Energy Services of America CORP (ESOA)

ITEM 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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 efficiency.

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.

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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.

Results of Operations for the Fiscal Year Ended September 30, 2024, Compared to the Fiscal Year Ended September 30, 2023.

Revenue. A table comparing the components of the Company’s revenues for the fiscal years ended September 30, 2024, and 2023 is below:

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Revenue increased by $47.8 million, or 15.7%, to $351.9 million for the fiscal year ended September 30, 2024, from $304.1 million for the fiscal year ended September 30, 2023. The increase was the result of increased work in the Electrical, Mechanical, and General and Gas & Water Distribution business lines, partially offset by a decrease in Gas & Petroleum Transmission work.

Gas & Water Distribution revenues totaled $82.4 million for the fiscal year ended September 30, 2024, an $18.9 million increase from $63.5 million for the fiscal year ended September 30, 2023. The revenue increase was primarily related to the Company’s continued focus on increasing water project opportunities.

Gas & Petroleum Transmission revenues totaled $81.1 million for the fiscal year ended September 30, 2024, an $11.0 million decrease from $92.1 million for the fiscal year ended September 30, 2023. The revenue decrease was primarily related to a significant natural gas project that was substantially completed during the fiscal year ended September 30, 2023 that was not fully replaced in the fiscal year ended September 30, 2024.

Electrical, Mechanical, & General services and construction revenues totaled $188.4 million for the fiscal year ended September 30, 2024, a $40.0 million increase from $148.4 million for the fiscal year ended September 30, 2023. The revenue increase was primarily related to increased mechanical and electrical maintenance services performed and an increase in new construction opportunities during the fiscal year ended September 30, 2024, as compared to the prior fiscal year.

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Cost of Revenues. A table comparing the components of the Company’s costs of revenues for fiscal years ended September 30, 2024 and 2023, is below:

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Total cost of revenues increased by $34.6 million, or 13.0%, to $301.9 million for the fiscal year ended September 30, 2024, from $267.3 million for the fiscal year ended September 30, 2023. The increase was the result of increased work in the Electrical, Mechanical, and General and Gas & Water Distribution business lines, partially offset by a decrease in Gas & Petroleum Transmission work.

Gas & Water Distribution cost of revenues totaled $63.3 million for the fiscal year ended September 30, 2024, a $14.4 million increase from $48.9 million for the fiscal year ended September 30, 2023. The cost of revenues increase was primarily related to the Company’s continued focus on increasing water project opportunities.

Gas & Petroleum Transmission cost of revenues totaled $69.5 million for the fiscal year ended September 30, 2024, a $10.0 million decrease from $79.5 million for the fiscal year ended September 30, 2023. The cost of revenues decrease was primarily related to a significant natural gas project that was substantially completed during the fiscal year ended September 30, 2023 that was not fully replaced in the fiscal year ended September 30, 2024.

Electrical, Mechanical, & General services and construction cost of revenues totaled $167.6 million for the fiscal year ended September 30, 2024, a $29.8 million increase from $137.8 million for the fiscal year ended September 30, 2023. The cost of revenues increase was primarily related to increased mechanical and electrical maintenance services performed and an increase in new construction opportunities during the fiscal year ended September 30, 2024, as compared to the prior fiscal year.

Unallocated shop expenses totaled $1.6 million for the fiscal year ended September 30, 2024, a $444,000 increase from $1.2 million for the fiscal year ended September 30, 2023. The increase in unallocated shop expenses was primarily due to decreased internal equipment charges to projects for the fiscal year ended September 30, 2024, as compared to the prior fiscal year.

Gross Profit. A table comparing the components of the Company’s gross profit for fiscal years ended September 30, 2024, and 2023, is below:

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Total gross profit increased by $13.1 million or 35.7% to $50.0 million for the fiscal year ended September 30, 2024, from $36.8 million for the fiscal year ended September 30, 2023.

Gas & Water Distribution gross profit totaled $19.2 million for the fiscal year ended September 30, 2024, a $4.5 million increase from $14.6 million for the fiscal year ended September 30, 2023. The gross profit increase was primarily related to the Company’s continued focus on increasing water project opportunities.

Gas & Petroleum Transmission gross profit totaled $11.6 million for the fiscal year ended September 30, 2024, a $1.1 million decrease from $12.7 million for the fiscal year ended September 30, 2023. The gross profit decrease was primarily related to less transmission work performed in the fiscal year ended September 30, 2024 as compared to the prior fiscal year.

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Electrical, Mechanical, & General services and construction gross profit totaled $20.8 million for the fiscal year ended September 30, 2024, a $10.1 million increase from $10.7 million for the fiscal year ended September 30, 2023. The gross profit increase was primarily related to a large new construction electrical project that resulted in higher than expected profits and increased profits in general contractor opportunities during the fiscal year ended September 30, 2024, as compared to the prior fiscal year.

Gross loss attributed to unallocated shop operations totaled $1.6 million for the fiscal year ended September 30, 2024, a $444,000 increase from $1.2 million for the fiscal year ended September 30, 2023. The gross loss increase was primarily due to decreased internal equipment charges to projects for the fiscal year ended September 30, 2024, as compared to the prior fiscal year.

Selling and administrative expenses. Total selling and administrative expenses increased by $6.3 million to $30.1 million for the fiscal year ended September 30, 2024, from $23.8 million for the fiscal year ended September 30, 2023. The increase was primarily related to increased business opportunities and management hirings needed to secure and manage projects.

Income from operations. Income from operations was $19.8 million for the fiscal year ended September 30, 2024, a $6.8 million increase from $13.0 million for the fiscal year ended September 30, 2023. The increase was due to the items described above.

Other nonoperating expense. Other nonoperating expense decreased by $266,000 or (92.5%) to $22,000 for the fiscal year ended September 30, 2024, from $288,000 for the fiscal year ended September 30, 2023. The decrease was primarily due to the receipt of a settlement from a former third-party administrator of the Company’s 401(k) retirement plan.

Income from lawsuit judgement. The Company received $15.6 million from a lawsuit judgement against a former customer for work performed in a prior period. Please see Legal Proceedings on page 15 for more information.

Gain on sale of equipment. The net gain on the sale of equipment increased by $227,000 or 657.3% to $261,000 for the fiscal year ended September 30, 2024, from $34,000 for the fiscal year ended September 30, 2023. This increase was primarily due to the Company sending more obsolete and underused equipment to auction during the fiscal year ended September 30, 2024.

Interest Expense. Interest expense decreased by $218,000 or (9.1%) to $2.2 million for the fiscal year ended September 30, 2024, from $2.4 million for the fiscal year ended September 30, 2023. This decrease was primarily due to lower line of credit borrowings during the fiscal year ended September 30, 2024.

Net Income. Income before income taxes was $33.5 million for the fiscal year ended September 30, 2024, compared to $10.4 million for the fiscal year ended September 30, 2023. The increase was due to the items mentioned above.

The income tax expense for the fiscal year ended September 30, 2024 was $8.4 million as compared to $3.0 million for the fiscal year ended September 30, 2023. The increase was due to an increase in taxable income in the fiscal year ended September 30, 2024, as compared to the prior fiscal year.

The effective income tax rate for the fiscal year ended September 30, 2024 was 25.1%, as compared to 28.7% for the prior fiscal year. 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 and non-deductible expenses.

Net income for the fiscal year ended September 30, 2024 was $25.1 million compared to $7.4 million for the fiscal year ended September 30, 2023. The increase was due to the items mentioned above.

Comparison of Financial Condition at September 30, 2024 Compared to September 30, 2023.

The Company had total assets of $158.2 million at September 30, 2024, an increase of $15.7 million from the prior fiscal year-end balance of $142.5 million.

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $68.8 million at September 30, 2024, an increase of $9.5 million from the combined prior fiscal year-end balance of $59.3 million. The increase was primarily due to the timing of receivables, retainages, and receipts at the fiscal year ended September 30, 2024 as compared to the prior fiscal year end.

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Cash and cash equivalents totaled $12.9 million at September 30, 2024, a decrease of $3.5 million from the prior fiscal year-end balance of $16.4 million. The decrease was primarily related to a net $7.9 million investment in property and equipment and a net $14.2 million used in financing activities, partially offset by a net $18.6 million provided by operating activities.

Net property, plant and equipment totaled $38.1 million at September 30, 2024, an increase of $1.6 million from the prior fiscal year-end balance of $36.5 million. Property, plant and equipment acquisitions totaled $10.9 million for the fiscal year 2024 while depreciation expense was $8.5 million, and the net impact of disposals was $797,000.

Right-of-use assets acquired from operating leases totaled $2.5 million net of amortization expense at September 30, 2024, a decrease of $795,000 from the prior fiscal year-end balance of $3.3 million. The decrease was primarily related to $1.3 million in right-of-use asset payments and, partially offset by $510,000 in right-of-use asset additions during the fiscal year ended September 30, 2024.

Goodwill and acquired intangible assets totaled $7.2 million at September 30, 2024, a $318,000 decrease from the prior fiscal year end balance of $7.5 million and was the result of intangible asset amortization expense of $438,000 for the fiscal year ended September 30, 2024, partially offset by $121,000 related to the acquisition of Heritage Painting.

Prepaid expenses and other totaled $4.1 million at September 30, 2024, an increase of $568,000 from the prior fiscal year-end balance of $3.5 million. The increase was primarily due to the increase of various prepaid insurance accounts at the fiscal year ended September 30, 2024, as compared to the prior fiscal year end.

Contract assets totaled $24.6 million at September 30, 2024, an increase of $8.6 million from the prior fiscal year-end balance of $16.0 million. This increase was primarily due to the timing of project billings and related costs and estimated earnings in excess of billings at September 30, 2024, as compared to at September 30, 2023.

Liabilities totaled $99.6 million at September 30, 2024, decrease of $8.3 million from the prior fiscal year-end balance of $107.9 million.

Contract liabilities totaled $17.0 million at September 30, 2024, a decrease of $792,000 from the prior fiscal year-end balance of $17.7 million. This decrease was due to increased billings in excess of costs and earnings when computing earned revenue on construction projects at September 30, 2024, as compared to at September 30, 2023.

The aggregate balance of current maturities of long-term debt and long-term debt totaled $23.6 million at September 30, 2024, a decrease of $1.4 million from the prior fiscal year-end balance of $25.0 million. The decrease was primarily due to $8.0 million in long-term debt repayments, partially offset by $2.0 million in long-term debt additions and $4.5 million in line of credit borrowings due by June 28, 2026.

Net deferred income tax payable totaled $6.5 million at September 30, 2024, a decrease of $380,000 from the prior fiscal year-end balance of $6.9 million. The decrease was primarily related to the addition of $533,000 in state net operating loss valuation allowances at the fiscal year ended September 30, 2024.

Accounts payable totaled $23.7 million as of September 30, 2024, an increase of $1.7 million from the prior fiscal year-end balance of $22.0 million. The increase was due to more work in progress at the end of the fiscal year ended September 30, 2024, as compared to the prior fiscal year-end.

Current and long-term operating lease liabilities totaled $2.5 million at September 30, 2024, a decrease of $818,000 from the prior fiscal year end balance of $3.4 million. The decrease was primarily related to $1.3 million in operating lease payments, partially offset by $510,000 in additions during the fiscal year ended September 30, 2024.

Accrued expenses and other current liabilities totaled $13.9 million at September 30, 2024, an increase of $752,000 from the prior fiscal year-end balance of $13.1 million. The increase was primarily due to increased labor and burden expenses incurred towards the end of the fiscal year 2024, as compared to fiscal 2023.

Current maturities of lines of credit and short-term borrowings totaled $10.3 million at September 30, 2024, a decrease of $9.6 million from the prior fiscal year-end balance of $19.8 million. This decrease was primarily due to $4.2 million in line of credit

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repayments, the reclass of $4.5 million in line of credit borrowings to long-term debt, and the payment of $950,000 in short-term insurance premium financing, partially offset by $100,000 in accrued interest on PPP loan debt.

Income taxes payable totaled $2.2 million at September 30, 2024, as compared to a prior fiscal year-end balance of $0 due to having net operating loss carry forwards at September 30, 2023.

Shareholders’ equity totaled $58.7 million at September 30, 2024, an increase of $24.1 million from the prior fiscal year-end balance of $34.6 million. This increase was primarily due to $25.1 million in net income, partially offset by $994,000 in special cash dividend payments.

Liquidity and Capital Resources

Operating Line of Credit

On August 8, 2024, the Company renewed its $30.0 million line of credit with a maturity date of June 28, 2026. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%.

The line of credit is limited to a borrowing base calculation as summarized below:

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The Company’s $4.5 million line of credit borrowing is recorded as a long-term debt as of September 30, 2024, as compared to an $8.7 million short-term borrowing at September 30, 2023.

The modified financial covenants for the quarter ended June 30, 2023, and all subsequent quarters, are below:

The Company’s lender has agreed to omit the effect of the PPP loan restatement from the Company’s covenant compliance calculations while a final decision on PPP loan forgiveness remains in question. Thus, the Company was in compliance with all covenants at September 30, 2024.

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Insurance Premiums Financed

The Company had previously financed insurance policy premiums on a short-term basis through a financing company prior to beginning to make quarterly installment payments for calendar year 2024. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. At September 30, 2024 and September 30, 2023, the remaining balance of the insurance premiums was $0 and $950,000, respectively.

Paycheck Protection Program Loans

Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with its Lender in an aggregate principal amount of $13.1 million pursuant to the PPP Loans. In a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the PPP Loans after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. During fiscal year 2021, the Company received notice that the SBA had granted forgiveness of the $9.8 million of PPP Loans and the SBA repaid the Lender in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.

During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously issued audited financial statements of the Company for fiscal 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $9.8 million, plus accrued interest.

During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.

Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.

Long-Term Debt

On December 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. 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 the U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of September 30, 2024, the Company had made principal payments of $437,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc.

On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing. As of September 30, 2024, the Company had repaid this loan in full.

On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West 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

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$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 of September 30, 2024, the Company had made annual installment payments of $2,000,000.

On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $3.0 million line of credit for the purchase of equipment. As of September 30, 2024, the Company had repaid this loan in full.

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West 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 of September 30, 2024, the Company had made principal payments of $2.4 million.

On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%. As of September 30, 2024, the Company had made principal payments of $3.1 million.

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri-State Paving. David E. Corns continued his role as President of the Company’s Tri-State Paving Subsidiary. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 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 has made $750,000 in principal payments on this note as of September 30, 2024.

On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank. This five-year agreement financed the previous cash value of equipment purchased in the Ryan Construction acquisition. This loan has monthly installment payments of $60,000 and has a fixed interest rate of 6.0%. The loan is collateralized by the Company’s equipment and receivables. As of September 30, 2024, the Company had made principal payments of $1.1 million.

On June 1, 2023, the Company entered into a $9.3 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $9.3 million line of credit (“Equipment Line of Credit 2023”), specifically for the purchase of equipment, for a period of six months with a fixed interest rate of 7.25%. After six months, all borrowings against the Equipment Line of Credit 2023 converted to a fifty-four-month term note agreement with a fixed interest rate of 7.25%. The loan is collateralized by the equipment purchased under this agreement. As of September 30, 2024, the Company had borrowed $9.3 million against this line of credit and made $1.5 million in principal payments.

On August 8, 2024, the Company renewed its $30.0 million line of credit with a maturity date of June 28, 2026. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%. The outstanding balance on the operating line of credit at September 30, 2024 was $4.5 million with an interest rate of 8.0%.

On August 8, 2024, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $5.0 million equipment line of credit, specifically for the purchase of equipment, for a period of twelve months with a variable interest rate based on the “Wall Street Journal” Prime Rate (the index) and initially at 8.5%. After twelve months, all borrowings against the equipment line of credit will be converted to a forty-eight month term note agreement with a

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fixed interest rate equal to the “U.S. Treasury Rate” plus 2.75% per annum. The loan is collateralized by the equipment purchased under this agreement. As of September 30, 2024, the Company had not borrowed against this line of credit.

At September 30, 2024, future expected payments due on short-term and long-term debt are as follows:

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As of September 30, 2024, the Company had $12.9 million in cash and $36.2 million in working capital (defined as current assets less current liabilities).

Leases

The Company leases office space for SQP for $1,500 per month. The lease, which was originally signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term. The Company has only committed to one-year renewals and is evaluating whether to renew for additional periods.

The Company had two lease agreements for construction equipment with a combined amount of $160,000 that were paid in full as of September 30, 2024. The leases had a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and were cancellable at any time without penalty. The Company exercised the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The related assets and finance lease obligations associated with these lease agreements had been included in the consolidated balance sheets within property, plant and equipment and long-term debt.

The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving, LLC transaction. The first operating lease, for the Hurricane, West Virginia facility, had a net present value of $236,000 at inception, and a carrying value of $46,000 at September 30, 2024. The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate at inception.

The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at inception, and expired on August 31, 2024. The lease was renewed for a two-year period with a net present value of $140,000 and had a carrying value of $123,000 at September 30, 2024. The 8.5% 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 with Enterprise acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for thirty-one vehicles with a net present value of $1.2 million. The Company subsequently netted forty-three additional leased vehicles. The right-of-use operating lease had a carrying value of $2.2 million at September 30, 2024. Each vehicle leased under the master lease program has its own implicit rate.

The Company had a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022, as part of the Ryan Environmental acquisition. This lease, for the Bridgeport, West Virginia facility, had a net present value of $140,000 at inception and no carrying value at September 30, 2023. The 4.5% interest rate on the operating lease was based on the Company’s incremental borrowing rate at inception. The Company has signed a one-year renewal agreement effective October 1, 2023 through September 30, 2024. The lease had a net present value of $125,000 at inception and no carrying value at September 30, 2024. The 8.5% interest rate on the operating lease was based on the Company’s incremental borrowing rate at inception. As of September 30, 2024, the Company has only committed to a one-year renewal and is evaluating whether to renew for additional periods.

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The Company has a right-of-use operating lease acquired on March 28, 2023. This lease, for the Winchester, Kentucky facility, had a net present value of $290,000 at inception and a carrying value of $161,000 at September 30, 2024. The 7.5% 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 are as follows:

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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 $16.3 million and $12.1 million for the twelve months ended September 30, 2024, and 2023, respectively.

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 September 30, 2024, the Company did not have any outstanding letters of credit.

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.

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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 on. 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 these letters or other collateral will reduce our borrowing capabilities. The Company does not anticipate any claims in the foreseeable future. At September 30, 2024, the Company had $117.6 million in performance bonds outstanding.

Concentration of Credit Risk

In the ordinary course of business, the Company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.

Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable, net of retention as of or for the fiscal years ended September 30, 2024, and 2023:

* Less than 10.0% and included in “All other” if applicable

* 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 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.

Litigation

As previously disclosed, in February 2018, the Company filed a lawsuit against a customer in the United States District Court for the Western District of Pennsylvania (the “District Court”). The lawsuit was related to a dispute over work performed on a pipeline construction project. On November 21, 2022, the District Court issued a judgment in favor of the Company. On April 17, 2024, the United States Court of Appeals for the Third Circuit (the “Appeals Court”) affirmed the decision of the District Court. In May 2024, the Appeals Court denied petitions for a rehearing. This upheld the award granted by the District Court in November 2022. The Company received approximately $15.6 million payment related to the lawsuit. The Company recognized the payment in its consolidated financial statements for the third fiscal quarter ended June 30, 2024.

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 complied with the demand according to 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

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does not expect any future liabilities related to this claim. The Company did not make any payments during the twelve months ended September 30, 2023 or 2024.

Other than described above, at September 30, 2024, 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, 2024, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Related Party Transactions

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

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises as partial consideration for the purchase of Tri-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 beginning April 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 has made $750,000 in principal payments on this note as of September 30, 2024.

Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns 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 $46,000 at September 30, 2024.

SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022. Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier 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, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”). Landlord decided to pursue the following development project (the “Project”): a historical building at 1030 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 have jointly provided an unconditional guarantee for the $5.0 million of obligations associated with the Project.

CJ Hughes entered into an agreement, cancelable at any time, with Construction Specialty Services (“CSS”), which is owned by Chuck Austin, the President of CJ Hughes. CSS rents equipment, periodically, to and as requested by CJ Hughes. The equipment rental rates are below the rates that the equipment can be rented from any unaffiliated rental company. CJ Hughes is not obliged to rent any equipment and does so only when CJ Hughes does not have equipment available of its own and would otherwise need to rent such equipment as the demand increases throughout the construction season. In the fiscal years 2023 and 2024, the rental amounts for these specific years were $387,000, and $318,000, respectively.

Other than mentioned above, there were no new material related party transactions entered into during the fiscal year ended September 30, 2024.

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.

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Inflation

Most significant project materials, such as pipe or electrical wire, are provided by the Company’s customers. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material cost 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 ended September 30, 2024, and 2023.

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 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.

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 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.

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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, 2024 and 2023:

​

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. At September 30, 2024, management review deemed that the allowance for doubtful accounts was adequate.

Please see the allowance for doubtful accounts table below:

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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, 2024.

Materially incorrect estimates could cause an impairment of goodwill or intangible assets and result in a loss in profitability for the Company.

A table of the Company’s intangible assets subject to amortization is below:

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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 initially recorded at their estimated fair value.

The Company’s depreciation expense for the twelve months ended September 30, 2024 and 2023 was $8.5 million and $7.3 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 ended September 30, 2024 and 2023 were $438,623 and $490,591, respectively. In general, amortization is included in “cost of revenues” on the Company’s consolidated statements of income.

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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 overvaluation 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 blended state rate of approximately 5% to 6.0% to taxable income or loss after consideration of non-taxable and non-deductible items.

The income tax expense for the fiscal year ended September 30, 2024 was $8.4 million as compared to $3.0 million for the fiscal year ended September 30, 2023. The increase was due to an increase in taxable income for the fiscal year ended September 30, 2024, as compared to the fiscal year ended September 30, 2023.

The effective income tax rate for the fiscal year ended September 30, 2024 was 25.1%, as compared to an effective income tax rate of 28.7% for the fiscal year ended September 30, 2023. 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 and non-deductible expenses.

Accounting for PPP Loans

The Company’s accounting for PPP loans reflects management’s best estimate of current and future amounts to be paid. The Company applies significant judgment regarding the determination of PPP loan forgiveness based on the rules established, and subsequently clarified by the SBA, including rules related to the Company’s affiliations and meeting SBA size standards.

Refer to Note 3 “Accounting for PPP Loans” in the accompanying consolidated financial statements for additional details.

New Accounting Pronouncements

On October 28, 2021, the Financial 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 after December 15, 2022. For all other entities they are effective for the fiscal years, including interim periods within those the fiscal years, beginning after December 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 its results of operations, financial position and cash flows; however, the Company does not expect a significant impact.

Subsequent Events

On October 31, 2024, the Company announced it had entered into an Asset Purchase Agreement with Tribute Contracting & Consultants, LLC (“Tribute”), an underground utility contractor that primarily specializes in water and wastewater system installations in Ohio, Kentucky, and West Virginia. On December 2, 2024, the Company closed on the acquisition. Under the terms of the agreement, Energy Services’ new subsidiary, Tribute Acquisition Company, purchased substantially all of the assets of Tribute for $22.0 million in cash, less any assumed debt and working capital adjustments, and $2.0 million of Energy Services’ common stock. The $22.0 million in cash was funded through a $16.0 million loan with United Bank, West Virginia, with the remainder paid in cash by the Company.

On November 20, 2024, the Company’s Board of Directors approved a quarterly cash dividend of $0.03 per common share. The dividend will be paid on January 2, 2025 to holders of record as of December 13, 2024. While this is expected to be a quarterly cash dividend, factors such as income from operations, cash flows, and overall financial outlook may affect future dividend payments.

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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.

​

ITEM 7.​ ​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 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.

Restatement

On May 31, 2023, the Company restated its previously issued audited financial statements for the fiscal years ended September 30, 2022 and 2021 to account for misstatements related to accounting for loans under the PPP.

Due to the economic uncertainties created by Coronavirus and related variants (“COVID-19”) and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes Construction Company, Inc., Contractors Rental Corporation and Nitro Construction Services, Inc., entered into separate PPP notes effective April 7, 2020, with United Bank as the lender (“Lender”) in an aggregate principal amount of $13.1 million pursuant to the PPP (collectively, the “PPP Loans”). In a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the PPP Loans after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. During fiscal year 2021, the Company received notice that The Small Business Administration (“SBA”) had granted forgiveness of the $9.8 million of PPP Loans and the SBA repaid the Lender in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.

During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously issued audited financial statements for the fiscal years ended September 30, 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA for the full $9.8 million, plus accrued interest.

During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.

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.

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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.

Results of Operations for the Fiscal Year Ended September 30, 2023, Compared to the Fiscal Year Ended September 30, 2022.

Revenue. A table comparing the components of the Company’s revenues for the fiscal years ended September 30, 2023, and 2022 is below:

​

Revenue increased by $106.5 million, or 53.9%, to $304.1 million for the fiscal year ended September 30, 2023, from $197.6 million for the fiscal year ended September 30, 2022. The increase was the result of increased work in all categories of business.

Gas & Water Distribution revenues totaled $63.5 million for the fiscal year ended September 30, 2023, a $10.2 million increase from $53.3 million for the fiscal year ended September 30, 2022. The revenue increase was primarily related to a full year of paving services performed on water projects during the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Gas & Petroleum Transmission revenues totaled $92.1 million for the fiscal year ended September 30, 2023, a $33.9 million increase from $58.3 million for the fiscal year ended September 30, 2022. The revenue increase was primarily related to an increase in the number of bidding opportunities compared to the prior fiscal year.

Electrical, Mechanical, & General services and construction revenues totaled $148.4 million for the fiscal year ended September 30, 2023, a $62.4 million increase from $86.0 million for the fiscal year ended September 30, 2022. The revenue increase was primarily related to increased mechanical and electrical maintenance services performed and an increase in new construction opportunities during the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

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Cost of Revenues. A table comparing the components of the Company’s costs of revenues for fiscal years ended September 30, 2023 and 2022, is below:

​

Total cost of revenues increased by $92.1 million or 52.5% to $267.3 million for the fiscal year ended September 30, 2023, from $175.2 million for the fiscal year ended September 30, 2022.

Gas & Water Distribution cost of revenues totaled $48.9 million for the fiscal year ended September 30, 2023, a $7.2 million increase from $41.7 million for the fiscal year ended September 30, 2022. The cost of revenues increase was primarily related to a full year of paving services performed on water projects during the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Gas & Petroleum Transmission cost of revenues totaled $79.5 million for the fiscal year ended September 30, 2023, a $24.6 million increase from $54.9 million for the fiscal year ended September 30, 2022. The cost of revenues increase was primarily related to increased bidding opportunities compared to the prior fiscal year.

Electrical, Mechanical, & General services and construction cost of revenues totaled $137.8 million for the fiscal year ended September 30, 2023, a $58.6 million increase from $79.1 million for the fiscal year ended September 30, 2022. The cost of revenues increase was primarily related to increased mechanical and electrical maintenance services performed and an increase in new construction opportunities during the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Unallocated shop expenses totaled $1.2 million for the fiscal year ended September 30, 2023, a $1.7 million increase from ($505,000) for the fiscal year ended September 30, 2022. The increase in unallocated shop expenses was primarily due to decreased internal equipment charges to projects for the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Gross Profit. A table comparing the components of the Company’s gross profit for fiscal years ended September 30, 2023, and 2022, is below:

​

​

Total gross profit increased by $14.4 million or 64.6% to $36.8 million for the fiscal year ended September 30, 2023, from $22.4 million for the fiscal year ended September 30, 2022.

Gas & Water Distribution gross profit totaled $14.6 million for the fiscal year ended September 30, 2023, a $3.1 million increase from $11.6 million for the fiscal year ended September 30, 2022. The gross profit increase was primarily related to a full year of paving services performed on water projects during the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Gas & Petroleum Transmission gross profit totaled $12.7 million for the fiscal year ended September 30, 2023, a $9.2 million increase from $3.4 million for the fiscal year ended September 30, 2022. The gross profit increase was primarily related to an increase

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in the number of bidding opportunities compared to the prior fiscal year and to one gas transmission project that lost $2.1 million in fiscal year 2022.

Electrical, Mechanical, & General services and construction gross profit totaled $10.7 million for the fiscal year ended September 30, 2023, a $3.8 million increase from $6.9 million for the fiscal year ended September 30, 2022. The gross profit increase was primarily related to increased mechanical and electrical maintenance services performed and an increase in new construction opportunities during the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Gross loss attributed to unallocated shop operations totaled $1.2 million for the fiscal year ended September 30, 2023, a $1.7 million decrease from a gross profit of $505,000 for the fiscal year ended September 30, 2022. The gross profit decrease was primarily due to decreased internal equipment charges to projects for the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

Selling and administrative expenses. Total selling and administrative expenses increased by $7.9 million to $23.8 million for the fiscal year ended September 30, 2023, from $15.9 million for the fiscal year ended September 30, 2022. Approximately $4.2 million of the selling and administrative expense increase related to growth from the more recent start-up or acquired operations of SQP, TSP, and RCS. The remaining increase was primarily related to increased business opportunities and management needed at the C.J. Hughes and NCS operations.

Income from operations. Income from operations was $13.0 million for the fiscal year ended September 30, 2023, a $6.5 million increase from $6.5 million for the fiscal year ended September 30, 2022. The increase was due to the items described above.

Interest Expense. Interest expense increased by $1.4 million or 171.1% to $2.4 million for the fiscal year ended September 30, 2023, from $988,000 for the fiscal year ended September 30, 2022. This increase was primarily due to increases in interest rates and the Company’s operating line of credit borrowings and a full year of interest related to financing the RCS and TSP acquisitions.

Other (Expense) income. Other expense, partially offset by other income related to the gain on sale of equipment and interest income, totaled ($253,000) for the fiscal year ended September 30, 2023, as compared to other income related to the sale of equipment and interest income, partially offset by other expense, of $508,000 for the fiscal year ended September 30, 2022. The change was primarily due to a decrease in equipment disposals during fiscal year 2023 as compared to the prior fiscal year.

Net Income. Income before income taxes was $10.4 million for the fiscal year ended September 30, 2023, compared to $6.0 million for the fiscal year ended September 30, 2022. The increase was due to the items mentioned above.

The income tax expense for the fiscal year ended September 30, 2023 was $3.0 million as compared to $2.3 million for the fiscal year ended September 30, 2022. The increase was due to an increase in taxable income in the fiscal year ended September 30, 2023, as compared to the prior fiscal year.

The effective income tax rate for the fiscal year ended September 30, 2023 was 28.7%, as compared to 37.6% for the prior fiscal year. 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 and non-deductible expenses.

Net income for the fiscal year ended September 30, 2023 was $7.4 million compared to $3.8 million for the fiscal year ended September 30, 2022. The increase was due to the items mentioned above.

Comparison of Financial Condition at September 30, 2023 Compared to September 30, 2022.

The Company had total assets of $142.5 million at September 30, 2023, an increase of $29.9 million from the prior fiscal year-end balance of $112.6 million.

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $59.3 million at September 30, 2023, an increase of $16.4 million from the combined prior fiscal year-end balance of $42.9 million. The increase was primarily due to increased work in the fiscal year 2023 as compared to 2022. Specifically, $104.9 million in revenue was generated in the fourth quarter of fiscal year 2023 as compared to $68.4 million for the same period in 2022.

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Cash and cash equivalents totaled $16.4 million at September 30, 2023, an increase of $9.0 million from the prior fiscal year-end balance of $7.4 million. The increase was primarily related to a net $21.1 million provided by operating activities, partially offset by a net $10.2 million investment in property and equipment and a net $1.9 million used in financing activities.

Net property, plant and equipment totaled $36.5 million at September 30, 2023, an increase of $3.9 million from the prior fiscal year-end balance of $32.7 million. Property, plant and equipment acquisitions totaled $11.8 million for the fiscal year 2023 while depreciation expense was $7.3 million, and the net impact of disposals was $614,000.

Right-of-use assets acquired from operating leases totaled $3.3 million net of amortization expense at September 30, 2023, as compared to $1.6 million in right-to-use assets at the prior fiscal year end. The increase was primarily related to an increase in the number of construction vehicles leased through Enterprise Fleet Management, Inc. (Enterprise) and a shop facility leased in Winchester, Kentucky.

Goodwill and acquired intangible assets totaled $7.5 million at September 30, 2023, a $491,000 decrease from the prior fiscal year end balance of $8.0 million and was the result of intangible asset amortization expense of $491,000 for the fiscal year ended September 30, 2023.

Prepaid expenses and other totaled $3.5 million at September 30, 2023, a decrease of $426,000 from the prior fiscal year-end balance of $3.9 million. The decrease was primarily due to the decrease of various prepaid insurance accounts based on labor cost expensed or standard monthly charges.

Contract assets totaled $16.0 million at September 30, 2023, a decrease of $154,000 from the prior fiscal year-end balance of $16.1 million. This decrease was primarily due to the timing of project billings and related costs and estimated earnings in excess of billings at September 30, 2023 as compared to at September 30, 2022.

Liabilities totaled $107.9 million at September 30, 2023, an increase of $23.5 million from the prior fiscal year-end balance of $84.4 million.

Contract liabilities totaled $17.7 million at September 30, 2023, an increase of $11.7 million from the prior fiscal year-end balance of $6.0 million. This increase was due to increased billings in excess of costs and earnings when computing earned revenue on construction projects at September 30, 2023, as compared to at September 30, 2022.

The aggregate balance of current maturities of long-term debt and long-term debt totaled $25.0 million at September 30, 2023, an increase of $7.4 million from the prior fiscal year-end balance of $17.6 million. The increase was primarily due to a $975,000 increase related to equipment financing, $8.5 million of equipment purchases refinanced from lines of credit and short-term borrowings to long-term debt, and $3.1 million borrowed to finance the RCS acquisition, partially offset by $5.2 million in payments on long-term debt.

Net deferred income tax payable totaled $6.9 million at September 30, 2023, an increase of $2.4 million from the prior fiscal year-end balance of $4.5 million. The increase was primarily related to a decrease in net operating loss carry forwards resulting from the taxable income for the fiscal year ended September 30, 2023.

Accounts payable totaled $22.0 million as of September 30, 2023, an increase of $1.7 million from the prior fiscal year-end balance of $20.3 million. The increase was due to more work in progress at the end of the fiscal year 2023, as compared to the prior fiscal year-end.

Current and long-term operating lease liabilities totaled $3.4 million at September 30, 2023, an increase of $1.7 million from the prior fiscal year end balance of $1.6 million. The increase was primarily related to an increase in the number of construction vehicles leased through Enterprise and a shop facility leased in Winchester, Kentucky.

Accrued expenses and other current liabilities totaled $13.1 million at September 30, 2023, an increase of $1.8 million from the prior fiscal year-end balance of $11.3 million. The increase was primarily due to increased labor and burden expenses incurred towards the end of the fiscal year 2023, as compared to the same period in fiscal 2022.

Lines of credit and short-term borrowings totaled $19.8 million at September 30, 2023, a decrease of $3.3 million from the prior fiscal year-end balance of $23.2 million. This decrease was primarily due to $8.5 million of equipment purchases refinanced to

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long-term debt, partially offset by $4.7 million in increased borrowings against the Company’s operating line of credit, a $370,000 increase to the remaining balance of insurance premiums financed, and a $100,000 increase relating to PPP loan interest.

Shareholders’ equity totaled $34.6 million at September 30, 2023, an increase of $6.4 million from the prior fiscal year-end balance of $28.2 million,. This increase was primarily due to $7.4 million in net income, partially offset by $833,000 in special cash dividend payments and $220,000 related to the repurchase of the Company’s stock.

Liquidity and Capital Resources

Operating Line of Credit

On January 19, 2023, the Company agreed to an amendment to a loan agreement which increased its line of credit to $30.0 million with a maturity date of June 28, 2023. On June 1, 2023, the agreement was renewed through June 28, 2024. The line of credit is limited to a borrowing base calculation, which was approximately $23.9 million at September 30, 2023. The outstanding balance on the line of credit was $8.7 million at September 30, 2023. The line of credit has a variable interest rate equal to the “Wall Street Journal” Prime Rate with a floor of 4.5%, which was 8.5% at September 30, 2023.

The modified financial covenants for the quarter ended June 30, 2023, and all subsequent quarters, are below:

The Company’s lender has agreed to omit the effect of the PPP loan restatement from the Company’s covenant compliance calculations while a final decision on PPP loan forgiveness remains in question. Thus, the Company was in compliance with all covenants at September 30, 2023.

Insurance Premiums Financed

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 eleven monthly payments. At September 30, 2023 and September 30, 2022, the remaining balance of the insurance premiums was $950,000 and $580,000, respectively.

Paycheck Protection Program Loans

Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with its Lender in an aggregate principal amount of $13.1 million pursuant to the PPP Loans. In a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the PPP Loans after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. During fiscal year 2021, the Company received notice that the SBA had granted forgiveness of the $9.8 million of PPP Loans and the SBA repaid the Lender in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.

During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a

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possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously issued audited financial statements of the Company for fiscal 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $9.8 million, plus accrued interest.

During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.

Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.

Long-Term Debt

On December 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. 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 the U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of September 30, 2023, the Company had made principal payments of $387,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc.

On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing. The variable interest rate on the loan agreement is 9.5% at September 30, 2023 with monthly payments of $12,580. As of September 30, 2023, the Company had made principal payments of $825,000. The loan is collateralized by the building and property purchased under this agreement.

On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West 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 of September 30, 2023, the Company had made annual installment payments of $1,250,000.

On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United 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 of September 30, 2023, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022. The interest rate at September 30, 2023 was 9.5%. The Company has made principal payments of $1.1 million on this note as of September 30, 2023.

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West 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 of September 30, 2023, the Company had made principal payments of $1.7 million.

On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%. The Company has made principal payments of $1.8 million on this note as of September 30, 2023.

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On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri-State Paving. David E. Corns continued his role as President of the Company’s Tri-State Paving Subsidiary. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 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 has made $500,000 in principal payments on this note as of September 30, 2023.

On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank. This five-year agreement financed the previous cash value of equipment purchased in the Ryan Construction acquisition. This loan has monthly installment payments of $60,000 and has a fixed interest rate of 6.0%. The loan is collateralized by the Company’s equipment and receivables. As of September 30, 2023, the Company had made principal payments of $499,000.

On June 1, 2023, the Company entered into a $9.3 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $9.3 million line of credit (“Equipment Line of Credit 2023”), specifically for the purchase of equipment, for a period of six months with a fixed interest rate of 7.25%. After six months, all borrowings against the Equipment Line of Credit 2023 will convert to a fifty-four-month term note agreement with a fixed interest rate of 7.25%. The loan is collateralized by the equipment purchased under this agreement. As of September 30, 2023, the Company had borrowed $8.5 million against this line of credit and had not made any principal payments.

At September 30, 2023, future expected payments due on short-term and long-term debt are as follows:

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As of September 30, 2023, the Company had $16.4 million in cash and $15.5 million in working capital (defined as current assets less current liabilities).

Leases

The Company leases office space for SQP for $1,500 per month. The lease, which was originally signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term. The Company has only committed to a one-year renewal and is evaluating whether to renew for additional periods.

The Company has two lease agreements for construction equipment with a combined amount of $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 related 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.

The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving, LLC transaction. The first operating lease, for the Hurricane, West Virginia facility, had a net present value of $236,000 at inception, and a carrying value of $133,000 at September 30, 2023. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at inception, and a carrying value of $57,000 at September 30, 2023. 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 with Enterprise acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for thirty-one vehicles with a net present value of $1.2 million. The Company subsequently netted forty-one additional leased vehicles with a net present value of $2.4 million. The right-of-use operating lease has a carrying value of $2.9 million at September 30, 2023. Each vehicle leased under the master lease program has its own implicit rate.

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The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022, as part of the Ryan Environmental acquisition. This lease, for the Bridgeport, West Virginia facility, had a net present value of $140,000 at inception and no carrying value at September 30, 2023. The 4.5% interest rate on the operating lease was based on the Company’s incremental borrowing rate at inception. The Company has signed a one-year renewal agreement effective October 1, 2023 through September 30, 2024.

The Company has a right-of-use operating lease acquired on March 28, 2023. This lease, for the Winchester, Kentucky facility, had a net present value of $290,000 at inception and a carrying value of $262,000 at September 30, 2023. The 7.75% 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 are as follows:

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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 $12.1 million and $9.8 million for the twelve months ended September 30, 2023, and 2022, respectively.

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 September 30, 2023, the Company did not have any outstanding letters of credit.

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.

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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 on. 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 these letters or other collateral will reduce our borrowing capabilities. The Company does not anticipate any claims in the foreseeable future. At September 30, 2023, the Company had $72.0 million in performance bonds outstanding.

Concentration of Credit Risk

In the ordinary course of business, the Company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.

Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable, net of retention as of or for the fiscal years ended September 30, 2023, and 2022:

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* Less than 10.0% and included in “All other” if applicable

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* 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 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.

Litigation

In February 2018, the Company filed a lawsuit against a former customer 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, 2023. The Company’s attorney’s fees have been expensed as incurred. The case has been appealed to the United States Court of Appeals for the Third Circuit and is expected to be heard within the next 12 months.

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

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does not expect any future liabilities related to this claim. The Company did not make any payments during the twelve months ended September 30, 2023.

Other than described above, at September 30, 2023, 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, 2023, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Related Party Transactions

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

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Samuel Kapourales, a director of Energy Services, was also a director of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, held the same position with Premier Financial Bancorp, Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and was a director of Premier Financial Bancorp, Inc. On September 17, 2021, Peoples Bancorp, Inc., parent company of Peoples Bank, completed an acquisition of Premier Financial Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank and Citizens Deposit Bank & Trust. On October 26, 2021, Mr. Douglas Reynolds was elected director of Peoples Bancorp, Inc., and its subsidiary Peoples Bank (collectively “Peoples Bank”). On February 21, 2023, Mr. Reynolds resigned from the board of directors of Peoples Bank. As of March 31, 2023, the Company had paid approximately $373,000 in principal and approximately $424,000 in interest since the beginning of the loan. This transaction was no longer considered a related party transaction subsequent to the quarter ended March 31, 2023.

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises as partial consideration for the purchase of Tri-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 beginning April 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 has made $500,000 in principal payments on this note as of September 30, 2023.

Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns 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 $133,000 at September 30, 2023.

SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022. Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier 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, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”). Landlord decided to pursue the following development project (the “Project”): a historical building at 1030 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 have 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 September 30, 2023.

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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. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material cost 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 ended September 30, 2023, and 2022.

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 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.

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;

●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 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.

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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, 2023 and 2022:

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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. At September 30, 2023, management review deemed that the allowance for doubtful accounts was adequate.

Please see the allowance for doubtful accounts table below:

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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, 2023.

Materially incorrect estimates could cause an impairment of goodwill or intangible assets and result in a loss in profitability for the Company.

A table of the Company’s intangible assets subject to amortization is below:

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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

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identifiable intangible assets recognized as part of the Company’s business combinations are initially recorded at their estimated fair value.

The Company’s depreciation expense for the twelve months ended September 30, 2023 and 2022 was $7.3 million and $5.6 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 ended September 30, 2023 and 2022 were $490,591 and $444,565, 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 overvaluation 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.

The income tax expense for the fiscal year ended September 30, 2023 was $3.0 million as compared to $2.3 million for the fiscal year ended September 30, 2022. The increase was due to an increase in taxable income for the fiscal year ended September 30, 2023, as compared to the fiscal year ended September 30, 2022.

The effective income tax rate for the fiscal year ended September 30, 2023 was 28.7%, as compared to an effective income tax rate of 37.6% for the fiscal year ended September 30, 2022. 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 and non-deductible expenses.

Accounting for PPP Loans

The Company’s accounting for PPP loans reflects management’s best estimate of current and future amounts to be paid. The Company applies significant judgment regarding the determination of PPP loan forgiveness based on the rules established, and subsequently clarified by the SBA, including rules related to the Company’s affiliations and meeting SBA size standards.

Refer to Note 3 “Accounting for PPP Loans” in the accompanying consolidated financial statements for additional details.

New Accounting Pronouncements

On October 28, 2021, the Financial 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 after December 15, 2022. For all other entities they are effective for the fiscal years, including interim periods within those the fiscal years, beginning after December 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

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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 Company adopted ASU 2021-10 on October 1, 2022, and its adoption did not have a significant impact on the Company’s consolidated financial statements.

Subsequent Events

On November 15, 2023, the Company’s Board of Directors approved an annual dividend of $0.06 per common share. The 2024 dividend was paid on January 2, 2024 to holders of record as of December 15, 2023. While this is expected to be an annual dividend, factors such as income from operations, cash flows, and overall financial outlook may affect future dividend payments.

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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ITEM 7.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 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 September 30, 2022, Compared to the Fiscal Year Ended September 30, 2021.

Revenue. A table comparing the components of the Company’s revenues for the fiscal years ended September 30, 2022, and 2021 is below:

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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 September 30, 2022 and 2021, is below:

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Total cost of revenues increased by $65.7 million or 60.0% to $175.2 million for the fiscal year ended September 30, 2022, from $109.5 million for the fiscal year ended September 30, 2021.

Gas & Water Distribution cost of revenues totaled $41.7 million for the fiscal year ended September 30, 2022, a $9.2 million increase from $32.5 million for the fiscal year ended September 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 of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, had cost of revenues of $3.1 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline cost of revenues, acquired on December 31, 2020, resulted in $1.8 million in additional cost of revenues during fiscal year 2022 as compared to 2021.

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Gas & Petroleum Transmission cost of revenues totaled $54.9 million for the fiscal year ended September 30, 2022, a $37.7 million increase from $17.2 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily related to an increase in the amount of bidding opportunities with both existing, long-term customers and newer customers. The Company has one gas transmission project that is projected to lose $2.1 million.

Electrical, Mechanical, & General services and construction cost of revenues totaled $79.1 million for the fiscal year ended September 30, 2022, a $23.5 million increase from $55.6 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 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 September 30, 2022, and 2021, is below:

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Total gross profit increased by $9.5 million or 73.1% to $22.4 million for the fiscal year ended September 30, 2022, from $12.9 million for the fiscal year ended September 30, 2021.

Gas & Water Distribution gross profit totaled $11.6 million for the fiscal year ended September 30, 2022, a $3.6 million increase from $8.0 million for the fiscal year ended September 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 of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, contributed gross profit of $1.8 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline gross profit, acquired on December 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 ended September 30, 2022, a $1.5 million decrease from $4.9 million for the fiscal year ended September 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 ended September 30, 2022, a $2.6 million increase from $4.3 million for the fiscal year ended September 30, 2021. The gross profit increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 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 ended September 30, 2022, a $4.8 million increase from $4.3 million in unallocated shop expenses for the fiscal year ended September 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 ended September 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 ended September 30, 2022, from $14.0 million for the fiscal year ended September 30, 2021. Approximately $700,000 of the selling and administrative expense increase for the fiscal year ended September 30, 2022 as compared to the prior fiscal year, was from the operations of the new subsidiaries, Tri-State Paving and Ryan 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.

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Income from operations. Income from operations was $6.5 million for the fiscal year ended September 30, 2022, a $7.6 million increase from a $1.1 million loss from operations for the fiscal year ended September 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 ended September 30, 2022, from $557,000 for the fiscal year ended September 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 ended September 30, 2022, as compared to other income of $10.7 million for the fiscal year ended September 30, 2021. The decrease in other income was primarily related to $9.8 million of PPP loan debt forgiveness recognized during the fiscal year ended September 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 ended September 30, 2022, compared to $9.1 million for the fiscal year ended September 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 ended September 30, 2022 was $2.3 million compared to an income tax benefit of ($29,000) for the fiscal year ended September 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 by Congress in March 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 ended September 30, 2022 was 37.0%. The effective income tax rate for the fiscal year ended September 30, 2021, was (0.32%). The PPP forgiveness had a significant impact on the effective income tax rate for the fiscal year ended September 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 ended September 30, 2022, and 2021 were $0 and $284,000, respectively. There will be no further dividends paid on preferred stock after the October 6, 2021 redemption of all the Company’s preferred stock.

Net income available to common stockholders for the fiscal year ended September 30, 2022 was $3.9 million compared to $8.8 million for the fiscal year ended September 30, 2021. The decrease was due to the items mentioned above.

Comparison of Financial Condition at September 30, 2022 Compared to September 30, 2021.

The Company had total assets of $112.6 million at September 30, 2022, an increase of $42.4 million from the prior the fiscal year-end balance of $70.2 million.

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $42.9 million at September 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 at September 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 the Tri-State Paving and Ryan Construction acquisitions accounted for $8.9 million of the $15.6 million in total acquisitions.

Contract assets totaled $16.1 million at September 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 at September 30, 2022 as compared to at September 30, 2021.

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Goodwill and acquired intangible assets totaled $8.0 million at September 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 the Tri-State Paving acquisition which goodwill and acquired intangible assets totaled $4.2 million at September 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 ended September 30, 2022.

Prepaid expenses and other totaled $3.9 million at September 30, 2022, an increase of $401,000 from the prior the fiscal year-end balance of $3.5 million. The increase was primarily due to the increase of various prepaid insurance accounts based on labor cost expensed or standard monthly charges.

Cash and cash equivalents totaled $7.4 million at September 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 $74.3 million at September 30, 2022, an increase of $38.8 million from the prior the fiscal year-end balance of $35.5 million.

Accounts payable totaled $20.3 million as of September 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 at September 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 at September 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 at September 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 the Tri-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 at September 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 at September 30, 2022, as compared to at September 30, 2021.

Operating lease liabilities totaled $1.6 million at September 30, 2022, an increase of $1.6 million from the prior fiscal year end balance. See “Leases” on page 29 for a discussion of operating leases added in the fiscal year 2022.

Net deferred income tax payable totaled 4.5 million at September 30, 2022, an increase of $2.5 million from the prior the fiscal year-end balance of $2.0 million. The increase was primarily related to a net operating loss (“NOL”) carryforward resulting from bonus depreciation on acquired assets.

Stockholders’ equity totaled $38.3 million at September 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 the Tri-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

On July 13, 2022, the Company received a one-year extension on its operating line of credit effective June 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 of September 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 by December 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 at September 30, 2022, was 5.5%. Based on the borrowing base calculation, the Company was able to borrow up to $12.2 million as of September 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 of September 30, 2021. The interest rate at September 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 $12.5 million:

Under the terms of the agreement, the Company must meet the following additional requirements for draw requests causing the borrowings to exceed $12.5 million:

The Company was not in compliance with all covenants but received a waiver on the $12.5 million component of the line of credit at September 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. In January 2022 and 2021, respectively, the Company financed $3.4 million and $3.2 million in insurance premiums. At September 30, 2022 and 2021, respectively, the remaining balance of the insurance premiums was $580,000 and $540,000.

Long-Term Debt

On December 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 the U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of September 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 by Peoples Bank, Inc., formerly First Bank of Charleston, Inc. (West Virginia).

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On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United 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% at September 30, 2022 with monthly payments of $12,193. As of September 30, 2022, the Company had made principal payments of $687,000. The loan is collateralized by the building and property purchased under this agreement.

On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United 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 of September 30, 2022, the Company had repaid this note in full.

On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West 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 of September 30, 2022, the Company had made annual installment payments of $500,000, interest payments of $152,000 and expensed $53,000 in accreted interest.

On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United 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 of September 30, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022. The interest rate at September 30, 2022 was 7.25%. The Company has made principal payments of $451,000 on this note as of September 30, 2022.

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West 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 of September 30, 2022, the Company had made principal payments of $971,000.

On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-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 of September 30, 2022.

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri-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 beginning April 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 of September 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:

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As of September 30, 2022, the Company had $7.4 million in cash and $15.1 million in working capital (defined as current assets less current liabilities).

Leases

The Company leases office space for SQP for $1,500 per month. The lease, signed on March 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 ended September 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 on April 29, 2022, as part of the Tri-State Paving transaction. The first operating lease, for the Hurricane, WV facility, had a net present value of $236,000 at April 29, 2022, and a carrying value of $205,000 at September 30, 2022. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at April 29, 2022, and a carrying value of $119,000 at September 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 with Enterprise Fleet Management, Inc. acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for 31 vehicles to be used for Ryan 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 at September 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 with RICA Developers, LLC acquired on August 12, 2022, as part of the Ryan Environmental acquisition. This lease, for the Bridgeport, WV facility, had a net present value of $140,000 at inception and a carrying value of $113,000 at September 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:

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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 ended September 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 September 30, 2022, the Company did not have any outstanding letters of credit.

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. At September 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 within the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.

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 ended September 30, 2022, and 2021:

* Less than 10.0% and included in “All other” if applicable

* 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.

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of September 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 of First Bank of Charleston. Mr. Samuel Kapourales, a director of Energy Services, was also a director of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, held the same position with Premier Financial Bancorp, Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and was a director of Premier Financial Bancorp, Inc. On September 17, 2021, Peoples Bancorp, Inc., parent company of Peoples Bank, completed an acquisition of Premier Financial Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank and Citizens Deposit Bank & Trust. On October 26, 2021, Mr. Douglas Reynolds was elected a director of Peoples Bancorp, Inc., and its subsidiary Peoples Bank.

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises as partial consideration for the purchase of Tri-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 beginning April 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 of September 30, 2022.

Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns 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 at September 30, 2022.

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SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022. Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier 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, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”). Landlord decided to pursue the following development project (the “Project”): a historical building at 1030 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 September 30, 2022.

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 ended September 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 ended September 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 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.

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:

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