ESOA

Business Context and Reporting Period

Company: Energy Services of America Corporation (ESOA)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and nine months ended June 30, 2025
Business Overview: ESOA is a contractor and service company operating primarily in the mid-Atlantic and central U.S., providing services to natural gas, petroleum, water distribution, automotive, chemical, and power industries. Key subsidiaries include C.J. Hughes (pipeline construction), Nitro (electrical/mechanical), and Tribute Contracting & Consultants (water/wastewater, acquired Dec 2024).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenue increased 20.6% ($17.7M) for the quarter and 13.6% ($33.7M) for the nine-month period compared to the prior year. This was driven by a 71.1% increase in Gas & Water Distribution revenue and a 7.5% increase in Electrical, Mechanical, & General services.
• Margin Compression: Gross profit margins declined significantly. The nine-month gross margin dropped from 13.1% in 2024 to 7.9% in 2025. Management attributed this to less efficient production, inclement weather in Q2 2025 causing lost workdays, and a shift in project mix.
• Profitability Decline: The company reported a net loss of $3.9 million for the nine months ended June 30, 2025, compared to net income of $18.4 million in the prior year. This reversal is primarily due to the absence of a $15.6 million one-time lawsuit judgment received in the prior year, combined with lower operating margins and increased interest expense.
• Debt Increase: Total debt increased to $59.1 million from $33.9 million at the prior fiscal year-end, largely due to $16.0 million in financing for the Tribute acquisition and increased equipment financing.

Guidance, Outlook, Risks, and Unusual Items

• Backlog: Unaudited backlog stood at $304.4 million as of June 30, 2025, up from $243.2 million at the prior fiscal year-end. This includes $133.0M in electrical/mechanical projects, $125.0M in water projects, and $30.0M in transmission projects.
• Outlook: Management notes that natural gas bid opportunities are occurring later than in previous years, though increased opportunities were seen in the third fiscal quarter. Water and wastewater projects remain strong.
• PPP Loan Contingency: A significant risk involves $9.8 million in Paycheck Protection Program (PPP) loans. Although previously forgiven, the SBA is reviewing the applications. The company has restated prior financials to record this as a short-term borrowing liability. If forgiveness is revoked, the company faces repayment plus potential penalties.
• Covenant Compliance: The company was not in compliance with all financial covenants at June 30, 2025, but received a waiver from its lender. Management projects compliance for the next twelve months.
• Unusual Items: The prior year's results included a $15.6 million gain from a lawsuit judgment, which is not present in the current period. Additionally, the company sold Revolt Energy (solar subsidiary) for nominal consideration in March 2025.

Investor Verification Checklist

• PPP Loan Status: Verify the current status of the SBA review on the $9.8 million PPP loans and the likelihood of repayment.
• Margin Recovery: Assess management's plan to address the significant decline in gross margins (from 13.1% to 7.9%) caused by weather and efficiency issues.
• Covenant Waivers: Monitor future quarterly reports for continued covenant compliance or the need for additional waivers.
• Acquisition Integration: Review the performance of the newly acquired Tribute Contracting & Consultants (revenue of $18.1M in the nine-month period) to ensure it meets growth expectations.
• Debt Service: Evaluate the impact of increased interest expense ($2.1M for nine months) on future cash flows given the higher debt load.