Energy Services of America CORP 10-Q for FY2021 Q1
Energy Services of America CORP (ESOA)
About this 10-Q
Energy Services of America CORP filed this 10-Q on February 16, 2021, covering the quarter ended December 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $32.01M
- up 23.9% from $25.84M a year earlier
- Diluted EPS
- -$0.05
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 2020.
Energy Services of America Corporation
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 20-4606266 |
| (State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
| 75 West 3rd Ave., Huntington, West Virginia | 25701 |
| (Address of Principal Executive Office) | (Zip Code) |
(304) 522-3868
(Registrant’s Telephone Number Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbols | Name of Each Exchange On Which Registered |
| None | None | None |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES x NO ¨.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO ¨.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, or an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |
| Non-accelerated filer | x | Smaller reporting company | x | |
| Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
As of February 15, 2021, there were 13,621,406 outstanding shares of the Registrant’s Common Stock.
Item 1. Financial Statements (Unaudited):
Energy Services of America Corporation
| December 31, | September 30, | |||||||
| 2020 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 12,345,745 | $ | 11,216,820 | ||||
| Accounts receivable-trade | 17,096,770 | 18,246,989 | ||||||
| Allowance for doubtful accounts | (70,310 | ) | (70,310 | ) | ||||
| Retainages receivable | 1,658,513 | 2,483,809 | ||||||
| Other receivables | 6,677 | 9,458 | ||||||
| Contract assets | 4,418,599 | 6,545,863 | ||||||
| Prepaid expenses and other | 2,763,189 | 3,338,943 | ||||||
| Total current assets | 38,219,183 | 41,771,572 | ||||||
| Property, plant and equipment, at cost | 56,679,946 | 53,324,843 | ||||||
| less accumulated depreciation | (37,706,313 | ) | (36,933,129 | ) | ||||
| Total fixed assets | 18,973,633 | 16,391,714 | ||||||
| Acquired intangible assets, net | 300,000 | - | ||||||
| Goodwill | 4,220,829 | - | ||||||
| Total assets | $ | 61,713,645 | $ | 58,163,286 | ||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities | ||||||||
| Current maturities of long-term debt | $ | 4,645,254 | $ | 4,028,900 | ||||
| Lines of credit and short term borrowings | 3,500,000 | 509,843 | ||||||
| Accounts payable | 5,783,559 | 5,222,222 | ||||||
| Accrued expenses and other current liabilities | 3,255,740 | 4,237,172 | ||||||
| Contract liabilities | 3,721,385 | 4,851,900 | ||||||
| Total current liabilities | 20,905,938 | 18,850,037 | ||||||
| Long-term debt, less current maturities | 13,496,506 | 11,233,705 | ||||||
| Deferred income taxes payable | 2,212,084 | 2,255,515 | ||||||
| Total liabilities | 36,614,528 | 32,339,257 | ||||||
| Shareholders' equity | ||||||||
| Preferred stock, $.0001 par value | ||||||||
| Authorized 1,000,000 shares, 206 issued at December 31, 2020 and September 30, 2020 | - | - | ||||||
| Common stock, $.0001 par value | ||||||||
| Authorized 50,000,000 shares 14,839,836 issued and 13,621,406 outstanding at December 31, 2020 and September 30, 2020 | 1,484 | 1,484 | ||||||
| Treasury stock, 1,218,430 shares at December 31, 2020 and September 30, 2020 | (122 | ) | (122 | ) | ||||
| Additional paid in capital | 60,670,699 | 60,670,699 | ||||||
| Retained deficit | (35,572,944 | ) | (34,848,032 | ) | ||||
| Total shareholders' equity | 25,099,117 | 25,824,029 | ||||||
| Total liabilities and shareholders' equity | $ | 61,713,645 | $ | 58,163,286 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
1
Energy Services of America Corporation
Consolidated Statements of Income
Unaudited
| Three Months Ended | Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Revenue | $ | 32,009,796 | $ | 25,843,307 | ||||
| Cost of revenues | 29,166,737 | 23,486,565 | ||||||
| Gross profit | 2,843,059 | 2,356,742 | ||||||
| Selling and administrative expenses | 3,595,830 | 2,595,772 | ||||||
| Loss from operations | (752,771 | ) | (239,030 | ) | ||||
| Other income (expense) | ||||||||
| Interest income | 151,765 | 53,249 | ||||||
| Other nonoperating expense | (52,623 | ) | (33,938 | ) | ||||
| Interest expense | (76,517 | ) | (186,845 | ) | ||||
| Gain on sale of equipment | 13,042 | 295,991 | ||||||
| 35,667 | 128,457 | |||||||
| Loss before income taxes | (717,104 | ) | (110,573 | ) | ||||
| Income tax benefit | (69,442 | ) | (36,459 | ) | ||||
| Net loss | (647,662 | ) | (74,114 | ) | ||||
| Dividends on preferred stock | 77,250 | 77,250 | ||||||
| Net loss available to common shareholders | $ | (724,912 | ) | $ | (151,364 | ) | ||
| Weighted average shares outstanding-basic | 13,621,406 | 13,911,610 | ||||||
| Weighted average shares-diluted | 13,621,406 | 13,911,610 | ||||||
| Loss per share available to common shareholders | $ | (0.053 | ) | $ | (0.011 | ) | ||
| Loss per share-diluted available to common shareholders | $ | (0.053 | ) | $ | (0.011 | ) | ||
The Accompanying Notes are an Integral Part of These Financial Statements
2
Energy Services of America Corporation
Consolidated Statements of Cash Flows
Unaudited
| Three Months Ended | Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| Cash flows from operating activities: | 2020 | 2019 | ||||||
| Net loss | $ | (647,662 | ) | $ | (74,114 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Depreciation expense | 1,083,853 | 1,095,282 | ||||||
| Gain on sale of equipment | (13,042 | ) | (295,991 | ) | ||||
| Provision for deferred taxes | 29,761 | (105,996 | ) | |||||
| Decrease in contracts receivable | 1,150,219 | 8,424,777 | ||||||
| Decrease in retainage receivable | 825,296 | 276,961 | ||||||
| Decrease in other receivables | 2,781 | 100 | ||||||
| Decrease in contract assets | 2,127,264 | 2,082,158 | ||||||
| Decrease in prepaid expenses | 575,754 | 153,912 | ||||||
| Increase in accounts payable | 561,337 | 1,384,658 | ||||||
| Decrease in accrued expenses | (977,374 | ) | (713,221 | ) | ||||
| Decrease in contract liabilities | (1,130,515 | ) | (222,884 | ) | ||||
| Decrease in income taxes payable | - | 21,811 | ||||||
| Net cash provided by operating activities | 3,587,672 | 12,027,453 | ||||||
| Cash flows from investing activities: | ||||||||
| Investment in property and equipment | (1,467,091 | ) | (747,534 | ) | ||||
| Proceeds from sales of property and equipment | 13,500 | 334,234 | ||||||
| Acquisition of West Virginia Pipeline, net of cash received of $250,000 | (3,250,000 | ) | - | |||||
| Net cash used in investing activities | (4,703,591 | ) | (413,300 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Dividends on common stock | - | (696,117 | ) | |||||
| Preferred dividends paid | (154,500 | ) | (154,500 | ) | ||||
| Treasury stock purchased by company | - | (29,974 | ) | |||||
| Borrowings on lines of credit and short term debt, net of (repayments) | 2,990,157 | (4,025,710 | ) | |||||
| Principal payments on long term debt | (590,813 | ) | (6,671,860 | ) | ||||
| Net cash provided by (used in) financing activities | 2,244,844 | (11,578,161 | ) | |||||
| Increase in cash and cash equivalents | 1,128,925 | 35,992 | ||||||
| Cash and cash equivalents beginning of period | 11,216,820 | 4,578,275 | ||||||
| Cash and cash equivalents end of period | $ | 12,345,745 | $ | 4,614,267 | ||||
| Supplemental schedule of noncash investing and financing activities: | ||||||||
| Purchases of property & equipment under financing agreements | $ | 349,139 | $ | 392,820 | ||||
| Note payable for acquisition of West Virginia Pipeline | $ | 3,000,000 | $ | - | ||||
| Debt assumed in acquisition of West Virginia Pipeline | $ | 120,829 | $ | - | ||||
| Supplemental disclosures of cash flows information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 76,517 | $ | 186,845 | ||||
| Income taxes | $ | - | $ | 48,000 | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
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Energy Services of America Corporation
Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended December 31, 2020 and 2019
| Total | ||||||||||||||||||||||||
| Common Stock | Additional Paid | Retained | Treasury | Shareholders' | ||||||||||||||||||||
| Shares | Amount | in Capital | Earnings (deficit) | Stock | Equity | |||||||||||||||||||
| Balance at September 30, 2019 | 13,924,789 | $ | 1,484 | $ | 60,938,896 | $ | (36,275,932 | ) | $ | (91 | ) | $ | 24,664,357 | |||||||||||
| Net loss | - | - | - | (74,114 | ) | - | (74,114 | ) | ||||||||||||||||
| Accrued preferred dividends | - | - | - | (77,250 | ) | - | (77,250 | ) | ||||||||||||||||
| Dividends on common stock ($0.05 per share on 13,922,336 shares; 317,500 common shares are part of preferred units and were not eligible for the common dividend) | - | - | - | (696,117 | ) | - | (696,117 | ) | ||||||||||||||||
| Treasury stock purchased by company | (34,687 | ) | - | (29,970 | ) | - | (4 | ) | (29,974 | ) | ||||||||||||||
| Balance at December 31, 2019 | 13,890,102 | $ | 1,484 | $ | 60,908,926 | $ | (37,123,413 | ) | $ | (95 | ) | $ | 23,786,902 | |||||||||||
| Balance at September 30, 2020 | 13,621,406 | $ | 1,484 | $ | 60,670,699 | $ | (34,848,032 | ) | $ | (122 | ) | $ | 25,824,029 | |||||||||||
| Net loss | - | - | - | (647,662 | ) | - | (647,662 | ) | ||||||||||||||||
| Preferred dividends | - | - | - | (77,250 | ) | - | (77,250 | ) | ||||||||||||||||
| Balance at December 31, 2020 | 13,621,406 | $ | 1,484 | $ | 60,670,699 | $ | (35,572,944 | ) | $ | (122 | ) | $ | 25,099,117 | |||||||||||
The Accompanying Notes are an Integral Part of These Financial Statements
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ENERGY SERVICES OF AMERICA CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Energy Services of America Corporation (“Energy Services” or the “Company”) is a contractor and service company that operates primarily in the mid-Atlantic region of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical and power industries. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R and fire protection services to customers primarily in the automotive, chemical and power industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All C.J. Hughes, Nitro, and Contractors Rental production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.
On December 31, 2020, Energy Services completed the purchase of West Virginia Pipeline, Inc. (“West Virginia Pipeline”), a West Virginia corporation located in Princeton, West Virginia. West Virginia Pipeline, a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. West Virginia Pipeline’s employees are non-union, and the company is managed independently from C.J. Hughes and Nitro.
The Company’s stock is quoted under the symbol “ESOA” on the OTC QB marketplace operated by the OTC Markets Group.
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto for the years ended September 30, 2020 and 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on January 4, 2021. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the interim financial reporting rules and regulations of the SEC. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations. The operating results for the three months ended December 31, 2020 and 2019 are not necessarily indicative of the results to be expected for the full year or any other interim period.
Principles of Consolidation
The consolidated financial statements of Energy Services include the accounts of Energy Services, its wholly owned subsidiaries West Virginia Pipeline and C.J. Hughes and its subsidiaries, Nitro, Pinnacle, and Contractors Rental. All significant intercompany accounts and transactions have been eliminated in the consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services, West Virginia Pipeline and C.J. Hughes and its subsidiaries.
5
2. REVENUE RECOGNITION
Our revenue is primarily derived from construction contracts that can span several quarters. We recognize revenue in accordance with Topic 606, which provides for a five-step model for recognizing revenue from contracts with customers as follows:
| 1. | Identify the contract |
| 2. | Identify performance obligations |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price |
| 5. | Recognize revenue |
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 customer’s ability to properly administer the contract. |
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability.
Our contract assets may 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 may 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.
6
3. DISAGGREGATION OF REVENUE
We disaggregate our revenue based on our operating groups and contract types as it is the format that is regularly reviewed by management. Our reportable operating groups are: Petroleum and Gas, Water, Sewer and other services, and Electrical and Mechanical services. Our contract types are: Lump Sum, Unit Price, Cost Plus and Time and Materials (“T&M”). The following tables present our disaggregated revenue for the three months ended December 31, 2020 and 2019:
| Three Months Ended December 31, 2020 | ||||||||||||||||
| Petroleum & Gas | Water, Sewer and Other | Electrical and Mechanical | Total revenue from contracts | |||||||||||||
| Lump sum contracts | $ | - | $ | - | $ | 11,666,631 | $ | 11,666,631 | ||||||||
| Unit price contracts | 11,827,050 | 3,707,181 | - | 15,534,231 | ||||||||||||
| Cost plus and T&M contracts | 290,000 | - | 4,518,934 | 4,808,934 | ||||||||||||
| Total revenue from contracts | $ | 12,117,050 | $ | 3,707,181 | $ | 16,185,565 | $ | 32,009,796 | ||||||||
| Earned over time | $ | 8,402,592 | $ | 3,707,181 | $ | 16,013,755 | $ | 28,123,528 | ||||||||
| Earned at point in time | 3,714,458 | 171,810 | 3,886,268 | |||||||||||||
| Total revenue from contracts | $ | 12,117,050 | $ | 3,707,181 | $ | 16,185,565 | $ | 32,009,796 | ||||||||
| Three Months Ended December 31, 2019 | ||||||||||||||||
| Petroleum & Gas | Water, Sewer and Other | Electrical and Mechanical | Total revenue from contracts | |||||||||||||
| Lump sum contracts | $ | - | $ | - | $ | 7,448,512 | $ | 7,448,512 | ||||||||
| Unit price contracts | 6,218,532 | 2,125,934 | - | 8,344,466 | ||||||||||||
| Cost plus and T&M contracts | 3,311,566 | 1,274,832 | 5,463,931 | 10,050,329 | ||||||||||||
| Total revenue from contracts | $ | 9,530,098 | $ | 3,400,766 | $ | 12,912,443 | $ | 25,843,307 | ||||||||
| Earned over time | $ | 7,116,701 | $ | 3,400,766 | $ | 12,599,705 | $ | 23,117,172 | ||||||||
| Earned at point in time | 2,413,397 | - | 312,738 | 2,726,135 | ||||||||||||
| Total revenue from contracts | $ | 9,530,098 | $ | 3,400,766 | $ | 12,912,443 | $ | 25,843,307 | ||||||||
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4. CONTRACT BALANCES
The Company’s accounts receivable consists of amounts that have been billed to customers. Collateral is generally not required. A majority of the Company’s contracts have monthly billing terms and payment terms within 30 to 45 days after invoices have been issued. The Company attempts to negotiate two-week billing terms and 15-day payment terms on larger projects. The timing of billings to customers may generate contract assets or contract liabilities.
During the three months ended December 31, 2020, we recognized revenue of $4.6 million that was included in the contract liability balance at September 30, 2020.
Accounts receivable-trade, net of allowance for doubtful accounts, retentions receivable, contract assets and contract liabilities consisted of the following:
| September 30, 2020 | December 31, 2020 | Change | ||||||||||
| Accounts receivable-trade, net of allowance for doubtful accounts | $ | 18,176,679 | $ | 17,026,460 | $ | (1,150,219 | ) | |||||
| Contract assets Cost and estimated earnings in excess of billings | $ | 6,545,863 | $ | 4,418,599 | $ | (2,127,264 | ) | |||||
| Contract liabilities Billings in excess of cost and estimated earnings | $ | 4,851,900 | $ | 3,721,385 | $ | (1,130,515 | ) | |||||
5. PERFORMANCE OBLIGATIONS
The Company provides construction services that can be classified into several groups: petroleum and gas, water, sewer and other, and electrical and mechanical services. Generally, our contracts contain one performance obligation that is satisfied over time because our performance typically creates or enhances an asset that the customer controls as the asset is created or enhanced. We recognize revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. 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. Under the cost-to-cost method, costs incurred to-date are generally the best depiction of transfer of control. All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs).
During the three months ended December 31, 2020, we recognized revenue of $1.0 million as a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2020. The changes in contract transaction price were from items such as changes in projected profit, executed or estimated change orders, and unresolved contract modifications and claims.
The Company does not sell warranties for its construction services. At December 31, 2020, the Company had $9.5 million in remaining unsatisfied performance obligations, in which revenue is expected to be recognized in less than twelve months.
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6. UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts as of December 31, 2020 and September 30, 2020 are summarized as follows:
| December 31, | September 30, | |||||||
| 2020 | 2020 | |||||||
| Costs incurred on contracts in progress | $ | 114,491,141 | $ | 74,996,405 | ||||
| Estimated earnings, net of estimated losses | 19,336,835 | 16,067,668 | ||||||
| 133,827,976 | 91,064,073 | |||||||
| Less billings to date | 133,130,762 | 89,370,110 | ||||||
| $ | 697,214 | $ | 1,693,963 | |||||
| Costs and estimated earnings in excess of billed on uncompleted contracts | $ | 4,418,599 | $ | 6,545,863 | ||||
| Less billings in excess of costs and estimated earnings on uncompleted contracts | 3,721,385 | 4,851,900 | ||||||
| $ | 697,214 | $ | 1,693,963 | |||||
Backlog at December 31, 2020 and September 30, 2020 was $60.7 million and $63.8 million, respectively.
7. FAIR VALUE MEASUREMENTS
The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
As noted above, there is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 — Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.
Level 2 — Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.
Level 3 — Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.
9
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The carrying amount for borrowings under the Company’s revolving credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Company’s long term fixed-rate debt to unrelated parties was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates for bank loans with similar terms and maturities. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $17.2 million at December 31, 2020 was $16.1 million as of the same date. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $15.8 million at September 30, 2020 was $14.8 million.
All receivables and payables are carried at net realizable value which approximates fair value because of their short duration to maturity.
8. LOSS PER SHARE
The amounts used to compute the loss per share for the three months ended December 31, 2020 and 2019 are summarized below.
| Three Months Ended | Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Net loss | $ | (647,662 | ) | $ | (74,114 | ) | ||
| Dividends on preferred stock | 77,250 | 77,250 | ||||||
| Net loss available to common shareholders | $ | (724,912 | ) | $ | (151,364 | ) | ||
| Weighted average shares outstanding-basic | 13,621,406 | 13,911,610 | ||||||
| Weighted average shares-diluted | 13,621,406 | 13,911,610 | ||||||
| Loss per share available to common shareholders | $ | (0.053 | ) | $ | (0.011 | ) | ||
| Loss per share available to common shareholders-diluted | $ | (0.053 | ) | $ | (0.011 | ) | ||
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9. INCOME TAXES
The components of income taxes are as follows:
| Three Months Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Federal | ||||||||
| Current | $ | (77,380 | ) | $ | 54,240 | |||
| Deferred | 23,214 | (82,678 | ) | |||||
| Total | $ | (54,166 | ) | $ | (28,438 | ) | ||
| State | ||||||||
| Current | $ | (21,824 | ) | $ | 15,298 | |||
| Deferred | 6,548 | (23,319 | ) | |||||
| Total | $ | (15,276 | ) | $ | (8,021 | ) | ||
| Total income tax benefit | $ | (69,442 | ) | $ | (36,459 | ) | ||
The effective income tax rate for the three months ended December 31, 2020 was (9.7%), as compared to (33.0%) for the same period in 2019. 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. Per diem paid to employees on construction projects is only partially deductible from taxable income and can have a significant impact on the effective tax rate.
The income tax effects of temporary differences giving rise to the deferred tax assets and liabilities are as follows:
| December 31, | September 30, | |||||||
| 2020 | 2020 | |||||||
| Deferred income tax liabilities | ||||||||
| Long-term | ||||||||
| Property and equipment | $ | 2,750,067 | $ | 2,746,331 | ||||
| Other | (19,805 | ) | (19,805 | ) | ||||
| Total deferred income tax liabilities | $ | 2,730,262 | $ | 2,726,526 | ||||
| Deferred income tax assets | ||||||||
| Long-term | ||||||||
| Other | $ | 518,178 | $ | 471,011 | ||||
| Total deferred income tax assets | $ | 518,178 | $ | 471,011 | ||||
| Total net deferred income tax liabilities | $ | 2,212,084 | $ | 2,255,515 | ||||
11
The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ended prior to September 30, 2017.
The Company does not believe that it has any unrecognized tax benefits included in its consolidated financial statements that require recognition. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in general and administrative expenses.
10. SHORT-TERM AND LONG-TERM DEBT
Short-term debt consists of the following:
On July 30, 2020, the Company received a one-year extension on its line of credit (“Operating Line of credit (2020)”) effective June 28, 2020. 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%. The line of credit expires on June 28, 2021. Based on the borrowing base calculation, the Company was able to borrow up to $9.9 million as of December 31, 2020. The Company had $3.5 million in borrowings on the line of credit, leaving $6.4 million available on the line of credit as of December 31, 2020. 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, leaving $11.1 million available on the line of credit as of September 30, 2020.
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. Major items excluded from the calculation are receivables from bonded jobs and retainage as well as items greater than 90 days old.
Under the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:
| 1. | Minimum tangible net worth of $19.0 million to be measured quarterly, |
| 2. | Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis, |
| 3. | Minimum current ratio of 1.50x to be measured quarterly, |
| 4. | Maximum debt to tangible net worth ratio (“TNW”) of 2.0x to be measured semi-annually, |
| 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. |
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:
| 1. | Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis, |
| 2. | Minimum tangible net worth of $21.0 million to be measured quarterly. |
The Company believes it was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2020) at December 31, 2020.
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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. It is typical that the Company makes a down payment in January and finances the remaining premium amount over ten monthly payments. In January 2020, the Company financed $3.1 million in insurance premium policies. At December 31, 2020, the balance of the premiums payments had been paid off.
A summary of short-term and long-term debt as of December 31, 2020 and September 30, 2020 is as follows:
| December 31, | September 30, | |||||||
| 2020 | 2020 | |||||||
| Line of credit payable to bank, monthly interest at 4.99%, final payment due by June 28, 2021. | 3,500,000 | - | ||||||
| Notes payable to finance companies, due in monthly installments totaling $70,062 including interest ranging from 0.00% to 6.03%, final payments due January 2021 through August 2026, secured by equipment. | 1,668,998 | 1,334,566 | ||||||
| Note payable to finance company for insurance premiums financed, due in monthly installments totaling $254,922 in FY 2020 and $267,677 in FY 2019, including interest rate at 3.50%, final payment made November 2020. | - | 509,843 | ||||||
| Notes payable to bank, due in monthly installments totaling $7,799, including interest at 4.82%, final payment due November 2034 secured by building and property. | 956,168 | 967,665 | ||||||
| Notes payable to bank, due in monthly installments totaling $11,602, including interest at 4.25%, final payment due November 2025 secured by building and property. | 606,842 | 644,172 | ||||||
| Notes payable to bank for $9.8 million in Paycheck Protection Program ("PPP") loan funds. Payments on the five-year note are expected to begin in March 2021 if PPP loan repayment is not forgiven, due in monthly installments totaling $168,187, including interest at 1.0%, final payment due December 2025. | 9,839,100 | 9,839,100 | ||||||
| Notes payable to bank, due in monthly installments totaling $98,865, including interest at 4.99%, final payment due September 2022 secured by equipment. | 1,711,220 | 1,983,911 | ||||||
| Notes payable to bank, due in monthly installments totaling $46,482, including interest at 5.00%, final payment due September 2021 secured by equipment. | 359,432 | 493,191 | ||||||
| Notes payable to David and Daniel Bolton, due in annual installments totaling $600,000, including interest at 3.25%, final payment due December 31, 2026, unsecured | 3,000,000 | - | ||||||
| Total debt | 21,641,760 | 15,772,448 | ||||||
| Less current maturities | 8,145,254 | 4,538,743 | ||||||
| Total long term debt | $ | 13,496,506 | $ | 11,233,705 | ||||
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11. ACQUISITION
On December 31, 2020, Energy Services completed an asset purchase of West Virginia Pipeline, a wholly owned subsidiary of Energy Services that operates as a gas and water distribution contractor primarily in southern West Virginia. Energy Services paid $3.5 million in cash and acquired a $3.0 million seller note with a term of five years with an interest rate of 3.25%. Previous owners, David Bolton and Daniel Bolton, have continued their roles as President and Vice President, respectively.
Energy Services accounts for business combinations under the acquisition method in accordance with ASC Topic 805, Business Combinations. Accordingly, for each transaction, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of the acquisition. In conjunction with the adoption of ASU 2015-16, upon receipt of final fair value estimates during the measurement period, which must be within one year of the acquisition date, Energy Services records any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments are determined. Energy Services is continuing to finalize the purchase price allocations related to the West Virginia Pipeline acquisition. Based on management's preliminary valuation of tangible and intangible assets acquired and liabilities assumed, the purchase price for the West Virginia Pipeline acquisition is allocated in the table below. These allocations are subject to change.
| Goodwill | $ | 4,220,829 | ||
| Equipment and vehicles | 1,565,000 | |||
| Building | 220,243 | |||
| Land | 64,757 | |||
| Non-compete agreement | 150,000 | |||
| Customer list | 150,000 | |||
| Cash received in acquisition | 250,000 | |||
| Debt assumed in acquisition | (120,829 | ) | ||
| Purchase price | $ | 6,500,000 |
On January 7, 2021, the Company filed a Current Report on Form 8-K to announce the completion of the acquisition under Item 2.01 Completion of Acquisition of Disposition of Assets. The Company has seventy-one (71) days from the filing date to amend the Form 8-K to include the financial statements of the business acquired and pro forma financial information.
The Company has incurred approximately $50,000 in legal expenses and $5,000 in accounting software expenses as part of the acquisition. The Company estimates it will have $75,000 in auditing expenses related to the Securities and Exchange Commission’s required disclosures mentioned directly above.
West Virginia Pipeline’s past financial performance, experienced management and workforce and relationships with its customers made it an attractive acquisition for the Company. Going back to 1963, West Virginia Pipeline has a long history of excellent work performance in southern West Virginia. Their geographic region compliments Energy Services’ as the two companies rarely competed for work previously. The $4.2 million in goodwill generated by the acquisition is largely the result of the synergies and economies of scale expected from the combining the operation of the Company and West Virginia Pipeline. Adding a non-union subsidiary will give Energy Services some flexibility in competing for work. While West Virginia Pipeline will be managed separately from the Company’s other union operations, it is expected that relationships built by all the companies will help provide new opportunities within the organization.
ITEM 2. 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 “Financial Statements” appearing in this report as well as 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. The term “Energy Services” refers to the Company, West Virginia Pipeline and C.J. Hughes and C.J. Hughes’ wholly owned subsidiaries on a consolidated basis.
Forward Looking Statements
Within Energy Services’ consolidated financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “may,” “will,” “should,” “could,” “expect,” “believe,” “intend” and other words of similar meaning.
These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services’ control. Energy Services has based its forward-looking statements on management’s beliefs and assumptions based on information available to management at the time the statements are made. Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and any or all of Energy Services’ forward-looking statements may turn out to be wrong. The accuracy of such statements can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.
All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, Energy Services does not undertake and expressly disclaims any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.
Company Overview
Energy Services of America Corporation (“Energy Services” or the “Company”) is a contractor and services company that operates primarily in the mid-Atlantic region of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical and power industries. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R and fire protection services to customers primarily in the automotive, chemical and power industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All C.J. Hughes, Nitro, and Contractors Rental production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.
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On December 31, 2020, Energy Services completed the purchase of West Virginia Pipeline, Inc. (“West Virginia Pipeline”), a West Virginia corporation located in Princeton, West Virginia. West Virginia Pipeline, a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. West Virginia Pipeline’s employees are non-union, and the company is managed independently from C.J. Hughes and Nitro.
Energy Services provides contracting services for utilities and energy related companies including gas, petroleum power, chemical, water & sewer and automotive industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky.
Energy Services’ customers include many of the leading companies in the industries it serves, including:
TransCanada Corporation
Columbia Gas Distribution
Marathon Petroleum
Mountaineer Gas
American Electric Power
Toyota Motor Manufacturing
Bayer Chemical
Dow Chemical
Kentucky American Water
WV American Water
Various state, county and municipal public service districts.
Energy Services’ sales force consists of industry professionals with significant relevant sales experience, who utilize industry contacts and available public data to determine how to most appropriately market the Company’s line of products. The Company relies on direct contact between its sales force and customers’ engineering and contracting departments in order to obtain new business. The Company’s website address is www.energyservicesofamerica.com.
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COVID-19 Response
In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This coronavirus outbreak has significantly impacted both the world and U.S. economies. In response to this coronavirus outbreak, the governments of many cities, counties, states and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes which has created significant uncertainties in the U.S. economy. In certain geographic regions in which the Company operates, temporary closures of businesses have been ordered or suggested and numerous other businesses have temporarily closed voluntarily. Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of travel-related businesses.
Some of the procedures that the Company has implemented to help protect employees from COVID-19 exposure are guidelines for social distancing, office sanitation, hand washing, mask wearing, limited office admittance and immediate symptom reporting. The Company has provided personal protective equipment and hand-sanitizers to employees and has made arrangements for administrative personnel to work from home. The Company works closely with our customers to limit exposure risk and cooperate with symptom reporting and contact tracing. Construction employees are required to meet all procedures established by our customers in addition to the Company’s own procedures. The Company also followed the paid sick and expanded family and medical leave guidelines set forth in the Families First Coronavirus Response Act, which expired on December 31, 2020. As of December 31, 2020, the Company has not had significant issues with COVID-19 exposure among its employees.
As of December 31, 2020, most of the Company’s existing customers had resumed projects that were affected by the March 2020 shutdowns. As a result, the Company has increased its employment level of construction personnel as compared to March 31, 2020. Given the uncertainty regarding the spread of this coronavirus, the related financial impact on the Company’s results of operations, financial position, and liquidity or capital resources cannot be reasonably estimated at this time.
Seasonality: Fluctuation of Results
Our revenues and results of operations can and usually are subject to seasonal variations. These variations are the result of weather, customer spending patterns, bidding seasons and holidays. The first quarter of the calendar year is typically the slowest in terms of revenues because inclement weather conditions causes delays in production and customers usually do not plan large projects during that time. While usually better than the first quarter, the second calendar year quarter often has some inclement weather which can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. The third and fourth calendar year quarters usually are less impacted by weather and usually have the largest number of projects underway. Many projects are completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.
In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.
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First Quarter Overview
The following is an overview of results from operations for the three months ended December 31, 2020 and 2019.
| Three Months Ended | Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Revenue | $ | 32,009,796 | $ | 25,843,307 | ||||
| Cost of revenues | 29,166,737 | 23,486,565 | ||||||
| Gross profit | 2,843,059 | 2,356,742 | ||||||
| Selling and administrative expenses | 3,595,830 | 2,595,772 | ||||||
| Loss from operations | (752,771 | ) | (239,030 | ) | ||||
| Other income (expense) | ||||||||
| Interest income | 151,765 | 53,249 | ||||||
| Other nonoperating expense | (52,623 | ) | (33,938 | ) | ||||
| Interest expense | (76,517 | ) | (186,845 | ) | ||||
| Gain on sale of equipment | 13,042 | 295,991 | ||||||
| 35,667 | 128,457 | |||||||
| Loss before income taxes | (717,104 | ) | (110,573 | ) | ||||
| Income tax benefit | (69,442 | ) | (36,459 | ) | ||||
| Net loss | (647,662 | ) | (74,114 | ) | ||||
| Dividends on preferred stock | 77,250 | 77,250 | ||||||
| Net loss available to common shareholders | $ | (724,912 | ) | $ | (151,364 | ) | ||
| Weighted average shares outstanding-basic | 13,621,406 | 13,911,610 | ||||||
| Weighted average shares-diluted | 13,621,406 | 13,911,610 | ||||||
| Loss per share | ||||||||
| available to common shareholders | $ | (0.053 | ) | $ | (0.011 | ) | ||
| Loss per share-diluted | ||||||||
| available to common shareholders | $ | (0.053 | ) | $ | (0.011 | ) | ||
17
Results of Operations for the Three Months Ended December 31, 2020 Compared to the Three Months Ended December 31, 2019
Revenues. Total revenues increased by $6.2 million or 23.9% to $32.0 million for the three months ended December 31, 2020 from $25.8 million for the same period in 2019. The increase was primarily attributable to a $3.3 million revenue increase in electrical and mechanical services, a $2.6 million revenue increase in petroleum and gas work and a $306,000 revenue increase in water and sewer projects and other ancillary services.
Cost of Revenues. Total cost of revenues increased by $5.7 million or 24.2% to $29.2 million for the three months ended December 31, 2020 from $23.5 million for the same period in 2019. The increase was primarily attributable to a $2.9 million cost increase in electrical and mechanical services, a $1.9 million cost increase in petroleum and gas work, a $556,000 cost decrease in water and sewer projects and other ancillary services and a $279,000 cost increase in equipment and tool shop operations not allocated to projects.
Gross Profit. Total gross profit increased by $486,000 or 38.5% to $2.8 million for the three months ended December 31, 2020 from $2.4 million for the same period in 2019. The increase was primarily attributable to a $679,000 gross profit increase in petroleum and gas work, a $336,000 gross profit increase in electrical and mechanical services, partially offset by a $279,000 gross profit decrease related to equipment and tool shop operations costs not allocated to projects and a $250,000 gross profit decrease in water and sewer projects and other ancillary services.
A table comparing the Company’s revenue and gross profit for the three months ended December 31, 2020 compared to the three months ended December 31, 2019 is below:
| Revenue | ||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||
| December 31, 2020 | Pct | December 31, 2019 | Pct | |||||||||||||
| Petroleum and gas | $ | 12,117,050 | 37.9 | % | $ | 9,530,098 | 36.9 | % | ||||||||
| Electrical and Mechanical | 16,185,565 | 50.6 | % | 12,912,443 | 50.0 | % | ||||||||||
| Water, Sewer, and other | 3,707,181 | 11.5 | % | 3,400,766 | 13.1 | % | ||||||||||
| Total | $ | 32,009,796 | 100.0 | % | $ | 25,843,307 | 100.0 | % | ||||||||
| Gross Profit | ||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||
| December 31, 2020 | Pct | December 31, 2019 | Pct | |||||||||||||
| Petroleum and gas | $ | 2,427,412 | 85.4 | % | $ | 1,748,249 | 74.2 | % | ||||||||
| Electrical and Mechanical | 1,005,684 | 35.4 | % | 670,114 | 28.4 | % | ||||||||||
| Water, Sewer, and other | 660,939 | 23.2 | % | 910,506 | 38.6 | % | ||||||||||
| Unallocated equipment and tool shop | (1,250,976 | ) | -44.0 | % | (972,127 | ) | -41.2 | % | ||||||||
| Total | $ | 2,843,059 | 100.0 | % | $ | 2,356,742 | 100.0 | % | ||||||||
| Gross profit percentage | 8.9 | % | 9.1 | % | ||||||||||||
Selling and administrative expenses. Total selling and administrative expenses increased by $1.0 million or 38.5% to $3.6 million for the three months ended December 31, 2020 from $2.6 million for the same period in 2019.
The increase in selling and administrative expenses was primarily related to higher salary and burden costs during the three months ended December 31, 2020 compared to the same period in 2019. Incentive compensation at the Company’s C.J. Hughes subsidiary increased by $481,000 in the three months ended December 31, 2020 compared to the same period in 2019. The overall increase in selling and administrative expense, including the increase in incentive compensation, relates to an initiative launched by C.J. Hughes to increase and incentivize operational talent within the company and increase revenue and profit margins.
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Interest Expense. Interest expense decreased by $110,000 or 59.0% to $77,000 for the three months ended December 31, 2020 from $187,000 for the same period in 2019.
This decrease in interest expense for the three months ended December 31, 2020 was primarily due to less long-term debt outstanding compared to the same period in 2019. This primarily relates to a $10.0 million term note that was paid off in January 2020.
Net loss. Loss before income taxes was ($648,000) for the three months ended December 31, 2020, compared to loss before income taxes of ($111,000) for the same period in 2019. The loss before income taxes for the respective periods were due to the items mentioned above.
Income tax benefit for the three months ended December 31, 2020 was ($69,000) compared to income tax benefit of ($36,000) for the same period in 2019. The higher income tax benefit for the three months ended December 31, 2020, was primarily due to a decrease in taxable income as compared to the same period in 2019.
The effective income tax rate for the three months ended December 31, 2020 was (9.7%), as compared to (33.0%) for the same period in 2019Effective 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. Per diem paid to employees on construction projects is only partially deductible from taxable income and can have a significant impact on the effective tax rate.
Dividends on preferred stock for the three months ended December 31, 2020 and 2019 were $77,250.
Net loss available to common shareholders for the three months ended December 31, 2020 was ($725,000) compared to net loss available to common shareholders of ($151,000) for the same period in 2019.
Comparison of Financial Condition at December 31, 2020 and September 30, 2020
The Company had total assets of $61.7 million at December 31, 2020, an increase of $3.5 million from the prior fiscal year end balance of $58.2 million. Goodwill and acquired intangible assets resulting from the West Virginia Pipeline acquisition totaled $4.5 million at December 31, 2020, an increase of $4.5 million from the prior fiscal year end. The Company had property, plant and equipment of $19.0 million at December 31, 2020, an increase of $2.6 million from the prior fiscal year end balance of $16.4 million. The increase was due to $3.7 million in property, plant and equipment acquisitions, of which $1.9 million related to the acquisition of West Virginia Pipeline, partially offset by depreciation of $1.1 million. Cash and cash equivalents totaled $12.3 million at December 31, 2020, an increase of $1.1 million from the prior fiscal year end balance of $11.2 million. The increase was primarily due to the decrease in accounts receivable. Accounts receivable, which totaled $17.1 million at December 31, 2020, decreased by $1.1 million from the prior fiscal year end balance of $18.2 million. The decrease was primarily due to the collection of receivables from September 30, 2020. Contract assets totaled $4.4 million at December 31, 2020, a decrease of $2.1 million from the prior fiscal year end balance of $6.5 million. The decrease was due to a difference in the timing of project billings at December 31, 2020 compared to September 30, 2020. Retainages receivable totaled $1.7 million at December 31, 2020, a decrease of $825,000 from the prior fiscal year end balance of $2.5 million. The decrease was due to the timing of retainage billings and receipts compared to September 30, 2020. Prepaid expenses and other totaled $2.8 million at December 31, 2020, a decrease of $576,000 from the prior fiscal year end balance of $3.3 million. The decrease was primarily due to a reduction in prepaid insurance that was expensed during the three months ended December 31, 2020.
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The Company had total liabilities of $36.6 million at December 31, 2020, an increase of $4.3 million from the prior fiscal year end balance of $32.3 million. Lines of credit and short-term borrowings totaled $3.5 million at December 31, 2020, an increase of $3.0 million from the prior fiscal year end balance of $510,000. The increase was primarily due to net line of credit borrowings of $3.5 million, partially offset by net short-term borrowing repayments related to insurance premiums financed of $510,000. Long-term debt totaled $18.1 million at December 31, 2020, an increase of $2.8 million from the prior fiscal year end balance of $15.3 million. The increase in long-term debt was due to the $3.0 million note payable related to the West Virginia Pipeline acquisition, partially offset by scheduled debt payments. Accounts payable totaled $5.8 million at December 31, 2020, an increase of $561,000 from the prior fiscal year end balance of $5.2 million. The increase was due to the timing of accounts payable payments as compared to September 30, 2020. Contract liabilities totaled $3.7 million at December 31, 2020, a decrease of $1.2 million from the prior fiscal year end total of $4.9 million. The decrease was due to a difference in the timing of project billings at December 31, 2020 compared to at September 30, 2020. Accrued expenses and other current liabilities totaled $3.3 million at December 31, 2020, a decrease of $981,000 from the prior fiscal year end balance of $4.2 million. The decrease was primarily due to the payment of accrued expenses in the three months ended December 31, 2020. Deferred tax liabilities totaled $2.2 million at December 31, 2020, a decrease of $43,000 from the prior fiscal year end balance of $2.3 million. The decrease was primarily related temporary book loss versus tax loss differences for the three months ended December 31, 2020.
Shareholders’ equity was $25.1 million at December 31, 2020, a decrease of $725,000 from the prior fiscal year end balance of $25.8 million. This decrease was due to the net loss available to common shareholders of ($725,000) for the three months ended December 31, 2020.
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 December 31, 2020, the Company had made principal payments of $244,000. 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 December 31, 2020, the Company had borrowed $2.46 million against this note and made principal payments of $2.1 million. The loan is 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 December 31, 2020, the Company had made principal payments of $493,000. 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 December 31, 2020, the Company had borrowed $5.0 million against this note and made principal payments of $3.3 million. The loan is collateralized by the equipment purchased under this agreement.
On May 30, 2019, the Company entered into Term Note 2019 with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note was to finance a specific construction project completed in September 2019. The loan was collateralized by the Company’s equipment. The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect the conditions of subsequent borrowings. The Company paid off Term Note 2019 in January 2020.
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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. As part of the $6.5 million acquisition, the acquisition company 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%.
Paycheck Protection Program Loans
Due to the economic uncertainties created by COVID-19 and the limited operating funds available, the Company applied for loans under the Paycheck Protection Program (“PPP”). On April 15, 2020, Energy Services of America Corporation and subsidiaries C.J. Hughes Construction Company, Contractors Rental Corporation and Nitro Construction Services, Inc. entered into separate Paycheck Protection Program Notes effective April 7, 2020 with United Bank, Inc. as the lender (“Lender”) in an aggregate principal amount of $13,139,100 pursuant to the PPP (collectively, the “PPP Loan”). 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 Loan funds 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. The Company had used all the available PPP Loan funds as of December 31, 2020 and is in the process of filing for loan forgiveness with its Lender. Any portion of the loan that is not forgiven will be converted to a five-year note with 1.0% interest.
The SBA has announced, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, following the lender’s submission of the borrower’s loan forgiveness application. The SBA will be reviewing a borrower’s required certification that current economic uncertainty makes the PPP loan request necessary to support the ongoing operations of the Applicant. Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The SBA has noted it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification.
The Company believes it meets the SBA’s certification requirement based on its limited access to capital, weakening business operations and small market value as described above. The Company’s shares of common stock do not trade on a national exchange. However, no assurance can be given as to the outcome of the SBA’s audit of the Company’s PPP Loan. The SBA could determine that the Company does not qualify in whole or in part for loan forgiveness. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. The Company could be required to return its PPP Loan. Any penalties in addition to the potential return of the PPP Loan could negatively impact the Company’s business, financial condition and results of operations and prospects.
Operating Line of Credit
On July 30, 2020, the Company received a one-year extension on its line of credit (“Operating Line of credit (2020)”) effective June 28, 2020. 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%. The line of credit expires on June 28, 2021. Based on the borrowing base calculation, the Company was able to borrow up to $9.9 million as of December 31, 2020. The Company had $3.5 million in borrowings on the line of credit, leaving $6.4 million available on the line of credit as of December 31, 2020. 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, leaving $11.1 million available on the line of credit as of September 30, 2020.
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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. Major items excluded from the calculation are receivables from bonded jobs and retainage as well as items greater than 90 days old.
Under the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:
| 1. | Minimum tangible net worth of $19.0 million to be measured quarterly, |
| 2. | Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis, |
| 3. | Minimum current ratio of 1.50x to be measured quarterly, |
| 4. | Maximum debt to tangible net worth ratio (“TNW”) of 2.0x to be measured semi-annually, |
| 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. |
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:
| 1. | Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis, |
| 2. | Minimum tangible net worth of $21.0 million to be measured quarterly. |
The Company believes it was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2020) at December 31, 2020.
Off-Balance Sheet Arrangements
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 in 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 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 $1.0 million and $788,000 for the three months ended December 31, 2020 and 2019, 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 and vendors on various customer projects. At December 31, 2020, the Company did not have any letters of credit outstanding.
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.
The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and number of contracts that can be bid. Depending upon the size and conditions of a 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 against outstanding performance bonds in the foreseeable future. At December 31, 2020, the Company had $5.7 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 three months ended December 31, 2020 and 2019:
| Three Months Ended | ||||||||
| Revenue | December 31, 2020 | December 31, 2019 | ||||||
| TransCanada Corporation | 13.7 | % | * | |||||
| All other | 86.3 | % | 100.0 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
| * Less than 10.0% and included in "All other" if applicable | ||||||||
| At | ||||||||
| Accounts receivable net of retention | December 31, 2020 | December 31, 2019 | ||||||
| WV American Water | 11.7 | % | 15.0 | % | ||||
| KY American Water | 10.3 | % | * | |||||
| All other | 78.0 | % | 85.0 | % | ||||
| Total | 100.0 | % | 100.0 | % | ||||
| * Less than 10.0% and included in "All other" if applicable | ||||||||
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Litigation
In February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction project. The Company is seeking $10.0 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Although no trial date has been set, the Company expects the case to go to trial in fiscal year 2021 barring a mediation settlement between the parties. Other than described above, at December 31, 2020, 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 December 31, 2020, 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. 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, holds the same position with Premier Financial Bancorp Inc. Mr. Neal Scaggs is a director of Energy Services and holds the same position with Premier Financial Bancorp, Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and a director of Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of December 31, 2020, we have paid approximately $244,000 in principal and approximately $318,000 in interest since the beginning of the loan. There were no new material related party transactions entered into during the three months ended December 31, 2020.
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
Due to relatively low levels of inflation during the three months ended December 31, 2020 and 2019, inflation did not have a significant effect on our results.
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Critical Accounting Policies
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.
Revenue Recognition
On October 1, 2018, the Company adopted an Accounting Standard Update, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. We adopted Topic 606 using a modified retrospective transition approach and elected to apply Topic 606 to contracts with customers that are not substantially complete, i.e. less than 90% complete, as of October 1, 2018. The adoption of Topic 606 did not have a material impact on the Company’s financial statements.
In addition, as of October 1, 2018, we began to separately present contract assets and liabilities on the Company’s consolidated balance sheet. Contract assets may include costs and estimated earnings in excess of billings that were previously separately presented. Contract liabilities may include billings in excess of costs and estimated earnings that were previously separately presented as well as provisions for losses, when occurred, that were previously included in accrued expenses and other current liabilities.
The accounting policies that were affected by Topic 606 and the changes thereto are as follows:
Revenue Recognition:
Our revenue is primarily derived from construction contracts that can span several quarters. We recognize revenue in accordance with Topic 606. Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows:
| 1. | Identify the contract, |
| 2. | Identify performance obligations, |
| 3. | Determine the transaction price, |
| 4. | Allocate the transaction price |
| 5. | Recognize revenue. |
Identify the Contract
The first step in applying Accounting Standards Codification (ASC) 606 is to identify the contract(s) with the customer. To do so, the Company evaluates indicators of the existence of the contract.
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Certain conditions must be present for there to be a contract with a customer:
| • | The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. |
| • | The Company can identify each party’s rights regarding the goods or services to be transferred. |
| • | The Company can identify the payment terms for the goods or services to be transferred. |
| • | The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract). |
It is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, the Company shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession.
Identify Performance Obligations
Once the Company has determined that it has a contract with a customer as defined in Accounting Standards Codification (ASC) 606, the Company must determine what the performance obligations are. A performance obligation is defined in the ASC Master Glossary as:
A promise in a contract with a customer to transfer to the customer either:
| • | A good or service (or a bundle of goods or services) that is distinct; |
| • | A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer. |
Generally, performance obligations are clearly stated in the contract. The Company’s contracts usually contain one performance obligation that is satisfied over time because our performance typically creates or enhances an asset that the customer controls as the asset is created or enhanced.
In assessing whether promises to transfer goods or service to the customer are separately identifiable, a company considers the following factors:
| • | The entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. Combined output or outputs might include more than one phase, element, or unit. |
| • | One or more of the goods or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods or services promised in the contract. |
| • | The goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfill its promise by transferring each of the goods or services independently. |
Under ASC 606, contracts will be required to be combined when certain criteria are met. The new accounting standard requires contracts be combined prior to further assessment of the five elements, if one or more of the following criteria are met:
| • | Negotiated at the same time with the same customer (or related party) with a single commercial objective in mind; |
| • | The consideration to be paid for one contract is dependent on another contract; |
| • | The promised goods and services in the contracts are a single performance obligation in accordance with the guidance. |
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If the promises do not meet the requirements for separating, the performance obligations shall be combined into one performance obligation. A contract could have several performance obligations which in themselves include sets of promises that are not distinct and cannot be separated.
Management has made the assessment that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials, labor and equipment into the deliverables promised to the customer) in all contract performed by the Company.
Determine Transaction Price
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. The consideration promised in a contract with customers may include both fixed amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated damages) to the extent that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (i.e., probable and estimable).
Variable consideration is defined broadly and can take many forms, such as incentives, penalty provisions, price concessions, rebates or refunds. Consideration is also considered variable if the amount the Company will receive is contingent on a future event occurring or not occurring, even though the amount itself is fixed.
The following are examples of variable considerations within a contract:
| • | Claims and pending change orders; |
| • | Unpriced change orders; |
| • | Incentive and penalty provisions within the contract; |
| • | Shared savings; |
| • | Price concessions; |
| • | Liquidating damages; and |
| • | Unit price contracts with variable consideration. |
Subsequent to the inception of a contract, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and claims to or from owners. Changes that are accounted for as an adjustment to existing performance obligations are allocated on the same basis at contract inception. Otherwise, changes are accounted for as separate performance obligation(s) and the separate transaction price is allocated as discussed above. Changes are made to the transaction price from unapproved change orders to the extent the amount can be reasonably estimated, and recovery is probable. On certain projects we have submitted and have pending unresolved contract modifications and affirmative claims (“affirmative claims”) to recover additional costs and the associated profit, if applicable, to which the Company believes it is entitled under the terms of contracts with customers, subcontractors, vendors or others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or affirmative claims or may have rejected or disagree entirely or partially as to such entitlement.
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Allocate Transaction Price
When a contract has a single performance obligation, the entire transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on estimated relative standalone selling prices of the goods or services at the inception of the contract, which typically is determined using cost plus an appropriate margin.
In accordance with Topic 606, the Company is required to estimate variable consideration when determining the contract transaction price by taking into account all the information (historical, current and forecasted) that is reasonably available and identifying a reasonable number of possible consideration amounts. Management must include an estimate of any variable consideration using either the “expected value” method or the “most likely amount” method.
The “expected value” method estimates variable consideration based on the range of possible outcomes and the probabilities of each outcome. This method might be most appropriate when the Company has a large number of contracts that have similar characteristics because it will likely have better information about the probabilities of various outcomes when there are a large number of similar transactions.
The “most likely amount” method estimates variable consideration based on the single most likely amount in a range of possible consideration amounts. This method might be the most predictive if the Company will receive one of only two possible amounts.
The method used is not a policy choice and should be applied consistently throughout a contract, however, is subject to guidance on constraining estimates of variable consideration. The Company may only include variable consideration within the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty is subsequently resolved. This assessment will require the application of judgment. While no single factor is determinative, the revenue standard includes factors to consider when assessing whether variable consideration should be constrained.
The following factors may increase the likelihood or the magnitude of a revenue reversal:
| • | The amount of consideration is highly susceptible to factors outside the entity’s influence, |
| • | The uncertainty is not expected to be resolved for a long period of time, |
| • | The entity’s experience with similar types of contracts is limited, |
| • | The entity has a practice of offering a broad range of price concessions or changing the payment terms frequently; and |
| • | The contract has a broad range of possible consideration amounts. |
Recognize Revenue
The Company disaggregates revenue based on our operating groups and contract types as it is the format that is regularly reviewed by management. Our reportable operating groups are: Petroleum and Gas, Water, Sewer and other services, and Electrical and Mechanical services. Our contract types are: Lump Sum, Unit Price, and Cost Plus and Time and Material (T&M).
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 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 Unit Price, Cost Plus and 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.
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The Company does have certain service and maintenance contracts in which each customer purchase order is considered its own performance obligation recognized over time and would be recognized depending on the type of contract mentioned above. 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.
All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors and outside equipment providers, direct overhead costs and internal equipment expense (primarily depreciation, fuel, maintenance and repairs).
The company recognizes revenue, but not profit, on certain uninstalled materials. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred), but the associated profit is not recognized until the end of the project. The costs of uninstalled materials will be tracked separately within the Company’s accounting software.
Pre-contract and bond costs, if required, on projects are generally immaterial to the total value of the Company’s contracts and are expensed when incurred. Project mobilization costs are also generally immaterial and charged to project costs as incurred. As a practical expedient, the Company recognizes these incremental costs as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. For projects expected to last greater than one year, mobilization costs will be capitalized as incurred and amortized over the expected duration of the project. For these projects, mobilization costs will be tracked separately in the Company’s accounting software. This includes costs associated with setting up a project lot or lay-down yard, equipment, tool and supply transportation, temporary facilities and utilities and worker qualification and safety training.
Contracts may require the Company to warranty that work is performed in accordance with the contract; however, the warranty is not priced separately, and the Company does not offer customers an option to purchase a warranty. As of December 31, 2020, the Company does not have a material amount of costs expensed that would otherwise be capitalized and amortized.
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 customer’s ability to properly administer the contract. |
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects have had, and can in future periods have, a significant effect on our profitability.
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Contract Assets:
Our contract assets may 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.
Contract Liabilities:
Our contract liabilities may 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.
Income Taxes
The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ended prior to September 30, 2017.
The Company follows the liability method of accounting for income taxes in accordance with the Income Taxes topic of the ASC 740. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a portion of the deferred tax asset will not be realized.
U.S. GAAP also prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or to be taken on a tax return. This evaluation is a two-step process. First, the recognition process determines if it is more likely than not that a tax position will be sustained based on the merits of the tax position upon examination by the appropriate taxing authority. Second, a measurement process is calculated to determine the amount of benefit/expense to recognize in the financial statements if a tax position meets the more likely than not recognition threshold. The tax position is measured at the greatest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement. Any interest and penalty related to the unrecognized tax benefits, as the result of recognition of tax obligations resulting from uncertain tax positions, are included in the provision for income taxes. The Company had not recognized any uncertain tax positions at December 31, 2020.
Claims
Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The Company records revenue on claims that have a high probability of success. Revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred.
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Self-Insurance
The Company has its workers’ compensation, general liability and auto insurance through a captive insurance company. While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs; the Company does have to maintain a surety deposit to guarantee payments of premiums. That account had a balance of $2.1 million as of December 31, 2020. Should the captive insurance company experience severe losses over an extended period, it could have a detrimental effect on the Company.
Current and Non-Current Accounts Receivable and Provision 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. At December 31, 2020, the management review deemed that the allowance for doubtful accounts was adequate.
Operating 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 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 $1.0 million and $788,000 for the three months ended December 31, 2020 and 2019, respectively.
Goodwill and other intangible assets
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis, including the identification of our reporting units, identification and allocation of the assets and liabilities to each of our reporting units and determination of fair value. In estimating the fair value of a reporting unit for the purposes of our annual or periodic impairment analyses, we make estimates and significant judgments about the future cash flows of that reporting unit. Our cash flow forecasts are based on assumptions that represent the highest and best use for our reporting units. Changes in judgment on these assumptions and estimates could result in further goodwill impairment charges.
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.
31
Subsequent Events
On January 5, 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 will be collateralized by the equipment purchased under this agreement. As of February 12, 2021, the Company had not borrowed against this line of credit.
On December 21, 2020, the Company’s 401(k) plan (“Plan”) initiated a change in 401(k) third party administrators. Contrary to industry-standard and without proper authorization from the Company, the departing third party administrator began to liquidate the collective trust holding shares of the Company’s stock on December 23, 2020. The Company did not realize the liquidation had occurred until after it was complete and is investigating the departing third party administrator’s actions. A total of 812,310 shares of Company stock in the collective trust was liquidated at a weighted price per share of approximately $1.12. On February 10, 2021, the Company’s Board of Directors approved a plan to correct the departing third party administrator’s actions by making Plan participants whole for the appreciation in the Company’s stock price through a Qualified Non-Elective Contribution (“QNEC”) attributable to the 2021 Plan year. The QNEC will allow for a one-time $651,000 contribution to the collective trust based on the $1.92 closing price of the Company’s stock on February 9, 2021. Employees will have the option to leave their funds in the collective trust in order to repurchase Company stock or reallocate to a fund of their choice.
Management has evaluated subsequent events through February 16, 2021, the date which the financial statements were available for issue. 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.
Outlook
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.
As a contractor providing electrical, mechanical, HVAC and underground piping installation and maintenance services to customers in the petroleum, natural gas, public utilities and power industries, the Company and its subsidiaries are considered an “Essential Business” in the various states in which it operates. While it is unknown how long the COVID-19 virus will last and what the complete financial effect will be to the Company, the coronavirus outbreak is expected to have a significant effect on the Company's 2021 operating results. As of December 31, 2020, many of the Company’s existing customers had resumed projects that were affected by the March 2020 shutdowns. As a result, the Company has increased its employment level of construction personnel as compared to March 31, 2020. Given the uncertainty regarding the spread of this coronavirus, the related financial impact on the Company’s results of operations, financial position, and liquidity or capital resources cannot be reasonably estimated at this time.
Currently, the Company is receiving bid opportunities from existing and potentially new customers. However, with potential economic uncertainties, such as a worsening of the COVID-19 pandemic, the continued depressed prices of oil and natural gas and the potential impact of environmental regulations, the demand for our customers’ projects could wane and their ability to fund planned projects could be reduced. Also, a shortage of qualified labor could lead to inefficient production and could make bidding and managing projects more difficult. The Company’s backlog at December 31, 2020 was $55.2 million, which included the newly acquired West Virginia Pipeline subsidiary. While adding additional projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available. Moreover, even if the Company obtains contracts, there can be no guarantee that the projects will go forward.
ITEM 3. Quantitative and Quantitative Disclosures About Market Risk
Not required for a smaller reporting company.
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ITEM 4. Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services of America Corporation files or submits under the Securities Exchange Act of 1934, is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in Energy Services of America Corporation’s internal control over financial reporting during Energy Services of America Corporation’s first quarter of fiscal year 2021 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.
PART II
In February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction project. The Company is seeking $10.0 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Although no trial date has been set, the Company expects the case to go to trial in fiscal year 2021 barring a mediation settlement between the parties. Other than described above, at December 31, 2020, 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 December 31, 2020, 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.
Please see the information disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on January 4, 2021. There have been no material changes to the risk factors since the filing of the Annual Report on Form 10-K.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) There have been no unregistered sales of equity securities during the period covered by the report.
(b) None.
(c) There were no repurchases of Energy Services of America Corporation’s shares of its common stock during the three months ended December 31, 2020.
33
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE |
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document |
34
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENERGY SERVICES OF AMERICA CORPORATION
| Date: February 16, 2021 | By: | /s/ Douglas V. Reynolds |
| Douglas V. Reynolds | ||
| Chief Executive Officer | ||
| Date: February 16, 2021 | By: | /s/ Charles P. Crimmel |
| Charles P. Crimmel | ||
| Chief Financial Officer | ||
35
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Douglas V. Reynolds, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Energy Services of America Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 16, 2021 | /s/ Douglas V. Reynolds | |
| Douglas V. Reynolds | ||
| Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Charles P. Crimmel, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Energy Services of America Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 16, 2021 | /s/ Charles P. Crimmel | |
| Charles P. Crimmel | ||
| Chief Financial Officer |
Exhibit 32
Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Douglas V. Reynolds, Chief Executive Officer and Charles P. Crimmel, Chief Financial Officer of Energy Services of America Corporation (the “Company”) each certify in their capacity as officers of the Company that they have reviewed this Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, and that to the best of their knowledge:
| 1. | the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and |
| 2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: February 16, 2021 | /s/ Douglas V. Reynolds |
| Douglas V. Reynolds | |
| Chief Executive Officer | |
| Date: February 16, 2021 | /s/ Charles P. Crimmel |
| Charles P. Crimmel | |
| Chief Financial Officer |