10-K
1
tm2038975d1_10k.htm
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year ended September
30, 2020
OR
̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________
to ____________________
Commission File Number: 001-32998
Energy
Services of America Corporation
(Exact Name of Registrant as Specified
in its Charter)
75 West 3rd Ave., Huntington, West Virginia 25701
(Address of Principal Executive Office) (Zip Code)
(304) 522-3868
(Registrant’s Telephone Number including
area code)
Securities Registered
Pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbols Name of Each Exchange On Which Registered
None None None
Securities Registered Pursuant to Section
12(g) of the Act:
Common Stock, par value $0.0001 per
share
(Title of Class)
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ̈
NO x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ̈
NO x
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 filing requirements for the past 90 days. YES x
NO ̈
Indicate by check
mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). YES x NO ̈
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller
reporting company”, and an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ̈ Accelerated filer ̈
Non-accelerated filer x Smaller reporting company x
Emerging growth company ̈
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ̈
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
̈
Indicate by check
mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ̈
NO x
The aggregate market
value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing
price on March 31, 2020 was $ 6,493,066.
As of January 4, 2021,
there were issued and outstanding 14,839,836 and 13,621,406, respectively, shares of the Registrant’s Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
Energy Services
of America Corporation
Annual Report
on Form 10-K
For the Fiscal
Year Ended
September
30, 2020
Table of Contents
ITEM 1. Business 3
ITEM 1A. Risk Factors 10
ITEM 1B. Unresolved Staff Comments 14
ITEM 2. Properties 14
ITEM 3. Legal Proceedings 15
ITEM 4. Mine Safety Disclosures 15
ITEM 6. Selected Financial Data 17
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 32
ITEM 8. Financial Statements and Supplementary Data 32
ITEM 9A. Controls and Procedures 32
ITEM 9B. Other Information 33
ITEM 10. Directors, Executive Officers and Corporate Governance 34
ITEM 11. Executive Compensation 39
ITEM 14. Principal Accountant Fees and Services 46
ITEM 15. Exhibits and Financial Statement Schedules 47
Signatures 49
2
Forward Looking Statements
Within
Energy Services’ (as defined below) consolidated financial statements and this Annual Report on Form 10-K, there are included
statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking
statements” under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that
they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,”
“project,” “forecast,” “may,” “will,” “should,” “could,”
“expect,” “believe,” “intend” and other words of similar meaning.
These
forward-looking statements are not guaranteeing 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.
PART I
ITEM 1. Business
Overview
Energy Services of
America Corporation (“Energy Services” or the “Company”) operates primarily in the mid-Atlantic region
of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical
and power industries. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the
Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation
(“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects
managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes,
provides electrical, mechanical, HVAC/R and fire protection services to customers primarily in the automotive, chemical and power
industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as
a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own.
All of the C.J. Hughes, Nitro, and Contractors Rental production personnel are union members of various related construction trade
unions and are subject to collective bargaining agreements that expire at varying time intervals.
The Company’s
stock is quoted under the symbol “ESOA” on the OTC QB marketplace operated by the OTC Markets Group.
Energy
Services provides contracting services for utilities and energy related companies including gas, petroleum power, chemical, water
& sewer and automotive industries. For the gas industry, the Company is primarily engaged in the construction, replacement
and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services
is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry,
the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and
automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation
and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers
and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump
station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair
services and other services related to pipeline construction. The majority of the Company’s customers are located in West
Virginia, Virginia, Ohio, Pennsylvania, and Kentucky.
3
The
Company had consolidated operating revenues of $119.2 million for the year ended September 30, 2020, of which 47.8% was attributable
to gas & petroleum contract work, 43.3% to electrical and mechanical contract services, and 8.9% to water and sewer contract
installations and other ancillary services. The Company had consolidated operating revenues of $174.5 million for the year ended
September 30, 2019, of which 60.4% was attributable to gas & petroleum contract work, 32.6% to electrical and mechanical contract
services, and 7.0% to water and sewer contract installations and other ancillary services.
Energy Services’
customers include many of the leading companies in the industries it serves, including:
TransCanada Corporation
Columbia Gas Distribution
Marathon Petroleum
Mountaineer Gas
American Electric Power
Toyota Motor Manufacturing
Bayer Chemical
Dow Chemical
Kentucky American Water
WV American Water
Various state, county and municipal
public service districts.
Energy Services’
sales force consists of industry professionals with significant relevant sales experience, who utilize industry contacts and available
public data to determine how to most appropriately market the Company’s line of products. The Company relies on direct contact
between its sales force and customers’ engineering and contracting departments in order to obtain new business. The Company’s
website address is www.energyservicesofamerica.com.
COVID-19
Response
In March 2020, the
World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This coronavirus outbreak has significantly
impacted both the world and U.S. economies. In response to this coronavirus outbreak, the governments of many cities, counties,
states and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and
business operations and advising or requiring individuals to limit or forego their time outside of their homes which has created
significant uncertainties in the U.S. economy. In certain geographic regions in which the Company operates, temporary closures
of businesses have been ordered or suggested and numerous other businesses have temporarily closed voluntarily. Further, individuals'
ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary
or mandated closures of travel-related businesses.
Some of the procedures
that the Company has implemented to help protect employees from COVID-19 exposure are guidelines for social distancing, office
sanitation, hand washing, mask wearing, limited office admittance and immediate symptom reporting. The Company has provided personal
protective equipment and hand-sanitizers to employees and has made arrangements for administrative personnel to work from home.
The Company works closely with our customers to limit exposure risk and cooperate with symptom reporting and contact tracing.
Construction employees are required to meet all procedures established by our customers in addition to the Company’s own
procedures. The Company also followed the paid sick and expanded family and medical leave guidelines set forth in the Families
First Coronavirus Response Act. As of September 30, 2020, the Company has not had significant issues with COVID-19 exposure among
its employees.
4
Due to the economic
uncertainties created by COVID-19 and the limited operating funds available, the Company applied for loans under the Paycheck Protection
Program (“PPP”). On April 15, 2020, Energy Services of America Corporation and subsidiaries C.J. Hughes Construction
Company, Contractors Rental Corporation and Nitro Construction Services, Inc. entered into separate Paycheck Protection Program
Notes effective April 7, 2020 with United Bank, Inc. as the lender (“Lender”) in an aggregate principal amount of $13,139,100
pursuant to the PPP (collectively, the “PPP Loan”). In a special meeting held on April 27, 2020, the Board of Directors
of the Company unanimously voted to return $3.3 million of the PPP Loan funds after discussing the financing needs of the Company
and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. The Company had used
all the available PPP Loan funds as of September 30, 2020 and is in the process of filing for loan forgiveness with its Lender.
As of September 30,
2020, most of the Company’s existing customers had resumed projects that were affected by the March 2020 shutdowns. As a
result, the Company has increased its employment level of construction personnel as compared to March 31, 2020. Given the uncertainty
regarding the spread of this coronavirus, the related financial impact on the Company’s results of operations, financial
position, and liquidity or capital resources cannot be reasonably estimated at this time.
Seasonality:
Fluctuation of Results
Our
revenues and results of operations can and usually are subject to seasonal variations. These variations are the result of weather,
customer spending patterns, bidding seasons and holidays. The first quarter of the calendar year is typically the slowest in terms
of revenues because inclement weather conditions causes delays in production and customers usually do not plan large projects during
that time. While usually better than the first quarter, the second calendar year quarter often has some inclement weather which
can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. The third and
fourth calendar year quarters usually are less impacted by weather and usually have the largest number of projects underway. Many
projects are completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend
their capital budget for the year or scale back projects due to capital budget overruns.
In
addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures
in proportion to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers
are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.
Accordingly,
our operating results in any quarter or year may not be indicative of the results that can be expected for any other quarter or
any other year. You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Understanding
Gross Margins” below for discussions of trends and challenges that may affect our financial condition and results of
operations.
5
Financing Arrangements
On December 16, 2014,
the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West
Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on
this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to
time based on changes in The U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve
weekly. As of September 30, 2020, the Company had made principal payments of $232,000. The
loan is collateralized by the building purchased under this agreement.
On
September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank, Inc. This six-year agreement
gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase
of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment
Line of Credit were converted to a five-year term note agreement with an interest rate of 5.0%. As
of September 30, 2020, the Company had borrowed $2.46 million against this note and made principal payments of $2.0 million. The
loan is collateralized by the equipment purchased under this agreement.
On November 13, 2015,
the Company entered into a 10-year $1.1 million loan agreement with United Bank, Inc. to purchase the fabrication shop and property
Nitro had previously been leasing for $12,900 each month. The interest rate on the new loan agreement is 4.25% with monthly payments
of $11,602. As of September 30, 2020, the Company had made principal payments of $456,000.
The loan is collateralized by the building and property purchased under this agreement.
On
June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement
gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase
of equipment, for a period of three months with an interest rate of 4.99%. After three months, all borrowings against the Equipment
Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99%. As
of September 30, 2020, the Company had borrowed $5.0 million against this note and made principal payments of $3.0 million. The
loan is collateralized by the equipment purchased under this agreement.
On May 30, 2019, the
Company entered into Term Note 2019 with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019)
to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note was
to finance a specific construction project completed in September 2019. The loan was collateralized by the Company’s equipment.
The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect
the conditions of subsequent borrowings. The Company paid off Term Note 2019 in January
2020.
On April 15, 2020,
Energy Services of America Corporation and subsidiaries C.J. Hughes Construction Company, Contractors Rental Corporation and Nitro
Construction Services, Inc. entered into separate Paycheck Protection Program Notes effective April 7, 2020 with United Bank, Inc.
as the lender in an aggregate principal amount of $13,139,100 pursuant to the PPP (collectively, the “PPP Loan”). In
a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the
PPP Loan funds after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with
$9.8 million in PPP Loans to fund operations. The Company had used all the available PPP Loan funds as of September 30, 2020 and
is in the process of filing for loan forgiveness with its Lender.
On July 30, 2020,
the Company received a one-year extension on its line of credit (“Operating Line of credit (2020)”) effective
June 28, 2020. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each
with separate borrowing requirements. The interest rate on the line of credit is the “Wall Street Journal” Prime
Rate (the index) with a floor of 4.99%. The line of credit expires on June 28, 2021. Based on the borrowing base calculation,
the Company could borrow up to $11.1 million as of September 30, 2020. The Company had no borrowings on the line of credit,
leaving $11.1 million available on the line of credit as of September 30, 2020. Based on the borrowing base calculation, the
Company was able to borrow up to $11.5 million as of September 30, 2019. The Company had borrowed $3.5 million on the line of
credit, leaving $8.0 million available on the line of credit as of September 30, 2019. Please see page 23 for a description
of the $12.5 million and $2.5 million components and the borrowing base calculation.
6
Backlog/New Business
The Company’s
backlog represents contracts for services that have been entered into, but which have not yet been completed. At September 30,
2020, Energy Services had a backlog of $63.8 million of work to be completed on existing contracts. At September 30, 2019, the
Company had a backlog of $63.0 million. Due to the timing of Energy Services’ construction contracts and the long-term nature
of some of our projects, portions of our backlog work may not be completed in the current fiscal year. Most of the Company’s
projects can be completed in a short period of time, typically two to five months. Larger projects usually take seven to eighteen
months to be completed. As a rule, work starts shortly after the signing of the contract.
Types of Contracts
Energy Services’
contracts are usually awarded on a competitive and negotiated basis. While some contracts may be lump sum or time and material
projects, most of the work is bid based upon unit prices for various portions of the work with a total agreed-upon price based
on estimated units. The actual revenues produced from the project will be dependent upon how accurate the customer estimates are
as to the units of the various items.
Raw Materials and Suppliers
The principal raw materials
that the Company and its subsidiaries use are metal plate, structural steel, pipe, wire, fittings and selected engineering equipment
such as pumps, valves and compressors. For the most part, the largest portion of these materials are supplied by the customer.
The materials that the Company purchases are predominately those of a consumable nature on the job, such as small tools and environmental
supplies. The COVID-19 pandemic did not have a significant impact on the Company’s ability to obtain raw materials.
We anticipate being able to obtain these materials, as well as any raw materials not supplied by our customers, for the foreseeable
future.
Industry Factors
Energy Services’
revenues, cash flows and earnings are substantially dependent upon, and affected by, the level of natural gas exploration development
activity and the levels of work on existing pipelines as well as the level of demand for our electrical and mechanical services.
Such activity and the resulting level of demand for pipeline construction and related services and electrical and mechanical services
are directly influenced by many factors over which the Company has no control. Such factors include the market prices of natural
gas and electricity, market expectations about future prices, the volatility of such prices, the cost of producing and delivering
natural gas and electricity, government regulations and trade restrictions, local and international political and economic conditions,
the development of alternate energy sources, changes in the tax code that affect the energy industry, and the long-term effects
of worldwide energy conservation measures. Energy Services cannot predict the future level of demand for its construction services,
future conditions in the pipeline or electrical construction industry or future pipeline and electrical construction rates.
Competition
The pipeline
construction industry is a highly competitive business characterized by high capital and maintenance costs. Pipeline
contracts are usually awarded through a competitive bid process. The Company believes that operators consider factors such as
quality of service, type and location of equipment, or the ability to provide ancillary services. However, price and the
ability to complete the project in a timely manner are the primary factors in determining which contractor is awarded a job.
There are many regional and national competitors that offer services similar to Energy Services. Certain of the
Company’s competitors have greater financial and human resources than Energy Services, which may enable them to compete
more efficiently because of price and technology. The Company’s largest competitors are Otis Eastern, Miller Pipeline,
Brown Electric, Summit Electric and Apex Pipeline.
7
Operating Hazards and Insurance
Energy Services’
operations are subject to many hazards inherent in the pipeline construction business, including, for example, operating equipment
in mountainous terrain, people working in deep trenches and people working near large equipment. These hazards could cause personal
injury or death, serious damage to or destruction of property and equipment, suspension of drilling operations, or substantial
damage to the environment, including damage to producing formations and surrounding areas. Energy Services seeks protection against
certain of these risks through insurance, including property casualty insurance on its equipment, commercial general liability
and commercial contract indemnity, commercial umbrella and workers’ compensation insurance.
The Company’s
insurance coverage for property damage to its equipment is based on estimates of the cost of comparable used equipment to replace
the insured property. There is a deductible per occurrence on equipment of $2,500 and $500 for damage to miscellaneous tools. The
Company also maintains third party liability insurance, pollution and professional liability insurance, and a commercial umbrella
policy. Energy Services believes that it is adequately insured for public liability and property damage to others with respect
to its operations. However, such insurance may not be enough to protect Energy Services against liability for all consequences
related to its operations.
Government Regulation and Environmental
Matters
General.
Energy Services’ operations are affected from time to time in varying degrees by political developments and federal, state
and local laws and regulations. In particular, natural gas production, operations and the profitability of the gas industry are
or have been affected by price controls, taxes and other laws relating to the natural gas industry, by changes in such laws and
by changes in administrative regulations. Although significant capital expenditures may be required to comply with such laws and
regulations, to date, such compliance costs have not had a material adverse effect on the earnings or competitive position of Energy
Services. In addition, Energy Services’ operations are vulnerable to risks arising from the numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating to environmental protection. Energy Services may
also be affected by regulations designed to provide benefits to companies engaged in the production of alternative sources of energy,
such as solar, wind, and related industries.
Environmental
Regulation. Energy Services’ activities are subject to existing federal, state and local laws and regulations
governing environmental quality, pollution control and the preservation of natural resources. Such laws and regulations concern,
among other things, the containment, disposal and recycling of waste materials, and reporting of the storage, use or release of
certain chemicals or hazardous substances. Numerous federal and state environmental laws regulate drilling activities and impose
liability for discharges of waste or spills, including those in coastal areas. The Company has conducted pipeline construction
in or near ecologically sensitive areas, such as wetlands and coastal environments, which are subject to additional regulatory
requirements. State and federal legislation also provide special protections to animal and marine life that could be affected by
the Company’s activities. In general, under various applicable environmental programs, the Company may potentially be subject
to regulatory enforcement action in the form of injunctions, cease and desist orders and administrative, civil and criminal penalties
for violations of environmental laws. Energy Services may also be subject to liability for natural resource damages and other civil
claims arising out of a pollution event. The Company would be responsible for any pollution event that was determined to be caused
by its actions. It has insurance that it believes is adequate to cover any such occurrences.
Environmental regulations
that affect Energy Services’ customers also have an indirect impact on Energy Services. Increasingly stringent environmental
regulation of the natural gas industry has led to higher drilling costs and a more difficult and lengthier well permitting process.
The primary
environmental statutory and regulatory programs that affect Energy Services’ operations include the following:
Department of Transportation regulations, regulations set forth by agencies such as the Federal Energy Regulatory Commission
and various environmental agencies including the Environmental Protection Agency, and state and local government
agencies.
8
Health
and Safety Matters. Energy Services’ facilities and operations are also governed by various other laws and
regulations, including the federal Occupational Safety and Health Act, relating to worker health and workplace safety. The Occupational
Safety and Health Administration has issued the Hazard Communication Standard. This standard applies to all private-sector employers,
including the natural gas exploration and producing industry. The Hazard Communication Standard requires that employers assess
their chemical hazards, obtain and maintain certain written descriptions of these hazards, develop a hazard communication program
and train employees to work safely with the chemicals on site. Failure to comply with the requirements of the standard may result
in administrative, civil and criminal penalties. Energy Services believes that appropriate precautions are taken to protect employees
and others from harmful exposure to materials handled and managed at its facilities and that it operates in substantial compliance
with all Occupational Safety and Health Act regulations. It is not anticipated that Energy Services will be required to make material
expenditures by reason of such health and safety laws and regulations.
Please see “COVID-19
Response” above to see the steps the company has taken to ensure the health and safety of its workforce as it relates to
the COVID-19 pandemic.
Research and Development/Intellectual
Property
Energy Services has
not made any material expenditure for research and development. Energy Services does not own any patents, trademarks or licenses.
Employees and Human Capital Resources
Energy Services of
America believes the Company’s greatest asset is its employees. The Company’s emphasis on the health and safety of
its employees is an important factor in maintaining its experienced workforce and attracting new talent. As of September 30, 2020,
the Company had 553 employees. Non-union management and administrative employees totaled 108 and union construction workers totaled
445.
The Company’s
non-union management and administrative employees are all eligible to participate in the Company paid health, vision, dental, life,
prescription, and long-term disability insurance plans. The Company also provides employee paid supplemental life and accident
insurance plans. To encourage employees to keep up with routine medical care and participate in its wellness program, the Company
funds a Health Reimbursement Account for participating employees. To help employees cover medical expenses pre-tax, the Company
offers employees a Flexible Spending Account. The Company also offers employees a 401(k) retirement plan with a Company match.
The Company’s
union construction workers are represented by various collective bargaining units that provide health and welfare and retirement
plans to their members. The Company’s top priority is the safety of our construction employees. The Company’s experienced
safety department ensures that employees have the Company and customer required safety training before starting a project. Daily
and weekly safety meetings at project sites help employees remain aware of potential hazards. Periodic internal and third-party
safety audits are performed to help ensure that the Company’s and customer’s safety procedures are followed.
Early in the COVID-19
pandemic, the Company had customers that delayed or cancelled projects due to the uncertainty in the economy and health concerns.
During this time, the Company attempted to keep as many of its employees working as possible by moving crews to different projects
or shifting work responsibilities. The Company also worked closely to accommodate employees’ request to use the Families
First Coronavirus Relief Act and the Family Medical Leave Act.
9
ITEM 1A. Risk Factors
Our business is subject
to a variety of risks and uncertainties, including, but not limited to, the risk and uncertainties described below. The risks and
uncertainties described below are not the only ones we may face. Additional risks and uncertainties not known to us or not described
below also may impair our business operations. If any of the following risks actually occur, our business financial condition and
results of operations could be impacted, and we may not be able to achieve our expectations, projections, intentions or beliefs
about future events that are intended as “forward-looking statements” under Private Securities Litigation Reform Act
of 1995 and should be read in conjunction with the section entitled “Forward looking statements”.
Risk Related to our Operations
Our operating results may vary significantly
from quarter to quarter.
We typically experience
lower volumes and lower margins during the winter months due to lower demand for our pipeline services and more difficult operating
conditions. Also, other items that can materially affect our quarterly results include:
· Adverse weather;
· Variations in the mix of our work in any quarter;
· Shortage of qualified labor;
· Unfavorable regional, national or global economic and market conditions;
· A reduction in the demand for our services;
· Changes in customer spending patterns and need for the services we provide;
· Unanticipated increases in construction and design costs;
· Timing and volume of work we perform;
· Termination of existing agreements;
· Losses experienced not covered by insurance;
· Payment risks associated with customer financial condition;
· Changes in bonding requirements of agreements;
· Interest rate variations; and
· Changes in accounting pronouncements.
Risk Related to our Business
The type of contracts we obtain could
adversely affect our profitability.
We enter into various
types of contracts, including fixed price and variable pricing contracts. On fixed price contracts our profits could be curtailed
or eliminated by unanticipated pricing increases associated with the contract.
A portion of our business depends
on our ability to provide surety bonds. We may be unable to compete on certain projects if we are not able to obtain the necessary
surety bonds.
Current or future market
conditions, including losses in the construction industry or as a result of large corporate bankruptcies, as well as changes in
our surety providers’ assessment of our operating and financial risk, could cause our surety providers to decline to issue
or renew, or substantially reduce the amount of bonds for our work or could increase our bonding costs. These actions could be
taken on short notice. Since a growing number of our customers require such bonding, should our surety providers limit or eliminate
our access to bonding, our performance could be negatively impacted if we are unable to replace the bonded business with work that
does not require bonding or if we are unable to provide other means of securing the jobs performance such as with letters of credit
or cash.
10
Many of our contracts can be cancelled
or delayed or may not be renewed upon completion.
If our customers should
cancel or delay many projects, our revenues could be reduced if we are unable to replace these contracts with others. Also, we
have contracts that expire and are renewed periodically. If we are unsuccessful in renewing those contracts, that could reduce
our revenue as well.
Our business requires a skilled labor
force and if we are unable to attract and retain qualified employees, our ability to maintain our productivity could be impaired.
Our productivity depends
upon our ability to employ and maintain skilled personnel to meet our requirements. Should some of our key managers leave the Company,
it could limit our productivity. Also, many of our labor personnel are trade union members. Should we encounter labor problems
associated with our union employees or if we are unable to employ enough available operators, welders, or other skilled labor,
our production could be significantly curtailed.
Our backlog may not be realized.
Our backlog could be
reduced due to cancellation of projects by customers and/or reductions in scope of the projects. Should this occur, our anticipated
revenues would be reduced unless we are able to replace those contracts.
We extend credit to customers for
purchases of our services and therefore have risk that they may not be able to repay us.
While we have not had
any significant problems with collections of accounts receivables historically, should there be an economic downturn our customers’
ability to repay us could be compromised, and this may curtail our operations and ability to operate profitably.
Our dependence on suppliers, subcontractors
and equipment manufacturers could expose us to risk of loss in our operations.
On certain projects,
we rely on suppliers to obtain the necessary materials and subcontractors to perform portions of our services. We also rely on
equipment manufacturers to provide us with the equipment needed to conduct our operations. Any limitation on the availability of
materials or equipment or failure to complete work on a timely basis by subcontractors in a quality fashion could lead to added
costs and therefore lower profitability for the Company.
Risk Related to the COVID-19 Pandemic
We have operations in multiple states
and face risks related to the Coronavirus/COVID 19 global pandemic that could impact our results of operations.
Our business could
be adversely affected by the effects of the widespread outbreak of Coronavirus (“COVID-19”). The outbreak of COVID-19
and other adverse public health developments will have a material and adverse effect on our business operations. These could include
disruptions or restrictions on our ability to travel or to complete our projects, as well as temporary closures of our facilities
or the facilities of our suppliers or customers. Any disruption of our suppliers or customers would likely impact our operating
results. In addition, the continued outbreak of COVID-19 could continue to adversely affect the economies of the states that we
operate in resulting in a long-term economic downturn that could impact our operating results.
11
The SBA intends to audit the Company’s
PPP Loan and if the SBA disagrees with the Company’s certification the Company could be subject to penalties and the return
of the PPP Loan which could negatively impact the Company’s business, financial condition and results of operations and prospects.
On April 15, 2020,
the Company and subsidiaries C.J. Hughes Construction Company, Contractors Rental Corporation and Nitro Construction Services,
Inc. entered into separate Paycheck Protection Program Notes (the “Notes”) effective April 7, 2020 with United Bank,
Inc. as the lender (“Lender”) in an aggregate principal amount of $13,139,100 pursuant to the Paycheck Protection Program
under the CARES Act (collectively, the “PPP Loan”). In a special meeting held on April 27, 2020, the Board of Directors
of the Company unanimously voted to return $3.3 million of the PPP Loan funds after discussing the financing needs of the Company
and subsidiaries. The Company and subsidiaries retained $9.8 million of its PPP Loan to fund operations. The Company is in the
process of applying for loan forgiveness with its Lender, with the amount which may be forgiven equal to the sum of the payroll
costs, covered mortgage obligations, covered rent obligations and covered utility payments incurred by the Company during the twenty-four
week period beginning on the date of first disbursement to the Company under the PPP Loan, calculated in accordance with the terms
of the CARES Act. The PPP Loan may be forgiven so long as employee and compensation
levels of the Company are maintained and 60% of the PPP Loan proceeds are used for payroll expenses, with the remaining 40% of
the PPP Loan proceeds used for other qualifying expenses. The Company used the proceeds from the PPP Loan in accordance
with the PPP Loan program.
The SBA has announced,
in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, following the lender’s
submission of the borrower’s loan forgiveness application. The SBA will be reviewing a borrower’s required certification
that current economic uncertainty makes the PPP loan request necessary to support the ongoing operations of the Applicant. Borrowers
must make this certification in good faith, taking into account their current business activity and their ability to access other
sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.
The SBA has noted it is unlikely that a public company with substantial market value and access to capital markets will be able
to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request,
the basis for its certification.
The Company believes
it meets the SBA’s certification requirement based on its limited access to capital, weakened business operations and small
market value as described above. The Company’s shares of common stock do not trade on a national exchange. However, no assurance
can be given as to the outcome of the SBA’s audit of the Company’s PPP Loan. The SBA could determine that the Company
does not qualify in whole or in part for loan forgiveness. In addition, it is unknown what type of penalties could be assessed
against the Company if the SBA disagrees with the Company’s certification. The Company could be required to return its PPP
Loan. Any penalties in addition to the potential return of the PPP Loan could negatively impact the Company’s business, financial
condition and results of operations and prospects.
Risk Related to our Industry
An economic downturn in the industries
we serve could lead to less demand for our services.
In addition to the
effects of an economic recession, there could be reductions in the industries that the Company serves. If the demand for natural
gas should drop dramatically, or the demand for electrical services drops dramatically, these would in turn result in less demand
for the Company’s services.
Project delays or cancellations may
result in additional costs to us, reductions in revenues or the payment of liquidated damages.
In certain circumstances,
we guarantee project completion by a scheduled acceptance date or are paid only upon achievement of certain acceptance and performance
testing levels. Failure to meet any of these requirements could result in additional costs or penalties which could exceed the
expected project profits.
12
Our industry is highly competitive.
Our industry has been
and remains competitive with competitors ranging from small owner operated companies to large public companies. Within that group
there may be companies with lower overhead costs that may be able to price their services at lower levels than we can. Accordingly,
if that occurs, our business opportunities could be severely limited. In addition, our industry competes for energy demand with
suppliers of alternative energy sources such as solar and wind.
We may be unsuccessful at generating
internal growth.
Our ability to generate internal
growth will be affected by our ability to:
· Attract new customers;
· Expand our relationships with existing customers;
· Hire and maintain qualified employees;
· Expand geographically; and
· Adjust quickly to changes in our industry.
Risk Related to Financing
Credit facilities to fund our operations
and growth might not be available.
Our business relies
heavily on having lines of credit in place to fund the various projects we are working on. Should funding not be available, or
on favorable terms, it could severely curtail our operations and the ability to generate profits. Energy Services maintains a banking
relationship with two regional banks and has lines of credit and borrowing facilities with these institutions. On July 30, 2020,
the Company renewed its $15.0 million Operating Line of Credit (2020) with United Bank, WV. The line of credit expires on June
28, 2021. Based on covenant ratios, the Company qualifies for the first $12.5 million component but not the $2.5 million component.
Based on the borrowing base calculation, the Company could borrow up to $11.1 million as of September 30, 2020. The Company had
no borrowings on the line of credit, leaving $11.1 million available on the line of credit. The Company believes this line of credit
will provide enough operating capital for future projects, but the Company cannot guarantee it will always have access to this
line of credit in the future depending on the Company’s financial performance.
Risk Related to our Financial Performance
Revenue and cost estimates on projects
may differ from actual results.
The preparation of
these consolidated financial statements requires us to make estimates and assumptions that affect the 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. While the Company believes estimates on project
performance are materially correct at September 30, 2020, there can be no assurance that actual results will not differ from those
estimates.
Risk Related to Law and Regulatory Compliance
During the ordinary course of business,
we may become subject to lawsuits or indemnity claims, which could materially and adversely affect our business and results of
operations.
From time to
time, we may in the ordinary course of business be named as a defendant in lawsuits, claims and other legal proceedings.
These actions may seek, among other things, compensation for alleged personal injury, worker’s compensation, employment
discrimination, breach of contract, property damages, civil penalties and other losses of injunctive or declaratory relief.