ESOA 10-Q
Energy Services of America CORP (ESOA)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
Commission File Number:
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Securities Registered Pursuant to Section 12(b) of the Act:
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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. ☒ 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). ☒ 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):
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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
As of August 9, 2024, there were
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 37 | |
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1
Part 1. Financial Information
Item 1. Financial Statements (Unaudited):
Energy Services of America Corporation
Consolidated Balance Sheets
Unaudited
June 30, | September 30, | |||||
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Assets | ||||||
Current assets |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable-trade |
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Allowance for doubtful accounts |
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Retainages receivable |
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Other receivables |
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Contract assets |
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Prepaid expenses and other |
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Total current assets |
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Property, plant and equipment, at cost |
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less accumulated depreciation |
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Total property and equipment, net |
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Right-of-use assets-operating leases | | | ||||
Intangible assets, net | | | ||||
Goodwill | | | ||||
Total assets | $ | | $ | | ||
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Liabilities and shareholders’ equity |
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Current liabilities |
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Current maturities of long-term debt | $ | | $ | | ||
Lines of credit and short-term borrowings |
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Current maturities of operating lease liabilities | | | ||||
Accounts payable |
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Accrued expenses and other current liabilities |
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Contract liabilities |
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Income tax payable |
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Total current liabilities |
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Long-term debt, less current maturities |
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Long-term operating lease liabilities, less current maturities | | | ||||
Deferred tax liability |
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Total liabilities |
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Shareholders’ equity |
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Common stock, $ |
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Treasury stock, |
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Additional paid in capital |
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Retained deficit |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | | ||
The Accompanying Notes are an Integral Part of These Financial Statements
2
Energy Services of America Corporation
Consolidated Statements of Income
Unaudited
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | ||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||
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Revenue | $ | | $ | | $ | | $ | | ||||
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Cost of revenues |
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Gross profit |
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Selling and administrative expenses |
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Income from operations |
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Other income (expense) |
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Interest income |
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Other nonoperating expense |
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Income from lawsuit judgement | | — | | — | ||||||||
Interest expense | ( | ( | ( | ( | ||||||||
Gain on sale of equipment |
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Income before income taxes |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
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Weighted average shares outstanding-basic |
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Weighted average shares-diluted |
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Earnings per share-basic | $ | | $ | | $ | | $ | | ||||
Earnings per share-diluted | $ | | $ | | $ | | $ | | ||||
The Accompanying Notes are an Integral Part of These Financial Statements
3
Energy Services of America Corporation
Consolidated Statements of Cash Flows
Unaudited
| Nine Months Ended | Nine Months Ended | ||||
June 30, | June 30, | |||||
| 2024 |
| 2023 | |||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Accreted interest on PPP loans | |
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Depreciation expense |
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Gain on sale of equipment |
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Provision for deferred taxes | | | ||||
Amortization of intangible assets | | | ||||
Accreted interest on notes payable | | | ||||
Vested restricted stock award compensation expense | | — | ||||
Decrease (increase) in accounts receivable |
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Increase in retainage receivable | ( | ( | ||||
Increase in other receivables | ( | ( | ||||
(Increase) decrease in contract assets | ( | | ||||
(Increase) decrease in prepaid expenses and other |
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Decrease in accounts payable |
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Increase (decrease) in accrued expenses and other current liabilities |
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Increase in contract liabilities |
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Net cash provided by operating activities |
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Cash flows from investing activities: |
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Investment in property and equipment |
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Proceeds from sales of property and equipment |
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Net cash used in investing activities |
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Cash flows from financing activities: |
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Dividends on common stock | ( | ( | ||||
Treasury stock purchased | ( | ( | ||||
Borrowings on lines of credit and short-term debt, net of (repayments) | ( | | ||||
Proceeds from long-term debt | — | | ||||
Principal payments on long-term debt | ( | ( | ||||
Net cash used in financing activities |
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(Decrease) increase in cash and cash equivalents |
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Cash and cash equivalents beginning of period |
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Cash and cash equivalents end of period | $ | | $ | | ||
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Supplemental schedule of noncash investing and financing activities: |
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Purchases of property & equipment under financing agreements | $ | | $ | | ||
Prepaid insurance premiums financed | $ | — | $ | | ||
Operating lease right-of-use asset disposals, net of acquisitions in exchange for operating liabilities | $ | ( | $ | | ||
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Supplemental disclosures of cash flows information: |
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Cash paid during the year for: |
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Interest | $ | | $ | | ||
Income taxes | $ | | $ | — | ||
The Accompanying Notes are an Integral Part of These Financial Statements
4
Energy Services of America Corporation
Consolidated Statements of Changes in Shareholders’ Equity
For the three and nine months ended June 30, 2024 and 2023
Total | |||||||||||||||||
Common Stock | Additional Paid | Retained | Treasury | Shareholders’ | |||||||||||||
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| in Capital |
| Deficit |
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Balance at September 30, 2023 |
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Net income |
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Dividends on common stock ($ | — | — | — | ( | — | ( | |||||||||||
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Balance at December 31, 2023 |
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Net loss |
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Vested restricted stock award | | — | — | | |||||||||||||
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Balance at March 31, 2024 |
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Net income |
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Treasury stock purchased by company |
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Balance at June 30, 2024 |
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Total | |||||||||||||||||
Common Stock | Additional Paid | Retained | Treasury | Shareholders’ | |||||||||||||
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| Deficit |
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Balance at September 30, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | — | — | — | | — | | |||||||||||
Balance at December 31, 2022 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
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Net loss | — | — | — | ( | — | ( | |||||||||||
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Dividends on common stock ($ | — | — | — | ( | — | ( | |||||||||||
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Treasury stock purchased by company | ( | — | ( | — | ( | ( | |||||||||||
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Balance at March 31, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Net income | — | — | — | | — | | |||||||||||
Treasury stock purchased by company | ( | — | ( | — | ( | ( | |||||||||||
Balance at June 30, 2023 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
The Accompanying Notes are an Integral Part of These Financial Statements
5
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”), formed in 2006, is a contractor and service company that operates primarily in the mid-Atlantic and central regions of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers, and other ancillary work with regards thereto. Energy Services’ other pipeline services include corrosion protection services, horizontal drilling services, 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 Company has also added the ability to install broadband and solar electric systems and perform civil and general contracting services.
C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes.
Nitro Construction Services, Inc. (“NCS”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, and fire protection services to customers primarily in the automotive, chemical, and power industries. Revolt Energy, LLC (“Revolt”), a wholly owned subsidiary of NCS, performs residential solar installation projects. Nitro Electric Company, LLC (“Nitro Electric”), a wholly owned subsidiary of NCS, performs industrial electrical work and has a satellite office registered in Michigan. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of NCS, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by NCS and has no employees of its own. NCS and its subsidiaries will collectively be referred to “Nitro”.
All C.J. Hughes, Nitro, and Contractors Rental construction personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.
West Virginia Pipeline, Inc. (“West Virginia Pipeline” or “WVP”), a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. The employees of West Virginia Pipeline are non-union and are managed independently of the Company’s union subsidiaries.
SQP Construction Group, Inc. (“SQP”), a wholly owned subsidiary of Energy Services, operates as a general contractor primarily in West Virginia. SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers. As a general contractor, SQP manages the overall construction project and subcontracts most of the work. The employees of SQP are non-union and are managed independently of the Company’s union subsidiaries.
Tri-State Paving & Sealcoating, Inc. (“TSP” or “Tri-State Paving”), a wholly owned subsidiary of Energy Services, completed the acquisition of substantially all the assets of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”) on April 29, 2022. Tri-State Paving provides utility paving services to water distribution customers in the Charleston, West Virginia, Lexington, Kentucky, and Chattanooga, Tennessee markets. The employees of TSP are non-union and are managed independently of the Company’s union subsidiaries.
Ryan Construction Services Inc. (“Ryan Construction” or “RCS”), a wholly owned subsidiary of Energy Services, formed in August 2022 in connection with the acquisition of substantially all the assets of Ryan Environmental, LLC and Ryan Environmental Transport, LLC (collectively “Ryan Environmental”), provides directional drilling services for broadband service providers along with offering natural gas distribution services, cathodic protection and corrosion prevention services, and civil construction services. Ryan Construction operates primarily in West Virginia and Pennsylvania. The employees of RCS are non-union and are managed independently of the Company’s union subsidiaries.
6
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, 2023, and 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on January 16, 2024. 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 (“U.S. GAAP”) 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 and nine months ended June 30, 2024 and 2023 are not necessarily indicative of the results to be expected for the full year or any other interim period.
Principles of Consolidation
The consolidated financial statements of Energy Services include the accounts of Energy Services, its wholly owned subsidiaries West Virginia Pipeline, SQP, Ryan Construction, Tri-State Paving and C.J. Hughes and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services, West Virginia Pipeline, SQP, Ryan Construction, Tri-State Paving and C.J. Hughes and its subsidiaries.
Use of Estimates and Assumptions
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ materially from those estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Please refer to Note 2 “Summary of Significant Accounting Policies” of the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended September 30, 2023, for a more detailed discussion of our significant accounting policies. There were no material changes to these significant accounting policies during the three and nine months ended June 30, 2024.
3. ACCOUNTING FOR PAYCHECK PROTECTION PROGRAM LOANS
Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the Paycheck Protection Program (“PPP”). On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with United Bank as its lender (the “Lender”) in an aggregate principal amount of $
During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously issued audited financial statements of the Company for the fiscal years 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $
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During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.
Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.
4. REVENUE RECOGNITION
Our revenue is primarily derived from construction contracts that can span several quarters. We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606” or “Topic 606”) which provides for a five-step model for recognizing revenue from contracts with customers as follows:
| ● | Identify the contract |
| ● | Identify performance obligations |
| ● | Determine the transaction price |
| ● | Allocate the transaction price |
| ● | 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, could have a significant effect on our profitability.
Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
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Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses, if incurred, 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.
5. DISAGGREGATION OF REVENUE
The Company disaggregates revenue based on the following lines of service: (1) Gas & Water Distribution, (2) Gas & Petroleum Transmission, and (3) Electrical, Mechanical, & General services and construction. Our contract types are: Lump Sum, Unit Price, Cost Plus and Time and Materials (“T&M”). The following tables present our disaggregated revenue for the three and nine months ended June 30, 2024 and 2023:
Three Months Ended June 30, 2024 | ||||||||||||
Electrical, | ||||||||||||
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Lump sum contracts | $ | | $ | | $ | | $ | | ||||
Unit price contracts |
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Cost plus and T&M contracts |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
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Earned over time | $ | | $ | | $ | | $ | | ||||
Earned at point in time |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
Nine Months Ended June 30, 2024 | ||||||||||||
Electrical, | ||||||||||||
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| Distribution |
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Lump sum contracts | $ | | $ | | $ | | $ | | ||||
Unit price contracts |
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Cost plus and T&M contracts |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
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Earned over time | $ | | $ | | $ | | $ | | ||||
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
Three Months Ended June 30, 2023 | ||||||||||||
Electrical, | ||||||||||||
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| Distribution |
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| General |
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Lump sum contracts | $ | — | $ | — | $ | | $ | | ||||
Unit price contracts |
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Cost plus and T&M contracts |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
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Earned over time | $ | | $ | | $ | | $ | | ||||
Earned at point in time |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
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Nine Months Ended June 30, 2023 | ||||||||||||
Electrical, | ||||||||||||
Gas & Water | Gas & Petroleum | Mechanical, & | Total revenue | |||||||||
| Distribution |
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| General |
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Lump sum contracts | $ | — | $ | — | $ | | $ | | ||||
Unit price contracts |
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Cost plus and T&M contracts |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
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Earned over time | $ | | $ | | $ | | $ | | ||||
Earned at point in time |
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Total revenue from contracts | $ | | $ | | $ | | $ | | ||||
6. CONTRACT BALANCES
The Company’s accounts receivable consists of amounts that have been billed to customers and collateral is generally not required. Most of the Company’s contracts have monthly billing terms; however, billing terms for some are based on project completion. Payment terms are generally within
During the three and nine months ended June 30, 2024, we recognized revenue of $
Accounts receivable-trade, net of allowance for doubtful accounts, contract assets and contract liabilities consisted of the following:
| June 30, 2024 |
| September 30, 2023 |
| Change | ||||
Accounts receivable-trade, net of allowance for doubtful accounts | $ | | $ | | $ | ( | |||
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Contract assets |
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Cost and estimated earnings in excess of billings | $ | | $ | | $ | | |||
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Contract liabilities |
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Billings in excess of cost and estimated earnings | $ | | $ | | $ | | |||
7. PERFORMANCE OBLIGATIONS
For the three and nine months ended June 30, 2024, there was
At June 30, 2024, the Company had $
10
8. UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts as of June 30, 2024 and September 30, 2023, are summarized as follows:
| June 30, 2024 |
| September 30, 2023 | |||
Costs incurred on contracts in progress | $ | | $ | | ||
Estimated earnings, net of estimated losses |
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Less billings to date |
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| $ | | $ | ( | ||
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Costs and estimated earnings in excess of billed on uncompleted contracts | $ | | $ | | ||
Less billings in excess of costs and estimated earnings on uncompleted contracts |
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$ | | $ | ( | |||
The Company’s unaudited backlog at June 30, 2024 and September 30, 2023 was $
9. FAIR VALUE MEASUREMENTS
The fair value measurement guidance of the Financial Accounting Standards Board (“FASB”) ASC 820, Fair Measurement defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and specifies 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 measurement guidance of the FASB ASC 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. 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 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or 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 was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $
11
All other current assets and liabilities are carried at net realizable value which approximates fair value because of their short duration to maturity.
10. EARNINGS PER SHARE
The amounts used to compute the earnings per share for the three and nine months ended June 30, 2024 and 2023 are summarized below.
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| Three Months Ended |
| Three Months Ended |
| Nine Months Ended |
| Nine Months Ended | ||||
June 30, 2024 | June 30, 2023 | June 30, 2024 | June 30, 2023 | |||||||||
Net income | $ | | $ | | $ | | $ | | ||||
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Weighted average shares outstanding-basic |
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Weighted average shares outstanding-diluted |
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Earnings per share available to common shareholders | $ | | $ | | $ | | $ | | ||||
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Earnings per share available to common shareholders-diluted | $ | | $ | | $ | | $ | | ||||
11. INCOME TAXES
The components of income taxes are as follows:
Three Months Ended | Nine Months Ended | |||||||||||
| June 30, 2024 |
| June 30, 2023 |
| June 30, 2024 |
| June 30, 2023 | |||||
Federal |
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Current | $ | | $ | | $ | | $ | | ||||
Deferred |
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Total | | |
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State |
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Total | | |
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Total income tax expense (benefit) | $ | | $ | | $ | | $ | | ||||
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. The Company’s provision for income taxes is computed by applying a federal rate of
The effective income tax rate for the three and nine months ended June 30, 2024 was
Major items that can affect the effective tax rate include amortization of goodwill and intangible assets and non-deductible amounts for per diem expenses.
12
The income tax effects of temporary differences giving rise to the deferred tax assets and liabilities are as follows:
|
| June 30, 2024 |
| September 30, 2023 | ||
Deferred tax liabilities |
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Property and equipment | $ | | $ | | ||
Other |
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Total deferred tax liabilities | $ | | $ | | ||
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Deferred income tax assets |
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Accruals & Other | $ | | $ | | ||
Net operating loss carryforward | — | | ||||
Total deferred tax assets | $ | | $ | | ||
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Total net deferred tax liabilities | $ | | $ | | ||
Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company had $
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.
12. SHORT-TERM AND LONG-TERM DEBT
Operating Line of Credit
On January 19, 2023, the Company received an amendment to its $
The line of credit is limited to a borrowing base calculation as summarized below:
| June 30, 2024 |
| September 30, 2023 |
| |||
Eligible borrowing base | $ | | $ | | |||
Borrowed on line of credit |
| — |
| | |||
Line of credit balance available | $ | — | $ | | |||
Interest rate |
| % |
| % | |||
The modified financial covenants for the quarter ended June 30, 2023, and all subsequent quarters, are below:
| ● | Minimum tangible net worth of $ |
| ● | Minimum traditional debt service coverage of |
| ● | Minimum current ratio of |
| ● | Maximum debt to tangible net worth ratio (“TNW”) of |
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| ● | Each ratio and covenant shall be determined, tested, and measured as of each calendar quarter beginning June 30, 2023, |
| ● | The Company shall maintain a ratio of Maximum Senior Funded Debt (“SFD”) to Earnings before Interest, Taxes, Depreciation and Amortization (“EBDITA”) equal to or less than |
The Company’s lender has agreed to omit the effect of the PPP loan restatement from the Company’s covenant compliance calculations while a final decision on PPP loan forgiveness remains in question. Thus, the Company was in compliance with all covenants at June 30, 2024. The Company projects to meet all covenant requirements for the next twelve months.
Insurance Premiums Financed
The Company financed its captive insurance policy premiums on a short-term basis through a financing company for the calendar year ended December 31, 2023. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. The Company made a down payment in January 2023 and financed the remaining premium amount over eleven monthly payments. At June 30, 2024 and September 30, 2023, the remaining balance of the insurance premiums was $
For the calendar year beginning January 1, 2024, the Company’s insurance company is accepting quarterly payments on certain insurance policies and the Company has prepaid the balance of the remaining policies as of June 30, 2024. The Company has
Paycheck Protection Program Loans
Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with its Lender in an aggregate principal amount of $
During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously audited financial statements of the Company for the fiscal years 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $
During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.
Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.
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A summary of short-term and long-term debt as of June 30, 2024 and September 30, 2023 is as follows:
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| June 30, 2024 |
| September 30, 2023 | ||
Line of credit payable to bank, monthly interest at | $ | — | $ | | ||
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Equipment line of credit with a total of $ | | | ||||
Paycheck Protection Program loans from Small Business Administration, |
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Term note payable to United Bank, WV Pipeline acquisition, due in monthly installments of $ | | | ||||
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Notes payable to finance companies, due in monthly installments totaling $ |
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Note payable to finance company for insurance premiums financed, due in monthly installments totaling $ |
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Notes payable to bank, due in monthly installments totaling $ |
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Notes payable to bank, due in monthly installments totaling $ |
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Notes payable to bank, due in monthly installments totaling $ |
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Notes payable to David Bolton and Daniel Bolton, due in annual installments totaling $ | | | ||||
Notes payable to bank, interest at | | | ||||
Term note payable to United Bank, Tri-State Paving acquisition, due in monthly installments of $ | | | ||||
Notes payable to Corns Enterprises, $ | | | ||||
Total debt | $ | | $ | | ||
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Less current maturities |
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Total long term debt, less current maturities | $ | | $ | | ||
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13. GOODWILL AND INTANGIBLE ASSETS
The Company follows the guidance of ASC Topic 350, Intangibles-Goodwill and Other, which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0). If a company fails this test or decides to bypass this step, it must proceed with a quantitative assessment of goodwill impairment. The Company did
A table of the Company’s goodwill as of and for the nine months ended June 30, 2024 and as of and for the twelve months ended September 30, 2023 is below:
| June 30, 2024 |
| September 30, 2023 | |||
Beginning balance | $ | | $ | | ||
Acquired |
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Ending balance | $ | | $ | | ||
A table of the Company’s intangible assets subject to amortization is below:
Accumulated | Accumulated | Amortization | Amortization | Amortization | Amortization | ||||||||||||||||||||||||
Remaining Life | Amortization and | Amortization and | and Impairment | and Impairment | and Impairment | and Impairment | |||||||||||||||||||||||
(in months) at | Impairment at | Impairment at | Three Months | Nine Months | Three Months | Nine Months | Net Book Value |
| Net Book Value | ||||||||||||||||||||
June 30, | June 30, | September 30, | Ended June 30, | Ended June 30, | Ended June 30, | Ended June 30, | at June 30, | at September 30, | |||||||||||||||||||||
Intangible assets: |
| 2024 |
| Original Cost |
| 2024 |
| 2023 |
| 2024 |
| 2024 |
| 2023 |
| 2023 |
| 2024 |
| 2023 | |||||||||
West Virginia Pipeline: |
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Customer Relationships | $ | | | $ | | | | | | $ | |
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Tradename | | | | | | | | |
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Non-competes |
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Tri-State Paving: |
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Tradename | | | | | | | | | | ||||||||||||||||||||
Non-competes | — | | | | — | — | | | — | — | |||||||||||||||||||
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Total intangible assets | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||||
The amortization on identifiable intangible assets for the three months ended June 30, 2024 and 2023 was $
Amortization expense associated with the identifiable intangible assets is expected to be as follows:
| Amortization Expense | ||
July 2024 to June 2025 |
| $ | |
July 2025 to June 2026 |
| | |
July 2026 to June 2027 |
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July 2027 to June 2028 |
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July 2028 to June 2029 |
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After |
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Total | $ | | |
14. LEASE OBLIGATIONS
The Company leases office space for SQP for $
The Company had
16
the expiration of the leases by applying the two-month deposit paid. The related assets and finance lease obligations associated with these lease agreements had been included in the consolidated balance sheets within property, plant and equipment and long-term debt.
The Company has
The Company has a right-of-use operating lease with Enterprise Fleet Management, Inc. (Enterprise) acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for
The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022 and renewed for one year effective October 1, 2023. This lease, for the Bridgeport, West Virginia facility, had a net present value of $
The Company has a right-of-use operating lease acquired on March 28, 2023. This lease, for the Winchester, Kentucky facility, had a net present value of $
The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by reporting period due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the consolidated statements of income, was $
Schedules related to the Company’s operating leases at June 30, 2024 can be found below:
Operating Lease-Weighted Average Remaining Term
Present value of | |||||||||
remaining | |||||||||
| Years left |
| liability |
| Lease end |
| Fiscal year end | ||
Operating lease 1 |
| $ | | 3/31/2025 | 2025 | ||||
Operating lease 2 |
| | 7/31/2024 |
| 2024 | ||||
Operating lease 3 | | 12/31/2027 | 2028 | ||||||
Operating lease 4 | | 9/30/2024 | 2024 | ||||||
Operating lease 5 | | 3/31/2026 | 2026 | ||||||
| $ | | |||||||
Weighted average remaining term |
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Operating Lease Maturity Schedule | |||
July 2024 to June 2025 |
| $ | |
July 2025 to June 2026 |
| | |
July 2026 to June 2027 |
| | |
July 2027 to June 2028 | | ||
| | ||
Less amounts representing interest |
| ( | |
Present value of operating lease liabilities | $ | |
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||
Operating Lease Expense |
| 2024 |
| 2024 |
| 2023 |
| 2023 | ||||
Amortization | ||||||||||||
Operating lease 1 |
| $ | | $ | | $ | | $ | | |||
Operating lease 2 | | | | | ||||||||
Operating lease 3 |
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Operating lease 4 | | | | | ||||||||
Operating lease 5 | | | | | ||||||||
Total amortization | | | | | ||||||||
Interest |
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Operating lease 1 | | | | | ||||||||
Operating lease 2 |
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Operating lease 3 | | | | | ||||||||
Operating lease 4 | | | | | ||||||||
Operating lease 5 | | | | | ||||||||
Total interest | | | | | ||||||||
Total amortization and interest | $ | | $ | | $ | | $ | | ||||
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||
Cash Paid for Operating Leases |
| 2024 |
| 2024 |
| 2023 |
| 2023 | ||||
Operating lease 1 |
| $ | | $ | | $ | | $ | | |||
Operating lease 2 | | | | | ||||||||
Operating lease 3 | | | | | ||||||||
Operating lease 4 | | | | | ||||||||
Operating lease 5 | | | | | ||||||||
| $ | | $ | | $ | | $ | | ||||
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15. SUBSEQUENT EVENTS
On July 11, 2024, the Company’s Nitro subsidiary completed the acquisition of substantially all the physical assets of Heritage Painting, LLC, a West Virginia corporation located in Poca, West Virginia for $
Management has evaluated all subsequent events for accounting and disclosure. There have been no other material events during the period, other than noted above, that would either impact the results reflected in the report or the Company’s results going forward.
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the “Financial Statements” appearing in this report as well as the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information. The term “Energy Services” refers to the Company, West Virginia Pipeline, SQP, Tri-State Paving, Ryan Construction, and C.J. Hughes and C.J. Hughes’ wholly owned subsidiaries on a consolidated basis.
Forward Looking Statements
Within Energy Services’ (as defined below) consolidated financial statements and this Quarterly Report on Form 10-Q, 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 do not guarantee future performance and involve or rely on 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 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”), formed in 2006, is a contractor and service company that operates primarily in the mid-Atlantic and central regions of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers, and other ancillary work with regards thereto. Energy Services’ other pipeline services include corrosion protection services, horizontal drilling services, 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 Company has also added the ability to install broadband and solar electric systems and perform civil and general contracting services.
Energy Services’ customers include many of the leading companies in the industries it serves, including:
TransCanada Corporation
NiSource, Inc.
Marathon Petroleum
Mountaineer Gas
American Electric Power
Toyota Motor Manufacturing
Bayer Chemical
Dow Chemical
Kentucky American Water
West Virginia American Water
Various state, county and municipal public service districts.
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The majority of the Company’s customers are in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky. However, the Company also performs work in other states including Alabama, Michigan, Illinois, Tennessee, North Carolina, and Indiana.
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 market the Company’s line of products most appropriately. The Company relies on direct contact between its sales force and customers’ engineering and contracting departments to obtain new business.
A substantial portion of the Company’s workforce are union members of various construction-related trade unions and are subject to separately negotiated collective bargaining agreements that expire at varying time intervals. The Company believes its relationship with its unionized workforce is good.
C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes.
Nitro Construction Services, Inc. (“NCS”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, and fire protection services to customers primarily in the automotive, chemical, and power industries. Revolt Energy, LLC (“Revolt”), a wholly owned subsidiary of NCS, performs residential solar installation projects. Nitro Electric Company, LLC (“Nitro Electric”), a wholly owned subsidiary of NCS, performs industrial electrical work and has a satellite office registered in Michigan. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of NCS, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by NCS and has no employees of its own. NCS and its subsidiaries will collectively be referred to “Nitro”.
All C.J. Hughes, Nitro, and Contractors Rental construction personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.
West Virginia Pipeline, Inc. (“West Virginia Pipeline” or “WVP”), a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. The employees of West Virginia Pipeline are non-union and are managed independently of the Company’s union subsidiaries.
SQP Construction Group, Inc. (“SQP”), a wholly owned subsidiary of Energy Services, operates as a general contractor primarily in West Virginia. SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers. As a general contractor, SQP manages the overall construction project and subcontracts most of the work. The employees of SQP are non-union and are managed independently of the Company’s union subsidiaries.
Tri-State Paving & Sealcoating, Inc. (“TSP” or “Tri-State Paving”), a wholly owned subsidiary of Energy Services, completed the acquisition of substantially all the assets of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”) on April 29, 2022. Tri-State Paving provides utility paving services to water distribution customers in the Charleston, West Virginia, Lexington, Kentucky, and Chattanooga, Tennessee markets. The employees of TSP are non-union and are managed independently of the Company’s union subsidiaries.
Ryan Construction Services Inc. (“Ryan Construction” or “RCS”), a wholly owned subsidiary of Energy Services, formed in August 2022 in connection with the acquisition of substantially all the assets of Ryan Environmental, LLC and Ryan Environmental Transport, LLC (collectively “Ryan Environmental”), provides directional drilling services for broadband service providers along with offering natural gas distribution services, cathodic protection and corrosion prevention services, and civil construction services. Ryan Construction operates primarily in West Virginia and Pennsylvania. The employees of RCS are non-union and are managed independently of the Company’s union subsidiaries.
The Company’s website address is www.energyservicesofamerica.com.
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
21
of revenues because inclement weather conditions cause 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.
Three and nine months ended June 30, 2024 and 2023 Overview
The following is an overview of results from operations for the three and nine months ended June 30, 2024 and 2023:
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||
| 2024 |
| 2023 |
| 2024 |
| 2023 | |||||
Revenue | $ | 85,923,760 | $ | 85,529,892 | $ | 247,214,602 | $ | 199,245,920 | ||||
Cost of revenues |
| 70,615,936 |
| 74,650,897 |
| 214,828,263 |
| 178,480,010 | ||||
Gross profit |
| 15,307,824 |
| 10,878,995 |
| 32,386,339 |
| 20,765,910 | ||||
Selling and administrative expenses |
| 6,815,191 |
| 5,283,617 |
| 21,335,862 |
| 16,487,502 | ||||
Income from operations |
| 8,492,633 |
| 5,595,378 |
| 11,050,477 |
| 4,278,408 | ||||
| ||||||||||||
Other income (expense) |
|
|
|
| ||||||||
Interest income |
| — |
| — |
| — |
| 196 | ||||
Other nonoperating expense |
| (27,446) |
| (72,338) |
| (33,935) |
| (163,525) | ||||
Income from lawsuit judgement | 15,634,499 | — | 15,634,499 | — | ||||||||
Interest expense |
| (546,960) |
| (639,888) |
| (1,771,560) |
| (1,713,862) | ||||
Gain on sale of equipment |
| 571 |
| 30,136 |
| 292,166 |
| 47,073 | ||||
| 15,060,664 |
| (682,090) |
| 14,121,170 |
| (1,830,118) | |||||
Income before income taxes |
| 23,553,297 |
| 4,913,288 |
| 25,171,647 |
| 2,448,290 | ||||
Income tax expense |
| 6,039,670 |
| 1,497,742 |
| 6,724,653 |
| 767,970 | ||||
Net income | $ | 17,513,627 | $ | 3,415,546 | $ | 18,446,994 | $ | 1,680,320 | ||||
Weighted average shares outstanding-basic |
| 16,565,827 |
| 16,602,556 |
| 16,567,034 |
| 16,659,169 | ||||
Weighted average shares-diluted |
| 16,597,982 |
| 16,602,556 |
| 16,602,903 |
| 16,659,169 | ||||
Earnings per share-basic | $ | 1.06 | $ | 0.21 | $ | 1.11 | $ | 0.10 | ||||
Earnings per share-diluted | $ | 1.06 | $ | 0.21 | $ | 1.11 | $ | 0.10 | ||||
22
Results of Operations for the Three and Nine Months Ended June 30, 2024 Compared to the Three and Nine Months Ended June 30, 2023
Revenues. A table comparing the Company’s revenues for the three and nine months ended June 30, 2024 compared to the three and nine months ended June 30, 2023 is below:
Three Months Ended |
|
|
| |||||||||||||
| June 30, 2024 |
| % of total |
| June 30, 2023 |
| % of total |
| Change |
| % Change |
| ||||
Gas & Water Distribution | $ | 22,536,366 | 26.2 | % | $ | 17,906,005 | 20.9 | % |
| 4,630,361 |
| 25.9 | % | |||
Gas & Petroleum Transmission |
| 17,138,806 | 19.9 | % |
| 28,488,329 | 33.3 | % |
| (11,349,523) |
| -39.8 | % | |||
Electrical, Mechanical, and General |
| 46,248,588 | 53.8 | % |
| 39,135,558 | 45.8 | % | 7,113,030 |
| 18.2 | % | ||||
Total | $ | 85,923,760 | 100.0 | % | $ | 85,529,892 | 100.0 | % | 393,868 |
| 0.5 | % | ||||
Nine Months Ended | ||||||||||||||||
| June 30, 2024 |
| % of total |
| June 30, 2023 |
| % of total |
| Change |
| % Change | |||||
Gas & Water Distribution | $ | 53,892,952 | 21.8 | % |
| 43,825,957 | 22.0 | % | $ | 10,066,995 | 23.0 | % | ||||
Gas & Petroleum Transmission |
| 55,465,127 | 22.4 | % |
| 50,718,004 | 25.5 | % |
| 4,747,123 |
| 9.4 | % | |||
Electrical, Mechanical, and General |
| 137,856,523 | 55.8 | % |
| 104,701,959 | 52.5 | % |
| 33,154,564 |
| 31.7 | % | |||
Total | $ | 247,214,602 | 100.0 | % | 199,245,920 | 100.0 | % | $ | 47,968,682 |
| 24.1 | % | ||||
Total revenues increased by $394,000 to $85.9 million for the three months ended June 30, 2024, as compared to $85.5 million for the three months ended June 30, 2023. Total revenues increased by $48.0 million to $247.2 million for the nine months ended June 30, 2024, as compared to $199.2 million for the nine months ended June 30, 2023. The increases were a result of increased work in all categories of business except for an $11.3 million decrease in Gas & Petroleum Transmission work for the three months ended June 30, 2024 as compared to the same period in 2023.
Gas & Water Distribution revenues totaled $22.5 million for the three months ended June 30, 2024, a $4.6 million increase from $17.9 million for the three months ended June 30, 2023. Gas & Water Distribution revenues totaled $53.9 million for the nine months ended June 30, 2024, a $10.1 million increase from $43.8 million for the nine months ended June 30, 2023. The revenue increases were primarily related to increased paving and gas and water distribution services performed during the three and nine months ended June 30, 2024, as compared to the same periods in 2023.
Gas & Petroleum Transmission revenues totaled $17.1 million for the three months ended June 30, 2024, an $11.4 million decrease from $28.5 million for the three months ended June 30, 2023. Gas & Petroleum Transmission revenues totaled $55.5 million for the nine months ended June 30, 2024, a $4.8 million increase from $50.7 million for the nine months ended June 30, 2023. The revenue decrease for the three months ended June 30, 2024, as compared to the same period in 2023, was primarily due to transmission work starting later in 2024 as compared to 2023 and the Company having a large transmission project that started in the third fiscal year quarter of 2023 that was not replaced in the third quarter of fiscal year 2024. The revenue increase for the nine months ended June 30, 2024, as compared to the same period in 2023, was primarily due to projects that started later in fiscal year 2023 and continued into fiscal year 2024.
Electrical, Mechanical, & General construction services revenues totaled $46.2 million for the three months ended June 30, 2024, a $7.1 million increase from $39.1 million for the three months ended June 30, 2023. Electrical, Mechanical, & General construction services revenues totaled $137.9 million for the nine months ended June 30, 2024, a $33.2 million increase from $104.7 million for the nine months ended June 30, 2023. The revenue increases were primarily related to an increase in general contracting and electrical services performed during the three and nine months ended June 30, 2024, as compared to the same period in the prior year.
23
Cost of Revenues. A table comparing the Company’s costs of revenues for the three and nine months ended June 30, 2024, compared to the three and nine months ended June 30, 2023, is below:
Three Months Ended |
| |||||||||||||||
| June 30, 2024 |
| % of total |
| June 30, 2023 |
| % of total |
| Change |
| % Change |
| ||||
Gas & Water Distribution | $ | 16,141,729 | 22.9 | % | $ | 13,256,617 | 17.8 | % | $ | 2,885,112 |
| 21.8 | % | |||
Gas & Petroleum Transmission |
| 12,549,506 | 17.8 | % |
| 24,517,102 | 32.8 | % |
| (11,967,596) |
| -48.8 | % | |||
Electrical, Mechanical, & General |
| 40,219,956 | 57.0 | % |
| 36,627,738 | 49.1 | % |
| 3,592,218 |
| 9.8 | % | |||
Unallocated Shop Expense |
| 1,704,745 | 2.4 | % |
| 249,440 | 0.3 | % |
| 1,455,305 |
| 583.4 | % | |||
Total | $ | 70,615,936 | 100.0 | % | $ | 74,650,897 | 100.0 | % | $ | (4,034,961) |
| -5.4 | % | |||
Nine Months Ended | ||||||||||||||||
| June 30, 2024 |
| % of total |
| June 30, 2023 |
| % of total |
| Change |
| % Change |
| ||||
Gas & Water Distribution | $ | 41,110,876 | 19.1 | % | $ | 34,521,047 | 19.3 | % | $ | 6,589,829 |
| 19.1 | % | |||
Gas & Petroleum Transmission |
| 47,248,674 | 22.0 | % |
| 44,352,812 | 24.9 | % |
| 2,895,862 |
| 6.5 | % | |||
Electrical, Mechanical, & General |
| 123,650,574 | 57.6 | % |
| 98,125,733 | 55.0 | % |
| 25,524,841 |
| 26.0 | % | |||
Unallocated Shop Expense |
| 2,818,139 | 1.3 | % |
| 1,480,418 | 0.8 | % |
| 1,337,721 |
| 90.4 | % | |||
Total | $ | 214,828,263 | 100.0 | % | $ | 178,480,010 | 100.0 | % | $ | 36,348,253 |
| 20.4 | % | |||
Total cost of revenues decreased by $4.0 million to $70.6 million for the three months ended June 30, 2024, as compared to $74.7 million for the three months ended June 30, 2023. Total cost of revenues increased by $36.3 million to $214.8 million for the nine months ended June 30, 2024, as compared to $178.5 million for the nine months ended June 30, 2023. The cost of revenues decreases for the three months ended June 30, 2024, as compared to the same period in 2023, as a result of Gas & Petroleum Transmission work starting later in 2024 as compared to 2023 and the Company having a large transmission project that started in the third fiscal year quarter of 2023 that was not replaced in the third quarter of fiscal year 2024. The cost of revenue increase for the nine months ended June 30, 2024, as compared to the nine months ended June 30, 2023, as a result of increased work in all categories of business.
Gas & Water Distribution cost of revenues totaled $16.1 million for the three months ended June 30, 2024, a $2.9 million increase from $13.3 million for the three months ended June 30, 2023. Gas & Water Distribution cost of revenues totaled $41.1 million for the nine months ended June 30, 2024, a $6.6 million increase from $34.5 million for the nine months ended June 30, 2023. The cost of revenues increase was primarily related to increased paving and gas and water distribution services performed during the nine months ended June 30, 2024, as compared to the same periods in 2023.
Gas & Petroleum Transmission cost of revenues totaled $12.5 million for the three months ended June 30, 2024, a $12.0 million decrease from $24.5 million for the three months ended June 30, 2023. Gas & Petroleum Transmission cost of revenues totaled $47.2 million for the nine months ended June 30, 2024, a $2.9 million increase from $44.4 million for the nine months ended June 30, 2023. The cost of revenues decreases for the three months ended June 30, 2024, as compared to the same period in 2023, were primarily due to Gas & Petroleum Transmission work starting later in 2024 as compared to 2023 and the Company having a large transmission project that started in the third fiscal year quarter of 2023 that was not replaced in the third quarter of fiscal year 2024. The cost of revenues increased for the nine months ended June 30, 2024, as compared to the same period in 2023, primarily due to projects that started later in fiscal year 2023 and continued into fiscal year 2024.
Electrical, Mechanical, & General construction services cost revenues totaled $40.2 million for the three months ended June 30, 2024, a $3.6 million increase from $36.6 million for the three months ended June 30, 2023. Electrical, Mechanical, & General construction services cost of revenues totaled $123.7 million for the nine months ended June 30, 2024, a $25.5 million increase from $98.1 million for the nine months ended June 30, 2023. The cost of revenues increase was primarily related to an increase in general contracting and electrical services performed during the three and nine months ended June 30, 2024, as compared to the same period in the prior year.
Unallocated shop expenses totaled $1.7 million for the three months ended June 30, 2024, a $1.5 increase from $249,000 for the three months ended June 30, 2023. Unallocated shop expenses totaled $2.8 million for the nine months ended June 30, 2024, a $1.3 million increase from $1.5 million for the nine months ended June 30, 2023. The changes in unallocated shop expenses were primarily due to changes in the amount of internal equipment charged to projects for the three and nine months ended June 30, 2024, as compared to the same period in the prior year.
24
Gross Profit (Loss). A table comparing the Company’s gross profit (loss) for the three and nine months ended June 30, 2024, compared to the three and nine months ended June 30, 2023, is below:
Three Months Ended | ||||||||||||||||
| June 30, 2024 |
| % of revenue |
| June 30, 2023 |
| % of revenue |
| Change |
| Pct. |
| ||||
Gas & Water Distribution | $ | 6,394,637 | 28.37 | % | $ | 4,649,388 | 25.97 | % |
| 1,745,249 | 37.5 | % | ||||
Gas & Petroleum Transmission |
| 4,589,300 | 26.78 | % |
| 3,971,227 | 13.94 | % |
| 618,073 | 15.6 | % | ||||
Electrical, Mechanical, & General |
| 6,028,632 | 13.04 | % |
| 2,507,820 | 6.41 | % |
| 3,520,812 | 140.4 | % | ||||
Unallocated Shop Expense |
| (1,704,745) |
| (249,440) |
| (1,455,305) | 583.4 | % | ||||||||
Total | $ | 15,307,824 | 17.8 | % | $ | 10,878,995 | 12.7 | % | 4,428,829 | 40.7 | % | |||||
Nine Months Ended | ||||||||||||||||
| June 30, 2024 |
| % of revenue |
| June 30, 2023 |
| % of revenue |
| Change |
| % Change |
| ||||
Gas & Water Distribution | $ | 12,782,076 | 23.72 | % | $ | 9,304,910 | 21.23 | % | $ | 3,477,166 | 37.4 | % | ||||
Gas & Petroleum Transmission |
| 8,216,453 | 14.81 | % | $ | 6,365,192 | 12.55 | % |
| 1,851,261 | 29.1 | % | ||||
Electrical, Mechanical, & General |
| 14,205,949 | 10.30 | % | $ | 6,576,226 | 6.28 | % |
| 7,629,723 | 116.0 | % | ||||
Unallocated Shop Expense |
| (2,818,139) | $ | (1,480,418) |
| (1,337,721) | 90.4 | % | ||||||||
Total | $ | 32,386,339 | 13.1 | % | $ | 20,765,910 | 10.4 | % | $ | 11,620,429 | 56.0 | % | ||||
Total gross profit increased by $4.4 million to $15.3 million for the three months ended June 30, 2024, as compared to $10.9 million for the three months ended June 30, 2023. Total gross profit increased by $11.6 million to $32.4 million for the nine months ended June 30, 2024, as compared to $20.8 million for the nine months ended June 30, 2023.
Gas & Water Distribution gross profit totaled $6.4 million for the three months ended June 30, 2024, a $1.7 million increase from $4.6 million for the three months ended June 30, 2023. Gas & Water Distribution gross profit totaled $12.8 million for the nine months ended June 30, 2024, a $3.5 million increase from $9.3 million for the nine months ended June 30, 2023. The gross profit increase was primarily related to increased paving and gas and water distribution services performed during the three and nine months ended June 30, 2024, as compared to the same period in 2023.
Gas & Petroleum Transmission gross profit totaled $4.6 million for the three months ended June 30, 2024, a $618,000 increase from $4.0 million for the three months ended June 30, 2023. Gas & Petroleum Transmission gross profit totaled $8.2 million for the nine months ended June 30, 2024, a $1.9 million increase from $6.4 million for the nine months ended June 30, 2023. The gross profit increase for the three months ended June 30, 2024, as compared to the same period in 2023, was primarily related to the unexpected receipt of project changes orders for work performed earlier in fiscal year 2023. The gross profit increase for the nine months ended June 30, 2024, as compared to the same period in 2023, was primarily related to projects that started later in fiscal year 2023 and continued into fiscal year 2024.
Electrical, Mechanical, & General construction services gross profit totaled $6.0 million for the three months ended June 30, 2024, a $3.5 million increase from $2.5 million for the three months ended June 30, 2023. Electrical, Mechanical, & General construction services gross profit totaled $14.2 million for the nine months ended June 30, 2024, a $7.6 million increase from $6.6 million for the nine months ended June 30, 2023. The gross profit increases were primarily related to an increase in general contracting and electrical services performed during the three and nine months ended June 30, 2024, as compared to the same periods in the prior year. In addition, the Company completed several milestones on a significant project nearing completion during the third quarter of fiscal year 2024 with a higher than expected profits.
Gross loss attributable to unallocated shop expenses totaled ($1.7) million for the three months ended June 30, 2024, a $1.5 increase from ($249,000) for the three months ended June 30, 2023. Gross loss attributable to unallocated shop expenses totaled ($2.8) million for the nine months ended June 30, 2024, a $1.3 million increase from ($1.5) million for the nine months ended June 30, 2023. The changes in unallocated shop expenses were due to changes in the amount of internal equipment charged to projects for the three and nine months ended June 30, 2024, as compared to the same periods in the prior year.
Selling and administrative expenses. Total selling and administrative expenses increased by $1.5 million to $6.8 million for the three months ended June 30, 2024, as compared to $5.3 million for the same period in the prior year. Total selling and administrative expenses increased by $4.8 million to $21.3 million for the nine months ended June 30, 2024, as compared to $16.5 million for the same
25
period in the prior year. The increase was primarily related to additional personnel hired to secure and manage work for expected growth.
Other nonoperating expense. Other nonoperating expenses totaled $27,000 for the three months ended June 30, 2024, as compared to $72,000 for the same period in the prior year. Other nonoperating expenses totaled $34,000 for the nine months ended June 30, 2024, as compared to $164,000 for the same period in the prior year. The change for the nine months ended June 30, 2024, as compared to the same period in 2023, was primarily related to an immaterial legal settlement that recouped costs expended in a prior period.
Income from Lawsuit Judgement. As previously disclosed, in February 2018, the Company filed a lawsuit against a customer in the United States District Court for the Western District of Pennsylvania (the “District Court”). The lawsuit was related to a dispute over work performed on a pipeline construction project. On November 21, 2022, the District Court issued a judgment in favor of the Company. On April 17, 2024, the United States Court of Appeals for the Third Circuit (the “Appeals Court”) affirmed the decision of the District Court. In May 2024, the Appeals Court denied petitions for a rehearing. This upheld the award granted by the District Court in November 2022. The Company received an approximately $15.6 million payment related to the lawsuit in May 2024.
Interest expense. Interest expense totaled $547,000 for the three months ended June 30, 2024, a decrease of $93,000 from $640,000 for the same period in the prior year. The decrease was primarily due to the Company paying off its operating line of credit in late May 2024. Interest expense totaled $1.8 million for the nine months ended June 30, 2024, an increase of $58,000 from $1.7 million for the same period in the prior year. The increase in interest expense was primarily due to interest paid for equipment financing added in late fiscal year 2023 and an increase in interest rates, partially offset by the Company paying off its operating line of credit in late May 2024.
Gain on sale of equipment. Gain on sale of equipment totaled $600 for the three months ended June 30, 2024, a decrease of $29,400 from $30,000 for the same period in the prior year. Gain on sale of equipment totaled $292,000 for the nine months ended June 30, 2024, an increase of $245,000 from $47,000 for the same period in the prior year. The Company sold certain underutilized or non-working pieces of equipment during the nine months ended June 30, 2024, with no comparable sale occurring during the nine months ended June 30, 2023.
Net income. Income before income taxes was $23.6 million for the three months ended June 30, 2024, as compared to $4.9 million for the same period in the prior year. Income before income taxes was $25.2 million for the nine months ended June 30, 2024, as compared to income before income taxes of $2.4 million for the same period in the prior year. The increases were primarily related to the items mentioned above.
Income tax expense for the three months ended June 30, 2024, was $6.0million compared to $1.5 million for the same period in the prior year. Income tax expense for the nine months ended June 30, 2024, was $6.7 million compared to income tax expense of $768,000 for the same period in the prior year. The increases in income tax expenses were due to an increase in taxable income primarily related to $15.6 million recognized as income from the receipt of a lawsuit judgement during the three and nine months ended June 30, 2024.
Net income for the three months ended June 30, 2024, was $17.5 million, as compared to $3.4 million for the same period in the prior year. Net income for the nine months ended June 30, 2024 was $18.4 million, as compared to a net loss of $1.7 million for the same period in 2023.
Comparison of Financial Condition at June 30, 2024, and September 30, 2023
The Company had total assets of $148.8 million at June 30, 2024, an increase of $6.3 million from the prior fiscal year end balance of $142.5 million.
Contract assets totaled $21.0 million at June 30, 2024, an increase of $5.1 million from the prior fiscal year end balance of $16.0 million. The increase was due to a difference in the timing of project billings at June 30, 2024, compared to September 30, 2023.
Retainage receivable totaled $10.3 million at June 30, 2024, an increase of $2.7 million from the prior fiscal year end balance of $7.6 million. The increase was primarily due to more current year projects that require retainages to be withheld.
26
The Company had net property, plant and equipment of $37.9 million at June 30, 2024, an increase of $1.4 million from the prior fiscal year end balance of $36.5 million. The increase was due to $8.4 million in asset additions, partially offset by $6.3 million in depreciation and net equipment disposals of $703,000.
Prepaid expenses and other totaled $4.2 million at June 30, 2024, an increase of $726,000 from the prior fiscal year end balance of $3.5 million. The increase was primarily due to an increase in prepaid insurance that will be expensed in the next twelve months.
Other receivables totaled $1.1 million at June 30, 2024, an increase of $605,000 from the prior fiscal year end balance of $517,000. The increase was primarily due to an advance made to the variable interest entity referenced in Related Party Transactions.
Cash and cash equivalents totaled $14.5 million at June 30, 2024, a decrease of $1.9 million from the prior fiscal year end balance of $16.4 million. The decrease was primarily due to a net $5.7 million investment in equipment, and a net $15.7 million used in financing activities, partially offset by a net $19.5 million provided from operating activities.
Accounts receivable, net of allowance for doubtful accounts, totaled $50.1 million at June 30, 2024, a decrease of $1.1 million from the prior fiscal year end balance of $51.2 million. The decrease was primarily due to the timing of cash collections and project invoicing since September 30, 2023.
Right-of-use assets totaled $2.5 million at June 30, 2024, a decrease of $829,000 from the prior fiscal year end balance of $3.3 million. The decrease was primarily due to the amortization of operating leases during the nine months ended June 30, 2024, partially offset by a net increase in leased vehicles.
Intangible assets, net totaled $3.1 million at June 30, 2024, a decrease of $324,000 from the prior fiscal year end balance of $3.4 million. The decrease was due to the amortization of intangible assets during the nine months ended June 30, 2024.
Goodwill totaled $4.1 million at June 30, 2024 and September 30, 2023.
The Company had total liabilities of $96.8 million at June 30, 2024, a decrease of $11.1 million from the prior fiscal year end balance of $107.9 million.
Lines of credit and short-term borrowings totaled $10.3 million at June 30, 2024, a decrease of $9.6 million from the prior fiscal year end balance of $19.8 million. The decrease was primarily due to repayment of the operating line of credit and financed insurance premiums. The remaining balance relates to PPP loans. Refer to Note 3 “Accounting for PPP Loans” in the accompanying consolidated financial statements for additional details.
Long-term debt totaled $21.7 million at June 30, 2024, a decrease of $3.3 million from the prior fiscal year end balance of $25.0 million. The decrease in long-term debt was primarily due to $5.0 million in payments on long-term debt, partially offset by $1.7 million in new equipment financing.
Accounts payable totaled $19.4 million at June 30, 2024, a decrease of approximately $2.6 million from the prior fiscal year end balance of $22.0 million. The decrease was due to the timing of accounts payable payments as compared to September 30, 2023.
Accrued expenses and other current liabilities totaled $12.0 million at June 30, 2024, a decrease of $1.1 million from the prior fiscal year end balance of $13.1 million. The decrease was due to the timing of accrued expense payments, as compared to September 30, 2023.
Current and long-term operating lease liabilities totaled $2.5 million at June 30, 2024, a decrease of $864,000 from the prior fiscal year end balance of $3.6 million. The decrease was due to payments made during the nine months ended June 30, 2024.
Income tax payable totaled $5.7 million at June 30, 2024, an increase of $5.7 million from the prior fiscal year end. The increase was primarily related to the taxable income generated during the nine months ended June 30, 2024.
Deferred tax liabilities totaled $7.3 million at June 30, 2024, an increase of $412,000 from the prior fiscal year end balance of $6.9 million. The increase was primarily related to a $910,000 reduction of a tax asset related to a net operating loss carry forward during the nine months ended June 30, 2024, partially offset by a $460,000 decrease in deferred taxes related to property and equipment.
27
Contract liabilities totaled $17.9 million at June 30, 2024, an increase of $202,000 from the prior fiscal year end balance of $17.7 million. The increase was due to a difference in the timing of project billings at June 30, 2024, as compared to September 30, 2023.
Shareholders’ equity was $52.0 million at June 30, 2024, an increase of $17.4 million from the prior fiscal year end balance of $34.6 million. The increase was primarily due to net income of $18.4 million for the nine months ended June 30, 2024, partially offset by an annual cash dividend payment of $994,000 on January 2, 2024.
Liquidity and Capital Resources
Operating Line of Credit
On January 19, 2023, the Company received an amendment to its $15.0 million operating line of credit which increased the line of credit to $30.0 million with a maturity date of June 28, 2023. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%. On June 1, 2023, the agreement was renewed through June 28, 2024. The Company is working with its lender and expects the operating line of credit to be extended in the Company’s fourth quarter of fiscal year 2024.
The line of credit is limited to a borrowing base calculation as summarized below:
| June 30, 2024 |
| September 30, 2023 |
| |||
Eligible borrowing base | $ | 18,971,952 | $ | 23,942,868 | |||
Borrowed on line of credit |
| — |
| 8,712,915 | |||
Line of credit balance available | $ | — | $ | 15,229,953 | |||
Interest rate |
| 8.5 | % |
| 8.5 | % | |
The modified financial covenants for the quarter ended June 30, 2023, and all subsequent quarters, are below:
| ● | Minimum tangible net worth of $28.0 million, |
| ● | Minimum traditional debt service coverage of 1.50x on a rolling twelve- month basis, |
| ● | Minimum current ratio of 1.20x, |
| ● | Maximum debt to tangible net worth ratio (“TNW”) of 2.75x, |
| ● | Each ratio and covenant shall be determined, tested, and measured as of each calendar quarter beginning June 30, 2023, |
| ● | The Company shall maintain a ratio of Maximum Senior Funded Debt (“SFD”) to Earnings before Interest, Taxes, Depreciation and Amortization (“EBDITA”) equal to or less than 3.5:1. SFD shall mean any funded debt or lease of the Company, other than subordinated debt. The covenant shall be tested quarterly, at the end of each fiscal quarter, with EBITDA based on the preceding four quarters. |
The Company’s lender has agreed to omit the effect of the PPP loan restatement from the Company’s covenant compliance calculations while a final decision on PPP loan forgiveness remains in question. Thus, the Company was in compliance with all covenants at June 30, 2024. The Company projects to meet all covenant requirements for the next twelve months.
Insurance Premiums Financed
The Company financed its captive insurance policy premiums on a short-term basis through a financing company for the calendar year ended December 31, 2023. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. The Company made a down payment in January 2023 and financed the remaining premium amount over eleven monthly payments. At June 30, 2024 and September 30, 2023, the remaining balance of the insurance premiums was $0 and $950,000, respectively.
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For the calendar year beginning January 1, 2024, the Company’s insurance company is accepting quarterly payments on certain insurance policies and the Company has prepaid the balance of the remaining policies as of June 30, 2024. The Company has no insurance premiums financed as of June 30, 2024.
Paycheck Protection Program Loans
Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with its Lender in an aggregate principal amount of $13.1 million pursuant to the PPP Loans. In a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the PPP Loans after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. During fiscal year 2021, the Company received notice that the SBA had granted forgiveness of the $9.8 million of PPP Loans and the SBA repaid the Lender in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.
During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, the Company restated the previously audited financial statements of the Company for the fiscal years 2022 and 2021. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $9.8 million, plus accrued interest.
During July 2023, management received notification from the SBA that two additional forgiveness applications related to the PPP Loans were under review. As part of the review, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender.
Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.
Long-Term Debt
On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with a bank to purchase the office building and property it had previously been leasing. The interest rate on this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to time based on changes in the U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of June 30, 2024, the Company had made principal payments of $425,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc., formerly First Bank of Charleston, Inc. (West Virginia).
On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing. The variable interest rate on the loan agreement is 9.5% at June 30, 2024. As of June 30, 2024, the Company had made principal payments of $900,000. The loan is collateralized by the building and property purchased under this agreement.
On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West Virginia Pipeline, Inc. For the purchase price allocation, the $3.0 million note had a fair value of $2.85 million. As part of the $6.35 million acquisition price, the Company paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires annual payments of at least $500,000 with a fixed interest rate of 3.25% on the $3.0 million sellers’ note, which equates to 5.35% on the carrying value of the note. As of June 30, 2024, the Company had made annual installment payments of $2.1 million.
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On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $3.0 million line of credit (“Equipment Line of Credit 2021”), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal. After twelve months, all borrowings against the Equipment Line of Credit 2021 were converted to a four-year term note agreement with a variable interest rate initially established at 4.25%. The loan is collateralized by the equipment purchased under this agreement. As of June 30, 2024, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022. The interest rate at June 30, 2023 was 9.5%. The Company has made principal payments of $1.6 million on this note as of June 30, 2024.
On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition. This loan has monthly installment payments of $64,853 and has a fixed interest rate of 4.25%. The loan is collateralized by the Company’s equipment and receivables. As of June 30, 2024, the Company had made principal payments of $2.2 million.
On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%. The Company has made principal payments of $2.8 million on this note as of June 30, 2024.
On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank. This five-year agreement financed the previous cash value of equipment purchased in the Ryan Construction acquisition. This loan has monthly installment payments of $59,932 and has a fixed interest rate of 6.0%. The loan is collateralized by the Company’s equipment and receivables. As of June 30, 2024, the Company had made principal payments of $928,000.
On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri-State Paving. David E. Corns remained as president of Tri-State Paving. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company has made principal payments of $750,000 on this note as of June 30, 2024.
On June 1, 2023, the Company entered into a $9.3 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $9.3 million line of credit (“Equipment Line of Credit 2023”), specifically for the purchase of equipment, for a period of six months with a fixed interest rate of 7.25%. After six months, all borrowings against the Equipment Line of Credit 2023 will convert to a fifty-four-month term note agreement with a fixed interest rate of 7.25%. The loan is collateralized by the equipment purchased under this agreement. As of June 30, 2024, the Company had borrowed $9.3 million against this line of credit and made $1.0 million in principal payments.
Operating Leases
The Company leases office space for SQP for $1,500 per month. The lease, which was originally signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term. The Company has only committed to a one-year renewal and is evaluating the intent to renew for additional periods.
The Company had two lease agreements for construction equipment with a combined amount of $160,000 that were paid in full as of June 30, 2024. The leases had a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and were cancellable at any time without penalty. The Company exercised the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The related assets and finance lease obligations associated with these lease agreements had been included in the consolidated balance sheets within property, plant and equipment and long-term debt.
The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving, LLC transaction. The first operating lease, for the Hurricane, West Virginia facility, had a net present value of $236,000 at inception, and a carrying value of $69,000 at June 30, 2024. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at inception, and a carrying value of $6,000 at June 30, 2024. The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate at inception.
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The Company has a right-of-use operating lease with Enterprise Fleet Management, Inc. (Enterprise) acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for thirty-one vehicles with a net present value of $1.2 million. The Company had seventy-one vehicles on lease at June 30, 2024. The right-of-use operating lease has a carrying value of $2.2 million at June 30, 2024. Each vehicle leased under the master lease program has its own implicit rate ranging from 12.8% to 15.6%.
The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022 and renewed for one year effective October 1, 2023. This lease, for the Bridgeport, West Virginia facility, had a net present value of $125,000 at inception and a carrying value of $21,000 at June 30, 2024. The 8.5% interest rate on the operating lease was based on the Company’s incremental borrowing rate at renewal.
The Company has a right-of-use operating lease acquired on March 28, 2023. This lease, for the Winchester, Kentucky facility, had a net present value of $290,000 at inception and a carrying value of $169,000 at June 30, 2024. The 7.75% interest rate on the operating lease is based on the Company’s incremental borrowing rate at inception.
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:
Rental Agreements
The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by reporting period due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the consolidated statements of income, was $3.3 million and $2.5 million, respectively, for the three months ended June 30, 2024 and 2023. Rental expenses were $12.0 million and $6.8 million, respectively, for the nine months ended June 30, 2024 and 2023.
Letters of Credit
Certain 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 June 30, 2024, 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 performance bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond. The Company must reimburse the insurer for any expenses or outlays it is required to make.
Currently, the Company has an agreement with a surety company to provide bonding which will suit the Company’s immediate needs. The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and value of contracts that can be bid. Depending upon the size and conditions of a particular contract, the Company may be required to post letters of credit or other collateral in favor of the insurer. Posting these letters or other collateral will reduce our borrowing capabilities. The Company does not anticipate any claims in the foreseeable future. At June 30, 2024, the Company had $94.5 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
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would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.
Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable, net of retention for the three and nine months ended June 30, 2024 and 2023:
| Three Months Ended | Three Months Ended |
| Nine Months Ended | Nine Months Ended |
| |||
June 30, | June 30, | June 30, | June 30, | ||||||
Revenue |
| 2024 |
| 2023 |
| 2024 |
| 2023 |
|
TransCanada Corporation |
| 11.6 | % | 15.1 | % | 14.3 | % | 11.1 | % |
NiSource and subsidiaries | * | 15.5 | % | * | 10.7 | % | |||
All other |
| 88.4 | % | 69.4 | % | 85.7 | % | 78.2 | % |
Total |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
*Less than 10.0% and included in “All other” if applicable
Accounts receivable, net of retention |
| at June 30, 2024 |
| at September 30, 2023 |
|
Walbridge Aldinger |
| 11.1 | % | * | |
All other |
| 88.9 | % | 100.0 | % |
Total |
| 100.0 | % | 100.0 | % |
*Less than 10.0% and included in “All other” if applicable
Litigation
As previously disclosed, in February 2018, the Company filed a lawsuit against a customer in the United States District Court for the Western District of Pennsylvania (the “District Court”). The lawsuit was related to a dispute over work performed on a pipeline construction project. On November 21, 2022, the District Court issued a judgment in favor of the Company. On April 17, 2024, the United States Court of Appeals for the Third Circuit (the “Appeals Court”) affirmed the decision of the District Court. In May 2024, the Appeals Court denied petitions for a rehearing. This upheld the award granted by the District Court in November 2022. The Company received an approximately $15.6 million payment related to the lawsuit in May 2024.
On November 12, 2021, the Company received a withdrawal liability claim from a pension plan to which the Company made pension contributions for union construction employees performing covered work in a particular jurisdiction. The Company has not performed covered work in their jurisdiction since 2011; however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law. The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021. The Company must comply with the demand under federal pension law; however, the Company firmly believes no withdrawal liability exists. The Company is in negotiations with the pension fund to resolve the matter and all future payments have been suspended as part of the negotiation. The Company has expensed all $164,000 in payments made through September 30, 2022 and does not expect any future liabilities related to this claim. The Company did not make any payments during the three and nine months ended June 30, 2024.
Other than described above, at June 30, 2024, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties, or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At June 30, 2024, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Related Party Transactions
On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises as partial consideration for the purchase of Tri-State Paving. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on
32
the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company has made $750,000 in principal payments on this note as of June 30, 2024.
Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns Enterprises. This thirty-six-month lease is treated as a right to use asset and has payments of $7,000 per month. The total net present value at inception was $236,000 with a carrying value of $69,000 at June 30, 2024.
SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022. Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier Ventures, LLC (“Ventures”) and 25% owned by SQP. SQP is not the primary beneficiary of the VIE and therefore will not consolidate Development into its consolidated financial statements. Instead, SQP will apply the equity method of accounting for its investment in Development. Development, a 1% owner, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”). Landlord decided to pursue the following development project (the “Project”): a historical building at 1030 Quarrier Street, Charleston, West Virginia as well as associated land (the “Property”) was purchased to be developed/rehabilitated into a commercial project including apartments and commercial space. Upon the completion of development, the Property will be used to generate rental income. SQP has been awarded the construction contract for the Project. United Bank provided $5.0 million in loans to fund the Project. SQP and Ventures have jointly provided an unconditional guarantee for the $5.0 million of obligations associated with the Project.
Other than mentioned above, there were no new material related party transactions entered into during the three and nine months ended June 30, 2024.
Certain Energy Services subsidiaries routinely engage in transactions in the normal course of business with each other, including sharing employee benefit plan coverage, payment for insurance and other expenses on behalf of other affiliates, and other services incidental to business of each of the affiliates. All revenue and related expense transactions, as well as the related accounts payable and accounts receivable have been eliminated in consolidation.
Inflation
Most significant project materials, such as pipe or electrical wire, are provided by the Company’s customers. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material costs increases in bids. Where allowed by contract, the Company will address fuel cost increases with customers. Significant inflation or supply chain issues could cause customers to delay or cancel planned projects; however, inflation did not have a significant effect on our results for the three and nine months ended June 30, 2024 and 2023.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. Management believes the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenues
The Company recognizes revenue as performance obligations are satisfied and control of the promised goods and service is transferred to the customer. For Lump Sum and Unit Price contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. For Cost Plus and Time and Material (“T&M”) contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward satisfaction of the performance obligation(s) using an output method. The Company also does certain T&M service work that is generally completed in a short duration and is recognized at a point in time.
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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 could have a significant effect on our profitability.
Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
The following table presents our costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings at June 30, 2024 and September 30, 2023:
| June 30, 2024 |
| September 30, 2023 | |||
Costs incurred on contracts in progress | $ | 347,023,673 | $ | 287,347,650 | ||
Estimated earnings, net of estimated losses |
| 55,753,948 |
| 38,976,895 | ||
| 402,777,621 |
| 326,324,545 | |||
Less billings to date |
| 399,676,125 |
| 328,112,326 | ||
$ | 3,101,496 |
| $ | (1,787,781) | ||
|
|
| ||||
Costs and estimated earnings in excess of billed on uncompleted contracts | $ | 21,046,114 | $ | 15,955,220 | ||
Less billings in excess of costs and estimated earnings on uncompleted contracts |
| 17,944,618 |
| 17,743,001 | ||
$ | 3,101,496 | $ | (1,787,781) | |||
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Allowance for doubtful accounts
The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customers’ access to capital, our customers’ willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. While most of our customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves.
Materially incorrect estimates of bad debt reserves could result in an unexpected loss in profitability for the Company. Additionally, frequently changing reserves could be an indication of risky or unreliable customers. At June 30, 2024, the management review deemed that the allowance for doubtful accounts was adequate.
Please see the allowance for doubtful accounts table below as of and for the nine months ended June 30, 2024 and as of and for the twelve months ended September 30, 2023:
| June 30, 2024 |
| September 30, 2023 | |||
Balance at beginning of period | $ | 51,063 | $ | 70,310 | ||
Charged to expense |
| — |
| — | ||
Deductions for uncollectible receivables written off, net of recoveries |
| — |
| (19,247) | ||
Balance at end of period | $ | 51,063 | $ | 51,063 | ||
Impairment of goodwill and intangible assets
The Company follows the guidance of Accounting Standards Codification (“ASC”) 350-20-35-3 “Intangibles-Goodwill and Other (Topic 350)” which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0). If a company fails this test or decides to bypass this step, it must proceed with a quantitative assessment of goodwill impairment. The Company did not have a goodwill impairment at June 30, 2024.
Materially incorrect estimates could cause an impairment of goodwill or intangible assets and result in a loss in profitability for the Company.
A table of the Company’s intangible assets subject to amortization is below:
Accumulated | Accumulated | Amortization | Amortization | Amortization | Amortization | ||||||||||||||||||||||||
Remaining Life | Amortization | Amortization | and Impairment | and Impairment | and Impairment | and Impairment | |||||||||||||||||||||||
| (in months) at |
|
| and Impairment |
| and Impairment |
| Three Months |
| Nine Months |
| Three Months | Nine Months | Net Book Value |
| Net Book Value | |||||||||||||
June 30, | at June 30, | at September 30, | Ended June 30, | Ended June 30, | Ended June 30, | Ended June 30, | at June 30, |
| at September 30, | ||||||||||||||||||||
Intangible assets: |
| 2024 |
| Original Cost |
| 2024 |
| 2023 |
| 2024 |
| 2024 |
| 2023 |
| 2023 |
| 2024 |
| 2023 | |||||||||
| |||||||||||||||||||||||||||||
West Virginia Pipeline: | |||||||||||||||||||||||||||||
Customer Relationships | 78 | $ | 2,209,724 | 773,387 | $ | 607,661 | 55,242 | 165,726 | 65,643 | 186,532 | $ | 1,436,337 |
| $ | 1,602,063 | ||||||||||||||
Tradename | 78 | 263,584 | 92,273 | 72,500 | 6,591 | 19,773 | 6,591 | 19,773 | 171,311 |
| 191,084 | ||||||||||||||||||
Non-competes | — | 83,203 | 83,203 | 83,203 | — | — | — | 10,397 | — |
| — | ||||||||||||||||||
Revolt Energy: |
|
|
|
|
|
|
|
| |||||||||||||||||||||
Employment agreement/non-compete |
| — |
| 100,000 |
| 100,000 |
| 100,000 |
| — |
| — |
| 13,887 | 22,221 |
| — | — | |||||||||||
Tri-State Paving: | |||||||||||||||||||||||||||||
Customer Relationships | 94 | 1,649,159 | 357,318 | 233,631 | 41,229 | 123,687 | 41,229 | 123,687 | 1,291,841 | 1,415,528 | |||||||||||||||||||
Tradename | 94 | 203,213 | 44,029 | 28,789 | 5,080 | 15,240 | 5,080 | 15,241 | 159,184 | 174,424 | |||||||||||||||||||
Non-competes | — | 39,960 | 39,960 | 39,960 | - | - | 3,390 | 23,370 | — | — | |||||||||||||||||||
Total intangible assets | $ | 4,548,843 | $ | 1,490,170 | $ | 1,165,744 | $ | 108,142 | $ | 324,426 | $ | 135,820 | $ | 401,221 | $ | 3,058,673 | $ | 3,383,099 | |||||||||||
Depreciation and Amortization
The purpose of depreciation and amortization is to represent an accurate value of assets on the books. Every year, as assets are used, their values are reduced on the balance sheet and expensed on the income statement. As depreciation and amortization are a noncash expense, the amount must be estimated. Each year a certain amount of depreciation and amortization is written off and the book value of the asset is reduced.
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Property and equipment are recorded at cost. Costs which extend the useful lives or increase the productivity of the assets are capitalized, while normal repairs and maintenance that do not extend the useful life or increase productivity of the asset are expensed as incurred. Property and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets: buildings 39 years; operating equipment and vehicles 5-7 years; and office equipment, furniture and fixtures 5-7 years.
Acquired intangible assets subject to amortization are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible assets is realized, over their respective estimated useful lives. The definite-lived identifiable intangible assets recognized as part of the Company’s business combinations are initially recorded at their estimated fair value.
The Company’s depreciation expenses for the three months ended June 30, 2024 and 2023 were $2.2 million and $1.7 million, respectively. The Company’s depreciation expenses for the nine months ended June 30, 2024 and 2023 were $6.3 million and $5.4 million, respectively. In general, depreciation is included in “cost of revenues” on the Company’s consolidated statements of income.
The Company’s amortization expenses for the three months ended June 30, 2024 and 2023 were $108,142 and $135,820, respectively. The Company’s amortization expenses for the nine months ended June 30, 2024 and 2023 were $324,426 and $401,221, respectively. In general, amortization is included in “cost of revenues” on the Company’s consolidated statements of income.
Materially incorrect estimates of depreciation and amortization and/or the useful lives of assets could significantly impact the value of long-lived assets on the Company’s consolidated financial statements. A material overvaluation could result in impairment charges and reduced profitability for the Company.
Income Taxes
The Company’s income tax expenses and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0% to taxable income or loss after consideration of non-taxable and non-deductible items.
The income tax expense for the three months ended June 30, 2024 was $6.0 million as compared to $1.5 million for the three months ended June 30, 2023. The income tax expense for the nine months ended June 30, 2024 was $6.7 million as compared to 768,000 for the nine months ended June 30, 2023. The changes were due to an increase in taxable income for the three and nine months ended June 30, 2024, as compared to the same period in 2023.
The effective income tax rate for the three and nine months ended June 30, 2024, was 25.6% and 30.5%, respectively, as compared to 26.7% and 31.4%, respectively, for the same periods in 2023. 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.
Accounting for PPP Loans
The Company’s accounting for PPP loans reflects management’s best estimate of current and future amounts to be paid. The Company applies significant judgment regarding the determination of PPP loan forgiveness based on the rules established, and subsequently clarified by the SBA, including rules related to the Company’s affiliations and meeting SBA size standards.
Refer to Note 3 “Accounting for PPP Loans” in the accompanying consolidated financial statements for additional details.
New Accounting Pronouncements
On October 28, 2021, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments of this ASU require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for public business entities for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2022. For all other entities they are effective for the fiscal years,
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including interim periods within those the fiscal years, beginning after December 15, 2023. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The Company is currently assessing the effect that ASU 2021-08 will have on its results of operations, financial position and cash flows; however, the Company does not expect a significant impact.
Subsequent Events
On July 11, 2024, the Company’s Nitro subsidiary completed the acquisition of substantially all the physical assets of Heritage Painting, LLC, a West Virginia corporation located in Poca, West Virginia for $300,000 cash.
Management has evaluated all subsequent events for accounting and disclosure. There have been no other material events during the period, other than noted above, that would either impact the results reflected in the report or the Company’s results going forward.
Outlook
The following statements are based on current expectations. These statements are forward-looking, and actual results may differ materially.
The Company is seeing a significant increase in bid opportunities for natural gas transmission and distribution projects along with electrical, mechanical, and general construction projects. The Company’s unaudited backlog at June 30, 2024, was $250.9 million, as compared to $185.9 million and $229.8 million at June 30, 2023, and September 30, 2023, respectively. 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 third quarter of fiscal year 2024 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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PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously disclosed, in February 2018, the Company filed a lawsuit against a customer in the United States District Court for the Western District of Pennsylvania (the “District Court”). The lawsuit was related to a dispute over work performed on a pipeline construction project. On November 21, 2022, the District Court issued a judgment in favor of the Company. On April 17, 2024, the United States Court of Appeals for the Third Circuit (the “Appeals Court”) affirmed the decision of the District Court. In May 2024, the Appeals Court denied petitions for a rehearing. This upheld the award granted by the District Court in November 2022. The Company received an approximately $15.6 million payment related to the lawsuit in May 2024.
On November 12, 2021, the Company received a withdrawal liability claim from a pension plan to which the Company made pension contributions for union construction employees performing covered work in a particular jurisdiction. The Company has not performed covered work in their jurisdiction since 2011; however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law. The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021. The Company must comply with the demand under federal pension law; however, the Company firmly believes no withdrawal liability exists. The Company is in negotiations with the pension fund to resolve the matter and all future payments have been suspended as part of the negotiation. The Company has expensed all $164,000 in payments made through September 30, 2022 and does not expect any future liabilities related to this claim. The Company did not make any payments during the three and nine months ended June 30, 2024.
Other than described above, at June 30, 2024, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties, or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At June 30, 2024, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 1A. Risk Factors
Please see the information disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on January 16, 2024. There have been no material changes to the risk factors since the filing of the Annual Report on Form 10-K.
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ITEM 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities
| (a) | There have been no unregistered sales of equity securities during the period covered by the report. |
| (b) | None. |
| (c) | A table showing repurchases of Energy Services of America Corporation’s shares of its common stock during the three months ended June 30, 2024 is below: |
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| Value of Shares |
| Maximum Number of | |||||
Purchased as Part of | Shares That May Yet Be | |||||||||
Total Number of Shares | Average Price | Publicly Announced | Purchased Under the | |||||||
Period | Purchased | Paid Per Share | Plans or Programs (1) | Plans or Programs | ||||||
April 2024 | — | — | — | 934,478 | ||||||
May 2024 | 6,901 | $ | 6.00 | $ | 41,379 | 893,099 | ||||
June 2024 | — | — | — | 893,099 | ||||||
Total |
| 6,901 | $ | 6.00 | $ | 41,379 |
| 893,099 | ||
(1) | On July 6, 2022 the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would repurchase up to 1,000,000 shares, or approximately 6%, of the Company’s issued and outstanding stock. The repurchase program started on August 16, 2022 and has no expiration date. |
ITEM 5. Other Information
During the third fiscal quarter of 2024, none of our directors or officers
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ITEM 6. Exhibits
31.1 |
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31.2 | ||
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32 | ||
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101.INS | XBRL Instance Document | |
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101.SCH | XBRL Taxonomy Extension Schema Document | |
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101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
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101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
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: August 12, 2024 | By: | /s/ Douglas V. Reynolds |
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| Douglas V. Reynolds |
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| Chief Executive Officer |
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Date: August 12, 2024 | By: | /s/ Charles P. Crimmel |
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| Charles P. Crimmel |
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| Chief Financial Officer |
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