UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(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, 2008 | ||
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) |
100 Industrial Lane, Huntington, West Virginia | 25702 | ||||
(Address of Principal Executive Office) | (Zip Code) |
(304) 399-6315 | ||
(Registrant’s Telephone Number including area code) |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES 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 |
As of February 10, 2009 there were issued and outstanding 12,092,307 shares of the Registrant’s Common Stock.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
Transitional Small Business Disclosure Format (check one) Yes o No x
EXPLANATORY NOTE
Energy Services of America Corporation is filing this Amendment to its Quarterly Report on Form 10-Q for the period ended December 31, 2008 (the “Quarterly Report”) to correct certain disclosure errors identified during a regulatory review of the Company’s Securities and Exchange Commission filings. This Form 10-Q/A only amends disclosures to correct the certifications pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) and revise the notes to pro forma income statement as previously disclosed in Item 2.
This Amendment does not reflect events that have occurred after the filing date of the Quarterly Report on Form 10-Q that the Company originally filed with the Securities and Exchange Commission on February 17, 2009, or modify or update the disclosures presented in the original Form 10-Q, except to reflect the corrections described above. Accordingly, this Form 10-Q/A should be read in conjunction with our filings with the Securities and Exchange Commission subsequent to the filing of the original Form 10-Q.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the “Unaudited Pro Forma Consolidated Financial information “ appearing in this section of this report as well as the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.
Forward Looking Statements
Within Energy Services’ financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “may,” “will,” “should,” “could,” “expect,” “believe,” “intend” and other words of similar meaning.
These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services’ control. Energy Services has based its forward-looking statements on management’s beliefs and assumptions based on information available to management at the time the statements are made. Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and any or all of Energy Services’ forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.
All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, Energy Services does not undertake and expressly disclaims any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.
Overview
Energy Services was formed on March 31, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. It operated as a “Blank Check Company” until August 15, 2008 at which time it completed the acquisitions of S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. S.T. Pipeline and C.J. Hughes are considered predecessor companies to Energy Services. The discussion of financial condition and operating results include the results of the two predecessors prior to the acquisition. This discussion is based in part on pro-forma income statement information. The Company acquired S.T. Pipeline for $16.2 million in cash and $3.0 million in a promissory note. The C.J. Hughes purchase price totaled $34 million, one half of which was in cash and one half in Energy Services common stock. The acquisitions are accounted for under the purchase method and the financial results of both acquisitions are included in the results of Energy Services from the date of acquisition.
Since the acquisitions, Energy Services has been engaged in one segment of operations which is providing contracting services for energy related companies. Currently Energy Services primarily services the Gas, Oil and Electrical industries though it does some other incidental work. For the Gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the Oil industry the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the Electrical industry, the Company provides a full range of electrical installations and repairs including substation and switchyard services, site preparation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Kentucky and North Carolina. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as building and replacing gas line services to individual customers of the various utility companies.
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The Company enters into various types of contracts, including competitive unit price, cost-plus (or time and materials basis) and fixed price (lump sum) contracts. The terms of the contracts will vary from job to job and customer to customer though most contracts are on the basis of either unit pricing in which the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project. Most of the Company’s projects are completed within one year of the start of the work. On occasion, the Company’s customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed.
The Company generally recognizes revenue on unit price and cost-plus contracts when units are completed or services are performed. Fixed price contracts usually results in recording revenues as work on the contract progresses on a percentage of completion basis. Under this accounting method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs to complete the contract. Many contacts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.
Seasonality: Fluctuation of Results
Our revenues and results of operations can and usually are subject to seasonal variations. These variations are the result of weather, customer spending patterns, bidding seasons and holidays. The second fiscal quarter of the year is typically the slowest in terms of revenues because inclement weather conditions cause delays in production and customers usually do not plan large projects during that time. While usually better than the second fiscal quarter, the first fiscal quarter often has some inclement weather which can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. Also in the first quarter there are holidays which can limit production. The third fiscal quarter usually is least impacted by weather and usually has the largest number of projects underway.
In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in relation to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers’ businesses are in relation to energy infrastructure expenditures and thereby their financial condition as to their capital needs and access to capital to finance those needs.
Accordingly, our operating results in any particular quarter or year may not be indicative of the results that can be expected for any other quarter or any other year. You should read “Understanding Gross Margins” and “Outlook” below for discussions of trends and challenges that may affect our financial condition and results of operations.
Understanding Gross Margins
Our gross margin is gross profit expressed as a percentage of revenues. Cost of revenues consists primarily of salaries, wages and some benefits to employees, depreciation, fuel and other equipment, equipment rentals, subcontracted services, portions of insurance, facilities expense, materials and parts and supplies. Various factors, some controllable, some not impact our gross margin on a quarterly or annual basis.
Seasonal. As discussed above, seasonal patterns can have a significant impact on gross margins. Usually, business is slower in the winter months versus the warmer months.
Weather. Adverse or favorable weather conditions can impact gross margin in a given period. Periods of wet weather, snow or rainfall, as well severe temperature extremes can severely impact production and therefore negatively impact revenues and margins. Conversely, periods of dry weather with moderate temperatures can positively impact revenues and margins due to the opportunity for increased production and efficiencies.
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Revenue Mix. The mix of revenues between customer types and types of work for various customers will impact gross margins. Some projects will have more margins while others that are extremely competitive in bidding may have narrower margins.
Service and Maintenance versus installation. In general, installation work has a higher gross margin than maintenance work. This is due to the fact that installation work usually is more of a fixed price nature and therefore has higher risks involved. Accordingly, a higher portion of the revenue mix from installation work typically will result in higher margins.
Subcontract work. Work that is subcontracted to other service providers generally has lower gross margins. Increases in subcontract work as a percentage of total revenues in a given period may contribute to a decrease in gross margin.
Materials versus Labor. Typically materials supplied on projects have smaller margins than labor. Accordingly, projects with a higher material cost in relation to the entire job will have a lower overall margin.
Depreciation. Depreciation is included in our cost of revenue. This is a common practice in the energy services industry, but can make comparability to other companies difficult.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees, general liability insurance and miscellaneous other expenses.
Results of Operations
Because the Company had no operations during the three months ended December 31, 2007 the information set forth below for the three months ended December 31, 2007 and the corresponding analysis of the comparative three months ended December 31, 2008 and December 31, 2007 is based on actual results for the three months ended December 31, 2008 and pro forma results as of December 31, 2007. This information is based upon and should be read in conjunction with the more detailed information included in the section titled “Unaudited Pro Forma Consolidated Financial Information.”
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Energy Services of America Corporation
ST Pipeline, Inc./C J Hughes
(Unaudited) Three Months Ended December 31, 2008 | Percent | Pro Forma Three Months Ended December 31, 2007 | Percent | |||||||||||||
Contract Revenues | $ | 33,679,046 | 100.0 | % | $ | 62,747,854 | 100.0 | % | ||||||||
Cost of Revenues | 35,275,121 | 104.7 | % | 45,164,879 | 72.0 | % | ||||||||||
Gross Profit (Loss) | (1,596,075 | ) | -4.7 | % | 17,582,975 | 28.0 | % | |||||||||
General and administrative expenses | 1,714,750 | 5.1 | % | 1,428,602 | 2.3 | % | ||||||||||
Net income (loss) from operations before taxes | (3,310,825 | ) | -9.8 | % | 16,154,373 | 25.7 | % | |||||||||
Interest Income | 36,273 | 0.1 | % | 428,700 | 0.7 | % | ||||||||||
Interest Expense | (416,772 | ) | -1.2 | % | (460,507 | ) | -0.7 | % | ||||||||
Other Income (Expense) | 154,251 | 0.5 | % | 274,536 | 0.4 | % | ||||||||||
Net Income (Loss) before tax | (3,537,073 | ) | -10.5 | % | 16,397,103 | 26.1 | % | |||||||||
Income taxes (benefit) | (1,342,564 | ) | -4.0 | % | 6,564,867 | 10.5 | % | |||||||||
Net Income (Loss) | (2,194,509 | ) | -6.5 | % | 9,832,235 | 15.7 | % | |||||||||
Weighted average shares outstanding- basic | 12,092,307 | 12,092,307 | ||||||||||||||
Weighted average shares- diluted | 12,092,307 | 14,535,525 | ||||||||||||||
Net income (Loss) per share- basic | $ | (0.18 | ) | $ | 0.81 | |||||||||||
Net income (Loss) per share- diluted | $ | (0.18 | ) | $ | 0.68 |
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following tables set forth summary financial information for our pro forma consolidated results for the three months ended December 31, 2007. The information is presented to show what the consolidated income statements would have looked like had the transactions with S.T. Pipeline and C.J. Hughes been completed at the beginning of that period. The information includes such adjustments as deemed necessary to reflect the transactions in a proper manner. This information should be read in conjunction with the notes thereto as well as the financial statements for the various entities included elsewhere in this document.
The unaudited pro forma information is for informational purposes only and is not intended to represent or be indicative of the consolidated results of operations that we would have reported had the merger transactions been completed as of the date presented and should not be taken as representative of our future consolidated results of operations.
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Energy Services of America Corporation
ST Pipeline, Inc./C J Hughes
Pro Forma Combined, Condensed, Consolidated Statement of Income
Energy Services of America Corporation Three months ended December 31, 2007 | ST Pipeline Three months Ended December 31. 2007 | ST Pipeline Pro Forma Adjustments | C J Hughes Three months Ended December 31. 2007 | C J Hughes Pro Forma Adjustments | Redemption Adjustments | Pro Forma Combined | ||||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||||
Contract Revenues | $ | 37,520,704 | $ | 25,227,150 | $ | 62,747,854 | ||||||||||||||||
Cost of Revenues | 22,409,224 | $ | 302,703 | (1) | 22,248,923 | $ | 204,028 | (1) | 45,164,879 | |||||||||||||
Gross Profit | 15,111,480 | (302,703 | ) | 2,978,227 | (204,028 | ) | — | 17,582,975 | ||||||||||||||
General and administrative expenses | $ | 58,374 | 419,290 | 950,938 | 1,428,602 | |||||||||||||||||
Net income (loss) from operations | (58,374 | ) | 14,692,190 | (302,703 | ) | 2,027,289 | (204,028 | ) | — | 16,154,373 | ||||||||||||
Interest Income | 619,160 | 10,574 | (49,998 | ) (2) | 21,346 | (52,913 | ) (2) | (119,469 | ) (5) | 428,700 | ||||||||||||
Interest Expense | (80,916 | ) | (56,250 | ) (3) | (323,341 | ) | (460,507 | ) | ||||||||||||||
Other Income (Expense) | 274,475 | 61 | 274,536 | |||||||||||||||||||
Income before income taxes | 560,786 | 14,896,323 | (408,951 | ) | 1,725,355 | (256,941 | ) | (119,469 | ) | 16,397,103 | ||||||||||||
Income taxes | 206,000 | — | 5,794,949 | (4) | — | 611,706 | (4) | (47,788 | ) (6) | 6,564,867 | ||||||||||||
Net Income | $ | 354,786 | $ | 14,896,323 | $ | (6,203,900 | ) | $ | 1,725,355 | $ | (868,647 | ) | $ | (71,681 | ) | $ | 9,832,235 | |||||
Weighted average shares outstanding | 10,750,000 | 2,964,763 | (1,622,456 | ) | 12,092,307 | |||||||||||||||||
Weighted average shares- diluted | 13,193,218 | 2,964,763 | (1,622,456 | ) | 14,535,525 | |||||||||||||||||
Net income per share- basic | $ | 0.03 | $ | 0.81 | ||||||||||||||||||
Net income per share- diluted | $ | 0.03 | $ | 0.68 |
Notes to pro forma income statement
(1) | These adjustments represent the added depreciation created from the mark to market of the fixed assets of S.T. Pipeline and C.J. Hughes as required by purchase accounting |
(2) | These adjustments reflect the interest income lost from the cash payments made to the shareholders of S.T. Pipeline and C.J. Hughes, etc. had the transaction been completed at the beginning of each period and therefore not earning interest. |
(3) | This adjustment is to reflect the added interest cost that would have occurred relating to the notes issued to the Shareholders of S.T. Pipeline had the transaction been in place for the respective periods |
(4) | S.T. Pipeline and C.J. Hughes were both Sub S corporations and therefore had no Federal income taxes. These entries are to reflect the estimated taxes for these companies had they been a part of Energy Services during the respective periods. |
(5) | In accordance with the bylaws of Energy Services, shareholders had the right to vote against the transactions and request their shares be redeemed. These entries reflect the lost interest income from the purchase of those shares so redeemed. |
(6) | These entries are to reflect the tax savings related to the interest income lost on the payments to redeem shares. |
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2008 Actual compared to 2007 Pro Forma
Revenues. Revenues decreased by $29 million or 46.3% to $34 million for the three months ended December 31, 2008. A primary factor in this decrease was a large project at ST Pipeline in 2007 that did not reoccur in 2008. ST Pipeline had revenues in the quarter ended December 31, 2007 of $37.5 million while the quarter ended December 31, 2008 had revenues of $5.3 million. This decrease was due primarily to the one large contract that was previously discussed. This decrease more than offset some increases at the other companies for the period.
Cost of Revenues. The three months ended December 21, 2007 was one of the most profitable periods in the predecessor Company’s history with a gross profit of $18 million or 28%. The three months ended December 31, 2008 resulted in a $1.6 million gross loss. As a result of this loss, the cost of revenues was significantly higher as a percentage of revenue than expected for the three months ended December 31, 2008. Cost of revenues decreased by 22%.
Gross Profit. For the three months ended December 31, 2008 we had a gross loss $1.6 million. This was compared to a $18 million profit in the three month period ended December 31, 2007. The loss was the result of two particular projects at one of the operating subsidiaries which lost $3.2 million for the quarter and those losses more than offset the normal performance at the other subsidiaries. There was a combination of events that resulted in the losses on these jobs. First, the Customer had several other projects that were supposed to start in the quarter that they decided to delay. The pricing had been established on these projects under the assumption of getting the added work. When that did not occur, many costs that would have been spread over all the jobs then had to be absorbed into these two existing jobs. Also, there were unplanned work stoppages initiated by the customer for the thanksgiving and Christmas holidays which resulted in added payroll costs of approximately $450,000. These jobs have been completed and since this was an unusual occurrence for portions of projects linked together get delayed and normally when planning a project you know of scheduled work stoppages, we believe that the results of these jobs is not indicative of future performance. We believe that this was an unusual occurrence and not indicative of future performance.
Selling general and administrative expenses. Selling, general and administrative increased by $300,000 (20.0%) to $1.7 million for the three months ended December 31, 2008. This increase was partially due to establishing new offices in Barboursville, WV. Increases in wages, supplies, etc. accounted for the remaining increase.
Income from Operations. Income from operations decreased $19 million or 120.5% to a $3.0 million loss for the three months ended December 31, 2008. This is a function of the previous categories.
Interest Income. Interest income decrease $392,000 which was due to funds being used for the acquisition of C.J. Hughes and S.T. Pipeline.
Interest Expense Interest Expense decreased by $44,000 to $417,000 for the three months ended December 31, 2008. This decrease was primarily driven by the reduction in the prime interest rate on which most of our financing is based.
Other Income. Other income decreased by $120,000 to $154,000 for the three months ended December 31, 2008. This decrease was driven by the reduction of rental of equipment to outside parties.
Net Income (Loss). Net Income decreased by $12 million or 122.3% to a net loss of $2.2 million for the three months ended December 31, 2008. The decrease occurred due to the various changes as previously discussed, principally the large decline in gross profit.
Comparison of Financial Condition
The Company had total assets at December 31, 2008 of $109.4 million. Some of the primary components of the balance sheet were accounts receivable which totaled $16.2 million down $22.3 million from the September 30, 2008 balances. This large reduction was driven by the collections from two significant projects which were completed during the current period. No significant projects have been contracted, at this point in time, to replace that revenue stream. We are currently bidding on at several significant projects and expect accounts receivable to return to the $30 million range. Other major categories of assets at December 31, 2008 included cash of $13.4 million and fixed assets of $32.3 million. Liabilities totaled $51.3 million down $22.1 million from the September 30, 2008 balances. This decrease was primarily due to reductions in accounts payable and debt.
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At the end of 2007, the Company had $50.7 million of funds in a trust account being held for the completion of acquisitions totaling at least 80% of the funds. That balance grew to $51.5 million by August 15, 2008. Upon completion of the ST Pipeline and CJ Hughes acquisitions on August 15, 2008, the Company disbursed those funds with $33.2 million in cash going to the acquired companies’ shareholders, $9.7 million to redeem those Energy Services shareholders electing redemption, $1.0 million to pay the underwriting deferred fee and the remaining $7.5 million to the Company to be used for general corporate purposes.
Stockholders’ Equity. Stockholders’ equity decreased from $60.3 million at September 30, 2008 to $58.1 million at December 31, 2008. This decrease was due to the net loss of $2.2 million for the three months ended December 31, 2008.
Liquidity and Capital Resources
Cash Requirements
We anticipate that our cash and cash equivalents on hand at September 30, 2008 which totaled $13.4 million along with our credit facilities available to us and our anticipated future cash flows from operations will provide sufficient cash to meet our operating needs. However, with the anticipated future energy shortage nationwide and the increased demand for our services, we could be faced with needing significant additional working capital. Also, current general credit tightening resulting from the general banking and other economic contraction that has occurred in the second half of 2008, has impaired the availability of credit facilities for future operational needs. A prolonged restriction in borrowing capacity may limit the growth ability of the Company.
Sources and uses of Cash
As of December 31, 2008, we had $13.4 million in cash, working capital of $13.2 million and long term debt net of current maturities of $21.3 million.
Off-Balance Sheet transactions
Due to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets. Though for the most part not material in nature, some of these are:
Leases
Our work often requires us to lease various facilities, equipment and vehicles. These leases usually are short term in nature, one year or less, though when warranted we may enter into longer term leases. By leasing equipment, vehicles and facilities, we are able to reduce our capital outlay requirements for equipment vehicles and facilities that we may only need for short periods of time. The Company currently rents two parcels of real estate from stockholders-directors of the company under long-term lease agreements. The one agreement calls for monthly rental payments of $5,000 and extends through January 1, 2012. The second agreement is for the Company’s headquarter offices and is rented from a corporation in which two of the Company’s directors are shareholders. The agreement began November 1, 2008 and runs through 2011 with options to renew past that. It calls for a monthly rental of $7,500 per month.
Letters of Credit
Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors, vendors, etc. on various customer projects. At December 31, 2008, the Company was contingently liable on an irrevocable Letter of Credit for $950,000 to guarantee payments of insurance premiums to the group captive insurance company through which the Company obtains its general liability insurance.
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Performance Bonds
Some customers, particularly new ones, or governmental agencies require us to post bid bonds, performance bonds and payment bonds. These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If we fail to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond. We must reimburse the insurer for any expenses or outlays it is required to make. Depending upon the size and conditions of a particular contract, we may be required to post letters of credit or other collateral in favor of the insurer. Posting of these letters or other collateral reduce our borrowing capabilities. Historically, the Company has never had a payment made by an insurer under these circumstances and does not anticipate any claims in the foreseeable future. At December 31, 2008, we had $26.1 million in bonds issued by the insurer outstanding.
Concentration of Credit Risk
In the ordinary course of business the company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within the United States. Consequently, we are subject to potential credit risk related to business and economic factors that would affect these companies. However, we generally have certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, we may take title to the underlying assets in lieu of cash in settlement of receivables. The Company had three customers that exceeded ten percent of revenues for the year ended December 31, 2008. Those companies were Equitable Resources, Columbia Gas and Markwest which accounted for 40% of revenues.
Litigation
The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personally injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Related Party Transactions
In the normal course of business, we enter into transactions from time to time with related parties. These transactions typically would not be material in nature and would usually would relate to real estate, vehicle or equipment rentals. However, from previous acquisition transactions the Company currently has $13 million of long-term debt to current directors, officers, and former owners of an acquired company.
Inflation
Due to relatively low levels of inflation during the three months ended December 31, 2007 and 2008, 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 pro forma consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. Management believes the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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Revenue Recognition We recognize revenue when services are performed except when work is being performed under a fixed price contract. Revenue from fixed price contracts are recognized under the percentage of completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Such contracts generally provide that the customer accept completion of progress to date and compensate us for services rendered, measured typically in terms of units installed, hours expended or some other measure of progress. Contract costs typically include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income and their effects are recognized in the period in which the revisions are determined.
Self Insurance The Company is insured at one subsidiary for general liability insurance through a captive insurance company. While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs, the Company does have to maintain a letter of credit to guarantee payments of premiums. Should the Captive experience severe losses over an extended period, it could have a detrimental affect on the Company.
Current and Non Current Accounts Receivable and Provision for Doubtful Accounts The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customer’s access to capital, our customer’s willingness or ability to pay, general economic conditions and the ongoing relationship with the customer. While most of our Customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves. At December 31, 2008, the management review deemed that the allowance for doubtful accounts was adequate to cover any anticipated losses.
Outlook
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.
Recently our customers have been experiencing high demand for their products, particularly Natural Gas. Accordingly, we normally 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, 2008 was $54 million and while adding additional business projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available. Moreover, even if the Company obtains contracts, there can be no guarantee that the projects will go forward if the current economic instability continues.
If the increased demand experienced in fiscal 2009 continues, we believe that the Company will continue to have opportunities to continue to improve both revenue volumes and the margins thereon. However, as noted above, if the current economic conditions persist, growth could be limited.
If growth continues, we will be required to make additional capital expenditures for equipment to keep up with that need. Currently, it is anticipated that in fiscal 2009, the Company’s needed capital expenditures will be between $2.0 million and $4.0 million dollars. However, if the customer demands continue to grow, this number could change dramatically. Significantly higher capital expenditure requirements could of course put a strain on the Company’s cash flows and require additional borrowings.
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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 |
11
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENERGY SERVICES OF AMERICA CORPORATION | |||
Date: May 6, 2009 | By: | /s/ Marshall T. Reynolds | |
Marshall T. Reynolds | |||
Chairman and Chief Executive Officer | |||
Date: May 6, 2009 | By: | /s/ Edsel R. Burns | |
Edsel R. Burns | |||
President | |||
(Principal Executive Officer) | |||
Date: May 6, 2009 | By: | /s/ Larry A. Blount | |
Larry A. Blount | |||
Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |