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Energy Services of America CORP - Quarter Report: 2014 June (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.   20549
FORM 10-Q

(Mark One)
 
  x       Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 
  For the quarterly period ended June 30, 2014
   
  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  August 12, 2014 there were issued and outstanding 14,239,836 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
20
     
Part II:
Other Information
20
     
Item 1.
Legal Proceedings
20
     
Item 1A.
Risk Factors
21
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
21
     
Item 4.
Mine Safety Disclosures
21
     
Item 6.
Exhibits
22
     
Signatures
23
 
 
 

 

 
ENERGY SERVICES OF AMERICA CORPORATION
 
CONSOLIDATED BALANCE SHEETS
 
             
   
June 30,
   
September 30,
 
Assets
 
2014
   
2013
 
   
(Unaudited)
       
Current Assets
           
Cash and cash equivalents
  $ 3,963,512     $ 6,152,382  
Accounts receivable-trade
    11,664,944       16,774,884  
Allowance for doubtful accounts
    (158,487 )     (236,657 )
Retainages receivable
    728,448       2,666,066  
Other receivables
    443,006       271,572  
Costs and estimated earnings in excess of billings on uncompleted contracts
    5,105,105       9,034,956  
Deferred tax asset
    1,920,827       1,809,684  
Prepaid expenses and other
    2,612,423       2,191,551  
Assets of discontinued operations
    1,272,334       2,274,079  
Total Current Assets
    27,552,112       40,938,517  
                 
Property, plant and equipment, at cost
    29,799,654       28,801,218  
less accumulated depreciation
    (21,570,005 )     (19,198,168 )
Assets of discontinued operations, net
    -       155,833  
      8,229,649       9,758,883  
Total Assets
  $ 35,781,761     $ 50,697,400  
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Current maturities of long-term debt
  $ 2,712,878     $ 5,280,558  
Lines of credit and short term borrowings
    570,059       10,132,667  
Accounts payable
    2,147,035       6,367,120  
Accrued expenses and other current liabilities
    2,146,509       3,422,385  
Billings in excess of costs and estimated earnings on uncompleted contracts
    1,123,897       3,697,887  
Income tax payable
    32,606       384,303  
Liabilities of discontinued operations
    487,651       1,370,465  
Total Current Liabilities
    9,220,635       30,655,385  
                 
Long-term debt, less current maturities
    8,426,182       1,058,720  
Deferred income taxes payable
    2,267,075       3,283,124  
Liabilities of discontinued operations
    13,170       756,983  
Total Liabilities
    19,927,062       35,754,212  
                 
Stockholders’ equity
               
                 
Preferred stock, $.0001 par value
               
Authorized 1,000,000 shares, 206 issued for June 2014 and
    -       -  
196 issued for September 2013
               
Common stock, $.0001 par value
               
Authorized 50,000,000 shares
               
14,839,836 issued and 14,239,836 outstanding for June 2014 and
               
14,814,836 issued and 14,514,836 outstanding for September 2013
    1,484       1,481  
                 
Treasury stock, 600,000 shares at June 30, 2014 and 300,000
    (60 )     (30 )
shares at September 30, 2013
               
                 
Additional paid in capital
    61,289,260       61,039,262  
Retained earnings (deficit)
    (45,435,985 )     (46,097,525 )
                 
Total Stockholders’ equity
    15,854,699       14,943,188  
                 
Total liabilities and stockholders’ equity
  $ 35,781,761     $ 50,697,400  
 
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
   
Nine Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
                         
Revenue
  $ 21,486,057     $ 30,690,169     $ 60,580,891     $ 78,424,217  
                                 
Cost of revenues
    19,762,712       28,272,270       55,216,775       71,185,726  
                                 
Gross profit
    1,723,345       2,417,899       5,364,116       7,238,491  
                                 
Selling and administrative expenses
    1,531,682       1,874,833       4,920,068       6,457,512  
Income from operations
    191,663       543,066       444,048       780,979  
                                 
Other income (expense)
                               
Interest income
    1,414       (489 )     1,191       230  
Other nonoperating income (expense)
    (5,386 )     1,109       6,720       (15,898 )
Interest expense
    (187,223 )     (429,004 )     (647,867 )     (1,384,146 )
Gain (loss) on sale of equipment
    (2,911 )     262,396       18,329       556,647  
      (194,106 )     (165,988 )     (621,627 )     (843,167 )
Income (loss) from continuing operations before income taxes
    (2,443 )     377,078       (177,579 )     (62,188 )
Income tax expense (benefit)
    (546,330 )     253,209       (1,174,847 )     230,094  
Income (loss) from continuing operations
    543,887       123,869       997,268       (292,282 )
                                 
Dividends on preferred stock
    77,250       -       309,000       -  
Income (loss) from continuing operations
                               
available to common shareholders
    466,637       123,869       688,268       (292,282 )
                                 
Income (loss) from discontinued operations
                               
net of tax expense
    (27,849 )     2,808,198       (26,728 )     1,265,130  
                                 
Net income available to common shareholders
  $ 438,788     $ 2,932,067     $ 661,540     $ 972,848  
                                 
Weighted average shares outstanding-basic
    14,239,836       14,458,836       14,426,796       14,458,836  
                                 
Weighted average shares-diluted
    17,673,169       14,458,836       17,831,802       14,458,836  
Earnings (loss) per share from continuing operations
                               
available to common shareholders
  $ 0.033     $ 0.009     $ 0.048     $ (0.020 )
                                 
Earnings (loss) per share from continuing operations-diluted
                               
available to common shareholders
  $ 0.026     $ 0.009     $ 0.039     $ (0.020 )
                                 
Earnings per share
                               
available to common shareholders
  $ 0.031     $ 0.203     $ 0.046     $ 0.067  
                                 
Earnings per share-diluted
                               
available to common shareholders
  $ 0.025     $ 0.203     $ 0.037     $ 0.067  
 
The Accompanying Notes are an Integral Part of These Financial Statements
 
2
 

 

 
ENERGY SERVICES OF AMERICA CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Unaudited
 
             
   
Nine Months Ended
   
Nine Months Ended
 
   
June 30,
   
June 30,
 
Cash flows from operating activities:
 
2014
   
2013
 
             
Net income available to common shareholders
  $ 661,540     $ 972,848  
                 
Adjustments to reconcile net income to net cash provided by operating activities:
               
                 
Depreciation expense
    2,538,052       3,318,695  
Provision for bad debts
    -       300,000  
(Gain) loss on sale/disposal of equipment
    2,504       (2,701,901 )
Provision for deferred taxes
    (1,073,935 )     (872,844 )
Share-based compensation expense
    -       28,483  
Decrease in contracts receivable
    4,763,339       1,495,968  
(Increase) decrease in retainage receivable
    2,228,306       (11,222 )
(Increase) decrease in other receivables
    (148,627 )     46,476  
Decrease in cost and estimated earnings in excess of billings on uncompleted contracts
    3,929,851       3,480,082  
Increase in prepaid expenses
    (420,872 )     (888,377 )
Decrease in accounts payable
    (5,081,207 )     (5,023,111 )
Increase (decrease) in accrued expenses
    (1,235,034 )     66,969  
Increase (decrease) in billings in excess of cost and estimated earnings on uncompleted contracts
    (2,573,990 )     1,990,510  
Decrease in income taxes payable
    (414,231 )     -  
Net cash provided by operating activities
    3,175,696       2,202,576  
                 
Cash flows from investing activities:
               
Investment in property & equipment
    (1,040,632 )     (563,088 )
Proceeds from sales of property and equipment
    171,940       8,805,630  
Net cash provided by (used in) investing activities
    (868,692 )     8,242,542  
                 
Cash flows from financing activities:
               
Proceeds from private placement of preferred stock
    249,998       -  
Par value of stock issued to preferred shareholders
    3       -  
Treasury stock purchased by company
    (30 )     -  
Borrowings on lines of credit and short term debt, net of (repayments)
    (9,562,608 )     (6,507,623 )
Proceeds from long term debt
    10,457,965       -  
Principal payments on long term debt
    (5,800,813 )     (4,959,454 )
Net cash used in financing activities
    (4,655,485 )     (11,467,077 )
                 
Decrease in cash and cash equivalents
    (2,348,481 )     (1,021,959 )
Cash beginning of period
    6,339,882       2,661,721  
Cash end of period
  $ 3,991,401     $ 1,639,762  
                 
Supplemental schedule of noncash investing and financing activities:
               
Purchases of property & equipment under financing agreements
  $ 142,630     $ 173,106  
Insurance premiums financed
  $ 2,268,510     $ 2,784,193  
                 
Supplemental disclosures of cash flows information:
               
Cash paid during the year for:
               
Interest
  $ 724,934     $ 1,346,206  
Income taxes
  $ 308,013     $ -  
Insurance premiums
  $ 1,919,783     $ 2,427,308  
Dividends paid on preferred stock
  $ 309,000     $ -  
 
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 nine months ended June 30, 2014 and 2013
 
                                     
                                 
Total
 
   
Common Stock
   
Additional Paid
   
Retained
   
Treasury
   
Stockholders’
 
   
Shares
   
Amount
   
in Capital
   
Earnings (deficit)
   
Stock
   
Equity
 
                                     
Balance at September 30, 2012
    14,458,836     $ 1,446     $ 56,107,650     $ (49,667,731 )   $ -     $ 6,441,365  
                                                 
Share-based compensation expense
    -       -       28,483       -       -       28,483  
                                                 
Net income
    -       -       -       972,848       -       972,848  
                                                 
Balance at June 30, 2013
    14,458,836     $ 1,446     $ 56,136,133     $ (48,694,883 )   $ -     $ 7,442,696  
                                                 
Balance at September 30, 2013
    14,514,836     $ 1,481     $ 61,039,262     $ (46,097,525 )   $ (30 )   $ 14,943,188  
                                                 
Private placement of preferred stock
    -       -       249,998       -       -       249,998  
                                                 
Common stock issued from private placement
    25,000       3       -       -       -       3  
                                                 
Treasury stock purchased by company
    (300,000 )     -       -       -       (30 )     (30 )
                                                 
Dividends on preferred stock
    -       -       -       (309,000 )     -       (309,000 )
                                                 
Net income
    -       -       -       970,540       -       970,540  
                                                 
Balance at June 30, 2014
    14,239,836     $ 1,484     $ 61,289,260     $ (45,435,985 )   $ (60 )   $ 15,854,699  
 
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 (the Company or Energy Services) 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.  C. J Hughes currently operates as the Company’s sole wholly owned subsidiary.

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.  On May 14, 2013, the Company liquidated the operation of S.T. and realized $1.9 million from the sale.  The financial position and results of operations of S.T. 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. (Nitro Electric), 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. (Contractors Rental), 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 and nine month periods ended June 30, 2014 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 subsidiary.  S.T. has been shown as discontinued operations for the three months and nine months ended June 30, 2014 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 subsidiary.

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 June 30, 2014 and September 30, 2013 are summarized as follows:           
 
   
June 30, 2014
   
September 30, 2013
Costs incurred on uncompleted contracts
  $ 89,319,389     $ 159,962,769  
Estimated earnings, net of estimated losses
    11,667,464       3,929,091  
      100,986,853       163,891,860  
Less billing to date
    97,005,645       158,554,791  
    $ 3,981,208     $ 5,337,069  
                 
Costs and estimated earnings in excess of billings on uncompleted contracts
  $ 5,105,105     $ 9,034,956  
Less billings in excess of costs and estimated earnings on uncompleted contracts
    1,123,897       3,697,887  
    $ 3,981,208     $ 5,337,069  

Backlog at June 30, 2014 and September 30, 2013 was $55.0 million and $52.6 million respectively.
 
3.  CLAIMS

The Company had claims against third parties valued at $2,200,000 at 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 June 30, 2014.
 
6
 

 

 
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 $11.7 million at June 30, 2014 was $11.5 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.
 
7
 

 

 
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. On May 14, 2013, the Company liquidated the operations of S.T. and realized $1.9 million from the sale.

The operating results for S.T. Pipeline, Inc. for the three months and nine months ended June 30, 2014 and 2013 are as follows:
                                 
   
Three Months Ended
   
Three Months Ended
   
Nine Month Ended
   
Nine Month Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
                         
Revenue
    -       303,780       (3,000 )     2,100,284  
                                 
Cost of revenues
    -       479,746       (106,734 )     3,161,707  
                                 
Gross profit (loss)
    -       (175,966 )     103,734       (1,061,423 )
Selling and administrative expenses
    -       110,495       83,301       921,113  
Income (loss) from operations
    -       (286,461 )     20,433       (1,982,536 )
Other income (expense)
                               
Interest income
    -       (1,088 )     -       -  
Other nonoperating income (expense)
    -       489       400       -  
Interest expense
    -       (526 )     -       (526 )
Gain (loss) on sale of equipment
    -       1,925,786       (20,833 )     2,145,254  
      -       1,924,661       (20,433 )     2,144,728  
Income before income taxes
    -       1,638,200       -       162,192  
Income tax expense (benefit)
    27,849       (1,169,998 )     26,728       (1,102,938 )
Net income (loss)
  $ (27,849 )   $ 2,808,198     $ (26,728 )   $ 1,265,130  

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 June 30, 2014 and year ended September 30, 2013.
                 
   
June 30,
   
September 30,
 
   
2014
   
2013
 
             
             
Cash
  $ 27,889     $ 187,500  
Accounts receivable, net
    -       (268,431 )
Retainages receivable
    -       290,688  
Deferred tax asset
    1,244,445       2,041,515  
Prepaid and other current assets
    -       22,807  
Assets of discontinued operations-current
    1,272,334       2,274,079  
Property, plant, and equipment, net
    -       155,833  
Total assets of discontinued operations
    1,272,334       2,429,912  
                 
Accounts payable
    496,227       1,357,349  
Accrued expenses and other current liabilities
    (8,576 )     13,116  
Liabilities of discontinued operations-current
    487,651       1,370,465  
Liabilities of discontinued operations-long term
    13,170       756,983  
Total liabilities of discontinued operations
    500,821       2,127,448  
                 
Net assets
  $ 771,513     $ 302,464  
 
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6. EARNINGS PER SHARE

The amounts used to compute the earnings per share for the three months and nine months ended June 30, 2014 and 2013 are summarized below.
                                 
   
Three Months Ended
    Three Months Ended    
Nine Months
   
Nine Months
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Income (loss) from continuting operations
  $ 543,887     $ 123,869     $ 997,268     $ (292,282 )
                                 
Dividends on preferred stock
    77,250       -       309,000       -  
                                 
Income (loss) available to common shareholders-continuing operations
  $ 466,637     $ 123,869     $ 688,268     $ (292,282 )
                                 
Weighted average shares outstanding
    14,239,836       14,458,836       14,426,796       14,458,836  
                                 
Weighted average shares outstanding-diluted
    17,673,169       14,458,836       17,831,802       14,458,836  
                                 
Earnings (losss) per share from continuing operations available to common shareholders
  $ 0.033     $ 0.009     $ 0.048     $ (0.020 )
Earnings (losss) per share from continuing operations available to common shareholders-diluted
  $ 0.026     $ 0.009     $ 0.039     $ (0.020 )
                                 
Income (loss) from discontinued operations
  $ (27,849 )   $ 2,808,198     $ (26,728 )   $ 1,265,130  
                                 
Weighted average shares outstanding
    14,239,836       14,458,836       14,426,796       14,458,836  
                                 
Weighted average shares outstanding-diluted
    17,673,169       14,458,836       17,831,802       14,458,836  
                                 
Earnings (loss) per share from discontinued operations
  $ (0.002 )   $ 0.194     $ (0.002 )   $ 0.087  
                                 
Earnings (loss) per share from discontinued operations-diluted
  $ (0.002 )   $ 0.194     $ (0.001 )   $ 0.087  
                                 
Net income
  $ 516,038     $ 2,932,067     $ 970,540     $ 972,848  
                                 
Dividends on preferred stock
    77,250       -       309,000       -  
                                 
Net income available to common shareholders
  $ 438,788     $ 2,932,067     $ 661,540     $ 972,848  
                                 
Earnings per share available to common shareholders
  $ 0.031     $ 0.203     $ 0.046     $ 0.067  
                                 
Earnings per share available to common shareholders-diluted
  $ 0.025     $ 0.203     $ 0.037     $ 0.067  

 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.
 
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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 are 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

 On August 15, 2008, Energy Services completed the acquisitions of S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc.
 
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.
 
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Representative Customer list:
 
Columbia Gas Transmission
Columbia Gas Distribution
Marathon Ashland Petroleum LLC
American Electric Power
Toyota Motor Manufacturing
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 the Company’s line of products. The Company relies on direct contact between its sales force and 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.

Wholly owned subsidiary 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, 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, 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.

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. On May 14, 2013, the Company liquidated the operation of S.T. and realized $1.9 million from the sale of assets. 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.

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 registered 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 included the significant and sustained losses that the Company has incurred over recent years as well as the inability to secure loans and lines of credit to fund the business in a manner deemed adequate to conduct our business. On January 31, 2014, the Company reached a refinancing agreement with its bank group that terminated the Forbearance Agreement the Company had been working under. The Company has also finished its restructuring effort in an attempt to return the Company to profitability. On May 30, 2014, The Company entered into a line of credit agreement with its lender to provide up to an additional $5.0 million in operating capital. The Company believes that it will be able to successfully resolve the factors that gave rise to Arnett Foster Toothman’s decision to render its “going concern” opinion by the end of the current fiscal year, September 30, 2014.
 
11
 

 

 
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, the Company delisted from the NYSE AMEX. Following the completion of the exchange offer and expiration of the warrants that were not tendered, the Company had 14,446,836 shares of common stock issued and outstanding and no warrants or units outstanding.

For the years ended September 2012 and 2013, employee stock grants of 12,000 and 6,000 shares of common stock were earned and issued, respectively.

In May 2013, the Company initiated a private placement of preferred stock with each $25,000 unit consisting of one preferred share of stock and 2,500 shares of common stock. Preferred stock dividends are paid at a rate of 3% of the investment semi-annually. As of September 30, 2013, this placement resulted in $3.5 million in cash invested in the Company with 350,000 shares of common stock issued. Additionally, one director received 56 shares of preferred stock with no common shares in return for forgiveness of a $1.4 million note owed by the Company. One former director forfeited 300,000 shares of common stock to the Company as of September 30, 2013. As of December 31, 2013, the Company had raised an additional $250,000 in proceeds from the private placement, which resulted in the issuance of 25,000 common shares. A director forfeited 300,000 shares of common stock to the Company in March 2014. The total shares of common stock issued and outstanding as of June 30, 2014 were 14,839,836 and 14,239,836, respectively.

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. subsidiary and dispose of its assets. The Company was also required to prepare recommendations relating to the on-going operations of Nitro Electric, C.J. Hughes, and Contractors Rental, including refinancing, sale or liquidation of the companies by May 31, 2013.
 
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 agreed to terminate their Forbearance Agreement with the Company. This was reported in the Company’s February 4, 2014 Form 8-K filing.
 
12
 

 

 
On May 30, 2014, the Company entered into a financing agreement with United Bank, Inc. to provide the Company with a $5.0 million revolving line of credit. This financing agreement is in addition to the prior financing arrangement with United Bank and Summit Community Bank. This was reported in the Company’s June 2, 2014 Form 8-K filing.
 
Third Quarter Overview
 
The following is an overview of results from operations for the three and nine months ended June 30, 2014 and 2013.
                                 
   
Three Months
   
Three Months
   
Nine Months
   
Nine Months
 
   
Ended
   
Ended
   
Ended
   
Ended
 
   
June 30, 2014
   
June 30, 2013
   
June 30, 2014
   
June 30, 2013
 
                         
Continuing Operations
                       
                         
Revenue
  $ 21,486,057     $ 30,690,169     $ 60,580,891     $ 78,424,217  
Cost of revenues
    19,762,712       28,272,270       55,216,775       71,185,726  
Gross profit
    1,723,345       2,417,899       5,364,116       7,238,491  
Selling & administrative expenses
    1,531,682       1,874,833       4,920,068       6,457,512  
Income from operations
    191,663       543,066       444,048       780,979  
Other expense
    (194,106 )     (165,988 )     (621,627 )     (843,167 )
Income (loss) before income tax
    (2,443 )     377,078       (177,579 )     (62,188 )
Income tax expense (benefit)
    (546,330 )     253,209       (1,174,847 )     230,094  
Net income (loss) from continuing operations
    543,887       123,869       997,268       (292,282 )
Dividends on preferred stock
    77,250       -       309,000       -  
Net income (loss) available to common shareholders
  $ 466,637     $ 123,869     $ 688,268     $ (292,282 )
                                 
Discontinued Operations
                               
                                 
Revenue
  $ -     $ 303,780     $ (3,000 )   $ 2,100,284  
Cost of revenues
    -       479,746       (106,734 )     3,161,707  
Gross profit (loss)
    -       (175,966 )     103,734       (1,061,423 )
Selling & administrative expenses
    -       110,495       83,301       921,113  
Income (loss) from operations
    -       (286,461 )     20,433       (1,982,536 )
Other income (expense)
    -       1,924,661       (20,433 )     2,144,728  
Income before income tax
    -       1,638,200       -       162,192  
Income tax expense (benefit)
    27,849       (1,169,998 )     26,728       (1,102,938 )
Net income (loss) from discontinued operations
  $ (27,849 )   $ 2,808,198     $ (26,728 )   $ 1,265,130  

Three and Nine Months Ended June 30, 2014 and 2013 Comparison

Revenues. Total revenues from continuing operations decreased by $9.2 million or 30.0% to $21.5 million for the three months ended June 30, 2014 compared to the same period in 2013 and decreased by $17.8 million or 22.8% to $60.6 million for the nine months ended June 30, 2014 compared to the same periods in 2013. The decrease was primarily attributable to unsuccessful bid attempts in 2014 on work in the natural gas transmission industry. The Company had no revenue from discontinued operations for the three months ended June 30, 2014 and a $3,000 reduction of revenue from discontinued operations for the nine months ended June 30, 2014 compared to $304,000 and $2.1 million for the three months and nine months ended June 30, 2013.
 
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Cost of Revenues. Total costs of revenues from continuing operations decreased by $8.5 million or 30.1% to $19.8 million for the three months ended June 30, 2014 and decreased $16.0 million or 22.4% to $55.2 million for the nine months ended June 30, 2014 compared to the same periods in 2013. The decrease was primarily attributable fewer projects being undertaken in 2014. Cost of revenues from discontinued operations decreased by $480,000 to $0 for the three months ended June 30, 2014 and decreased by $3.3 million to ($107,000) for the nine months ended June 30, 2014 compared to the same periods ended in 2013. There was a reclassification of costs accrued as direct costs as of September 30, 2013 and charged as selling and administrative expense for the three and nine months ended June 30, 2014.

Gross Profit. Total gross profit from continuing operations decreased by $695,000 or 28.7% to $1.7 million for the three months ended June 30, 2014 and decreased $1.9 million or 25.9 % to $5.4 million for the nine months ended June 30, 2014 compared to the same periods ending in 2013. This was due to the decrease in revenues for the three months and nine months ended June 30, 2014 compared to the same periods ending in 2013. There was no gross profit on discontinued operations for the three months ended June 30, 2014.

Selling and administrative expenses. Total selling and administrative expenses from continuing operations decreased by $343,000 or 18.3% to $1.5 million for the three months ended June 30, 2014 and decreased $1.5 million or 23.8% to $4.9 million for the nine months ended June 30, 2014 compared to the same periods ending in 2013. This decrease was due in part to a $652,000 decrease in restructuring costs to $19,000 for the nine months ended June 30, 2014. The remainder reflects cost reduction measures taken by the Company. There were no selling and administrative expenses for discontinued operations for the three months ended June 30, 2014 and such expenses decreased by $838,000 to $83,000 for the nine months ended June 30, 2014 compared to the same period ended in 2013. 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 $242,000 or 56.4% to $187,000 for the three months ended June 30, 2014 and decreased $736,000 or 53.2% to $648,000 for the nine months ended June 30, 2014 compared to the same periods ending in 2013. The decrease was primarily due to the decrease of debt owed to the bank group resulting from the liquidation of S.T. assets in May 2013.

Net Income (Loss). Net income from continuing operations was $544,000 for the three months ended June 30, 2014 compared to a net income of $124,000 for the same period ending in 2013. Net income from continuing operations was $997,000 for the nine months ended June 30, 2014 compared to a net loss of $292,000 for the same period ending in 2013. Income tax benefits for the three and nine months ended June 30, 2014 were $546,000 and $1.2 million, respectively. Included in net income for the nine months ended June 30, 2013 was a $557,000 gain on the sale of equipment. The net loss from discontinued operations for the three months ended June 30, 2014 was $28,000 compared to a net income of $2.8 million for the same period ended in 2013. The net loss from discontinued operations for the nine months ended June 30, 2014 was $27,000 compared to a net income of $1.3 million for the same period ended in 2013. Included in the net income for the nine months ended June 30, 2014 was a $21,000 loss from the sale of equipment compared to a $2.1 million gain for the nine months ended June 30, 2013.
 
14
 

 


Comparison of Financial Condition
 
The Company had total assets at June 30, 2014 of $35.8 million, a decrease of $14.9 million from September 30, 2013. Two primary components of the balance sheet were accounts receivable which totaled $11.7 million, a decrease of $5.1 million from September 30, 2013 and costs and earnings in excess of billings which totaled $5.1 million, a decrease of $3.9 million from September 30, 2013. Other major categories of assets at June 30, 2014 included cash of $4.0 million and fixed assets less accumulated depreciation of $8.2 million. Liabilities totaled $19.9 million, a decrease of $15.8 million from September 30, 2013. One primary component was accounts payable which totaled $2.1 million, a decrease of $4.2 million from September 30 2013. Also, long term debt and short term borrowings totaled $11.7 million, a decrease of $4.8 million from September 30, 2013.

Stockholders’ Equity. Stockholders’ equity increased $912,000 from $14.9 million at September 30, 2013 to $15.9 million at June 30, 2014. This increase was due to the net income of $971,000, $250,000 in proceeds from the issuance of preferred stock offset by a $309,000 reduction for dividends on preferred stock.
 
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 fourth quarter of the Company’s fiscal year. On May 30, 2014, the Company and United Bank, Inc. entered into a line of credit agreement to provide the Company with access to operating capital. The Company may borrow against the line of credit provided it meets certain borrowing base requirements, with $5.0 million being the maximum allowed. If the Company has borrowed more than the borrowing base allows, the Company must repay the excess borrowings to United Bank, Inc. At June 30, 2014, there were no draws against the line of credit.

Sources and Uses of Cash

The net income available to common shareholders for the nine months ended June 30, 2014 was $662,000, which was significantly affected by depreciation expense during the period of $2.5 million. Contracts, other receivables, and prepaids provided $7.8 million while decreases in accounts payable and accrued expenses used $6.3 million. Net cash provided by operating activities was $3.2 million for the nine month period ended June 30, 2014. Investing activities used $869,000. Financing activities used $4.7 million. As of June 30, 2014, the Company had $4.0 million in cash and working capital of $18.3 million.

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Loan Covenants

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

 
1.
Minimum tangible net worth of $10.0 million to be measured quarterly
 
2.
Minimum traditional debt service coverage of 1.50x to be measured quarterly on a rolling twelve month basis
 
3.
Minimum current ratio of 1.30x to be measured quarterly
 
4.
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  
 
On July 31, 2014, the bank group modified the calculation of the debt service coverage covenant in the loan agreement so that the Company will maintain a minimum debt service coverage ratio of no less than 1.50 to 1.0 tested quarterly, as of the end of each fiscal quarter, based upon the preceding four quarters. Debt service coverage will be defined as the ratio of cash flow (net income plus depreciation, amortization and interest expense, plus or minus one-time/non-recurring income and expenses (determined at the Lender’s sole discretion)) divided by the annualized debt service requirements on the Company’s senior secured term debt (post refinance), actual interest paid on the Company’s senior secured revolving credit facility and the annualized payments on any other debt outstanding.

This modification applies as of June 30, 2014, as well as future periods. The Company is in compliance with all loan covenants as of June 30, 2014.

Off-Balance Sheet transactions

Due to the nature of our industry, the Company often enters 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 $6,300 per month and escalates to $6,684 before expiring in December 2016. The shop rental is $10,000 per month and escalates to $11,500 in January 2015 until expiration in December 2018.
 
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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 June 30, 2014, 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. In February 2014, the Company entered into an agreement with a surety company to provide bonding which will suit the Company’s immediate needs. 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 June 30, 2014, the Company had $23.8 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 three customers that exceeded 10% of revenues for the nine months ended June 30, 2014. These customers accounted for 41.8% of revenues for the period and 40.9% of receivables at June 30, 2014. Another customer accounted for 13.4% of receivables at June 30, 2014.

Related Party Transactions
 
Total long-term debt at June 30, 2014 was $11.1 million, none of which was related party debt. Related party transactions for the nine months ended June 30, 2014 were immaterial.

Inflation
 
Due to relatively low levels of inflation during the nine months ended June 30, 2014 and 2013, inflation did not have a significant effect on our results.
 
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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 $1.0 million as of June 30, 2014. Should the Company experience severe losses over an extended period, it could have a detrimental effect on the Company, notwithstanding the captive insurance company.
 
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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 June 30, 2014, 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 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 fourth quarter of the Company’s fiscal year. On May 30, 2014, the Company and United Bank, Inc. entered into a line of credit agreement to provide the Company with access to operating capital. The Company may borrow against the line of credit provided it meets certain borrowing base requirements, with $5.0 million being the maximum allowed. If the Company has borrowed more than the borrowing base allows, the Company must repay the excess borrowings to United Bank, Inc.
 
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 projects could wane and also their ability to fund planned projects could be reduced. The Company’s backlog at June 30, 2014 was $55.0 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.
 
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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 believe 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 believe 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 third 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.
 
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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 equity 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; however, a Director of the Company did return 300,000 shares of common stock without consideration.
 
Date
 
Common Shares
 
Par Value
 
Total Paid
             
March 24, 2014
 
300,000
 
$0.0001
 
$0
 
ITEM 4. Mine Safety Disclosures
 
None

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ITEM 6. Exhibits
 
10.1
 
31.1
Omnibus Amendment
 
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
   
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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
 
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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: August 12, 2014
By: 
/s/ Douglas V. Reynolds  
    Douglas V. Reynolds  
    Chief Executive Officer  
 
 
Date: August 12, 2014
By: 
/s/ Charles P. Crimmel  
    Charles P. Crimmel  
    Chief Financial Officer  
 
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