test during the quarter ended September 30, 2012, the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet.  Refer to Note 4, Goodwill and Intangible Assets of the Company’s September 30, 2012 10-K filing for further information.
 
The Company has also evaluated the fair value of S.T. Pipeline’s assets at March 31, 2013 and believes the fair value of the assets exceed book value.  The Company has received an appraisal of S.T. Pipeline’s assets from two vendors and adjusted each appraisal for the costs to sell the assets, which did not result in any impairment.

5.  DISCONTINUED OPERATIONS

Due to organizational changes and operating losses incurred in fiscal year 2012, the Company has decided to discontinue the operations of the wholly owned subsidiary S.T. Pipeline, Inc.  The Company has signed a contract with an auction house to sell off the assets of S.T. Pipeline on May 14, 2013.  The Company expects the proceeds from the sale to be in the range of $8.0 million to $10.0 million.   All net proceeds will go to the bank group to reduce the balance on the Company’s Line of Credit (LOC).

The operating results for S.T. Pipeline, Inc. for the three and six months ended March 31, 2013 and 2012 are as follows:
 
   
Three Months Ended
   
Six Months Ended
 
   
March 31, 2013
   
March 31, 2012
   
March 31, 2013
   
March 31, 2012
 
   
(In Millions)
   
(In Millions)
   
(In Millions)
   
(In Millions)
 
                         
Sales
  $ 0.30     $ 10.50     $ 1.80     $ 34.93  
Cost of Revenues
    0.39       14.71       2.68       36.09  
Gross loss
    (0.09 )     (4.21 )     (0.88 )     (1.16 )
 Selling & Adm.
    0.45       0.58       0.81       1.17  
 Loss from operations
    (0.54 )     (4.79 )     (1.69 )     (2.33 )
 Other income
    0.01       0.02       0.22       0.02  
 Loss before tax
    (0.53 )     (4.77 )     (1.47 )     (2.31 )
 Income tax expense (benefit)
    0.37       (1.73 )     0.07       (0.73 )
 Net loss
  $ (0.90 )   $ (3.04 )   $ (1.54 )   $ (1.58 )

 
8

 
 
The following table shows the components of asset and liabilities that are classified as discontinued operations in the Company’s consolidated balances sheets for quarter ended March 31, 2013 and year ended September 30, 2012 (in Thousands).
 
   
March 31,
    September 30,  
   
2013
    2012  
Accounts receivable, net
  $ 279     $ 2,853  
Costs in excess of billings
    -       403  
Retainages receivable
    291       764  
Deferred tax asset
    2,440       2,440  
Prepaid and other current assets
    657       1,348  
Assets of discontinued operations-current
    3,667       7,808  
Property, plant, and equipment, net
    5,816       6,477  
Total assets of discontinued operations
    9,483       14,285  
                 
Accounts payable
    1,355       1,745  
Billings in excess of cost
    -       63  
Accrued expenses and other current liabilities
    104       341  
Liabilities of discontinued operations-current
    1,459       2,149  
Liabilities of discontinued operations-long term
    2,668       2,601  
Total liabilities of discontinued operations
    4,127       4,750  
                 
Net assets
  $ 5,356     $ 9,535  
 
6.  EARNINGS PER SHARE

The amounts used to compute the earnings per share for the three and six months ended March 31, 2013 and 2012 are summarized below.
 
   
Three Months Ended
March 31,
   
Six Months Ended
March 31,
 
                         
   
2013
   
2012
   
2013
   
2012
 
                         
Loss from continuing operations
  $ (302,383 )   $ (879,207 )   $ (416,151 )   $ (1,202,195 )
                                 
Weighted average shares outstanding
    14,458,836       14,446,836       14,458,836       14,446,836  
 
                               
Loss per share from continuing operations
  $ (0.021 )   $ (0.061 )   $ (0.029 )   $ (0.083 )
                                 
Net Loss from discontinued operations
  $ (896,626 )   $ (3,036,306 )   $ (1,543,068 )   $ (1,579,896 )
                                 
Weighted average shares outstanding basic
    14,458,836       14,446,836       14,458,836       14,446,836  
 
                               
Loss per share from discontinued operations
  $ (0.062 )   $ (0.210 )   $ (0.107 )   $ (0.109 )
                                 
Net Loss
  $ (1,199,009 )   $ (3,915,513 )   $ (1,959,219 )   $ (2,782,091 )
                                 
Loss per share
  $ (0.083 )   $ (0.271 )   $ (0.136 )   $ (0.193 )
 
 
9

 
 
As of the six month period ended March 31, 2013 and 2012, there are no options or warrants having a dilutive effect on the Company’s earnings per share calculation.
 
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the “Consolidated Financial Information” appearing in this section of this  report as well as the historical financial statements and related notes contained elsewhere herein.  Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.  The term “Energy Services” refers to the Company and wholly-owned subsidiaries on a consolidated basis.
 
Forward Looking Statements

Within Energy Services’ financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995.  You can identify these statements by the fact that they do not relate strictly to historical or current facts.  They use words such as “anticipate,” “estimate,” “project,” “forecast,” “may,” “will,” “should,” “could,” “expect,” “believe,” “intend” and other words of similar meaning.

These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services’ control.  Energy Services has based its forward-looking statements on management’s beliefs and assumptions based on information available to management at the time the statements are made.  Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and any or all of Energy Services’ forward-looking statements may turn out to be wrong.  They can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.

All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report.  In addition, Energy Services does not undertake and expressly disclaims any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.
 
Company Overview

Energy Services was formed on March 31, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business.  It operated as a “blank check company” until August 15, 2008 at which time it completed the acquisitions of S.T. Pipeline, Inc. and C J Hughes Construction Company, Inc.
 
 
10

 
 
During the fourth quarter of 2012, the Company delisted from the New York Stock Exchange.  The Company’s common stock now trades in the Over-the-Counter market under the symbol “ESOA”.
 
On November 28, 2012, the Company entered into a Forbearance Agreement with our lenders related to our revolving line of credit and term debt.  The Forbearance Agreement, among other things, required that the Company close the S. T. Pipeline subsidiary and dispose of its assets.  The Company is also required to prepare recommendations relating to the on-going operations of Nitro Electric Company, Inc, C.J. Hughes Construction Company, and Contractors Rental Corporation, including refinancing, sale or liquidation of the companies.  Under the terms of the Forbearance Agreement the Company cannot make additional draws on the revolving line of credit.  Although the Company can request the establishment of a forbearance line of credit, the lenders are under no obligation to approve it.  The limitations on our working capital could have a severe impact on our ability to obtain and perform additional work.  The Forbearance Agreement, which may be terminated upon certain events, was originally set to expire on May 31, 2013, but was extended to May 31, 2014.  Please see the Company’s May 6, 2013 Form 8-K filing for further information.
 
In connection with their audit of our 2012 financial statements, Arnett Foster Toothman PLLC, our independent public auditing firm, expressed substantial doubt about the ability of the Company to continue as a “going concern”.  The financial difficulties giving rise to Arnett Foster Toothman’s conclusion include the significant and sustained losses that the Company has incurred over recent years as well as our inability to secure loans and lines of credit to fund our business in a manner deemed adequate to conduct our business.  Although pursuant to the terms of the Forbearance Agreement, the Company is exploring all avenues to return to profitability, there can be no assurance that the Company will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman’s decision to render its “going concern” opinion.
 
The Company has engaged a restructuring agent to aid in the development of a restructuring plan, and intends to explore alternative financing options as well as the ability to raise equity capital.  
 
Since the acquisitions, Energy Services has been engaged in one segment of operations, which is providing contracting services for energy related companies.   Currently, Energy Services primarily services the gas, oil and electrical industries.  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.  The Company is exploring options to remain active in the oil and gas industries with the discontinuance of S.T. Pipeline.  The Company believes there is opportunity within this industry given the current projections of pipelines being constructed.

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 Pennsylvania.  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.
 
 
11

 

The Company enters into various types of contracts, including competitive unit price, time and material 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 time and material contracts when units are completed or services are performed.  Fixed price contracts usually result 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 at completion of the contract.  Many contracts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.
 
Second Quarter Overview

The following is an overview for the three and six months ended March 31, 2013.
 
   
Three Months ended
   
Six Months ended
 
   
March 31, 2013
   
March 31, 2013
 
   
(In Millions)
   
(In Millions)
 
             
Continuing Operations
           
Sales
  $ 24.69     $ 51.87  
Cost of revenues
    22.81       47.05  
Gross profit
    1.88       4.82  
Selling & Adm.
    2.03       4.58  
Loss from operations
    (0.15 )     0.24  
Other expense
    (0.49 )     (0.68 )
Loss before income tax
    (0.64 )     (0.44 )
Income tax benefit
    (0.34 )     (0.02 )
Net loss from continuing operations
  $ (0.30 )   $ (0.42 )
                 
Discontinued Operations
               
Sales
  $ 0.30     $ 1.80  
Cost of revenues
    0.39       2.68  
Gross loss
    (0.09 )     (0.88 )
Selling & Adm.
    0.45       0.81  
Loss from operations
    (0.54 )     (1.69 )
Other income
    0.01       0.22  
Loss before income tax
    (0.53 )     (1.47 )
Income tax expense
    0.37       0.07  
Loss from discontinued operations
  $ (0.90 )   $ (1.54 )
 
 
12

 
 
The second quarter for the Company is typically a slower period for our business lines given the weather and climate.  The weather normally does not allow as many workable days as the third and fourth quarters.
 
Quarter Ending March 31, 2013 and 2012 Comparison

            Revenues.  Total revenues of continuing operations decreased by $1.9 million or 7.2% to $24.7 million for the three months ended March 31, 2013 and increased $140,000 or 0.3% to $51.9 million for the six months ended March 31, 2013 compared to the same period in 2012.   The revenue for discontinued operations decreased by $10.2 million to $304,000 for the three months ended March 31, 2013 and decreased $33.1 million to $1.8 million for the six months ended March 31, 2013 compared to the same period in 2012.

            Cost of Revenues. Total costs of revenues of continuing operations decreased by $2.3 million or 9.3% to $22.8 million for the three months ended March 31, 2013 and decreased $575,000 or 1.2% to $47.1 million for the six months ended March 31, 2013 compared to the same period in 2012.   The costs of revenues for discontinued operations decreased by $14.3 million to $390,000 for the three months ended March 31, 2013 and decreased $33.4 million to $2.7 million for the six months ended March 31, 2013 compared to the same period in 2012.

Gross Profit.   Total gross profit of continuing operations increased by $417,000 or 28.6% to $1.9 million for the three months ended March 31, 2013 and increased $715,000 or 17.4% to $4.8 million for the six months ended March 31, 2013 compared to the same period in 2012.   The gross loss for discontinued operations increased by $278,000 to a gross loss of $885,000 for the three months ended March 31, 2013 and decreased $4.1 million to a gross loss of $86,000 for the six months ended March 31, 2013 compared to the same period in 2012.

Selling and administrative expenses.  Total selling and administrative expenses of continuing operations decreased by $438,000 or 17.7% to $2.0 million for the three months ended March 31, 2013 and decreased $583,000 for the six months ended March 31, 2013 compared to the same period ending in 2012.  The selling and administrative expenses of discontinued operations decreased by $358,000 to $811,000 for the three months ended March 31, 2013 and decreased $123,000 to $453,000 for the six months ended March 31, 2013 compared to the same period ending in 2012.

With respect to continuing operations, there was a $1.1 million reduction in selling and administrative expenses for the six months ended March 31, 2013 that resulted from combining the management of C.J. Hughes, Inc. and Contractors Rental, Inc.  The Company also incurred $531,000 in restructuring costs related to the consultant put in place under terms of the Forbearance Agreement for the six months ended March 31, 2013.  The restructuring costs are expected to continue through at least May 31, 2014.

Interest Expense.  Interest expense from continuing operations increased by $22,000 or 5.0% to $472,000 for the three months ended March 31, 2013 compared to the same period ending for 2012.

Net Income (Loss). The Company had a net loss of $302,000 from continuing operations for the three months ended March 31, 2013 compared to a net loss of $879,000 for the same period ending in 2012.  The Company had a net loss of $897,000 from discontinued operations for the three months ended March 31, 2013 compared to a net loss of $3.0 million for the same period ending in 2012.
 
 
13

 
 
As previously disclosed, the Company incurred substantial losses in 2012 related to two major projects.  Below is the detail related to those losses.
 
   
12,000 ft 6” replacement and 14,000 ft 12” replacement

At Quarter Ended
 
                                     
   
9/30/2011
   
12/31/2011
   
3/31/2012
   
6/30/2012
   
9/30/2012
   
12/31/2012
 
                                 
Completed
 
                                                 
Contract amount
  $ 8,612,000     $ 8,612,000     $ 9,100,000     $ 9,377,720     $ 9,647,650     $ 9,653,550  
                                                 
Cost to date
    3,212,060       7,566,120       11,699,590       14,047,950       14,606,290       14,650,160  
                                               
Est. costs to complete
    4,060,500       1,200,000       2,250,000       250,000       63,000    
-
 
                                                 
Est. costs at completion
    7,272,560       8,766,120       13,949,590       14,297,950       14,669,290       14,650,160  
                                                 
Est. profit (loss)
  $ 1,339,440     $ (154,120 )   $ (4,849,590 )   $ (4,920,230 )   $ (5,021,640 )   $ (4,996,610 )
                                                 
Percent complete
    44.2 %     86.3 %     83.9 %     98.3 %     99.6 %     100 %
 
   
For Quarter Ended
 
       
   
9/30/2011
   
12/31/2011
   
3/31/2012
   
6/30/2012
   
9/30/2012
   
12/31/2012
 
   
 
                           
Completed
 
                                                 
Earned revenue
  $ 3,803,648     $ 3,608,351     $ (562,000 )   $ 2,277,720     $ 456,930     $ 68,900  
                                                 
Costs of revenue
    3,212,060       4,354,060       4,133,470       2,348,360       558,340       43,870  
                                                 
Gross profit (loss)
  $ 591,588     $ (745,709 )   $ (4,695,470 )   $ (70,640 )   $ (101,410 )   $ 25,030  
 
This was a unit price project for the replacement of approximately 12,000 feet of six inch pipe and 14,000 feet of twelve inch pipe in McDowell County, West Virginia.  The project began during the fourth quarter of fiscal year 2011 and was completed during the first quarter of fiscal year 2013.  The contract began with an estimated value of $ 8,612,000 and through contract additions and extra work increased by $ 1,041,550 to a final contract price of $ 9,653,550.  The project was billed every two weeks after actual quantities installed were agreed upon by a Company field supervisor and a customer inspector.

Earned revenue for each quarter was calculated using the percent complete method of revenue recognition.  Total costs to date were compared to total forecasted costs at completion as provided by the project’s management team.  The resulting percentage of costs completed was used to determine how much of the contract value to recognize as revenue.    When the estimated costs at completion moved the project to a loss position, the full amount of the expected loss was recorded in that quarter.

The Company recognized $ 592,000 of profit on the project for the quarter ended September 30, 2011.  However, the project began to experience difficulties in the quarter ended December 31, 2011 due to weather based project delays.  At this time, the Company recognized a $ 746,000 loss for the quarter, and a loss of $ 154,000 for the project to date.

The project experienced more than anticipated weather delays and a greater than anticipated amount of underground rock during the quarter ended March 31, 2012, at which time the Company recorded an additional $ 4.7 million loss.  The major components of costs overruns during this period were labor, benefits, and equipment rental, all of which were greatly impacted due to lost time and inefficient production caused by the factors mentioned above.  Union contracts negotiated with the various unions involved with the projects call for rain out and/or show up time to be paid even if work is stopped due to weather conditions.  Total labor and benefit costs for the quarter was $ 3.0 million.  In addition to the impact on labor costs, weather conditions also extend the amount of time outside equipment rentals are required to complete the project.  Total outside equipment rental for the quarter was $ 560,000.
 
 
14

 

The project was completed during the first quarter of fiscal 2013 and finished with total revenue of $ 9,653,550, costs of $ 14,650,160 and a total project loss of $ 4,996,610. The Company does not anticipate any additional losses on this project.

   
49,400 ft of 24” pipe
 
       
   
At Quarter Ended
 
       
   
12/31/2011
   
3/31/2012
   
6/30/2012
   
9/30/2012
   
12/31/2012
 
                           
Completed
 
                                         
Contract amount
  $ 13,388,670     $ 18,946,437     $ 20,162,561     $ 21,174,380     $ 21,197,818  
                                         
Cost to date
    876,092       11,066,099       21,715,318       24,730,308       24,805,555  
                                         
Est. costs to complete
    11,977,031       7,673,385       926,944       25,000       -  
                                         
Est. costs at completion
    12,853,123       18,739,484       22,642,262       24,755,308       24,805,555  
                                         
Est. profit (loss)
  $ 535,547     $ 206,953     $ (2,479,701 )   $ (3,580,928 )   $ (3,607,737 )
                                         
Percent complete
    6.8 %     59.1 %     95.9 %     99.9 %     100 %

   
For Quarter Ended
 
       
   
12/31/2011
   
3/31/2012
   
6/30/2012
   
9/30/2012
   
12/31/2012
 
                           
Completed
 
                               
Earned revenue
  $ 912,596     $ 10,275,714     $ 8,047,307     $ 1,913,764     $ 48,438  
                                         
Costs of revenue
    876,092       10,190,007       10,649,219       3,014,990       75,247  
                                         
Gross profit (loss)
  $ 36,504     $ 85,707     $ (2,601,912 )   $ (1,101,226 )   $ (26,809 )
 
This was a unit price project for the replacement of approximately 49,400 feet of twenty four inch pipe in Wetzel County, West Virginia.  The project began during the first quarter of fiscal year 2012 and was completed during the first quarter of fiscal year 2013.  The contract began with an estimated value of $13,388,670 and through contract additions and extra work increased by $7,809,148 to a final contract price of $21,197,818.  The project was billed every two weeks after actual quantities installed were agreed upon by a Company field supervisor and a customer inspector.

Earned revenue for each quarter was calculated using the percent complete method of revenue recognition.  Total costs to date were compared to total forecasted costs at completion as provided by the project’s management team.  The resulting percentage of costs completed was used to determine how much of the contract value to recognize as revenue.    When the estimated costs at completion moved the project to a loss position, the full amount of the expected loss was recorded in that quarter.
 
 
15

 
 
The Company recognized $ 743,000 of profit on the project through the second quarter ended March 31, 2012.  However, the project began to experience difficulties in the quarter ended June 30, 2012 due to weather based project delays and inefficient production.  At this time, the Company recognized a $2.5 million loss for the quarter, and a loss of $1.7 million for the project to date.  It was during this quarter that the Company fell behind schedule on the project and made an attempt to make up for the lost and inefficient production by maintaining a higher labor force and outside equipment rentals than was originally estimated.  Major components of costs of revenues for the quarter were labor and burden of $7.1 million and outside equipment rental of $935,000.
 
The Company recognized another $1.1 million loss on the project during the quarter ended September 30, 2012.  Costs for the quarter exceeded the estimated costs to complete as of June 30, 2012 by $2.1 million; however, the estimated contract amount increased by $1.0 million.  Major costs components of costs for the quarter were labor and burden of $1.4 million and outside equipment rentals of $500,000.
 
The project was completed during the quarter ended December 31, 2012 and finished with a total loss of $3.6 million.  The Company does not anticipate any additional losses on this project.
 
The Company is not engaged in any major projects at this time that losses are expected.
 
Comparison of Financial Condition
 
The Company had total assets at March 31, 2013 of $50.2 million, a decrease of $9.6 million from September 30, 2012.  Some of the primary components of the balance sheet were accounts receivable which totaled $9.1 million, a decrease of $6.6 million from September 30, 2012.  Other major categories of assets at March 31, 2013 included cash of $5.9 million and fixed assets less accumulated depreciation of $16.5 million.  Liabilities totaled $45.7 million, a decrease of $7.6 million from September 30, 2012.   This decrease was primarily due to a decrease in accounts payable.
 
Stockholders’ Equity. Stockholders’ equity decreased from $6.4 million at September 30, 2012 to $4.5 million at March 31, 2013.  This decrease was primarily due to the net loss of $2.0 million.   We have not paid any cash or stock dividends on our common stock, nor have we repurchased shares of our common stock.
 
Liquidity and Capital Resources
 
Cash Requirements
 
The Forbearance Agreement, among other things, does not allow for additional draws on our revolving line of credit.  We can apply for a separate forbearance line of credit, but approval by our lenders is at their discretion.  We prepare weekly cash forecasts for our own benefit and for submission to our lenders.  During the third and fourth quarters, the Company anticipates it will be limited in its ability to fund additional work not currently under contract.  The Company is currently working with a restructuring agent to determine the best course of action for the Company and its shareholders, including refinancing opportunities.  The Company is also exploring opportunities to raise equity capital.
 
 
16

 
 
Sources and Uses of Cash
 
           The net loss for the six months ended March 31, 2013 was $2.0 million, which includes depreciation expense of $2.4 million.   Contracts, other receivables, and prepaids provided $9.9 million while decreases in accounts payable and accrued expenses used $5.6 million.  Net cash provided by operating activities was $4.6 million for the six month period ended March 31, 2013.  Investing activities provided $701,000. Financing activities consumed $1.4 million.
 
As of March 31, 2013, the Company had $6.5 million in cash, a working capital deficiency of $3.2 million and long term debt, net of current maturities of $2.5 million.
 
Loan Covenants
 
The Company has established an eighteen million ($18,000,000) Line of Credit agreement with a regional bank.  The line of credit is subject to the terms of the Forbearance Agreement discussed above. Interest during the forbearance period is 6.5%, which expires May 31, 2013.  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 certain percentages of receivables from bonded jobs and retainage as well as items greater than one hundred twenty (120) days old.  At March 31, 2013 the Company had borrowed $17.1 million on the line of credit.
 
The debt covenants with respect to the Company’s current ratio and debt to tangible net worth have been waived under the Forbearance Agreement.  The Company is in compliance with the remaining debt covenants at March 31, 2013.
 
In accordance with the terms of the Forbearance Agreement, the lenders have agreed to forbear from exercising and enforcing its default-related rights under the notes.
 
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 agreement calls for monthly rental payments of $5,000 and extends through August 15, 2014.  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 October 2013 with options to renew.  This agreement calls for a monthly rental of $7,500 per month.  The Company also rents office and shop space from other independent lessors.  The office space rental is $6,000 per month and extends to March 2014.  The shop rental is $5,800 monthly and extends to May 2014.
 
 
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Letters of Credit
 
Certain customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors, vendors, etc. on various customer projects.  At March 31, 2013, the Company had one letter of credit outstanding in the amount of $953,340.
 
Performance Bonds
 
Some customers, particularly new ones or governmental agencies, require the Company 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.  Effective October 19, 2012, the Company’s bonding company discontinued issuing the Company any new bonds until further notice.  The Company is actively searching for a new bonding company.  The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and amount of contracts that can be bid.
 
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 March 31, 2013, the Company had $23.7 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 two customers that exceeded 10% of revenues for the six months ended March 31, 2013.  Those two customers accounted for 28.0% of revenues for the period.
 
Related Party Transactions
 
           Total long-term debt at March 31, 2013 was $2.5 million, of which $1.2 million was related party debt payable to a certain director by August 2014.
 
 
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Inflation
 
Due to relatively low levels of inflation during the six months ended March 31, 2013 and 2012, inflation did not have a significant effect on our results.
 
Critical Accounting Policies
 
The discussion and analysis of the Company’s financial condition and results of operations are based on our 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.
 
Claims.  Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs.  The Company records revenue on claims that have a high probability of success.  Revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred.
 
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 at completion.  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.
 
 
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Self Insurance.  The Company has its workers’ compensation, general liability and auto 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 restricted cash account to guarantee payments of premiums. That restricted account had a balance of $1.4 million as of March 31, 2013.  Should the captive experience severe losses over an extended period, it could have a detrimental effect on the Company.
 
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 March 31, 2013, the management review deemed that the allowance for doubtful accounts was adequate.
 
Outlook
 
The following statements are based on current expectations.  These statements are forward looking, and actual results may differ materially.
 
        The Company has reached an agreement with its lender to extend the Forbearance Agreement to May 31, 2014.  The agreement requires the Company to consummate the issuance of Preferred Stock in an amount not less than $6 million by May 31, 2013.  One million dollars of which would be paid toward the principle reduction of outstanding debt.  The agreement also requires the Company to sell, refinance, or liquidate both Nitro Electric and C.J. Hughes no later than May 31, 2014 and begin the sale S.T. Pipeline’s equipment on or before May 14, 2013.  Please see the Company’s May 6, 2013 Form 8-K filing for further details.
 
All jobs being performed by S.T. Pipeline have been completed and the operations have been closed.  The Company does not anticipate any residual effects from the contracts completed by S.T. Pipeline during the first and second quarter as all contract obligations have been met.  The Company is expecting losses at S.T. Pipeline of approximately $110,000 per month until the sale of equipment has occurred.  This would result in negative cash flows from S.T. Pipeline of approximately $110,000 per month.
 
The Company has signed a contract with an auction house to sell off S.T. Pipeline’s equipment on May 14, 2013.  The Company expects the proceeds from the sale to be in the range of $8.0 million to $10.0 million.  All net proceeds will go to the bank group to reduce the balance of the Company’s Line of Credit (LOC) and Term Note based on a prorated amount of the outstanding principal balance for each.  The balance of the LOC and Term note were $16,512,063 and $7,996,394, respectively, at the time of the execution of the Forbearance Agreement extension.  The funds provided by the sale should reduce the total outstanding debt balance to $14.5 million to $16.5 million based on the Company’s current projection.
 
The Company is also having discussions with investment banking groups relative to a capital raise or the marketing of Nitro Electric and C.J. Hughes, but no definitive plan has been established.  After the disposition of S.T. Pipeline’s assets, the Company will have better perspective as to the likelihood of being able to operate Nitro Electric and C.J. Hughes.
 
 
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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, the Company is seeing the increased demand for our services and accordingly, the Company 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 March 31, 2013 was $54.9 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.
 
The Company’s ability to complete the existing backlog and to obtain and perform additional work will be dependent on the Company complying with the terms of the Forbearance Agreement with our lenders and finding alternative funding, possibly including an infusion of equity capital.  See the “Liquidity and Capital Resources” section for further discussion.
 
ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to market risks, primarily related to increases in fuel prices and adverse changes in interest rates, as discussed below.
 
Fuel Prices.   Our exposure to market risk for changes in fuel prices relates to our consumption of fuel and the price we have to pay for it.  As prices rise, our total fuel cost rises.  We do not feel that this risk is significant due to the fact that we would be able to pass a portion of those increases on to our customers.
 
Interest Rate.  Our exposure to market rate risk for changes in interest rates relates to our borrowings from  banks.   Some of our loans have variable interest rates.  Accordingly, as rates rise, our interest cost would rise.  We do not feel that this risk is significant.
 
ITEM 4. Controls and Procedures
 
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services of America Corporation files or submits under the Securities Exchange Act of 1934, is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management including our Chief Executive Officer, as appropriate to allow timely decisions regarding required disclosure.
 
 
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There has been no change in Energy Services of America Corporation’s internal control over financial reporting during Energy Services of America Corporation’s second quarter of fiscal year 2013 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.
 
PART II
 
OTHER INFORMATION
 
ITEM 1. Legal Proceedings
 
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 personal 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.
 
ITEM 1A. Risk Factors
 
Please see the information disclosed in the “Risk Factors” section of our Form 10-K as filed with the Securities and Exchange Commission on December 28, 2012, and which is incorporated herein by reference.   There have been no changes to the risk factors since the filing of the Annual Report on Form 10-K.
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
(a) There have been no unregistered sales of securities during the periods covered by the report.
 
(b)  None
 
Energy Services of America Corporation did not repurchase any shares of its common stock during the relevant period.
 
ITEM 4. Removed and Reserved
 
ITEM 6. Exhibits
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
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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
 
101.INS
 
101.SCH
 
101.CAL
 
101.DEF
 
101.LAB
 
101.PRE
XBRL Instance Document
 
XBRL Taxonomy Extension Schema Document
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
XBRL Taxonomy Extension Definition Linkbase Document
 
XBRL Taxonomy Extension Label Linkbase Document
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
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SIGNATURES
 
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
ENERGY SERVICES OF AMERICA CORPORATION
     
Date: May 10, 2013 By: /s/  Douglas V. Reynolds  
      Douglas V. Reynolds  
      Chief Executive Officer  
         
Date: May 10, 2013 By: /s/  Larry A. Blount  
      Larry A. Blount  
      Chief Financial Officer  
 
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