ESOA

Business Context and Reporting Period

Company: Energy Services of America Corporation (formerly a blank check company).

Reporting Period: Quarterly report (Form 10-Q) for the three months ended December 31, 2008.

Operational Status: The Company transitioned from a shell company to an operating entity on August 15, 2008, following the acquisition of S.T. Pipeline, Inc. and C.J. Hughes Construction Company, Inc. It provides contracting services for the gas, oil, and electrical industries, primarily in the Appalachian region.

Key Financial Metrics

Note: Q4 2007 figures are Pro Forma to reflect the acquisitions as if they occurred at the beginning of the period.

Material Changes vs. Prior Period

• Revenue Decline: Revenue decreased by approximately $29 million (46.3%) compared to the pro forma prior year. This was driven by the completion of major projects in 2007 that did not recur and seasonal weather delays.
• Gross Margin Collapse: The Company shifted from a 28% gross margin in the prior year to a -4.7% gross margin. A $3.2 million loss on two specific projects at one subsidiary, caused by inclement weather and adverse working conditions, was the primary driver.
• Balance Sheet Contraction: Total assets decreased from $133.7 million (Sept 30, 2008) to $109.4 million (Dec 31, 2008). Accounts receivable dropped by $22.3 million due to collections on completed projects, with no significant new projects contracted to replace the volume immediately.
• Debt Reduction: Total liabilities decreased by $22.1 million, primarily due to reductions in accounts payable and debt repayments.

Outlook, Risks, and Management Commentary

• Management Commentary: Management attributes the Q4 loss to unusual weather conditions and project-specific issues, stating these are not indicative of future performance. They anticipate accounts receivable to return to the $30 million range as new projects are bid.
• Backlog: As of December 31, 2008, the Company had a backlog of $54 million.
• Capital Expenditures: Anticipated capital expenditures for fiscal 2009 are estimated between $2.0 million and $4.0 million, though this could increase with demand.
• Liquidity Risks: While current cash ($13.4 million) and credit facilities are deemed sufficient for current needs, management notes that general credit tightening in late 2008 may impair future borrowing capacity, potentially limiting growth.
• Market Risks: The Company is exposed to fuel price increases and variable interest rates on borrowings. Customer concentration is high, with three customers (Equitable Resources, Columbia Gas, and Markwest) accounting for 40% of revenues.
• Off-Balance Sheet Items: The Company has $26.1 million in outstanding performance bonds and a $950,000 letter of credit for insurance premiums.

Investor Verification Checklist

• Project Losses: Verify the specific nature of the $3.2 million loss on the two projects and confirm management's assertion that these were one-time weather-related events.
• Backlog Conversion: Assess the likelihood of converting the $54 million backlog into revenue given the current economic instability and credit tightening mentioned in the filing.
• Related Party Debt: Review the terms of the $13 million in debt payable to directors, officers, and former owners, including the $4 million note payable upon collection of specific receivables.
• Customer Concentration: Evaluate the financial health of the top three customers (40% of revenue) to assess credit risk.
• Seasonality Impact: Monitor Q1 and Q2 results to see if the seasonal weather delays cited for Q4 persist or if margins recover as expected.