Energy Services of America (ESOA) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,  D.C.   20549

FORM 10-Q

(Mark One)

x      Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

oTransition report under Section 13 or 15(d) of the Securities Exchange act of 1934

For the transition period from _______________ to _________________

 Commission File Number:  001-32998

Energy Services of America Corporation

(Exact Name of Registrant as Specified in its Charter)

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

100 Industrial Lane, Huntington, West Virginia	25702
(Address of Principal Executive Office)	(Zip Code)

(304) 399-6315

(Registrant’s Telephone Number including area code)

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

                Indicate by check mark whether the registrant 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  o     NO o

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

Large Accelerated Filer o                   Accelerated Filer o                   Non-Accelerated Filer o   Smaller Reporting Company  x

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

As of May 11, 2011 there were issued and outstanding 12,092,307 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 Stockholders’ Equity	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16
Item 4.	Controls and Procedures	16
Part II:	OtherInformation	17
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	17
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 4.	Removed and Reserved	17
Item 6.	Exhibits	18
Signatures		18

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31,			September 30,
Assets	2011			2010
	(Unaudited)			(Audited)
Current Assets
Cash and cash equivalents	$	1,845,542		$	2,576,551
Accounts receivable-trade		12,363,928			25,872,375
Allowance for doubtful accounts		(278,339	)		(283,191	)
Retainages receivable		10,575,699			13,932,520
Other receivables		316,027			399,874
Costs and estimated earnings in excess of billings on uncompleted contracts		8,762,448			20,301,075
Deferred tax asset		2,307,342			256,961
Prepaid expenses and other		3,015,293			1,945,671
Total Current Assets		38,907,940			65,001,836
Property, plant and equipment, at cost		40,897,772			39,370,608
less accumulated depreciation		(15,215,113	)		(12,310,200	)
		25,682,659			27,060,408
Goodwill		36,914,021			36,914,021
Total Assets	$	101,504,620		$	128,976,265
Liabilities and Stockholders' Equity
Current Liabilities
Current maturities of long-term debt	$	5,011,856		$	6,804,734
Lines of credit and short term borrowings		12,762,386			13,493,860
Accounts payable		4,374,319			15,073,323
Accrued expenses and other current liabilities		4,166,565			12,171,528
Billings in excess of costs and estimated earnings on uncompleted contracts		854,659			1,984,098
Total Current Liabilities		27,169,785			49,527,543
Long-term debt, less current maturities		6,589,963			7,474,861
Long-term debt, payable to shareholder		4,100,000			4,700,000
Deferred income taxes payable		6,912,307			7,154,112
Total Liabilities		44,772,055			68,856,516
Stockholders' equity
Preferred stock, $.0001 par value
Authorized 1,000,000 shares, none issued		-			-
Common stock, $.0001 par value
Authorized 50,000,000 shares
Issued and outstanding 12,092,307
shares		1,209			1,209
Additional paid in capital		56,024,192			55,988,324
Retained earnings		707,164			4,130,216
Total Stockholders' equity		56,732,565			60,119,749
Total liabilities and stockholders' equity	$	101,504,620		$	128,976,265

The Accompanying Notes are an integral Part of These Financial Statements

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ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	March 31,			March 31,			March 31,			March 31,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Revenue	$	13,782,189		$	20,295,342		$	47,737,310		$	50,247,079
Cost of revenues		15,329,864			21,468,697			45,683,977			46,654,708
Gross profit (loss)		(1,547,675	)		(1,173,355	)		2,053,333			3,592,371
Selling and administrative expenses		3,549,508			2,766,444			6,729,809			6,183,835
Income (loss) from operations		(5,097,183	)		(3,939,799	)		(4,676,476	)		(2,591,464	)
Other income (expense)
Interest income		442			11,099			1,283			27,177
Other nonoperating income		8,067			199,275			9,773			319,722
Interest expense		(401,204	)		(383,037	)		(923,262	)		(804,571	)
Gain on sale of equipment		9,850			13,866			12,938			13,247
		(382,845	)		(158,797	)		(899,268	)		(444,425	)
Income (loss) before income taxes		(5,480,028	)		(4,098,596	)		(5,575,744	)		(3,035,889	)
					-
Income tax expense (benefit)		(2,111,529	)		(1,505,791	)		(2,152,692	)		(1,080,644	)
Net income (loss)	$	(3,368,499	)	$	(2,592,805	)	$	(3,423,052	)	$	(1,955,245	)
Weighted average shares outstanding-basic		12,092,307			12,092,307			12,092,307			12,092,307
Weighted average shares-diluted		12,092,307			12,092,307			12,092,307			12,092,307
Net income (loss) per share basic	$	(0.28	)	$	(0.21	)	$	(0.28	)	$	(0.16	)
Net income (loss) per share diluted	$	(0.28	)	$	(0.21	)	$	(0.28	)	$	(0.16	)

The Accompanying Notes are an integral Part of These Financial Statements

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ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Six Months Ended			Six Months Ended
	March 31,			March 31,
Operating activities	2011			2010
Net income (loss)	$	(3,423,052	)	$	(1,955,245	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense		2,915,444			3,052,041
(Gain) loss on sale/disposal of equipment		(12,938	)		(13,247	)
Provision for deferred taxes		(2,292,186	)		(1,070,657	)
Share-based compensation expense		35,868			-
(Increase) decrease in contracts receivable		13,503,595			6,683,029
(Increase) decrease in retainage receivable		3,356,821			155,532
(Increase) decrease in other receivables		83,847			52,419
(Increase) decrease in cost and estimated earnings in excess of billings on uncompleted contracts		11,538,627			(2,269,781	)
(Increase) decrease in prepaid expenses		(1,069,622	)		(1,053,879	)
Increase (decrease) in accounts payable		(10,699,004	)		(331,653	)
Increase (decrease) in accrued expenses		(7,951,949	)		(1,272,734	)
Increase (decrease) in billings in excess of cost and estimated earnings on uncompleted contracts		(1,129,439	)		405,261
Net cash provided by (used in) operating activities		4,856,012			2,381,086
Cash flows from investing activities:
Investment in property & equipment		(544,420	)		(1,152,614	)
Proceeds from sales of property and equipment		24,456			441,622
Net cash provided by (used in) investing activities		(519,964	)		(710,992	)
Cash flows from financing activities:
Repayment of loans from shareholders		(600,000	)		(500,000	)
Borrowings on lines of credit and short term debt, net of (repayments)		(731,474	)		70,045
Principal payments on long term debt		(3,735,583	)		(2,890,650	)
Net cash provided by (used in) financing activities		(5,067,057	)		(3,320,605	)
Increase (decrease) in cash and cash equivalents		(731,009	)		(1,650,511	)
Cash beginning of period		2,576,551			2,829,988
Cash end of period	$	1,845,542		$	1,179,477
Supplemental schedule of noncash investing and financing activities:
Insurance premiums financed	$	512,256		$	1,267,160
Purchases of property & equipment under financing agreements	$	1,004,793		$	646,742
Short term borrowing renewed as long term note	$	-		$	800,000
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Interest	$	917,613		$	813,124
Income taxes	$	486,043		$	78,700
Insurance premiums financed	$	146,195		$	-

The Accompanying Notes are an integral Part of These Financial Statements

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ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the three months ended March 31, 2011 and 2010

 Unaudited

										Total
	Common Stock				Additional Paid		Retained			Stockholders'
	Shares		Amount		in Capital		Earnings			Equity
Balance at September 30, 2009		12,092,307	$	1,209	$	55,976,368	$	(1,642,134	)	$	54,335,443
Net Income (Loss)		-		-		-		(1,955,245	)		(1,955,245	)
Balance at March 31, 2010		12,092,307	$	1,209	$	55,976,368	$	(3,597,379	)	$	52,380,198
Balance at September 30, 2010		12,092,307	$	1,209	$	55,988,324	$	4,130,216		$	60,119,749
Share-based compensation expense		-		-		35,868		-			35,868
Net Income (Loss)		-		-		-		(3,423,052	)		(3,423,052	)
Balance at March 31, 2011		12,092,307	$	1,209	$	56,024,192	$	707,164		$	56,732,565

The Accompanying Notes are an integral Part of These Financial Statements

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ENERGY SERVICES OF AMERICA CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.   BUSINESS AND ORGANIZATION:

Energy Services of America Corporation, formerly known as Energy Services Acquisition Corp., (the Company or Energy Services) was incorporated in Delaware on March 31, 2006 as a blank check company whose objective was to acquire an operating business or businesses.  On September 6, 2006 the Company sold 8,600,000 units in the public offering at a price of $6.00 per unit.  Each unit consisted of one share of the Company’s common stock and two common stock purchase warrants for the purchase of a share of common stock at $5.00.  The warrants could not be exercised until the later of the completion of the business acquisition or one year from issue date.   The Company operated as a blank check company until August 15, 2008.  On that date the Company acquired S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. with proceeds from the Company’s Initial Public Offering.  S. T. Pipeline and C. J Hughes are operated as wholly owned subsidiaries of the Company.

Interim Financial Statements

The accompanying unaudited 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 financial statements and footnotes thereto for the years ended September 30, 2010 and 2009 included in the Company’s Form 10-K filed December 21, 2010.  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 interim financial reporting rules and regulations of the “SEC”.  However, the Company believes that the disclosures are adequate to make the information presented not misleading.  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 periods ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for the full year.

Principles of Consolidation

The consolidated financial statements of Energy Services include the accounts of Energy Services and its wholly owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Unless the context requires otherwise, references to Energy Services include Energy Services and its consolidated subsidiaries.

Reclassifications

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

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2.  UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts as of March 31, 2011 and September 30, 2010 are summarized as follows:          

	March 31, 2011		September 30, 2010
Costs incurred on contracts in progress	$	184,495,154	$	215,024,745
Estimated earnings, net of estimated losses		2,046,009		21,611,438
		186,541,163		236,636,183
Less:  Billings to date		178,633,374		218,319,206
	$	7,907,789	$	18,316,977
Costs and estimated earnings in excess of billings on
uncompleted contracts	$	8,762,448	$	20,301,075
Less:   Billings in excess of costs and estimated earnings
on uncompleted Contracts		854,659		1,984,098
	$	7,907,789	$	18,316,977

Backlog at March 31, 2011 and September 30, 2010 was $159.2 million and $47.8 million respectively.

3.  CLAIMS

The Company reported $3.5 million in claims revenue for the period ending September 30, 2010.  These claims were a result of a combination of customer-caused delays, errors in specification and designs, and disputed or unapproved contract change orders.  Revenue from these claims was recorded only to the extent contract costs relating to the claim have been incurred, factored by a probability factor to insure a conservative amount was recorded.  The Company considers collection of these claims highly probable.

Resolution of these claims is a three step process.  The Company first meets with the customer to try to resolve all issues.  Secondly, if that is unsuccessful, non-binding mediation is held with an impartial mediator who tries to get both sides to agree on the issues.  If mediation is unsuccessful, the third phase is binding arbitration.  Under this step each party presents its case before a panel of three arbitrators who rule on the merits of the case.   The claims reported are at the first phase of this process.

4.  FAIR VALUE MEASUREMENTS

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 currently available to the Company for bank loans with similar terms and maturities, which is a level 3 input. It was not practicable to estimate the fair value of notes payable to related parties. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $10.6 million at March 31, 2011 was $10.9 million.

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5.  EARNINGS PER SHARE

The amounts used to compute the basic and diluted earnings per share for the three months and six months ended March 31, 2011 and 2010.

		Three Months Ended						Six Months Ended
		March 31,						March 31,
		2011			2010			2011			2010
Net Income (Loss) from continuing operations available to common shareholders	$	(3,368,499	)	$	(2,592,805	)	$	(3,423,052	)	$	(1,955,245	)
Weighted average shares outstanding basic		12,092,307			12,092,307			12,092,307			12,092,307
Effect of dilutive warrants		‐0‐			‐0‐			‐0‐			‐0‐
Weighted average shares outstanding diluted		12,092,307			12,092,307			12,092,307			12,092,307
Net Income (Loss) per share‐basic	$	(0.28	)	$	(0.21	)	$	(0.28	)	$	(0.16	)
Net Income (Loss) per share‐diluted	$	(0.28	)	$	(0.21	)	$	(0.28	)	$	(0.16	)

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 “Consolidated Financial Information” appearing in this section of this  report as well as the historical financial statements and related notes contained elsewhere herein.  Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.  The term “Energy Services” refers to the Company and wholly-owned subsidiaries on a consolidated basis.

Forward Looking Statements

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

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

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

Company Overview

Energy Services was formed on March 31, 2006, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business.  It operated as a “blank check company” until August 15, 2008 at which time it completed the acquisitions of S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc.  The Company acquired S.T. Pipeline for $16.2 million in cash and $3.0 million in a promissory note.  The C.J. Hughes purchase price totaled $34.0 million, one half of which was in cash and one half in Energy Services common stock.    The acquisitions are accounted for under the purchase method and the financial results of both acquisitions are included in the results of Energy Services from the date of acquisition.

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

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.

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The Company generally recognizes revenue on unit price and cost-plus contracts when units are completed 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 to complete the contract.  Many contracts also include retainage provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.

Second Quarter Overview

The following is an overview for the three months and six months ended March 31, 2011.

	Three Months ended			Six Months ended
	March 31, 2011			March 31, 2011
	( In Millions )			(In Millions)
Sales	$	13.78		$	47.74
Cost of Revenues		15.33			45.68
Gross Profit (Loss)		(1.55	)		2.06
Selling & Adm.		3.55			6.73
Income (loss) from operations before taxes		(5.10	)		(4.67	)
Other income (expenses)		(0.38	)		(.90	)
Income (Loss) before tax		(5.48	)		(5.57	)
Income taxes (benefit)		(2.11	)		(2.15	)
Net Income(Loss)	$	(3.37	)	$	(3.42	)

 

The second quarter for the Company is typically a very slow period for our business lines.  The weather plays a major role in our operations during this period of time.  The weather in the Mid Atlantic states  in 2010-2011 has been extreme and has caused major work delays which resulted in larger than expected losses.

The Company’s cash and cash equivalents decreased by $8.1 million, working capital totaled $11.7 million at March 31, 2011.  Accounts receivable and retainage receivable decreased by $3.8 million or 23% during the quarter ending March 31, 2011 and long-term debt was reduced by $730,000 or 6%.

Three and Six Months Ended March 31, 2011 and 2010

            Revenues.  Revenues decreased by $6.5 million or 32.1%  to $13.78 million for the three months ended March 31, 2011 and decreased by $2.5 million or 5% to $47.7 million for the six months ended March 31, 2011 compared to the same periods in 2010.   The decrease in revenue for the quarter ended March 31, 2011 was due to extreme weather conditions experienced in the Mid Atlantic area.  Normally we have snow during this period but this year we have experienced heavy rains as well.  This resulted in project delays.   The lower decrease for the six months revenue was due to one large project being completed during the three months ended December 31, 2010.

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Cost of Revenues. Costs of Revenues decreased by $6.1 million or 28.6% to $15.3 million for the three months ended March 31, 2011 and decreased by $970,000 or 2.1% to $45.7 million for the six months ended March 31, 2011 compared to the same periods ending in 2010.  The decrease in the cost of revenue reflects fewer projects being undertaken during the three and six months ended March 31, 2011. Certain costs of revenues remain fairly constant during reduced revenue periods which caused us to have a loss from operations during this period.  Approximately $1.7 million of unallocated equipment costs were included in cost of operations during this period.

Gross Profit (Loss).   Gross loss increased by $374,000 or 31.94% to $1.5 million for the three months ended March 31, 2011 and the gross profit decreased by $1.5 million or 42.8 % to $2.1 million for the six months ended March 31, 201 1 compared to the same periods ending in 2010.  The reductions was due to the previously stated conditions.

Selling and administrative expenses.  Selling and administrative expenses increased by $783,000 or 28.3% to $3.5 million  for the three months ended March 31, 2011 and increased by $546,000 or 8.8% to $6.7 million for the six months ended March 31, 2011 compared to the same periods ending in 2010.  This increase was primarily due to the Company paying key employees during periods when projects were delayed due to the extreme weather.

Income  (loss) from Operations.  We had a loss of $5.1 million for the three months ended March 31, 2011 and a loss of $4.7 million for the six months ended March 31, 2011 compared to losses of $3.9 million and $2.6 million for the three and six months ended March 31, 2010.  This is a function of the previous categories.

Interest Income. Interest income decreased by $11,000 or 96.0% to $442 for the three months ended March 31, 2011 and decreased by $26,000 or 95% to $1,300 for the six months ended March 31, 2011 compared to the same period ending for 2010.   This reflects lower interest rates and lower levels of invested cash.

Interest Expense. Interest expense increased by $18,000 or 4.7% to $401,000 for the three months ended March 31, 2011 and increased $119,000 or14.8% to $923,000 for the six months ended March 31, 2011 compared to the same period ending for 2010.  Increased borrowings during the periods ending in 2011 compared to the same periods ending in 2010 were the primary reasons for the increase in interest expense.

Other Income (Expense).  Other income decreased by $195,224 or 91.5%  to $17,917 for the three months ended March 31, 2011 and decreased by $310,258 or 93.2% to $22,711 for the six months ended March 31, 2011 compared to the same period ending for 2010.  This reduction was due to the reduction of outside equipment rental income.

Net Income (Loss). We had a net loss of $3.4 million for the three months ended March 31, 2011 and a net loss of $3.4 million for the six months ended March 31, 2011 compared to net losses of $2.6 million and $2.0 for the same periods ending in 2010.  The net loss occurred principally due to reduced revenue caused by the extreme weather the region experienced during this period.

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Comparison of Financial Condition

The Company had total assets at March 31, 2011 of $101.5 million, a decrease of $27.5 million from September 30, 2010.  Some of the primary components of the balance sheet were accounts receivable which totaled $12.4 million, a decrease of $13.5 million from September 30, 2010.  This reduction resulted from substantial collections during this quarter.  Other major categories of assets at March 31, 2011 included cash of $1.8 million and fixed assets less accumulated depreciation of $25.7 million.  Liabilities totaled $44.8 million, a decrease of $24.1 million from September 30, 2010.   This decrease was primarily due to reductions in accounts payable and debt which were paid down with the collections on accounts receivable.

Stockholders’ Equity.Stockholders’ equity decreased from $60.12 million at September 30, 2010 to $56.73  million at March 31, 2011.  This decrease was due to the net loss of $3.4 million and an increase in additional paid in capital of $36,000.   We have not paid any cash or stock dividends on our common stock, nor have we repurchased shares of our common stock.

Liquidity and Capital Resources

Cash Requirements

We anticipate that our cash and cash equivalents on hand at March 31, 2011 which totaled  $1.8 million along with  our credit facilities available to us and our anticipated future cash flows from operations will provide sufficient cash to meet our operating needs.  However, the increased demand for our services could result in the Company requiring significant additional working capital.

Sources and Uses of Cash

                The net loss for the six months ended March 31, 2011 was $3.4 million.  The depreciation expense was $2.9 million.   Contracts, other receivables and prepaids provided $27.4 million while accounts payable and accrued expenses consumed $18.7 million.  Net cash provided by operating activities was $4.9 million.  Financing activities consumed $5.1 million. Outstanding lines of credit consumed $731,000 at March 31, 2011  and long term debt payments were $3.7 million during this period.

As of March 31, 2011, we had $1.8 million in cash, working capital of $11.7 million and long term debt, net of current maturities of $10.7 million.

Loan Covenants

The Company entered into a fifteen million dollar ($15.0 million) Line of Credit agreement with a regional bank on August 20, 2009.  On May 27, 2010 the Line of Credit was increased to seventeen million five hundred thousand dollars ($17.5 million).  On June 24, 2010 the Line of Credit was increased to nineteen million five hundred thousand ($19.5 million).  Interest will accrue on the line of credit at an annual rate based on “Wall Street Journal” Prime Rate (the Index) with a floor of six percent (6.0%).  Cash available under the line of credit is calculated based on a percentage of the Company’s accounts receivable with certain exclusions along with seventy five percent of certain unencumbered fixed assets.  Major items excluded from calculation are fifty percent (50%) of receivables from bonded jobs, fifty percent (50%) of retainage receivables, and items greater than one hundred twenty (120) days old.

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At March 31, 2011 the Company had access to $17.4 million on the Line of Credit based on its borrowing base certificate, of which it had drawn $12.4  million and had $1.4 million outstanding on a Letter of Credit.  The total available on the line at March 31, 2011 was $3.6 million.   The access to the additional cash from the line of credit along with anticipated collections of receivables are expected to be sufficient for the Company’s anticipated capital needs.

If additional working capital is unavailable the Company’s growth and ability to undertake larger projects will be impaired which could have a significant negative impact on the Company’s operating margins and overall financial strength.

The following are the major covenants of the line:

 Current Ratio must be not less than 1.1 in the first year.  As of March 31, 2010 our current ratio was 1.43.

Debt to tangible net worth must not exceed 3.5 during the first year.  Our debt to tangible net worth at March 31, 2011 was 2.26.

 Capital Expenditures  must not exceed $7.5 million.  Capital expenditures from the loan date was approximately $5.9 million.

Dividends shall not exceed 50% of taxable income without prior bank approval.  No dividends have been declared.

The Company was in compliance with all loan covenants.

Off-Balance Sheet transactions

Due to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets.  Though for the most part not material in nature, some of these are:

Leases

Our work often requires us to lease various facilities, equipment and vehicles.  These leases usually are short term in nature, one year or less though at times we may enter into longer term leases when warranted.  By leasing equipment, vehicles and facilities, we are able to reduce our capital outlay requirements for equipment vehicles and facilities that we may only need for short periods of time.  The Company currently rents two pieces of real estate from directors of the Company under long-term lease agreements.  One agreement calls for monthly rental payments of $5,000 and extends through January 1, 2012.  The second agreement is for the Company’s headquarter offices and is rented from a corporation in which two of the Company’s directors are shareholders.  The agreement began November 1, 2008 and runs through 2011 with options to renew.  The second agreement calls for a monthly rental of $7,500 per month.  The Company also rents office and shop space from other independent lessors.  The office space rental is $11,000 per month and extends to December 2012.  The shop rental is $2,200 monthly and extends to October 2012.

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Letters of Credit

Certain customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors, vendors, etc. on various customer projects.  At March 31, 2011, the Company had one letter of credit outstanding in the amount of $1.4 million.

Performance Bonds

Some customers, particularly new ones, or governmental agencies require us to post bid bonds, performance bonds and payment bonds.   These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors.  If we fail to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond.  We must reimburse the insurer for any expenses or outlays it isrequired to make.  Depending upon the size and conditions of a particular contract, we may be required to post letters of credit or other collateral in favor of the insurer.   Posting of these letters or other collateral reduce our borrowing capabilities.   Historically, the Company has never had a payment made by an insurer under these circumstances and does not anticipate any claims in the foreseeable future.    At March 31, 2011, we had $107 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, we are subject to potential credit risk related to business and economic factors that would affect these companies.  However, we generally have certain statutory lien rights with respect to services provided.  Under certain circumstances such as foreclosure, we may take title to the underlying assets in lieu of cash in settlement of receivables.  The Company had two customers that exceeded 10% of revenues for the six months ended March 31, 2011.  Those two customers accounted for 29% of revenues for the six months ended March 31, 2011.

Related Party Transactions

Total long-term debt at March 31, 2011 was $15.7 million, of which $5.1million was payable to certain directors, officers and former owners of S.T. Pipeline, Inc.   The related party debt consists of a $4.1 million note due in August 2012, and a $1.0 million note payable on August 15, 2011.

Inflation

Due to relatively low levels of inflation during the six months ended March 31, 2011 and 2010, inflation did not have a significant effect on our results.

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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 to total estimated costs for each contract.  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 the services rendered, measured in terms of units installed, hours expended or other measures for progress.   Contract costs include all direct material, labor and subcontract costs and those 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, job conditions, and others all 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.

                Revenue on all costs plus and time and material contracts is recognized when services are performed or when units are completed.

Goodwill.The Company has selected July 1 as the date of the annual goodwill impairment evaluation, which is the first day of our fourth fiscal quarter.  Goodwill was assigned to the operating units at the time of acquisition.  The  reporting units to which goodwill was assigned  are CJ Hughes (“CJ”) and  its subsidiary Contractors Rental Corp (“CRC”) as one unit, Nitro Electric, a subsidiary of CJ Hughes-”Nitro”  and to ST Pipeline.  The assignment to CJ consolidated and ST Pipeline was based on the purchase price of each company.  Both purchases were supported by fairness opinions.  The allocation of the goodwill arising from the purchase of CJ was allocated between CJ/CRC and Nitro based on an internally prepared analysis of the relative fair values of each unit. 

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CJ and its subsidiary CRC are considered one reporting unit because CRC almost exclusively provides labor for CJ as a subcontractor. There have been no material operational changes to any reporting units since the date of acquisition. Although the Company uses a centralized management approach, the reporting units have continued to perform similar services to those performed prior to the acquisition.  There have been no sales of equipment, other than in the ordinary course of business, or dispositions of lines of business by any of the operating units.

The Company has determined that its operating units meet the criteria for aggregation and can be deemed a single reporting unit because of their similar economic characteristics.  The July 1, 2010 annual impairment testing indicates that the fair value of the aggregated operating units is at least 10% higher than the carrying value at that date.  Management is not aware of any changes in circumstances since the impairment test date that would indicate that goodwill might be impaired.

The Company’s valuation was based on management’s projected operating results for the next fiscal year. The fair value was determined using a weighted combination of a market approach to value utilizing pricing multiples of guideline publicly traded companies, a market approach to value utilizing pricing multiples of guideline merger and acquisition transactions, and an income approach to value utilizing a discounted cash flow model.

The Company’s market capitalization, including the market cap of both the common stock and the outstanding warrants, is currently below book value.  At March 31, 2011 the market cap of the Company was at 89% of book value.

Management will continue to assess at each reporting date the need for a goodwill impairment test under the Accounting Standards Codification if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

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 restricted cash account to guarantee payments of premiums. That restricted account had a balance of $1,304,537 as of March 31, 2011.  Should the Captive experience severe losses over an extended period, it could have a detrimental effect on the Company.

Current and Non Current Accounts Receivable and Provision for Doubtful Accounts

The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful.  Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customer’s access to capital, our customer’s willingness or ability to pay, general economic conditions and the ongoing relationship with the customer.  While most of our Customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves.  At March 31, 2011, the management review deemed that the allowance for doubtful accounts was adequate to cover any anticipated losses.

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Outlook

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

We expect to see spending from our customers on their transmission and distribution systems increasing over the next few years as demand returns to normalized levels.   The Company’s backlog at March 31, 2011 was $159.2 million and while adding additional business projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available.

If the increased demand moves to expected levels in fiscal 2011 and beyond, we believe that the Company will continue to have opportunities to continue to improve both revenue and the profits thereon.

If growth continues, we will be required to make additional capital expenditures for equipment to keep up with that need.  Currently, it is anticipated that in fiscal 2011, the Company’s capital expenditures will be between $2.0 million and $4.0 million.  However, if the customer demands increase beyond anticipated levels, this number could be significantly higher.  Significantly higher capital expenditure requirements could impair our cash flows and require additional borrowings.

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks, primarily related to increases in fuel prices and adverse changes in interest rates, as discussed below.

Fuel Prices.   Our exposure to market risk for changes in fuel prices relates to our consumption of fuel and the price we have to pay for it.  As prices rise, our total fuel cost rises.  We do not feel that this risk is significant due to the fact that we would be able to pass a portion of those increases on to our customers.

Interest Rate.  Our exposure to market rate risk for changes in interest rates relates to our borrowings from  banks.   Some of our loans have variable interest rates.  Accordingly, as rates rise, our interest cost would rise.  We do not feel that this risk is significant.

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, as appropriate to allow timely decisions regarding required disclosure.

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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 2011 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.  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 Form 10-K as filed with the Securities and Exchange Commission on December 21, 2010, and which is incorporated herein by reference.   There have been no 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 securities during the periods covered by the report.

(b)  None

Energy Services of America Corporation did not repurchase any shares of its common stock during the relevant period.

ITEM 4. Removed and Reserved

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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

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ENERGY SERVICES OF AMERICA CORPORATION

Date: May 11, 2011	By: /s/ Edsel R. Burns
	Edsel R. Burns
	Chief Executive Officer
Date: May 11, 2011	By: / s/ Larry A. Blount
	Larry A. Blount
	Chief Financial Officer

 

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