Company Quick10K Filing
Quick10K
Energy Services of America
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-05-15 Earnings, Exhibits
8-K 2019-05-14 Officers
8-K 2019-02-20 Shareholder Vote
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-12-28 Earnings, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-08-03 Other Events, Exhibits
8-K 2018-02-22 Shareholder Vote
8-K 2018-02-16 Earnings, Exhibits
8-K 2018-01-09 Other Events, Exhibits
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VSEC VSE 298
MAGS Magal Security Systems 116
AXU Alexco Resource 113
QTXB Quantrx Biomedical 0
WLMS Williams Industrial Services Group 0
RVRA Riviera Resources 0
EMG Emergent Capital 0
ESOA 2019-03-31
Part 1. Financial Information
Item 1. Financial Statements (Unaudited):
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Quantitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits
EX-31.1 tv521326_ex31-1.htm
EX-31.2 tv521326_ex31-2.htm
EX-32 tv521326_ex32.htm

Energy Services of America Earnings 2019-03-31

ESOA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv521326_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

(Mark One)

 

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2019

 

Energy Services of America Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   20-4606266
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)

 

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

 

(304) 522-3868

(Registrant’s Telephone Number Including Area Code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES x   NO ¨.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x   NO ¨.

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, or an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer x Smaller reporting company x
       
    Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES ¨  NO x

 

As of May 2, 2019, there were 13,981,475 outstanding shares of the Registrant’s Common Stock.

 

Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class Ticker symbol(s) Name of each exchange on which registered
Common stock, $0.0001 Par Value ESOA OTC QB

 

 

 

 

 

Part 1: Financial Information  
   
Item 1. Financial Statements (Unaudited):  
   
Consolidated Balance Sheets 1
   
Consolidated Statements of Income 2
   
Consolidated Statements of Cash Flows 3
   
Consolidated Statements of Changes in Shareholders’ Equity 4
   
Notes to Unaudited Consolidated Financial Statements 5
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 30
   
Item 4.  Controls and Procedures 30
   
Part II:  Other Information  
   
Item 1.   Legal Proceedings 31
   
Item 1A. Risk Factors 31
   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds 31
   
Item 6.   Exhibits 32
   
Signatures 33

 

 

 

 

Part 1. Financial Information

 

Item 1. Financial Statements (Unaudited):

 

Energy Services of America Corporation

Consolidated Balance Sheets

 

   March 31,   September 30, 
   2019   2018 
   (Unaudited)     
Assets          
Current assets          
Cash and cash equivalents  $2,766,461   $1,065,550 
Accounts receivable-trade   18,438,234    22,227,555 
Allowance for doubtful accounts   (83,885)   (83,885)
Retainages receivable   4,703,085    4,919,351 
Other receivables   46,619    266,179 
Contract assets   13,521,588    5,353,375 
Prepaid expenses and other   5,125,686    4,117,276 
Total current assets   44,517,788    37,865,401 
           
Property, plant and equipment, at cost   49,301,428    48,278,427 
less accumulated depreciation   (32,972,790)   (31,462,438)
Total fixed assets   16,328,638    16,815,989 
           
Total assets  $60,846,426   $54,681,390 
           
Liabilities and shareholders' equity          
Current liabilities          
Current maturities of long-term debt  $2,386,883   $3,221,268 
Lines of credit and short term borrowings   12,102,841    6,069,247 
Accounts payable   8,684,544    6,204,870 
Accrued expenses and other current liabilities   6,339,278    4,301,515 
Contract liabilities   2,525,081    3,261,201 
Income tax payable   -    545,237 
Total current liabilities   32,038,627    23,603,338 
           
Long-term debt, less current maturities   5,257,421    6,468,630 
Deferred income taxes payable   1,121,474    1,328,375 
Total liabilities   38,417,522    31,400,343 
           
Shareholders' equity          
           
Preferred stock, $.0001 par value Authorized 1,000,000 shares, 206 issued at March 31, 2019 and September 30, 2018   -    - 
           
Common stock, $.0001 par value Authorized 50,000,000 shares 14,839,836 issued and 14,023,188 outstanding at March 31, 2019 and 14,839,836 issued and 14,194,517 outstanding at September 30, 2018   1,484    1,484 
           
Treasury stock, 816,648 shares at March 31, 2019 and 645,319 at September 30, 2018   (82)   (65)
           
Additional paid in capital   61,034,918    61,239,470 
Retained earnings (deficit)   (38,607,416)   (37,959,842)
Total shareholders' equity   22,428,904    23,281,047 
           
Total liabilities and shareholders' equity  $60,846,426   $54,681,390 

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

 1 

 

 

Energy Services of America Corporation

Consolidated Statements of Income

Unaudited

 

   Three Months Ended   Three Months Ended   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)

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

 2 

 

 

Energy Services of America Corporation

Consolidated Statements of Cash Flows

Unaudited

 

   Six Months Ended   Six Months Ended 
   March 31,   March 31, 
   2019   2018 
         
Cash flows from operating activities:          
           
Net loss  $(493,074)  $(799,075)
           
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
Depreciation expense   2,062,589    2,114,346 
Gain on sale of equipment   (137,569)   (388,375)
Provision for deferred taxes   (76,050)   (320,599)
Decrease in contracts receivable   3,789,321    10,994,609 
Decrease in retainage receivable   216,266    2,419,213 
Decrease (increase) in other receivables   88,709    (2,459)
Increase in contract assets   (8,168,213)   (346,385)
Increase in prepaid expenses   (1,008,410)   (1,028,102)
Increase (decrease) in accounts payable   2,479,674    (2,634,999)
Increase (decrease) in accrued expenses   2,037,763    (1,778,307)
(Decrease) increase in contract liabilities   (736,120)   494,018 
Decrease in income taxes payable   (545,237)   - 
Net cash (used in) provided by operating activities   (490,351)   8,723,885 
           
Cash flows from investing activities:          
Investment in property and equipment   (1,811,044)   (969,804)
Proceeds from sales of property and equipment   402,909    443,340 
Net cash used in investing activities   (1,408,135)   (526,464)
           
Cash flows from financing activities:          
Preferred dividends paid   (154,500)   (154,500)
Treasury stock purchased by company   (204,569)   - 
Borrowings on lines of credit and short term debt, net of (repayments)   6,033,594    (4,573,780)
Principal payments on long term debt   (2,075,128)   (2,290,410)
Net cash provided by (used in) financing activities   3,599,397    (7,018,690)
           
Increase in cash and cash equivalents   1,700,911    1,178,731 
Cash and cash equivalents beginning of period   1,065,550    1,675,525 
Cash and cash equivalents end of period  $2,766,461   $2,854,256 
           
Supplemental schedule of noncash investing and financing activities:          
Purchases of property & equipment under financing agreements  $29,534   $- 
Insurance premiums financed  $3,159,083   $3,130,859 
Accrued dividends on preferred stock  $77,250   $77,250 
           
Supplemental disclosures of cash flows information:          
Cash paid during the year for:          
Interest  $413,474   $539,552 
Income taxes  $630,670   $21,357 

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

 3 

 

 

Energy Services of America Corporation

Consolidated Statements of Changes in Shareholders’ Equity

For the six months ended March 31, 2019 and 2018

 

                       Total 
   Common Stock   Additional Paid   Retained   Treasury   Shareholders' 
   Shares   Amount   in Capital   Earnings (deficit)   Stock   Equity 
                         
Balance at September 30, 2017   14,239,836   $1,484   $61,289,260   $(40,159,865)  $(60)  $21,130,819 
                               
Net loss   -    -    -    (799,075)   -    (799,075)
                               
Preferred dividends   -    -    -    (154,500)   -    (154,500)
                               
Balance at March 31, 2018   14,239,836   $1,484   $61,289,260   $(41,113,440)  $(60)  $20,177,244 
                               
Balance at September 30, 2018   14,194,517   $1,484   $61,239,470   $(37,959,842)  $(65)  $23,281,047 
                               
Net loss   -    -    -    (493,074)   -    (493,074)
                               
Preferred dividends   -    -    -    (154,500)   -    (154,500)
                               
Treasury stock purchased by company   (171,329)   -    (204,552)   -    (17)   (204,569)
                               
Balance at March 31, 2019   14,023,188   $1,484   $61,034,918   $(38,607,416)  $(82)  $22,428,904 

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

 4 

 

 

ENERGY SERVICES OF AMERICA CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1. BUSINESS AND ORGANIZATION

 

Energy Services of America Corporation (“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.

 

The Company’s stock is quoted under the symbol “ESOA” on the OTC QB market place operated by the OTC Markets Group.

 

Interim Financial Statements

 

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto for the years ended September 30, 2018 and 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 28, 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the interim financial reporting rules and regulations of the SEC. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations. The operating results for the three and six months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year or any other interim period.

 

Principles of Consolidation

 

The consolidated financial statements of Energy Services include the accounts of Energy Services and its wholly owned subsidiary, C.J. Hughes and its subsidiaries, Nitro, Pinnacle, and Contractors Rental. All significant intercompany accounts and transactions have been eliminated in the consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services and C.J. Hughes and C.J. Hughes’ subsidiaries.

 

Reclassifications

 

Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the current year.

 

 5 

 

 

2. 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.

 

   March 31, 2019     
         
           Balance Without 
   As Reported   Adjustments   ASC 606 Adoption 
Assets               
Accounts receivable-trade  $18,438,234   $-   $18,438,234 
Contract assets   13,521,588    -    13,521,588 
Other current assets   12,557,966    -    12,557,966 
Total current assets   44,517,788    -    44,517,788 
Total fixed assets   16,328,638    -    16,328,638 
Total assets  $60,846,426   $-   $60,846,426 

 

           Balance Without 
   As Reported   Adjustments   ASC 606 Adoption 
Liabilities               
Contract liabilities  $2,525,081   $-   $2,525,081 
Other current liabilities   29,513,546    -    29,513,546 
Total current liabilities   32,038,627    -    32,038,627 
Other long-term liabilities   6,378,895    -    6,378,895 
Total liabilities   38,417,522    -    38,417,522 
Retained earnings   (38,607,416)   -    (38,607,416)
Stockholders' equity   22,428,904    -    22,428,904 
Total liabilities and stockholders' equity  $60,846,426   $-   $60,846,426 

 

           Balance Without 
   As Reported   Adjustments   ASC 606 Adoption 
Revenue  $96,069,583   $-   $96,069,583 
loss before income taxes   (613,892)   -    (613,892)
Income tax benefit   (120,818)   -    (120,818)
Net loss   (493,074)   -    (493,074)
Net loss available to common shareholders  $(647,574)  $-   $(647,574)

 

 6 

 

 

3. DISAGGREGATION OF REVENUE

 

We disaggregate our 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 following tables present our disaggregated revenue for the three and six months ended March 31, 2019 and 2018:  

 

Three months ended March 31, 2019

 

   Petroleum &
Gas
   Water, Sewer and
Other
   Electrical and
Mechanical
   Total revenue
from contracts
 
                 
Lump sum contracts  $-   $-   $7,073,312   $7,073,312 
Unit price contracts   28,295,402    (768,333)   -    27,527,069 
Cost plus and T&M contracts   1,163,461    86,801    4,222,830    5,473,092 
Revenue from contracts in progress  $29,458,863   $(681,532)  $11,296,142   $40,073,473 
                     
Lump sum contracts  $-   $-   $3,359,764   $3,359,764 
Unit price contracts   461,433    2,897,005    -    3,358,438 
Cost plus and T&M contracts   29,289    172,899    (38,419)   163,769 
Revenue from completed contracts   490,722    3,069,904    3,321,345    6,881,971 
                     
Total revenue from contracts  $29,949,585   $2,388,372   $14,617,487   $46,955,444 
                     
Earned over time  $29,949,585   $2,388,372   $14,430,794   $46,768,751 
Earned at point in time   -    -    186,693    186,693 
Total revenue from contracts  $29,949,585   $2,388,372   $14,617,487   $46,955,444 

 

Three months ended March 31, 2018

 

   Petroleum &
Gas
   Water, Sewer and
Other
   Electrical and
Mechanical
   Total revenue
from contracts
 
                 
Lump sum contracts  $-   $-  $7,046,412   $7,046,412 
Unit price contracts   1,749,056    1,064,689   -    2,813,745 
Cost plus and T&M contracts   1,039,058    154,369   2,542,709    3,736,136 
Revenue from contracts in progress  $2,788,114   $1,219,058   $9,589,121   $13,596,293 
                     
Lump sum contracts  $-   $-  $3,491,575   $3,491,575 
Unit price contracts   3,263,465    580,103   (816,737)   3,026,831 
Cost plus and T&M contracts   153,459    6,723   2,818,152    2,978,334 
Revenue from completed contracts   3,416,924    586,826    5,492,990    9,496,740 
                     
Total revenue from contracts  $6,205,038   $1,805,884   $15,082,111   $23,093,033 
                     
Earned over time  $6,205,038   $1,805,884  $14,888,364   $22,899,286 
Earned at point in time   -    -   193,747    193,747 
Total revenue from contracts  $6,205,038   $1,805,884   $15,082,111   $23,093,033 

 

 7 

 

 

Six months ended March 31, 2019

 

   Petroleum &
Gas
   Water, Sewer and
Other
   Electrical and
Mechanical
   Total revenue
from contracts
 
                 
Lump sum contracts  $-   $-   $14,410,022   $14,410,022 
Unit price contracts   54,645,570    2,303,710    -    56,949,280 
Cost plus and T&M contracts   2,824,471    461,125    8,771,509    12,057,105 
Revenue from contracts in progress  $57,470,041   $2,764,835   $23,181,531   $83,416,407 
                     
Lump sum contracts  $-   $-   $4,239,742   $4,239,742 
Unit price contracts   2,926,568    3,295,919    -    6,222,487 
Cost plus and T&M contracts   463,339    182,741    1,544,867    2,190,947 
Revenue from completed contracts   3,389,907    3,478,660    5,784,609    12,653,176 
                     
Total revenue from contracts  $60,859,948   $6,243,495   $28,966,140   $96,069,583 
                     
Earned over time  $60,859,948   $6,243,495   $28,512,418   $95,615,861 
Earned at point in time   -    -    453,722    453,722 
Total revenue from contracts  $60,859,948   $6,243,495   $28,966,140   $96,069,583 

 

Six months ended March 31, 2018

 

   Petroleum &
Gas
   Water, Sewer and
Other
   Electrical and
Mechanical
   Total revenue
from contracts
 
                 
Lump sum contracts  $-   $-   $17,702,601   $17,702,601 
Unit price contracts   8,453,125    2,760,541    -    11,213,666 
Cost plus and T&M contracts   2,838,478    183,342    6,211,544    9,233,364 
Revenue from contracts in progress  $11,291,603   $2,943,883   $23,914,145   $38,149,631 
                     
Lump sum contracts  $-   $-   $5,487,822   $5,487,822 
Unit price contracts   6,894,839    1,480,652    -    8,375,491 
Cost plus and T&M contracts   802,817    6,723    2,818,152    3,627,692 
Revenue from completed contracts   7,697,656    1,487,375    8,305,974    17,491,005 
                     
Total revenue from contracts  $18,989,259   $4,431,258   $32,220,119   $55,640,636 
                     
Earned over time  $18,989,259   $4,431,258   $31,785,412   $55,205,929 
Earned at point in time   -    -    434,707    434,707 
Total revenue from contracts  $18,989,259   $4,431,258   $32,220,119   $55,640,636 

 

 8 

 

 

4. CONTRACT BALANCES

 

Accounts receivable, which are included in current assets on the Consolidated Balance Sheets, totaled $18.4 million at March 31, 2019, a $3.8 million decrease from $22.2 million at September 30, 2018. The decrease was mainly due to timing of billings and receipts. Contract assets, which are included in current assets on the Consolidated Balance Sheets, totaled $13.5 million at March 31, 2019, a $8.2 million increase from $5.4 million at September 30, 2018. This was due to an increase in costs and estimated earnings in excess of billings on uncompleted projects. Contract liabilities, which are included in current liabilities on the Consolidated Balance Sheets, totaled $2.5 million at March 31, 2019, a $736,000 decrease from $3.3 million at September 30, 2018. This was due to a decrease in billings in excess of costs and estimated earnings on uncompleted projects.

 

The Company’s accounts receivable consists of amounts that have been billed to customers. Collateral is generally not required. A majority of the Company’s contracts have monthly billing terms and payment terms within 30 to 45 days after invoices have been issued. The Company attempts to negotiate two-week billing terms and 15-day payment terms on larger projects. The timing of billings to customers may generate contract assets or contract liabilities.

 

During the six months ended March 31, 2019, we recognized revenue of $2.0 million that was included in the contract liability balance at September 30, 2018.

 

Accounts receivable, contract assets and contract liabilities consisted of the following:

 

   September 30, 2018   March 31, 2019   Change 
             
Accounts receivable-trade  $22,227,555   $18,438,234   $(3,789,321)
                
Contract assets               
Cost and estimated eanings in excess of billings  $5,353,375   $13,521,588   $8,168,213 
                
Contract liabilites               
Billings in excess of cost and estimated earnings  $3,261,201   $2,525,081   $(736,120)

 

 9 

 

 

5. PERFORMANCE OBLIGATIONS

 

The Company provides construction services that can be classified into several groups: petroleum and gas, water, sewer and other, and electrical and mechanical services. Generally, our contracts 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. We recognize revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. 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. Under the cost to cost method, costs incurred to-date are generally the best depiction of transfer of control. 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, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs).

 

The Company’s accounts receivable consists of amounts that have billed to customers. Collateral is generally not required. A majority of the Company’s contracts have monthly billing terms and payment terms within 30 to 45 days after invoices have been issued. The Company attempts to negotiate two-week billing terms and 15-day payment terms on larger projects. The timing of billings to customers may generate contract assets or contract liabilities. Certain construction contracts include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and are therefore not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the customer. We have determined there are no significant financing components in our contracts during the three and six months ended March 31, 2019.

 

During the three and six months ended March 31, 2019, we recognized revenue of $518,000 and $370,000, respectively, as a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2018. The changes in contract transaction price were from items such as changes in projected profit, executed or estimated change orders, and unresolved contract modifications and claims.

 

The Company does not sell warranties for its construction services. At March 31, 2019, the Company had $20.7 million in remaining unsatisfied performance obligations, in which revenue is expected to be recognized in less than twelve months.

 

 10 

 

 

6. UNCOMPLETED CONTRACTS

 

Costs, estimated earnings, and billings on uncompleted contracts as of March 31, 2019 and September 30, 2018 are summarized as follows:

 

   March 31,   September 30, 
   2019   2018 
Costs incurred on contracts in progress  $129,885,573   $154,793,209 
Estimated earnings, net of estimated losses   12,375,997    11,687,859 
    142,261,570    166,481,068 
Less billings to date   131,265,063    164,388,894 
   $10,996,507   $2,092,174 
           
Costs and estimated earnings in excess of billed on uncompleted contracts  $13,521,588   $5,353,375 
           
Less billings in excess of costs and estimated earnings on uncompleted contracts   2,525,081    3,261,201 
           
   $10,996,507   $2,092,174 

 

Backlog at March 31, 2019 and September 30, 2018 was $48.0 million and $71.1 million, respectively. The March 31, 2019 backlog does not include $15.0 million in projects that were subsequently awarded.

 

 11 

 

 

7. FAIR VALUE MEASUREMENTS

 

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

 

Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

As noted above, there is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 — Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.

 

Level 2 — Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

 

Level 3 — Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The carrying amount for borrowings under the Company’s revolving credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Company’s long term fixed-rate debt to unrelated parties was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates for bank loans with similar terms and maturities. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $8.7 million at March 31, 2019 was $8.6 million. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $10.3 million at September 30, 2018 was $10.2 million.

 

All receivables and payables are carried at net realizable value which approximates fair value because of their short duration to maturity.

 

 12 

 

 

8. EARNINGS PER SHARE

 

The amounts used to compute the earnings per share for the three and six months ended March 31, 2019 and 2018 are summarized below.

 

   Three Months Ended   Three Months Ended   Six Months Ended   Six Months Ended 
   March 31,   March 31,   March 31,   March 31, 
   2019   2018   2019   2018 
                 
Net loss  $(1,124,458)  $(947,575)  $(493,074)  $(799,075)
                     
Dividends on preferred stock   77,250    77,250    154,500    154,500 
                     
Loss available to common shareholders  $(1,201,708)  $(1,024,825)  $(647,574)  $(953,575)
                     
Weighted average shares outstanding   14,060,456    14,239,836    14,102,117    14,239,836 
                     
Weighted average shares outstanding-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 available to common shareholders-diluted  $(0.085)  $(0.072)  $(0.046)  $(0.067)

 

9. INCOME TAXES

 

The components of income taxes are as follows:

 

   Six months ended March 31, 
   2019   2018 
Federal          
Current  $(34,942)  $(152,484)
Deferred   (59,319)   (63,045)
Total   (94,261)   (215,529)
           
State          
Current  $(9,826)  $(63,716)
Deferred   (16,731)   23,443 
Total   (26,557)   (40,273)
           
Total income tax benefit  $(120,818)  $(255,802)

 

 13 

 

 

The income tax effects of temporary differences giving rise to the deferred tax assets and liabilities are as follows:

 

   March 31,   September 30, 
   2019   2018 
Deferred income tax liabilities          
Long-term          
Property and equipment  $(1,884,522)  $(2,023,641)
Other   19,805    (4,639)
Total deferred income tax liabilities  $(1,864,717)  $(2,028,280)
           
Deferred income tax assets          
Other   612,392    699,905 
Net operating loss carryforward   130,851    - 
Total deferred income tax assets   743,243    699,905 
Total net deferred income tax liabilities  $(1,121,474)  $(1,328,375)

 

The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. Consequent to the passage of the Act, the Company’s deferred tax assets and liabilities were adjusted for the effects of the Act’s changes in the tax law and rates. For the year ended September 30, 2018, the Company realized approximately $588,000 in income tax benefits recorded to income tax expense to reflect the impact of the Act’s rate change on the Company’s net deferred tax assets.

 

The Company does not believe that it has any unrecognized tax benefits included in its consolidated financial statements that require recognition. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in general and administrative expenses.

 

 14 

 

 

10. SHORT-TERM AND LONG-TERM DEBT

 

Short-term debt consists of the following:

 

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.

 

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.

 

 15 

 

 

The Company also finances insurance policy premiums on a short-term basis through a financing company. These insurance policies included: workers’ compensation, general liability, automobile, umbrella, and equipment policies. It is typical that the Company makes a down payment in January and finances the remaining premium amount over nine or ten monthly payments. In January 2019, The Company financed $3.2 million in insurance premium policies and had an outstanding balance of $2.1 million at March 31, 2019.

 

A summary of short-term and long-term debt as of March 31, 2019 and September 30, 2018 is as follows:

 

   March 31,   September 30, 
   2019   2018 
         
Line of credit payable to bank, monthly interest at 5.50%, final payment due by April 28, 2020.  $10,000,000   $5,500,000 
           
Notes payable to finance companies, due in monthly installments  totaling $62,887 including interest ranging from 0.0% to 7.62%, final payments due April 2019 through March 2024, secured by equipment.   999,979    1,332,993 
           
Note payable to finance company for insurance premiums financed, due in monthly installments  totaling $267,677, including interest rate at 2.77%, final payment due November 2019.   2,102,841    569,247 
           
Notes payable to bank, due in monthly installments totaling  $7,799, including interest at 4.82%, final  payment due November 2034 secured by  building and property.   1,033,472    1,054,248 
           
Notes payable to bank, due in monthly installments totaling  $12,028, including interest at 5.0%, final  payment due November 2025 secured by  building and property.   802,220    851,768 
           
Notes payable to bank, due in monthly installments totaling  $172,473, including interest at 6.5%, final  payment due February 2019 secured by  equipment.   -    702,097 
           
Notes payable to bank, due in monthly installments totaling  $30,914, including interest at 5.0%, final  payment due February 2019 secured by  equipment.   -    154,116 
           
Notes payable to bank, due in monthly installments totaling  $98,865, including interest at 4.99%, final  payment due September 2022 secured by  equipment.   3,548,394    4,045,025 
           
Notes payable to bank, due in monthly installments totaling  $46,482, including interest at 5.00%, final  payment due September 2021 secured by  equipment.   1,260,239    1,549,651 
           
Total debt   19,747,145    15,759,145 
           
Less current maturities   14,489,724    9,290,515 
           
Total long term debt  $5,257,421   $6,468,630 

 

 16 

 

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the “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 Stream

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.

 

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)

 

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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

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

 

ITEM 3. Quantitative and Quantitative Disclosures About Market Risk

 

Not required for a smaller reporting company.

 

ITEM 4. Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services of America Corporation files or submits under the Securities Exchange Act of 1934, is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

There has been no change in Energy Services of America Corporation’s internal control over financial reporting during Energy Services of America Corporation’s second quarter of fiscal year 2019 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.

 

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PART II

 

OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

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.

 

ITEM 1A. Risk Factors

 

Please see the information disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on December 28, 2018. There have been no material changes to the risk factors since the filing of the Annual Report on Form 10-K.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

(a) There have been no unregistered sales of equity securities during the period covered by the report.

 

(b) None.

 

(c) The repurchases of Energy Services of America Corporation’s shares of its common stock during the six months ended March 31, 2019 was as follows:

 

Period  Total Number of
Shares Purchased
   Average Price
Paid Per Share
   Value of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
   Maximum Number of
Shares That May Yet
Be Purchased Under
the Plans or Programs
 
                 
October 1, 2018-October 31, 2018   75,669   $1.22   $92,355    1,302,996 
November 1, 2018-November 30, 2018   31,999    1.23    39,201    1,270,997 
December 1, 2018-December 31, 2018   15,678    1.18    18,443    1,255,319 
January 1, 2019-January 31, 2019   9,771    1.09    10,625    1,245,548 
February 1, 2019-February 28, 2019   9,791    1.18    11,529    1,235,757 
March 1, 2019-March 31, 2019   28,421    1.14    32,417    1,207,336 
Total   171,329   $1.19   $204,569      

 

(1) On August 3, 2018, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would repurchase up to 10%, or approximately 1,423,984 shares, of the Company's issued and outstanding stock.  The repurchase program will expire on August 15, 2019.

 

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ITEM 6. Exhibits

 

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    ENERGY SERVICES OF AMERICA CORPORATION
       
Date: May 15, 2019   By: /s/ Douglas V. Reynolds
      Douglas V. Reynolds
      Chief Executive Officer
       
Date: May 15, 2019   By: /s/ Charles P. Crimmel
      Charles P. Crimmel
      Chief Financial Officer

 

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