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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended September 30, 2022

☐ 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 Symbol Name of Each ExchangeOn Which Registered

Common Stock, par value $0.0001per share ESOA The Nasdaq Stock Market, LLC

Securities Registered Pursuant to Section 12(g) of the Act:

None

(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☒

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☒

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☒ 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⌧ 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.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☒ Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant 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. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

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, 2022, was $ 24,004,287.

As of December 21, 2022, there were issued and outstanding 17,885,615 and 16,667,185, respectively, shares of the Registrant’s Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant incorporates by reference its definitive Proxy Statement with respect to its 2023 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of its fiscal year, into (Part III) of this Annual Report on Form 10-K.

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Energy Services of America Corporation

Annual Report on Form 10-K

For the Fiscal Year Ended

September 30, 2022

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ITEM 1. Business 3

ITEM 1A. Risk Factors 9

ITEM 1B. Unresolved Staff Comments 15

ITEM 2. Properties 15

ITEM 3. Legal Proceedings 15

ITEM 4. Mine Safety Disclosures 16

ITEM 6. Reserved 17

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk 33

ITEM 8. Financial Statements and Supplementary Data 33

ITEM 9A. Controls and Procedures 33

ITEM 9B. Other Information 34

ITEM 10. Directors, Executive Officers and Corporate Governance 34

ITEM 11. Executive Compensation 34

ITEM 14. Principal Accountant Fees and Services 35

ITEM 15. Exhibits and Financial Statement Schedules 36

ITEM 16. Form 10-K Summary 37

Signatures. 38

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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”), formed in 2006, is a contractor and service company that operates primarily in the mid-Atlantic and central regions of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers, and other ancillary work with regards thereto. Energy Services’ other 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 Company has also added the ability to install residential, commercial, and industrial solar systems and perform civil and general contracting services.

The Company had consolidated operating revenues of $197.6 million for the fiscal year ended September 30, 2022, of which 43.5% was attributable to electrical, mechanical, and general contract services, 29.5% to gas and petroleum transmission projects, and 27.0% to gas & water distributions services. The Company had consolidated operating revenues of $122.5 million for the fiscal year ended September 30, 2021, of which 48.9% was attributable to electrical, mechanical, and general contract services, 33.0% to gas & water distributions services, and 18.1% to gas and petroleum transmission projects.

Energy Services’ customers include many of the leading companies in the industries it serves, including:

TransCanada Corporation

NiSource, Inc.

Marathon Petroleum

Mountaineer Gas

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Dow Chemical

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Kentucky American Water

WV American Water

Various state, county and municipal public service districts.

The majority of the Company’s customers are in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky. However, the Company also performs work in other states including Alabama, Michigan, Illinois, Tennessee, and Indiana.

Energy Services’ sales force consists of industry professionals with significant relevant sales experience, who utilize industry contacts and available public data to determine how to market the Company’s line of products most appropriately. The Company relies on direct contact between its sales force and customers’ engineering and contracting departments to obtain new business.

A substantial portion of the Company’s workforce are union members of various construction related trade unions and are subject to separately negotiated collective bargaining agreements that expire at varying time intervals. The Company believes its relationship with its unionized workforce is good.

C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes.

Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, solar installation, and fire protection services to customers primarily in the automotive, chemical, and power industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own.

All C.J. Hughes, Nitro, and Contractors Rental construction personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.

West Virginia Pipeline, Inc. (“West Virginia Pipeline” or “WVP”), a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. The employees of West Virginia Pipeline are non-union and are managed independently from the Company’s union subsidiaries.

SQP Construction Group, Inc. (“SQP”), a wholly owned subsidiary of Energy Services, operates as a general contractor primarily in West Virginia. SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers. As a general contractor, SQP manages the overall construction project and subcontracts most of the work. The employees of SQP are non-union and are managed independently from the Company’s union subsidiaries.

Tri-State Paving & Sealcoating, Inc. (“TSP” or “Tri-State Paving”), a wholly owned subsidiary of Energy Services, completed the acquisition of substantially all of the assets of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”) on April 29, 2022. Tri-State Paving provides utility paving services to water distribution customers in the Charleston, West Virginia, Lexington, Kentucky, and Chattanooga, Tennessee markets. The employees of TSP are non-union and are managed independently from the Company’s union subsidiaries.

Ryan Construction Services Inc. (“Ryan Construction” or “RCS”), a wholly owned subsidiary of Energy Services, formed in August 2022 in connection with the acquisition of substantially all of the assets of Ryan Environmental, LLC and Ryan Environmental Transport, LLC, provides directional drilling services for broadband service providers along with offering natural gas distribution services, cathodic protection and corrosion prevention services, and civil construction services. Ryan Construction operates primarily in West Virginia and Pennsylvania. The employees of RCS are non-union and are managed independently from the Company’s union subsidiaries.

The Company’s website address is www.energyservicesofamerica.com.

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Recent Events

On October 6, 2021, the Company’s transfer agent completed the full redemption of all the Company’s 6.0% Convertible Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”), which resulted in the issuance of 2,626,492 new shares of the Company’s common stock, the issuance of 317,500 common shares that were included in Series A Preferred Stock units, and cash redemption payments of $1.3 million. The Company’s total outstanding common shares after redemption was 16,247,898 as of October 6, 2021.

On February 16, 2022, the stockholders of Energy Services approved the Company’s 2022 Equity Incentive Plan (the “Plan”), which provides for the grant of stock-based awards to officers and employees of the Company and its subsidiaries. The maximum number of shares of stock, in the aggregate, that may be granted under the Plan as stock options, restricted stock or restricted stock units is 1,500,000 shares. A description of the material terms of the Plan is contained in the Company’s definitive proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on January 11, 2022. No grants of stock-based awards were made during the fiscal year ended September 30, 2022.

On March 23, 2022, the Company’s common stock began trading on the Nasdaq Capital Market operated by The Nasdaq Stock Market, LLC under the symbol “ESOA”.

Pursuant to the Asset Purchase Agreement signed on April 6, 2022, and amended on April 29, 2022, the Company acquired substantially all the assets (including but not limited to customer contracts, employees, and equipment) of Tri-State Paving, LLC for $7.5 million in cash, a $1.0 million promissory note, and $1.0 million in Energy Services common stock. The $7.5 million in cash was funded through a loan with United Bank, Inc., Huntington, West Virginia (“United Bank”). The transaction resulted in the issuance of 419,287 common shares, bringing the total outstanding common shares to 16,667,185 as of April 29, 2022. David E. Corns continued his role as President of the Company’s new subsidiary, Tri-State Paving, which earned revenues of $4.9 million for the fiscal year ended September 30, 2022.

On July 6, 2022, the Company’s Board of Directors authorized a new share repurchase program (the “Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase amount not to exceed 1,000,000 shares, which was approximately 6.0% of its outstanding common stock as of the date of the announcement. The Program does not obligate the Company to purchase any number of shares, and there is no guarantee as to the exact number of shares to be repurchased by the Company. No repurchases were made in connection with the Program during the fiscal year ended September 30, 2022.

On August 11, 2022, Ryan Construction Services Inc., a newly formed wholly owned subsidiary of Energy Services, completed the acquisition of Ryan Environmental, LLC (“Ryan Environmental”), located in Bridgeport, WV, pursuant to an order issued by the United States Bankruptcy Court for the Northern District of West Virginia (the “Court”) on August 9, 2022 and Ryan Environmental Transport, LLC (“Ryan Transport”), located in Bridgeport, West Virginia, under the terms of an Asset Purchase Agreement. As part of the business combination, the Company acquired certain assets, including equipment, vehicles, and small tools, of Ryan Environmental for $3.0 million in cash and certain assets, including equipment and small tools, of Ryan Transport for $1.0 million in cash.

COVID-19 Response

For the fiscal year ended September 30, 2022, the Company did not have significant issues with COVID-19 exposure among its employees and most of the Company’s existing customers had resumed projects that were affected by COVID-19 shutdowns in fiscal 2021.

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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 cause delays in production and customers usually do not plan large projects during that time. While usually better than the first quarter, the second calendar year quarter often has some inclement weather which can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. The third and fourth calendar year quarters usually are less impacted by weather and usually have the largest number of projects underway. Many projects are completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.

In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations. As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.

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.

Paycheck Protection Program Loans

Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the Paycheck Protection Program (“PPP”). On April 15, 2020, Energy Services and subsidiaries, C.J. Hughes, Contractors Rental and Nitro entered into separate PPP notes effective April 7, 2020, with United Bank as the lender (“Lender”) in an aggregate principal amount of $13.1 million 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 Small Business Administration (“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 at the time of the loan made 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.

During fiscal year 2021, the Company received notice that the SBA had granted forgiveness of the $9.8 million of PPP borrowings and the SBA repaid the lending institution in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.

Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could still revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loan could negatively impact the Company’s business, financial condition and results of operations and prospects.

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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, 2022, Energy Services had a backlog of $142.3 million of work to be completed on existing contracts. At September 30, 2021, the Company had a backlog of $72.2 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. Whilesome 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. Purchases made by the Company are predominately those of a consumable nature, such as small tools, welding rod and environmental supplies. The COVID-19 pandemic has not had a significant impact on the Company’s ability to obtain materials and consumables for projects awarded. We anticipate being able to obtain materials for current work, as well as any raw materials not supplied by our customers, for the foreseeable future. However, the inability of our customers to obtain raw materials may delay projects from being bid, awarded, started, or completed. Although not a significant impact, the Company has experienced minor delays resulting from the availability of construction equipment and vehicles.

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, electrical, and mechanical construction industries are highly competitive and characterized by high capital and maintenance costs. 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.

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Operating Hazards and Insurance

Energy Services’ operations are subject to many hazards inherent in the pipeline, electrical, and mechanical construction businesses, including, for example, operating equipment in mountainous terrain, people working in deep trenches, people working near large construction equipment, and people working near manufacturing equipment and power sources. These hazards could cause personal injury or death, serious damage to or destruction of property and equipment, and 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.

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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.

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, 2022, the Company had 1,055 employees including 353 full-time non-union employees.

The Company’s non-union construction, 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.

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”.

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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;

● Supply chain constraints;

● Interest rate variations; and

● Changes in accounting and financial reporting standards.

Future acquisitions could disrupt the Company’s business and adversely affect our results of operations, financial condition and cash flows.

In fiscal 2022, the Company completed the acquisitions of Tri-State Paving and Ryan Construction. The Company may choose to expand by making additional acquisitions that could be material to its business, results of operations, financial condition and cash flows. Acquisitions involve many risks, including the following:

The occurrence of any of these risks could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

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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.

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.

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We face cybersecurity risk including the breach of confidential personal information, Company or customer intellectual properties, and delays related to data loss.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger and other systems. Our computer systems, data management and internal processes, as well as those of third parties, are integral to our performance. Our operational risks include the risk of malfeasance by employees or persons outside our company, errors relating to transaction processing and technology, systems failures or interruptions, breaches of our internal control systems, and business continuation and disaster recovery. There have been increasing efforts by third parties to breach data security. Such attacks include computer viruses, malicious or destructive code, phishing attacks, denial of service or information or other security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information, damages to systems, or other material disruptions to network access or business operations. The Company uses industry-leading firewall hardware and runs anti-malware, antivirus, and anti-exploit solutions on all computers as a first line of defense to prevent security breaches. The Company’s email software utilizes spam blocking, phishing filtering, and external sender warnings. The Company uses compartmentalized network drive access to mitigate ransomware damage and performs daily encrypted backups to secure offsite locations including a disaster recovery site.

Although we take protective measures and believe that we have not experienced any of the data breaches described above, the security of our computer systems, software, and networks may be vulnerable to breaches, unauthorized access, misuse, computer viruses, or other malicious code and cyber-attacks that could have an impact on information security. Because the techniques used to cause security breaches change frequently, we may be unable to proactively address these techniques or to implement adequate preventative measures.

Inflation can have an adverse impact on our business and on our customers.

Inflation risk is the risk that the value of assets or income will be worth less in the future as inflation decreases the value of money. Recently, there have been market indicators of a pronounced rise in inflation and the Federal Reserve has raised certain benchmark interest rates in an effort to combat inflation. Inflation generally increases the cost of goods and services we will use in our business operations, such as electricity and other utilities, which increases our expenses. In addition, we may have to increase both wages to retain our employees and the cost of our services by a greater amount than we have budgeted. Furthermore, our customers will also be affected by inflation and the rising costs of goods and services used in their businesses, which could have a negative impact on their ability to use our services and afford to pay our fees.

Societal responses to climate change could adversely affect our business and performance, including indirectly through impacts on our customers.

Concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts around the world to mitigate those impacts. Consumers and businesses also may change their behavior on their own as a result of these concerns. We and our customers will need to respond to new laws and regulations as well as consumer and business preferences resulting from climate change concerns. We and our customers may face cost increases, asset value reductions and operating process changes. The impact on our customers will likely vary depending on their specific attributes, including reliance on or role in carbon intensive activities. Among the impacts to us could be a drop in demand for our products and services, particularly in certain sectors. Our efforts to take these risks into account may not be effective in protecting us from the negative impact of new laws and regulations or changes in consumer or business behavior.

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 and related variants (“COVID-19”). The outbreak of COVID-19 and other adverse public health developments may 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.

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The SBA may review the Company’s PPP Loan forgiveness application and if the SBA disagrees with the Company’s certification the Company could be subject to penalties and the repayment of the PPP Loans, which could negatively impact the Company’s business, financial condition and results of operations and prospects.

In fiscal year 2021, the Company received notification of forgiveness on the $9.8 million in PPP loans received in calendar year 2020. The Company must retain PPP loan documentation in its files for six years after the date of forgiveness. The Company believes it meets the SBA’s certification requirement based on its limited access to capital, weakened business operations during the pandemic and small market value. The Company’s shares of common stock did not trade on a national exchange at the time we applied for PPP loans and at the time such loans were forgiven by the SBA.

The Company has not received any notifications related to an audit; however, the Company has provided additional payroll costs information for two companies as requested by the SBA through the Company’s lender. The Company has received no other requests or questions. However, no assurance can be given as to the outcome if the SBA re-evaluates the Company’s loan certification. 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 repay its PPP Loans. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.

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 and mechanical 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.

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.

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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 13, 2022, the Company renewed its $15.0 million operating line of credit with United Bank. Based on the borrowing base calculation, the Company could borrow up to $12.5 million as of September 30, 2022. The Company had borrowed $12.5 million on the line of credit as of September 30, 2022, leaving no borrowings available on the line of credit as of that date. The Company believes this line of credit will provide enough operating capital for future projects, but the Company and its lenders are working on a financing package that could expand the current operating line. 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, 2022, 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.

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.

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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.

Risks Relating to Ownership of Our Common Stock

Our common stock is not heavily traded, and the stock price may fluctuate significantly.

Our common stock is traded on the NASDAQ Capital Market under the symbol “ESOA.” Certain brokers currently make a market in the common stock, but such transactions are infrequent, and the volume of shares traded is relatively small. Management cannot predict whether these or other brokers will continue to make a market in our common stock. Prices on stock that is not heavily traded, such as our common stock, can be more volatile than heavily traded stock. Factors such as our financial results, the introduction of new products and services by us or our competitors, publicity regarding our industry, and various other factors may have a significant impact on the market price of the shares of the common stock. Management also cannot predict the extent to which an active public market for our common stock will develop or be sustained in the future. Accordingly, stockholders may not be able to sell their shares of our common stock at the volumes, prices, or times that they desire.

Our directors beneficially own a significant portion of our common stock and have substantial influence over us.

Our directors, as a group, beneficially owned approximately 36.1% of our outstanding shares of common stock as of September 30, 2022. As a result of this level of ownership, our directors have the ability, by taking coordinated action, to exercise significant influence over our affairs and policies. The interests of our directors may not be consistent with your interests as a stockholder. This influence may also have the effect of delaying or preventing changes of control or changes in management, or limiting the ability of our other stockholders to approve transactions that they may deem to be in the best interests of our Company.

ITEM 1B.Unresolved Staff Comments

None.

ITEM 2.Properties

The Company and its subsidiaries own the property where its subsidiaries, C.J. Hughes, Nitro, West Virginia Pipeline, SQP, Tri-State Paving and Ryan Construction 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 offices of C.J. Hughes and Contractors Rental. Nitro’s office is located at 4300 1st Ave., Nitro, WV 25143. West Virginia Pipeline’s office is located at 300 Pipeline Road, Princeton, WV 24739. SQP leases its office space and is located at 281 Smiley Drive, St Albans, WV 25177. TSP leases its office space and is located at 3384 Teays Valley Rd, Hurricane, WV 25526. Ryan Construction leases its office space and is located at 5793 W. Veterans Memorial Highway, Bridgeport, WV 26330. The Company’s management believes that its properties are adequate for the business it conducts. Please see “Liquidity and Capital Resources” for a description of the mortgages and leases on these properties.

ITEM 3.Legal Proceedings

In February 2018, the Company filed a lawsuit against a former customer (“Defendant”) in the United States District Court for the Western District of Pennsylvania. The lawsuit is related to a dispute over work performed on a pipeline construction project. On November 21, 2022, a Judgment Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest. The amounts awarded by the Judgment Order have not been recognized in the Company’s consolidated financial statements as of September 30, 2022. The Company’s attorney’s fees have been expensed as incurred. On December 16, 2022, the Defendant filed a notice of appeal with the court.

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On November 12, 2021, the Company received a withdrawal liability claim from a pension plan to which the Company made pension contributions for union construction employees performing covered work in a particular jurisdiction. The Company has not performed covered work in their jurisdiction since 2011; however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law. The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021. The Company must comply with the demand under federal pension law; however, the Company firmly believes no withdrawal liability exists. The Company is in negotiations with the pension fund to resolve the matter and all future payments have been suspended as part of the negotiation. The Company has expensed all $164,000 in payments made through September 30, 2022 and does not expect any future liabilities related to this claim.

Other than described above, at September 30, 2022, 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, 2022, 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

On March 23, 2022, the Company’s common stock began trading on the Nasdaq Capital Market operated by The Nasdaq Stock Market, LLC under the symbol “ESOA”. The Company’s common stock had previously been traded under the symbol “ESOA” on the OTCQB 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. 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 2021 High Low Dividends

Fiscal 2022 High Low Dividends

As of December 21, 2022, there were 31 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.

The Company did not repurchase any stock during the twelve months ended September 30, 2022 and 2021.

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ITEM 6. Reserved

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ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the 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 and Administrative Expenses

Selling 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.

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Results of Operations for the Fiscal Year Ended September 30, 2022, Compared to the Fiscal Year Ended September 30, 2021.

Revenue. A table comparing the components of the Company’s revenues for the fiscal years ended September 30, 2022, and 2021 is below:

Fiscal Year Ended

Revenue increased by $75.1 million, or 61.3%, to $197.6 million for the fiscal year ended September 30, 2022, from $122.5 million for the fiscal year ended September 30, 2021.

Gas & Water Distribution revenues totaled $53.3 million for the fiscal year ended September 30, 2022, a $12.9 million increase from $40.4 million for the fiscal year ended September 30, 2021. The revenue increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, contributed revenues of $4.9 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline revenue, acquired on December 31, 2020, resulted in $3.1 million in additional revenue during fiscal year 2022 as compared to 2021.

Gas & Petroleum Transmission revenues totaled $58.3 million for the fiscal year ended September 30, 2022, a $36.1 million increase from $22.1 million for the fiscal year ended September 30, 2021. The revenue increase was primarily related to an increase in the amount of bidding opportunities with both existing, long-term customers and newer customers.

Electrical, Mechanical, & General services and construction revenues totaled $86.0 million for the fiscal year ended September 30, 2022, a $26.1 million increase from $59.9 million for the fiscal year ended September 30, 2021. The revenue increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased revenues by $19.3 million in fiscal year 2022 as compared to 2021.

Cost of Revenues. A table comparing the components of the Company’s costs of revenues for fiscal years ended September 30, 2022 and 2021, is below:

Fiscal Year Ended

September 30, 2022 % of total September 30, 2021 % of total Change % Change

Total cost of revenues increased by $65.7 million or 60.0% to $175.2 million for the fiscal year ended September 30, 2022, from $109.5 million for the fiscal year ended September 30, 2021.

Gas & Water Distribution cost of revenues totaled $41.7 million for the fiscal year ended September 30, 2022, a $9.2 million increase from $32.5 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, had cost of revenues of $3.1 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline cost of revenues, acquired on December 31, 2020, resulted in $1.8 million in additional cost of revenues during fiscal year 2022 as compared to 2021.

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Gas & Petroleum Transmission cost of revenues totaled $54.9 million for the fiscal year ended September 30, 2022, a $37.7 million increase from $17.2 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily related to an increase in the amount of bidding opportunities with both existing, long-term customers and newer customers. The Company has one gas transmission project that is projected to lose $2.1 million.

Electrical, Mechanical, & General services and construction cost of revenues totaled $79.1 million for the fiscal year ended September 30, 2022, a $23.5 million increase from $55.6 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased costs of revenues by $16.4 million in fiscal year 2022 as compared to 2021.

Gross Profit. A table comparing the components of the Company’s gross profit for fiscal years ended September 30, 2022, and 2021, is below:

Fiscal Year Ended

Gross profit percentage 11.3 % 10.6 %

Total gross profit increased by $9.5 million or 73.1% to $22.4 million for the fiscal year ended September 30, 2022, from $12.9 million for the fiscal year ended September 30, 2021.

Gas & Water Distribution gross profit totaled $11.6 million for the fiscal year ended September 30, 2022, a $3.6 million increase from $8.0 million for the fiscal year ended September 30, 2021. The gross profit increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, contributed gross profit of $1.8 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline gross profit, acquired on December 31, 2020, resulted in $1.3 million in additional gross profit during the fiscal year 2022 as compared to 2021.

Gas & Petroleum Transmission gross profit totaled $3.4 million for the fiscal year ended September 30, 2022, a $1.5 million decrease from $4.9 million for the fiscal year ended September 30, 2021. The gross profit decrease was primarily related to one gas transmission project that is projected to lose $2.1 million.

Electrical, Mechanical, & General services and construction gross profit totaled $6.9 million for the fiscal year ended September 30, 2022, a $2.6 million increase from $4.3 million for the fiscal year ended September 30, 2021. The gross profit increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased gross profit by $3.0 million in the fiscal year 2022 as compared to 2021.

Gross profit attributed to unallocated shop operations totaled $506,000 for the fiscal year ended September 30, 2022, a $4.8 million increase from $4.3 million in unallocated shop expenses for the fiscal year ended September 30, 2021. The gross profit increase was primarily due to increased internal equipment charges to projects and better project costs tracking for the fiscal year ended September 30, 2022, as compared to 2021.

Selling and administrative expenses. Total selling and administrative expenses increased by $1.9 million to $15.9 million for the fiscal year ended September 30, 2022, from $14.0 million for the fiscal year ended September 30, 2021. Approximately $700,000 of the selling and administrative expense increase for the fiscal year ended September 30, 2022 as compared to the prior fiscal year, was from the operations of the new subsidiaries, Tri-State Paving and Ryan Construction. In addition, the Company incurred approximately $1.6 in million additional selling and administrative expenses related to a full twelve months of activity for West Virginia Pipeline and SQP in the fiscal year 2022 as compared to 2021.

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Income from operations. Income from operations was $6.5 million for the fiscal year ended September 30, 2022, a $7.6 million increase from a $1.1 million loss from operations for the fiscal year ended September 30, 2021. The increase was due to the items described above.

Interest Expense. Interest expense increased by $331,000 or 59.3% to $888,000 for the fiscal year ended September 30, 2022, from $557,000 for the fiscal year ended September 30, 2021. This increase was primarily due to increased line of credit borrowings and financing the financing of acquisitions.

Other Income. Other income totaled $507,000 for the fiscal year ended September 30, 2022, as compared to other income of $10.7 million for the fiscal year ended September 30, 2021. The decrease in other income was primarily related to $9.8 million of PPP loan debt forgiveness recognized during the fiscal year ended September 30, 2021. Please see the “Paycheck Protection Program Loans” disclosure on page 9.

Net Income. Income before income taxes was $6.1 million for the fiscal year ended September 30, 2022, compared to $9.1 million for the fiscal year ended September 30, 2021. The $3.0 million decrease was primarily due to a one-time $9.8 million PPP loan debt forgiveness in the fiscal year 2021, partially offset by a $7.6 million increase in income from operations.

The income tax expense for fiscal year ended September 30, 2022 was $2.3 million compared to an income tax benefit of ($29,000) for the fiscal year ended September 30, 2021. The increase was due to an increase in taxable income. According to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress in March 2020, PPP loan forgiveness is not taxable. In accordance with the Consolidated Appropriations Act, 2021, the Company’s PPP related expenditures in the fiscal year 2020 were considered deductible expenses for federal income tax purposes.

The effective income tax rate for the fiscal year ended September 30, 2022 was 37.0%. The effective income tax rate for the fiscal year ended September 30, 2021, was (0.32%). The PPP forgiveness had a significant impact on the effective income tax rate for the fiscal year ended September 30, 2021, as taxable income was decreased by $9.8 million. Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income or loss, non-taxable items and nondeductible expenses.

Dividends on preferred stock for the fiscal years ended September 30, 2022, and 2021 were $0 and $284,000, respectively. There will be no further dividends paid on preferred stock after the October 6, 2021 redemption of all the Company’s preferred stock.

Net income available to common stockholders for the fiscal year ended September 30, 2022 was $3.9 million compared to $8.8 million for the fiscal year ended September 30, 2021. The decrease was due to the items mentioned above.

Comparison of Financial Condition at September 30, 2022 Compared to September 30, 2021.

The Company had total assets of $112.6 million at September 30, 2022, an increase of $42.4 million from the prior the fiscal year-end balance of $70.2 million.

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $42.9 million at September 30, 2022, an increase of $20.4 million from the combined prior the fiscal year-end balance of $22.5 million. The increase was primarily due to increased work in the fiscal year 2022 as compared to 2021. Specifically, $69.4 million in revenue was generated in the fourth quarter of fiscal year 2022 as compared to $39.6 million for the same period in 2021.

Net property, plant and equipment totaled $32.7 million at September 30, 2022, an increase of $9.7 million from the prior the fiscal year-end balance of $23.0 million. Property, plant and equipment acquisitions totaled $15.6 million for the fiscal year 2022 while depreciation expense was $5.6 million, and the net impact of disposals was $316,000. Assets received as part of the Tri-State Paving and Ryan Construction acquisitions accounted for $8.9 million of the $15.6 million in total acquisitions.

Contract assets totaled $16.1 million at September 30, 2022, an increase of $7.4 million from the prior the fiscal year-end balance of $8.7 million. This increase was primarily due to increased work and the timing of project billings and related increase in costs and estimated earnings in excess of billings at September 30, 2022 as compared to at September 30, 2021.

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Goodwill and acquired intangible assets totaled $8.0 million at September 30, 2022, a $3.7 million increase from the prior fiscal year end balance of $4.2 million. The increase to goodwill and acquired intangible assets was primarily the result of the Tri-State Paving acquisition which goodwill and acquired intangible assets totaled $4.2 million at September 30, 2022, and was partially offset by $445,000 in amortization expense for fiscal year 2022.

Right-of-use assets acquired from operating leases totaled $1.6 million net of amortization expense, as compared to no right-to-use assets at the prior the fiscal year end. The operating leases were primarily related to the business combinations completed in the fiscal year ended September 30, 2022.

Prepaid expenses and other totaled $3.9 million at September 30, 2022, an increase of $401,000 from the prior the fiscal year-end balance of $3.5 million. The increase was primarily due to the increase of various prepaid insurance accounts based on labor cost expensed or standard monthly charges.

Cash and cash equivalents totaled $7.4 million at September 30, 2022, a decrease of $799,000 from the prior the fiscal year-end balance of $8.2 million. The decrease was primarily related to a net $8.3 million investment in property and equipment, $4.3 million in long-term debt repayments, and $1.2 million in preferred stock conversion payments, partially offset by a net $4.7 million increase in line of credit and short-term borrowings and $8.3 million in net cash provided by operating activities.

Liabilities totaled $74.3 million at September 30, 2022, an increase of $38.8 million from the prior the fiscal year-end balance of $35.5 million.

Accounts payable totaled $20.3 million as of September 30, 2022, an increase of $13.0 million from the prior the fiscal year-end balance of $7.3 million. The increase was due to more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021.

Lines of credit and short-term borrowings totaled $13.1 million at September 30, 2022, an increase of $8.1 million from the prior the fiscal year-end balance of $5.0 million. This increase was primarily due to increased borrowings against the Company’s operating line of credit because or more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021.

Accrued expenses and other current liabilities totaled $11.3 million at September 30, 2022, an increase of $5.7 million from the prior the fiscal year-end balance of $5.6 million. The increase was primarily due to increased labor and burden expenses incurred towards the end of the fiscal year 2022, as compared to the same period in fiscal 2021.

The aggregate balance of current maturities of long-term debt and long-term debt totaled $17.6 million at September 30, 2022, an increase of $5.2 million from the prior the fiscal year-end balance of $12.4 million. The increase was primarily due to a $8.4 million increase related to financing the Tri-State Paving acquisition and $940,000 in equipment financing, partially offset by $4.3 million in payments on long-term debt.

Contract liabilities totaled $6.0 million at September 30, 2022, an increase of $2.8 million from the prior the fiscal year-end balance of $3.2 million. This increase was due to increased billings in excess of costs and earnings when computing earned revenue on construction projects at September 30, 2022, as compared to at September 30, 2021.

Operating lease liabilities totaled $1.6 million at September 30, 2022, an increase of $1.6 million from the prior fiscal year end balance. See “Leases” on page 29 for a discussion of operating leases added in the fiscal year 2022.

Net deferred income tax payable totaled 4.5 million at September 30, 2022, an increase of $2.5 million from the prior the fiscal year-end balance of $2.0 million. The increase was primarily related to a net operating loss (“NOL”) carryforward resulting from bonus depreciation on acquired assets.

Stockholders’ equity totaled $38.3 million at September 30, 2022, an increase of $3.7 million from the prior the fiscal year-end balance of $34.6 million. This increase was primarily due to $3.9 million in net income and a $1.0 million increase in additional paid in capital related to stock issued as part of the Tri-State Paving acquisition, partially offset by $1.2 million in preferred stock redemption payments.

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Liquidity and Capital Resources

Operating Line of Credit and Short-Term Borrowings

On July 13, 2022, the Company received a one-year extension on its operating line of credit effective June 28, 2022. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component. The Company can borrow from the $12.5 million component first and then from the additional $2.5 million component if additional requirements are met. The covenant requirements for both components are below. Based on the borrowing base calculation, the Company borrowed all $12.5 million available on the line of credit as of September 30, 2022. The Company did not meet the requirements to borrow any from the $2.5 million component. The Company expects to receive an amendment to increase its line of credit by December 31, 2022.

The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%. The interest rate at September 30, 2022, was 5.5%. Based on the borrowing base calculation, the Company was able to borrow up to $12.2 million as of September 30, 2021. The Company had $4.5 million in borrowings on the line of credit, leaving $7.7 million available on the line of credit as of September 30, 2021. The interest rate at September 30, 2021, was 4.99%.

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 $21.5 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 $24.0 million to be measured quarterly.

The Company was not in compliance with all covenants but received a waiver on the $12.5 million component of the line of credit at September 30, 2022. The Company projects to be in compliance with all covenants associated with the $12.5 million component for the next twelve months.

The Company also finances insurance policy premiums on a short-term basis through a financing company. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. The Company makes a down payment in January and finances the remaining premium amount over ten monthly payments. In January 2022 and 2021, respectively, the Company financed $3.4 million and $3.2 million in insurance premiums. At September 30, 2022 and 2021, respectively, the remaining balance of the insurance premiums was $580,000 and $540,000.

Long-Term Debt

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with a bank to purchase the office building and property it had previously been leasing 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, 2022, the Company had made principal payments of $333,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc., formerly First Bank of Charleston, Inc. (West Virginia).

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On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month. The variable interest rate on the loan agreement is 7.25% at September 30, 2022 with monthly payments of $12,193. As of September 30, 2022, the Company had made principal payments of $687,000. 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. 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% with monthly payments of $98,865. As of September 30, 2022, the Company had repaid this note in full.

On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West Virginia Pipeline, Inc. For the purchase price allocation, the $3.0 million note had a fair value of $2.85 million. As part of the $6.35 million acquisition price, the Company paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires annual payments of at least $500,000 with a fixed interest rate of 3.25% on the $3.0 million sellers’ note, which equates to 5.35% on the carrying value of the note. As of September 30, 2022, the Company had made annual installment payments of $500,000, interest payments of $152,000 and expensed $53,000 in accreted interest.

On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $3.0 million line of credit (“Equipment Line of Credit 2021”), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal. After twelve months, all borrowings against the Equipment Line of Credit 2021 were converted to a four-year term note agreement with a variable interest rate initially established at 4.25%. The loan is collateralized by the equipment purchased under this agreement. As of September 30, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022. The interest rate at September 30, 2022 was 7.25%. The Company has made principal payments of $451,000 on this note as of September 30, 2022.

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition. This loan has monthly installment payments of $64,853 and has a fixed interest rate of 4.25%. The loan is collateralized by the Company’s equipment and receivables. As of September 30, 2022, the Company had made principal payments of $971,000.

On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%. The Company has made principal payments of $518,000 on this note as of September 30, 2022.

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri-State Paving. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company recorded $7,800 in accreted interest and has not made any principal payments on this note as of September 30, 2022.

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:

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As of September 30, 2022, the Company had $7.4 million in cash and $15.1 million in working capital (defined as current assets less current liabilities).

Leases

The Company leases office space for SQP for $1,500 per month. The lease, signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term. Rental terms for the option periods shall be negotiated and agreed mutually between the parties and shall not exceed five percent increases to rent, if any. The lease is expensed monthly and not treated as a right-to-use asset as it does not have a material impact on the Company’s consolidated financial statements.

During fiscal year ended September 30, 2022, the Company entered into two lease agreements for construction equipment for a combined $160,000. The leases have a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and are cancellable at any time without penalty. The Company has the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The right-of-use assets and finance lease obligations associated with these lease agreements are included in the consolidated balance sheets within property, plant and equipment and long-term debt, respectively, and do not have a material impact on the Company’s consolidated financial statements.

The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving transaction. The first operating lease, for the Hurricane, WV facility, had a net present value of $236,000 at April 29, 2022, and a carrying value of $205,000 at September 30, 2022. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at April 29, 2022, and a carrying value of $119,000 at September 30, 2022. The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate at inception.

The Company has a right-of-use operating lease with Enterprise Fleet Management, Inc. acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for 31 vehicles to be used for Ryan Construction; however, the Company plans to add vehicles as it finds necessary. This lease had a net present value of $1.2 million at inception, which approximates the carrying value at September 30, 2022. The 4.5% interest rate on the operating lease is based on the Company’s incremental borrowing rate at inception.

The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022, as part of the Ryan Environmental acquisition. This lease, for the Bridgeport, WV facility, had a net present value of $140,000 at inception and a carrying value of $113,000 at September 30, 2022. The 4.5% interest rate on the operating lease is based on the Company’s incremental borrowing rate at inception.

The maturities of the Company’s operating lease liabilities were as follows:

Less amounts representing interest (119,807)

Present value of operating lease liabilities $ 1,604,277

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:

Rental Agreements

The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by the fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the consolidated statements of income, was $9.8 million and $3.6 million for the twelve months ended September 30, 2022, and 2021, respectively.

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Letters of Credit

Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors, vendors, etc. on various customer projects. At September 30, 2022, 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 performance bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond. The Company must reimburse the insurer for any expenses or outlays it is required to make.

Currently, the Company has an agreement with a surety company to provide bonding which will suit the Company’s immediate needs. The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and value of contracts that can be bid. Depending upon the size and conditions of a particular contract, the Company may be required to post letters of credit or other collateral in favor of the insurer. Posting 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, 2022, the Company had $82.8 million in performance bonds outstanding.

Concentration of Credit Risk

In the ordinary course of business, the Company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.

Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable, net of retention for the fiscal years ended September 30, 2022, and 2021:

TransCanada Corporation 16.6 % 11.0 %

* Less than 10.0% and included in “All other” if applicable

Accounts receivable, net of retention FY 2022 FY 2021

TransCanada Corporation 11.6 % 13.2 %

Kentucky American Water * 16.3 %

* Less than 10.0% and included in “All other” if applicable

Virtually all work performed for major customers was awarded under competitive bid fixed price or unit price arrangements. The loss of a major customer could have a severe impact on the profitability of operations of the Company. However, due to the nature of the Company’s operations, the major customers and sources of revenues may change from year to year.

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Litigation

Related Party Transactions

We intend that all transactions between us and our executive officers, directors, holders of 10% or more of the shares of any class of our common stock and affiliates thereof, will be on terms no less favorable than those terms given to unaffiliated third parties and will be approved by a majority of our independent outside directors not having any interest in the transaction.

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of September 30, 2022, the Company had paid approximately $333,000 in principal and approximately $370,000 in interest since the beginning of the loan. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Samuel Kapourales, a director of Energy Services, was also a director of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, held the same position with Premier Financial Bancorp, Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and was a director of Premier Financial Bancorp, Inc. On September 17, 2021, Peoples Bancorp, Inc., parent company of Peoples Bank, completed an acquisition of Premier Financial Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank and Citizens Deposit Bank & Trust. On October 26, 2021, Mr. Douglas Reynolds was elected a director of Peoples Bancorp, Inc., and its subsidiary Peoples Bank.

On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises as partial consideration for the purchase of Tri-State Paving. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company recorded $7,800 in accreted interest and has not made any principal payments on this note as of September 30, 2022.

Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns Enterprises. This thirty-six-month lease is treated as a right to use asset and has payments of $7,000 per month. The total net present value at inception was $236,000 with a carrying value of $205,000 at September 30, 2022.

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SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022. Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier Ventures, LLC (“Ventures”) and 25% owned by SQP. SQP is not the primary beneficiary of the VIE and therefore, will not consolidate Development into its consolidated financial statements. Instead, SQP will apply the equity method of accounting for its investment in Development. Development, a 1% owner, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”). Landlord decided to pursue the following development project (the “Project”): a historical building at 1030 Quarrier Street, Charleston, West Virginia as well as associated land (the “Property”) was purchased to be developed/rehabilitated into a commercial project including apartments and commercial space. Upon the completion of development, the Property will be used to generate rental income. SQP has been awarded the construction contract for the Project. United Bank provided $5.0 million in loans to fund the Project. SQP and Ventures has jointly provided an unconditional guarantee for the $5.0 million of obligations associated with the Project.

Other than mentioned above, there were no new material related party transactions entered into during the fiscal year ended September 30, 2022.

Certain Energy Services subsidiaries routinely engage in transactions in the normal course of business with each other, including sharing employee benefit plan coverage, payment for insurance and other expenses on behalf of other affiliates, and other services incidental to business of each of the affiliates. All revenue and related expense transactions, as well as the related accounts payable and accounts receivable have been eliminated in consolidation.

Inflation

Most significant project materials, such as pipe or electrical wire, are provided by the Company’s customers. The Company did experience costs increases on materials for fire protection projects, which had been bid several months prior, during the twelve months ended September 30, 2022. While significant to those smaller projects, the costs increases were immaterial to the overall operations of the Company. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material costs increases in bids. Where allowed by contract, the Company will address fuel cost increases with customers. Significant inflation or supply chain issues could cause customers to delay or cancel planned projects; however, inflation did not have a significant effect on our results for the twelve months ended September 30, 2022, and 2021.

Critical Accounting Estimates

The discussion and analysis of the Company’s financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. Management believes the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenues

The Company recognizes revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. For Lump Sum and Unit Price contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. For Cost Plus and Time and Material (“T&M”) contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward satisfaction of the performance obligation(s) using an output method. The Company also does certain T&M service work that is generally completed in a short duration and is recognized at a point in time.

The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. We believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:

● the completeness and accuracy of the original bid;

● costs associated with scope changes;

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● changes in costs of labor and/or materials;

● extended overhead and other costs due to owner, weather and other delays;

● subcontractor performance issues;

● changes in productivity expectations;

● site conditions that differ from those assumed in the original bid;

● changes from original design on design-build projects;

● a change in the availability and proximity of equipment and materials;

● the customer’s ability to properly administer the contract.

The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects could have, a significant effect on our profitability.

Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.

Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.

The following table presents our costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings at September 30, 2022 and 2021:

Costs and estimated earnings in excess of billed on

Less billings in excess of costs and estimated earnings on

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Allowance for doubtful accounts

The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customers’ access to capital, our customers’ willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. While most of our customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves.

Materially incorrect estimates of bad debt reserves could result in an unexpected loss in profitability for the Company. Additionally, frequently changing reserves could be an indication of risky or unreliable customers. At September 30, 2022, the management review deemed that the allowance for doubtful accounts was adequate.

Please see the allowance for doubtful accounts table below:

Year Ended September 30,

Charged to expense — —

Deductions for uncollectible receivables written off, net of recoveries — —

Impairment of goodwill and intangible assets

The Company follows the guidance of Accounting Standards Codification (“ASC”) 350-20-35-3 “Intangibles-Goodwill and Other (Topic 350)” which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0). If a company fails this test or decides to bypass this step, it must proceed with a quantitative assessment of goodwill impairment. The Company did not have a goodwill impairment at September 30, 2022.

Materially incorrect estimates could cause an impairment to goodwill or intangible assets and result in a loss in profitability for the Company.

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A table of the Company’s intangible assets subject to amortization is below:

Accumulated Accumulated Amortization and

Amortization and Amortization and Impairment

West Virginia Pipeline:

Revolt Energy:

Tri-State Paving:

Depreciation and Amortization

The purpose of depreciation and amortization is to represent an accurate value of assets on the books. Every year, as assets are used, their values are reduced on the balance sheet and expensed on the income statement. As depreciation and amortization are a noncash expense, the amount must be estimated. Each year a certain amount of depreciation and amortization is written off and the book value of the asset is reduced.

Property and equipment are recorded at cost. Costs which extend the useful lives or increase the productivity of the assets are capitalized, while normal repairs and maintenance that do not extend the useful life or increase productivity of the asset are expensed as incurred. Property and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets: buildings 39 years; operating equipment and vehicles 5-7 years; and office equipment, furniture and fixtures 5-7 years.

Acquired intangible assets subject to amortization are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible assets is realized, over their respective estimated useful lives. The definite-lived identifiable intangible assets recognized as part of the Company’s business combinations are recorded at their estimated fair value.

The Company’s depreciation expense for the twelve months ended September 30, 2022, and 2021 was $5.6 million and $4.7 million, respectively. In general, depreciation is included in “cost of revenues” on the Company’s consolidated statements of income.

The Company’s amortization expense for the twelve months ended September 30, 2022, and 2021 was $445,000 and $231,000, respectively. In general, amortization is included in “cost of revenues” on the Company’s consolidated statements of income.

Materially incorrect estimates of depreciation and amortization and/or the useful lives of assets could significantly impact the value of long-lived assets on the Company’s consolidated financial statements. A material over valuation could result in impairment charges and reduced profitability for the Company.

Income Taxes

The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0% to taxable income or loss after consideration of non-taxable and non-deductible items.

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Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were 37.0% and (0.3%) for the twelve months ended September 30, 2022 and 2021, respectively. Our tax rate is affected by recurring items, such as non-deductible expenses, which we expect to be fairly consistent in the near term.

On June 16, 2021, the Company received notice that the SBA had granted forgiveness and repaid $9.8 million of Paycheck Protection Program (“PPP”) borrowings to its lender. The forgiveness was recorded as “other nonoperating income” for the twelve months ended September 30, 2021. According to the CARES Act passed by Congress in March 2020, PPP loan forgiveness is not taxable. In accordance with the Consolidated Appropriations Act, 2021, the Company’s PPP related expenditures in the fiscal year 2020 were considered deductible expenses for federal income tax purposes. The PPP forgiveness had a significant impact on the effective income tax rate for the twelve months ended September 30, 2021, as taxable income was decreased by $9.8 million.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. At September 30, 2022, the Company had a net deferred income tax liability of $4.5 million as compared to $2.0 million at September 30, 2021. The Company’s deferred income tax liabilities at September 30, 2022 totaled $7.7 million and primarily related to depreciation on property and equipment. The Company’s deferred income tax assets at September 30, 2022, totaled $3.2 million and primarily related to a NOL carryforward. The Company believes that it is more likely than not that all NOL carryforwards will be realized.

New Accounting Pronouncements

On October 28, 2021, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The amendments of this ASU require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for public business entities for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2022. For all other entities they are effective for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2023. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The Company is currently assessing the effect that ASU 2021-08 will have on their results of operations, financial position and cash flows; however, the Company does not expect a significant impact.

The FASB recently issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”, which aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements. Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date. Retrospective application of the guidance is permitted. The guidance in ASU 2021-10 is effective for financial statements of all entities for annual periods beginning after December 15, 2021, with early application permitted. ASU 2021-10 has not become effective for the Company; however, a significant impact is not expected.

Subsequent Events

On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank to finance the Ryan Environmental acquisition. This is a five-year agreement with a fixed interest rate of 6.0% and monthly payments of $59,932 beginning on November 10, 2022.

In February 2018, the Company filed a lawsuit against a former customer in the United States District Court for the Western District of Pennsylvania. The lawsuit is related to a dispute over work performed on a pipeline construction project. On November 16, 2022, a Judgement Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest. None of the award had been recognized in the Company’s consolidated financial statements as of September 30, 2022. The Company’s attorney’s fees have been expensed as incurred. On December 16, 2022, the Defendant filed a notice of appeal with the court.

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Management has evaluated all subsequent events for accounting and disclosure. There have been no other material events during the period, other than noted above, that would either impact the results reflected in the report or the Company’s results going forward.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

ITEM 8.Financial Statements and Supplementary Data

Financial Statements are included at page F-1 of this Annual Report on Form 10-K.

ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

(b) Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting refers to the process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:

(1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management has used the framework set forth in the report entitled “Internal Control–Integrated Framework 2013” published by the Committee of Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of the Company’s internal control over financial reporting. Management has not identified any material weakness in the Company’s internal control over financial reporting. Management has concluded that the Company’s internal control over financial reporting was effective as of the end of the most recent the fiscal year.

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This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only Management’s report in this Annual Report.

There has been no change in Energy Services of America Corporation’s internal control over financial reporting during Energy Services of America Corporation’s fourth quarter of the fiscal year 2022, that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.

ITEM 9B.Other Information

None.

ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not Applicable.

PART III

ITEM 10.Directors, Executive Officers and Corporate Governance

The Company has adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics was previously filed as an exhibit to our Registration Statement on Form S-1. A copy of the Code will be furnished without charge upon written request to the Corporate Secretary, Energy Services of America Corporation, 75 West 3rd Ave., Huntington, West Virginia 25701.

The information contained under the sections captioned “Proposal I – Election of Directors” in the Company’s definitive Proxy Statement for the 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2022 (the “Proxy Statement”) is incorporated herein by reference.

ITEM 11.Executive Compensation

The information contained under the section captioned “Proposal I – Election of Directors – Executive and Director Compensation” in the definitive Proxy Statement is incorporated herein by reference.

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

(a)Securities Authorized for issuance under Stock-Based Compensation Plans

The following table presents certain information regarding our Equity Compensation Plan in effect as of September 30, 2022:

Number of securities to be Number of securities

issued upon exercise of Weighted average remaining available for

Plan outstanding options and rights exercise price issuance under plan

Equity compensation plans approved by stockholders — — 1,500,000

Equity compensations plans not approved by stockholders — — —

(b)Security Ownership of Certain Beneficial Owners

The information required by this item is incorporated herein by reference to the section captioned “Security Ownership of Certain Beneficial Owners” in the Proxy Statement.

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(c)Security Ownership of Management

The information required by this item is incorporated herein by reference to the section captioned “Proposal I – Election of Directors” in the Proxy Statement.

(d)Changes in Control

Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

Energy Services of America CORP ESOA US Equity

ESOA · 10-K · period ended 2022-09-30

ITEM 1.Business

ITEM 1A.Risk Factors

ITEM 1B.Unresolved Staff Comments

ITEM 2.Properties

ITEM 3.Legal Proceedings

ITEM 4.Mine Safety Disclosures

ITEM 6. Reserved

ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8.Financial Statements and Supplementary Data

ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

ITEM 9A.Controls and Procedures

ITEM 9B.Other Information

ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

ITEM 10.Directors, Executive Officers and Corporate Governance

ITEM 11.Executive Compensation

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

ITEM 13.Certain Relationships and Related Transactions, and Director Independence

Energy Services of America CORP ESOA US Equity☆

ESOA · 10-K · period ended 2022-09-30

ITEM 1.Business

ITEM 1A.Risk Factors

ITEM 1B.Unresolved Staff Comments

ITEM 2.Properties

ITEM 3.Legal Proceedings

ITEM 4.Mine Safety Disclosures

ITEM 6. Reserved

ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

ITEM 8.Financial Statements and Supplementary Data

ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

ITEM 9A.Controls and Procedures

ITEM 9B.Other Information

ITEM 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

ITEM 10.Directors, Executive Officers and Corporate Governance

ITEM 11.Executive Compensation

ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

ITEM 13.Certain Relationships and Related Transactions, and Director Independence

Energy Services of America CORP ESOA US Equity