ENERGY SERVICES OF AMERICA CORPORATION You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with 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.
Understanding Gross Margins
Our gross margin is gross profit expressed as a percentage of revenues. Cost of revenues consists primarily of salaries, wages and some benefits to employees, depreciation, fuel and other equipment costs, equipment rentals, subcontracted services, portions of insurance, facilities expense, materials and parts and supplies. Factors affecting gross margin include:
Seasonal. As discussed above, seasonal patterns can have a significant impact on gross margins. Usually, business is slower in the winter months versus the warmer months.
Weather. Adverse or favorable weather conditions can impact gross margin in each period. Periods of wet weather, snow or rainfall, as well as severe temperature extremes can severely impact production and therefore negatively impact revenues and margins. Conversely, periods of dry weather with moderate temperatures can positively impact revenues and margins due to the opportunity for increased production and efficiencies. Revenue Mix. The mix of revenues between customer types and types of work for various customers will impact gross margins. Some projects will have greater margins while others that are extremely competitive in bidding may have narrower margins. Service and Maintenance versus Installation. In general, installation work has a higher gross margin than maintenance work. This is because installation work usually is of a fixed price nature and therefore has higher risks involved. Accordingly, a higher portion of the revenue mix from installation work typically will result in higher margins.
Subcontract Work. Work that is subcontracted to other service providers generally has lower gross margins. Increases in subcontract work as a percentage of total revenues in each period may contribute to a decrease in gross margin.
Materials versus Labor. Typically, materials supplied on projects have lower margins than labor. Accordingly, projects with a higher material cost in relation to the entire job will have a lower overall margin.
Depreciation. Depreciation is included in our cost of revenue. This is a common practice in our industry but can make comparability to other companies difficult.
Margin Risk. Failure to properly execute a job including failure to properly manage and supervise a job could decrease the profit margin.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees, general liability insurance and miscellaneous other
expenses.
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Results of Operations for the Fiscal Year Ended
Revenue. A table comparing the components of the Company's revenues for the
fiscal years ended
Fiscal Year Ended
September 30, 2022 % of total
$ 53,311,569 27.0 %
$ 40,440,195 33.02 %
58,268,501 29.5 % 22,133,483 18.07 % 36,135,018 163.3 %
Electrical, Mechanical, and General 86,009,930 43.5 %
59,892,148 48.91 % 26,117,782 43.6 %
Total $ 197,590,000 100.0 % $ 122,465,826 100.0 % $ 75,124,174 61.3 %
Revenue increased by $75.1 million , or 61.3%, to $197.6 million for the fiscal
year ended September 30, 2022 , from $122.5 million for the fiscal year ended
September 30, 2021 .
Gas & Water Distribution revenues totaled $53.3 million for the fiscal year
ended September 30, 2022 , a $12.9 million increase from $40.4 million for the
fiscal year ended September 30, 2021 . The revenue increase was primarily related
to the Company's overall commitment to growing this line of business through
adding new distribution crews and the acquisition of Tri-State Paving , which
primarily provides services for water utility companies. Tri-State Paving ,
acquired on April 29, 2022 , contributed revenues of $4.9 million for the fiscal
year ended September 30, 2022 . A full year of West Virginia Pipeline revenue,
acquired on December 31, 2020 , resulted in $3.1 million in additional revenue
during fiscal year 2022 as compared to 2021.
Gas & Petroleum Transmission revenues totaled $58.3 million for the fiscal year
ended September 30, 2022 , a $36.1 million increase from $22.1 million for the
fiscal year ended September 30, 2021 . The revenue increase was primarily related
to an increase in the amount of bidding opportunities with both existing,
long-term customers and newer customers.
Electrical, Mechanical, & General services and construction revenues totaled
$86.0 million for the fiscal year ended September 30, 2022 , a $26.1 million
increase from $59.9 million for the fiscal year ended September 30, 2021 . The
revenue increase was primarily due to growth in general and civil construction
opportunities for SQP, which began operations in March 2021 and increased
revenues by $19.3 million in fiscal year 2022 as compared to 2021.
Cost of Revenues. A table comparing the components of the Company's costs of
revenues for fiscal years ended
Fiscal Year Ended
September 30, 2022 % of total
$ 41,726,934 23.8
% $ 32,467,794 29.6 %
54,856,321 31.3 % 17,237,245 15.7 % 37,619,076 218.2 %
Electrical, Mechanical, and General 79,141,713 45.2 % 55,574,528 50.7 % 23,567,185 42.4 %
Unallocated Shop (Profit) Expense (505,716) (0.3)% 4,265,237 3.9 % (4,770,953) (111.9) % Total$ 175,219,252 100.0 %$ 109,544,804 100.0 %$ 65,674,448 60.0 % Total cost of revenues increased by$65.7 million or 60.0% to$175.2 million for the fiscal year endedSeptember 30, 2022 , from$109.5 million for the fiscal year endedSeptember 30, 2021 . Gas & Water Distribution cost of revenues totaled$41.7 million for the fiscal year endedSeptember 30, 2022 , a$9.2 million increase from$32.5 million for the fiscal year endedSeptember 30, 2021 . The cost of revenues increase was primarily related to the Company's overall commitment to growing this line of business through adding new distribution crews and the acquisition ofTri-State Paving , which primarily provides services for water utility companies.Tri-State Paving , acquired onApril 29, 2022 , had cost of revenues of$3.1 million for the fiscal year endedSeptember 30, 2022 . A full year of West Virginia Pipeline cost of revenues, acquired onDecember 31, 2020 , resulted in$1.8 million in additional cost of revenues during fiscal year 2022 as compared to 2021. 19
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Gas & Petroleum Transmission cost of revenues totaled
Electrical, Mechanical, & General services and construction cost of revenues totaled$79.1 million for the fiscal year endedSeptember 30, 2022 , a$23.5 million increase from$55.6 million for the fiscal year endedSeptember 30, 2021 . The cost of revenues increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations inMarch 2021 and increased costs of revenues by$16.4 million in fiscal year 2022 as compared to 2021.
Gross Profit. A table comparing the components of the Company's gross profit for
fiscal years ended
Fiscal Year Ended
September 30, 2022 % of revenue September 30, 2021 % of revenue Change % Change
Gas & Water Distribution $ 11,584,635 51.8 % $ 7,972,401 61.7 % $ 3,612,234 45.3 %Gas & Petroleum Transmission 3,412,180 15.3 % 4,896,238 37.9 % (1,484,058) (30.3) % Electrical, Mechanical, and General 6,868,217 30.7 % 4,317,620 33.4 % 2,550,597 59.1 % Unallocated Shop Profit (Expense) 505,716 2.3
% (4,265,237) (33.0) % 4,770,953 (111.9) % Total $ 22,370,748 100.0 % $ 12,921,022 100.0 %$ 9,449,726 73.1 % Gross profit percentage 11.3 % 10.6 %
Total gross profit increased by$9.5 million or 73.1% to$22.4 million for the fiscal year endedSeptember 30, 2022 , from$12.9 million for the fiscal year endedSeptember 30, 2021 . Gas & Water Distribution gross profit totaled$11.6 million for the fiscal year endedSeptember 30, 2022 , a$3.6 million increase from$8.0 million for the fiscal year endedSeptember 30, 2021 . The gross profit increase was primarily related to the Company's overall commitment to growing this line of business through adding new distribution crews and the acquisition ofTri-State Paving , which primarily provides services for water utility companies.Tri-State Paving , acquired onApril 29, 2022 , contributed gross profit of$1.8 million for the fiscal year endedSeptember 30, 2022 . A full year of West Virginia Pipeline gross profit, acquired onDecember 31, 2020 , resulted in$1.3 million in additional gross profit during the fiscal year 2022 as compared to 2021. Gas & Petroleum Transmission gross profit totaled$3.4 million for the fiscal year endedSeptember 30, 2022 , a$1.5 million decrease from$4.9 million for the fiscal year endedSeptember 30, 2021 . The gross profit decrease was primarily related to one gas transmission project that is projected to lose$2.1 million . Electrical, Mechanical, & General services and construction gross profit totaled$6.9 million for the fiscal year endedSeptember 30, 2022 , a$2.6 million increase from$4.3 million for the fiscal year endedSeptember 30, 2021 . The gross profit increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations inMarch 2021 and increased gross profit by$3.0 million in the fiscal year 2022 as compared to 2021. Gross profit attributed to unallocated shop operations totaled$506,000 for the fiscal year endedSeptember 30, 2022 , a$4.8 million increase from$4.3 million in unallocated shop expenses for the fiscal year endedSeptember 30, 2021 . The gross profit increase was primarily due to increased internal equipment charges to projects and better project costs tracking for the fiscal year endedSeptember 30, 2022 , as compared to 2021. Selling and administrative expenses. Total selling and administrative expenses increased by$1.9 million to$15.9 million for the fiscal year endedSeptember 30, 2022 , from$14.0 million for the fiscal year endedSeptember 30, 2021 . Approximately$700,000 of the selling and administrative expense increase for the fiscal year endedSeptember 30, 2022 as compared to the prior fiscal year, was from the operations of the new subsidiaries,Tri-State Paving andRyan Construction . In addition, the Company incurred approximately$1.6 in million additional selling and administrative expenses related to a full twelve months of activity for West Virginia Pipeline and SQP in the fiscal year 2022 as compared to 2021. 20 Table of Contents Income from operations. Income from operations was$6.5 million for the fiscal year endedSeptember 30, 2022 , a$7.6 million increase from a$1.1 million loss from operations for the fiscal year endedSeptember 30, 2021 . The increase was due to the items described above. Interest Expense. Interest expense increased by$331,000 or 59.3% to$888,000 for the fiscal year endedSeptember 30, 2022 , from$557,000 for the fiscal year endedSeptember 30, 2021 . This increase was primarily due to increased line of credit borrowings and financing the financing of acquisitions. Other Income. Other income totaled$507,000 for the fiscal year endedSeptember 30, 2022 , as compared to other income of$10.7 million for the fiscal year endedSeptember 30, 2021 . The decrease in other income was primarily related to$9.8 million of PPP loan debt forgiveness recognized during the fiscal year endedSeptember 30, 2021 . Please see the "Paycheck Protection Program Loans" disclosure on page 9. Net Income. Income before income taxes was$6.1 million for the fiscal year endedSeptember 30, 2022 , compared to$9.1 million for the fiscal year endedSeptember 30, 2021 . The$3.0 million decrease was primarily due to a one-time$9.8 million PPP loan debt forgiveness in the fiscal year 2021, partially offset by a$7.6 million increase in income from operations. The income tax expense for fiscal year endedSeptember 30, 2022 was$2.3 million compared to an income tax benefit of ($29,000 ) for the fiscal year endedSeptember 30, 2021 . The increase was due to an increase in taxable income. According to the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") passed byCongress inMarch 2020 , PPP loan forgiveness is not taxable. In accordance with the Consolidated Appropriations Act, 2021, the Company's PPP related expenditures in the fiscal year 2020 were considered deductible expenses for federal income tax purposes. The effective income tax rate for the fiscal year endedSeptember 30, 2022 was 37.0%. The effective income tax rate for the fiscal year endedSeptember 30, 2021 , was (0.32%). The PPP forgiveness had a significant impact on the effective income tax rate for the fiscal year endedSeptember 30, 2021 , as taxable income was decreased by$9.8 million . Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income or loss, non-taxable items and nondeductible expenses. Dividends on preferred stock for the fiscal years endedSeptember 30, 2022 , and 2021 were$0 and$284,000 , respectively. There will be no further dividends paid on preferred stock after theOctober 6, 2021 redemption of all the Company's preferred stock. Net income available to common stockholders for the fiscal year endedSeptember 30, 2022 was$3.9 million compared to$8.8 million for the fiscal year endedSeptember 30, 2021 . The decrease was due to the items mentioned above.
Comparison of Financial Condition at
The Company had total assets of
The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled$42.9 million atSeptember 30, 2022 , an increase of$20.4 million from the combined prior the fiscal year-end balance of$22.5 million . The increase was primarily due to increased work in the fiscal year 2022 as compared to 2021. Specifically,$69.4 million in revenue was generated in the fourth quarter of fiscal year 2022 as compared to$39.6 million for the same period in 2021. Net property, plant and equipment totaled$32.7 million atSeptember 30, 2022 , an increase of$9.7 million from the prior the fiscal year-end balance of$23.0 million . Property, plant and equipment acquisitions totaled$15.6 million for the fiscal year 2022 while depreciation expense was$5.6 million , and the net impact of disposals was$316,000 . Assets received as part of theTri-State Paving andRyan Construction acquisitions accounted for$8.9 million of the$15.6 million in total acquisitions. Contract assets totaled$16.1 million atSeptember 30, 2022 , an increase of$7.4 million from the prior the fiscal year-end balance of$8.7 million . This increase was primarily due to increased work and the timing of project billings and related increase in costs and estimated earnings in excess of billings atSeptember 30, 2022 as compared to atSeptember 30, 2021 . 21
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Goodwill and acquired intangible assets totaled$8.0 million atSeptember 30, 2022 , a$3.7 million increase from the prior fiscal year end balance of$4.2 million . The increase to goodwill and acquired intangible assets was primarily the result of theTri-State Paving acquisition which goodwill and acquired intangible assets totaled$4.2 million atSeptember 30, 2022 , and was partially offset by$445,000 in amortization expense for fiscal year 2022. Right-of-use assets acquired from operating leases totaled$1.6 million net of amortization expense, as compared to no right-to-use assets at the prior the fiscal year end. The operating leases were primarily related to the business combinations completed in the fiscal year endedSeptember 30, 2022 .
Prepaid expenses and other totaled
Cash and cash equivalents totaled$7.4 million atSeptember 30, 2022 , a decrease of$799,000 from the prior the fiscal year-end balance of$8.2 million . The decrease was primarily related to a net$8.3 million investment in property and equipment,$4.3 million in long-term debt repayments, and$1.2 million in preferred stock conversion payments, partially offset by a net$4.7 million increase in line of credit and short-term borrowings and$8.3 million in net cash provided by operating activities.
Liabilities totaled
Accounts payable totaled$20.3 million as ofSeptember 30, 2022 , an increase of$13.0 million from the prior the fiscal year-end balance of$7.3 million . The increase was due to more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021. Lines of credit and short-term borrowings totaled$13.1 million atSeptember 30, 2022 , an increase of$8.1 million from the prior the fiscal year-end balance of$5.0 million . This increase was primarily due to increased borrowings against the Company's operating line of credit because or more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021. Accrued expenses and other current liabilities totaled$11.3 million atSeptember 30, 2022 , an increase of$5.7 million from the prior the fiscal year-end balance of$5.6 million . The increase was primarily due to increased labor and burden expenses incurred towards the end of the fiscal year 2022, as compared to the same period in fiscal 2021. The aggregate balance of current maturities of long-term debt and long-term debt totaled$17.6 million atSeptember 30, 2022 , an increase of$5.2 million from the prior the fiscal year-end balance of$12.4 million . The increase was primarily due to a$8.4 million increase related to financing theTri-State Paving acquisition and$940,000 in equipment financing, partially offset by$4.3 million in payments on long-term debt. Contract liabilities totaled$6.0 million atSeptember 30, 2022 , an increase of$2.8 million from the prior the fiscal year-end balance of$3.2 million . This increase was due to increased billings in excess of costs and earnings when computing earned revenue on construction projects atSeptember 30, 2022 , as compared to atSeptember 30, 2021 .
Operating lease liabilities totaled
Net deferred income tax payable totaled 4.5 million at
Stockholders' equity totaled$38.3 million atSeptember 30, 2022 , an increase of$3.7 million from the prior the fiscal year-end balance of$34.6 million . This increase was primarily due to$3.9 million in net income and a$1.0 million increase in additional paid in capital related to stock issued as part of theTri-State Paving acquisition, partially offset by$1.2 million in preferred
stock redemption payments.
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Liquidity and Capital Resources
Operating Line of Credit and Short-Term Borrowings
OnJuly 13, 2022 , the Company received a one-year extension on its operating line of credit effectiveJune 28, 2022 . The$15.0 million revolving line of credit has a$12.5 million component and a$2.5 million component. The Company can borrow from the$12.5 million component first and then from the additional$2.5 million component if additional requirements are met. The covenant requirements for both components are below. Based on the borrowing base calculation, the Company borrowed all$12.5 million available on the line of credit as ofSeptember 30, 2022 . The Company did not meet the requirements to borrow any from the$2.5 million component. The Company expects to receive an amendment to increase its line of credit byDecember 31, 2022 . The interest rate on the line of credit is the "Wall Street Journal " Prime Rate (the index) with a floor of 4.99%. The interest rate atSeptember 30, 2022 , was 5.5%. Based on the borrowing base calculation, the Company was able to borrow up to$12.2 million as ofSeptember 30, 2021 . The Company had$4.5 million in borrowings on the line of credit, leaving$7.7 million available on the line of credit as ofSeptember 30, 2021 . The interest rate atSeptember 30, 2021 , was 4.99%. Major items excluded from the borrowing base calculation are receivables from bonded jobs and retainage as well as all items greater than ninety (90) days old. Line of credit borrowings are collateralized by the Company's accounts receivable. Cash available under the line is calculated based on 70.0% of the Company's eligible accounts receivable.
Under the terms of the agreement, the Company must meet the following loan
covenants to access the first
1. Minimum tangible net worth of$21.5 million to be measured quarterly,
2. Minimum traditional debt service coverage of 1.25x to be measured quarterly on
a rolling twelve- month basis,
3. Minimum current ratio of 1.50x to be measured quarterly,
4. Maximum debt to tangible net worth ratio ("TNW") of 1.5x to be measured
semi-annually,
Full review of accounts receivable aging report and work in progress. The
5. results of the review shall be satisfactory to the lender in its sole and
unfettered discretion.
Under the terms of the agreement, the Company must meet the following additional
requirements for draw requests causing the borrowings to exceed
1. Minimum traditional debt service coverage of 2.0x to be measured quarterly on
a rolling twelve-month basis,
2. Minimum tangible net worth of
The Company was not in compliance with all covenants but received a waiver on the$12.5 million component of the line of credit atSeptember 30, 2022 . The Company projects to be in compliance with all covenants associated with the$12.5 million component for the next twelve months. The Company also finances insurance policy premiums on a short-term basis through a financing company. These insurance policies include workers' compensation, general liability, automobile, umbrella, and equipment policies. The Company makes a down payment in January and finances the remaining premium amount over ten monthly payments. InJanuary 2022 and 2021, respectively, the Company financed$3.4 million and$3.2 million in insurance premiums. AtSeptember 30, 2022 and 2021, respectively, the remaining balance of the insurance premiums was$580,000 and$540,000 .
Long-Term Debt
OnDecember 16, 2014 , the Company's Nitro subsidiary entered into a 20-year$1.2 million loan agreement with a bank to purchase the office building and property it had previously been leasing for$6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly payments of$7,800 . The interest rate on this note is subject to change from time to time based on changes in theU.S. Treasury yield, adjusted to a constant maturity of three years as published by theFederal Reserve weekly. As ofSeptember 30, 2022 , the Company had made principal payments of$333,000 . The loan is collateralized by the building purchased under this agreement. The note is currently held byPeoples Bank, Inc. , formerlyFirst Bank of Charleston, Inc. (West Virginia ). 23
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OnNovember 13, 2015 , the Company entered into a 10-year$1.1 million loan agreement withUnited Bank to purchase the fabrication shop and property Nitro had previously been leasing for$12,900 each month. The variable interest rate on the loan agreement is 7.25% atSeptember 30, 2022 with monthly payments of$12,193 . As ofSeptember 30, 2022 , the Company had made principal payments of$687,000 . The loan is collateralized by the building and property purchased under this agreement. OnJune 28, 2017 , the Company entered into a$5.0 million Non-Revolving Note agreement withUnited Bank . 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% with monthly payments of$98,865 . As ofSeptember 30, 2022 , the Company had repaid this note in full. OnDecember 31, 2020 ,West Virginia Pipeline Acquisition Company , later renamedWest Virginia Pipeline, Inc. , entered into a$3.0 million sellers' note agreement with David andDaniel Bolton for the remaining purchase price ofWest Virginia Pipeline, Inc. For the purchase price allocation, the$3.0 million note had a fair value of$2.85 million . As part of the$6.35 million acquisition price, the Company paid$3.5 million in cash in addition to the note. The unsecured five-year term note requires annual payments of at least$500,000 with a fixed interest rate of 3.25% on the$3.0 million sellers' note, which equates to 5.35% on the carrying value of the note. As ofSeptember 30, 2022 , the Company had made annual installment payments of$500,000 , interest payments of$152,000 and expensed$53,000 in accreted interest. OnJanuary 4, 2021 , the Company entered into a$3.0 million Non-Revolving Note agreement withUnited Bank . This five-year agreement gave the Company access to a$3.0 million line of credit ("Equipment Line of Credit 2021"), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal. After twelve months, all borrowings against the Equipment Line of Credit 2021 were converted to a four-year term note agreement with a variable interest rate initially established at 4.25%. The loan is collateralized by the equipment purchased under this agreement. As ofSeptember 30, 2022 , the Company borrowed$3.0 million against this line of credit with monthly payments of$68,150 that started inFebruary 2022 . The interest rate atSeptember 30, 2022 was 7.25%. The Company has made principal payments of$451,000 on this note as ofSeptember 30, 2022 . OnApril 2, 2021 , the Company entered into a$3.5 million Non-Revolving Note agreement withUnited Bank . This five-year agreement repaid the outstanding$3.5 million line of credit that was used for the down payment on theWest Virginia Pipeline acquisition. This loan has monthly installment payments of$64,853 and has a fixed interest rate of 4.25%. The loan is collateralized by the Company's equipment and receivables. As ofSeptember 30, 2022 , the Company had made principal payments of$971,000 . OnApril 29, 2022 , the Company entered into a$7.5 million Non-Revolving Note agreement withUnited Bank . This five-year agreement was used to finance the purchase ofTri-State Paving and has monthly payments of$129,910 with a fixed interest rate of 4.25%. The Company has made principal payments of$518,000 on this note as ofSeptember 30, 2022 . OnApril 29, 2022 , the Company entered into a$1.0 million promissory note agreement withCorns Enterprises , a related party, as partial consideration for the purchase ofTri-State Paving . This four-year agreement requires$250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginningApril 29, 2022 . Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company recorded$7,800 in accreted interest and has not made any principal payments on this note as ofSeptember 30, 2022 . The maturities of long-term and short-term debt, which includes line of credit borrowings, term notes payable to banks, and notes payable on various equipment purchases, were as follows: 2023$ 17,140,336 2024 4,061,665 2025 4,170,114 2026 3,569,091 2027 1,069,272 Thereafter 623,942$ 30,634,420 24 Table of Contents
As of
Leases
The Company leases office space for SQP for$1,500 per month. The lease, signed onMarch 25, 2021 , is for a period of two years with five one-year renewals available immediately following the end of the base term. Rental terms for the option periods shall be negotiated and agreed mutually between the parties and shall not exceed five percent increases to rent, if any. The lease is expensed monthly and not treated as a right-to-use asset as it does not have a material impact on the Company's consolidated financial statements. During fiscal year endedSeptember 30, 2022 , the Company entered into two lease agreements for construction equipment for a combined$160,000 . The leases have a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of$6,645 and are cancellable at any time without penalty. The Company has the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The right-of-use assets and finance lease obligations associated with these lease agreements are included in the consolidated balance sheets within property, plant and equipment and long-term debt, respectively, and do not have a material impact on the Company's consolidated financial statements. The Company has two right-of-use operating leases acquired onApril 29, 2022 , as part of theTri-State Paving transaction. The first operating lease, for theHurricane, WV facility, had a net present value of$236,000 atApril 29, 2022 , and a carrying value of$205,000 atSeptember 30, 2022 . The second operating lease, for theChattanooga, Tennessee facility, had a net present value of$144,000 atApril 29, 2022 , and a carrying value of$119,000 atSeptember 30, 2022 . The 4.5% interest rate on the operating leases is based on the Company's incremental borrowing rate at inception. The Company has a right-of-use operating lease withEnterprise Fleet Management, Inc. acquired onAugust 11, 2022 , as part of the Ryan Environmental acquisition. This lease agreement was initially for 31 vehicles to be used forRyan Construction ; however, the Company plans to add vehicles as it finds necessary. This lease had a net present value of$1.2 million at inception, which approximates the carrying value atSeptember 30, 2022 . The 4.5% interest rate on the operating lease is based on the Company's incremental borrowing rate at inception. The Company has a right-of-use operating lease withRICA Developers, LLC acquired onAugust 12, 2022 , as part of the Ryan Environmental acquisition. This lease, for theBridgeport, WV facility, had a net present value of$140,000 at inception and a carrying value of$113,000 atSeptember 30, 2022 . The 4.5% interest rate on the operating lease is based on the Company's incremental borrowing rate at inception. The maturities of the Company's operating lease liabilities were as follows: 2023$ 588,653 2024 465,428 2025 373,397 2026 296,606 1,724,084 Less amounts representing interest (119,807)
Present value of operating lease liabilities
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 on our balance sheets. Though for the most part not material in nature, some of these are: Rental Agreements The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by the fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the consolidated statements of income, was$9.8 million and$3.6 million for the twelve months endedSeptember 30, 2022 , and 2021,
respectively.
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Letters of Credit
Certain of our customers or vendors may require letters of credit to secure
payments that the vendors are making on our behalf or to secure payments to
subcontractors, vendors, etc. on various customer projects. At
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 performance 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. Currently, the Company has 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 value of contracts that can be bid. Depending upon the size and conditions of a particular 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 in the foreseeable future. AtSeptember 30, 2022 , the Company had$82.8 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 withinthe 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. Please see the tables below for customers that represent 10.0% or more of the Company's revenue or accounts receivable, net of retention for the fiscal years endedSeptember 30, 2022 , and 2021: Revenue FY 2022 FY 2021 TransCanada Corporation 16.6 % 11.0 % All other 83.4 % 89.0 % Total 100.0 % 100.0 %
* Less than 10.0% and included in "All other" if applicable
Accounts receivable, net of retention FY 2022 FY 2021 TransCanada Corporation 11.6 % 13.2 % Kentucky American Water * 16.3 % All other 88.4 % 70.5 % Total 100.0 % 100.0 %
* Less than 10.0% and included in "All other" if applicable
Virtually all work performed for major customers was awarded under competitive
bid fixed price or unit price arrangements. The loss of a major customer could
have a severe impact on the profitability of operations of the Company. However,
due to the nature of the Company's operations, the major customers and sources
of revenues may change from year to year.
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Litigation
In February 2018 , the Company filed a lawsuit against a former customer
("Defendant") in the United States District Court for the Western District of
Pennsylvania . The lawsuit is related to a dispute over work performed on a
pipeline construction project. On November 21, 2022 , a Judgment Order was
issued, and the Company was awarded $13.1 million , of which $5.8 million was the
jury award, $1.6 million was for attorney's fees, and $5.7 million was for
penalties and interest. The amounts awarded by the Judgment Order have not been
recognized in the Company's consolidated financial statements as of September
30, 2022 . The Company's attorney's fees have been expensed as incurred. On
December 16, 2022 , the Defendant filed a notice of appeal with the court.
On November 12, 2021 , the Company received a withdrawal liability claim from a
pension plan to which the Company made pension contributions for union
construction employees performing covered work in a particular jurisdiction. The
Company has not performed covered work in their jurisdiction since 2011;
however, the Company disagrees with the withdrawal claim and believes it is
covered by an exemption under federal law. The demand called for thirty-four
quarterly installment payments of $41,000 starting December 15, 2021 . The
Company must comply with the demand under federal pension law; however, the
Company firmly believes no withdrawal liability exists. The Company is in
negotiations with the pension fund to resolve the matter and all future payments
have been suspended as part of the negotiation. The Company has expensed all
$164,000 in payments made through September 30, 2022 and does not expect any
future liabilities related to this claim.
Other than described above, at September 30, 2022 , the Company was not involved
in any legal proceedings other than in the ordinary course of business. The
Company is a party from time to time to various lawsuits, claims and other legal
proceedings that arise in the ordinary course of business. These actions
typically seek, among other things, compensation for alleged personal injury,
breach of contract and/or property damages, punitive damages, civil penalties or
other losses, or injunctive or declaratory relief. With respect to all such
lawsuits, claims, and proceedings, we record reserves when it is probable that a
liability has been incurred and the amount of loss can be reasonably estimated.
At September 30, 2022 , 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. OnDecember 16, 2014 , the Company's Nitro subsidiary entered into a 20-year$1.2 million loan agreement withFirst Bank of Charleston, Inc. (West Virginia ) to purchase the office building and property it had previously been leasing for$6,300 each month. The interest rate on the loan agreement is 4.82% with monthly payments of$7,800 . As ofSeptember 30, 2022 , the Company had paid approximately$333,000 in principal and approximately$370,000 in interest since the beginning of the loan. Mr.Douglas Reynolds , President of Energy Services, was a director and secretary ofFirst Bank of Charleston . Mr.Samuel Kapourales , a director of Energy Services, was also a director ofFirst Bank of Charleston . OnOctober 15, 2018 ,First Bank of Charleston was merged intoPremier Bank, Inc. , a wholly owned subsidiary ofPremier Financial Bancorp, Inc. Mr.Marshall Reynolds , Chairman of theBoard of Energy Services , held the same position withPremier Financial Bancorp, Inc. Mr.Douglas Reynolds is the president and a director of Energy Services and was a director ofPremier Financial Bancorp, Inc. OnSeptember 17, 2021 , Peoples Bancorp, Inc., parent company ofPeoples Bank , completed an acquisition ofPremier Financial Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank andCitizens Deposit Bank & Trust . OnOctober 26, 2021 , Mr.Douglas Reynolds was elected a director of Peoples Bancorp, Inc., and its subsidiaryPeoples Bank . OnApril 29, 2022 , the Company entered into a$1.0 million promissory note agreement withCorns Enterprises as partial consideration for the purchase ofTri-State Paving . This four-year agreement requires$250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginningApril 29, 2022 . Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company recorded$7,800 in accreted interest and has not made any principal payments on this note as ofSeptember 30, 2022 . Subsequent to theApril 29, 2022 acquisition ofTri-State Paving , the Company entered into an operating lease for facilities inHurricane, West Virginia withCorns Enterprises . This thirty-six-month lease is treated as a right to use asset and has payments of$7,000 per month. The total net present value at inception was$236,000 with a carrying value of$205,000 atSeptember 30, 2022 . 27 Table of Contents
SQP made an equity investment of$156,000 in 1030Quarrier Development, LLC ("Development") inAugust 2022 . Development is a variable interest entity ("VIE") that is 75% owned by 1030Quarrier Ventures, LLC ("Ventures") and 25% owned by SQP. SQP is not the primary beneficiary of the VIE and therefore, will not consolidate Development into its consolidated financial statements. Instead, SQP will apply the equity method of accounting for its investment in Development. Development, a 1% owner, andUnited Bank , a 99% owner, formed 1030Quarrier Landlord, LLC ("Landlord"). Landlord decided to pursue the following development project (the "Project"): a historical building at1030 Quarrier Street ,Charleston, West Virginia as well as associated land (the "Property") was purchased to be developed/rehabilitated into a commercial project including apartments and commercial space. Upon the completion of development, the Property will be used to generate rental income. SQP has been awarded the construction contract for the Project.United Bank provided$5.0 million in loans to fund the Project. SQP and Ventures has jointly provided an unconditional guarantee for the$5.0 million of obligations associated with the Project.
Other than mentioned above, there were no new material related party
transactions entered into during the fiscal year ended
Certain Energy Services subsidiaries routinely engage in transactions in the normal course of business with each other, including sharing employee benefit plan coverage, payment for insurance and other expenses on behalf of other affiliates, and other services incidental to business of each of the affiliates. All revenue and related expense transactions, as well as the related accounts payable and accounts receivable have been eliminated in consolidation.
Inflation
Most significant project materials, such as pipe or electrical wire, are provided by the Company's customers. The Company did experience costs increases on materials for fire protection projects, which had been bid several months prior, during the twelve months endedSeptember 30, 2022 . While significant to those smaller projects, the costs increases were immaterial to the overall operations of the Company. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material costs increases in bids. Where allowed by contract, the Company will address fuel cost increases with customers. Significant inflation or supply chain issues could cause customers to delay or cancel planned projects; however, inflation did not have a significant effect on our results for the twelve months endedSeptember 30, 2022 , and 2021.
Critical Accounting Estimates
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 inthe 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. Revenues
The Company recognizes revenue as performance obligations are satisfied and
control of the promised good and service is transferred to the customer. For
Lump Sum and Unit Price contracts, revenue is ordinarily recognized over time as
control is transferred to the customers by measuring the progress toward
complete satisfaction of the performance obligation(s) using an input (i.e.,
"cost to cost") method. For Cost Plus and Time and Material ("T&M") contracts,
revenue is ordinarily recognized over time as control is transferred to the
customers by measuring the progress toward satisfaction of the performance
obligation(s) using an output method. The Company also does certain T&M service
work that is generally completed in a short duration and is recognized at a
point in time.
The accuracy of our revenue and profit recognition in a given period depends on
the accuracy of our estimates of the cost to complete each project. We believe
our experience allows us to create materially reliable estimates. There are a
number of factors that can contribute to changes in estimates of contract cost
and profitability. The most significant of these include:
? the completeness and accuracy of the original bid;
? costs associated with scope changes;
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? changes in costs of labor and/or materials;
? extended overhead and other costs due to owner, weather and other delays;
? subcontractor performance issues;
? changes in productivity expectations;
? site conditions that differ from those assumed in the original bid;
? changes from original design on design-build projects;
? the availability and skill level of workers in the geographic location of the
project;
? a change in the availability and proximity of equipment and materials;
? our ability to fully and promptly recover on affirmative claims and back
charges for additional contract costs; and
? the customer's ability to properly administer the contract.
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects could have, a significant effect on our profitability.
Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced. Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
The following table presents our costs and estimated earnings in excess of
billings and billings in excess of costs and estimated earnings at
September 30, 2022 September 30, 2021
Costs incurred on contracts in progress $ 192,957,145 $ 64,903,618
Estimated earnings, net of estimated losses 28,150,060 13,280,334
221,107,205 78,183,952
Less billings to date 211,025,190 72,606,840
$ 10,082,015 $ 5,577,112
Costs and estimated earnings in excess of billed on uncompleted contracts
$ 16,109,593 $ 8,730,402 Less billings in excess of costs and estimated earnings on uncompleted contracts
6,027,578 3,153,290
$ 10,082,015 $ 5,577,112
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Allowance 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 customers' access to capital, our customers' willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. 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. Materially incorrect estimates of bad debt reserves could result in an unexpected loss in profitability for the Company. Additionally, frequently changing reserves could be an indication of risky or unreliable customers. AtSeptember 30, 2022 , the management review deemed that the allowance for doubtful accounts was adequate.
Please see the allowance for doubtful accounts table below:
Year Ended September 30,
2022 2021
Balance at beginning of year $ 70,310 $ 70,310
Charged to expense - -
Deductions for uncollectible receivables written off, net
of recoveries - -
Balance at end of year $ 70,310 $ 70,310 Impairment of goodwill and intangible assets
The Company follows the guidance of Accounting Standards Codification ("ASC")
350-20-35-3 "Intangibles-Goodwill and Other (Topic 350)" which requires a
company to record an impairment charge based on the excess of a reporting unit's
carrying amount of goodwill over its fair value. Under the current guidance,
companies can first choose to assess any impairment based on qualitative factors
(Step 0). If a company fails this test or decides to bypass this step, it must
proceed with a quantitative assessment of goodwill impairment. The Company did
not have a goodwill impairment at September 30, 2022 .
Materially incorrect estimates could cause an impairment to goodwill or intangible assets and result in a loss in profitability for the Company.
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A table of the Company's intangible assets subject to amortization is below:
Accumulated Accumulated Amortization and
Amortization and Amortization and Impairment
Remaining Life at Impairment at Impairment at Twelve Months Ended
September 30, Original September 30, September 30, September 30, Net Book
Intangible assets: 2022 Cost 2022 2021 2022 Value
West Virginia Pipeline: Customer Relationships 99 months$ 2,209,724 $ 386,693 $ 165,725 $ 220,968$ 1,823,031 Tradename 99 months 263,584 46,136 19,772 26,364 217,448 Non-competes 3 months 83,203 72,806 31,202 41,604 10,397 Revolt Energy:
Employment agreement/non-compete 19 months 100,000
77,779 13,889 63,890 22,221
Tri-State Paving:
Customer Relationships 115 months 1,649,159 66,781 - 66,781 1,582,378
Tradename 115 months 203,213 8,368 - 8,368 194,845
Non-competes 7 months 39,960 16,590 - 16,590 23,370
Total intangible assets $ 4,548,843 $ 675,153 $ 230,588 $ 444,565 $ 3,873,690 Depreciation and Amortization
The purpose of depreciation and amortization is to represent an accurate value of assets on the books. Every year, as assets are used, their values are reduced on the balance sheet and expensed on the income statement. As depreciation and amortization are a noncash expense, the amount must be estimated. Each year a certain amount of depreciation and amortization is written off and the book value of the asset is reduced. Property and equipment are recorded at cost. Costs which extend the useful lives or increase the productivity of the assets are capitalized, while normal repairs and maintenance that do not extend the useful life or increase productivity of the asset are expensed as incurred. Property and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets: buildings 39 years; operating equipment and vehicles 5-7 years; and office equipment, furniture and fixtures 5-7 years. Acquired intangible assets subject to amortization are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible assets is realized, over their respective estimated useful lives. The definite-lived identifiable intangible assets recognized as part of the Company's business combinations are recorded at their estimated fair value. The Company's depreciation expense for the twelve months endedSeptember 30, 2022 , and 2021 was$5.6 million and$4.7 million , respectively. In general, depreciation is included in "cost of revenues" on the Company's consolidated statements of income. The Company's amortization expense for the twelve months endedSeptember 30, 2022 , and 2021 was$445,000 and$231,000 , respectively. In general, amortization is included in "cost of revenues" on the Company's consolidated statements of income. Materially incorrect estimates of depreciation and amortization and/or the useful lives of assets could significantly impact the value of long-lived assets on the Company's consolidated financial statements. A material over valuation could result in impairment charges and reduced profitability for the Company.
Income Taxes
The Company's income tax expense and deferred tax assets and liabilities reflect
management's best estimate of current and future taxes to be paid. Significant
judgments and estimates are required in the determination of the consolidated
income tax expense. The Company's provision for income taxes is computed by
applying a federal rate of 21.0% and a state rate of 6.0% to taxable income or
loss after consideration of non-taxable and non-deductible items.
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Permanent income tax differences result in an increase or decrease to taxable income and impact the Company's effective tax rates, which were 37.0% and (0.3%) for the twelve months endedSeptember 30, 2022 and 2021, respectively. Our tax rate is affected by recurring items, such as non-deductible expenses, which we expect to be fairly consistent in the near term. OnJune 16, 2021 , the Company received notice that the SBA had granted forgiveness and repaid$9.8 million of Paycheck Protection Program ("PPP") borrowings to its lender. The forgiveness was recorded as "other nonoperating income" for the twelve months endedSeptember 30, 2021 . According to the CARES Act passed byCongress inMarch 2020 , PPP loan forgiveness is not taxable. In accordance with the Consolidated Appropriations Act, 2021, the Company's PPP related expenditures in the fiscal year 2020 were considered deductible expenses for federal income tax purposes. The PPP forgiveness had a significant impact on the effective income tax rate for the twelve months endedSeptember 30, 2021 , as taxable income was decreased by$9.8 million . Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. AtSeptember 30, 2022 , the Company had a net deferred income tax liability of$4.5 million as compared to$2.0 million atSeptember 30, 2021 . The Company's deferred income tax liabilities atSeptember 30, 2022 totaled$7.7 million and primarily related to depreciation on property and equipment. The Company's deferred income tax assets atSeptember 30, 2022 , totaled$3.2 million and primarily related to a NOL carryforward. The Company believes that it is more likely than not that all NOL carryforwards will be realized.
New Accounting Pronouncements
OnOctober 28, 2021 , theFinancial Accounting Standards Board ("FASB") released Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers". The amendments of this ASU require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for public business entities for the fiscal years, including interim periods within those the fiscal years, beginning afterDecember 15, 2022 . For all other entities they are effective for the fiscal years, including interim periods within those the fiscal years, beginning afterDecember 15, 2023 . Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The Company is currently assessing the effect that ASU 2021-08 will have on their results of operations, financial position and cash flows; however, the Company does not expect a significant impact. The FASB recently issued ASU 2021-10, "Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance", which aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements. Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date. Retrospective application of the guidance is permitted. The guidance in ASU 2021-10 is effective for financial statements of all entities for annual periods beginning afterDecember 15, 2021 , with early application permitted. ASU 2021-10 has not become effective for the Company; however, a significant impact is not expected.
Subsequent Events
OnOctober 10, 2022 , the Company entered into a$3.1 million promissory note agreement withUnited Bank to finance the Ryan Environmental acquisition. This is a five-year agreement with a fixed interest rate of 6.0% and monthly payments of$59,932 beginning onNovember 10, 2022 . InFebruary 2018 , the Company filed a lawsuit against a former customer in theUnited States District Court for the Western District of Pennsylvania . The lawsuit is related to a dispute over work performed on a pipeline construction project. OnNovember 16, 2022 , a Judgement Order was issued, and the Company was awarded$13.1 million , of which$5.8 million was the jury award,$1.6 million was for attorney's fees, and$5.7 million was for penalties and interest. None of the award had been recognized in the Company's consolidated financial statements as ofSeptember 30, 2022 . The Company's attorney's fees have been expensed as incurred. OnDecember 16, 2022 , the Defendant filed a notice of
appeal with the court.
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Management has evaluated all subsequent events for accounting and disclosure.
There have been no other material events during the period, other than noted
above, that would either impact the results reflected in the report or the
Company's results going forward.
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