# Energy Services of America CORP (ESOA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Energy Services of America CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1357971/000141057821000612/esoa-20210930x10k.htm
Accession: 0001410578-21-000612
Filing date: 2021-12-29
Report date: 2021-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ESOA/
All MD&A years: /company/ESOA/mda/
Next year: /company/ESOA/mda/fy2022/ (FY 2022)

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, General and Administrative Expenses

Selling, general 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.

16

Table of Contents

Results of Operations for the Year Ended September 30, 2021, Compared to the Year Ended September 30, 2020.

Revenue. A table comparing the components of the Company’s revenues for the fiscal years ended September 30, 2021, and 2020 is below:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Fiscal Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","September 30, 2021","\u200b","% of total","\u200b","September 30, 2020","\u200b","% of total","\u200b","Change","\u200b","% Change"],["Gas & Water Distribution","","$","40,440,195","","33.0","%","$","24,488,259","","20.54","%","$","15,951,936","","65.14","%"],["Gas & Petroleum Transmission","\u200b","","22,133,483","","18.1","%","","43,044,207","","36.11","%","","(20,910,724)","","(48.58)","%"],["Electrical, Mechanical, and General","\u200b","","59,892,148","","48.9","%","","51,661,974","","43.34","%","","8,230,174","","15.93","%"],["Total","\u200b","$","122,465,826","","100.0","%","$","119,194,440","","100.0","%","$","3,271,386","","2.74","%"]]
[[/GREPCENT_TABLE]]

​

Revenue increased by $3.3 million or 2.7% to $122.5 million for the fiscal year ended September 30, 2021, from $119.2 million for the fiscal year ended September 30, 2020.

Gas & Water Distribution revenues totaled $40.4 million for fiscal year ended September 30, 2021, a $16.0 million increase from $24.5 million for fiscal year ended September 30, 2020. 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 West Virginia Pipeline. West Virginia Pipeline, acquired on December 31, 2020, contributed revenues of $5.7 million for the fiscal year ended September 30, 2021.

Gas & Petroleum Transmission revenues totaled $22.1 million for fiscal year ended September 30, 2021, a $20.9 million decrease from $43.0 million for fiscal year ended September 30, 2020. The revenue decrease was primarily related to fewer project bid opportunities combined with greater competition from non-union and larger union bidders during fiscal year ended September 30, 2021. The Company was awarded several transmission projects that were delayed by the customer until later in the Company’s fourth quarter of fiscal year 2021. Those projects are expected to be completed in the Company’s first quarter of fiscal year 2022.

Electrical, Mechanical, & General services and construction revenues totaled $59.9 million for fiscal year ended September 30, 2021, an $8.2 million increase from $51.7 million for fiscal year ended September 30, 2020. The revenue increase was primarily due to a large automotive project, which started in fiscal year 2020 and was completed in fiscal year 2021. In addition, the Company had a significant amount of outage work that started in the fourth quarter of fiscal year 2021. SQP, started in March 2021, accounted for $3.1 million in revenue for fiscal year 2021.

Please see page F-31 of the Notes to Consolidated Financial Statements for a quarterly summary of revenues earned.

Cost of Revenues. A table comparing the components of the Company’s costs of revenues for fiscal years ended September 30, 2021 and 2020, is below:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Fiscal Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","September 30, 2021","","% of total","","September 30, 2020","","% of total","","\u200b","Change","","% Change"],["Gas & Water Distribution","\u200b","$","32,467,794","","29.6","%","$","20,108,867","","19.0","%","$","12,358,927","","61.46","%"],["Gas & Petroleum Transmission","\u200b","","17,237,245","","15.7","%","","32,356,277","","30.6","%","","(15,119,032)","","(46.73)","%"],["Electrical, Mechanical, and General","\u200b","","55,574,528","","50.7","%","","48,475,344","","45.9","%","","7,099,184","","14.64","%"],["Unallocated Shop Expenses","\u200b","","4,265,237","","3.9","%","","4,752,721","","4.5","%","","(487,484)","","(10.26)","%"],["Total","\u200b","$","109,544,804","","100.0","%","$","105,693,209","","100.0","%","$","3,851,595","","3.64","%"]]
[[/GREPCENT_TABLE]]

​

Total cost of revenues increased by $3.8 million or 3.6% to $109.5 million for fiscal year ended September 30, 2021, from $105.7 million for the fiscal year ended September 30, 2020.

Gas & Water Distribution cost of revenues totaled $32.5 million for the fiscal year ended September 30, 2021, a $12.4 million increase from $20.1 million for fiscal year ended September 30, 2020. 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 West Virginia Pipeline. West Virginia Pipeline, acquired on December 31, 2020, incurred cost of revenues of $3.4 million for fiscal year ended September 30, 2021.

17

Table of Contents

Gas & Petroleum Transmission cost of revenues totaled $17.2 million for fiscal year ended September 30, 2021, a $15.2 million decrease from $32.4 million for fiscal year ended September 30, 2020. The cost of revenues decrease was primarily related to fewer project bid opportunities combined with greater competition from non-union and larger union bidders during fiscal year ended September 30, 2021.

Electrical, Mechanical, & General services and construction cost of revenues totaled $55.6 million for fiscal year ended September 30, 2021, a $7.1 million increase from $48.5 million for fiscal year ended September 30, 2020. The cost of revenues increase was primarily due to a large automotive project, which started in fiscal year 2020 and was completed in fiscal year 2021. In addition, the Company had a significant amount of outage work that started in the fourth quarter of fiscal year 2021. SQP, started in March 2021, accounted for $2.7 million in cost of revenues for fiscal year 2021.

Unallocated shop expenses totaled $4.3 million for fiscal year ended September 30, 2021, a $487,000 decrease from $4.8 million for fiscal year ended September 30, 2020. The decrease in unallocated shop expenses was due to increased internal equipment charges to projects for fiscal year ended September 30, 2021, as compared to 2020.  

Gross Profit. A table comparing the components of the Company’s gross profit for fiscal years ended September 30, 2021, and 2020, is below:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Fiscal Year Ended","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","September 30, 2021","","% of revenue","","\u200b","September 30, 2020","","% of revenue","","\u200b","Change","","% Change"],["Gas & Water Distribution","\u200b","$","7,972,401","\u200b","61.7","%","$","4,379,392","\u200b","32.4","%","$","3,593,009","\u200b","82.0","%"],["Gas & Petroleum Transmission","","\u200b","4,896,238","","37.9","%","\u200b","10,687,930","","79.2","%","\u200b","(5,791,692)","","(54.2)","%"],["Electrical, Mechanical, and General","","\u200b","4,317,620","","33.4","%","\u200b","3,186,630","","23.6","%","\u200b","1,130,990","","35.5","%"],["Unallocated Shop Expenses","","\u200b","(4,265,237)","","(33.0)","%","\u200b","(4,752,721)","","(35.2)","%","\u200b","487,484","","(10.3)","%"],["Total","\u200b","$","12,921,022","","100.0","%","$","13,501,231","","100.0","%","$","(580,209)","","(4.3)","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Gross profit percentage","\u200b","","10.6","%","\u200b","\u200b","","11.3","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

​

Total gross profit decreased by $580,000 or (4.3%) to $12.9 million for fiscal year ended September 30, 2021, from $13.5 million for fiscal year ended September 30, 2020.

Gas & Water Distribution gross profit totaled $8.0 million for fiscal year ended September 30, 2021, a $3.6 million increase from $4.4 million for fiscal year ended September 30, 2020. 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 West Virginia Pipeline. West Virginia Pipeline, acquired on December 31, 2020, contributed gross profit of $2.4 million for fiscal year ended September 30, 2021.

Gas & Petroleum Transmission gross profit totaled $4.9 million for fiscal year ended September 30, 2021, a $5.8 million decrease from $10.7 million for fiscal year ended September 30, 2020. The gross profit decrease was primarily related to fewer project bid opportunities combined with greater competition from larger union and non-union bidders during fiscal year ended September 30, 2021.

Electrical, Mechanical, & General services and construction gross profit totaled $4.3 million for fiscal year ended September 30, 2021, a $1.1 million increase from $3.2 million for fiscal year ended September 30, 2020. An increase in volume combined with more efficient production accounted for the increased gross profit. SQP, started in March 2021, accounted for $388,000 in gross profit for fiscal year 2021.

Gross loss attributed to unallocated shop expenses totaled $4.3 million for fiscal year ended September 30, 2021, a $487,000 decrease from $4.8 million for fiscal year ended September 30, 2020. The gross loss decrease was primarily due to increased internal equipment charges to projects for fiscal year ended September 30, 2021, as compared to 2020.  

Selling and administrative expenses. Total selling and administrative expenses increased by $4.0 million to $13.8 million for fiscal year ended September 30, 2021, from $9.8 million for fiscal year ended September 30, 2020. Approximately $1.2 million of the selling and administrative expense increase for fiscal year ended September 30, 2021, was from the operations of the new subsidiaries, West Virginia Pipeline and SQP. In addition, the Company incurred approximately $150,000 in acquisition costs during the fiscal year ended September 30, 2021.

18

Table of Contents

The Company incurred higher labor costs for fiscal year ended September 30, 2021, compared to fiscal year ended September 30, 2020, primarily due to the Company investing approximately $962,000 in personnel to enhance project management and estimating in the transmission division, develop a quality assurance/quality control program, expand its mechanical services, and improve production tracking. Additionally, incentive compensation increased by $481,000 for fiscal year ended September 30, 2021, as compared to fiscal year ended September 30, 2020. The overall increase in selling and administrative expense, including an increase in incentive compensation, related to an initiative launched by the Company to increase and incentivize operational talent within the Company in order to increase revenue and profit margins.

A one-time $651,000 Qualified Non-Elective Contribution (“QNEC”) adjustment to the Company’s 401(k) plan (“Plan”) attributable to the 2021 Plan year increased selling and administrative costs for fiscal year ended September 30, 2021, as compared to fiscal year ended September 30, 2020. The reason for the QNEC adjustment was to correct Plan participant’s balances due to a third-party administrator’s actions.

(Loss) income from operations. Loss from operations was ($893,000) for fiscal year ended September 30, 2021, a $4.6 million decrease from a $3.7 million income from operations for the fiscal year ended September 30, 2020.  

Interest Expense. Interest expense increased by $71,000 or 14.6% to $557,000 for the fiscal year ended September 30, 2021, from $486,000 for the fiscal year ended September 30, 2020. This increase was primarily due to increased line of credit borrowings and financing the West Virginia Pipeline acquisition and equipment purchases.

Other income (expenses). Other income totaled $10.0 million for fiscal year ended September 30, 2021, as compared to other expenses of ($93,000) for fiscal year ended September 30, 2020. The increase 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 $9.1 million for fiscal year ended September 30, 2021, compared to $3.6 million for fiscal year ended September 30, 2020. The increase in income before income taxes was primarily due to PPP loan debt forgiveness, which was a one-time event that will not be repeated.

Income tax benefit for fiscal year ended September 30, 2021, was ($29,000) compared to income tax expense of $1.1 million for fiscal year ended September 30, 2020.

The effective income tax rate for fiscal year ended September 30, 2021, was (0.32%), as compared to 32.0% for fiscal year ended September 30, 2020. Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income and non-deductible expenses.  

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 fiscal year 2020 were considered deductible expenses for federal income tax purposes. The PPP forgiveness had a significant impact on the effective income tax rate for fiscal year ended September 30, 2021, as taxable income was decreased by $9.8 million.  

Per diem paid to employees on construction projects and entertainment expenses are only partially deductible from taxable income and can have a significant impact on the effective tax rate. For the fiscal years ended September 30, 2021, and 2020, the non-deductible portion of per diem and entertainment expenses resulted in an approximate increase in taxable income of $515,000 and $530,000, respectively.

Dividends on preferred stock for fiscal years ended September 30, 2021, and 2020 were $284,238 and $309,000, 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 shareholders for fiscal year ended September 30, 2021, was $8.8 million compared to $2.1 million for fiscal year ended September 30, 2020.

19

Table of Contents

Comparison of Financial Condition at September 30, 2021 Compared to September 30, 2020.

The Company had total assets of $70.2 million at September 30, 2021, an increase of $12.0 million from the prior fiscal year end balance of $58.2 million.  

Net property, plant and equipment totaled $22.9 million at September 30, 2021, an increase of $6.5 million from the prior fiscal year end balance of $16.4 million. Property, plant and equipment acquisitions totaled $11.3 million for fiscal year 2021 while depreciation expense was $4.7 million, and the net impact of disposals was $76,000. Assets received as part of the West Virginia Pipeline and Revolt Energy acquisitions accounted for $2.1 million of the $11.3 million in total acquisitions.

Goodwill and acquired intangible assets resulting from the West Virginia Pipeline and Revolt Energy acquisitions totaled $4.2 million at September 30, 2021, as compared to no goodwill and acquired intangible assets at the prior fiscal year end.

Contract assets totaled $8.7 million at September 30, 2021, an increase of $2.2 million from the prior fiscal year end balance of $6.5 million. This increase was primarily due to the timing of project billings and related increase in costs and estimated earnings in excess of billings at September 30, 2021 as compared to at September 30, 2020.

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $22.5 million at September 30, 2021, an increase of $1.8 million from the combined prior fiscal year end balance of $20.7 million. The increase was primarily due to a $2.5 million increase in accounts receivable related to the new subsidiaries, West Virginia Pipeline and SQP.

Prepaid expenses and other totaled $3.5 million at September 30, 2021, an increase of $200,000 from the prior fiscal year end balance of $3.3 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 $8.2 million at September 30, 2021, a decrease of $3.0 million from the prior fiscal year end balance of $11.2 million. The decrease was primarily related to a $6.0 million investment in property and equipment and $2.8 million in long-term debt repayments, partially offset by a $4.5 million increase in line of credit borrowings and $800,000 net cash provided by operating activities.

Liabilities totaled $35.5 million at September 30, 2021, an increase of $3.2 million from the prior fiscal year end balance of $32.3 million.

Lines of credit and short-term borrowings totaled $5.0 million at September 30, 2021, an increase of $4.5 million from the prior fiscal year end balance of $510,000. This increase was primarily due to borrowings against the Company’s operating line of credit.

Accounts payable totaled $7.3 million as of September 30, 2021, an increase of $2.1 million from the prior fiscal year end balance of $5.2 million. The increase was due to the timing of payments to material and equipment providers. New subsidiaries, West Virginia Pipeline and SQP, accounted for $1.1 million of the increase.

Accrued expenses and other current liabilities totaled $5.6 million at September 30, 2021, an increase of $1.4 million from the prior fiscal year end balance of $4.2 million. The increase was primarily due to increased labor and burden expenses incurred towards the end of fiscal year 2021 compared to 2020.

The aggregate balance of current maturities of long-term debt and long-term debt totaled $12.4 million at September 30, 2021, a decrease of $2.8 million from the prior fiscal year end balance of $15.3 million. The decrease was primarily due to forgiveness received on $9.8 million in PPP loans and $2.8 million in debt repayments, partially offset by a $6.4 million increase related to financing the West Virginia Pipeline acquisition and a $3.0 million increase related to the financing of equipment.  

Contract liabilities totaled $3.2 million at September 30, 2021, a decrease of $1.7 million from the prior fiscal year end balance of $4.9 million. This decrease was due to a lower amount of overbillings when comparing the billed revenue and percentage of cost completed on construction projects in 2021 as compared to 2020.

20

Table of Contents

Net deferred income tax payable totaled $2.0 million at September 30, 2021, a decrease of $222,000 from the prior fiscal year end balance of $2.3 million. The decrease was primarily due to a loss from operations net of non-taxable income recognized from PPP loan forgiveness and deferred income tax payable resulting from bonus depreciation on property, plant and equipment acquisitions in fiscal year 2021.

Shareholders’ equity totaled $34.6 million at September 30, 2021, an increase of $8.8 million from the prior fiscal year end balance of $25.8 million. This increase was primarily due to $9.8 million in income related to PPP loan forgiveness, partially offset by a loss of ($742,000) prior to PPP loan forgiveness, and $284,000 in accrued preferred dividends.

Liquidity and Capital Resources

Indebtedness

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 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, 2021, the Company had made principal payments of $281,000. The loan is collateralized by the building purchased under this agreement.

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank, Inc. This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment Line of Credit were converted to a five-year term note agreement with an interest rate of 5.0%. As of September 30, 2021, the Company had borrowed $2.46 million against this note and had paid off the loan, which was collateralized by the equipment purchased under this agreement.

On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank, Inc. to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month. The interest rate on the new loan agreement is 4.25% with monthly payments of $11,602. As of September 30, 2021, the Company had made principal payments of $569,000. 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, Inc. 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%. As of September 30, 2021, the Company had borrowed $5.0 million against this note and made principal payments of $4.2 million. The loan is collateralized by the equipment 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 fair acquisition, the acquirer paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires equal annual payments 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, 2021, the Company has made interest payments of $73,000 and expensed $22,500 in accreted interest. The Company made the first installment payment in December 2021.

On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank, Inc. 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 will be 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, 2021, the Company borrowed $3.0 million against this line of credit with payments set to begin in February 2022. The Company has made interest payments of $34,000 on this note as of September 30, 2021.

21

Table of Contents

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank, Inc. 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 a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal. The loan is collateralized by the Company’s equipment and receivables. As of September 30, 2021, the Company had made principal payments of $316,000.

Operating Line of Credit

On August 3, 2021, the Company received a one-year extension on its line of credit (“Operating Line of credit (2021)”) effective June 28, 2021. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%. 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%. Based on the borrowing base calculation, the Company was able to borrow up to $11.1 million as of September 30, 2020. The Company had no borrowings on the line of credit, as of September 30, 2020. The interest rate at September 30, 2020, 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:

[[GREPCENT_TABLE]]
[["","1.","Minimum tangible net worth of $19.0 million to be measured quarterly,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2.","Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","3.","Minimum current ratio of 1.50x to be measured quarterly,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","4.","Maximum debt to tangible net worth ratio (\u201cTNW\u201d) of 2.0x to be measured semi-annually,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","5.","Full review of accounts receivable aging report and work in progress. The results of the review shall be satisfactory to the lender in its sole and unfettered discretion."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","1.","Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis,"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","2.","Minimum tangible net worth of $21.0 million to be measured quarterly."]]
[[/GREPCENT_TABLE]]

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2021) at September 30, 2021 except for the debt service coverage ratio, for which the Company obtained a waiver from its lender.

As of September 30, 2021, the Company had $8.2 million in cash and $18.4 million in working capital. 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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b"],["2022","","$","8,441,824"],["2023","\u200b","","2,152,652"],["2024","\u200b","","2,215,516"],["2025","\u200b","","2,278,581"],["2026","\u200b","","1,739,495"],["Thereafter","\u200b","","634,530"],["\u200b","\u200b","$","17,462,598"]]
[[/GREPCENT_TABLE]]

​

22

Table of Contents

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:

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Among other things, lessees are required to recognize the following for all leases (except for short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. It is the Company’s preference to acquire equipment needed for long-term use through purchase, by cash or finance. For equipment needed on a short-term basis, the Company will enter into short-term rental agreements with the equipment provider where the agreement is cancellable at any time. The adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.

The Company leases office space for SQP Construction Group 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 agree 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.

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 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 Income Statement, was $3.6 million and $4.2 million for the twelve months ended September 30, 2021, and 2020, 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, 2021, 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 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, 2021, the Company had $30.1 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.  

23

Table of Contents

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, 2021, and 2020:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Revenue","","FY 2021","","FY 2020"],["TransCanada Corporation","","11.0","%","24.7","%"],["Marathon Petroleum","","\u200b","*","11.1","%"],["All other","","89.0","%","64.2","%"],["Total","","100.0","%","100.0","%"]]
[[/GREPCENT_TABLE]]

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Accounts receivable net of retention","","FY 2021","","FY 2020"],["Kentucky American Water","","16.3","%","\u200b","*"],["TransCanada Corporation","","13.2","%","18.4","%"],["Marathon Petroleum","\u200b","\u200b","*","19.7","%"],["Shimizu North American LLC","\u200b","\u200b","*","11.9","%"],["All other","","70.5","%","50.0","%"],["Total","","100.0","%","100.0","%"]]
[[/GREPCENT_TABLE]]

* 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.

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 changes on a pipeline construction project. On November 9, 2021, the Company was awarded $5.8 million, none of which has been recognized in the Company’s financial statements.  The Defendant has filed motions to request a new trial or a renewed judgement as a matter of law, which has not been ruled upon. The Company anticipates that a final judgement order will be issued in the first calendar quarter of 2022. A party to a civil lawsuit usually has 30 days from the entry of judgment to file a notice of appeal.

Other than described above, at September 30, 2021, 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, 2021, 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, 2021, the Company had paid approximately $281,000 in principal and approximately $351,000 in interest since the beginning of the loan.  Mr. Douglas Reynolds,

24

Table of Contents

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 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 fair acquisition, the acquirer paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires equal annual payments 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, 2021, the Company has made interest payments of $73,000 and expensed $22,500 in accreted interest. The Company made the first installment payment in December 2021.

Other than mentioned above, there were no new material related party transactions entered into during the fiscal year ended September 30, 2021.

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.  Therefore, inflation did not have a significant effect on our results for the fiscal years ended September 30, 2021, and 2020. However, significant inflation or supply chain issues could cause customers to delay or cancel planned projects.

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.

25

Table of Contents

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:

[[GREPCENT_TABLE]]
[["","\u25cf","the completeness and accuracy of the original bid;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","costs associated with scope changes;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in costs of labor and/or materials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","extended overhead and other costs due to owner, weather and other delays;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","subcontractor performance issues;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in productivity expectations;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","site conditions that differ from those assumed in the original bid;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes from original design on design-build projects;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the availability and skill level of workers in the geographic location of the project;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","a change in the availability and proximity of equipment and materials;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the customer\u2019s ability to properly administer the contract."]]
[[/GREPCENT_TABLE]]

The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects could have, a significant effect on our profitability.

Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.

Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.

The following table presents our costs and estimated earning in excess of billings and billings in excess of costs and estimated earnings at September 30, 2021, and 2020:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended September 30,"],["\u200b","\u200b","2021","\u200b","2020"],["Costs incurred on contracts in progress","","$","64,903,618","","$","74,996,405"],["Estimated earnings, net of estimated losses","","\u200b","13,280,334","","\u200b","16,067,668"],["\u200b","","\u200b","78,183,952","","\u200b","91,064,073"],["Less billings to date","","\u200b","72,606,840","","\u200b","89,370,110"],["\u200b","\u200b","$","5,577,112","\u200b","$","1,693,963"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Costs and estimated earnings in excess of billed on","\u200b","","","\u200b"],["uncompleted contracts","\u200b","$","8,730,402","\u200b","$","6,545,863"],["Less billings in excess of costs and estimated earnings on","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["uncompleted contracts","\u200b","","3,153,290","\u200b","","4,851,900"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","$","5,577,112","\u200b","$","1,693,963"]]
[[/GREPCENT_TABLE]]

​

26

Table of Contents

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, 2021, the management review deemed that the allowance for doubtful accounts was adequate. Please see the table below:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended September 30,"],["\u200b","\u200b","2021","\u200b","2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Balance at beginning of year","","$","70,310","","$","70,310"],["Charged to expense","","\u200b","\u2014","","\u200b","\u2014"],["Deductions for uncollectible receivables written off, net of recoveries","","\u200b","\u2014","","\u200b","\u2014"],["Balance at end of year","\u200b","$","70,310","\u200b","$","70,310"]]
[[/GREPCENT_TABLE]]

​

Impairment of goodwill and intangible assets

The Company follows the guidance of 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 two-step quantitative assessment of goodwill impairment. The Company did not have a goodwill impairment at September 30, 2021.

Based on management's preliminary valuation of tangible and intangible assets acquired and liabilities assumed, the West Virginia Pipeline and Revolt Energy acquisitions resulted in goodwill of $4.2 million and intangible assets of $400,000.   A subsequent independent, third-party fair value evaluation analysis of the purchase price allocations resulted in the reclassification of $2.3 million from goodwill to intangible assets, primarily customer relationships. At September 30, 2021, goodwill and intangible assets were $1.8 million and $2.4 million, respectively.

Materially incorrect estimates could cause an impairment to 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:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","Remaining Life at","","\u200b","\u200b","","\u200b","\u200b","","Amortization and","","\u200b","\u200b"],["\u200b","\u200b","September 30,","\u200b","Original","\u200b","Accumulated","\u200b","Impairment FY","\u200b","Net Book"],["Intangible assets:","\u200b","2021","\u200b","Cost","\u200b","Amortization","\u200b","2021","\u200b","Value"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["West Virginia Pipeline","\u200b","","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b"],["Customer Relationships","\u200b","111 months","\u200b","$","2,209,724","\u200b","$","165,725","\u200b","$","165,725","\u200b","$","2,043,999"],["Tradename","\u200b","111 months","\u200b","\u200b","263,584","\u200b","\u200b","19,772","\u200b","\u200b","19,772","\u200b","\u200b","243,812"],["Non-competes","","51 months","\u200b","\u200b","83,203","\u200b","\u200b","31,202","\u200b","\u200b","31,202","\u200b","\u200b","52,001"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Revolt Energy","","","\u200b","","","\u200b","","","\u200b","","","\u200b"],["Non-compete","","31 months","\u200b","","100,000","\u200b","","13,889","\u200b","","13,889","\u200b","","86,111"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total intangible assets","","","\u200b","$","2,656,511","\u200b","$","230,588","\u200b","$","230,588","\u200b","$","2,425,923"]]
[[/GREPCENT_TABLE]]

​

27

Table of Contents

Depreciation

The purpose of depreciation 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 is a noncash expense, the amount must be estimated. Each year a certain amount of depreciation 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.

The Company’s depreciation expense for fiscal years ended September 30, 2021, and 2020 was $4.7 million and $4.4 million, respectively.  In general, depreciation is included in “cost of revenues” on the Company’s Consolidated Statements of Income.

Materially incorrect estimates of depreciation and/or the useful lives of assets could significantly impact the value of property, plant, and equipment on the Company’s financial statements. A material over valuation could result in impairment charges and reduced profitability for the Company.

Income Taxes

Our 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%.  

Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were (.32%) and 32.0% for fiscal years 2021 and 2020, respectively.  Our tax rate is affected by recurring items, such as non-tax deductible portions of per diem paid to construction personnel, which we expect to be fairly consistent in the near term. For the fiscal years ended September 30, 2021, and 2020, the non-deductible portion of per diem and entertainment expenses resulted in approximate increases in taxable income of $515,000 and $530,000, respectively.  Our tax estimates are also affected by discrete items that may occur in any given year but are not consistent from year to year. In fiscal year 2021, $9.8 million in PPP loan forgiveness was excluded from taxable income.  Additionally, the Company is expecting to receive approximately a $250,000 federal income tax credit related to a solar installation project at its Nitro, WV facility.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future. At September 30, 2021, the Company had a net deferred income tax liability of $2.0 million as compared to $2.3 million at September 30, 2020.  The Company’s deferred income tax liabilities at September 30, 2021 was $4.9 million and primarily related to depreciation on property and equipment.  The Company’s deferred income tax assets at September 30, 2021 was $2.9 million and primarily related to a net operating loss (“NOL”) carryforward. The Company believes that it is more likely than not that all NOL carryforwards will be realized.

The Company’s tax provision is evaluated as part of its annual audit; however, a material difference between the provision and actual income tax filings could result in adjustments to income tax benefits or expenses and deferred tax assets and liabilities. Changes in tax laws and rates may also affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

New Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. ASU 2017-04 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The update was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company has adopted ASU 2017-04 and it did not have a material impact on its financial statements or disclosure.

28

Table of Contents

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

Subsequent Events

On October 6, 2021, the Company’s transfer agent completed the previously disclosed Series A Preferred Stock redemption, which resulted in the issuance of 2,626,492 new shares of the Company’s common stock, the issuance of 317,500 common shares that were included in Series A Preferred Stock units, and cash redemption payments of approximately $1.3 million. The Company’s total outstanding common shares after redemption was 16,247,898 as of October 6, 2021.

On November 9, 2021, the Company was awarded $5.8 million in a lawsuit related to construction services performed for a former customer (“Defendant”), none of which has been recognized in the Company’s financial statements.  The Defendant has filed motions to request a new trial or a renewed judgement as a matter of law, which has not been ruled upon. The Company anticipates that a final judgement order will be issued in the first calendar quarter of 2022. A party to a civil lawsuit usually has 30 days from the entry of judgment to file a notice of appeal.

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 and plans to seek arbitration to resolve the matter. If successfully arbitrated, the Company expects to receive repayment of all installment payments made.

Management has evaluated subsequent events through December 29, 2021, the date which the financial statements were available for issue.  There have been no material events noted during the period that would either impact the results reflected in this report or the Company’s results going forward.

​