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.
Also, we often indemnify our customers for claims related to the services we provide and actions we take under our contracts
with them. Because our services in certain instances may be integral to the operation and performance of our customers’
infrastructure, we may become subject to lawsuits or claims for any failure of the systems we work on. While we carry
insurance to protect the Company against such claims, the outcomes of any of the lawsuits, claims or legal proceedings could
result in significant costs and diversion of management’s attention from the business. Payments of significant amounts,
even if reserved, could adversely affect our reputation, liquidity and results of operations.
13
We may incur liabilities or suffer
negative financial or reputational harm relating to occupational health and safety matters.
Our operations are
subject to extensive laws and regulations relating to the maintenance of safe conditions in the workplace. While we are constantly
monitoring our health and safety programs, our industry involves a high degree of operating risk and there can be no assurance
given that we will avoid significant liability exposure and/or be precluded from working for various customers due to high incident
rates.
Changes
by the government in laws regulating the industries we serve could reduce our sales volumes.
If the government enacts
legislation that has a serious impact on the industries we serve, it could lead to the curtailment of capital projects in those
industries and therefore lead to lower sales volumes for our Company.
Our failure to comply with environmental
laws could result in significant liabilities.
Our operations are
subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products,
polychlorinated biphenyls (PCBs) and other hazardous materials, as well as fuel storage. We also work around and under bodies of
water. We invest significantly in compliance with the appropriate laws and regulations. However, if we should inadvertently cause
contamination of waters or soils, liabilities for our Company relating to cleanup and remediation could be substantial and could
exceed any insurance coverage we might have and result in a negative impact to the Company’s ability to operate.
Risk Related to Ownership of our Stocks
We have sold Units, each consisting
of one share of 6.0% Convertible Perpetual Preferred Stock, Series A and 2,500 shares of Common Stock. If the Preferred Stock is
converted to Common Stock, shareholders may experience dilution of their ownership interest.
As of September 30,
2013, the Company sold 140 units in a private placement to accredited investors, with an additional 10 units sold during the fiscal
year ended September 30, 2014 for a total of 150 units. As a result of the private placement, an additional 375,000 shares of common
stock were outstanding as of September 30, 2020. The Company also issued 56 shares of Preferred Stock to Marshall Reynolds, Chairman
of the Board of Directors, in exchange for a debt forgiveness of $1.4 million. Mr. Reynolds did not receive any shares of common
stock in this transaction. In addition, if the Company elects to allow the holders of the Preferred Stock to choose to convert
their Preferred Stock into shares of common stock, we would issue an additional 3,433,333 shares of common stock, which will result
in shareholders experiencing a dilution in their ownership interest.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
The
Company and its subsidiaries own the property where its subsidiaries, C.J. Hughes and Nitro, and the Company’s headquarters
are located. We maintain our executive offices at 75 West 3rd Ave., Huntington, West Virginia 25701, which is also the
office of C.J. Hughes. Nitro’s office is located at 4300 1st Ave., Nitro, WV 25143. The Company’s
management believes that its properties are adequate for the business it conducts. Please see “Liquidity and Capital Resources”
on page 20 for a description of the mortgages on the Nitro properties.
14
ITEM 3. Legal Proceedings
In
February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction
project. The Company is seeking $10.0 million in the lawsuit, none of which has been recognized in the Company’s financial
statements. Although no trial date has been set, the Company expects the case to go to trial in fiscal year 2021 barring a mediation
settlement between the parties. Other than described above, at September 30, 2020, the Company was not involved in any legal
proceedings other than in the ordinary course of business. The Company is a party from time
to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically
seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages,
civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings,
we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At
September 30, 2020, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to
have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. Mine Safety Disclosures
None.
PART II
The Company’s common stock is quoted
under the symbol “ESOA” and transactions in the stock are reported on the OTC QB marketplace.
The following table
sets forth the range of high and low sales prices for common stock during each of the last two fiscal years and is based on information
provided by the OTC QB. The high and low “bid price”, as required to be disclosed by Regulation S-K, was not available
for certain periods because either these were not two-sided quotes by market makers or there was only one market maker with a two-sided
quote. Over the counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not
necessarily represent actual transactions.
Common Stock
Fiscal 2019 High Low Dividends
Fiscal 2020 High Low Dividends
As of September 30,
2020, there were 23 holders of record of our common stock. Certain shares of the Company’s common stock are held in “nominee”
or “street” name and accordingly the number of beneficial owners of common stock is not included in the number of record
holders.
15
On December 11, 2019,
the Company declared a $0.05 per share special dividend that was paid on December 31, 2019 to common stockholders of record as
of December 23, 2019. The special dividend totaled $696,117. The payment of cash dividends in the future will be contingent upon
our revenues and earnings, if any, capital requirements and general financial condition. The payment of any future dividends will
be within the discretion of our board of directors.
On August 3, 2018,
the Company announced that the Board of Directors authorized a stock repurchase program under which the Company could purchase
up to 10%, or approximately 1,423,984 shares, of the Company’s issued and outstanding common stock. The repurchase program
started on August 15, 2018 and expired on August 15, 2019. The program resulted in the repurchase of 305,908 shares.
On
August 22, 2019, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company
could purchase up to 10%, or approximately 1,393,393 shares, of the Company’s issued and outstanding common stock. The repurchase
program started on August 26, 2019 and expired on August 26, 2020. The Company suspended the repurchase program on April 27, 2020.
Accordingly, the Company made no repurchases of common stock during the fourth fiscal quarter of 2020. The program resulted in
the repurchase of 312,522 shares.
In
2010, the Board of Directors adopted, and our stockholders approved, the Energy Services of America Corporation Long Term
Incentive Plan (the “LTIP”), to provide our employees and directors with additional incentives to promote our growth
and performance. The LTIP gives us the flexibility we need to continue to attract and retain highly qualified employees and directors
by offering a competitive compensation program that is linked to the performance of our common stock.
(a) (b) (c)
Equity compensation plans approved by security holders - - 1,149,000
Equity compensation plans not approved by security holders - - -
16
ITEM 6. Selected Financial Data
Not
required for smaller reporting companies.
You
should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with
the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated
financial statements include more detailed information regarding the basis of presentation for the following information.
Understanding
Gross Margins
Our
gross margin is gross profit expressed as a percentage of revenues. Cost of revenues consists primarily of salaries, wages and
some benefits to employees, depreciation, fuel and other equipment costs, equipment rentals, subcontracted services, portions of
insurance, facilities expense, materials and parts and supplies. Factors affecting gross margin include:
Seasonal.
As discussed above, seasonal patterns can have a significant impact on gross margins.
Usually, business is slower in the winter months versus the warmer months.
Weather.
Adverse or favorable weather conditions can impact gross margin in each period.
Periods of wet weather, snow or rainfall, as well as severe temperature extremes can severely impact production and therefore negatively
impact revenues and margins. Conversely, periods of dry weather with moderate temperatures can positively impact revenues and margins
due to the opportunity for increased production and efficiencies.
Revenue
Mix. The mix of revenues
between customer types and types of work for various customers will impact gross margins. Some projects will have greater margins
while others that are extremely competitive in bidding may have narrower margins.
Service
and Maintenance versus Installation. In
general, installation work has a higher gross margin than maintenance work. This is because installation work usually is of a fixed
price nature and therefore has higher risks involved. Accordingly, a higher portion of the revenue mix from installation work typically
will result in higher margins.
Subcontract
Work. Work that is subcontracted to other service providers generally has
lower gross margins. Increases in subcontract work as a percentage of total revenues in each period may contribute to a decrease
in gross margin.
Materials
versus Labor. Typically, materials supplied on projects have lower margins
than labor. Accordingly, projects with a higher material cost in relation to the entire job will have a lower overall margin.
Depreciation.
Depreciation is included in our cost of revenue. This is a common practice in
our industry but can make comparability to other companies difficult.
Margin
Risk. Failure to properly execute a job including failure to properly manage
and supervise a job could decrease the profit margin.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries
and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees,
general liability insurance and miscellaneous other expenses.
17
Results
of Operations for the Year Ended September 30, 2020 Compared to the Year Ended September 30, 2019
Revenue.
Revenue decreased by $55.3 million or 31.7% to $119.2 million for the year ended September 30, 2020 from $174.5 million for the
year ended September 30, 2019. The decrease was primarily attributable to a $48.5 million revenue decrease in petroleum
and gas work, a $5.2 million revenue decrease in electrical and mechanical services and a $1.6 million revenue decrease in water
and sewer and other ancillary services.
The primary reason
for the decrease in revenue from petroleum and gas projects was due to a $74.0 million gas transmission project completed in fiscal
year 2019, and we had no similar project in fiscal year 2020. Even before the COVID-19 pandemic, many gas transmission projects
had been cancelled or delayed in 2020. While the gas and petroleum revenue decreased in fiscal year 2020, the Company continued
to perform the projects that were awarded. The decrease in revenue from electrical and mechanical services and water and sewer
and ancillary services was primarily due to projects suspended, delayed, or cancelled due to the COVID-19 pandemic.
Cost
of Revenues. Cost of revenues decreased by $56.2 million or 34.7% to $105.7
million for the year ended September 30, 2020 from $161.9 million for the year ended September 30, 2019. The decrease was
primarily attributable to a $52.3 million cost decrease in petroleum and gas work, a $5.3 million cost decrease in electrical and
mechanical services and a $361,000 cost decrease in water and sewer and other ancillary services, partially offset by a $1.8 million
costs increase in equipment and tool shop operations not allocated to projects.
The primary reason
for the decrease in costs from petroleum and gas projects was due to a $74.0 million gas transmission project completed in fiscal
year 2019, and we had no similar project in fiscal year 2020. Even before the COVID-19 pandemic, many gas transmission projects
had been cancelled or delayed in 2020. The decrease in costs from electrical and mechanical services and water and sewer and other
ancillary services was primarily due to projects suspended, delayed, or cancelled due to the COVID-19 pandemic. The
increase in shop costs was primarily due to a lower volume of projects and less internal equipment and tool costs allocated to
projects in fiscal year 2020 as compared to fiscal year 2019.
Gross
Profit. Gross profit increased by $821,000 or 6.5% to $13.5 million for the year ended September 30, 2020 from $12.7 million
for the year ended September 30, 2019. The increase was primarily attributable to a $3.8 million gross profit increase in
petroleum and gas work, and a $38,000 gross profit increase in electrical and mechanical services, partially offset by a $1.8 million
gross profit decrease in equipment and tool shop operations not allocated to projects and a $1.2 million gross profit decrease
in water and sewer and other ancillary services. The gross profit percentage was 11.4% for
the year ended September 30, 2020 and 8.6% for the year ended September 30, 2019.
The
primary reason for the gross profit increase in gas and petroleum work was projects started late in the Company’s third quarter
and early fourth quarter that exceeded profit expectations. The Company’s familiarity with the customer, project scope and
location allowed for greater productivity. The increase in gross profit from electrical and mechanical services was primarily due
to several projects that performed better than expected in the Company’s fourth quarter of fiscal year 2020. The gross profit
from those projects was offset by the gross profit lost due to the revenue decrease related to the COVID-19 pandemic. The decrease
in gross profit related to equipment and tool shop operations was primarily due to a lower volume of projects and less internal
equipment and tool costs allocated to projects in fiscal year 2020 as compared to fiscal year 2019. The gross profit decrease in
water and sewer and other ancillary services was primarily due to fewer and smaller projects and decreased productivity related
to the COVID-19 pandemic.
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A
table comparing the Company’s revenue and gross profit for the three and twelve months ended September 30, 2020 compared
to the three and twelve months ended September 30, 2019 is below:
Revenue
Three Months Ended Three Months Ended Twelve Months Ended Twelve Months Ended
Gross Profit
Three Months Ended Three Months Ended Twelve Months Ended Twelve Months Ended
Selling
and administrative expenses. Selling and administrative expenses increased by $974,000 or 11.0% to $9.8 million for the
year ended September 30, 2020 from $8.9 million for the year ended September 30, 2019. The increase was primarily due to the addition
of several key employees in an effort to expand the Company’s customer base and market the services the Company performs,
to manage the gas distribution services and to enhance the Company’s technological ability to track productivity and streamline
reporting. The Company also had increased labor expense related to the COVID-19 pandemic. Expenses for employees that utilized
the Families First Coronavirus Response Act were charged to selling and administrative expenses even if they were normally charged
to projects.
Income
from operations. Income from operations decreased by $153,000 or 4.0% to $3.7
million for the year ended September 30, 2020 from $3.8 million for the year ended September 30, 2019. The decrease was primarily
due to the items mentioned above.
Interest
Expense. Interest expense decreased by $578,000 or 54.3% to $486,000 for the
year ended September 30, 2020 from $1.1 million for the year ended September 30, 2019. This decrease was primarily due to
reduced line of credit borrowings and the repayment of long-term debt in early fiscal year 2020.
Net
Income. Income before income tax expense was $3.6 million for fiscal year 2020, compared to $3.0 million for fiscal
year 2019.
Income tax expense
for fiscal year 2020 was $1.1 million compared to $969,000 for fiscal year 2019. The effective tax expense rate for fiscal year
2020 was 32.0% as compared to 32.7% for fiscal year 2019. Effective income tax rates are estimates and may vary from period to
period due to changes in the amount of taxable income and non-deductible expenses. Per diem paid to the Company’s production
personnel, where required by contract and federal law, are the Company’s major source of non-deductible expenses. The non-deductible
portion of per diem was $530,000 and $879,000 in fiscal years 2020 and 2019, respectively.
19
Dividends on preferred
stock for fiscal years ended September 30, 2020 and 2019 were $309,000.
The
net income available to common shareholders was $2.1 million for the year ended September 30, 2020 compared to a net income available
to common shareholders of $1.7 million for the year ended September 30, 2019.
Comparison
of Financial Condition at September 30, 2020 Compared to September 30, 2019.
The
Company had total assets of $58.2 million at September 30, 2020, an increase of $2.3 million from the prior fiscal year end balance
of $55.9 million. Cash and cash equivalents totaled $11.2 million at September 30, 2020, an increase of $6.6 million from the prior
fiscal year end balance of $4.6 million. The increase was primarily related to the receipt of $9.8 million in operating funds,
a $4.5 million decrease in accounts receivable and retention, partially offset by a $3.7 million decrease in total debt and a $3.5
million investment in equipment. Prepaid expenses and other totaled $3.3 million at September 30, 2020, an increase of $600,000
from the prior fiscal year end balance of $2.7 million. The increase was primarily due to the increase of various prepaid insurance
accounts based on labor cost expensed or standard monthly charges. The aggregate balance of accounts receivable, retainages
receivable, allowance for doubtful accounts and other receivables totaled $20.7 million at September 30, 2020, a decrease of $4.4
million from the combined prior fiscal year end balance of $25.1 million. The decreases of
$3.4 million in accounts receivable and other receivables and $1.0 million in retainages receivable were due to collections under
contractual terms. Net property, plant and equipment totaled $16.4 million at September 30, 2020, a decrease of $423,000 from the
prior fiscal year end balance of $16.8 million. Property, plant and equipment acquisitions totaled $4.2 million for fiscal year
2020 while depreciation expense was $4.4 million, and the net impact of disposals was $189,000. Contract assets totaled $6.5 million
at September 30, 2020, a decrease of $114,000 from the prior fiscal year end balance of $6.7 million. This decrease was
primarily due to the decrease in costs and estimated earnings in excess of billings at September 30, 2020 as compared to at September
30, 2019.
Liabilities
totaled $32.3 million at September 30, 2020, an increase of $1.0 million from the prior fiscal year end balance of $31.3 million.
Accounts payable totaled $5.2 million as of September 30, 2020, an increase of $2.3 million from the prior fiscal year end balance
of $2.9 million. The increase was due to the timing of payments to material and equipment
providers. Contract liabilities totaled $4.9 million at September 30, 2020, an increase of $1.4 million from the prior fiscal year
end balance of $3.5 million. This increase was due to a larger number of overbillings when comparing the billed revenue and percentage
of cost completed on construction projects in 2020 as compared to 2019. Net deferred income tax payable totaled $2.3 million at
September 30, 2020, an increase of $330,000 from the prior fiscal year end balance of $1.9 million. The increase was primarily
due to deferred income tax payable resulting from bonus depreciation on fiscal year 2020 property, plant and equipment acquisitions.
Accrued expenses and other current liabilities totaled $4.2 million at September 30, 2020, an increase of $728,000 from the prior
fiscal year end balance of $3.5 million. The increase was primarily due to higher labor expenses incurred towards the end of fiscal
year 2020 compared to 2019. Lines of credit and short-term borrowings totaled $510,000 at September 30, 2020, a decrease of $3.5
million from the prior fiscal year end balance of $4.0 million. This decrease was primarily due to repayments against the Company’s
operating line of credit. The aggregate balance of current maturities of long-term debt and long-term debt totaled $15.3 million
at September 30, 2020, a decrease of $165,000 from the prior fiscal year end balance of $15.4 million. The decrease was primarily
due to repayment of the $10.0 million refinanced from line of credit borrowings to long-term debt, partially offset by $9.8 million
in proceeds from PPP loans.
Shareholders’
equity totaled $25.8 million at September 30, 2020, an increase of $1.1 million from the prior fiscal year end balance of $24.7
million. This increase was primarily due to the $2.4 million net income generated by the Company in fiscal year 2020, $696,000
in dividends paid on common stock, $309,000 in dividends paid on preferred stock and $268,000 from the repurchase of common shares
of Company stock.
20
Liquidity
and Capital Resources
Indebtedness
On December 16, 2014,
the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West
Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on
this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to
time based on changes in The U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve
weekly. As of September 30, 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.
21
Operating
Line of Credit
On July 30, 2020, the
Company received a one-year extension on its line of credit (“Operating Line of credit (2020)”) effective June 28,
2020. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each with separate
borrowing requirements. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index)
with a floor of 4.99%. The line of credit expires on June 28, 2021. Based on the borrowing base calculation, the Company was able
to borrow up to $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.
Major items excluded
from the borrowing base calculation are receivables from bonded jobs and retainage as well as all items greater than ninety (90)
days old. Line of credit borrowings are collateralized by the Company’s accounts receivable. Cash
available under the line is calculated based on 70.0% of the Company’s eligible accounts receivable.
Under
the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:
1. Minimum tangible net worth of $19.0 million to be measured quarterly
3. Minimum current ratio of 1.50x to be measured quarterly
Under
the terms of the agreement, the Company must meet the following additional requirements for draw requests causing the borrowings
to exceed $12.5 million:
2. Minimum tangible net worth of $21.0 million to be measured quarterly
The
Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2020) at September 30,
2020.
As
of September 30, 2020, the Company had $11.2 million in cash and $22.9 million in working capital. The maturities of long-term
and short-term debt, which includes line of credit borrowings, term notes payable to banks, and notes payable on various equipment
purchases, were as follows:
22
Off-Balance
Sheet Transactions
Due
to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that
result in risks not directly reflected on our balance sheets. Though for the most part not material in nature, some of these are:
Leases
In February 2016, the
FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is effective for public business entities for fiscal years
beginning after December 15, 2018 including interim periods within those fiscal years. Among other things, lessees are required
to recognize the following for all leases (except for short-term leases) at the commencement date: a lease liability, which is
a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset,
which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
It is the Company’s preference to acquire equipment needed for long-term use through purchase, by cash or finance. For equipment
needed on a short-term basis, the Company will enter into short-term rental agreements with the equipment provider where the agreement
is cancellable at any time. The adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.
The Company rents equipment
for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by fiscal
year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense was
$4.2 million and $10.0 million for fiscal years ended September 30, 2020 and 2019, respectively.
Letters
of Credit
Certain
of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure
payments to subcontractors, vendors, etc. on various customer projects. At September 30, 2020, the Company did not have
any outstanding letters of credit.
Performance
Bonds
Some
customers, particularly new ones or governmental agencies require the Company to post bid bonds, performance bonds and payment
bonds (collectively, performance bonds). These bonds are obtained through insurance carriers and guarantee to the customer that
we will perform under the terms of a contract and that we will pay subcontractors and vendors. If the Company fails to perform
under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services
under the bond. The Company must reimburse the insurer for any expenses or outlays it is required to make.
Currently,
the Company has an agreement with a surety company to provide bonding which will suit the Company’s immediate needs. The
ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and
value of contracts that can be bid.
Depending
upon the size and conditions of a particular contract, the Company may be required to post letters of credit or other collateral
in favor of the insurer. Posting of these letters or other collateral will reduce our borrowing capabilities. The Company does
not anticipate any claims in the foreseeable future. At September 30, 2020, the Company had $3.2 million in performance bonds outstanding.
23
Concentration
of Credit Risk
In
the ordinary course of business, the Company grants credit under normal payment terms, generally without collateral, to our customers,
which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within
the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that
would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided.
Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement
of receivables.
Please
see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable net of retention
for fiscal years 2020 and 2019:
TransCanada Corporation 24.7 % 11.8 %
Marathon Petroleum 11.1 % *
Goff Connector LLC * 29.0 %
* Less than 10.0% and included in "All other" if applicable
Accounts receivable net of retention FY 2020 FY 2019
Marathon Petroleum 19.7 % *
TransCanada Corporation 18.4 % 12.2 %
Shimizu North American LLC 11.9 % *
Goff Connector LLC * 22.0 %
* Less than 10.0% and included in "All other" if applicable
Litigation
In