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

ENERGY SERVICES OF AMERICA CORP.

(ESOA)
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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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08/14/2020 | 11:22am 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, and became an operating entity on August 15, 2008. C.J. Hughes
Construction Company, Inc. ("C.J. Hughes"), a wholly owned subsidiary of the
Company, 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.



                                       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
June 30, 2020 were $30.8 million of which 51.2% was attributable to gas and
petroleum work, 42.1% to electrical and mechanical services and 6.7% to water
and sewer installations and other ancillary services. The Company's consolidated
operating revenues for the three months ended June 30, 2019 were $40.2 million
of which 57.4% was attributable to gas and petroleum work, 34.9% to electrical
and mechanical services and 7.7% to water and sewer installations and other
ancillary services.



The Company's consolidated operating revenues for the nine months ended June 30,
2020 were $74.7 million of which 48.7% was attributable to electrical and
mechanical services, 40.7% to gas and petroleum work and 10.6% to water and
sewer installations and other ancillary services. The Company's consolidated
operating revenues for the nine months ended June 30, 2019 were $136.3 million
of which 61.6% was attributable to gas and petroleum work, 31.5% to electrical
and mechanical services and 6.9% to water and sewer installations and other
ancillary services.



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



Mountaineer Gas

TransCanada 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.



COVID-19 Response


In March 2020, the World Health Organization recognized the novel strain of
coronavirus, COVID-19, as a pandemic. This coronavirus outbreak has
significantly impacted both the world and U.S. economies. During March 2020 many
state and local governments, in addition to the federal government, have reacted
to the public health crisis, creating significant uncertainties in the U.S.
economy. In response to this coronavirus outbreak, the governments of many
cities, counties, states and other geographic regions have taken preventative or
protective actions, such as imposing restrictions on travel and business
operations and advising or requiring individuals to limit or forego their time
outside of their homes. In certain geographic regions in which the Company
operates, temporary closures of businesses have been ordered or suggested and
numerous other businesses have temporarily closed voluntarily. Further,
individuals' ability to travel has been curtailed through mandated travel
restrictions and may be further limited through additional voluntary or mandated
closures of travel-related businesses.



Some of the procedures that the Company has implemented to help protect
employees from COVID-19 exposure are guidelines for social distancing, office
sanitation, hand washing, mask wearing, limited office admittance and immediate
symptom reporting. The Company has provided personal protective equipment and
hand-sanitizers to employees and has made arrangements for administrative
personnel to work from home. The Company works closely with our customers to
limit exposure risk and cooperate with symptom reporting and contact tracing.
Construction employees are required to meet all procedures established by our
customers in addition to the Company's own procedures. The Company also followed
the paid sick and expanded family and medical leave guidelines set forth in the
Families First Coronavirus Response Act. As of August 13, 2020, the Company has
not had significant issues with COVID-19 exposure.



Due to the economic uncertainties created by COVID-19 and the limited operating
funds available, the Company applied for loans under the Paycheck Protection
Program ("PPP"). On April 15, 2020, Energy Services of America Corporation and
subsidiaries C.J. Hughes Construction Company, Contractors Rental Corporation
and Nitro Construction Services, Inc. entered into separate Paycheck Protection
Program Notes (the "Notes") effective April 7, 2020 with United Bank, Inc. as
the lender ("Lender") in an aggregate principal amount of $13,139,100 pursuant
to the PPP (collectively, the "PPP Loan"). In a special meeting held on
April 27, 2020, the Board of Directors (the "Board") of the Company unanimously
voted to return $3.3 million of the PPP Loan funds after discussing the
financing needs of the Company and subsidiaries. That left the Company and
subsidiaries with $9.8 million in PPP Loans to fund operations. The Company had
used all the available PPP Loan funds as of August 13, 2020 and plans to file
for forgiveness in the Company's fourth quarter of fiscal year 2020.



                                       19




As of August 13, 2020, most of the Company's existing customers had resumed
projects that were affected by the March 2020 shutdowns. As a result, the
Company has increased its employment level of construction personnel as compared
to March 31, 2020. Given the uncertainty regarding the spread of this
coronavirus, the related financial impact on the Company's results of
operations, financial position, and liquidity or capital resources cannot be
reasonably estimated at this time.



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.



                                       20




Third Quarter and Nine Months Overview

The following is an overview of results from operations for the three and nine months ended June 30, 2020 and 2019.



                                                  Three Months Ended       Three Months Ended       Nine Months Ended       Nine Months Ended
                                                       June 30,                 June 30,                June 30,                June 30,
                                                         2020                     2019                    2020                    2019
Revenue                                          $         30,762,725     $         40,187,978     $        74,678,432$       136,257,561

Cost of revenues                                           27,936,548               36,936,926              69,425,044             128,580,270

Gross profit                                                2,826,177                3,251,052               5,253,388               7,677,291
Selling and administrative expenses                         2,532,141      
         2,021,359               7,473,422               6,790,032
Income (loss) from operations                                 294,036                1,229,693              (2,220,034 )               887,259

Other income (expense)
Interest income                                                    83                        -                  53,332                  58,023
Other nonoperating expense                                    (53,793 )                (25,736 )              (130,472 )               (79,312 )
Interest expense                                             (101,335 )               (331,067 )              (400,197 )              (744,541 )
Gain on sale of equipment                                      43,296                   68,672                 563,062                 206,241
                                                             (111,749 )               (288,131 )                85,725                (559,589 )
Income (loss) before income taxes                             182,287      
           941,562              (2,134,309 )               327,670
Income tax expense (benefit)                                  200,242                  455,805                (347,629 )               334,987
Net (loss) income                                             (17,955 )                485,757              (1,786,680 )                (7,317 )
Dividends on preferred stock                                   77,250                   77,250                 231,750                 231,750
(Loss) income available to common shareholders   $            (95,205 )   $            408,507     $        (2,018,430 )   $          (239,067 )

Weighted average shares outstanding-basic                  13,627,293               13,985,579              13,844,340              14,080,299
Weighted average shares-diluted                            13,627,293               17,418,912              13,844,340              14,080,299
(Loss) earnings per share
available to common shareholders                 $             (0.007 )   $              0.029     $            (0.146 )   $            (0.017 )

(Loss) earnings per share-diluted
available to common shareholders                 $             (0.007 )   $
             0.023     $            (0.146 )   $            (0.017 )




                                       21




Results of Operations for the Three and Nine Months Ended June 30, 2020 Compared to the Three and Nine Months Ended June 30, 2019




Revenues. Total revenues decreased by $9.4 million or 23.5% to $30.8 million for
the three months ended June 30, 2020 from $40.2 million for the same period in
2019. The decrease was primarily attributable to a $7.3 million revenue decrease
in petroleum and gas work, a $1.1 million revenue decrease in electrical and
mechanical services and a $1.0 million revenue decrease in water and sewer
projects and other ancillary services. Total revenues decreased by $61.6 million
or 45.2% to $74.7 million for the nine months ended June 30, 2020 from $136.3
million for the same period in 2019. The decrease was primarily attributable to
a $53.6 million revenue decrease in petroleum and gas work, a $6.6 million
revenue decrease in electrical and mechanical services and a $1.4 million
revenue decrease in water and sewer projects and other ancillary services.



The revenue decrease in petroleum and gas work was primarily related to a
twenty-mile pipeline project in northern West Virginia that was in progress
during the nine months ended June 30, 2019 and completed in September 2019. The
project ran over budget due to environmental delays and adverse working
conditions related to weather. Generally, the Company's major projects will
extend into the first quarter of the next fiscal year. However, the Company's
major projects in fiscal year 2019 completed on or before September 2019. The
Company had a limited number of new projects that started in the first nine
months of fiscal year 2020. The COVID-19 pandemic began to affect the Company in
mid-March 2020 and resulted in many existing and potential customers suspending
or delaying projects.


Cost of Revenues. Total cost of revenues decreased by $9.0 million or 24.4% to
$27.9 million for the three months ended June 30, 2020 from $36.9 million for
the same period in 2019. The decrease was primarily attributable to a $8.2
million cost decrease in petroleum and gas work, a $1.1 million cost decrease in
electrical and mechanical services, a $675,000 cost decrease in water and sewer
projects and other ancillary services, partially offset by a $1.1 million cost
increase in equipment and tool shop operations not allocated to projects. Total
cost of revenues decreased by $59.2 million or 46.0% to $69.4 million for the
nine months ended June 30, 2020 from $128.6 million for the same period in 2019.
The decrease was primarily attributable to a $54.2 million cost decrease in
petroleum and gas work, a $6.2 million cost decrease in electrical and
mechanical services, a $688,000 cost decrease in water and sewer projects and
other ancillary services, partially offset by a $1.9 million cost increase in
equipment and tool shop operations not allocated to projects.



The cost of revenues decrease in petroleum and gas work was primarily related to
a twenty-mile pipeline project in northern West Virginia that was in progress
during the nine months ended June 30, 2019 and completed in September 2019. The
project ran over budget due to environmental delays and adverse working
conditions related to weather. Generally, the Company's major projects will
extend into the first quarter of the next fiscal year. However, the Company's
major projects in fiscal year 2019 completed on or before September 2019. The
Company had a limited number of new projects that started in the first nine
months of fiscal year 2020. The COVID-19 pandemic began to affect the Company in
mid-March 2020 and resulted in many existing and potential customers suspending
or delaying projects.



Gross Profit. Total gross profit decreased by $425,000 or 13.1% to $2.8 million
for the three months ended June 30, 2020 from $3.3 million for the same period
in 2019. The decrease was primarily attributable to a $1.1 million gross profit
decrease related to equipment and tool shop operations costs not allocated to
projects, a $359,000 gross profit decrease in water and sewer projects and other
ancillary services, partially offset by a $914,000 gross profit increase in
petroleum and gas work and a gross profit increase of $78,000 in electrical
and
mechanical services.



Total gross profit decreased by $2.4 million or 31.6% to $5.3 million for the
nine months ended June 30, 2020 from $7.7 million for the same period in 2019.
The decrease was primarily attributable to a $1.9 million gross profit decrease
related to equipment and tool shop operations costs not allocated to projects, a
$726,000 gross profit decrease in water and sewer projects and other ancillary
services, and a $406,000 gross profit decrease in electrical and mechanical
services, partially offset by a $658,000 gross profit increase in petroleum
and
gas work.


The overall gross profit decrease for the three and nine months ended June 30,
2020 compared to the same periods in 2019 was primarily related to the decrease
in revenues mentioned above. Generally, the Company's major projects will extend
into the first quarter of the next fiscal year. However, the Company's major
projects in fiscal year 2019 completed on or before September 2019. The Company
had a limited number of new projects that started in the first nine months of
fiscal year 2020. The COVID-19 pandemic began to affect the Company in
mid-March 2020 and resulted in many existing and potential customers suspending
or delaying projects.



Also, the decreased amount of work during the nine months ended June 30, 2020
resulted in less of the Company's owned equipment being used on projects and
reduced the internal equipment charges from shop operations to projects compared
to prior periods. The shop operation relies on internal equipment charges to
recover shop operation costs such as depreciation and maintenance. In addition,
the Company invested in general maintenance and repairs on Company owned
equipment in preparation for new projects starting in the third quarter of
fiscal year 2020.



Selling and administrative expenses. Total selling and administrative expenses increased by $511,000 or 25.3% to $2.5 million for the three months ended June 30, 2020 from $2.0 million for the same period in 2019.

Total selling and administrative expenses increased by $683,000 or 10.1% to $7.5
million for the nine months ended June 30, 2020 from $6.8 million for the same
period in 2019.



The increase in selling and administrative expenses was primarily related to
fewer projects in progress during the three and nine months ended June 30, 2020
and the reassignment of project management personnel to assist in obtaining
new
work.



                                       22





Interest Expense. Interest expense decreased by $230,000 or 69.4% to $101,000
for the three months ended June 30, 2020 from $331,000 for the same period
in
2019.


Interest expense decreased by $345,000 or 46.3% to $400,000 for the nine months ended June 30, 2020 from $745,000 for the same period in 2019.

This decrease in interest expense for the three and nine months ended June 30,
2020 was primarily due to the repayment of the line of credit and short-term
borrowings and additional principal payments on long-term debt.



Net (loss) income. Income before income taxes was $182,000 for the three months
ended June 30, 2020, compared to income before income taxes of $942,000 for the
same period in 2019. Loss before income taxes was ($2.1) million for the nine
months ended June 30, 2020, compared to income before income taxes of $328,000
for the same period in 2019. The income and loss before income taxes for the
respective periods were due to the items mentioned above.



Income tax expense for the three months ended June 30, 2020 was $200,000
compared to income tax expense of $456,000 for the same period in 2019. Income
tax benefit for the nine months ended June 30, 2020 was $347,000 compared to
income tax expense of $335,000 for the same period in 2019. The lower income tax
expense for the three months ended June 30, 2020, was primarily due to a
decrease in taxable income as compared to the same period in 2019. The greater
income tax benefit for the nine months ended June 30, 2020 was primarily due to
a decrease in taxable income as compared to the same period in 2019.



The effective income tax rate for the three months ended June 30, 2020 was
109.8%, as compared to 48.4% for the same period in 2019. The effective income
tax rate for the nine months ended June 30, 2020 was (16.3%), as compared to
102.2% for the same period in 2019. 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. Per diem paid to employees on construction projects
is only partially deductible from taxable income and can have a significant
impact on the effective tax rate.



Dividends on preferred stock for the three months ended June 30, 2020 and 2019
were $77,250. Dividends on preferred stock for the nine months ended June 30,
2020 and 2019 were $231,750.



Net loss available to common shareholders for the three months ended June 30,
2020 was ($95,000) compared to net income available to common shareholders of
$409,000 for the same period in 2019. Net loss available to common shareholders
for the nine months ended June 30, 2020 was ($2.0) million compared to net loss
available to common shareholders of ($239,000) for the same period in 2019.

Comparison of Financial Condition at June 30, 2020 and September 30, 2019

The Company had total assets of $55.1 million at June 30, 2020, a decrease of
$832,000 from the prior fiscal year end balance of $55.9 million. Accounts
receivable, which totaled $17.9 million at June 30, 2020, decreased by $3.8
million from the prior fiscal year end balance of $21.7 million. The decrease
was primarily due to the collection of receivables from September 30, 2019.
Retainages receivable totaled $1.8 million at June 30, 2020, a decrease of $1.7
million from the prior fiscal year end balance of $3.5 million. The decrease was
due to the timing of retainage billings and receipts compared to September 30,
2019. Contract assets totaled $5.3 million at June 30, 2020, a decrease of $1.4
million from the prior fiscal year end balance of $6.7 million. The decrease was
due to a difference in the timing of project billings at June 30, 2020 compared
to September 30, 2019. The Company had property, plant and equipment of $16.6
million at June 30, 2020, a decrease of $178,000 from the prior fiscal year end
balance of $16.8 million. This decrease was due to depreciation of $3.3 million
and net equipment disposals of $155,000, partially offset by equipment
acquisitions of $3.3 million. Cash and cash equivalents totaled $9.3 million at
June 30, 2020, an increase of $4.7 million from the prior fiscal year end
balance of $4.6 million. The increase was primarily due to the decrease in
accounts receivable and PPP loan proceeds, partially offset by the repayments of
short-term and long-term debt. Prepaid expenses and other totaled $4.3 million
at June 30, 2020, an increase of $1.6 million from the prior fiscal year end
balance of $2.7 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 nine months ended June 30, 2020.



The Company had total liabilities of $33.4 million at June 30, 2020, an increase
of $2.1 million from the prior fiscal year end balance of $31.3 million.
Accounts payable totaled $6.1 million at June 30, 2020, an increase of $3.2
million from the prior fiscal year end balance of $2.9 million. The increase was
due to the timing of accounts payable payments as compared to September 30,
2019. Contract liabilities totaled $5.9 million at June 30, 2020, an increase of
$2.4 million from the prior fiscal year end total of $3.5 million. The increase
was due to a difference in the timing of project billings at June 30, 2020
compared to at September 30, 2019. Long-term debt totaled $12.2 million at
June 30, 2020, an increase of $1.2 million from the prior fiscal year end
balance of $11.0 million. The increase in long-term debt was due to the proceeds
from the PPP Loans, partially offset by scheduled debt payments and the
repayment of Term Note (2019). Lines of credit and short-term borrowings totaled
$1.3 million at June 30, 2020, a decrease of $2.7 million from the prior fiscal
year end balance of $4.0 million. The decrease was primarily due to net line of
credit repayments of $3.5 million, partially offset by net short-term borrowings
related to insurance premiums financed of $800,000. Accrued expenses and other
current liabilities totaled $2.7 million at June 30, 2020, a decrease of
$778,000 from the prior fiscal year end balance of $3.5 million. The decrease
was primarily due to the payment of accrued expenses in the nine months ended
June 30, 2020. Current maturities of long-term debt totaled $3.7 million at
June 30, 2020, a decrease of $750,000 from the prior fiscal year end balance of
$4.4 million. The decrease was primarily due to scheduled debt payments and the
repayment of Term Note (2019), partially offset by the proceeds from the PPP
Loans. Deferred tax liabilities totaled $1.5 million at June 30, 2020, a
decrease of $474,000 from the prior fiscal year end balance of $1.9 million. The
decrease was primarily related to a $459,000 net operating loss carry forward
resulting from the net loss available to common shareholders for the nine months
ended June 30, 2020.


Shareholders' equity was $21.7 million at June 30, 2020, a decrease of $3.0 million from the prior fiscal year end balance of $24.7 million. This decrease was due to the net loss available to common shareholders of $2.0 million, $268,000 in common stock repurchased by the Company and $696,000 in special dividends paid to common shareholders for the nine months ended June 30, 2020.



                                       23




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 was 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.



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. As of
June 30, 2020, the Company had made principal payments of $221,000. 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 for $1.6 million with First Guaranty Bank. The agreement had an
interest rate of 5.0%. The note was paid in full during the second quarter of
fiscal year 2019. The loan was collateralized by the Company's accounts
receivable and equipment.



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 were converted to a five-year term note agreement with
an interest rate of 5.0%. As of June 30, 2020, the Company had borrowed $2.46
million against this note and made principal payments of $1.8 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. As of June 30,
2020, the Company had made principal payments of $428,000. 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 June 30, 2020, the Company had borrowed $5.0
million against this note and made principal payments of $2.7 million. The loan
is collateralized by the equipment purchased under this agreement.



On May 30, 2019, the Company entered into Term Note 2019 with United Bank which
refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a
five-year term note with a fixed interest rate of 5.50%. The purpose of this
note was to finance a specific construction project completed in September 2019.
The loan was collateralized by the Company's equipment. The refinancing
effectively reset the Company's line of credit borrowings to zero as of May 30,
2019 and did not affect the conditions of subsequent borrowings. The Company
paid off Term Note (2019) in January 2020.



On April 15, 2020, Energy Services of America Corporation and subsidiaries C.J.
Hughes Construction Company, Contractors Rental Corporation and Nitro
Construction Services, Inc. entered into separate Paycheck Protection Program
Notes (the "Notes") effective April 7, 2020 with United Bank, Inc. as the lender
("Lender") in an aggregate principal amount of $13,139,100 pursuant to the PPP
(collectively, the "PPP Loan"). In a special meeting held on April 27, 2020, the
Board of Directors (the "Board") of the Company unanimously voted to return $3.3
million of the PPP Loan funds after discussing the financing needs of the
Company and subsidiaries. That left the Company and subsidiaries with $9.8
million in PPP Loans to fund operations. The Company had used all the available
PPP Loan funds as of August 13, 2020 and plans to file for forgiveness in the
Company's fourth quarter of fiscal year 2020.



  24






Operating Line of Credit



On March 21, 2018, the Company entered into a financing agreement ("Operating
Line of Credit (2018)") with United Bank, Inc., ("United Bank"), to provide the
Company with a $15.0 million revolving line of credit. This line had a $12.5
million component and a $2.5 million component, each with separate borrowing
requirements. 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. Operating Line of Credit (2018) expired on
February 28, 2019 but was extended through April 28, 2019. The Company received
a twelve-month extension ("Operating Line of Credit (2019)") through April 28,
2020 on May 7, 2019. On May 12, 2020, the Company received a two-month extension
of the line of credit through June 28, 2020. On July 30, 2020, the Company
received a one-year extension of the line of credit effective June 28, 2020 with
an expiration date of June 28, 2021.



As of the September 30, 2019 borrowing base calculation, the Company could
borrow up to $11.5 million on the line of credit. The Company had borrowed $3.5
million on the line of credit, leaving $8.0 million available. Subsequent to
September 30, 2019, the Company repaid $3.5 million against the line of credit.
As of the June 30, 2020 borrowing base calculation, the Company could borrow up
to $11.5 million on the line of credit. The Company had no line of credit
borrowings, leaving $11.5 million available on the line of credit as of June 30,
2020.



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 $19.0 million to be measured quarterly

2. Minimum traditional debt service coverage of 1.25x 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 2.0x to be measured

semi-annually

5. 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.



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

a rolling twelve-month basis

2. Minimum tangible net worth of $21.0 million to be measured quarterly.

The Company received a waiver for all covenant violations for the $12.5 million component of Operating Line of Credit (2019) at June 30, 2020.



  25





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



The Company's work sometimes requires us to lease various equipment; however,
the Company typically elects to purchase or rent needed equipment before
leasing. 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, the Company could reduce capital outlay requirements for equipment that
may only be needed for short periods of time. As of June 30, 2020, the Company
had no lease commitments.



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 June 30, 2020, 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.



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 June 30, 2020, the Company had
$3.5 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 nine months
ended June 30, 2020. This customer, TransCanada, represented 19.1% of revenues.
The Company had three customers that exceeded 10.0% of receivables at June 30,
2020. These customers, TransCanada, Shimizu North America and Stenco
Construction, represented 26.9%, 17.1% and 13.1%, respectively, of receivables
net of retention at June 30, 2020.



  26






The Company had one customer that exceeded 10.0% of revenues for the nine months
ended June 30, 2019. The customer, Goff Full Stream Interconnect, represented
35.8% of revenues. The Company had two customers that exceeded 10.0% of
receivables at June 30, 2019. These customers, TransCanada and Mountaineer Gas,
represented 25.0%, and 18.1% of receivables net of retention at June 30, 2019,
respectively.



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 $12.5 million in the lawsuit, none of which has been recognized in the
Company's financial statements. Although no trial date has been set, the Company
expects the case to go to trial in fiscal year 2021 barring a mediation
settlement between the parties. Other than described above, at June 30, 2020,
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 June 30, 2020, 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.



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 June 30, 2020, we have
paid approximately $221,000 in principal and approximately $294,000 in interest
since the beginning of the loan. There were no new material related party
transactions entered into during the quarter ended June 30, 2020.



Certain Energy Services subsidiaries routinely engage in transactions in the
normal course of business with each other, including sharing employee benefit
plan coverage, payment for insurance and other expenses on behalf of other
affiliates, and other services incidental to business of each of the affiliates.
All revenue and related expense transactions, as well as the related accounts
payable and accounts receivable have been eliminated in consolidation.



Inflation


Due to relatively low levels of inflation during the three and nine months ended June 30, 2020 and 2019, inflation did not have a significant effect on our results.



  27






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 may include costs and estimated earnings in excess of billings that were
previously separately presented. Contract liabilities may 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.



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




Identify the Contract



The first step in applying Accounting Standards Codification (ASC) 606 is to identify the contract(s) with the customer. To do so, the Company evaluates indicators of the existence of the contract.

Certain conditions must be present for there to be a contract with a customer:

· The parties to the contract have approved the contract (in writing, orally, or

in accordance with other customary business practices) and are committed to

perform their respective obligations.

· The Company can identify each party's rights regarding the goods or services to

   be transferred.



· The Company can identify the payment terms for the goods or services to be

   transferred.




· The contract has commercial substance (that is, the risk, timing, or amount of

   the entity's future cash flows is expected to change as a result of the
   contract).




  28





It is probable that the Company will collect the consideration to which it will
be entitled in exchange for the goods or services that will be transferred to
the customer. In evaluating whether collectability of an amount of consideration
is probable, the Company shall consider only the customer's ability and
intention to pay that amount of consideration when it is due. The amount of
consideration to which the entity will be entitled may be less than the price
stated in the contract if the consideration is variable because the entity may
offer the customer a price concession.



Identify Performance Obligations

Once the Company has determined that it has a contract with a customer as defined in Accounting Standards Codification (ASC) 606, the Company must determine what the performance obligations are. A performance obligation is defined in the ASC Master Glossary as:

A promise in a contract with a customer to transfer to the customer either:



 · A good or service (or a bundle of goods or services) that is distinct;

· A series of distinct goods or services that are substantially the same and that

   have the same pattern of transfer to the customer.



Generally, performance obligations are clearly stated in the contract. The
Company's contracts usually contain one performance obligation that is satisfied
over time because our performance typically creates or enhances an asset that
the customer controls as the asset is created or enhanced.



In assessing whether promises to transfer goods or service to the customer are separately identifiable, a company considers the following factors:

· The entity provides a significant service of integrating the goods or services

with other goods or services promised in the contract into a bundle of goods or

services that represent the combined output or outputs for which the customer

has contracted. In other words, the entity is using the goods or services as

inputs to produce or deliver the combined output or outputs specified by the

   customer.  Combined output or outputs might include more than one phase,
   element, or unit.



· One or more of the goods or services significantly modifies or customizes, or

are significantly modified or customized by, one or more of the other goods or

   services promised in the contract.



· The goods or services are highly interdependent or highly interrelated.

In

other words, each of the goods or services is significantly affected by one or

more of the other goods or services in the contract. For example, in some

cases, two or more goods or services are significantly affected by each other

because the entity would not be able to fulfill its promise by transferring

   each of the goods or services independently.




Under ASC 606, contracts will be required to be combined when certain criteria
are met. The new accounting standard requires contracts be combined prior to
further assessment of the five elements, if one or more of the following
criteria are met:



· Negotiated at the same time with the same customer (or related party) with a

   single commercial objective in mind;



· The consideration to be paid for one contract is dependent on another contract;

· The promised goods and services in the contracts are a single performance

   obligation in accordance with the guidance.




  29






If the promises do not meet the requirements for separating, the performance
obligations shall be combined into one performance obligation.  A contract could
have several performance obligations which in themselves include sets of
promises that are not distinct and cannot be separated.



Management has made the assessment that the company is acting as a principal
rather than as an agent (i.e., the company integrates the materials, labor and
equipment into the deliverables promised to the customer) in all contract
performed by the Company.



Determine Transaction Price



The transaction price is the amount of consideration to which the Company
expects 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).


Variable consideration is defined broadly and can take many forms, such as incentives, penalty provisions, price concessions, rebates or refunds. Consideration is also considered variable if the amount the Company will receive is contingent on a future event occurring or not occurring, even though the amount itself is fixed.

The following are examples of variable considerations within a contract:

· Claims and pending change orders;




 · Unpriced change orders;



· Incentive and penalty provisions within the contract;




 · Shared savings;




 · Price concessions;



· Liquidating damages; and

· Unit price contracts with variable consideration.





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.



Allocate Transaction Price


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.



  30





In accordance with Topic 606, the Company is required to estimate variable consideration when determining the contract transaction price by taking into account all the information (historical, current and forecasted) that is reasonably available and identifying a reasonable number of possible consideration amounts. Management must include an estimate of any variable consideration using either the "expected value" method or the "most likely amount" method.




The "expected value" method estimates variable consideration based on the range
of possible outcomes and the probabilities of each outcome.  This method might
be most appropriate when the Company has a large number of contracts that have
similar characteristics because it will likely have better information about the
probabilities of various outcomes when there are a large number of similar
transactions.



The "most likely amount" method estimates variable consideration based on the
single most likely amount in a range of possible consideration amounts. This
method might be the most predictive if the Company will receive one of only
two
possible amounts.



The method used is not a policy choice and should be applied consistently
throughout a contract, however, is subject to guidance on constraining estimates
of variable consideration. The Company may only include variable consideration
within the transaction price to the extent that it is probable that a
significant reversal of revenue will not occur when the uncertainty is
subsequently resolved. This assessment will require the application of judgment.

While no single factor is determinative, the revenue standard includes factors to consider when assessing whether variable consideration should be constrained.

The following factors may increase the likelihood or the magnitude of a revenue reversal:

· The amount of consideration is highly susceptible to factors outside the

   entity's influence;



· The uncertainty is not expected to be resolved for a long period of time;

· The entity's experience with similar types of contracts is limited;

· The entity has a practice of offering a broad range of price concessions or

   changing the payment terms frequently; and



· The contract has a broad range of possible consideration amounts.




Recognize Revenue



The Company disaggregates revenue based on our operating groups and contract
types as it is the format that is regularly reviewed by management. Our
reportable operating groups are: Petroleum and Gas, Water, Sewer and other
services, and Electrical and Mechanical services. Our contract types are: Lump
Sum, Unit Price, and Cost Plus and Time and Material (T&M).



The Company recognizes revenue as performance obligations are satisfied and
control of the promised good and service is transferred to the customer. For
Lump Sum contracts, revenue is ordinarily recognized over time as control is
transferred to the customers by measuring the progress toward complete
satisfaction of the performance obligation(s) using an input (i.e., "cost to
cost") method. For Unit Price, Cost Plus and T&M contracts, revenue is
ordinarily recognized over time as control is transferred to the customers by
measuring the progress toward satisfaction of the performance
obligation(s) using an output method.



The Company does have certain service and maintenance contracts in which each
customer purchase order is considered its own performance obligation recognized
over time and would be recognized depending on the type of contract mentioned
above. The Company also does certain T&M service work that is generally
completed in a short duration and is recognized at a point in time.



  31






All contract costs, including those associated with affirmative claims, change
orders and back charges, are recorded as incurred and revisions to estimated
total costs are reflected as soon as the obligation to perform is
determined. Contract costs consist of direct costs on contracts, including labor
and materials, amounts payable to subcontractors and outside equipment
providers, direct overhead costs and internal equipment expense (primarily
depreciation, fuel, maintenance and repairs).



The company recognizes revenue, but not profit, on certain uninstalled
materials. Revenue on these uninstalled materials is recognized when the cost is
incurred (when control is transferred), but the associated profit is not
recognized until the end of the project. The costs of uninstalled materials will
be tracked separately within the Company's accounting software.



Pre-contract and bond costs, if required, on projects are generally immaterial
to the total value of the Company's contracts and are expensed when incurred.
Project mobilization costs are also generally immaterial and charged to project
costs as incurred. As a practical expedient, the Company recognizes these
incremental costs as an expense when incurred if the amortization period of the
asset that the entity otherwise would have recognized is one year or less. For
projects expected to last greater than one year, mobilization costs will be
capitalized as incurred and amortized over the expected duration of the project.
For these projects, mobilization costs will be tracked separately in the
Company's accounting software. This includes costs associated with setting up a
project lot or lay-down yard, equipment, tool and supply transportation,
temporary facilities and utilities and worker qualification and safety training.



Contracts may require the Company to warranty that work is performed in
accordance with the contract; however, the warranty is not priced separately,
and the Company does not offer customers an option to purchase a warranty. As of
June 30, 2020, the Company does not have a material amount of costs expensed
that would otherwise be capitalized and amortized.



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.



  32






Contract Assets:



Our contract assets may 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 may 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.



Income Taxes



The Company and all subsidiaries file a consolidated federal and various state
income tax returns on a fiscal year basis. With few exceptions, the Company is
no longer subject to U.S. federal, state, or local income tax examinations for
years ended prior to September 30, 2017.



The Company follows the liability method of accounting for income taxes in
accordance with the Income Taxes topic of the ASC 740. Under this method,
deferred tax assets and liabilities are recorded for future tax consequences of
temporary differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the underlying assets or liabilities are recovered
or settled. A valuation allowance is established to reduce deferred tax assets
if it is more likely than not that a portion of the deferred tax asset will
not
be realized.



U.S. GAAP also prescribes a comprehensive model for how companies should
recognize, measure, present and disclose in their financial statements uncertain
tax positions taken or to be taken on a tax return. This evaluation is a
two-step process.  First, the recognition process determines if it is more
likely than not that a tax position will be sustained based on the merits of the
tax position upon examination by the appropriate taxing authority.  Second, a
measurement process is calculated to determine the amount of benefit/expense to
recognize in the financial statements if a tax position meets the more likely
than not recognition threshold.  The tax position is measured at the greatest
amount of benefit/expense that is more likely than not of being realized upon
ultimate settlement.  Any interest and penalty related to the unrecognized tax
benefits, as the result of recognition of tax obligations resulting from
uncertain tax positions, are included in the provision for income taxes. The
Company had not recognized any uncertain tax positions at June 30, 2020.



Claims


Claims are amounts in excess of the agreed contract price that a contractor
seeks to collect from customers or others for customer-caused delays, errors in
specifications and designs, contract terminations, change orders in dispute or
unapproved as to both scope and price, or other causes of unanticipated
additional costs. The Company records revenue on claims that have a high
probability of success. Revenue from a claim is recorded only to the extent that
contract costs relating to the claim have been incurred.



  33






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 June 30, 2020.
Should the captive insurance company experience severe losses over an extended
period, it could have a detrimental effect 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 customers' access to capital, our customers' willingness or ability to pay,
general economic conditions and the ongoing relationship with the customers.
While most of our customers are large well capitalized companies, should they
experience material changes in their revenues and cash flows or incur other
difficulties and not be able to pay the amounts owed, this could cause reduced
cash flows and losses in excess of our current reserves. At June 30, 2020, the
management review deemed that the allowance for doubtful accounts was adequate.



Operating Leases



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 are 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.


It is the Company's preference to acquire equipment needed for long-term use through purchase, by cash or finance. For equipment needed on a short-term basis, the Company will enter into short-term rental agreements with the equipment provider. The Company believes the adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.

New Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value
Measurement. The amendments in this Update modify the disclosure requirements on
fair value measurements in Topic 820, Fair Value Measurement, based on the
concepts in the Concepts Statement, including the consideration of costs and
benefits. In addition, the amendments eliminate at a minimum from the phrase an
entity shall disclose at a minimum to promote the appropriate exercise of
discretion by entities when considering fair value measurement disclosures and
to clarify that materiality is an appropriate consideration of entities and
their auditors when evaluating disclosure requirements. The amendments on
changes in unrealized gains and losses, the range and weighted average of
significant unobservable inputs used to develop Level III fair value
measurements, and the narrative description of measurement uncertainty should be
applied prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other amendments should be
applied retrospectively to all periods presented upon their effective date.
Early adoption is permitted. An entity is permitted to early adopt any removed
or modified disclosures upon issuance of this Update and delay adoption of the
additional disclosures until their effective date. For all entities, amendments
are effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. The amendments on changes in unrealized gains
and losses, the range and weighted average of significant unobservable inputs
used to develop Level III fair value measurements, and the narrative description
of measurement uncertainty should be applied prospectively for only the most
recent interim or annual period presented in the initial fiscal year of
adoption. All other amendments should be applied retrospectively to all periods
presented upon their effective date. An entity is permitted to early adopt any
removed or modified disclosures upon issuance of ASU No. 2018-13 and delay
adoption of the additional disclosures until their effective date. The Company
is currently evaluating the impact, if any, that adoption will have on its
consolidated financial statements.



  34






Subsequent Events


On July 30, 2020, the Company received a one-year extension on the $15.0 million operating line of credit effective June 28, 2020 with an expiration date of June 28, 2021.



Outlook


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




As a contractor providing electrical, mechanical, HVAC and underground piping
installation and maintenance services to customers in the petroleum, natural
gas, public utilities and power industries, the Company and its subsidiaries are
considered an "Essential Business" in the various states in which it operates.
While it is unknown how long the COVID-19 virus will last and what the complete
financial effect will be to the Company, the coronavirus outbreak will have a
significant effect on the Company's 2020 operating results. As of March 31,
2020, the Company has seen a decline in business as certain existing customers
and potential customers decided to cancel or delay construction projects as a
result of the COVID-19 pandemic. However, during the three months ended June 30,
2020, many of the Company's existing customers had resumed projects that were
affected by the March 2020 shutdowns. As a result, the Company has increased its
employment level of construction personnel as compared to March 31, 2020. Given
the uncertainty regarding the spread of this coronavirus, the related financial
impact on the Company's results of operations, financial position, and liquidity
or capital resources cannot be reasonably estimated at this time.



On July 30, 2020, the Company received a one-year extension on the $15.0 million
operating line of credit effective June 28, 2020 with an expiration date of
June 28, 2021. Prior to receiving the extension, the Company had concerns as to
whether the current eligible borrowing base on the line of credit could fully
fund construction projects. Due to the uncertain access to outside capital, the
parent company and subsidiaries accepted $9.8 million, collectively, in PPP Loan
proceeds. The Company had used all the available PPP Loan funds as of August 13,
2020 and plans to file for forgiveness in the Company's fourth quarter of fiscal
year 2020. The loan may be forgiven so long as employee and compensation levels
of the Company are maintained and 60% of the PPP Loan proceeds are used for
payroll expenses, with the remaining 40% of the PPP Loan proceeds used for other
qualifying expenses. Any portion of the loan that is not forgiven will be
converted to a five-year note with 1.0% interest.



The SBA has announced, in consultation with the Department of the Treasury, that
it will review all loans in excess of $2 million, following the lender's
submission of the borrower's loan forgiveness application. The SBA will be
reviewing a borrower's required certification that current economic uncertainty
makes the PPP loan request necessary to support the ongoing operations of the
Applicant. Borrowers must make this certification in good faith, taking into
account their current business activity and their ability to access other
sources of liquidity sufficient to support their ongoing operations in a manner
that is not significantly detrimental to the business. The SBA has noted it is
unlikely that a public company with substantial market value and access to
capital markets will be able to make the required certification in good faith,
and such a company should be prepared to demonstrate to the SBA, upon request,
the basis for its certification.



  35





The Company believes it meets the SBA's certification requirement based on its
limited access to capital, weakening business operations and small market value
as described above. The Company's shares of common stock do not trade on a
national exchange. However, no assurance can be given as to the outcome of the
SBA's audit of the Company's PPP Loan. The SBA could determine that the Company
does not qualify in whole or in part for loan forgiveness. In addition, it is
unknown what type of penalties could be assessed against the Company if the SBA
disagrees with the Company's certification. The Company could be required to
return its PPP Loan. Any penalties in addition to the potential return of the
PPP Loan could negatively impact the Company's business, financial condition and
results of operations and prospects.



Currently, the Company is receiving bid opportunities from existing and
potentially new customers. However, with potential economic uncertainties, such
as a worsening of the COVID-19 pandemic, the continued depressed prices of oil
and natural gas and environmental regulations, 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 June 30, 2020 was $69.8 million. 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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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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