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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Energy Services of America Corp.    ESOA

ENERGY SERVICES OF AMERICA CORP.

(ESOA)
Delayed Quote. Delayed OTC Bulletin Board - Other OTC - 09/16 10:09:07 am
0.846 USD   -0.47%
08/14ENERGY SERVICES OF AMERICA : Files Quarterly Report
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05/15ENERGY SERVICES OF AMERICA : Files Quarterly Report
PR
02/14ENERGY SERVICES OF AMERICA : Files Quarterly Report
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ENERGY SERVICES OF AMERICA : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/15/2019 | 03:13pm EDT
You should read the following discussion of the financial condition and results
of operations of Energy Services in conjunction with the "Financial Statements"
appearing in 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, C.J. Hughes and C.J. Hughes' wholly owned
subsidiaries on a consolidated basis.



Forward Looking Statements



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



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



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



Company Overview


Energy Services of America Corporation ("Energy Services" or the "Company") was
formed in 2006 as a special purpose acquisition corporation, or blank check
company. 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. Contractors Rental
Corporation ("Contractors Rental"), a wholly owned subsidiary of C.J. Hughes,
provides union building trade employees for projects managed by C.J. Hughes.
Nitro Construction Services, Inc. ("Nitro"), a wholly owned subsidiary of C. J.
Hughes, is an electrical and mechanical contractor that provides its services to
the power, chemical and automotive industries. Nitro operates primarily in the
mid-Atlantic region of the United States. Pinnacle Technical Solutions, Inc.
("Pinnacle"), a wholly owned subsidiary of Nitro, operates as a data storage
facility within Nitro's office building. Pinnacle is supported by Nitro and has
no employees of its own. All of the C.J. Hughes, Nitro, 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. Wholly owned subsidiary S.T. Pipeline, formerly
presented as a discontinued operation, has been absorbed into Energy Services in
2019 for financial statement presentation.



  17






Energy Services is engaged in providing contracting services for energy related
companies. Currently Energy Services primarily services the gas, petroleum,
power, chemical and automotive industries, though it does some other incidental
work such as water and sewer projects. 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 power, chemical, and automotive industries,
the Company provides a full range of electrical and mechanical installations and
repairs including substation and switchyard services, site preparation,
equipment setting, pipe fabrication and installation, 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, Pennsylvania, and Kentucky. 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 build and replace gas line services to
individual customers of the various utility companies.



The Company's consolidated operating revenues for the three months ended March
31, 2019 were $47.0 million of which 63.8% was attributable to gas & petroleum
work, 31.1% to electrical and mechanical services, and 5.1% to water and sewer
installations and other ancillary services. The Company's consolidated operating
revenues for the six months ended March 31, 2019 were $96.1 million of which
63.5% was attributable to gas & petroleum work, 30.2% to electrical and
mechanical services, and 6.3% to water and sewer installations and other
ancillary services.



The Company's consolidated operating revenues for the three months ended March
31, 2018 were $23.1 million of which 65.3% was attributable to electrical and
mechanical services, 27.1% to gas & petroleum work, and 7.6% to water and sewer
installations and other ancillary services. The Company's consolidated operating
revenues for the six months ended March 31, 2018 were $55.6 million of which
57.9% was attributable to electrical and mechanical services, 34.2% to gas &
petroleum work, and 7.9% to water and sewer installations and other ancillary
services.


Energy Services' customers include many of the leading companies in the industries it serves, including:



Goff Full StreamMountaineer GasTransCanada Corporation

Columbia Gas Distribution

Marathon Petroleum

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Dow Chemical

Kentucky American Water

Various state, county and municipal public service districts.



  18






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 complete, or services are performed. Fixed price contracts usually
result in recording revenues as work on the contract progresses on a percentage
of completion basis. Under this accounting method, revenue is recognized based
on the percentage of total costs incurred to date in proportion to total
estimated costs at completion. Many contracts also include retention provisions
under which a percentage of the contract price is withheld until the project is
complete and has been accepted by the customer.



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.



Seasonality: Fluctuation of Results




Our revenues and results of operations can and usually are subject to seasonal
variations. These variations are the result of weather, customer spending
patterns, bidding seasons and holidays. The first quarter of the calendar year
is typically the slowest in terms of revenues because inclement weather
conditions causes delays in production and customers usually do not plan large
projects during that time. While usually better than the first quarter, the
second calendar year quarter often has some inclement weather which can cause
delays in production, reducing the revenues the Company receives and/or
increasing the production costs. The third and fourth calendar year quarters
usually are less impacted by weather and usually have the largest number of
projects underway. Many projects are completed in the fourth calendar year
quarter and revenues are often impacted by customers seeking to either spend
their capital budget for the year or scale back projects due to capital budget
overruns.


In addition to the fluctuations discussed above, the pipeline industry can be
highly cyclical, reflecting variances in capital expenditures in proportion to
energy price fluctuations. As a result, our volume of business may be adversely
affected by where our customers are in the cycle and thereby their financial
condition as to their capital needs and access to capital to finance those
needs. Accordingly, our operating results in any particular quarter or year may
not be indicative of the results that can be expected for any other quarter
or
any other year.



  19






Second Quarter Overview


The following is an overview of results from operations for the three and six months ended March 31, 2019 and 2018.



                                                  Three Months Ended       Three Months Ended       Six Months Ended       Six Months Ended
                                                      March 31,                March 31,               March 31,              March 31,
                                                         2019                     2018                    2019                   2018

Revenue                                          $         46,955,444     $         23,093,033     $       96,069,583$       55,640,636

Cost of revenues                                           46,364,050               22,036,935             91,643,344             52,609,084

Gross profit                                                  591,394                1,056,098              4,426,239              3,031,552
Selling and administrative expenses                         2,012,282      
         1,956,356              4,768,673              3,965,447
Loss from operations                                       (1,420,888 )               (900,258 )             (342,434 )             (933,895 )

Other income (expense)
Interest income                                                16,501                       61                 58,023                132,342
Other nonoperating expense                                    (20,581 )                (47,023 )              (53,576 )             (102,147 )
Interest expense                                             (209,125 )               (243,708 )             (413,474 )             (539,552 )
Gain on sale of equipment                                     111,817                   19,670                137,569                388,375
                                                             (101,388 )               (271,000 )             (271,458 )             (120,982 )

Loss before income taxes                                   (1,522,276 )             (1,171,258 )             (613,892 )           (1,054,877 )

Income tax benefit                                           (397,818 )               (223,683 )             (120,818 )             (255,802 )

Net loss                                                   (1,124,458 )               (947,575 )             (493,074 )             (799,075 )

Dividends on preferred stock                                   77,250                   77,250                154,500                154,500

Net loss available to common shareholders $ (1,201,708 ) $

(1,024,825 ) $ (647,574 ) $ (953,575 )

Weighted average shares outstanding-basic                  14,060,456               14,239,836             14,102,117             14,239,836

Weighted average shares-diluted                            14,060,456               14,239,836             14,102,117             14,239,836

Loss per share available to common
shareholders                                     $             (0.085 )   $             (0.072 )   $           (0.046 )   $           (0.067 )

Loss per share-diluted available to common
shareholders                                     $             (0.085 )   $             (0.072 )   $           (0.046 )   $           (0.067 )




  20





Results of Operations for the Three and Six Months Ended March 31, 2019 Compared to the Three and Six Months Ended March 31, 2018




Revenues. Total revenues increased by $23.9 million or 103.3% to $47.0 million
for the three months ended March 31, 2019 from $23.1 million for the same period
in 2018. The increase was primarily attributable to a $23.7 million revenue
increase in petroleum and gas work and a $643,000 revenue increase in water and
sewer projects and other ancillary services, partially offset by a $465,000
revenue decrease in electrical and mechanical services.



Total revenues increased by $40.4 million or 72.7% to $96.1 million for the six
months ended March 31, 2019 from $55.6 million for the same period in 2018. The
increase was primarily attributable to a $41.9 million revenue increase in
petroleum and gas work and a $1.8 million revenue increase in water and sewer
projects and other ancillary services, partially offset by a $3.3 million
revenue decrease in electrical and mechanical services.



Cost of Revenues. Total cost of revenues increased by $24.4 million or 110.4% to
$46.4 million for the three months ended March 31, 2019 from $22.0 million for
the same period in 2018. The increase was primarily attributable to a $24.3
million cost increase in petroleum and gas work, a $224,000 cost increase in
water and sewer projects and other ancillary services, and a $52,000 cost
increase in equipment and tool shop operations not allocated to projects,
partially offset by a $278,000 cost decrease in electrical and mechanical
services.



Total cost of revenues increased by $39.0 million or 74.2% to $91.6 million for
the six months ended March 31, 2019 from $52.6 million for the same period in
2018. The increase was primarily attributable to a $41.2 million cost increase
in petroleum and gas work, a $997,000 cost increase in water and sewer projects
and other ancillary services, partially offset by a $2.9 million cost decrease
in electrical and mechanical services and a $250,000 cost decrease in equipment
and tool shop operations not allocated to projects.



Gross Profit. Total gross profit decreased by $465,000 or 44.0% to $591,000 for
the three months ended March 31, 2019 from $1.1 million for the same period in
2018. The decrease was primarily attributable to a $645,000 gross profit
decrease in petroleum and gas work, a $186,000 gross profit decrease in
electrical and mechanical services, and a $52,000 gross profit decrease related
to equipment and tool shop operations costs not allocated to projects, partially
offset by a $418,000 gross profit increase in water and sewer projects and
other
ancillary services.



Total gross profit increased by $1.4 million or 46.0% to $4.4 million for the
six months ended March 31, 2019 from $3.0 million for the same period in 2018.
The increase was primarily attributable to a $763,000 gross profit increase in
petroleum and gas work, a $748,000 gross profit increase in water and sewer
projects and other ancillary services and a $250,000 gross profit increase
related to equipment and tool shop operations costs not allocated to projects,
partially offset by a $366,000 gross profit decrease in electrical and
mechanical services.



Selling and administrative expenses. Total selling and administrative expenses
increased by $56,000 or 2.9% to $2.0 million for the three months ended March
31, 2019 from $2.0 million for the same period in 2018. The increase was
primarily related to additional operations personnel needed to secure and
manage.



Total selling and administrative expenses increased by $803,000 or 20.3% to $4.8
million for the six months ended March 31, 2019 from $4.0 million for the same
period in 2018. The increase was primarily related to additional operations
personnel needed to secure and manage projects and payment of performance
bonuses, which were significantly less in 2018.



Interest Expense. Interest expense decreased by $35,000 or 14.2% to $209,000 for
the three months ended March 31, 2019 from $244,000 for the same period in 2018.
This decrease was primarily due to the timing of line of credit borrowings and
decreasing long-term debt.



Interest expense decreased by $127,000 or 23.4% to $413,000 for the six months
ended March 31, 2019 from $540,000 for the same period in 2018. This decrease
was primarily due to the timing of line of credit borrowings and decreasing
long-term debt



  21






Net Loss. Loss before income taxes was $1.5 million for the three months ended
March 31, 2019, compared to $1.2 million for the same period in 2018. Loss
before income taxes was $614,000 for the six months ended March 31, 2019,
compared to $1.1 million for the same period in 2018. The losses were due to the
items mentioned above.



Income tax benefit for the three months ended March 31, 2019 was $398,000
compared to $224,000 for the same period in 2018. The increase in income tax
benefit was primarily due to the decrease in taxable income. Income tax benefit
for the six months ended March 31, 2019 was $121,000 compared to $256,000 for
the same period in 2018. The decrease in income tax benefit was primarily due to
the increase in taxable income.



The effective income tax rate for the three months ended March 31, 2019 was
(26.1%), as compared to (19.1%) for the same period in 2018. The effective
income tax rate for the six months ended March 31, 2019 was (19.7%), as compared
to (24.2%) for the same period in 2018. Effective income tax rates are estimates
and may vary from period to period due to changes in the amount of taxable
income and non-deductible expenses.



The US Tax Cuts and Jobs Act of 2017 (the "Act") was enacted in December 2017.
As a result, the top corporate income tax rate was reduced from 35% to 21%
beginning with tax years after December 31, 2017. As a fiscal year filer, the
Act will require the Company used a "blended" tax rate of 24.5% for fiscal year
2018. Beginning with fiscal year 2019, the Company's federal tax rate will
be
21%.


Dividends on preferred stock for the three and six months ended March 31, 2019 and 2018 were $77,250 and $154,500, respectively.

Net loss available to common shareholders for the three months ended March 31,
2019 was $1.2 million compared to $1.0 million for the same period in 2018. Net
loss available to common shareholders for the six months ended March 31, 2019
was $648,000 compared to $954,000 for the same period in 2018.



Comparison of Financial Condition at March 31, 2019 and September 30, 2018



The Company had total assets of $60.8 million at March 31, 2019, an increase of
$6.1 million from the prior fiscal year end balance of $54.7 million. Contract
assets totaled $13.5 million at March 31, 2019, an increase of $8.1 million from
the prior fiscal year end balance of $5.4 million. The increase was due to a
difference in the timing of project billings at March 31, 2019 compared to
September 30, 2018. Cash and cash equivalents totaled $2.8 million at March 31,
2019, an increase of $1.7 million from the prior fiscal year end balance of $1.1
million. The increase was primarily due to the decrease in accounts receivable
and the increase in accounts payable. Prepaid expenses and other totaled $5.1
million at March 31, 2019, an increase of $1.0 million from the prior fiscal
year end balance of $4.1 million. This increase was primarily due to the
financing of the Company's insurance policies, partially offset by a reduction
in prepaid insurance that was expensed during the six months ended March 31,
2019. Accounts receivable, which totaled $18.4 million at March 31, 2019,
decreased by $3.8 million from the prior fiscal year end balance of $22.2
million. The decrease was primarily due to the reduced billings on significant
projects at March 31, 2019 and the collection of receivables from September 30,
2018. The Company had property, plant and equipment of $16.3 million at March
31, 2019, a decrease of $487,000 from prior fiscal year end balance of $16.8
million. This decrease was due to depreciation of $2.1 million and net equipment
disposals of $265,000, partially offset by equipment acquisitions of $1.8
million. Other receivables totaled $47,000 at March 31, 2019, a decrease of
$220,000 from the prior fiscal year end balance of $266,000. The decrease was
due to the collection of other receivables from September 30, 2018. Retainages
receivable totaled $4.7 million at March 31, 2019, a decrease of $216,000 from
the prior fiscal year end balance of $4.9 million. The decrease was due to the
billing of retainages from September 30, 2018.



  22






The Company had total liabilities of $38.4 million at March 31, 2019, an
increase of $7.0 million from the prior fiscal year end balance of $31.4
million. Lines of credit and short-term borrowings totaled $12.1 million at
March 31, 2019, an increase of $6.0 million from the prior fiscal year end
balance of $6.1 million. This increase was primarily due to $4.5 million in line
of credit borrowings and a $1.5 million increase in short term borrowings
related to insurance premiums financed. Accounts payable totaled $8.7 million at
March 31, 2019, an increase of $2.5 million from the prior fiscal year end
balance of $6.2 million. The increase is due to significant project costs during
fiscal year 2019. Accrued expenses and other current liabilities totaled $6.3
million at March 31, 2019, an increase of $2.0 million from the prior fiscal
year end balance of $4.3 million. The increase was primarily due to significant
project costs during fiscal year 2019. Long-term debt totaled $5.3 million at
March 31, 2019, a decrease of $1.2 million from the prior fiscal year end
balance of $6.5 million. The decrease in long-term debt was due to principal
repayments on such debt. Current maturities of long-term debt totaled $2.4
million at March 31, 2019, a decrease of $834,000 from the prior fiscal year end
balance of $3.2 million. Contract liabilities totaled $2.5 million at March 31,
2019, a decrease of $736,000 from the prior fiscal year end total of $3.3
million. The decrease was due to a difference in the timing of project billings
at March 31, 2019 compared to at September 30, 2018. The decrease in current
maturities of long-term debt was due to principal repayments on such debt.
Income taxes payable totaled $0 at March 31, 2019, a decrease of $545,000 from
the prior fiscal year end balance of $545,000. The decrease was due to the
payment of income taxes from September 30, 2018 and the taxable loss for the six
months ended March 31, 2019. Deferred tax liabilities totaled $1.1 million at
March 31, 2019, a decrease of $207,000 from the prior fiscal year end balance of
$1.3 million.



Shareholders' equity was $22.4 million at March 31, 2019, a decrease of $852,000
from the prior fiscal year end balance of $23.3 million. This decrease was due
to the net loss available to common shareholders of $648,000 for the six months
ended March 31, 2019 and $205,000 in common stock repurchased by the Company.



Liquidity and Capital Resources



Indebtedness



On January 31, 2014, the Company entered into a financing arrangement ("Term
Note") with United Bank, Inc. and Summit Community Bank. The financing
arrangement is a five-year term loan in the amount of $8.8 million. This note
was paid in full during the second quarter of fiscal year 2019. In addition, the
Company entered into a separate five-year term loan agreement with First
Guaranty Bank for $1.6 million, which was later refinanced by United Bank. Taken
together, the $10.4 million in new financings superseded the prior financing
arrangements the Company had with United Bank, Inc. and other lenders. This was
reported in the Company's February 4, 2014 Form 8-K filing. The loan was
collateralized by the Company's accounts receivable and equipment.



Under the terms of the 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 ("TNW") to be measured semi-annually
    on the following basis:




Date         Debt to TNW
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 is required to
maintain a minimum debt service coverage ratio of no less than 1.50 to 1.0x
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 bank group'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 applied as of June 30, 2014, as
well as for future periods.  The Company was not in compliance with all loan
covenants at March 31, 2019; however, the Company received a waiver on May
7,
2019.



  23





On December 16, 2014, the Company's Nitro subsidiary entered into a 20-year $1.2
million loan agreement with First Bank of Charleston, Inc. (West Virginia) to
purchase the office building and property it had previously been leasing for
$6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly
payments of $7,800. The interest rate on this note is subject to change from
time to time based on changes in The U.S.Treasury yield, adjusted to a constant
maturity of three years as published by the Federal Reserve weekly. The loan is
collateralized by the building purchased under this agreement.



On September 16, 2015, the Company entered into a $1.2 million 41-month term
note agreement with United Bank, Inc. to refinance the five-year term note
agreement with First Guaranty Bank. The agreement has an interest rate of 5.0%
and is subject to the terms of the January 31, 2014 Term Note agreement
discussed above. The loan was collateralized by the Company's accounts
receivable and equipment. The note was paid in full during the second quarter of
fiscal year 2019.



On September 16, 2015, the Company entered into a $2.5 million Non-Revolving
Note agreement with United Bank, Inc. This six-year agreement gave the Company
access to a $2.5 million line of credit ("Equipment Line of Credit"),
specifically for the purchase of equipment, for the period of one year with an
interest rate of 5.0%. After the first year, all borrowings against the
Equipment Line of Credit will be converted to a five-year term note agreement
with an interest rate of 5.0%. As of March 31, 2019, the Company had borrowed
$2.46 million against this line of credit and made principal payments of $1.2
million. The loan is collateralized by the equipment purchased under this
agreement.



On November 13, 2015, the Company entered into a 10-year $1.1 million loan
agreement with United Bank, Inc. to purchase the fabrication shop and property
Nitro had previously been leasing for $12,900 each month. The interest rate on
the new loan agreement is 5.0% with monthly payments of $12,028. The loan is
collateralized by the building and property purchased under this agreement.



On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note
agreement with United Bank, Inc. This five-year agreement gave the Company
access to a $5.0 million line of credit ("Equipment Line of Credit 2017"),
specifically for the purchase of equipment, for a period of three months with an
interest rate of 4.99%. After three months, all borrowings against the Equipment
Line of Credit 2017 were converted to a five-year term note agreement with an
interest rate of 4.99%. As of March 31, 2019, the Company had borrowed $5.0
million against this line of credit and made principal payments of $1.5 million.
The loan is collateralized by the equipment purchased under this agreement.



On May 7, 2019, the Company's lenders conditionally approved a five-year $10.0
million term note. The interest rate on this note is fixed at 5.50%. The purpose
of this note is to finance a specific construction project currently in
progress. The $10.0 million borrowed against the operating line of credit at
March 31, 2019 would be refinanced by this note.



Operating Line of Credit



On March 21, 2018, the Company entered into a financing agreement ("Operating
Line of Credit (2018)") with United Bank, Inc. to provide the Company with a
$15.0 million revolving line of credit. The interest rate on the line of credit
is the "Wall Street Journal" Prime Rate (the index) with a floor of 4.99%. The
effective date of this agreement was February 27, 2018 and it replaced the $15.0
million revolving line of credit ("Operating Line of Credit (2017)") entered
into with United Bank, Inc. effective February 27, 2017. This agreement expired
on February 28, 2019 but was extended through April 28, 2019 by the Company's
lenders. The Company received a twelve-month extension on May 7, 2019.



The Company had borrowed $5.5 million against the Operating Line of Credit
(2018) as of September 30, 2018 and had up to $7.0 million available to borrow
depending on the Company's borrowing base report. The Company had borrowed $10.0
million against the Operating Line of Credit (2018) as of March 31, 2019 and had
up to $2.5 million available to borrow depending on the Company's borrowing
base
report.



  24






Major items excluded from the borrowing base calculation are receivables from
bonded jobs and retainage as well as all items greater than ninety (90) days
old. Line of credit borrowings are collateralized by the Company's accounts
receivable. Cash available under the line is calculated based on 70.0% of the
Company's eligible accounts receivable. Major items excluded from the
calculation are receivables from bonded jobs and retainage as well as items
greater than 90 days old.



Under the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:

1. Minimum tangible net worth of $17.0 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 1.50x to be measured quarterly

4. Maximum debt to tangible net worth ratio ("TNW") of 1.50x to be measured

    semi-annually.



Under the terms of the agreement, the Company must meet the following additional requirements for draw requests causing the borrowings to exceed $12.5 million:

1. Minimum tangible net worth of $19.0 million to be measured quarterly

2. Minimum traditional debt service coverage of 2.0x to be measured quarterly on

a rolling twelve-month basis

3. Full review of accounts receivable aging report and work in progress. The

results of the review shall be satisfactory to the lender in its sole and

    unfettered discretion.



The Company was not in compliance with all covenants for the $12.5 million
Operating Line of Credit (2018) at March 31, 2019; however, the Company received
a waiver on May 7, 2019. On the same date, the Company's lenders conditionally
approved a five-year $10.0 million term note dependent on an ongoing equipment
appraisal. The interest rate on this note is fixed at 5.50%. The purpose of this
note is to finance a specific construction project currently in progress.



Off-Balance Sheet Arrangements

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 equipment, vehicles, and facilities.
These leases usually are short-term in nature, with duration of two year or
less, though at times we may enter into longer term leases when warranted. By
leasing, we are able to reduce our capital outlay requirements for equipment,
vehicles and facilities that we may only need for short periods of time. As of
March 31, 2019, the Company had operating lease commitments of $74,000 with
various expiration dates through March 2021.



  25






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 and vendors on various customer projects. At March 31, 2019, the Company did not have any letters of credit outstanding.



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 the Company fails 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. The Company
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 number of contracts that can be bid.



Depending upon the size and conditions of a contract, the Company 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. The Company does not anticipate any claims against outstanding
performance bonds in the foreseeable future. At March 31, 2019, the Company had
$8.9 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, the Company
is subject to potential credit risk related to business and economic factors
that would affect these companies. However, the Company generally has certain
statutory lien rights with respect to services provided. Under certain
circumstances such as foreclosure, the Company may take title to the underlying
assets in lieu of cash in settlement of receivables.



The Company had one customer that exceeded 10.0% of revenues for the six months
ended March 31, 2019. The customer, Goff Full Stream Interconnect, represented
41.8% of revenues. The Company had three customers that exceeded 10.0% of
receivables at March 31, 2019. These customers, Marathon Petroleum, Goff Full
Stream Interconnect and Dow Chemical, represented 22.9%, 14.9%, and 11.7% of
receivables net of retention at March 31, 2019, respectively.



The Company had three customers that exceeded 10.0% of revenues for the six
months ended March 31, 2018. The customers, Toyota Motor Mfg., Marathon
Petroleum, and Dow Chemical, represented 24.3%, 15.6%, and 10.4% of revenues,
respectively. The Company had one customer that exceeded 10.0% of receivables at
March 31, 2018. The customer, Toyota Motor Mfg., represented 19.9% of
receivables net of retention at March 31, 2018.



Litigation



In February 2018, the Company filed a lawsuit against a former customer related
to a dispute over changes on a pipeline construction project. The Company is
seeking $6.9 million in the lawsuit, none of which has been recognized in the
Company's financial statements. Other than described above, at March 31, 2019,
the Company was not involved in any legal proceedings other than in the ordinary
course of business. 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. At March 31, 2019, the Company does 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.



  26






Related Party Transactions



We intend that all transactions between us and our executive officers,
directors, holders of 10% or more of the shares of any class of our common stock
and affiliates thereof, will be on terms no less favorable than those terms
given to unaffiliated third parties and will be approved by a majority of our
independent outside directors not having any interest in the transaction.



On December 16, 2014, the Company's Nitro subsidiary entered into a 20-year $1.2
million loan agreement with First Bank of Charleston, Inc. (West Virginia) to
purchase the office building and property it had previously been leasing for
$6,300 each month. Mr. Douglas Reynolds, President of Energy Services, was a
director and secretary of First Bank of Charleston. Mr. Nester Logan and Mr.
Samuel Kapourales, directors of Energy Services, were also directors of First
Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged
into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp,
Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, holds the
same position with Premier Financial Bancorp Inc. Mr. Keith Molihan and Mr. Neal
Scaggs are both directors of Energy Services and hold the same position with
Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82%
with monthly payments of $7,800. As of March 31, 2019, we have paid
approximately $166,000 in principal and approximately $231,000 in interest
since
the beginning of the loan.


There were no new material related party transactions during the six months ended March 31, 2019.



Inflation


Due to relatively low levels of inflation during the six months ended March 31, 2019 and 2018, inflation did not have a significant effect on our results.

Critical Accounting Policies




The discussion and analysis of the Company's financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities
known to exist at the date of the consolidated financial statements and reported
amounts of revenues and expenses during the reporting period. We evaluate our
estimates on an ongoing basis, based on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances.
There can be no assurance that actual results will not differ from those
estimates. Management believes the following accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.


Revenue Recognition. On October 1, 2018, the Company adopted an Accounting
Standard Update, Revenue from Contracts with Customers (Topic 606). The core
principle of Topic 606 is that revenue will be recognized when promised goods or
services are transferred to customers in an amount that reflects consideration
for which entitlement is expected in exchange for those goods or services. We
adopted Topic 606 using a modified retrospective transition approach and elected
to apply Topic 606 to contracts with customers that are not substantially
complete, i.e. less than 90% complete, as of October 1, 2018. The adoption of
Topic 606 did not have a material impact on the Company's financial statements.



In addition, as of October 1, 2018, we began to separately present contract
assets and liabilities on the Company's consolidated balance sheet. Contract
assets include costs and estimated earnings in excess of billings that were
previously separately presented. Contract liabilities include billings in excess
of costs and estimated earnings that were previously separately presented as
well as provisions for losses, when occurred, that were previously included in
accrued expenses and other current liabilities.



  27





The accounting policies that were affected by Topic 606 and the changes thereto are as follows:




Revenue Recognition: Our revenue is primarily derived from construction
contracts that can span several quarters. We recognize revenue in accordance
with Topic 606. Topic 606 provides for a five-step model for recognizing revenue
from contracts with customers as follows:



  1. Identify the contract
  2. Identify performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price
  5. Recognize revenue




The accuracy of our revenue and profit recognition in a given period depends on
the accuracy of our estimates of the cost to complete each project. We believe
our experience allows us to create materially reliable estimates. There are a
number of factors that can contribute to changes in estimates of contract cost
and profitability. The most significant of these include:



  • the completeness and accuracy of the original bid;
  • costs associated with scope changes;
  • changes in costs of labor and/or materials;

• extended overhead and other costs due to owner, weather and other delays;

  • subcontractor performance issues;
  • changes in productivity expectations;
  • site conditions that differ from those assumed in the original bid;
  • changes from original design on design-build projects;

• the availability and skill level of workers in the geographic location of the

project;

• a change in the availability and proximity of equipment and materials;

• our ability to fully and promptly recover on affirmative claims and back

    charges for additional contract costs; and
  • the customer's ability to properly administer the contract.




The foregoing factors, as well as the stage of completion of contracts in
process and the mix of contracts at different margins may cause fluctuations in
gross profit from period to period. Significant changes in cost estimates,
particularly in our larger, more complex projects have had, and can in future
periods have, a significant effect on our profitability.



The transaction price is the amount of consideration to which we expect to be
entitled in exchange for transferring goods and services to the customer. The
consideration promised in a contract with customers may include both fixed
amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated
damages) to the extent that a significant reversal of cumulative revenue
recognized will not occur when the uncertainty associated with the variable
consideration is subsequently resolved (i.e., probable and estimable). When a
contract has a single performance obligation, the entire transaction price is
attributed to that performance obligation. When a contract has more than one
performance obligation, the transaction price is allocated to each performance
obligation based on estimated relative standalone selling prices of the goods or
services at the inception of the contract, which typically is determined using
cost plus an appropriate margin.



Subsequent to the inception of a contract, the transaction price could change
for various reasons, including the executed or estimated amount of change orders
and unresolved contract modifications and claims to or from owners. Changes that
are accounted for as an adjustment to existing performance obligations are
allocated on the same basis at contract inception. Otherwise, changes are
accounted for as separate performance obligation(s) and the separate transaction
price is allocated as discussed above. Changes are made to the transaction price
from unapproved change orders to the extent the amount can be reasonably
estimated, and recovery is probable. On certain projects we have submitted and
have pending unresolved contract modifications and affirmative claims
("affirmative claims") to recover additional costs and the associated profit, if
applicable, to which the Company believes it is entitled under the terms of
contracts with customers, subcontractors, vendors or others. The owners or their
authorized representatives and/or other third parties may be in partial or full
agreement with the modifications or affirmative claims or may have rejected or
disagree entirely or partially as to such entitlement.



  28





Costs to obtain our contracts ("pre-bid costs") that are not expected to be
recovered from the customer are expensed as incurred and included in selling and
administrative expenses on our consolidated statements of income. Costs to
mobilize equipment and labor to a job site prior to substantive work beginning
("mobilization costs") are capitalized as incurred and amortized over the
expected duration of the contract. As of March 31, 2019, we had no material
capitalized mobilization costs.



Contract Assets: Our contract assets include cost and estimated earnings in
excess of billings that represent amounts earned and reimbursable under
contracts, including claim recovery estimates, but have a conditional right for
billing and payment such as achievement of milestones or completion of the
project. With the exception of customer affirmative claims, generally, such
unbilled amounts will become billable according to the contract terms and
generally will be billed and collected over the next three months. Settlement
with the customer of outstanding affirmative claims is dependent on the claims
resolution process and could extend beyond one year. Based on our historical
experience, we generally consider the collection risk related to billable
amounts to be low. When events or conditions indicate that it is probable that
the amounts outstanding become unbillable, the transaction price and associated
contract asset is reduced.



Contract Liabilities: Our contract liabilities consist of provisions for losses
and billings in excess of costs and estimated earnings. Provisions for losses
are recognized in the consolidated statements of income at the uncompleted
performance obligation level for the amount of total estimated losses in the
period that evidence indicates that the estimated total cost of a performance
obligation exceeds its estimated total revenue. Billings in excess of costs and
estimated earnings are billings to customers on contracts in advance of work
performed, including advance payments negotiated as a contract condition.
Generally, unearned project-related costs will be earned over the next twelve
months.



Self-Insurance. The Company has its workers' compensation, general liability and
auto insurance through a captive insurance company. While the Company believes
that this arrangement has been very beneficial in reducing and stabilizing
insurance costs the Company does have to maintain a surety deposit to guarantee
payments of premiums. That account had a balance of $1.9 million as of March 31,
2019. Should the captive insurance company experience severe losses over an
extended period, it could have a detrimental effect on the Company.



Accounts Receivable and Provision for Doubtful Accounts. The Company provides an
allowance for doubtful accounts when collection of an account is considered
doubtful. Inherent in the assessment of the allowance for doubtful accounts are
certain judgments and estimates relating to factors such as a customer's access
to capital, the 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 become
unable to pay the amounts owed, this could cause reduced cash flows and losses
in excess of our current reserves. At March 31, 2019, management concluded that
the allowance for doubtful accounts was adequate.



New Accounting Pronouncements



In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)". ASU 2016-02
is effective for public business entities for fiscal years beginning after
December 15, 2018 including interim periods within those fiscal years. Among
other things, lessees will be required to recognize the following for all leases
(except for short-term leases) at the commencement date: a lease liability,
which is a lessee's obligation to make lease payments arising from a lease,
measured on a discounted basis; and a right-of-use asset, which is an asset that
represents the lessee's right to use, or control the use of, a specified asset
for the lease term. The Company is currently evaluating the impact, if any, that
adoption will have on its consolidated financial statements.



  29






Outlook


The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.




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 along with the existing
Operating Line of Credit (2018) with United Bank, Inc., which was extended to
April 28, 2020, will be adequate to meet our cash needs for the Company's 2019
fiscal year. The Company may borrow against the line of credit provided it meets
certain borrowing base requirements, with $15.0 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. As of March 31,
2019, the Company had borrowings of $10.0 million against the Operating Line of
Credit (2018).



Currently, the Company is receiving bid opportunities from existing and
potentially new customers. However, with potential economic uncertainties the
demand for our customers' projects could wane and their ability to fund planned
projects could be reduced. Also, a shortage of qualified labor could lead to
inefficient production and could make bidding and managing projects more
difficult. The Company's backlog at March 31, 2019 was $48.0 million, which does
not include $15 million in projects awarded after March 31, 2019. While adding
additional 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.

© Edgar Online, source Glimpses

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Energy Services of America Corp. Technical Analysis Chart | MarketScreener
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Managers
NameTitle
Douglas V. Reynolds President, Chief Executive Officer & Director
Marshall T. Reynolds Chairman
Charles P. Crimmel Chief Financial Officer, Secretary & Treasurer
Jack M. Reynolds Director
Neal Wyatt Scaggs Independent Director
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