Energy Services of America CORP - FORM 10-Q

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EX-32 - EXHIBIT 32 - Energy Services of America CORP	tv500591_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Energy Services of America CORP	tv500591_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Energy Services of America CORP	tv500591_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2018

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange act of 1934

For the transition period from _______________ to _________________

Commission File Number: 001-32998

Energy Services of America Corporation

(Exact Name of Registrant as Specified in Its Charter)

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

75 West 3^rd 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨.

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	¨	(Do not check if a smaller reporting company)

		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 August 1, 2018, there were 14,239,836 outstanding shares of the Registrant’s Common Stock.

Part 1: Financial Information

Item 1. Financial Statements (Unaudited):

Consolidated Balance Sheets	1

Consolidated Statements of Income	2

Consolidated Statements of Cash Flows	3

Consolidated Statements of Changes in Shareholders’ Equity	4

Notes to Unaudited Consolidated Financial Statements	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3. Quantitative and Qualitative Disclosures About Market Risk	28

Item 4. Controls and Procedures	28

Part II: Other Information

Item 1. Legal Proceedings	28

Item 1A. Risk Factors	28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 6. Exhibits	29

Signatures	30

Part 1. Financial Information

Item 1. Financial Statements (Unaudited):

Energy Services of America Corporation

Consolidated Balance Sheets

	June 30,			September 30,
	2018			2017
	(Unaudited)
Assets

Current assets
Cash and cash equivalents	$	4,340,195		$	1,663,222
Accounts receivable-trade		9,714,285			23,140,272
Allowance for doubtful accounts		(110,578	)		(108,200	)
Retainages receivable		1,788,806			3,773,892
Other receivables		399,252			96,242
Costs and estimated earnings in excess of billings on uncompleted contracts		7,072,826			5,350,884
Prepaid expenses and other		4,299,205			4,044,731
Assets of discontinued operations		12,303			12,303
Total current assets		27,516,294			37,973,346

Property, plant and equipment, at cost		47,971,458			48,436,122
less accumulated depreciation		(30,634,640	)		(29,243,614	)
Total fixed assets		17,336,818			19,192,508

Long-term notes receivable		137,281			137,281

Total assets	$	44,990,393		$	57,303,135

Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt	$	3,791,374		$	4,562,918
Lines of credit and short term borrowings		3,923,118			9,432,968
Accounts payable		3,887,393			5,522,143
Accrued expenses and other current liabilities		2,857,192			4,302,611
Billings in excess of costs and estimated earnings on uncompleted contracts		1,877,960			2,173,965
Income tax payable		92,310			-
Liabilities of discontinued operations		28,671			28,671
Total current liabilities		16,458,018			26,023,276

Long-term debt, less current maturities		7,026,871			9,702,483
Deferred income taxes payable		309,243			446,557
Total liabilities		23,794,132			36,172,316

Shareholders' equity

Preferred stock, $.0001 par value
Authorized 1,000,000 shares, 206 issued for June 30, 2018 and September 30, 2017		-			-
Common stock, $.0001 par value
Authorized 50,000,000 shares 14,839,836 issued and 14,239,836 outstanding for June 30, 2018 shares and September 30, 2017		1,484			1,484

Treasury stock, 600,000 shares at June 30, 2018 and September 30, 2017		(60	)		(60	)

Additional paid in capital		61,289,260			61,289,260
Retained earnings (deficit)		(40,094,423	)		(40,159,865	)
Total shareholders' equity		21,196,261			21,130,819

Total liabilities and shareholders' equity	$	44,990,393		$	57,303,135

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Income

Unaudited

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	2018			2017			2018			2017

Revenue	$	29,549,659		$	35,686,215		$	85,190,295		$	98,554,692

Cost of revenues		26,166,268			37,124,756			78,775,352			93,796,294

Gross profit (loss)		3,383,391			(1,438,541	)		6,414,943			4,758,398

Selling and administrative expenses		1,773,304			1,600,454			5,738,751			5,735,342
Income (loss) from operations		1,610,087			(3,038,995	)		676,192			(976,944	)

Other income (expense)
Interest income		-			-			132,342			-
Other nonoperating income (expense)		(55,016	)		5,112			(157,163	)		(106,548	)
Interest expense		(190,781	)		(183,583	)		(730,333	)		(558,098	)
Gain on sale of equipment		7,572			26,431			395,947			95,262
		(238,225	)		(152,040	)		(359,207	)		(569,384	)

Income (loss) before income taxes		1,371,862			(3,191,035	)		316,985			(1,546,328	)

Income tax expense (benefit)		275,595			(1,323,887	)		19,793			(605,298	)

Net income (loss)		1,096,267			(1,867,148	)		297,192			(941,030	)

Dividends on preferred stock		77,250			77,250			231,750			231,750

Net income (loss) available to common shareholders	$	1,019,017		$	(1,944,398	)	$	65,442		$	(1,172,780	)

Weighted average shares outstanding-basic		14,239,836			14,239,836			14,239,836			14,239,836

Weighted average shares-diluted		17,673,169			14,239,836			17,673,169			14,239,836
Earnings (loss) per share from continuing operations available to common shareholders	$	0.072		$	(0.137	)	$	0.005		$	(0.082	)

Earnings (loss) per share from continuing operations-diluted available to common shareholders	$	0.058		$	(0.137	)	$	0.004		$	(0.082	)

Earnings (loss) per share available to common shareholders	$	0.072		$	(0.137	)	$	0.005		$	(0.082	)

Earnings (loss) per share-diluted available to common shareholders	$	0.058		$	(0.137	)	$	0.004		$	(0.082	)

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Cash Flows

Unaudited

	Nine Months Ended			Nine Months Ended
	June 30,			June 30,
	2018			2017
Cash flows from operating activities:

Net income (loss)	$	297,192		$	(941,030	)

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense		3,187,733			2,286,618
Gain on sale/disposal of equipment		(395,947	)		(95,262	)
Provision for deferred taxes		(137,314	)		(603,999	)
Decrease in contracts receivable		13,428,365			6,733,586
Decrease in retainage receivable		1,985,086			81,493
(Increase) decrease in other receivables		(303,010	)		6,537
(Increase) decrease in cost and estimated earnings in excess of billings on uncompleted contracts		(1,721,942	)		1,016,914
Increase in prepaid expenses		(254,474	)		(2,284,185	)
(Decrease) increase in accounts payable		(1,634,750	)		2,665,594
Decrease in accrued expenses		(1,368,169	)		(1,619,451	)
Decrease in billings in excess of cost and estimated earnings on uncompleted contracts		(296,005	)		(887,102	)
Increase (decrease) in income taxes payable		92,310			(1,076,440	)
Net cash provided by operating activities		12,879,075			5,283,273

Cash flows from investing activities:
Investment in property and equipment		(1,409,423	)		(7,144,371	)
Proceeds from sales of property and equipment		473,327			213,771
Net cash used in investing activities		(936,096	)		(6,930,600	)

Cash flows from financing activities:
Borrowings on lines of credit and short term debt, net of (repayments)		(5,509,850	)		5,048,639
Dividends on common stock		-			(696,117	)
Preferred dividends paid		(309,000	)		(309,000	)
Principal payments on long term debt		(3,447,156	)		(2,176,401	)
Net cash provided by (used in) financing activities		(9,266,006	)		1,867,121

Increase in cash and cash equivalents		2,676,973			219,794
Cash beginning of period		1,675,525			3,828,093
Cash end of period	$	4,352,498		$	4,047,887

Supplemental schedule of noncash investing and financing activities:
Purchases of property & equipment under financing agreements	$	-		$	705,265
Insurance Premiums Financed	$	3,130,859		$	3,524,350
Accrued dividends on preferred stock	$	231,750		$	231,750

Supplemental disclosures of cash flows information:
Cash paid during the year for:
Interest	$	730,333		$	558,098
Income taxes	$	21,357		$	1,344,568

The Consolidated Statements of Cash Flows includes the discontinued operation, S.T. Pipeline.

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Changes in Shareholders’ Equity

For the nine months ended June 30, 2018 and 2017

	Common Stock				Additional Paid		Retained			Treasury			Total Shareholders'
	Shares		Amount		in Capital		Earnings (deficit)			Stock			Equity

Balance at September 30, 2016		14,239,836	$	1,484	$	61,289,260	$	(38,766,992	)	$	(60	)	$	22,523,692

Net loss		-		-		-		(941,030	)		-			(941,030	)

Accrued preferred dividends		-		-		-		(231,750	)		-			(231,750	)

Dividends on common stock ($0.05 per share on 13,922,336 shares; 317,500 common shares are part of preferred units and were not eligible for the common dividend)		-		-		-		(696,117	)		-			(696,117	)

Balance at June 30, 2017		14,239,836	$	1,484	$	61,289,260	$	(40,635,889	)	$	(60	)	$	20,654,795

Balance at September 30, 2017		14,239,836	$	1,484	$	61,289,260	$	(40,159,865	)	$	(60	)	$	21,130,819

Net income		-		-		-		297,192			-			297,192

Accrued preferred dividends		-		-		-		(231,750	)		-			(231,750	)

Balance at June 30, 2018		14,239,836	$	1,484	$	61,289,260	$	(40,094,423	)	$	(60	)	$	21,196,261

The Accompanying Notes are an Integral Part of These Financial Statements

ENERGY SERVICES OF AMERICA CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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. On August 15, 2008, Energy Services completed the acquisitions of S.T. Pipeline, Inc. (“S.T. Pipeline”) and C.J. Hughes Construction Company, Inc. (“C.J. Hughes”).

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. S.T. Pipeline engaged in the construction of natural gas pipelines for utility companies in various states, mostly in the mid-Atlantic area of the country. On May 14, 2013, the Company liquidated the operations of S.T. Pipeline and realized $1.9 million from the sale of assets. The financial position and results of operations of S.T. Pipeline have been presented as discontinued operations in the accompanying financial statements for all presented periods.

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, 2017 and 2016 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 15, 2017. 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 nine months ended June 30, 2018 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. S.T. Pipeline has been shown as discontinued operations for the three and nine months ended June 30, 2018 and 2017. 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.

UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts as of June 30, 2018 and September 30, 2017 are summarized as follows:

	June 30, 2018		September 30, 2017

Costs incurred on uncompleted contracts	$	129,469,592	$	143,738,101

Estimated earnings, net of estimated losses		7,690,952		9,573,781
		137,160,544		153,311,882

Less billing to date		131,965,678		150,134,963
	$	5,194,866	$	3,176,919

Costs and estimated earnings in excess of billings on uncompleted contracts	$	7,072,826	$	5,350,884

Less billings in excess of costs and estimated earnings on uncompleted contracts		1,877,960		2,173,965
	$	5,194,866	$	3,176,919

Backlog at June 30, 2018 and September 30, 2017 was $84.4 million and $62.5 million, respectively. In July 2018, the Company was awarded an additional $12.0 million in pipeline projects. These projects are not included in the June 30, 2018 backlog.

CLAIMS

The Company does not have any claims recorded as of June 30, 2018. Claims receivable is a component of cost and estimated earnings in excess of billing.

FAIR VALUE MEASUREMENTS

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

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

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

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

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

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

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

The carrying amount for borrowings under the Company’s revolving credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Company’s long term fixed-rate debt to unrelated parties was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates for bank loans with similar terms and maturities. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $11.2 million at June 30, 2018 was $11.1 million.

The Company uses fair value measurements on a non-recurring basis in its assessment of goodwill and long-lived assets held and used. In accordance with its annual impairment test during the quarter ended September 30, 2012, the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet. Refer to Note 4, Goodwill and Intangible Assets, of the Company’s Annual Report on Form 10-K for the year ended September 30, 2017 for further information.

DISCONTINUED OPERATIONS

Due to organizational changes and operating losses incurred in fiscal year 2012, the Company decided to discontinue the operations of its wholly owned subsidiary S.T Pipeline. On May 14, 2013, the Company liquidated the operations of S.T. Pipeline and realized $1.9 million from the sale.

The Company did not have income from discontinued operations for the three and nine months ended June 30, 2018 and 2017.

The following table shows the components of assets and liabilities that are classified as discontinued operations in the Company’s consolidated balance sheets at June 30, 2018 and September 30, 2017.

	June 30,			September 30,
	2018			2017

Cash	$	12,303		$	12,303
Assets of discontinued operations-current		12,303			12,303
Total assets of discontinued operations		12,303			12,303

Accrued expenses and other current liabilities		28,671			28,671
Liabilities of discontinued operations-current		28,671			28,671
Total liabilities of discontinued operations		28,671			28,671

Net liabilities	$	(16,368	)	$	(16,368	)

The $29,000 in accrued expenses and other current liabilities at June 30, 2018 represents a reserve for any unexpected expenses that may be incurred by the discontinued operation. As of June 30, 2018, the Company had paid all debts known to exist to the unsecured creditors of the discontinued operation.

EARNINGS PER SHARE

The amounts used to compute the earnings per share for the three and nine months ended June 30, 2018 and 2017 are summarized below.

	Three Months Ended		Three Months Ended			Nine Months Ended		Nine Months Ended
	June 30,		June 30,			June 30,		June 30,
	2018		2017			2018		2017

Income (loss) from continuing operations	$	1,096,267	$	(1,867,148	)	$	297,192	$	(941,030	)

Dividends on preferred stock		77,250		77,250			231,750		231,750

Income (loss) available to common shareholders-continuing operations	$	1,019,017	$	(1,944,398	)	$	65,442	$	(1,172,780	)

Weighted average shares outstanding		14,239,836		14,239,836			14,239,836		14,239,836

Weighted average shares outstanding-diluted		17,673,169		14,239,836			17,673,169		14,239,836

Earnings (loss) per share from continuing operations available to common shareholders	$	0.072	$	(0.137	)	$	0.005	$	(0.082	)

Earnings (loss) per share from continuing operations available to common shareholders-diluted	$	0.058	$	(0.137	)	$	0.004	$	(0.082	)

Income from discontinued operations	$	-	$	-		$	-	$	-

Weighted average shares outstanding		14,239,836		14,239,836			14,239,836		14,239,836

Weighted average shares outstanding-diluted		17,673,169		14,239,836			17,673,169		14,239,836

Earnings per share from discontinued operations	$	-	$	-		$	-	$	-

Earnings per share from discontinued operations-diluted	$	-	$	-		$	-	$	-

Net income (loss)	$	1,096,267	$	(1,867,148	)	$	297,192	$	(941,030	)

Dividends on preferred stock		77,250		77,250			231,750		231,750

Net income (loss) available to common shareholders	$	1,019,017	$	(1,944,398	)	$	65,442	$	(1,172,780	)

Earnings (loss) per share available to common shareholders	$	0.072	$	(0.137	)	$	0.005	$	(0.082	)

Earnings (loss) per share available to common shareholders-diluted	$	0.058	$	(0.137	)	$	0.004	$	(0.082	)

INCOME TAXES

The components of income taxes are as follows:

	Nine months ended June 30,
	2018			2017

Federal
Current	$	292,008		$	(472,296	)
Deferred		(267,997	)		(43,155	)
Total		24,011			(515,451	)

State
Current		22,532			(80,842	)
Deferred		(26,750	)		(9,005	)
Total		(4,218	)		(89,847	)

Total income tax expense (benefit)	$	19,793		$	(605,298	)

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

	June 30,			September 30,
	2018			2017

Deferred income tax assets

Long-term
Net operating loss carryforward	$	23,171		$	180,605
Other deferred assets		872,137			1,213,461
Total deferred income tax assets		895,308			1,394,066

Continuing operations		895,308			1,394,066
Total deferred income tax assets		895,308			1,394,066

Deferred income tax liabilities

Long-term
Property and equipment	$	1,226,924		$	1,857,088
Other deferred liabilities		(22,373	)		(16,465	)
Total deferred income tax liabilities-LT		1,204,551			1,840,623

Continuing operations		1,204,551			1,840,623
Total deferred income tax liabilities-LT		1,204,551			1,840,623

Net deferred income tax liabilities	$	309,243		$	446,557

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.

SHORT-TERM AND LONG-TERM DEBT

A summary of short-term and long-term debt as of June 30, 2018 and September 30, 2017 is as follows:

	June 30,		September 30,
	2018		2017

Line of credit payable to bank, monthly interest at 4.99%, final payment due by February 27, 2018.	$	2,500,000	$	9,112,572
Renewal signed on March 21, 2018 to extend until February 27, 2019.

Notes payable to finance companies, due in monthly installments totaling $64,859 including interest ranging from 1.00% to 10.09%, final payments due through June 2018 to June 2019, secured by equipment.		1,478,028		2,042,524

Note payable to finance company for insurance premiums financed, due in monthly installments totaling $288,581 in 2018 and $320,396 in 2017, including interest rate at 2.77%, final payment due October 2018.		1,423,118		320,396

Notes payable to bank, due in monthly installments totaling $7,799, including interest at 4.75%, final payment due November 2034 secured by building and property.		1,061,049		1,094,631

Notes payable to bank, due in monthly installments totaling $11,506, including interest at 5.00%, final payment due November 2025 secured by building and property.		876,161		949,481

Notes payable to bank, due in monthly installments totaling $172,473, including interest at 6.50%, final payment due February 2019 secured by equipment.		1,202,670		2,655,515

Notes payable to bank, due in monthly installments totaling $30,914, including interest at 5.00%, final payment due February 2019 secured by equipment.		244,117		507,507

Notes payable to bank, due in monthly installments totaling $94,333, including interest at 4.99%, final payment due September 2022 secured by equipment.		4,288,006		5,000,000

Notes payable to bank, due in monthly installments totaling $46,405, including interest at 5.00%, final payment due September 2021 secured by equipment.		1,668,214		2,015,743

Total debt		14,741,363		23,698,369

Less current maturities		7,714,492		13,995,886

Total long term debt	$	7,026,871	$	9,702,483

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

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. S.T. Pipeline engaged in the construction of natural gas pipelines for utility companies in various states, mostly in the mid-Atlantic area of the country. On May 14, 2013, the Company liquidated the operations of S.T. Pipeline and realized $1.9 million from the sale of assets. The financial position and results of operations of S.T. Pipeline have been presented as discontinued operations in the accompanying financial statements for all presented periods.

Energy Services is engaged in providing contracting services for energy related companies. Currently Energy Services primarily services the gas, petroleum, power, chemical and automotive industries, though it does some other incidental work such as water and sewer projects. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as build and replace gas line services to individual customers of the various utility companies.

The Company’s consolidated operating revenues for the three months ended June 30, 2018 were $29.5 million of which 53.9% was attributable to gas & petroleum work, 39.1% to electrical and mechanical services, and 7.0% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the nine months ended June 30, 2018 were $85.2 million of which 51.4% was attributable to electrical and mechanical services, 41.1% to gas & petroleum work, and 7.5% to water and sewer installations and other ancillary services.

The Company’s consolidated operating revenues for the three months ended June 30, 2017 were $35.7 million of which 61.8% was attributable to gas & petroleum work, 32.6% to electrical and mechanical services, and 5.6% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the nine months ended June 30, 2017 were $98.6 million of which 55.6% was attributable to gas & petroleum work, 37.8% to electrical and mechanical services, and 6.6% to water and sewer installations and other ancillary services.

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

Mountaineer Gas

TransCanada Corporation

Columbia Gas Distribution

Marathon Petroleum

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Dow Chemical

Kentucky American Water

Various state, county and municipal public service districts.

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.

Forbearance Agreement and Financing Arrangements

On November 28, 2012, the Company entered into a Forbearance Agreement with United Bank, Inc. (West Virginia), Summit Community Bank (West Virginia), and First Guaranty Bank (Louisiana) related to our revolving line of credit and term debt as reported in the Company’s November 29, 2012 Form 8-K filing. The Forbearance Agreement, among other things, required the Company to close S.T. Pipeline and dispose of its assets. The Company was also required to prepare recommendations relating to the on-going operations of Nitro, C.J. Hughes, and Contractors Rental, including refinancing, sale or liquidation of the companies by May 31, 2013.

On January 31, 2014, the Company entered into a financing arrangement (“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. In addition, the Company entered into a separate five-year term loan agreement with First Guaranty Bank for $1.6 million. Taken together, the $10.4 million in new financings superseded the prior financing arrangements the Company had with United Bank, Inc. and other lenders. As a result of entering into the new financings, United Bank, Inc. and the other lenders of the Company agreed to terminate their Forbearance Agreement with the Company. This was reported in the Company’s February 4, 2014 Form 8-K filing. The loan is collateralized by the Company’s accounts receivable and equipment.

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank, Inc. This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment Line of Credit will be converted to a five-year term note agreement with an interest rate of 5.0%. As of June 30, 2018, the Company had borrowed $2.46 million against this line of credit and made principal payments of $792,000. The loan is collateralized by the equipment purchased under this agreement.

On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase of equipment, for a period of three months with an interest rate of 4.99%. After three months, all borrowings against the Equipment Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99%. As of June 30, 2018, the Company had borrowed $5.0 million against this line of credit and made principal payments of $712,000. The loan is collateralized by the equipment purchased under this agreement.

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 is a renewal of the $15.0 million revolving line of credit (“Operating Line of Credit (2017)”) entered into with United Bank, Inc. effective February 27, 2017. At June 30, 2018, the balance on this line of credit was $2.5 million. The line of credit is collateralized by the Company’s accounts receivable and equipment.

Third Quarter Overview

The following is an overview of results from operations for the three and nine months ended June 30, 2018 and 2017.

	Three Months Ended			Three Months Ended			Nine Months Ended			Nine Months Ended
	June 30,			June 30,			June 30,			June 30,
	2018			2017			2018			2017

Revenue	$	29,549,659		$	35,686,215		$	85,190,295		$	98,554,692
Cost of revenues		26,166,268			37,124,756			78,775,352			93,796,294
Gross profit (loss)		3,383,391			(1,438,541	)		6,414,943			4,758,398
Selling & administrative expenses		1,773,304			1,600,454			5,738,751			5,735,342
Income (loss) from operations		1,610,087			(3,038,995	)		676,192			(976,944	)
Other expense		(238,225	)		(152,040	)		(359,207	)		(569,384	)
Income (loss) before tax		1,371,862			(3,191,035	)		316,985			(1,546,328	)
Income tax expense (benefit)		275,595			(1,323,887	)		19,793			(605,298	)
Net income (loss)		1,096,267			(1,867,148	)		297,192			(941,030	)
Dividends on preferred stock		77,250			77,250			231,750			231,750
Net income (loss) available to common shareholders	$	1,019,017		$	(1,944,398	)	$	65,442		$	(1,172,780	)

Results of Operations for the Three and Nine Months Ended June 30, 2018 Compared to the Three and Nine Months Ended June 30, 2017

Revenues. Total revenues from continuing operations decreased by $6.2 million or 17.2% to $29.5 million for the three months ended June 30, 2018 from $35.7 million for the same period in 2017. The decrease was primarily attributable to a $6.1 million revenue decrease in petroleum and gas work and a $77,000 revenue decrease in electrical and mechanical services, partially offset by an $80,000 revenue increase in water and sewer projects and other ancillary services. The Company had no revenue from discontinued operations for the three months ended June 30, 2018 and 2017.

Total revenues from continuing operations decreased by $13.4 million or 13.6% to $85.2 million for the nine months ended June 30, 2018 from $98.6 million for the same period in 2017. The decrease was primarily attributable to a $20.0 million revenue decrease in petroleum and gas work and a $20,000 revenue decrease in water and sewer projects and other ancillary services, partially offset by a $6.5 million revenue increase in electrical and mechanical services. The Company had no revenue from discontinued operations for nine months ended June 30, 2018 and 2017.

Due to a shortage of qualified labor and the extended schedules on the projects noted in “Major Projects with Losses” below, the Company was not able to secure additional transmission pipeline work in the quarters ended September 30, 2017 and December 31, 2017. This resulted in less revenue for the nine months ended June 30, 2018 as compared to the same period in 2017. The Company also had several significant pipeline jobs start later in fiscal year 2018 as compared to fiscal year 2017. These factors also affected “Cost of Revenues” and “Gross Profit” below.

Cost of Revenues. Total cost of revenues from continuing operations decreased by $10.9 million or 29.5% to $26.2 million for the three months ended June 30, 2018 from $37.1 million for the same period in 2017. The decrease was primarily attributable to an $11.1 million cost decrease in petroleum and gas work, a $146,000 cost decrease in electrical and mechanical services, and a $69,000 cost decrease in equipment and tool shop operations not allocated to projects, partially offset by a $333,000 cost increase in water and sewer projects and other ancillary services. There was no cost of revenues from discontinued operations for the three months ended June 30, 2018 and 2017.

Total cost of revenues from continuing operations decreased by $15.0 million or 16.0% to $78.8 million for the nine months ended June 30, 2018 from $93.8 million for the same period in 2017. The decrease was primarily attributable to a $22.1 million cost decrease in petroleum and gas work, partially offset by a $6.3 million cost increase in electrical and mechanical services, a $509,000 cost increase in equipment and tool shop operations not allocated to projects, and a $278,000 cost increase in water and sewer projects and other ancillary services. There was no cost of revenues from discontinued operations for the nine months ended June 30, 2018 and 2017.

Gross Profit. Total gross profit from continuing operations increased by $4.8 million or 335.2% to $3.4 million for the three months ended June 30, 2018, from a $1.4 million gross loss for the same period in 2017. The increase was primarily attributable to a $4.9 million gross profit increase in petroleum and gas work, a $70,000 gross profit increase in electrical and mechanical services, and a $69,0000 gross profit increase related to equipment and tool shop operations costs not allocated to projects, partially offset by a $254,000 gross profit decrease in water and sewer projects and other ancillary services. There were no gross profits from discontinued operations for the three months ended June 30, 2018 and 2017.

Total gross profit from continuing operations increased by $1.6 million or 34.8% to $6.4 million for the nine months ended June 30, 2018, from $4.8 million for the same period in 2017. The increase was primarily attributable to a $2.2 million gross profit increase in petroleum and gas work, and a $225,000 gross profit increase in electrical and mechanical services, partially offset by a $509,000 gross profit decrease related to equipment and tool shop operations costs not allocated to projects, and a $299,000 gross profit decrease in water and sewer projects and other ancillary services. There were no gross profits from discontinued operations for the nine months ended June 30, 2018 and 2017.

Selling and administrative expenses. Total selling and administrative expenses from continuing operations increased by $173,000 or 10.8% to $1.8 million for the three months ended June 30, 2018 from $1.6 million for the same period in 2017. There were no selling and administrative expenses for discontinued operations for the three months ended June 30, 2018 and 2017. The Company believes that any ongoing costs associated with closing discontinued operations will be immaterial.

Total selling and administrative expenses from continuing operations increased by $3,000 or 0.06% to $5.7 million for the nine months ended June 30, 2018 as compared to the same period in 2017. There were no selling and administrative expenses for discontinued operations for the nine months ended June 30, 2018 and 2017. The Company believes that any ongoing costs associated with closing discontinued operations will be immaterial.

Interest Expense. Interest expense increased by $7,000 or 3.9% to $191,000 for the three months ended June 30, 2018 from $184,000 for the same period in 2017. This increase was primarily due to interest expense on the Equipment Line of Credit (2017).

Interest expense increased by $172,000 or 30.9% to $730,000 for the nine months ended June 30, 2018 from $558,000 for the same period in 2017. This increase was primarily due to interest expense on the Equipment Line of Credit (2017) and Operating Line of Credit (2017).

Net Income (loss). Income from continuing operations before income taxes was $1.4 million for the three months ended June 30, 2018, compared to a loss from continuing operations before income taxes of $3.2 million for the same period in 2017. Income from continuing operations before taxes was $317,000 for the nine months ended June 30, 2018, compared to a loss from continuing operations before income taxes of $1.5 million for the same period in 2017. The increase to both periods was due to the items mentioned above. There was no income from discontinued operations for the three and nine months ended June 30, 2018 and 2017.

Income tax expense for the three months ended June 30, 2018 was $276,000 compared to a $1.3 million income tax benefit for the same period in 2017. Income tax expense for the nine months ended June 30, 2018 was $20,000 compared to an income tax benefit of $605,000 for the same period in 2017. The increase in income tax expense was primarily due to the increase in income from continuing operations before income taxes. The Company experienced a reduced income tax expense for the three and nine months ended June 30, 2018 due to the decrease in the federal corporate income tax rate and a tax benefit generated from adjusting the Company’s deferred tax asset and liability amounts. The effective income tax rate for the three months ended June 30, 2018 was 20.1%, as compared to 41.5% for the same period in 2017. The effective income tax rate for the nine months ended June 30, 2018 was 6.2%, as compared to 39.1% for the same period in 2017. 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 to use a “blended” tax rate for fiscal year 2018. Beginning with fiscal year 2019, the Company’s federal tax rate will be 21%. The Company’s deferred tax asset and liability were calculated at the 24.5% rate at June 30, 2018.

Accrued dividends on preferred stock for the three months ended June 30, 2018 and 2017 were $77,250. Accrued dividends on preferred stock for the nine months ended June 30, 2018 and 2017 were $231,750.

Net income available to common shareholders for the three months ended June 30, 2018 was $1.0 million, compared to a $1.9 million loss for the same period in 2017. Net income available to common shareholders for the nine months ended June 30, 2018 was $65,000 compared to a net loss available to common shareholders of $1.2 million for the same period in 2017.

Major Projects with Losses

The Company had two pipeline projects (“Project A” and “Project B”), both started in April 2017, that recognized an estimated combined loss of $5.0 million at September 30, 2017 and an estimated loss of $545,000 for the nine months ended June 30, 2018. The projects were completed during the first quarter of fiscal year 2018 except for final clean up that was completed in July 2018. The Company believes the total projected loss has been reflected as of June 30, 2018.

Project A had an estimated contract value of $10.3 million to install 19,000 feet of 24” pipe, 3,400 feet of 16” pipe, and 600 feet of 8” pipe. At June 30, 2018, the Company had recognized a $3.5 million loss on this project. Project B had an estimated contract value of $5.1 million to install 14,600 feet of 16” steel pipe. At June 30, 2018, the Company had recognized a $2.0 million loss on this project. Losses on both projects were primarily due to daily production significantly below historical results. The inefficient production was due to a shortage of qualified labor during an extremely busy time in the pipeline industry and more inclement weather than was estimated for the projects. This led to greater labor expense and longer project schedules than was estimated on the projects. A summary of the projects is below:

	Earned		Cost of		Gross
	Revenue		Revenues		Loss

At September 30, 2017
Project A	$	8,429,838	$	11,507,538	$	(3,077,700	)
Project B		5,054,534		6,931,887		(1,877,353	)
Total	$	13,484,372	$	18,439,425	$	(4,955,053	)

Nine Months Ended June 30, 2018
Project A	$	1,911,499	$	2,286,518	$	(375,019	)
Project B		-		169,739		(169,739	)
Total	$	1,911,499	$	2,456,257	$	(544,758	)

Projects to Date
Project A	$	10,341,337	$	13,794,056	$	(3,452,719	)
Project B		5,054,534		7,101,626		(2,047,092	)
Total	$	15,395,871	$	20,895,682	$	(5,499,811	)

Comparison of Financial Condition at June 30, 2018 and September 30, 2017

The Company had total assets of $45.0 million at June 30, 2018, a decrease of $12.3 million from the prior fiscal year end balance of $57.3 million. Accounts receivable, which totaled $9.7 million at June 30, 2018, decreased by $13.4 million from the prior fiscal year end balance of $23.1 million. The decrease was primarily due to significant projects starting later in the Company’s fiscal year 2018. Retainages receivable totaled $1.8 million at June 30, 2018, a decrease of $2.0 million from the prior fiscal year end balance of $3.8 million. The decrease was due to the completion of projects and billing of retention in the nine months ended June 30, 2018. The Company also had net fixed assets of $17.3 million at June 30, 2018, a decrease of $1.9 million from prior fiscal year end balance of $19.2 million. This decrease was due to depreciation of $3.2 million and a net fixed asset disposal of $100,000 after reducing accumulated depreciation, partially offset by equipment acquisitions of $1.4 million. Cash and cash equivalents totaled $4.3 million at June 30, 2018, an increase of $2.7 million from the prior fiscal year end balance of $1.7 million. This increase was primarily due to the decrease in accounts receivable, partially offset by the decrease in accounts payable, short term debt, and accrued expenses and other liabilities. Estimated earnings in excess of billings on uncompleted contracts totaled $7.1 million at June 30, 2018, an increase of $1.7 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 June 30, 2018 compared to September 30, 2017. Other receivables totaled $399,000 at June 30, 2018, an increase of $303,000 from the prior fiscal year end balance of $96,000. Prepaid expenses and other totaled $4.3 million at June 30, 2018, an increase of $254,000 from the prior fiscal year end balance of $4.0 million. This increase was primarily due to the financing of the Company’s insurance premiums net of insurance cost accruals.

The Company had total liabilities of $23.8 million at June 30, 2018, a decrease of $12.4 million from the prior fiscal year end balance of $36.2 million. Lines of credit and short-term borrowings totaled $3.9 million at June 30, 2018, a decrease of $5.5 million from the prior fiscal year end balance of $9.4 million. This decrease was primarily due to $6.6 million in line of credit repayments, partially offset by a $1.1 million increase in short term borrowings related to insurance premiums, net of repayments. Accounts payable and accrued expenses totaled $6.7 million at June 30, 2018, a decrease of $3.1 million from the prior fiscal year end balance of $9.8 million. Long-term debt totaled $7.0 million at June 30, 2018, a decrease of $2.7 million from the prior fiscal year end balance of $9.7 million. The decrease in long-term debt was due to principal repayments on such debt. Deferred tax liabilities totaled $309,000 at June 30, 2018, a decrease of $137,000 from the prior fiscal year end balance of $447,000. The decrease was due to the reduction in the federal corporate tax rate as noted above. Current maturities of long-term debt totaled $3.8 million at June 30, 2018, a decrease of $772,000 from the prior fiscal year end balance of $4.6 million. Billings in excess of cost and estimated earnings on uncompleted contracts totaled $1.9 million at June 30, 2018, a decrease of $296,000 from the prior fiscal year end total of $2.2 million. The decrease was due to a difference in the timing of project billings at June 30, 2018 compared to September 30, 2017.

Shareholders’ equity was $21.2 million at June 30, 2018, an increase of $65,000 from the prior fiscal year end balance of $21.1 million. This increase was due to the net income available to common shareholders of $65,000 for the nine months ended June 30, 2018.

Liquidity and Capital Resources

Indebtedness

On January 31, 2014, the Company entered into a financing arrangement with United Bank, Inc. (West Virginia) and Summit Community Bank (West Virginia). The financing arrangement is a five-year term loan in the amount of $8.8 million and bears interest at an annual rate of 6.50%. In addition, the Company entered into a separate five-year term loan agreement with First Guaranty Bank (Louisiana) for $1.6 million and bears interest at an annual rate of 3.55%. Taken together, the $10.4 million in new financings supersedes the prior financing arrangements the Company had with United Bank as well as the other lenders. As a result of entering into the new financings, United Bank and the other lenders of the Company agreed to terminate their Forbearance Agreement with the Company. This was reported in the Company’s February 4, 2014 Form 8-K filing. The loan is 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:

Minimum tangible net worth of $10.0 million to be measured quarterly

Minimum traditional debt service coverage of 1.50x to be measured quarterly on a rolling twelve-month basis

Minimum current ratio of 1.30x to be measured quarterly

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 in compliance with, or obtained a waiver for, all loan covenants at June 30, 2018.

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 4.75% 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 is collateralized by the Company’s accounts receivable and equipment.

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank, Inc. This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment Line of Credit will be converted to a five-year term note agreement with an interest rate of 5.0%. This agreement is subject to the terms of the January 31, 2014 Term Note agreement discussed above. At June 30, 2018, the Company had borrowed $2.46 million against this line of credit and made principal payments of $792,000. 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 4.25% with monthly payments of $11,500. The loan is collateralized by the building and property purchased under this agreement.

Operating Line of Credit

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:

Minimum tangible net worth of $17.0 million to be measured quarterly

Minimum traditional debt service coverage of 1.50x to be measured quarterly on a rolling twelve- month basis

Minimum current ratio of 1.50x to be measured quarterly

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:

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

Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis

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 in compliance with, or obtained a waiver for, all covenants and additional requirements for the $15.0 million Operating Line of Credit (2018) at June 30, 2018.

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 June 30, 2018, the Company had operating lease commitments of $60,000 with various expiration dates through March 2020.

Letters of Credit

Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors and vendors on various customer projects. At June 30, 2018, 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 June 30, 2018, the Company had $13.2 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 three customers that exceeded 10.0% of revenues for the nine months ended June 30, 2018. The three customers, Toyota Motor Manufacturing, Marathon Petroleum and Dow Chemical, represented 19.2%, 13.7% and 10.4% of revenues, respectively. The Company had two customers that exceeded 10.0% of receivables at June 30, 2018. These customers, Dow Chemical and Mountaineer Gas, represented 13.6% and 10.5% of receivables net of retention at June 30, 2018, respectively. The Company had three customers that exceeded 10.0% of revenues for the nine months ended June 30, 2017. These customers, Marathon Petroleum, Columbia Gas Distribution, and EQT, represented 17.3%, 14.4%, and 10.4% of revenues, respectively. The Company had two customers that exceeded 10.0% of receivables at June 30, 2017. These customers, Rice Energy and Columbia Gas Distribution, represented 16.1% and 15.4% of receivables net of retention at June 30, 2017, respectively.

The Company’s consolidated operating revenues for the nine months ended June 30, 2018 were $85.2 million of which 51.4% was attributable to electrical and mechanical services, 41.1% to gas & petroleum work, and 7.5% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the nine months ended June 30, 2017 were $98.6 million of which 55.6% was attributable to gas and petroleum work, 37.8% to electrical and mechanical contract services, and 6.6% to water and sewer installations and other ancillary services.

Litigation

The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged 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. 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. At June 30, 2018, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Related Party Transactions

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

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. Mr. Douglas Reynolds, President of Energy Services, is a director and secretary of First Bank of Charleston. Mr. Nester Logan and Mr. Samuel Kapourales, directors of Energy Services, are also directors of First Bank of Charleston. The interest rate on the loan agreement is 4.75% with monthly payments of $7,800. As of June 30, 2018, we have paid approximately $108,000 in principal and approximately $150,000 in interest since the beginning of the loan.

There were no new material related party transactions during the nine months ended June 30, 2018.

Inflation

Due to relatively low levels of inflation during the nine months ended June 30, 2018 and 2017, inflation did not have a significant effect on our results.

New Accounting Pronouncements

In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of ASU 2014-09 for all entities by one year. In June 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (e.g., insurance contracts or lease contracts). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance, and creates a Topic 606 Revenue from Contracts with Customers. With the amendments in ASU 2015-14, ASU 2014-09 will be effective for the Company beginning after December 15, 2017, including interim periods. In September 2017, the FASB issued ASU 2017-13 which amends the early adoption date option for certain companies related to the adoption of ASU 2014-09. The Company expects that the adoption of ASU 2014-09 will not have a material impact on its financial statements or disclosure.

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 expects that the adoption of ASU 2016-02 will not have a material impact on its financial statements or disclosure.

In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The effective date of ASU 2016-20 is the same date that Topic 606 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The amendments in ASU 2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, and Advertising Costs. The Company expects that the adoption of ASU 2016-20 will not have a material impact on its financial statements or disclosure.

On March 13, 2018, the Financial Accounting Standards Board issued ASU 2018-05, ”Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. These amendments to the Accounting Standards Codification add the guidance, among other things, to the FASB Accounting Standards Codification regarding the Tax Cuts and Jobs Act (the Act) under the Securities and Exchange Commission’s Staff Accounting Bulletin No. 118 to address situations where the accounting under Topic 740 was previously incomplete for certain income tax effects of the Act upon issuance of an entity’s financial statements for the reporting period in which the Act was enacted. The amendments of ASU 2018-05 were effective immediately upon issuance.

Critical Accounting Policies

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

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

Revenue Recognition. Revenues from fixed price contracts are recognized using the percentage-of-completion method, measured by the percentage of costs incurred to date of total estimated costs at completion. These contracts provide for a fixed amount of revenues for the entire project. Such contracts provide that the customer accept completion of progress to date and compensate us for services rendered, measured in terms of units installed, hours expended or some other measure of progress. Contract costs include all direct material, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, tools and expendables. The cost estimates are based on the professional knowledge and experience of the Company’s engineers, project managers and financial professionals. Changes in job performance and job conditions affect the total estimated costs at completion. The effects of these changes are recognized in the period in which they occur. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. The current asset “Costs and estimated earnings in excess of billings on uncompleted contracts” represents revenues recognized in excess of amounts billed for fixed price contracts. The current liability “Billings in excess of costs and estimated earnings on uncompleted contracts” represents billings in excess of revenues recognized for fixed price contracts. Revenues on all costs plus and time and material contracts are recognized when services are performed or when units are completed.

Self-Insurance. The Company carries workers’ compensation, general liability and automobile insurance through a captive insurance company. While the Company believes that this arrangement has been beneficial in reducing and stabilizing insurance costs, the Company does have to maintain a restricted cash account to guarantee payments of premiums. That restricted account had a balance of $2.1 million as of June 30, 2018 and is classified as “Prepaid expenses and other” on the Company’s Consolidated Balance Sheets. Should the Company experience severe losses over an extended period, it could have a detrimental effect on the Company, notwithstanding the captive insurance 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 June 30, 2018, management concluded that the allowance for doubtful accounts was adequate.

Outlook

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

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. will be adequate to meet our cash needs for the Company’s 2018 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 June 30, 2018, the Company had borrowings of $2.5 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 June 30, 2018 was $84.4 million. Additionally, the Company was awarded $12.0 million in pipeline projects in July 2018. 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 third quarter of fiscal year 2018 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. 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. At June 30, 2018, we do not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

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 15, 2017. 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) Energy Services of America Corporation did not repurchase any shares of its common stock during the three months ended June 30, 2018.

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

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: August 14, 2018	By:	/s/ Douglas V. Reynolds
		Douglas V. Reynolds
		Chief Executive Officer

Date: August 14, 2018	By:	/s/ Charles P. Crimmel
		Charles P. Crimmel
		Chief Financial Officer

Energy Services of America CORP - FORM 10-Q - August 14, 2018

Attached files

Energy Services of America CORP Reports