Energy Services of America CORP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Energy Services of America CORP	Financial_Report.xls
EX-32 - EXHIBIT 32 - Energy Services of America CORP	ex32.htm
EX-31.1 - EXHIBIT 31.1 - Energy Services of America CORP	ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Energy Services of America CORP	ex31-2.htm

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 December 31, 2013

o 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)

75 West 3rd Ave., Huntington, West Virginia			25701
(Address of Principal Executive Office)			(Zip Code)

	(304) 522-3868
(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 February 1, 2014 there were issued and outstanding 14,539,836 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	9

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20

Item 4.	Controls and Procedures	21

Part II:	Other Information	21

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22

Item 4.	Removed and Reserved	22

Item 6.	Exhibits	22

Signatures		23

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED BALANCE SHEETS

	December 31,			September 30,
Assets	2013			2013
	(Unaudited)
Current Assets
Cash and cash equivalents	$	6,044,532		$	6,152,382
Accounts receivable-trade		13,984,256			16,774,884
Allowance for doubtful accounts		(196,692	)		(236,657	)
Retainages receivable		1,988,244			2,666,066
Other receivables		273,331			271,572
Costs and estimated earnings in excess of billings on uncompleted contracts		4,195,554			9,034,956
Deferred tax asset		2,024,543			1,809,684
Prepaid expenses and other		1,848,558			2,191,551
Assets of discontinued operations		2,345,976			2,274,079
Total Current Assets		32,508,302			40,938,517

Property, plant and equipment, at cost		29,042,825			28,801,218
less accumulated depreciation		(20,055,020	)		(19,198,168	)
Assets of discontinued operations, net		-			155,833
		8,987,805			9,758,883
Total Assets	$	41,496,107		$	50,697,400

Liabilities and Stockholders’ Equity
Current Liabilities
Current maturities of long-term debt	$	4,596,511		$	5,280,558
Lines of credit and short term borrowings		8,628,265			10,132,667
Accounts payable		1,667,617			6,367,120
Accrued expenses and other current liabilities		2,362,618			3,422,385
Billings in excess of costs and estimated earnings on uncompleted contracts		2,714,686			3,697,887
Income tax payable		170,764			384,303
Liabilities of discontinued operations		928,333			1,370,465
Total Current Liabilities		21,068,794			30,655,385

Long-term debt, less current maturities		905,220			1,058,720
Deferred income taxes payable		3,061,193			3,283,124
Liabilities of discontinued operations		799,790			756,983
Total Liabilities		25,834,997			35,754,212

Stockholders’ equity

Preferred stock, $.0001 par value Authorized 1,000,000 shares, 206 issued at December 31, 2013 and 196 at September 30, 2013		-			-
Common stock, $.0001 par value Authorized 50,000,000 shares, issued and outstanding at December 31, 2013 14,539,836 shares and at September 30, 2013 14,514,836 shares		1,454			1,451


Additional paid in capital		61,289,260			61,039,262
Retained earnings (deficit)		(45,629,604	)		(46,097,525	)
Total Stockholders’ equity		15,661,110			14,943,188

Total liabilities and stockholders’ equity	$	41,496,107		$	50,697,400

The Accompanying Notes are an Integral Part of These Financial Statements

ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Unaudited

	Three Months Ended			Three Months Ended
	December 31,			December 31,
	2013			2012


Revenue	$	25,050,410		$	27,178,511

Cost of revenues		22,874,079			24,236,470

Gross profit		2,176,331			2,942,041

Selling and administrative expenses		1,768,923			2,549,349
Income from operations		407,408			392,692

Other income (expense)
Interest income		(223	)		2,598
Other nonoperating income		11,453			-
Interest expense (benefit)		(354,058	)		(483,377	)
Gain on sale of equipment		-			294,251
		(342,828	)		(186,528	)
Income from continuing operations before income taxes		64,580			206,164
Income tax expense (benefit)		(382,899	)		319,932
Income (loss) from continuing operations		447,479			(113,768	)

Income (loss) from discontinued operations
net of tax benefit of $303,000 for December 2012		20,442			(646,442	)
and $20,000 for December 2013

Net income (loss)	$	467,921		$	(760,210	)

Weighted average shares outstanding-basic		14,527,227			14,458,836

Weighted average shares-diluted		17,876,503			14,458,836
	$	0.031		$	(0.008	)
Earnings (loss) per share from continuing operations
	$	0.025		$	(0.008	)
Earnings (loss) per share from continuing operations-diluted

Earnings (loss) per share	$	0.032		$	(0.053	)

Earnings (loss) per share-diluted	$	0.026		$	(0.053	)

The Accompanying Notes are an Integral Part of These Financial Statements

ENERGY SERVICES OF AMERICA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended			Three Months Ended
	December 31,			December 31,
Cash flows from operating activities:	2013			2012

Net income (loss)	$	467,921		$	(760,210	)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense		856,851			1,402,178
(Gain) loss on sale/disposal of equipment		20,833			(501,806	)
Provision for deferred taxes		(457,232	)		(583,807	)
Share-based compensation expense		-			9,494
(Increase) decrease in contracts receivable		2,605,100			(2,795,111	)
(Increase) decrease in retainage receivable		823,385			(278,750	)
(Increase) decrease in other receivables		(1,759	)		44,595
Decrease in cost and estimated earnings in excess of billings on uncompleted contracts		4,839,402			3,199,554
Decrease in prepaid expenses		341,935			540,771
Decrease in accounts payable		(5,134,202	)		(1,649,350	)
Decrease in accrued expenses		(1,067,200	)		(816	)
Increase (decrease) in billings in excess of cost and estimated earnings on uncompleted contracts		(983,201	)		3,052,281
Increase (decrease) in income taxes payable		(213,539	)		600,656
Net cash provided by operating activities		2,098,294			2,279,679

Cash flows from investing activities:
Investment in property & equipment		(241,606	)		(3,615	)
Proceeds from sales of property and equipment		135,000			694,889
Net cash provided by (used in) investing activities		(106,606	)		691,274


Cash flows from financing activities:
Proceeds from private placement of preferred stock		249,998			-
Par value of common stock issued to preferred shareholders		3			-
Borrowings on lines of credit and short term debt, net of (repayments)		(1,504,402	)		(1,003,473	)
Principal payments on long term debt		(837,547	)		(1,097,317	)
Net cash used in financing activities		(2,091,948	)		(2,100,790	)

Increase (decrease) in cash and cash equivalents		(100,260	)		870,163
Cash beginning of period		6,339,882			2,661,721
Cash end of period	$	6,239,622		$	3,531,884

Supplemental schedule of noncash investing and financing activities:
Purchases of property & equipment under financing agreements	$	-		$	-
Insurance premiums financed	$	-		$	-

Supplemental disclosures of cash flows information:

Cash paid during the year for:
Interest	$	412,708		$	474,052
Income taxes	$	267,430		$	-
Insurance premiums	$	221,320		$	516,276

The Accompanying Notes are an Integral Part of These Financial Statements

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended December 31, 2013 and 2012

										Total
	Common Stock				Additional Paid		Retained			Stockholders’
	Shares		Amount		in Capital		Earnings (deficit)			Equity

Balance at September 30, 2012		14,458,836	$	1,446	$	56,107,650	$	(49,667,731	)	$	6,441,365

Share-based compensation expense		-		-		9,494		-			9,494

Net loss		-		-		-		(760,210	)		(760,210	)

Balance at December 31, 2012		14,458,836	$	1,446	$	56,117,144	$	(50,427,941	)	$	5,690,649

Balance at September 30, 2013		14,514,836	$	1,451	$	61,039,262	$	(46,097,525	)	$	14,943,188

Private placement of preferred stock						249,998		-			249,998

Common stock issued from private placement		25,000		3		-		-			3

Net Income		-		-		-		467,921			467,921

Balance at December 31, 2013		14,539,836		1,454		61,289,260		(45,629,604	)		15,661,110

The Accompanying Notes are an Integral Part of These Financial Statements

ENERGY SERVICES OF AMERICA CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS AND ORGANIZATION:

Energy Services of America Corporation, formerly known as Energy Services Acquisition Corp., (the Company) was incorporated in Delaware on March 31, 2006 as a blank check company whose objective was to acquire an operating business or businesses. 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. engaged in the construction of natural gas pipelines for utility companies in various states, mostly in the mid-Atlantic area of the country. 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. On May 14, 2013, the Company liquidated the operation of S.T. and realized $1.9 million from the sale.

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, 2013 and 2012 included in the Company’s Form 10-K filed December 20, 2013. 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 month period ended December 31, 2013 are not necessarily indicative of the results to be expected for the full year.

Principles of Consolidation

The consolidated financial statements of Energy Services include the accounts of Energy Services and its wholly owned subsidiaries. S.T. Pipeline has been shown as discontinued operations for the three months ended December 31, 2012 and 2013. 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.

2. UNCOMPLETED CONTRACTS

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


	December 31, 2013		September 30, 2013

Costs incurred on contracts in progress	$	146,724,521	$	159,962,769
Estimated earnings, net of estimated losses		7,848,044		3,929,091
		154,572,565		163,891,860

Less: Billings to date		153,091,697		158,554,791
	$	1,480,868	$	5,337,069

Costs and estimated earnings in excess of billings on uncompleted contracts	$	4,195,554	$	9,034,956
Less: Billings in excess of costs and estimated earnings on uncompleted Contracts		2,714,686		3,697,887
	$	1,480,868	$	5,337,069

Backlog at December 31, 2013 and September 30, 2013 was $45.1 million and $52.6 million respectively.

3. CLAIMS

The Company had claims valued at $2,200,000 with respect to September 30, 2013. On December 5, 2013, the Company entered into a settlement agreement for $2,350,000. The agreement called for payment to be received by the Company within 10 days of execution. The Company received payment of the full amount on December 13, 2013. The Company does not have any claims recorded as of December 31, 2013.

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.

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 $5.4 million at December 31, 2013 was $5.5 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, 2013 10-K filing for further information.

5. DISCONTINUED OPERATIONS

Due to organizational changes and operating losses incurred in fiscal year 2012, the Company decided to discontinue the operations of its wholly owned subsidiary S.T. Pipeline, Inc. On May 14, 2013, the Company liquidated the operation of S.T. and realized $1.9 million from the sale.

The operating results for S.T. Pipeline, Inc. for the three months ended December 31, 2013 and 2012 are as follows:

	Three Months ended			Three Months ended
	December 31, 2013			December 31, 2012
	(In Millions)			(In Millions)

Sales	$	-0-		$	1.49
Cost of Revenues		(0.10	)		2.29
Gross Profit (Loss)		0.10			(0.80	)
Selling & Adm.		0.08			0.36
Income (loss) from operations		0.02			(1.16	)
Other income (loss)		(0.02	)		0.21
Income (loss) before tax	-0-				(0.95	)
Income tax benefit		(0.02	)		(0.30	)
Net income (loss)	$	0.02		$	(0.65	)

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 December 31, 2013 and year ended September 30, 2013 (in Thousands).

	December 31,			September 30,
	2013			2013
Accounts receivable	$	177		$	32
Retainages receivable		145			291
Allowance for doubtful accounts		(300	)		(300	)
Deferred tax asset		2,105			2,042
Prepaid and other current assets		219			209
Assets of discontinued operations-current		2,346			2,274
Property, plant, and equipment, net	-0-				156
Total assets of discontinued operations		2,346			2,430

Accounts payable		923			1,357
Accrued expenses and other current liabilities		6			13
Liabilities of discontinued operations-current		929			1,370
Liabilities of discontinued operations-long term		800			757
Total liabilities of discontinued operations		1,729			2,127

Net assets	$	617		$	303

6. EARNINGS PER SHARE

The amounts used to compute the earnings per share for the three months ended December 31, 2013 and 2012 are summarized below.


	Three Months Ended December 31,

	2013		2012

Weighted average shares outstanding-basic		14,527,227		14,458,836

Weighted average shares outstanding-diluted		17,876,503		14,458,836

Income (loss) from continuing operations	$	447,479	$	(113,768	)

Earnings (loss) per share from continuing operations-basic	$	0.031	$	(0.008	)

Earnings (loss) per share from continuing operations-diluted	$	0.025	$	(0.008	)

Net Income (loss) from discontinued operations	$	20,442	$	(646,442	)

Earnings (loss) per share from discontinued operations-basic	$	0.001	$	(0.045	)

Earnings (loss) per share from discontinued operations-diluted	$	0.001	$	(0.045	)

Net Income (Loss)	$	467,921	$	(760,210	)

Earnings (loss) per share-basic	$	0.032	$	(0.053	)

Earnings (loss) per share -diluted	$	0.026	$	(0.053	)

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

Until August 15, 2008, Energy Services of America (ESA) operated as a blank check company. On August 15, 2008, the Company completed the acquisitions of S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. Each of S.T. Pipeline and C.J. Hughes are held as separate subsidiaries of ESA.

Energy Services is a provider of contracting services to America’s energy providers, primarily the gas and electricity providers. The Company’s services include:

●

The installation, replacement and repairs of pipelines for the oil and natural gas industries.

●

General electrical services for both power companies and various other industrial applications.

●

The installation of water and sewer lines for various governmental agencies.

●

Various other ancillary services related to the other services.

Energy Services operates primarily in the mid-Atlantic region of the United States. The work includes a combination of both interstate and intrastate pipelines that move natural gas from the producing regions to consumption regions. 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 include 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

Bayer Chemical

Dow Chemical

Kentucky American Water

Equitable Resources

Various State, county and municipal public service districts.

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.

A goodwill impairment charge was recorded in the fourth fiscal quarter of 2012 in the amount of $36.9 million, representing all of the goodwill on our balance sheet. Based on our continued operating losses and management’s forecasts of future cash flows our goodwill impairment test indicated that the goodwill of the Company had no value. See Note 4 of the Consolidated Financial Statements.

In connection with their audit of the Company’s 2013 financial statements, Arnett Foster Toothman, our independent public auditing firm as part of its audit report on our financial statements 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 we are exploring all avenues to return to profitability, there can be no assurance that we will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman’s decision to render its “going concern” opinion.

On September 28, 2011, the Company completed an exchange offer pursuant to which we exchanged 8 ½ warrants for one share of common stock. Following the completion of the exchange offer any warrants which were not exchanged expired on October 12, 2011. On November 14, 2011, we delisted from the NYSE AMEX the warrants and units. Following the completion of the exchange offer and expiration of the warrants that were not tendered, we had 14,446,836 shares of common stock issued and outstanding and no warrants or units outstanding.

The Company’s stock trades under the symbol “ESOA” and transactions in the stock are reported on the Over-the-Counter market.

Forbearance Agreement

On November 28, 2012, the Company entered into a Forbearance Agreement with our lender related to our revolving line of credit and term debt as reported in the Company’s November 29, 2012 Form 8-K filing. The Forbearance Agreement, among other things, required the Company to close the S. T. Pipeline subsidiary and dispose of its assets. The Company was 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 by May 31, 2013. Under the terms of the agreement we cannot make additional draws on the revolving line of credit. Although the Company can request the establishment of a forbearance line of credit, the lender is 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 may be terminated upon certain events. See “Risk Factors” and Note 11 of the Consolidated Financial Statements.

On December 18, 2012, the Company committed to the closing and subsequent disposition of the assets of S .T. Pipeline under the terms of the Forbearance Agreement and the Company’s restructuring plan. A liquidation sale of the assets of S.T. Pipeline occurred on May 14, 2013. Results relating to S.T. Pipeline up to the date of the liquidation sale of assets are as follows:

Gross proceeds	$	8,105,230
Commission		(709,208	)
Other auction expenses		(162,109	)
Net proceeds	$	7,233,913
Book value of equipment		5,325,916
Gain on sale	$	1,907,997

The Forbearance Agreement, which was originally set to expire on May 31, 2013, was extended to May 31, 2014 as reported in the Company’s May 6, 2013 Form 8-K filing. The agreement requires the Company to recapitalize the Company through the sale of Preferred Stock in an amount not less than $6.0 million. As of December 31, 2013 the Company has received $5.25 million in order to satisfy this requirement. Of this amount $1.0 million has been used to repay a portion of the outstanding line of credit balance and the remainder will be used as operating capital by the Company.

In addition, on August 6, 2013, the Company issued 56 shares of Series A Preferred Stock to Marshall T. Reynolds, the Chairman of the Board of Directors of the Company, in exchange for Mr. Reynolds’ agreement to cancel and forgive the Company’s obligation under a promissory note held by Mr. Reynolds in the aggregate amount of $1.4 million (including principal and accrued but unpaid interest). Mr. Reynolds did not receive any shares of common stock in connection with the exchange of the promissory note. This was reported in Company’s August 8, 2013 Form 8-K filing.

On September 6, 2013, the Company entered into an amendment to the Forbearance Agreement which extends the period under which the Company must raise funds and establishes tranches in which the capital and cash components of the capital raise must be undertaken. The amendment also requires the Company to pay the greater of $1.0 million or 50% of the amount collected on a claim the Company is pursuing against a third party, with which, the Company reached a settlement agreement on December 5, 2013. See below for further details. The amendment states that the amount of debt held by Mr. Reynolds and converted into equity shall be counted toward the $1.5 million in equity to be raised by August 31, 2013. The agreement also requires the Company to raise $1.5 million cash equity by September 30, 2013 and $1.4 million cash equity by December 31, 2013. This was reported in the Company’s September 9, 2013 Form 8-K filing.

On September 9, 2013, the Company entered into an agreement with Centrus which supercedes its prior agreement. Pursuant to the new agreement Centrus’ role as Chief Restructuring Agent had ended and Centrus will now act as Financial Advisor to the Company. This was reported in the Company’s September 11, 2013 Form 8-K filing.

On October 1, 2013, the Company entered into an amendment to the Forbearance Agreement which extends the period under which the Company must raise $1.025 million in cash equity previously due to be raised by September 30, 2013 until October 31, 2013. This was reported in the Company’s October 4, 2013 Form 8-K filing. The Company had raised $475,000 towards the September 30, 2013 deadline before the extension and the requirement to raise an additional $1.4 million cash equity by December 31, 2013 remained unchanged.

On December 5, 2013, the Company entered into a settlement agreement for its claim against a third party. The agreement calls for the Company to receive $2,350,000 within 10 days of the execution of the agreement. The Company received the settlement payment on December 13, 2013. The Company recorded $2,200,000 in revenue on this claim as of September 30, 2013.

On December 12, 2013, the Company entered into an amendment to the Forbearance Agreement which extends the period under which the Company must raise $1.025 million in cash equity previously due to be raised by October 31, 2013 until December 31, 2013. This was reported in the Company’s December 13, 2013 Form 8-K filing. The requirement to raise an additional $1.4 million cash equity by December 31, 2013 remained unchanged.

On January 31, 2014, the Company entered into a financing arrangement with United Bank, Inc. (West Virginia) and Summit Community Bank (West Virginia). The financing arrangement is a five year term loan in the amount of $8.8 million. In addition, the Company entered into a separate five year term loan agreement with First Guaranty Bank (Louisiana) for $1.6 million. Taken together, the $10.4 million in new financings supersede the prior financing arrangements the Company had with United Bank as well as the other lenders. As a result of entering into the new financings, United Bank and the other lenders of the Company have agreed to terminate their Forbearance Agreement with the Company. This was reported in the Company’s February 4, 2014 Form 8-K filing.

First Quarter Overview

The following is an overview for the three months ended December 31, 2013 and 2012.


	Three Months ended			Three Months ended
	December 31, 2013			December 31, 2012
	(In Millions)			(In Millions)

Continuing Operations
Sales	$	25.05		$	27.18
Cost of revenues		22.87			24.24
Gross profit		2.18			2.94
Selling & Adm.		1.77			2.55
Income from operations		0.41			0.39
Other expense		(0.34	)		(0.19	)
Income before income tax		0.07			0.20
Income tax expense (benefit)		(0.38	)		0.32
Net income (loss) from continuing operations	$	0.45		$	(0.12	)

Discontinued Operations
Sales	$	-0-		$	1.49
Cost of revenues		(0.10	)		2.29
Gross profit (loss)		0.10			(0.80	)
Selling & Adm.		0.08			0.36
Income (loss) from operations		0.02			(1.16	)
Other income		(0.02	)		0.21
Income (loss) before income tax		-0-			(0.95	)
Income tax benefit		(0.02	)		(0.30	)
Net income (loss) from discontinued operations	$	0.02		$	(0.65	)

The first fiscal quarter of the Company is typically a slower period for our business lines given the weather and climate. The Company typically has the fewest number of workable days during the first quarter as compared to the remaining quarters.

Quarter Ending December 31, 2013 and 2012 Comparison

Revenues. Total revenues from continuing operations decreased by $2.1 million or 7.8% to $25.1 million for the three months ended December 31, 2013 compared to the same period in 2012. The decrease was primarily attributable to customer scheduled outage work performed by the Company in December 2012 that did not occur in December 2013. The Company did not have any revenue from discontinued operations for the three months ended December 31, 2013 compared to $1.5 million for the three months ended December 31, 2012.

Cost of Revenues. Total costs of revenues from continuing operations decreased by $1.4 million or 5.6% to $22.9 million for the three months ended December 31, 2013 compared to the same period in 2012. The decrease in cost of revenues was primarily attributable to customer scheduled outage work performed by the Company in December 2012 that did not occur in December 2013. Cost of revenues for discontinued operations decreased by $2.4 million to $(103,000) for the three months ended December 31, 2013 compared to the same period ended in 2012. The negative costs of revenues was due to a reclassification of costs accrued as direct costs as of September 30, 2013 and charged as selling and administrative as it was expensed for the three months ended December 31, 2013.

Gross Profit. Total gross profit from continuing operations decreased by $766,000 or 26.0% to $2.2 million for the three months ended December 31, 2013 compared to the same period ending in 2012. This was due to the decrease in revenues for the three months ended December 31, 2013 compared to 2012, in addition to higher than expected gross margins recognized on several jobs that were completed during the three months ended December 31, 2012. Gross profit on discontinued operations increased by $903,000 to $103,000 for the three months ended December 31, 2013 compared to the same period ended in 2012. This was a result of the items mentioned above.

Selling and administrative expenses. Total selling and administrative expenses from continuing operations decreased by $780,000 or 30.1% to $1.8 million for the three months ended December 31, 2013 compared to the same period ending in 2012. This decrease was due in part to a $350,000 decrease in restructuring costs to a total of $13,000 for the three months ended December 31, 2013. The remainder reflects cost reduction measures taken by the Company. Selling and administrative expenses for discontinued operations decreased by $440,000 to $83,000 for the three months ended December 2013 compared to the same period ended in 2012. The $83,000 in expenses was in part due to a reclassification of costs related to non-project liabilities accrued as direct project costs as of September 30, 2013. The Company believes that any ongoing costs associated with closing discontinued operations will be immaterial.

Interest Expense. Interest expense decreased by $129,000 or 26.8% to $354,000 for the three months ended December 31, 2013 compared to the same period ending in 2012. This was primarily due to the decrease of debt owed to the bank group resulting from the liquidation of ST Pipeline assets in May 2013.

Net Income (Loss). Net income from continuing operations was $447,000 for the three months ended December 31, 2013 compared to a net loss of $114,000 for the same period ending in 2012. Included in net income for the three months ended December 31, 2012 is a $294,000 gain on the sale of equipment. The net income from discontinued operations for the three months ended December 31, 2013 was $20,000 compared to a net loss of $646,000 for the same period ended in 2012. Included in the net income for the three months ended December 31, 2013 was a $21,000 loss from the sale of equipment compared to a $208,000 gain for the three months ended December 31, 2012.

Comparison of Financial Condition

The Company had total assets at December 31, 2013 of $41.5 million, a decrease of $9.2 million from September 30, 2013. Two primary components of the balance sheet were accounts receivable which totaled $14.0 million, a decrease of $2.8 million from September 30, 2013 and costs and earnings in excess of billings which totaled $4.2 million, a decreased by $4.8 million from September 30, 2013. Other major categories of assets at December 31, 2013 included cash of $6.0 million and fixed assets less accumulated depreciation of $9.0 million. Liabilities totaled $25.8 million, a decrease of $9.9 million from September 30, 2013. One primary component was accounts payable which totaled $1.7 million, a decrease of $4.7 million from September 30 2013. Also, long term debt and short term borrowings totaled $14.1 million, a decrease of $2.3 million from September 30, 2013.

Stockholders’ Equity. Stockholders’ equity increased $718,000 from $14.9 million at September 30, 2013 to $15.7 million at December 31, 2013. This increase was due to the net income of $468,000 and $250,000 from the issuance of preferred stock. We have not paid any cash or stock dividends on our common stock. The Company paid $136,000 in interest on preferred shares of stock as of December 31, 2013.

Liquidity and Capital Resources

Cash Requirements

We prepare weekly cash forecasts for our own benefit and for submission to our lenders. We anticipate that our current cash and the cash to be generated from collection of our receivables will be adequate for our cash needs for the second quarter of the Company’s fiscal year. The new financing agreement the Company reached with its lenders on January 31, 2014 is for term financing and does not provide for a line of credit. The Company has had preliminary discussions with its lenders concerning the financing of future work.

Sources and Uses of Cash

The net income for the three months ended December 31, 2013 was $468,000, which was significantly affected by depreciation expense during the period of $857,000. Contracts, other receivables, and prepaids provided $8.6 million while decreases in accounts payable and accrued expenses used $6.2 million. Net cash provided by operating activities was $2.1 million for the three month period ended December 31, 2013. Investing activities used $107,000. Financing activities used $2.1 million. As of December 31, 2013, we had $6.2 million in cash and working capital of $11.4 million.

Loan Covenants

Under the terms of the new financing agreement reached January 31, 2014, the Company must meet the following loan covenants:

Minimum tangible net worth of $10.0 million to be measured quarterly

Minimum traditional debt service coverage of 1.50x to be measured quarterly on a rolling twelve month basis

Minimum current ratio of 1.30x to be measured quarterly

Maximum debt to tangible net worth ratio to be measured semi-annual on the following basis:


	Date		Debt to TNW
	6/30/2014		2.50x
	12/31/2014		2.25x
	6/30/2015		2.00x
	12/31/2015		1.75x
	6/30/2016		1.50x
	Thereafter		1.50x

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 office and shop space from an independent lessor for its Nitro Electric operations. The office space rental is $6,000 per month and the shop rental is $5,800 monthly. Both extend to May 2014.

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 December 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, (collectively, performance 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 December 31, 2013, we had $16.7 million in performance bonds 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 one customer that exceeded 10% of revenues for the three months ended December 31, 2013 and 10% of receivables. This customer accounted for 29.3% of revenues for the period and 17.6% of receivables at December 31, 2013. Another customer accounted for 10.8% of receivables at December 31, 2013.

Related Party Transactions

Total long-term debt at December 31, 2013 was $5.5 million, none of which was related party debt. Related party transactions for the three months ended December 31, 2013 were immaterial.

Inflation

Due to relatively low levels of inflation during the three months ended December 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.

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 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 December 31, 2013. Should the Company experience severe losses over an extended period, it could have a detrimental effect on the Company, notwithstanding the captive insurance 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 customers’ 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 December 31, 2013, management concluded 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.

On January 31, 2014, the Company entered into a financing arrangement with United Bank, Inc. (West Virginia) and Summit Community Bank (West Virginia). The amount of the financing arrangement is for $8.8 million. In addition, the Company entered into a separate loan arrangement with First Guaranty Bank (Louisiana) for $1.6 million. Taken together, the $10.4 million in new financings supersede the prior financing arrangements the Company had with United Bank as well as the other lenders. As a result of entering into the new financings, United Bank and the other lenders of the Company have agreed to terminate their Forbearance Agreement with the Company.

The new financing agreement the Company reached with its lenders on January 31, 2014 is for term financing and does not provide for a line of credit. The Company has had preliminary discussions with the lenders concerning the financing of future work. The Company prepares weekly cash forecasts for our own benefit and for submission to our lenders. We anticipate that our current cash and the cash to be generated from collection of our receivables will be adequate for our cash needs for the second quarter of the Company’s fiscal year.

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 its 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 December 31, 2013 was $45.1 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.

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.

There has been no change in Energy Services of America Corporation’s internal control over financial reporting during Energy Services of America Corporation’s first quarter of fiscal year 2014 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 20, 2013, 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
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	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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: February 14, 2014	By:	/s/ Douglas V. Reynolds
		Douglas V. Reynolds
		Chief Executive Officer


Date: February 14, 2014	By:	/ s/ Charles P. Crimmel
		Charles P. Crimmel
		Chief Financial Officer

Energy Services of America CORP - FORM 10-Q - February 14, 2014

Attached files

Energy Services of America CORP Reports