Energy Services of America CORP 10-Q for FY2020 Q1
Energy Services of America CORP (ESOA)
About this 10-Q
Energy Services of America CORP filed this 10-Q on February 13, 2020, covering the quarter ended December 31, 2019 (FY2020 Q1).
Headline figures
Quarter ended December 31, 2019, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $25.84M
- down 47.4% from $49.11M a year earlier
- Diluted EPS
- -$0.01
- compared with $0.03 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, 2019
| 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 3, 2020, there were 13,841,030 outstanding shares of the Registrant’s Common Stock.
Item 1. Financial Statements (Unaudited):
Energy Services of America Corporation
| December 31, | September 30, | |||||||
| 2019 | 2019 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 4,614,267 | $ | 4,578,275 | ||||
| Accounts receivable-trade | 13,253,845 | 21,678,622 | ||||||
| Allowance for doubtful accounts | (70,310 | ) | (70,310 | ) | ||||
| Retainages receivable | 3,244,600 | 3,521,561 | ||||||
| Other receivables | 9,908 | 10,008 | ||||||
| Contract assets | 4,577,549 | 6,659,707 | ||||||
| Prepaid expenses and other | 2,581,062 | 2,734,974 | ||||||
| Total current assets | 28,210,921 | 39,112,837 | ||||||
| Property, plant and equipment, at cost | 51,537,312 | 51,268,358 | ||||||
| less accumulated depreciation | (34,715,282 | ) | (34,453,157 | ) | ||||
| Total fixed assets | 16,822,030 | 16,815,201 | ||||||
| Total assets | $ | 45,032,951 | $ | 55,928,038 | ||||
| Liabilities and shareholders' equity | ||||||||
| Current liabilities | ||||||||
| Current maturities of long-term debt | $ | 4,484,554 | $ | 4,403,573 | ||||
| Lines of credit and short term borrowings | - | 4,025,710 | ||||||
| Accounts payable | 4,304,276 | 2,919,618 | ||||||
| Accrued expenses and other current liabilities | 2,718,902 | 3,509,373 | ||||||
| Contract liabilities | 3,232,404 | 3,455,288 | ||||||
| Income tax payable | 21,811 | - | ||||||
| Total current liabilities | 14,761,947 | 18,313,562 | ||||||
| Long-term debt, less current maturities | 4,664,275 | 11,024,296 | ||||||
| Deferred income taxes payable | 1,819,827 | 1,925,823 | ||||||
| Total liabilities | 21,246,049 | 31,263,681 | ||||||
| Shareholders' equity | ||||||||
| Preferred stock, $.0001 par value | ||||||||
| Authorized 1,000,000 shares, 206 issued at December 31, 2019 and September 30, 2019 | - | - | ||||||
| Common stock, $.0001 par value | ||||||||
| Authorized 50,000,000 shares 14,839,836 issued and 13,890,102 outstanding at December 31, 2019 and 14,839,836 issued and 13,924,789 outstanding at September 30, 2019 | 1,484 | 1,484 | ||||||
| Treasury stock, 949,734 shares at December 31, 2019 and 915,047 at September 30, 2019 | (95 | ) | (91 | ) | ||||
| Additional paid in capital | 60,908,926 | 60,938,896 | ||||||
| Retained earnings (deficit) | (37,123,413 | ) | (36,275,932 | ) | ||||
| Total shareholders' equity | 23,786,902 | 24,664,357 | ||||||
| Total liabilities and shareholders' equity | $ | 45,032,951 | $ | 55,928,038 | ||||
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, | |||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 25,843,307 | $ | 49,114,139 | ||||
| Cost of revenues | 23,486,565 | 45,279,294 | ||||||
| Gross profit | 2,356,742 | 3,834,845 | ||||||
| Selling and administrative expenses | 2,595,772 | 2,756,391 | ||||||
| Income (loss) from operations | (239,030 | ) | 1,078,454 | |||||
| Other income (expense) | ||||||||
| Interest income | 53,249 | 41,522 | ||||||
| Other nonoperating expense | (33,938 | ) | (32,995 | ) | ||||
| Interest expense | (186,845 | ) | (204,349 | ) | ||||
| Gain on sale of equipment | 295,991 | 25,752 | ||||||
| 128,457 | (170,070 | ) | ||||||
| Income (loss) before income taxes | (110,573 | ) | 908,384 | |||||
| Income tax expense (benefit) | (36,459 | ) | 277,000 | |||||
| Net income (loss) | (74,114 | ) | 631,384 | |||||
| Dividends on preferred stock | 77,250 | 77,250 | ||||||
| Net income (loss) available to common shareholders | $ | (151,364 | ) | $ | 554,134 | |||
| Weighted average shares outstanding-basic | 13,911,610 | 14,135,900 | ||||||
| Weighted average shares-diluted | 13,911,610 | 17,569,233 | ||||||
| Earnings (loss) per share available to common shareholders | $ | (0.011 | ) | $ | 0.039 | |||
| Earnings (loss) per share-diluted available to common shareholders | $ | (0.011 | ) | $ | 0.032 | |||
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, | |||||||
| 2019 | 2018 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | (74,114 | ) | $ | 631,384 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation expense | 1,095,282 | 1,022,367 | ||||||
| Gain on sale of equipment | (295,991 | ) | (25,752 | ) | ||||
| Provision for deferred taxes | (105,996 | ) | (76,910 | ) | ||||
| Decrease in contracts receivable | 8,424,777 | 2,858,750 | ||||||
| Decrease (increase) in retainage receivable | 276,961 | (806,151 | ) | |||||
| Decrease in other receivables | 100 | 111,275 | ||||||
| Decrease (increase) in contract assets | 2,082,158 | (5,177,749 | ) | |||||
| Decrease in prepaid expenses | 153,912 | 678,975 | ||||||
| Increase in accounts payable | 1,384,658 | 2,896,014 | ||||||
| Decrease in accrued expenses | (713,221 | ) | (488,099 | ) | ||||
| Decrease increase in contract liabilities | (222,884 | ) | (1,704,440 | ) | ||||
| Increase in income taxes payable | 21,811 | 353,910 | ||||||
| Net cash provided by operating activities | 12,027,453 | 273,574 | ||||||
| Cash flows from investing activities: | ||||||||
| Investment in property and equipment | (747,534 | ) | (585,008 | ) | ||||
| Proceeds from sales of property and equipment | 334,234 | 47,365 | ||||||
| Net cash used in investing activities | (413,300 | ) | (537,643 | ) | ||||
| 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 | ) | (149,998 | ) | ||||
| Borrowings on lines of credit and short term debt, net of (repayments) | (4,025,710 | ) | 3,430,753 | |||||
| Principal payments on long term debt | (6,671,860 | ) | (1,228,506 | ) | ||||
| Net cash (used in) provided by financing activities | (11,578,161 | ) | 1,897,749 | |||||
| Increase in cash and cash equivalents | 35,992 | 1,633,680 | ||||||
| Cash and cash equivalents beginning of period | 4,578,275 | 1,065,550 | ||||||
| Cash and cash equivalents end of period | $ | 4,614,267 | $ | 2,699,230 | ||||
| Supplemental schedule of noncash investing and financing activities: | ||||||||
| Purchases of property & equipment under financing agreements | $ | 392,820 | $ | - | ||||
| Supplemental disclosures of cash flows information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 186,845 | $ | 204,349 | ||||
| Income taxes | $ | 48,000 | $ | - | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
3
Energy Services of America Corporation
Consolidated Statements of Changes in Shareholders’ Equity
For the three months ended December 31, 2019 and 2018
| Common Stock | Additional Paid | Retained | Treasury | Total Shareholders' | ||||||||||||||||||||
| Shares | Amount | in Capital | Earnings (deficit) | Stock | Equity | |||||||||||||||||||
| Balance at September 30, 2018 | 14,194,517 | $ | 1,484 | $ | 61,239,470 | $ | (37,959,842 | ) | $ | (65 | ) | $ | 23,281,047 | |||||||||||
| Net income | - | - | - | 631,384 | - | 631,384 | ||||||||||||||||||
| Accrued preferred dividends | - | - | - | (77,250 | ) | - | (77,250 | ) | ||||||||||||||||
| Treasury stock purchased by company | (123,346 | ) | - | (149,986 | ) | - | (12 | ) | (149,998 | ) | ||||||||||||||
| Balance at December 31, 2018 | 14,071,171 | $ | 1,484 | $ | 61,089,484 | $ | (37,405,708 | ) | $ | (77 | ) | $ | 23,685,183 | |||||||||||
| 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 | |||||||||||
The Accompanying Notes are an Integral Part of These Financial Statements
4
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”) was formed in 2006 as a special purpose acquisition corporation, or blank check company, and became an operating entity on August 15, 2008. 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. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. 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, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro operates primarily in the mid-Atlantic region of the United States. 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 of the 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.
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, 2019 and 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 20, 2019. 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, 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 and its wholly owned subsidiary, 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 and C.J. Hughes and C.J. Hughes’ subsidiaries.
Reclassifications
Certain reclassifications have been made in prior years’ financial statements to conform to classifications used in the current year.
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 include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
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, and Cost Plus and T&M. The following tables present our disaggregated revenue for the three months ended December 31, 2019 and 2018:
| Three Months Ended December 31, 2019 | ||||||||||||||||
| Petroleum & Gas | Water, Sewer and Other | Electrical and Mechanical | Total revenue from contracts | |||||||||||||
| Lump sum contracts | $ | - | $ | - | $ | 5,465,539 | $ | 5,465,539 | ||||||||
| Unit price contracts | - | - | - | - | ||||||||||||
| Cost plus and T&M contracts | 3,029,720 | 1,274,832 | 4,629,309 | 8,933,861 | ||||||||||||
| Revenue from contracts in progress | $ | 3,029,720 | $ | 1,274,832 | $ | 10,094,848 | $ | 14,399,400 | ||||||||
| Lump sum contracts | $ | - | $ | - | $ | 1,982,973 | $ | 1,982,973 | ||||||||
| Unit price contracts | 6,218,532 | 2,125,934 | - | 8,344,466 | ||||||||||||
| Cost plus and T&M contracts | 281,846 | - | 834,622 | 1,116,468 | ||||||||||||
| Revenue from completed contracts | 6,500,378 | 2,125,934 | 2,817,595 | 11,443,907 | ||||||||||||
| 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 | ||||||||
| Three Months Ended December 31, 2018 | ||||||||||||||||
| Petroleum & Gas | Water, Sewer and Other | Electrical and Mechanical | Total revenue from contracts | |||||||||||||
| Lump sum contracts | $ | - | $ | - | $ | 7,336,710 | $ | 7,336,710 | ||||||||
| Unit price contracts | 26,350,168 | 3,072,043 | - | 29,422,211 | ||||||||||||
| Cost plus and T&M contracts | 1,788,299 | 247,035 | 4,548,679 | 6,584,013 | ||||||||||||
| Revenue from contracts in progress | $ | 28,138,467 | $ | 3,319,078 | $ | 11,885,389 | $ | 43,342,934 | ||||||||
| Lump sum contracts | $ | - | $ | - | $ | 879,978 | $ | 879,978 | ||||||||
| Unit price contracts | 2,465,135 | 398,914 | - | 2,864,049 | ||||||||||||
| Cost plus and T&M contracts | 434,050 | 9,842 | 1,583,286 | 2,027,178 | ||||||||||||
| Revenue from completed contracts | 2,899,185 | 408,756 | 2,463,264 | 5,771,205 | ||||||||||||
| Total revenue from contracts | $ | 31,037,652 | $ | 3,727,834 | $ | 14,348,653 | $ | 49,114,139 | ||||||||
| Earned over time | $ | 30,330,197 | $ | 3,727,834 | $ | 14,081,624 | $ | 48,139,655 | ||||||||
| Earned at point in time | 707,455 | - | 267,029 | 974,484 | ||||||||||||
| Total revenue from contracts | $ | 31,037,652 | $ | 3,727,834 | $ | 14,348,653 | $ | 49,114,139 | ||||||||
7
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, 2019, we recognized revenue of $3.0 million that was included in the contract liability balance at September 30, 2019.
Accounts receivable-trade, net of allowance for doubtful accounts, retainages receivable, contract assets and contract liabilities consisted of the following:
| September 30, 2019 | December 31, 2019 | Change | ||||||||||
| Accounts receivable-trade, net of allowance for doutful accounts | $ | 21,608,312 | $ | 13,183,535 | $ | (8,424,777 | ) | |||||
| Retainages receivable | 3,521,561 | 3,244,600 | (276,961 | ) | ||||||||
| Contract assets | ||||||||||||
| Cost and estimated eanings in excess of billings | 6,659,707 | 4,577,549 | (2,082,158 | ) | ||||||||
| Contract liabilites | ||||||||||||
| Billings in excess of cost and estimated earnings | $ | 3,455,288 | $ | 3,232,404 | $ | (222,884 | ) | |||||
8
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, 2019, we recognized revenue of $636,000 as a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2019. 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, 2019, the Company had $26.4 million in remaining unsatisfied performance obligations, in which revenue is expected to be recognized in less than twelve months.
6. UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts as of December 31, 2019 and September 30, 2019 are summarized as follows:
| December 31, | September 30, | |||||||
| 2019 | 2019 | |||||||
| Costs incurred on contracts in progress | $ | 73,297,219 | $ | 163,768,655 | ||||
| Estimated earnings, net of estimated losses | 14,759,933 | 18,215,388 | ||||||
| 88,057,152 | 181,984,043 | |||||||
| Less billings to date | 86,712,007 | 178,779,624 | ||||||
| $ | 1,345,145 | $ | 3,204,419 | |||||
| Contract assets: costs and estimated earnings in excess of billed on uncompleted contracts | $ | 4,577,549 | $ | 6,659,707 | ||||
| Less contract liabilities: billings in excess of costs and estimated earnings on uncompleted contracts | 3,232,404 | 3,455,288 | ||||||
| $ | 1,345,145 | $ | 3,204,419 | |||||
Backlog at December 31, 2019 and September 30, 2019 was $63.2 million and $63.0 million, respectively.
9
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.
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 $8.1 million at December 31, 2019 was $8.1 million. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $16.0 million at September 30, 2019 was $16.0 million.
All receivables and payables are carried at net realizable value which approximates fair value because of their short duration to maturity.
10
8. EARNINGS (LOSS) PER SHARE
The amounts used to compute the earnings (loss) per share for the three months ended December 31, 2019 and 2018 are summarized below.
| Three Months Ended | Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Net income (loss) | $ | (74,114 | ) | $ | 631,384 | |||
| Dividends on preferred stock | 77,250 | 77,250 | ||||||
| Income (loss) available to common shareholders | $ | (151,364 | ) | $ | 554,134 | |||
| Weighted average shares outstanding | 13,911,610 | 14,135,900 | ||||||
| Weighted average shares outstanding-diluted | 13,911,610 | 17,569,233 | ||||||
| Earnings (loss) per share available to common shareholders | $ | (0.011 | ) | $ | 0.039 | |||
| Earnings (loss) per share available to common shareholders-diluted | $ | (0.011 | ) | $ | 0.032 | |||
9. INCOME TAXES
The components of income taxes are as follows:
| Three months ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Federal | ||||||||
| Current | $ | 54,240 | $ | 267,020 | ||||
| Deferred | (82,678 | ) | (62,807 | ) | ||||
| Total | (28,438 | ) | 204,213 | |||||
| State | ||||||||
| Current | $ | 15,298 | $ | 86,889 | ||||
| Deferred | (23,319 | ) | (14,102 | ) | ||||
| Total | (8,021 | ) | 72,787 | |||||
| Total income tax expense (benefit) | $ | (36,459 | ) | $ | 277,000 | |||
The effective income tax rate for the three months ended December 31, 2019 was (33.0%), as compared to 30.5% for the same period in 2018. 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.
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The income tax effects of temporary differences giving rise to the deferred tax assets and liabilities are as follows:
| December 31, | September 30, | |||||||
| 2019 | 2019 | |||||||
| Deferred income tax liabilities | ||||||||
| Long-term | ||||||||
| Property and equipment | $ | 2,404,986 | $ | 2,539,639 | ||||
| Other | (19,805 | ) | (19,805 | ) | ||||
| Total deferred income tax liabilities | $ | 2,385,181 | $ | 2,519,834 | ||||
| Deferred income tax assets | ||||||||
| Other | 565,354 | 594,011 | ||||||
| Total deferred income tax assets | 565,354 | 594,011 | ||||||
| Total net deferred income tax liabilities | $ | 1,819,827 | $ | 1,925,823 | ||||
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, 2016.
The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. Consequent to the passage of the Act, the Company’s deferred tax assets and liabilities were adjusted for the effects of the Act’s changes in the tax law and rates.
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.
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10. SHORT-TERM AND LONG-TERM DEBT
Short-term debt consists of the following:
On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank, Inc., (“United Bank”), to provide the Company with a $15.0 million revolving line of credit. This line had 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 effective date of this agreement was February 27, 2018. Operating Line of Credit (2018) expired on February 28, 2019 but was extended through April 28, 2019. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019.
As of the September 30, 2019 borrowing base calculation, the Company could borrow up to $11.5 million on the line of credit. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available. Subsequent to September 30, 2019, the Company repaid $3.5 million against the line of credit. As of the December 31, 2019 borrowing base calculation, the Company could borrow up to $7.8 million on the line of credit. The Company did not have any line of credit borrowings, leaving $7.8 million available.
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 was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at December 31, 2019.
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 nine or ten monthly payments. In January 2019, The Company financed $3.2 million in insurance premium policies. At September 30, 2019, the balance of the remaining premiums to be paid was $526,000, which was paid in three months ended December 31, 2019. As of December 31, 2019, the Company did not have short-term borrowings related to insurance premium policies.
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A summary of short-term and long-term debt as of December 31, 2019 and September 30, 2019 is as follows:
| December 31, | September 30, | |||||||
| 2019 | 2019 | |||||||
| Line of credit payable to bank, monthly interest at 5.50%, final payment due by April 28, 2020. | $ | - | $ | 3,500,000 | ||||
| Notes payable to finance companies, due in monthly installments totaling $94,464 including interest ranging from 0.00% to 6.03%, final payments due January 2020 through August 2026, secured by equipment. | 1,842,897 | 1,691,991 | ||||||
| Note payable to finance company for insurance premiums financed, due in monthly installments totaling $267,677, including interest rate at 2.77%, final payment due November 2019. | - | 525,710 | ||||||
| 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. | 1,001,235 | 1,012,126 | ||||||
| Notes payable to bank, due in monthly installments totaling $12,028, including interest at 5.0%, final payment due November 2025 secured by building and property. | 725,825 | 751,987 | ||||||
| Notes payable to bank, due in monthly installments totaling $98,865, including interest at 4.99%, final payment due September 2022 secured by equipment. | 2,781,244 | 3,040,600 | ||||||
| Notes payable to bank, due in monthly installments totaling $46,482, including interest at 5.00%, final payment due September 2021 secured by equipment. | 884,065 | 1,011,160 | ||||||
| Notes payable to bank, due in monthly installments totaling $191,012, including interest at 5.50%, final payment due May 2024 secured by equipment. | 1,913,563 | 7,920,005 | ||||||
| Total debt | 9,148,829 | 19,453,579 | ||||||
| Less current maturities | 4,484,554 | 8,429,283 | ||||||
| Total long term debt | $ | 4,664,275 | $ | 11,024,296 | ||||
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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, 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”) was formed in 2006 as a special purpose acquisition corporation, or blank check company, and became an operating entity on August 15, 2008. 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. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. 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, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro operates primarily in the mid-Atlantic region of the United States. 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 of the 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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Energy Services is engaged in providing contracting services for energy related companies. Currently Energy Services primarily services the gas, petroleum, power, chemical and automotive industries, though it does some other incidental work such as water and sewer projects. 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. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as build and replace gas line services to individual customers of the various utility companies.
The Company’s consolidated operating revenues for the three months ended December 31, 2019 were $25.8 million of which 50.0% was attributable to electrical and mechanical services, 36.9% to gas & petroleum work and 13.1% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the three months ended December 31, 2018 were $49.1 million of which 63.2% was attributable to gas & petroleum work, 29.2% to electrical and mechanical services and 7.6% to water and sewer installations and other ancillary services.
Energy Services’ customers include many of the leading companies in the industries it serves, including:
Goff Full Stream
Mountaineer Gas
TransCanada Corporation
Columbia Gas Distribution
Marathon Petroleum
American Electric Power
Toyota Motor Manufacturing
Bayer Chemical
Dow Chemical
Kentucky American Water
Various state, county and municipal public service districts.
The Company enters into various types of contracts, including competitive unit price, cost-plus (or time and materials basis) and fixed price (lump sum) contracts. The terms of the contracts will vary from job to job and customer to customer though most contracts are on the basis of either unit pricing, in which the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project. Most of the Company’s projects are completed within one year of the start of the work. On occasion, the Company’s customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed. The Company generally recognizes revenue on unit price and cost-plus contracts when units are complete, or services are performed. Fixed price contracts usually result in recording revenues as work on the contract progresses on a percentage of completion basis. Under this accounting method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs at completion. Many contracts also include retention provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.
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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.
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. Accordingly, our operating results in any particular quarter or year may not be indicative of the results that can be expected for any other quarter or any other year.
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First Quarter Overview
The following is an overview of results from operations for the three months ended December 31, 2019 and 2018.
| Three Months Ended | Three Months Ended | |||||||
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Revenue | $ | 25,843,307 | $ | 49,114,139 | ||||
| Cost of revenues | 23,486,565 | 45,279,294 | ||||||
| Gross profit | 2,356,742 | 3,834,845 | ||||||
| Selling and administrative expenses | 2,595,772 | 2,756,391 | ||||||
| Income (loss) from operations | (239,030 | ) | 1,078,454 | |||||
| Other income (expense) | ||||||||
| Interest income | 53,249 | 41,522 | ||||||
| Other nonoperating expense | (33,938 | ) | (32,995 | ) | ||||
| Interest expense | (186,845 | ) | (204,349 | ) | ||||
| Gain on sale of equipment | 295,991 | 25,752 | ||||||
| 128,457 | (170,070 | ) | ||||||
| Income (loss) before income taxes | (110,573 | ) | 908,384 | |||||
| Income tax expense (benefit) | (36,459 | ) | 277,000 | |||||
| Net income (loss) | (74,114 | ) | 631,384 | |||||
| Dividends on preferred stock | 77,250 | 77,250 | ||||||
| Net income (loss) available to common shareholders | $ | (151,364 | ) | $ | 554,134 | |||
| Weighted average shares outstanding-basic | 13,911,610 | 14,135,900 | ||||||
| Weighted average shares-diluted | 13,911,610 | 17,569,233 | ||||||
| Earnings (loss) per share | ||||||||
| available to common shareholders | $ | (0.011 | ) | $ | 0.039 | |||
| Earnings (loss) per share-diluted | ||||||||
| available to common shareholders | $ | (0.011 | ) | $ | 0.032 | |||
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Results of Operations for the Three Months Ended December 31, 2019 Compared to the Three Months Ended December 31, 2018
Revenues. Total revenues decreased by $23.3 million or 47.4% to $25.8 million for the three months ended December 31, 2019 from $49.1 million for the same period in 2018. The decrease was primarily attributable to a $21.5 million revenue decrease in petroleum and gas work, a $1.4 million revenue decrease in electrical and mechanical services and a $327,000 revenue decrease in water and sewer projects and other ancillary services. The revenue decrease in petroleum and gas work was primarily related to a twenty-mile pipeline project in northern West Virginia that was in progress during the three months ended December 31, 2018 and completed in September 2019. There were no major projects started in the last quarter of calendar year 2019.
Cost of Revenues. Total cost of revenues decreased by $21.8 million or 48.1% to $23.5 million for the three months ended December 31, 2019 from $45.3 million for the same period in 2018. The decrease was primarily attributable to a $20.5 million cost decrease in petroleum and gas work, a $1.1 million cost decrease in electrical and mechanical services and a $236,000 cost decrease in water and sewer projects and other ancillary services, partially offset by a $78,000 cost increase in equipment and tool shop operations not allocated to projects. The cost of revenues decrease in petroleum and gas work was primarily related to a twenty-mile pipeline project in northern West Virginia that was in progress during the three months ended December 31, 2018 and completed in September 2019. There were no major projects started in the last quarter of calendar year 2019.
Gross Profit. Total gross profit decreased by $1.4 million or 38.5% to $2.4 million for the three months ended December 31, 2019 from $3.8 million for the same period in 2018. The decrease was primarily attributable to a $1.0 million gross profit decrease in petroleum and gas work, a $310,000 gross profit decrease in electrical and mechanical services, a $91,000 gross profit decrease in water and sewer projects and other ancillary services and a $78,000 gross profit decrease related to equipment and tool shop operations costs not allocated to projects. The gross profit decrease in petroleum and gas work was primarily related to a twenty-mile pipeline project in northern West Virginia that was in progress during the three months ended December 31, 2018 and completed in September 2019. There were no major projects started in the last quarter of calendar year 2019.
Selling and administrative expenses. Total selling and administrative expenses decreased by $161,000 or 5.8% to $2.6 million for the three months ended December 31, 2019 from $2.8 million for the same period in 2018.
Interest Expense. Interest expense decreased by $17,000 or 8.6% to $187,000 for the three months ended December 31, 2019 from $204,000 for the same period in 2018. This decrease was primarily due to the repayment of the line of credit and short-term borrowings and additional principal payments on long-term debt.
Net Income (loss). Loss before income taxes was ($111,000) for the three months ended December 31, 2019, compared to income before taxes of $908,000 for the same period in 2018. The loss before income taxes was due to the items mentioned above.
Income tax benefit for the three months ended December 31, 2019 was $36,000 compared to income tax expense of $277,000 for the same period in 2018. The income tax benefit for the three months ended December 31, 2019 was primarily due to a decrease in taxable income as compared to the same period in 2018.
The effective income tax rate for the three months ended December 31, 2019 was (33.0%), as compared to 30.5% for the same period in 2018. 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.
The US Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted in December 2017. As a result, the top corporate income tax rate was reduced from 35% to 21% beginning with tax years after December 31, 2017. As a fiscal year filer, the Act required the Company to use a “blended” tax rate of 24.5% for fiscal year 2018. Beginning with fiscal year 2019, the Company’s federal tax rate will be 21%.
Dividends on preferred stock for the three months ended December 31, 2019 and 2018 were $77,250.
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Net loss available to common shareholders for the three months ended December 31, 2019 was ($151,000) compared to net income available to common shareholders of $554,000 for the same period in 2018.
Comparison of Financial Condition at December 31, 2019 and September 30, 2019
The Company had total assets of $45.0 million at December 31, 2019, a decrease of $10.9 million from the prior fiscal year end balance of $55.9 million. Accounts receivable, which totaled $13.3 million at December 31, 2019, decreased by $8.4 million from the prior fiscal year end balance of $21.7 million. The decrease was primarily due to the collection of receivables from September 30, 2019. Retainages receivable totaled $3.2 million at December 31, 2019, a decrease of $277,000 from the prior fiscal year end balance of $3.5 million. The decrease was due to the timing of retainage billings and receipts compared to September 30, 2019. Contract assets totaled $4.6 million at December 31, 2019, a decrease of $2.1 million from the prior fiscal year end balance of $6.7 million. The decrease was due to a difference in the timing of project billings at December 31, 2019 compared to September 30, 2019. Prepaid expenses and other totaled $2.6 million at December 31, 2019, a decrease of $154,000 from the prior fiscal year end balance of $2.7 million. This decrease was primarily due to the financing of the Company’s insurance policies, partially offset by a reduction in prepaid insurance that was expensed during the three months ended December 31, 2019. Cash and cash equivalents totaled $4.6 million at December 31, 2019, an increase of $36,000 from the prior fiscal year end balance. The increase was primarily due to the decrease in accounts receivable, partially offset by the repayments of short-term and long-term debt. The Company had property, plant and equipment of $16.8 million at December 31, 2019, an increase of $7,000 from the prior fiscal year end balance. This increase was due to depreciation of $1.1 million and net equipment disposals of $38,000, partially offset by equipment acquisitions of $1.1 million.
The Company had total liabilities of $21.2 million at December 31, 2019, a decrease of $10.1 million from the prior fiscal year end balance of $31.3 million. Long-term debt totaled $4.7 million at December 31, 2019, a decrease of $6.3 million from the prior fiscal year end balance of $11.0 million. The decrease in long-term debt was due to scheduled payments and additional principal repayments on long-term debt. The Company did not have lines of credit and short-term borrowings at December 31, 2019, a decrease of $4.0 million from the prior fiscal year end balance of $4.0 million. This decrease was primarily due to $3.5 million in line of credit repayments and repayments of $526,000 in short term borrowings related to insurance premiums financed. Accrued expenses and other current liabilities totaled $2.7 million at December 31, 2019, a decrease of $790,000 from the prior fiscal year end balance of $3.5 million. The decrease was primarily due to the payment of accrued expenses in the three months ended December 31, 2019. Contract liabilities totaled $3.2 million at December 31, 2019, a decrease of $223,000 from the prior fiscal year end total of $3.5 million. The decrease was due to a difference in the timing of project billings at December 31, 2019 compared to at September 30, 2019. Deferred tax liabilities totaled $1.8 million at December 31, 2019, a decrease of $106,000 from the prior fiscal year end balance of $1.9 million. Accounts payable totaled $4.3 million at December 31, 2019, an increase of $1.4 million from the prior fiscal year end balance of $2.9 million. The increase was due to the timing of accounts payable payments as compared to September 30, 2019. Current maturities of long-term debt totaled $4.5 million at December 31, 2019, an increase of $81,000 from the prior fiscal year end balance of $4.4 million. The increase was primarily due to the addition of Term Note (2019), partially offset by two term notes paid off during fiscal year 2019. Income taxes payable totaled $22,000 at December 31, 2019, an increase of $22,000 from the prior fiscal year end balance of $0. The increase was due to income taxes payable at December 31, 2019, partially offset by estimated tax payments made in the three months ended December 31, 2019.
Shareholders’ equity was $23.8 million at December 31, 2019, a decrease of $877,000 from the prior fiscal year end balance of $24.7 million. This decrease was due to the net loss available to common shareholders of $151,000, $30,000 in common stock repurchased by the Company and $696,000 in special dividends paid to common shareholders for the three months ended December 31, 2019.
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Liquidity and Capital Resources
Indebtedness
On January 31, 2014, the Company entered into a financing arrangement (“Term Note”) with United Bank, Inc. and Summit Community Bank. The financing arrangement was a five-year term loan in the amount of $8.8 million. This note was paid in full during the second quarter of fiscal year 2019.
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, 2019, the Company had made principal payments of $199,000. The loan is collateralized by the building purchased under this agreement.
On September 16, 2015, the Company entered into a $1.2 million 41-month term note agreement with United Bank, Inc. to refinance the five-year term note agreement for $1.6 million with First Guaranty Bank. The agreement had an interest rate of 5.0%. The note was paid in full during the second quarter of fiscal year 2019. The loan was collateralized by the Company’s accounts receivable and equipment.
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, 2019, the Company had borrowed $2.46 million against this note and made principal payments of $1.6 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 5.0% with monthly payments of $12,028. As of December 31, 2019, the Company had made principal payments of $347,000. 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, 2019, the Company had borrowed $5.0 million against this note and made principal payments of $2.2 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 Company anticipates paying off Term Note (2019) in less than one year. Covenants for the loan are the same as the $12.5 million component of Operating Line of Credit (2019). 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. As of December 31, 2019, the Company had made principal payments of $8.1 million. The loan is collateralized by the Company’s equipment.
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Operating Line of Credit
On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank, Inc., (“United Bank”), to provide the Company with a $15.0 million revolving line of credit. This line had 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 effective date of this agreement was February 27, 2018. Operating Line of Credit (2018) expired on February 28, 2019 but was extended through April 28, 2019. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019.
As of the September 30, 2019 borrowing base calculation, the Company could borrow up to $11.5 million on the line of credit. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available. Subsequent to September 30, 2019, the Company repaid $3.5 million against the line of credit. As of the December 31, 2019 borrowing base calculation, the Company could borrow up to $7.8 million on the line of credit. The Company did not have any line of credit borrowings, leaving $7.8 million available.
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 was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at December 31, 2019.
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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
Our work often requires us to lease various equipment, vehicles, and facilities. These leases usually are short-term in nature, with duration of two year or less, though at times we may enter into longer term leases when warranted. By leasing, we are able to reduce our capital outlay requirements for equipment, vehicles and facilities that we may only need for short periods of time. As of December 31, 2019, the Company had one operating lease commitment of $56,000 that will expire in April 2020.
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, 2019, 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, 2019, the Company had $4.2 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.
The Company did not have a customer that exceeded 10.0% of revenues for the three months ended December 31, 2019. The Company had one customer that exceeded 10.0% of receivables at December 31, 2019. This customer, WV American Water, represented 15.0% of receivables net of retention at December 31, 2019.
The Company had two customers that exceeded 10.0% of revenues for the three months ended December 31, 2018. The two customers, Goff Full Stream Interconnect and TransCanada, represented 36.7% and 11.3% of revenues, respectively. The Company had two customers that exceeded 10.0% of receivables at December 31, 2018. These customers, Goff Full Stream Interconnect and Dow Chemical, represented 18.5% and 12.9% of receivables net of retention at December 31, 2018, respectively.
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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 $13.7 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at December 31, 2019, 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, 2019, 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. Nester Logan and Mr. Samuel Kapourales, directors of Energy Services, were also directors 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. Keith Molihan and Mr. Neal Scaggs are both directors of Energy Services and hold the same position with Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of December 31, 2019, we have paid approximately $199,000 in principal and approximately $269,000 in interest since the beginning of the loan. There were no new material related party transactions entered into during the quarter ended December 31, 2019.
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, 2019 and 2018, 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 include costs and estimated earnings in excess of billings that were previously separately presented. Contract liabilities 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 |
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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.
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. |
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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. |
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. |
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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.
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. |
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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.
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, 2019, the Company does not have a material amount of costs expensed that would otherwise be capitalized and amortized.
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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.
Contract Assets:
Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
Contract Liabilities:
Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
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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, 2016.
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, 2019.
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.
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 $1.9 million as of December 31, 2019. 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, 2019, the management review deemed that the allowance for doubtful accounts was adequate.
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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. The Company believes the adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.
New Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. In addition, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact, if any, that adoption will have on its consolidated financial statements.
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Outlook
The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.
The Company prepares weekly cash forecasts for our own benefit and for submission to our lenders. We anticipate that our current cash and the cash to be generated from collection of our receivables along with the existing Operating Line of Credit (2019) with United Bank, Inc., which was extended to April 28, 2020, will be adequate to meet our cash needs for the Company’s 2020 fiscal year. The Company may borrow against the line of credit provided it meets certain borrowing base requirements, with $15.0 million being the maximum allowed. If the Company has borrowed more than the borrowing base allows, the Company must repay the excess borrowings to United Bank, Inc. As of December 31, 2019, the Company had no borrowings against the Operating Line of Credit (2019).
Currently, the Company is receiving bid opportunities from existing and potentially new customers. However, with potential economic uncertainties, such as the prices of oil and natural gas, and 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, 2019 was $63.2 million. 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.
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 2020 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.
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OTHER INFORMATION
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 $13.7 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at December 31, 2019, 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, 2019, 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 December 20, 2019. 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) The repurchases of Energy Services of America Corporation’s shares of its common stock during the three months ended December 31, 2019 was as follows:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Value of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| October 1, 2019-October 31, 2019 | 13,853 | $ | 0.88 | $ | 12,135 | 1,368,994 | ||||||||||
| November 1, 2019-November 30, 2019 | 9,648 | 0.84 | 8,116 | 1,359,346 | ||||||||||||
| December 1, 2019-December 31, 2019 | 11,186 | 0.87 | 9,740 | 1,348,160 | ||||||||||||
| Total | 34,687 | $ | 0.86 | 29,991 | ||||||||||||
(1) On August 3, 2018, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would repurchase up to 10%, or approximately 1,423,984 shares, of the Company's issued and outstanding stock. The repurchase program started on August 15, 2018 and expired on August 15, 2019. On August 22, 2019, the Company announced that the Board of Directors authorized a second stock repurchase program under which the Company would repurchase up to 10%, or approximately 1,393,393 shares of the Company's issued and outstanding stock. The repurchase program started on August 26, 2019 and will expire on August 26, 2020.
| 34 |
|
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 |
| 35 |
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 13, 2020 | By: | /s/ Douglas V. Reynolds | |
| Douglas V. Reynolds | |||
| Chief Executive Officer | |||
| Date: February 13, 2020 | By: | /s/ Charles P. Crimmel | |
| Charles P. Crimmel | |||
| Chief Financial Officer | |||
| 36 |
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 13, 2020 | /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 13, 2020 | /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, 2019, 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 13, 2020 | /s/ Douglas V. Reynolds | ||
| Douglas V. Reynolds | |||
| Chief Executive Officer | |||
| Date: February 13, 2020 | /s/ Charles P. Crimmel | ||
| Charles P. Crimmel | |||
| Chief Financial Officer | |||