Company Quick10K Filing
Energy Services of America
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 17 $16
10-K 2019-12-20 Annual: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-Q 2019-02-14 Quarter: 2018-12-31
10-K 2018-12-28 Annual: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-14 Quarter: 2018-03-31
10-Q 2018-02-13 Quarter: 2017-12-31
10-K 2017-12-15 Annual: 2017-09-30
10-Q 2017-08-11 Quarter: 2017-06-30
10-Q 2017-05-11 Quarter: 2017-03-31
10-Q 2017-02-13 Quarter: 2016-12-31
10-K 2016-12-15 Annual: 2016-09-30
10-Q 2016-08-11 Quarter: 2016-06-30
10-Q 2016-05-12 Quarter: 2016-03-31
10-Q 2016-02-11 Quarter: 2015-12-31
10-K 2015-12-17 Annual: 2015-09-30
10-Q 2015-08-12 Quarter: 2015-06-30
10-Q 2015-05-11 Quarter: 2015-03-31
10-Q 2015-02-13 Quarter: 2014-12-31
10-K 2014-12-18 Annual: 2014-09-30
10-Q 2014-08-12 Quarter: 2014-06-30
10-Q 2014-05-12 Quarter: 2014-03-31
10-Q 2014-02-14 Quarter: 2013-12-31
10-K 2013-12-20 Annual: 2013-09-30
10-Q 2013-08-13 Quarter: 2013-06-30
10-Q 2013-05-10 Quarter: 2013-03-31
10-Q 2013-02-14 Quarter: 2012-12-31
10-K 2012-12-28 Annual: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-14 Quarter: 2012-03-31
10-Q 2012-02-10 Quarter: 2011-12-31
10-K 2011-12-22 Annual: 2011-09-30
10-Q 2011-08-12 Quarter: 2011-06-30
10-Q 2011-05-11 Quarter: 2011-03-31
10-Q 2011-02-14 Quarter: 2010-12-31
10-K 2010-12-21 Annual: 2010-09-30
10-Q 2010-08-09 Quarter: 2010-06-30
10-Q 2010-05-14 Quarter: 2010-03-31
10-Q 2010-02-12 Quarter: 2009-12-31
8-K 2020-01-13 Earnings, Exhibits
8-K 2019-12-20 Earnings, Exhibits
8-K 2019-12-11 Other Events, Exhibits
8-K 2019-12-10 Earnings, Exhibits
8-K 2019-08-23 Earnings, Exhibits
8-K 2019-08-21 Other Events, Exhibits
8-K 2019-08-14 Earnings, Exhibits
8-K 2019-06-19 Officers
8-K 2019-05-15 Earnings, Exhibits
8-K 2019-05-14 Officers
8-K 2019-02-20 Shareholder Vote
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-12-28 Earnings, Exhibits
8-K 2018-08-14 Earnings, Exhibits
8-K 2018-08-03 Other Events, Exhibits
8-K 2018-05-14 Earnings, Exhibits
8-K 2018-02-22 Shareholder Vote
8-K 2018-02-16 Earnings, Exhibits
8-K 2018-02-13 Earnings, Exhibits
8-K 2018-01-09 Other Events, Exhibits
ESOA 2019-09-30
Part I
Item 1.Business
Item 1A.Risk Factors
Item 1B.Unresolved Staff Comments
Item 2.Properties
Item 3.Legal Proceedings
Item 4.Mine Safety Disclosures
Part II
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.Selected Financial Data
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
Part III
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
Item 14.Principal Accountant Fees and Services
Part IV
Item 15.Exhibits and Financial Statement Schedules
Item 16.Form 10-K Summary
EX-4.2 tm1919819d1_ex4-2.htm
EX-21 tm1919819d1_ex21.htm
EX-23 tm1919819d1_ex23.htm
EX-31.1 tm1919819d1_ex31-1.htm
EX-31.2 tm1919819d1_ex31-2.htm
EX-32 tm1919819d1_ex32.htm

Energy Services of America Earnings 2019-09-30

ESOA 10K Annual Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
TKLS 16 1 3 2 -0 -5 -4 16 -5% -4.1 -524%
OPCO 16 18 5 28 8 1 1 16 29% 12.5 6%
PAOS 16 21 11 38 9 3 4 19 23% 4.4 12%
FUTU 16 1 10 1 0 -8 -8 15 42% -1.8 -682%
ESOA 16 63 40 187 13 2 4 34 7% 8.9 4%
CLCS 15 0 5 0 0 -3 -3 15 -4.6 -4,239%
HMMR 15 4 4 0 0 -3 -2 15 0% -8.0 -69%
SRRE 15 184 67 8 2 47 52 -4 19% -0.1 26%
AMAR 15 1 1 0 0 -1 -1 14 6% -12.5 -122%
FXS 15 15 0 0 0 -0 -0 -124 1,936.1 -2%

10-K 1 tm1919819d1_10k.htm FORM 10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the Fiscal Year ended September 30, 2019

 

OR

 

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

 

For the transition period from ____________________ to ____________________

 

Commission File Number: 001-32998

 

Energy Services of America Corporation

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   20-4606266
(State or Other Jurisdiction of Incorporation or Organization)   (I.R.S. Employer Identification Number)

 

75 West 3rd Ave., Huntington, West Virginia   25701
(Address of Principal Executive Office)   (Zip Code)

 

(304) 522-3868

(Registrant’s Telephone Number including area code)

 

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

 

Title of Each Class Trading Symbols

Name of Each Exchange

On Which Registered

None None None

 

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

 

Common Stock, par value $0.0001 per share

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and an “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨ Accelerated filer ¨
       
Non-accelerated filer x Smaller reporting company x
       
    Emerging growth company ¨

 

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

 

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price on March 31, 2019 was $ 9,267,020.

 

As of December 1, 2019, there were issued and outstanding 14,839,836 and 13,899,492, respectively, shares of the Registrant’s Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None

 

 

 

 

 

 

Energy Services of America Corporation

Annual Report on Form 10-K

For the Fiscal Year Ended

September 30, 2019

 

Table of Contents

 

ITEM 1.  Business  3
ITEM 1A.  Risk Factors  9
ITEM 1B.  Unresolved Staff Comments  12
ITEM 2.  Properties  12
ITEM 3.  Legal Proceedings  13
ITEM 4.  Mine Safety Disclosures  13
ITEM 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  13
ITEM 6.  Selected Financial Data  15
ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations  15
ITEM 7A.  Quantitative and Qualitative Disclosures about Market Risk  29
ITEM 8.  Financial Statements and Supplementary Data  30
ITEM 9.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure  30
ITEM 9A.  Controls and Procedures  30
ITEM 9B.  Other Information  31
ITEM 10.  Directors, Executive Officers and Corporate Governance  31
ITEM 11.  Executive Compensation  37
ITEM 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters  42
ITEM 13.  Certain Relationships and Related Transactions, and Director Independence  44
ITEM 14.  Principal Accountant Fees and Services  45
ITEM 15.  Exhibits and Financial Statement Schedules  46
ITEM 16.  Form 10-K Summary  47
Signatures     48

 

 

 

 

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”) was formed in 2006 as a special purpose acquisition corporation, or blank check company, and became an operating entity on August 15, 2008. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C. J. Hughes, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro operates primarily in the mid-Atlantic region of the United States. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All of the C.J. Hughes, Nitro, and Contractors Rental production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals. S.T. Pipeline, Inc., is a wholly owned subsidiary of the Company whose operations was liquidated on May 14, 2013. It was previously presented as a discontinued operation through September 30, 2018, but now is no longer presented separately in Energy Services’ 2019 financial statement presentation.

 

The Company’s stock is quoted under the symbol “ESOA” on the OTC QB marketplace operated by the OTC Markets Group.

 

3

 

 

Energy Services is engaged in providing contracting services for energy related companies. Currently Energy Services primarily services the gas, petroleum, power, chemical and automotive industries, though it does some other incidental work such as water and sewer projects. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company’s customers are in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as build and replace gas line services to individual customers of the various utility companies.

 

The Company had consolidated operating revenues of $174.5 million for the year ended September 30, 2019, of which 60.4% was attributable to gas & petroleum contract work, 32.6% to electrical and mechanical contract services, and 7.0% to water and sewer contract installations and other ancillary services. The Company had consolidated operating revenues of $135.5 million for the year ended September 30, 2018, of which 51.5% was attributable to gas & petroleum contract work, 41.7% to electrical and mechanical contract services, and 6.8% to water and sewer contract installations and other ancillary services.

 

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

 

Full Stream Goff Connector, LLC

TransCanada Corporation

Columbia Gas Distribution

Marathon Petroleum

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Dow Chemical

Kentucky American Water

Various state, county and municipal public service districts.

 

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

 

4

 

 

Seasonality: Fluctuation of Results

 

Our revenues and results of operations can and usually are subject to seasonal variations. These variations are the result of weather, customer spending patterns, bidding seasons and holidays. The first quarter of the calendar year is typically the slowest in terms of revenues because inclement weather conditions causes delays in production and customers usually do not plan large projects during that time. While usually better than the first quarter, the second calendar year quarter often has some inclement weather which can cause delays in production, reducing the revenues the Company receives and/or increasing the production costs. The third and fourth calendar year quarters usually are less impacted by weather and usually have the largest number of projects underway. Many projects are completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.

 

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

 

Accordingly, our operating results in any quarter or year may not be indicative of the results that can be expected for any other quarter or any other year. You should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Understanding Gross Margins” below for discussions of trends and challenges that may affect our financial condition and results of operations.

 

Financing Arrangements

 

On January 31, 2014, the Company entered into a financing arrangement (“Term Note”) with United Bank, Inc. (“United Bank”) and Summit Community Bank. The financing arrangement was a five-year term loan in the amount of $8.8 million. In addition, the Company entered into a separate five-year term loan agreement with First Guaranty Bank for $1.6 million, which was later refinanced by United Bank, Inc. Both loans were collateralized by the Company’s accounts receivable and equipment and were paid off during the second quarter of fiscal year 2019.

 

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to time based on changes in The U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. The loan is collateralized by the building purchased under this agreement. As of September 30, 2019, the Company has made principal payments of $189,000.

 

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank. This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment Line of Credit were converted to a five-year term note agreement with an interest rate of 5.0%. The Company borrowed $2.5 million against this loan, which is collateralized by the equipment purchased under this agreement. As of September 30, 2019, the Company had made principal payments of $1.5 million.

 

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 interest rate on the loan agreement is 5.5% with monthly payments of $12,028. The loan is collateralized by the building and property purchased under this agreement. As of September 30, 2019, the Company has made principal payments of $348,000.

 

5

 

 

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%. The Company borrowed $5.0 million against this loan, which is collateralized by the equipment purchased under this agreement. As of September 30, 2019, the Company had made principal payments of $2.0 million.

 

On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank to provide the Company with a $15.0 million revolving line of credit. This line had a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. Operating Line of Credit (2018) expired on February 28, 2019 but was extended through April 28, 2019. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019. Based on covenant ratios, the Company qualifies for the first $12.5 million component but not the $2.5 million component. Based on the borrowing base calculation, the Company could borrow up to $11.5 million as of September 30, 2019. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available on the line of credit. Please see page 19 for a description of the $12.5 million and $2.5 million components and the borrowing base calculation.

 

On May 30, 2019, the Company entered into a financing agreement (“Term Note (2019)”) with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note was to finance a specific construction project completed in September 2019. The Company anticipates paying off Term Note (2019) in less than one year. Covenants for the loan are the same as the $12.5 million component of Operating Line of Credit (2019). The loan is collateralized by the Company’s equipment. The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect the conditions of subsequent borrowings. As of September 30, 2019, the Company had made principal payments of $2.1 million.

 

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, 2019, Energy Services had a backlog of $63.0 million of work to be completed on existing contracts. At September 30, 2018, the Company had a backlog of $71.1 million. Due to the timing of Energy Services’ construction contracts and the long-term nature of some of our projects, portions of our backlog work may not be completed in the current fiscal year. Most of the Company’s projects can be completed in a short period of time, typically two to five months. Larger projects usually take seven to eighteen months to be completed. As a rule, work starts shortly after the signing of the contract.

 

Types of Contracts

 

Energy Services’ contracts are usually awarded on a competitive and negotiated basis. While some contracts may be lump sum or time and material projects, most of the work is bid based upon unit prices for various portions of the work with a total agreed-upon price based on estimated units. The actual revenues produced from the project will be dependent upon how accurate the customer estimates are as to the units of the various items.

 

Raw Materials and Suppliers

 

The principal raw materials that the Company and its subsidiaries use are metal plate, structural steel, pipe, wire, fittings and selected engineering equipment such as pumps, valves and compressors. For the most part, the largest portion of these materials are supplied by the customer. The materials that the Company purchases are predominately those of a consumable nature on the job, such as small tools and environmental supplies. We anticipate being able to obtain these materials, as well as any raw materials not supplied by our customers, for the foreseeable future.

 

6

 

 

Industry Factors

 

Energy Services’ revenues, cash flows and earnings are substantially dependent upon, and affected by, the level of natural gas exploration development activity and the levels of work on existing pipelines as well as the level of demand for our electrical and mechanical services. Such activity and the resulting level of demand for pipeline construction and related services and electrical and mechanical services are directly influenced by many factors over which the Company has no control. Such factors include the market prices of natural gas and electricity, market expectations about future prices, the volatility of such prices, the cost of producing and delivering natural gas and electricity, government regulations and trade restrictions, local and international political and economic conditions, the development of alternate energy sources, changes in the tax code that affect the energy industry, and the long-term effects of worldwide energy conservation measures. Energy Services cannot predict the future level of demand for its construction services, future conditions in the pipeline or electrical construction industry or future pipeline and electrical construction rates.

 

Competition

 

The pipeline construction industry is a highly competitive business characterized by high capital and maintenance costs. Pipeline contracts are usually awarded through a competitive bid process. The Company believes that operators consider factors such as quality of service, type and location of equipment, or the ability to provide ancillary services. However, price and the ability to complete the project in a timely manner are the primary factors in determining which contractor is awarded a job. There are many regional and national competitors that offer services similar to Energy Services. Certain of the Company’s competitors have greater financial and human resources than Energy Services, which may enable them to compete more efficiently because of price and technology. The Company’s largest competitors are Otis Eastern, Miller Pipeline, Brown Electric, Summit Electric and Apex Pipeline.

 

Operating Hazards and Insurance

 

Energy Services’ operations are subject to many hazards inherent in the pipeline construction business, including, for example, operating equipment in mountainous terrain, people working in deep trenches and people working near large equipment. These hazards could cause personal injury or death, serious damage to or destruction of property and equipment, suspension of drilling operations, or substantial damage to the environment, including damage to producing formations and surrounding areas. Energy Services seeks protection against certain of these risks through insurance, including property casualty insurance on its equipment, commercial general liability and commercial contract indemnity, commercial umbrella and workers’ compensation insurance.

 

The Company’s insurance coverage for property damage to its equipment is based on estimates of the cost of comparable used equipment to replace the insured property. There is a deductible per occurrence on equipment of $2,500 and $500 for damage to miscellaneous tools. The Company also maintains third party liability insurance, pollution and professional liability insurance, and a commercial umbrella policy. Energy Services believes that it is adequately insured for public liability and property damage to others with respect to its operations. However, such insurance may not be enough to protect Energy Services against liability for all consequences related to its operations.

 

Government Regulation and Environmental Matters

 

General. Energy Services’ operations are affected from time to time in varying degrees by political developments and federal, state and local laws and regulations. In particular, natural gas production, operations and the profitability of the gas industry are or have been affected by price controls, taxes and other laws relating to the natural gas industry, by changes in such laws and by changes in administrative regulations. Although significant capital expenditures may be required to comply with such laws and regulations, to date, such compliance costs have not had a material adverse effect on the earnings or competitive position of Energy Services. In addition, Energy Services’ operations are vulnerable to risks arising from the numerous laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. Energy Services may also be affected by regulations designed to provide benefits to companies engaged in the production of alternative sources of energy, such as solar, wind, and related industries.

 

7

 

 

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.

 

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

 

As of September 30, 2019, the Company had approximately 484 employees including management, with approximately 85 of those employees being full-time. The Company’s construction personnel are trade union members represented by various collective bargaining units.

 

8

 

 

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”.

 

Our operating results may vary significantly from quarter to quarter.

 

We typically experience lower volumes and lower margins during the winter months due to lower demand for our pipeline services and more difficult operating conditions. Also, other items that can materially affect our quarterly results include:

 

·Adverse weather;
·Variations in the mix of our work in any quarter;
·Shortage of qualified labor;
·Unfavorable regional, national or global economic and market conditions;
·A reduction in the demand for our services;
·Changes in customer spending patterns and need for the services we provide;
·Unanticipated increases in construction and design costs;
·Timing and volume of work we perform;
·Termination of existing agreements;
·Losses experienced not covered by insurance;
·Payment risks associated with customer financial condition;
·Changes in bonding requirements of agreements;
·Interest rate variations; and
·Changes in accounting pronouncements.

 

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. The Company currently has a $15.0 million Operating Line of Credit (2019). Based on covenant ratios, the Company qualifies for the first $12.5 million component but not the $2.5 million component. Based on the borrowing base calculation, the Company could borrow up to $11.5 million as of September 30, 2019. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available on the line of credit. The Company believes this line of credit will provide enough operating capital for future projects, but the Company cannot guarantee it will always have access to this line of credit in the future depending on the Company’s financial performance.

 

9

 

 

We have sold Units, each consisting of one share of 6.0% Convertible Perpetual Preferred Stock, Series A and 2,500 shares of Common Stock. If the Preferred Stock is converted to Common Stock, shareholders may experience dilution of their ownership interest.

 

As of September 30, 2013, the Company sold 140 units in a private placement to accredited investors, with an additional 10 units sold during the fiscal year ended September 30, 2014 for a total of 150 units. As a result of the private placement, an additional 375,000 shares of common stock were outstanding as of September 30, 2019. The Company also issued 56 shares of Preferred Stock to Marshall Reynolds, Chairman of the Board of Directors, in exchange for a debt forgiveness of $1.4 million. Mr. Reynolds did not receive any shares of common stock in this transaction. In addition, if the Company elects to allow the holders of the Preferred Stock to choose to convert their Preferred Stock into shares of common stock, we would issue an additional 3,433,333 shares of common stock, which will result in shareholders experiencing a dilution in their ownership interest.

 

An economic downturn in the industries we serve could lead to less demand for our services.

 

In addition to the effects of an economic recession, there could be reductions in the industries that the Company serves. If the demand for natural gas should drop dramatically, or the demand for electrical services drops dramatically, these would in turn result in less demand for the Company’s services.

 

Project delays or cancellations may result in additional costs to us, reductions in revenues or the payment of liquidated damages.

 

In certain circumstances, we guarantee project completion by a scheduled acceptance date or are paid only upon achievement of certain acceptance and performance testing levels. Failure to meet any of these requirements could result in additional costs or penalties which could exceed the expected project profits.

 

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, 2019, there can be no assurance that actual results will not differ from those estimates.

 

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.

 

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.

 

10

 

 

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.

 

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.

 

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 rebid periodically. If we are unsuccessful in rebidding 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.

 

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.

 

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.

 

11

 

 

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.

 

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.

 

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.

 

ITEM 1B.Unresolved Staff Comments

 

None.

 

ITEM 2.Properties

 

The Company and its subsidiaries own the property where its subsidiaries, C.J. Hughes and Nitro, and the Company’s headquarters are located. We maintain our executive offices at 75 West 3rd Ave., Huntington, West Virginia 25701, which is also the office of C.J. Hughes. Nitro’s office is located at 4300 1st Ave., Nitro, WV 25143. The Company’s management believes that its properties are adequate for the business it conducts. Please see “Liquidity and Capital Resources” on page 18 for a description of the mortgages on the Nitro properties.

 

12

 

 

ITEM 3.Legal Proceedings

 

In February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction project. The Company is seeking $13.7 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at September 30, 2019, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At September 30, 2019, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

ITEM 4.Mine Safety Disclosures

 

None.

 

PART II

 

ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

The Company’s common stock is quoted under the symbol “ESOA” and transactions in the stock are reported on the OTC QB marketplace.

 

The following table sets forth the range of high and low sales prices for common stock during each of the last two fiscal years and is based on information provided by OTC QB. The high and low “bid price”, as required to be disclosed by Regulation S-K, was not available for certain periods because either these were not two-sided quotes by market makers or there was only one market maker with a two-sided quote. Over the counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

 

Common Stock

 

Fiscal 2018  High   Low   Dividends 
Quarter ended December 31, 2017  $1.09   $0.85   $- 
Quarter ended March 31, 2018   0.98    0.54    - 
Quarter ended June 30, 2018   0.88    0.60    - 
Quarter ended September 30, 2018   1.24    0.74    - 
                
Fiscal 2019   High    Low    Dividends 
Quarter ended December 31, 2018  $1.39   $1.07   $- 
Quarter ended March 31, 2019   1.30    0.95    - 
Quarter ended June 30, 2019   1.23    0.60    - 
Quarter ended September 30, 2019   1.07    0.66    - 

 

As of September 30, 2019, there were 24 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.

 

On December 11, 2019, the Company declared a $0.05 special dividend to be paid on December 31, 2019 for stockholders as of December 23, 2019. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any future dividends will be within the discretion of our board of directors.

 

13

 

 

On August 3, 2018, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would purchase up to 10%, or approximately 1,423,984 shares, of the Company’s issued and outstanding stock. The repurchase program started on August 15, 2018 and expired on August 15, 2019. The program resulted in the repurchase of 305,908 shares.

 

On August 22, 2019, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would purchase up to 10%, or approximately 1,393,393 shares, of the Company’s issued and outstanding stock. The repurchase program started on August 26, 2019 and will expire on August 26, 2020. The program resulted in the repurchase of 9,139 shares through September 30, 2019. Subsequent to September 30, 2019, the Company had purchased 25,297 shares of common stock as of December 1, 2019, at a purchase value of $20,723.

 

In 2010, the Board of Directors adopted, and our stockholders approved, the Energy Services of America Corporation Long Term Incentive Plan (the “LTIP”), to provide our employees and directors with additional incentives to promote our growth and performance. The LTIP gives us the flexibility we need to continue to attract and retain highly qualified employees and directors by offering a competitive compensation program that is linked to the performance of our common stock.

 

Long Term Incentive Plan  Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
   Weighted-average exercise
price of outstanding options,
warrants and rights
   Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))
 
   (a)   (b)   (c) 
Equity compensation plans approved by security holders         -             -    1,149,000 
                
Equity compensation plans not approved by security holders   -    -    - 
Total   -    -    1,149,000 

 

14

 

 

ITEM 6.Selected Financial Data

 

Not required for smaller reporting companies.

 

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, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees, general liability insurance and miscellaneous other expenses.

 

15

 

 

Results of Operations for the Year Ended September 30, 2019 Compared to the Year Ended September 30, 2018

 

Revenue. Revenue increased by $39.0 million or 28.8% to $174.5 million for the year ended September 30, 2019 from $135.5 million for the year ended September 30, 2018. The increase was primarily attributable to a $35.8 million revenue increase in petroleum and gas work, a $2.9 million revenue increase in water and sewer and other ancillary services and a $346,000 revenue increase in electrical and mechanical services.

 

Cost of Revenues. Cost of revenues increased by $38.1 million or 30.7% to $161.9 million for the year ended September 30, 2019 from $123.8 million for the year ended September 30, 2018. The increase was primarily attributable to a $34.7 million cost increase in petroleum and gas work, a $1.8 million cost increase in electrical and mechanical services, a $790,000 cost increase in equipment and tool shop operations not allocated to projects and a $728,000 cost increase in water and sewer and other ancillary services.

 

Gross Profit. Gross profit increased by $1.1 million or 8.8% to $12.7 million for the year ended September 30, 2019 from $11.6 million for the year ended September 30, 2018. The increase was primarily attributable to a $2.2 million gross profit increase in water and sewer and other ancillary services and a $1.1 million gross profit increase in petroleum and gas work, partially offset by a $1.4 million gross profit decrease in electrical and mechanical services and a $790,000 gross profit decrease in equipment and tool shop operations not allocated to projects. The gross profit percentage was 7.3% for the year ended September 30, 2019 and 8.6% for the year ended September 30, 2018.

 

Selling and administrative expenses. Selling and administrative expenses increased by $1.1 million or 14.6% to $8.9 million for the year ended September 30, 2019 from $7.7 million for the year ended September 30, 2018. The increase was primarily due to additional labor expense needed to bid and manage projects in fiscal year 2019 as compared to fiscal year 2018.

 

Income from operations. Income from operations decreased by $100,000 or 2.5% to $3.8 million for the year ended September 30, 2019 from $3.9 million for the year ended September 30, 2018. The decrease was primarily due to the items mentioned above.

 

Interest Expense. Interest expense increased by $148,000 or 16.1% to $1.1 million for the year ended September 30, 2019 from $917,000 for the year ended September 30, 2018. This increase was primarily due to increased line of credit borrowings and interest paid on Term Note 2019.

 

Net Income. Income before income tax expense was $3.0 million for fiscal year 2019, compared to $3.4 million for fiscal year 2018.

 

Income tax expense for fiscal year 2019 was $969,000 compared to $910,000 for fiscal year 2018. The effective tax expense rate for fiscal year 2019 was 32.7% as compared to 26.6% for fiscal year 2018. Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income and non-deductible expenses. Per diem paid to the Company’s production personnel, where required by contract and federal law, results in the Company’s largest source of non-deductible expense. The non-deductible portion of per diem was $879,000 and $633,000 in fiscal years 2019 and 2018, respectively.

 

Dividends on preferred stock for fiscal years ended September 30, 2019 and 2018 were $309,000.

 

The net income available to common shareholders was $1.7 million for the year ended September 30, 2019 compared to $2.2 million for the year ended September 30, 2018.

 

16

 

 

Comparison of Financial Condition at September 30, 2019 Compared to September 30, 2018.

 

The Company had total assets of $55.9 million at September 30, 2019, an increase of $1.2 million from the prior fiscal year end balance of $54.7 million. Cash and cash equivalents totaled $4.6 million at September 30, 2019, an increase of $3.5 million from the prior year end balance of $1.1 million. The increase was primarily related to funding projects through line of credit borrowings, of which $10.0 million was refinanced as long-term debt. Contract assets totaled $6.7 million at September 30, 2019, an increase of $1.3 million from the prior year end balance of $5.4 million. This increase was primarily due to the increase in costs and estimated earnings in excess of billings at September 30, 2019 as compared to at September 30, 2018. The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $25.1 million at September 30, 2019, a decrease of $2.2 million from the combined prior year end balance of $27.3 million. The decreases of $1.4 million in retainages receivable and $805,000 in accounts receivable and other receivables were due to collections under contractual terms. Prepaid expenses and other totaled $2.7 million at September 30, 2019, a decrease of $1.4 million from the prior year end balance of $4.1 million. The decrease was primarily due to the reduction of various prepaid insurance accounts based on labor cost expensed or standard monthly charges. Net property, plant and equipment totaled $16.8 million at September 30, 2019 and 2018. Acquisitions totaled $4.5 million for fiscal year 2019 while depreciation expense was $4.2 million, and the net impact of disposals was $371,000.

 

Liabilities totaled $31.3 million at September 30, 2019, a decrease of $137,000 from the prior year end balance of $31.4 million. Accounts payable totaled $2.9 million as of September 30, 2019, a decrease of $3.3 million from the prior year end balance of $6.2 million. The decrease was due to the timing of payments to material and equipment providers. Lines of credit and short-term borrowings totaled $4.0 million at September 30, 2019, a decrease of $2.1 million from the prior year end balance of $6.1 million. This decrease was primarily due to repayments against the Company’s operating line of credit. Accrued expenses and other current liabilities totaled $3.5 million at September 30, 2019, a decrease of $792,000 from the prior year end balance of $4.3 million. The decrease was primarily due to lower labor expenses incurred towards the end of fiscal year 2019 compared to 2018. Income tax payable totaled $0 at September 30, 2019, as compared to a balance of $545,000 at September 30, 2018. The decrease was due to the payment of fiscal year 2018 income taxes and an expected minimal overpayment on fiscal year 2019 estimated income tax payments. The aggregate balance of current maturities of long-term debt and long-term debt totaled $15.4 million at September 30, 2019, an increase of $5.7 million from the prior year end balance of $9.7 million. The increase was primarily due to $10.0 million refinanced from line of credit borrowings to long-term debt, partially offset by principal repayments on long-term debt. Net deferred income tax payable totaled $1.9 million at September 30, 2019, a $597,000 increase from the prior year end balance of $1.3 million. The increase was primarily due to deferred income tax payable resulting from bonus depreciation on fiscal year 2019 property, plant and equipment acquisitions. Contract liabilities totaled $3.5 million at September 30, 2019, an increase of $194,000 from the prior year end balance of $3.3 million. This increase was due to a larger number of overbillings when comparing the billed revenue and percentage of cost completed on construction projects in 2019 as compared to 2018.

 

Shareholders’ equity totaled $24.7 million at September 30, 2019, an increase of $1.4 million from the prior year end balance of $23.3 million. This increase was primarily due to the $2.0 million in net income generated by the Company in fiscal year 2019, partially offset by $309,000 in dividends paid on preferred stock and $301,000 from the repurchase of common shares of Company stock.

 

17

 

 

Liquidity and Capital Resources

 

Indebtedness

 

On January 31, 2014, the Company entered into a financing arrangement (“Term Note”) with United Bank and Summit Community Bank. The financing arrangement was a five-year term loan in the amount of $8.8 million. In addition, the Company entered into a separate five-year term loan agreement with First Guaranty Bank for $1.6 million, which was later refinanced by United Bank, Inc. Both loans were collateralized by the Company’s accounts receivable and equipment and were paid off during the second quarter of fiscal year 2019.

 

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to time based on changes in The U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. The loan is collateralized by the building purchased under this agreement. As of September 30, 2019, the Company has made principal payments of $189,000.

 

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank. This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment Line of Credit were converted to a five-year term note agreement with an interest rate of 5.0%. The Company borrowed $2.5 million against this loan, which is collateralized by the equipment purchased under this agreement. As of September 30, 2019, the Company had made principal payments of $1.5 million.

 

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 interest rate on the loan agreement is 5.5% with monthly payments of $12,028. The loan is collateralized by the building and property purchased under this agreement. As of September 30, 2019, the Company has made principal payments of $348,000.

 

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%. The Company borrowed $5.0 million against this loan, which is collateralized by the equipment purchased under this agreement. As of September 30, 2019, the Company had made principal payments of $2.0 million.

 

On May 30, 2019, the Company entered into Term Note 2019 with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note was to finance a specific construction project completed in September 2019. The Company anticipates paying off Term Note (2019) in less than one year. Covenants for the loan are the same as the $12.5 million component of Operating Line of Credit (2019). The loan is collateralized by the Company’s equipment. The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect the conditions of subsequent borrowings. As of September 30, 2019, the Company had made principal payments of $2.1 million.

 

18

 

 

Operating Line of Credit

 

On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank, Inc., (“United Bank”), to provide the Company with a $15.0 million revolving line of credit. This line had a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%. The effective date of this agreement was February 27, 2018 and it replaced the $15.0 million revolving line of credit (“Operating Line of Credit (2017)”) entered into with United Bank effective February 27, 2017. Operating Line of Credit (2018) expired on February 28, 2019 but was extended through April 28, 2019. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019.

 

The Company had borrowed $5.5 million against the Operating Line of Credit (2018) as of September 30, 2018 and had up to $7.0 million available to borrow against the first $12.5 million depending on the Company’s borrowing base report. The Company had borrowed an additional $4.5 million for a total of $10.0 million against the Operating Line of Credit (2019) as of May 30, 2019. On May 30, 2019, the Company entered into Term Note 2019 with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note is to finance a specific construction project completed in September 2019. Company anticipates paying off Term Note (2019) in less than one year. The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect the conditions of subsequent borrowings. Based on the borrowing base calculation, the Company could borrow up to $11.5 million as of September 30, 2019. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available on the line of credit.

 

Major items excluded from the borrowing base calculation are receivables from bonded jobs and retainage as well as all items greater than ninety (90) days old. Line of credit borrowings are collateralized by the Company’s accounts receivable. Cash available under the line is calculated based on 70.0% of the Company’s eligible accounts receivable. Major items excluded from the calculation are receivables from bonded jobs and retainage as well as items greater than 90 days old.

 

Under the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:

 

1.Minimum tangible net worth of $19.0 million to be measured quarterly
2.Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis
3.Minimum current ratio of 1.50x to be measured quarterly
4.Maximum debt to tangible net worth ratio (“TNW”) of 2.0x to be measured semi-annually
5.Full review of accounts receivable aging report and work in progress. The results of the review shall be satisfactory to the lender in its sole and unfettered discretion.

 

Under the terms of the agreement, the Company must meet the following additional requirements for draw requests causing the borrowings to exceed $12.5 million:

 

1.Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis
2.Minimum tangible net worth of $21.0 million to be measured quarterly

 

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at September 30, 2019.

 

19

 

 

As of September 30, 2019, the Company had $4.6 million in cash and working capital of $20.8 million. 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:

 

2020  $8,429,283 
2021   3,977,300 
2022   3,286,263 
2023   2,419,847 
2024   273,646 
Thereafter   1,067,240 
   $19,453,579 

 

Off-Balance Sheet Transactions

 

Due to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheets. Though for the most part not material in nature, some of these are:

 

Leases

 

Our work often requires us to lease various facilities, equipment and vehicles. These leases usually are short term in nature, one year or less though at times we may enter longer term leases when warranted. By leasing equipment, vehicles and facilities, we can reduce our capital outlay requirements for equipment, vehicles and facilities that we may only need for short periods of time.

 

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, 2019, the Company did not have any outstanding letters of credit.

 

Performance Bonds

 

Some customers, particularly new ones or governmental agencies require the Company to post bid bonds, performance bonds and payment bonds (collectively, performance bonds). These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond. The Company must reimburse the insurer for any expenses or outlays it is required to make.

 

Beginning in February 2014 and currently in effect, the Company entered into 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.

 

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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, 2019, the Company had $5.7 million in performance bonds outstanding.

 

Concentration of Credit Risk

 

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

 

The Company had two customers that exceeded 10.0% of revenues for the year ended September 30, 2019. The two customers, Full Stream Goff Connector, LLC and TransCanada Corporation, represented 29.0% and 11.8% of revenues, respectively. The Company had two customers that exceeded 10.0% of receivables net of retention. These two customers, Full Stream Goff Connector, LLC and TransCanada Corporation, represented 22.0% and 12.2% of receivables net of retention, respectively. The Company had two customers that exceeded 10.0% of revenues for the year ended September 30, 2018. The two customers, Full Stream Goff Connector, LLC and Toyota Motor Manufacturing, represented 17.3% and 13.3% of revenues, respectively. The Company had two customers that exceeded 10.0% of receivables net of retention. These two customers, Full Stream Goff Connector, LLC and TransCanada Corporation, represented 25.5% and 22.3% of receivables net of retention, respectively.

 

The Company’s consolidated operating revenues for the year ended September 30, 2019 were $174.5 million of which 60.4% was attributable to gas and petroleum contract work, 32.6% to electrical and mechanical contract services and 7.0% to water and sewer contract installations and other ancillary services. The Company’s consolidated operating revenues for the year ended September 30, 2018 were $135.5 million of which 51.5% was attributable to gas and petroleum contract work, 41.7% to electrical and mechanical contract services and 6.8% to water and sewer contract installations and other ancillary services.

 

Litigation

 

In February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction project. The Company is seeking $13.7 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at September 30, 2019, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At September 30, 2019, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

 

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Related Party Transactions

 

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

 

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Nester Logan and Mr. Samuel Kapourales, directors of Energy Services, were also directors of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, holds the same position with Premier Financial Bancorp Inc. Mr. Keith Molihan and Mr. Neal Scaggs are both directors of Energy Services and hold the same position with Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of September 30, 2019, we have paid approximately $189,000 in principal and approximately $256,000 in interest since the beginning of the loan. There were no new material related party transactions entered into during the fiscal year ended September 30, 2019.

 

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

 

Inflation

 

Due to relatively low levels of inflation during the years ended September 30, 2019 and 2018, inflation did not have a significant effect on our results.

 

New Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Among other things, lessees will be required to recognize the following for all leases (except for short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company expects that the adoption of ASU 2016-02 will not have a material impact on its financial statements or disclosure.

 

Critical Accounting Policies

 

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

 

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Revenue Recognition

 

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.

 

On October 1, 2018, the Company adopted an Accounting Standard Update, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. We adopted Topic 606 using a modified retrospective transition approach and elected to apply Topic 606 to contracts with customers that are not substantially complete, i.e. less than 90% complete, as of October 1, 2018. The adoption of Topic 606 did not have a material impact on the Company’s financial statements.

 

In addition, as of October 1, 2018, we began to separately present contract assets and liabilities on the Company’s consolidated balance sheet. Contract assets include costs and estimated earnings in excess of billings that were previously separately presented. Contract liabilities include billings in excess of costs and estimated earnings that were previously separately presented as well as provisions for losses, when occurred, that were previously included in accrued expenses and other current liabilities.

 

The accounting policies that were affected by Topic 606 and the changes thereto are as follows:

 

Revenue Recognition: 

 

Our revenue is primarily derived from construction contracts that can span several quarters. We recognize revenue in accordance with Topic 606. Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows:

 

  1. Identify the contract

  2. Identify performance obligations

  3. Determine the transaction price

  4. Allocate the transaction price

  5. Recognize revenue

 

Identify the Contract

 

The first step in applying Accounting Standards Codification (ASC) 606 is to identify the contract(s) with the customer. To do so, the Company evaluates indicators of the existence of the contract.

 

Certain conditions must be present for there to be a contract with a customer:

 

The parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations.

 

The Company can identify each party’s rights regarding the goods or services to be transferred.

 

The Company can identify the payment terms for the goods or services to be transferred.

 

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The contract has commercial substance (that is, the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract).

 

It is probable that the Company will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, the Company shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession.

 

Identify Performance Obligations

 

Once the Company has determined that it has a contract with a customer as defined in Accounting Standards Codification (ASC) 606, the Company must determine what the performance obligations are. A performance obligation is defined in the ASC Master Glossary as:

 

A promise in a contract with a customer to transfer to the customer either:

 

A good or service (or a bundle of goods or services) that is distinct;
   
 A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

 

Generally, performance obligations are clearly stated in the contract. The Company’s contracts usually contain one performance obligation that is satisfied over time because our performance typically creates or enhances an asset that the customer controls as the asset is created or enhanced.

 

In assessing whether promises to transfer goods or service to the customer are separately identifiable, a company considers the following factors:

 

 The entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted.  In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer.  Combined output or outputs might include more than one phase, element, or unit.
   
 One or more of the goods or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods or services promised in the contract.
   
 The goods or services are highly interdependent or highly interrelated.  In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract.  For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfill its promise by transferring each of the goods or services independently.

 

Under ASC 606, contracts will be required to be combined when certain criteria are met. The new accounting standard requires contracts be combined prior to further assessment of the five elements, if one or more of the following criteria are met:

 

 Negotiated at the same time with the same customer (or related party) with a single commercial objective in mind;
   
 The consideration to be paid for one contract is dependent on another contract;
   
 The promised goods and services in the contracts are a single performance obligation in accordance with the guidance.

 

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If the promises do not meet the requirements for separating, the performance obligations shall be combined into one performance obligation.  A contract could have several performance obligations which in themselves include sets of promises that are not distinct and cannot be separated.

 

Management has made the assessment that the company is acting as a principal rather than as an agent (i.e., the company integrates the materials, labor and equipment into the deliverables promised to the customer) in all contract performed by the Company.

 

Determine Transaction Price

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring goods and services to the customer. The consideration promised in a contract with customers may include both fixed amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated damages) to the extent that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (i.e., probable and estimable).

 

Variable consideration is defined broadly and can take many forms, such as incentives, penalty provisions, price concessions, rebates or refunds.  Consideration is also considered variable if the amount the Company will receive is contingent on a future event occurring or not occurring, even though the amount itself is fixed.

 

The following are examples of variable considerations within a contract:

 

 Claims and pending change orders;
   
 Unpriced change orders;
   
 Incentive and penalty provisions within the contract;
   
 Shared savings;
   
 Price concessions;
   
 Liquidating damages; and
   
 Unit price contracts with variable consideration.

 

Subsequent to the inception of a contract, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and claims to or from owners. Changes that are accounted for as an adjustment to existing performance obligations are allocated on the same basis at contract inception. Otherwise, changes are accounted for as separate performance obligation(s) and the separate transaction price is allocated as discussed above. Changes are made to the transaction price from unapproved change orders to the extent the amount can be reasonably estimated, and recovery is probable. On certain projects we have submitted and have pending unresolved contract modifications and affirmative claims (“affirmative claims”) to recover additional costs and the associated profit, if applicable, to which the Company believes it is entitled under the terms of contracts with customers, subcontractors, vendors or others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or affirmative claims or may have rejected or disagree entirely or partially as to such entitlement.

 

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Allocate Transaction Price

 

When a contract has a single performance obligation, the entire transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on estimated relative standalone selling prices of the goods or services at the inception of the contract, which typically is determined using cost plus an appropriate margin.

 

In accordance with Topic 606, the Company is required to estimate variable consideration when determining the contract transaction price by taking into account all the information (historical, current and forecasted) that is reasonably available and identifying a reasonable number of possible consideration amounts.  Management must include an estimate of any variable consideration using either the “expected value” method or the “most likely amount” method.

 

The “expected value” method estimates variable consideration based on the range of possible outcomes and the probabilities of each outcome.  This method might be most appropriate when the Company has a large number of contracts that have similar characteristics because it will likely have better information about the probabilities of various outcomes when there are a large number of similar transactions. 

 

The “most likely amount” method estimates variable consideration based on the single most likely amount in a range of possible consideration amounts. This method might be the most predictive if the Company will receive one of only two possible amounts.

 

The method used is not a policy choice and should be applied consistently throughout a contract, however, is subject to guidance on constraining estimates of variable consideration. The Company may only include variable consideration within the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty is subsequently resolved. This assessment will require the application of judgment.  While no single factor is determinative, the revenue standard includes factors to consider when assessing whether variable consideration should be constrained.

 

The following factors may increase the likelihood or the magnitude of a revenue reversal:

 

 The amount of consideration is highly susceptible to factors outside the entity’s influence;
   
 The uncertainty is not expected to be resolved for a long period of time;
   
 The entity’s experience with similar types of contracts is limited;
   
 The entity has a practice of offering a broad range of price concessions or changing the payment terms frequently; and
   
 The contract has a broad range of possible consideration amounts.

 

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Recognize Revenue

 

The Company disaggregates revenue based on our operating groups and contract types as it is the format that is regularly reviewed by management. Our reportable operating groups are: Petroleum and Gas, Water, Sewer and other services, and Electrical and Mechanical services. Our contract types are: Lump Sum, Unit Price, and Cost Plus and Time and Material (T&M).

 

The Company recognizes revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. For Lump Sum contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. For Unit Price, Cost Plus and T&M contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward satisfaction of the performance obligation(s) using an output method.

 

The Company does have certain service and maintenance contracts in which each customer purchase order is considered its own performance obligation recognized over time and would be recognized depending on the type of contract mentioned above. The Company also does certain T&M service work that is generally completed in a short duration and is recognized at a point in time.

 

All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors and outside equipment providers, direct overhead costs and internal equipment expense (primarily depreciation, fuel, maintenance and repairs).

 

The company recognizes revenue, but not profit, on certain uninstalled materials. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred), but the associated profit is not recognized until the end of the project. The costs of uninstalled materials will be tracked separately within the Company’s accounting software.

 

Pre-contract and bond costs, if required, on projects are generally immaterial to the total value of the Company’s contracts and are expensed when incurred. Project mobilization costs are also generally immaterial and charged to project costs as incurred. As a practical expedient, the Company recognizes these incremental costs as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. For projects expected to last greater than one year, mobilization costs will be capitalized as incurred and amortized over the expected duration of the project. For these projects, mobilization costs will be tracked separately in the Company’s accounting software. This includes costs associated with setting up a project lot or lay-down yard, equipment, tool and supply transportation, temporary facilities and utilities and worker qualification and safety training.

 

Contracts may require the Company to warranty that work is performed in accordance with the contract; however, the warranty is not priced separately, and the Company does not offer customers an option to purchase a warranty. As of September 30, 2019, the Company does not have a material amount of costs expensed that would otherwise be capitalized and amortized.

 

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

 

  the completeness and accuracy of the original bid;

  costs associated with scope changes;

  changes in costs of labor and/or materials;

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

  subcontractor performance issues;

  changes in productivity expectations;

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

  changes from original design on design-build projects;

  the availability and skill level of workers in the geographic location of the project;

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

  our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and

  the customer’s ability to properly administer the contract.

 

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

 

Contract Assets:

 

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

 

Contract Liabilities: 

 

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

 

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Income Taxes

 

The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ended prior to September 30, 2016.

 

The Company follows the liability method of accounting for income taxes in accordance with the Income Taxes topic of the ASC 740. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a portion of the deferred tax asset will not be realized.

 

U.S. GAAP also prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or to be taken on a tax return. This evaluation is a two-step process.  First, the recognition process determines if it is more likely than not that a tax position will be sustained based on the merits of the tax position upon examination by the appropriate taxing authority.  Second, a measurement process is calculated to determine the amount of benefit/expense to recognize in the financial statements if a tax position meets the more likely than not recognition threshold.  The tax position is measured at the greatest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.  Any interest and penalty related to the unrecognized tax benefits, as the result of recognition of tax obligations resulting from uncertain tax positions, are included in the provision for income taxes. The Company had not recognized any uncertain tax positions at September 30, 2019.

  

Goodwill

 

In the quarter ended September 30, 2012, the Company recorded a goodwill impairment charge of $36.9 million, which represented the entire amount of goodwill carried on the Company’s balance sheet. The goodwill impairment test indicated that there was no residual goodwill of the Company. The Company had determined that its operating units meet the criteria for aggregation and could be deemed a single reporting unit because of their similar economic characteristics. Therefore, the goodwill impairment test was conducted at the Company level.

 

Claims

 

Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The Company records revenue on claims that have a high probability of success. Revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred.

 

Self-Insurance

 

The Company has its workers’ compensation, general liability and auto insurance through a captive insurance company. While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs; the Company does have to maintain a surety deposit to guarantee payments of premiums. That account had a balance of $1.9 million as of September 30, 2019. Should the captive insurance company experience severe losses over an extended period, it could have a detrimental effect on the Company.

 

Current and Non-Current Accounts Receivable and Provision for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customers’ access to capital, our customers’ willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. While most of our customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves. At September 30, 2019, the management review deemed that the allowance for doubtful accounts was adequate.

 

Subsequent Events

 

Management has evaluated subsequent events through December 20, 2019, the date which the financial statements were available for issue.  There have been no material events noted during the period that would either impact the results reflected in the report or the Company’s results going forward.

 

On December 11, 2019, the Company declared a $0.05 special dividend to be paid on December 31, 2019 for stockholders as of December 23, 2019. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any future dividends will be within the discretion of our board of directors.

 

Subsequent to September 30, 2019, the Company had purchased 25,297 shares of common stock as of December 1, 2019, at a purchase value of $20,723.

 

ITEM 7A.Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

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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 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.

 

(c) Changes in Internal Controls Over Financial Reporting

 

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 fiscal year 2019 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.

 

PART III

 

ITEM 10.Directors, Executive Officers and Corporate Governance

 

The principal occupation during the past five years of each director and executive officer is set forth below. All directors and executive officers have held their present positions since our inception in 2006 unless otherwise stated.

 

Marshall T. Reynolds has served as Chairman of the Board of Directors since our inception. Mr. Reynolds has served as Chief Executive Officer and Chairman of the Board Directors of Champion Industries, Inc., a commercial printer, business form manufacturer and supplier of office products and furniture, from 1992 to 2016, and sole stockholder from 1972 to 1993; President and General Manager of The Harrah and Reynolds Corporation, from 1964 (and sole stockholder since 1972) to present; and Chairman of the Board of Directors of McCorkle Machine and Engineering Company in Huntington, West Virginia. Mr. Reynolds is also Chairman of the Board of Directors of First Guaranty Bancshares, Inc., in Hammond, Louisiana; and Chairman of the Board of Directors of Premier Financial Bancorp, Inc., in Huntington, West Virginia and a director of Summit State Bank in Santa Rosa, CA since December 1998. Mr. Reynolds is the father of Jack M. Reynolds and Douglas V. Reynolds. Mr. Reynolds varied career as a business leader and experience in a number of industries qualifies him to be on the Board of Directors.

 

Douglas V. Reynolds was appointed President and Chief Executive Officer of the Company on December 6, 2012 and has served as a Director since 2008. Mr. Reynolds is an attorney for Reynolds & Brown, PLLC. Mr. Reynolds is the President of the Transylvania Corporation and a director of The Harrah and Reynolds Corporation. Mr. Reynolds is a graduate of Duke University and holds a law degree from West Virginia University. Mr. Reynolds is the son of Director Marshall T. Reynolds and brother of Jack M. Reynolds. Mr. Reynolds’ varied experience and senior management roles with other companies make Mr. Reynolds a valuable member of the Board.

 

Jack M. Reynolds served as President and Chief Financial Officer from our inception until September 2008 and has been a member of our Board of Directors since our inception. Mr. Reynolds has been a Vice President of Pritchard Electric Company since 1998. Pritchard is an electrical contractor providing electrical services to both utility companies as well as private industries. Mr. Reynolds also serves as a Director of Citizens Deposit Bank of Vanceburg, Kentucky. Mr. Reynolds is the son of Marshall T. Reynolds and the brother of Douglas V. Reynolds. Mr. Reynolds lengthy service at Pritchard Electric and knowledge of the contracting industry provides hands on expertise to the Board of Directors.

 

Neal W. Scaggs has been a Director since our inception. Mr. Scaggs has been president of Baisden Brothers, Inc. (retail and wholesale hardware) from 1963 to the present. Mr. Scaggs is on the Boards of Directors of Premier Financial Bancorp, Inc. and Champion Industries, Inc. Mr. Scaggs also serves as Chairman of the Board of Directors of Bucane, Inc. Mr. Scaggs business experience in sales, marketing and capital markets provides a broad business perspective to the Board of Directors.

 

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Joseph L. Williams has been a Director since our inception. Mr. Williams is the Chairman and Chief Executive Officer of Basic Supply Company, Inc., which he founded in 1977. Mr. Williams was Chairman, President and Chief Executive Officer of Consolidated Bank & Trust Co., in Richmond, Virginia from 2007 until it merged with Premier Financial Bancorp, Inc. in 2009. Mr. Williams is a former member of the West Virginia Governor’s Workforce Investment Council. He is a former Director of Unlimited Future, Inc. (a small business incubator) and a former Member of the National Advisory Council of the U.S. Small Business Administration. Mr. Williams is a former Mayor and City Councilman of the City of Huntington, West Virginia. He is a graduate of Marshall University with a degree in finance and is a former member of its Institutional Board of Governors. Mr. Williams' investment and management experience provides the board of directors an important perspective in business development.

 

Keith Molihan was appointed to the Board of Directors on August 15, 2008. Mr. Molihan is a retired executive director of the Lawrence County Community Action Organization. Mr. Molihan has served as Chairman of the Board of Directors of Ohio River Bank, Chairman of the Board of Directors of Farmers Bank of Eminence Kentucky and Chairman of the Board of EMEGA Turbine Technology, as well as President of the Lawrence County Ohio Port Authority and President of the Southeast Ohio Emergency Medical organization. Mr. Molihan’s experience provides insights in the industrial aspects of the Company’s business.

 

Samuel G. Kapourales is a Board Member of the West Virginia Health Care Authority and Kapourales Properties, LLC. Mr. Kapourales serves as a Director of First National Bank of Williamson and First Bank of Charleston. Mr. Kapourales’ varied business experience makes him a valuable member of the Board.

 

Bruce H. Elliott was appointed to the Board of Directors on August 20, 2014. Mr. Elliott graduated Magna Cum Laude from Bridgewater College (Bridgewater, VA) with a degree in Accounting. He is a certified public accountant and Principal of D'amelio, Cohen & Associates, LLC, an accounting firm located in Baltimore, Maryland. Mr. Elliott is licensed in Maryland, Virginia, and West Virginia, and is a member of each state’s CPA society. He is also active in various community service projects. Mr. Elliott’s accounting and financial background provides insight to issues important to shareholders and investors.

 

Charles Abraham, MD was appointed to the Board of Directors on January 1, 2016. Dr. Abraham is a retired Otolaryngology (Ear Nose & Throat) Specialist in Huntington, WV and was affiliated with multiple hospitals in the area, including Cabell Huntington Hospital, St. Mary’s Medical Center and Huntington. Dr. Abraham continues to practice part-time at the Veterans Affairs Medical Center. He received his medical degree from West Virginia University School of Medicine and has been in practice since 1968. He also received an MBA degree from Marshall University in August 1996. Dr. Abraham is certified by the American Board of Otolaryngology. Dr. Abraham’s healthcare experience and understanding of health insurance related matters makes him a valuable member of the Board.

 

Frank Lucente was appointed to the Board of Directors on June 19, 2019. Mr. Lucente, a retired Naval officer, holds a Masters in Business Administration (MBA) with a specialty in marketing from Marshall University in Huntington, WV. Mr. Lucente is the founder, owner and president of Sam’s Hot Dogs, Inc., a franchise with over 45 locations in Virginia, West Virginia, Kentucky, North Carolina, and Georgia. In addition, Mr. Lucente is the co-founder of Rocco’s Restaurants, Inc. in Ceredo, WV. From 2005 to 2016, Mr. Lucente served as a city council member in Waynesboro, VA and served stints as vice mayor and mayor during that time. Mr. Lucente has served as the chairman of the board of Rocco’s Italian Specialty Foods, Inc. since 2014.

 

Charles P. Crimmel was appointed as Chief Financial Officer of the Company on November 1, 2013 after serving as Controller from 2008 to 2013. Mr. Crimmel graduated from West Virginia University in 1995 with a Bachelor of Science degree in Business Administration and Accounting. Mr. Crimmel was employed by Union Boiler Company as a Field Clerk and Staff Accountant from 1995 to 1996. From 1996-2005, Mr. Crimmel served as Staff Accountant and Controller for Williams Union Boiler/Williams Service Group. From 2005-2008, Mr. Crimmel was Controller for Nitro Electric Company.

 

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Board Leadership Structure and Risk Oversight

 

Our board of directors is chaired by Mr. Marshall T. Reynolds, who is a non-executive director. We separate the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences between the two roles. The Chief Executive Officer is responsible for overseeing the day to day operations of the Company. The Chairman provides guidance to the Chief Executive Officer and, together with the entire board of directors helps develop the strategic plan for the Company.

 

The role of the board of directors in the Company’s risk oversight process includes receiving reports from senior management on areas of material risk to the Company, including operational, financial, legal, regulatory, strategic and reputational risk. The full board reviews such reports and follows up with senior management to best determine how to address such risks.

 

Meetings of the Board of Directors

 

During fiscal 2019, the Board of Directors held twelve regular meetings and one special meeting. No director attended fewer than 75% in the aggregate of the total number of board meetings held. All directors serving on our committees attended more than 75% of the total number of committee meetings on which they served during fiscal 2019. Although not required, attendance of Board members at the Annual Meeting of Stockholders is encouraged. All members of our Board of Directors as of the Annual Meeting date attended the 2019 Annual Meeting of Stockholders.

 

Board Committees

 

Audit Committee. The Audit Committee consisted of Messrs. Scaggs, Logan and Molihan, with Mr. Scaggs acting as chairman of the committee in fiscal 2019. Mr. Logan served on the committee until his resignation on May 16, 2019. Mr. Lucente was appointed to the committee on November 20, 2019. The audit committee met four times during the fiscal year ended September 30, 2019. All the directors appointed to the audit committee are independent members of the board of directors, as defined by Securities and Exchange Commission rules (Rule 10A-3 of the Securities Exchange Act of 1934) and the NYSE American corporate governance listing standards. Each member of the audit committee is financially literate, and the Board of Directors has determined that Mr. Molihan qualifies as audit committee financial expert, as such term is defined by Securities and Exchange Commission rules. The committee’s charter can be found at: www.energyservicesofamerica.com/posting/Audit_Committee_Charter_v1.pdf.

 

The Audit Committee reviews the professional services and independence of our independent registered public accounting firm and our accounts, procedures and internal controls. The audit committee also recommends the firm selected to be our independent registered public accounting firm, reviews and approves the scope of the annual audit, reviews and evaluates with the independent registered public accounting firm our annual audit and annual consolidated financial statements, reviews with management the status of internal accounting controls, evaluates problem areas having a potential financial impact on us that are brought to the committee’s attention by management, the independent registered public accounting firm or the board of directors, and evaluates all of our public financial reporting documents.

 

The Audit Committee approved the appointment of Arnett Carbis Toothman to be our independent registered public accounting firm for the 2020 fiscal year. A representative of Arnett Carbis Toothman is expected to attend the 2020 Annual Meeting of Stockholders.

 

Nominating Committee. The Board has determined that the independent members of the Board of Directors will perform the duties of the nominating committee of the Board of Directors. The nominating committee does not have a written charter. The nominating committee will (i) identify individuals qualified to become members of the Board of Directors and recommend to the Board of Directors the nominees for election to the Board of Directors; (ii) recommend director nominees for each committee to the Board of Directors; and (iii) identify individuals to fill any vacancies on the Board of Directors. The nominating committee met one time during the fiscal year ended September 30, 2019.

 

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The nominating committee of the Board identifies nominees by first evaluating the current members of the Board of Directors willing to continue in service. Current members of the Board of Directors with skills and experience that are relevant to our business and who are willing to continue in service are first considered for re-nomination, balancing the value of continuity of service by existing members of the Board of Directors with that of obtaining a new perspective. If any member of the Board of Directors does not wish to continue in service, or if the Board decides not to re-nominate a member for re-election, or if the size of the Board of Directors is increased, the independent directors would solicit suggestions for director candidates from all board members. The independent directors would seek to identify a candidate who at a minimum satisfies the following criteria:

 

has the highest personal and professional ethics and integrity and whose values are compatible with ours;

 

has experiences and achievements that have given him or her the ability to exercise and develop good business judgment;

 

is willing to devote the necessary time to the work of the Board of Directors and its committees, which includes being available for board and committee meetings;

 

is familiar with the communities in which we operate and/or is actively engaged in community activities;

 

is involved in other activities or interests that do not create a conflict with his or her responsibilities to us and our stockholders; and

 

has the capacity and desire to represent the balanced, best interests of our stockholders as a group, and not primarily a special interest group or constituency.

 

The nominating committee will also consider whether a candidate satisfies the criteria for “independence” under Securities and Exchange Commission or NYSE American rules and, if a nominee is sought for service on the audit committee, the financial and accounting expertise of a candidate, including whether an individual qualifies as an “audit committee financial expert.” The nominating committee will consider diversity in identifying nominees for director but has no specific policy or established criteria in this regard. The nominating committee seeks candidates who have a broad range of business experience when considering nominees to the Board of Directors.

 

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Procedures for the Nomination of Directors by Stockholders

 

The Board of Directors has adopted procedures for the submission of director nominees by stockholders. If a determination is made that an additional candidate is needed for the Board of Directors, the independent members of the Board of Directors will consider candidates submitted by our stockholders. Stockholders can submit the names of qualified candidates for director by writing to our Corporate Secretary at 75 West 3rd Ave., Huntington, West Virginia 25701. The Corporate Secretary must receive a submission not less than forty-five (45) days prior to the date of our proxy materials for the preceding year’s annual meeting. The submission must include the following information:

 

a statement that the writer is a stockholder and is proposing a candidate for consideration by our independent directors;

 

the name and address of the stockholder as they appear on our books and number of shares of our common stock that are owned beneficially by such stockholder (if the stockholder is not a holder of record, appropriate evidence of the stockholder’s ownership will be required);

 

the name, address and contact information for the candidate, and the number of shares of our common stock that are owned by the candidate (if the candidate is not a holder of record, appropriate evidence of the stockholder’s ownership should be provided);

 

a statement of the candidate’s business and educational experience;

 

such other information regarding the candidate as would be required to be included in the proxy statement pursuant to Securities and Exchange Commission Regulation 14A;

 

a statement detailing any relationship between the candidate and Energy Services of America Corporation;

 

a statement detailing any relationship between the candidate and any customer, supplier or competitor of Energy Services of America Corporation;

 

detailed information about any relationship or understanding between the proposing stockholder and the candidate; and

 

a statement that the candidate is willing to be considered and willing to serve as a director if nominated and elected.

 

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Stockholder Communications with the Board

 

A stockholder who wants to communicate with the Board of Directors or with any individual director can write to the Corporate Secretary at 75 West 3rd Ave., Huntington, West Virginia 25701, Attention: Corporate Secretary. The letter should indicate that the author is a stockholder and if shares are not held of record, should include appropriate evidence of stock ownership. Depending on the subject matter, the Secretary will:

 

forward the communication to the director or directors to whom it is addressed;

 

attempt to handle the inquiry directly, i.e. where it is a request for information about us or it is a stock-related matter; or

 

not forward the communication if it is primarily commercial in nature, relates to an improper or irrelevant topic, or is unduly hostile, threatening, illegal or otherwise inappropriate.

 

At each board meeting, management shall present a summary of all communications received since the last meeting that were not forwarded and make those communications available to the directors.

 

The Compensation Committee

 

The compensation committee consisted of directors Joseph L. Williams, Keith Molihan and Nester S. Logan until his resignation on May 16, 2019. Each member of the compensation committee is considered “independent” as defined in the NYSE American corporate governance listing standards. The Board of Directors has not adopted a written charter for the Committee. The compensation committee met one time during fiscal year 2019.

 

The compensation committee is appointed by the Board of Directors to assist the Board in developing compensation philosophy, criteria, goals and policies for our executive officers that reflect our values and strategic objectives. The committee reviews the performance of our executive officers and annually recommends to the full Board the compensation and benefits for our executive officers (including the Chief Executive Officer). The committee administers our equity and long-term incentive plans. The committee establishes the terms of employment and severance agreements/arrangements for executive officers, if applicable. The committee recommends to the full Board the compensation to be paid to our directors and any affiliates for their service on the Board. Finally, the committee establishes annual compensation percentage increases for all employees. Our President and Chief Executive Officer provides recommendations to the compensation committee related to our compensation program. However, our President and Chief Executive Officer does not vote on and is not present for any discussion of his own compensation.

 

For 2019, in making compensation decisions, the compensation committee did not use strict numerical formulas to determine the compensation paid to our executive officers. However, the committee considered a variety of factors in its deliberations over executive compensation, emphasizing the profitability and scope of our operations, the experience, expertise and management skills of the named executive officers and their role in our future success, as well as compensation surveys prepared by professional firms to determine compensation paid to executives performing similar duties for comparable companies. While the quantitative and non-quantitative factors described above were considered by the committee in determining the compensation paid to our named executive officers, such factors were not assigned a specific weight in evaluating the performance of the named executive officers. In determining the Chief Executive Officer’s bonus, the Chairman of the Board also considers the above factors and makes a recommendation to the committee which authorizes such bonus. For the other named executive officer, the Chief Executive Officer considers the above factors and makes a recommendation to the committee which authorized his bonus. The Company paid $40,000 in bonuses to the named executive officers during fiscal year 2019.

 

The Compensation Committee has authority to approve the engagement of any compensation consultant it uses and the fees for those services. However, the Compensation Committee did not engage a compensation consultant to assist in determining the amount or form of executive and director compensation with respect to fiscal year 2019.

 

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Code of Ethics

 

We have 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.

 

ITEM 11.Executive Compensation

 

Executive and Director Compensation

 

We have adopted a compensation committee policy that reflects the compensation philosophy and objectives of the compensation committee.

 

Compensation Philosophy and Objectives

 

The compensation committee believes that an effective executive compensation program rewards the achievement of pre-established short term, long-term and strategic goals, and aligns executives’ interests with those of our stockholders. The committee regularly evaluates both performance and compensation relative to other comparable companies. We also manage our named executive officers’ compensation to align with the time horizon of our growth and development. As we grow, we strive to ensure that our compensation programs and practices remain consistent with our philosophy to provide competitive, performance-based, and risk appropriate compensation that enables us to attract, motivate and retain top performers who are essential to our successful growth and performance.

 

The primary objectives of our executive compensation program are to:

 

provide pay for performance utilizing short and long-term incentives;

 

be competitive with the marketplace within which we compete for talent;

 

ensure compensation programs reward performance while appropriately managing risk; and

 

enable us to attract, motivate, and retain top talent.

 

We accomplish all these objectives through a total compensation program that balances fixed and variable (i.e. incentive) compensation with a focus on providing rewards to named executive officers for their contributions towards achieving core business objectives and furthering our short and long-term performance. We balance our desire for superior performance with safeguards so that our programs do not result in excessive risk taking that can threaten our long-term value and stability. We also recognize that our ability to attract and retain top talent has become even more critical as we grow.

 

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Our executive compensation philosophy provides competitive ranges for each component of our compensation program and our compensation paid in the aggregate. The starting point targets market median, but by using performance-based instruments, actual compensation paid to our named executive officers varies depending on our performance against our stated objectives. We meet our compensation objectives for our named executive officers through the following components of their total compensation:

 

Base salaries are targeted at market median, but allow for recognition of everyone’s role, contribution, performance, and experience.

 

Bonuses, which are determined by the compensation committee, reflect market median levels although actual payouts will vary based on our performance relative to company-wide, team and individual contributions toward our strategic plan.

 

Retirement, health, life insurance, disability, severance and other perquisites and benefits are provided, but their focus and value are intentionally set to be conservatively competitive in order to attract and retain talented individuals.

 

Executive total compensation is expected to vary each year and evolve over the long-term to reflect our performance relative to our peers and the industry, and to correspond with shareholder returns.

 

We review our executive compensation philosophy and programs annually to ensure that they are achieving desired objectives and supporting our needs as we grow to be a more complex organization.

 

Summary Compensation Table for Named Executive Officers. The following table shows the compensation of the Company’s executive officers for the years ended September 30, 2019 and 2018. Messrs. Reynolds and Crimmel were the only executive officers who received total compensation in excess of $100,000 for services to the Company or any of its subsidiaries during the years ended September 30, 2019 or 2018.

 

Summary Compensation Table
Name and principal position  Year   Salary   Bonus   Stock awards   All other
compensation (1)
   Total 
Douglas V. Reynolds   2019   $80,000   $30,000   $-   $4,154   $114,154 
President and Chief   2018   $80,000   $-   $-   $3,600   $83,600 
Executive Officer                              
                               
Charles P. Crimmel   2019   $120,016   $10,000   $-   $5,851   $135,867 
Secretary/Treasurer and   2018   $104,965   $-   $-   $4,724   $109,689 
Chief Financial Officer                              
                               

(1)Other compensation in 2019 includes 401(k) plan matching contributions of $4,154 for Mr. Reynolds and $5,851 for Mr. Crimmel.  Other compensation in 2018 includes 401(k) plan matching contributions of $3,600 for Mr. Reynolds and $4,724 for Mr. Crimmel.

 

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Benefit Plans

 

Stock Benefit Plans

 

Long Term Incentive Plan. In 2010, the Board of Directors adopted, and our stockholders approved, the Energy Services of America Corporation Long Term Incentive Plan (the “LTIP”), to provide our employees and directors with additional incentives to promote our growth and performance. The LTIP gives us the flexibility we need to continue to attract and retain highly qualified employees and directors by offering a competitive compensation program that is linked to the performance of our common stock.

 

The LTIP is administered by our compensation committee. The committee may determine the type of award and the terms and conditions of each award under the LTIP, which shall be set forth in an award agreement delivered to each participant. The LTIP authorizes the issuance of up to 1,200,000 shares of Company common stock pursuant to grants of restricted stock awards, performance share awards, restricted stock units, performance share units, incentive stock options, non-qualified stock options and stock appreciation rights, provided, however, that in any five-year period, no individual may receive a grant of any type for more than 180,000 shares.

 

The committee is authorized to grant awards, the vesting of which may be subject to the satisfaction of performance-based conditions. The vesting date of performance-based awards is the date on which all the performance measures are attained, and the performance period is concluded. Any unvested performance-based awards for which the performance measures are not satisfied will be forfeited without consideration. If the right to become vested in an award under the LTIP is conditioned on the completion of a specified period of service with the Company or its subsidiaries, without the achievement of performance measures or objectives, then the required period of service for full vesting shall be determined by the committee and evidenced in the award agreement. In general, no awards may vest at a rate exceeding one-third per year commencing one year after the date of grant.

 

Unless otherwise provided in an award agreement, in the event of a participant’s termination of service for any reason other than disability, retirement, death or termination for cause, then (i) any stock options and stock appreciation rights shall be exercisable only as to those awards that were vested on the date of termination of service and only for a period of three months following termination, and (ii) any restricted stock awards or restricted stock units that have not vested as of the date of termination of service shall expire and be forfeited. In the event of termination for cause, any awards that have not vested, or have vested but have not been exercised (in the case of stock options and stock appreciation rights) shall expire and shall be forfeited.

 

Upon termination of service due to death or disability, all stock options and stock appreciation rights shall be exercisable as to all shares subject to an outstanding award, whether or not then exercisable, and all restricted stock and restricted stock unit awards shall become fully vested at the date of termination of service. Stock options and stock appreciation rights may be exercised for a period of one year following such termination of service.

 

Unless otherwise provided in an award agreement, upon termination of service due to retirement, all stock options and stock appreciation rights shall be exercisable as to all shares subject to an outstanding award, whether or not then exercisable. Unless otherwise provided in an award agreement, all other awards shall become fully vested on retirement.

 

Unless otherwise provided in an award agreement, upon the occurrence of an involuntary termination of employment (or, as to a director, termination of service as a director) following a “change in control” of the Company (as defined in the LTIP), all outstanding options and stock appreciation rights then held by a participant will become fully exercisable and all restricted stock and restricted stock unit awards shall be fully earned and vested. In the event of a change in control, any performance measure attached to an award shall be deemed satisfied as of the date of the change in control.

 

If the committee determines that a present or former participant has (i) used for profit, or disclosed to unauthorized persons, our confidential information or trade secrets; (ii) breached any contract with or violated any fiduciary obligation to us; or (iii) engaged in any conduct which the committee determines is injurious to the Company, the committee may cause that participant to forfeit his or her outstanding awards under the Plan.

 

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If we are required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, any participant who is an executive officer shall (i) reimburse the Company the amount of any bonus or incentive compensation paid to such participant that were subsequently reduced due to the restatement; (ii) have outstanding awards granted under the LTIP cancelled; and/or (iii) reimburse the Company for any gains realized in the exercise of options, vesting of or open market sales of vested, restricted stock awards or performance share awards, payment of any restricted stock units, performance share units or stock appreciation rights granted to such participant, regardless of when issued, but only if, and to the extent that (A) the amount of the bonus or incentive compensation was calculated based on achievement of the original financial results; (B) the executive officer engaged in intentional misconduct that caused or partially caused the need for the restatement; and (C) the amount of the bonus or incentive compensation, as calculated under the restated financial results, is less than the amount actually paid or awarded under the original financial results.

 

The Board of Directors may, at any time, amend or terminate the LTIP or any award granted under the LTIP, provided that, except as provided in the LTIP, no amendment or termination may adversely impair the rights of an outstanding award without the participant’s (or affected beneficiary’s) written consent.

 

For fiscal year 2019, no awards were granted under LTIP to the named executive officers by the compensation committee.

 

Energy Services 401(k) Plan

 

401(k) Retirement Plans

 

We maintain the Energy Services of America Staff 401(k) Retirement Plan (the “Plan”). Our three wholly owned subsidiaries, C. J. Hughes Construction Company, Inc., Nitro Construction Services, Inc., and Contractors Rental Corporation adopted the Plan on behalf of their non-union employees. Employees are eligible to participate in the Plan upon completion of six months of service but must wait until a quarterly entry date to join the Plan. Employees may contribute eligible wages up to the maximum indexed dollar amount set by the Internal Revenue Service, which was $19,000 for 2019. In addition, participants who are age 50 or older by the end of the Plan year may elect to defer up to an additional $6,000 into the 401(k) Plan for 2019. The Company provided a matching contribution to each participant’s account equal to 100% of each dollar contributed for the first 3% of eligible wages and 50% of each dollar contributed for the next 3% of eligible wages. The Company’s matching contribution is used by the Plan’s third-party administrator to purchase Energy Services of America stock from the open market. Additionally, each Plan year, the Company may make discretionary profit-sharing contributions for participants who are actively employed on the last day of the Plan year. The discretionary contributions will be allocated to a qualifying participant’s individual account based on the ratio of his or her compensation to the total compensation of all qualifying participants for the Plan year. No discretionary profit-sharing contributions were made in 2019. Participants direct the investment of their account in the Plan, selecting from investment funds provided under the Plan. Participants receive quarterly benefit statements that provide information on their account balances and have immediate access to their account through an Interactive Voice Response System and the Internet. Plan benefits are paid as soon as administratively possible following the participant’s termination of employment. Lump sums, partial payments and installment payments are available if the participant’s account balance exceeds $1,000.

 

Energy Services of America Corporation 2009 Employee Stock Purchase Plan

 

The plan enables eligible employees to purchase common stock through payroll deductions. The plan is intended to qualify under Section 423 of the Internal Revenue Code and its regulations. Up to 1,200,000 shares of common stock, subject to adjustments, may be issued under this plan. An eligible employee’s stock purchases during a calendar year may not exceed the lesser of: (a) a percentage of the participant’s compensation or a total dollar amount as specified by the committee or (b) $25,000. During 2019, we did not utilize the plan.

 

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Directors’ Compensation

 

Director Compensation. The table set forth below shows the compensation of our non-executive directors for the fiscal year ended September 30, 2019. We did not make any non-equity incentive plan awards to directors and there were no preferential earnings on nonqualified deferred compensation. Each Director received retainer fees of $1,000 per month. No fee payments were made for committee participation.

 

Name  Fees earned or paid
in cash ($)
   Stock Awards ($)   All other
compensation ($)
   Total 
Marshall T. Reynolds  $12,000   $             -   $             -   $12,000 
Samuel G. Kapourales   12,000    -    -    12,000 
Jack M. Reynolds   12,000    -    -    12,000 
Neal W. Scaggs   12,000    -    -    12,000 
Joseph L. Williams   12,000    -    -    12,000 
Keith Molihan   12,000    -    -    12,000 
Nester S. Logan   8,000(1)   -    -    8,000 
Frank Lucente   4,000(2)   -    -    4,000 
Bruce H. Elliott   12,000    -    -    12,000 
Charles Abraham   12,000    -    -    12,000 
Total  $108,000   $-   $-   $108,000 

 

(1)  Resigned effective May 16, 2019

(2)  Appointed June 19, 2019

 

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

 

Persons and groups who beneficially own in excess of five percent of our common stock are required to file certain reports with the Securities and Exchange Commission regarding such ownership. The following table sets forth, as of September 30, 2019, the shares of common stock beneficially owned by each person who was the beneficial owner of more than five percent of our outstanding shares of common stock, as well as the shares owned by our directors and executive officers as a group.

 

Name and Address of Beneficial Owners     Amount of Shares Owned
and Nature of Beneficial
Ownership (1)
     Percent of Shares
of Common Stock
Owned
     Preferred Shares
Owned
     Percent of Shares
of Preferred Stock
Owned
 
All Directors and Executive Officers                                
as a Group (11 persons)     7,265,650 (2)     45.39 %     125       60.68 %
                                 
Principal Stockholders:                                
                               
Marshall T. Reynolds     2,426,796 (3)     16.30 %     58       28.16 %
75 West 3rd Ave.                                
Huntington, WV 25701                                
                                 
Douglas V. Reynolds     1,681,681 (4)     11.86 %     15       7.28 %
75 West 3rd Ave.                                
Huntington, WV 25701                                
                                 
Samuel G. Kapourales     761,474 (5)     5.37 %     16       7.77 %
75 West 3rd Ave.                                
Huntington, WV 25701                                

 

(1)In accordance with Rule 13d-3 under the Security Exchange Act of 1934, a person is deemed to be the beneficial owner for purposes of this table of any shares of common stock if he has sole or shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the date as of which beneficial ownership is being determined. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares.  Includes all shares held directly as well as by spouses and minor children, in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or shared voting and investment power.
(2)Includes 2,083,333 shares of common stock issuable upon conversion of shares of preferred stock.
(3)Includes 966,667 shares of common stock issuable upon conversion of shares of preferred stock.
(4)Includes 250,000 shares of common stock issuable upon conversion of shares of preferred stock and 43,430 common shares related to 401(k) match. held by third party plan administrator
(5)Includes 266,667 shares of common stock issuable upon conversion of shares of preferred stock.

 

42

 

 

The table below sets forth certain information regarding our Board of Directors and executive officers, including the terms of office of board members and the ownership of our securities.

 

Names and Address (1)    Age (2)   Position Held   Director
Since
    Current
Term to
Expire
    Shares of Common
Stock Beneficially
Owned on Record
Date (3)
    Percent of
Common
Shares
    Preferred
Shares
Owned
    Percent of
Preferred
Shares
 
Directors:                                                            
                                                             
Marshall T. Reynolds     83     Chairman and Director     2006       2020       2,426,796 (4)     16.30 %     58       28.16 %
                                                             
Douglas V. Reynolds      43       President and Chief Executive Officer, Director     2008       2020       1,681,681 (5)     11.86 %     15       7.28 %
                                                           
Samuel G. Kapourales     84     Director     2010       2020       761,474 (6)     5.37 %     16       7.77 %
                                                             
Jack M. Reynolds     54     Director     2006       2020       458,216 (7)     3.29 %     1       0.49 %
                                                             
Neal W. Scaggs     83     Director     2006       2020       670,206 (8)     4.72 %     16       7.77 %
                                                             
Joseph L. Williams     74     Director     2006       2020       139,481 (9)     1.00 %     1       0.49 %
                                                             
Keith Molihan     77     Director     2008       2020       29,167 (10)     0.21 %     1       0.49 %
                                                             
Frank S. Lucente     74     Director     2019       2020       332,165 (11)     2.38 %     2       0.97 %
                                                             
Bruce H. Elliott     64     Director     2014       2020       203,750       1.46 %     -       0.00 %
                                                             
Charles Abraham     76     Director     2016       2020       547,254 (12)     3.86 %     15       7.28 %
                                                             
Charles P. Crimmel     46     Chief Financial Officer     n/a       n/a       15,462 (13)     0.11 %     -       0.00 %
                                                             
All Directors and Executive Officers as a Group (11 persons)                                 7,265,650 (14)     45.39 %     125       60.68 %

 

  

(1)The mailing address for each person is 75 West 3rd Ave., Huntington, WV 25701
(2)As of September 30, 2019.
(3)In accordance with Rule 13d-3 under the Security Exchange Act of 1934, a person is deemed to be the beneficial owner for purposes of this table of any shares of common stock if he has sole or shared voting or investment power with respect to such security, or has a right to acquire beneficial ownership at any time within 60 days from the date as of which beneficial ownership is being determined. As used herein, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. Includes all shares held directly as well as by spouses and minor children, in trust and other indirect ownership, over which shares the named individuals effectively exercise sole or shared voting and investment power.
(4)Includes 966,667 shares of common stock issuable upon conversion of shares of preferred stock.
(5)Includes 250,000 shares of common stock issuable upon conversion of shares of preferred stock and 43,430 common shares related to 401(k) match held by third party plan administrator.
(6)Includes 266,667 shares of common stock issuable upon conversion of shares of preferred stock.
(7)Includes 16,667 shares of common stock issuable upon conversion of shares of preferred stock.
(8)Includes 266,667 shares of common stock issuable upon conversion of shares of preferred stock.
(9)Includes16,667 shares of common stock issuable upon conversion of shares of preferred stock.
(10)Includes 16,667 shares of common stock issuable upon conversion of shares of preferred stock.
(11)Includes 33,333 shares of common stock issuable upon conversion of shares of preferred stock.
(12)Includes 250,000 shares of common stock issuable upon conversion of shares of preferred stock.
(13)Includes 15,462 shares of common stock related to 401(k) match held by third party plan administrator.
(14) Includes 2,083,333 shares of common stock issuable upon conversion of shares of preferred stock.

 

43

 

 

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

 

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

 

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Nester Logan and Mr. Samuel Kapourales, directors of Energy Services, were also directors of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, holds the same position with Premier Financial Bancorp Inc. Mr. Keith Molihan and Mr. Neal Scaggs are both directors of Energy Services and hold the same position with Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of September 30, 2019, we have paid approximately $189,000 in principal and approximately $256,000 in interest since the beginning of the loan. There were no new material related party transactions entered into during the fiscal year ended September 30, 2019.

 

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

 

Board Independence

 

The Board of Directors consists of a majority of “independent directors” within the meaning of the NYSE American corporate governance listing standards. The Board of Directors has determined that Messrs. Scaggs, Molihan, Williams, Kapourales, Abraham, Lucente and Elliott are “independent directors” within the meaning of such standards. Mr. Logan was an independent director until his resignation on May 16, 2019. There were no transactions not required to be reported under “Certain Relationships and Related Transactions” that were considered in determining the independence of our directors.

 

44

 

 

ITEM 14.Principal Accountant Fees and Services

 

Audit Fees

 

We were billed by Arnett Carbis Toothman, our independent registered public accountant, $148,223 and $115,926 for the services they have performed in connection with the audit of our financial statements included in our Annual Report for fiscal 2019 and 2018, respectively and for the review of interim financial statements included in our quarterly reports on Form 10-Q during these periods.

 

Audit-Related Fees

 

During fiscal years 2019 and 2018, we had no audit-related fees.

 

Tax Fees

 

During the fiscal years ended September 30, 2019 and 2018, we were billed by Arnett Carbis Toothman $60,256 and $54,663, respectively, for tax compliance services. Income tax fees were higher in fiscal year 2018 primarily due to net operating loss issues arising in fiscal year 2017 and cost incurred in 2018.

 

Employee Benefit Plan

 

During the fiscal years ended September 30, 2019 and 2018, we were billed by Arnett Carbis Toothman $48,473 and $36,866, respectively, for the services they performed in connection with the audit of our 401(k) Plan and Form 11-K filing.

 

All Other Fees

 

During fiscal years 2019 and 2018, we were billed by Arnett Carbis Toothman, $11,585 and $4,869, respectively, for fees billed for products and services provided by our independent registered public accounting firm other than those set forth above. These fees consisted primarily of travel and postage expenses.

 

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

 

The audit committee’s policy is to pre-approve all audit and non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the service or category of services and is generally subject to a specific budget. The audit committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent registered public accounting firm and management are required to periodically report to the full audit committee regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. All the fees paid in the audit-related, tax and all other categories during 2019 and 2018 were approved per the pre-approval policies.

 

45

 

 

PART IV

 

ITEM 15.Exhibits and Financial Statement Schedules

 

The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:

 

(a)(1) Consolidated Financial Statements  
     
  Energy Services of America Corporation  
     
  Report of Independent Registered Public Accounting Firm F-1
     
  Consolidated Balance Sheets, September 30, 2019 and September 30, 2018 F-2
     
  Consolidated Statements of Income, Years Ended September 30, 2019 and September 30, 2018 F-3
     
  Consolidated Statements of Cash Flows, Years Ended September 30, 2019 and September 30, 2018 F-4
     
  Consolidated Statements of Changes in Shareholders’ Equity, Years Ended September 30, 2019 and September 30, 2018 F-5
     
  Notes to Consolidated Financial Statements F-6
     
(a)(2) Consolidated Financial Statement Schedules  
     
  No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes  
     
(a)(3) Exhibits  

 

46

 

 

Exhibit No.   Description
 
3.1   Amended and Restated Certificate of Incorporation (1)
3.2   Bylaws (1)
3.3   Certificate of Amendment to the Registrant’s Certificate of Incorporation (1)
3.4   Certificate of Designations Series A Preferred Stock (4)
4.1   Form of Certificate of Common Stock (1)
4.2   Description of Common Stock
10.1   Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and the Registrant (1)
10.2   Form of Stock Escrow Agreement between the Registrant, Continental Stock Transfer & Trust Company and the Initial Stockholders (1)
10.3   Form of Letter Agreement between Chapman Printing Co. and the Registrant regarding administrative support (1)
10.4   Form of Amended Registration Rights Agreement among the Registrant and the Initial Stockholders (1)
10.6.1   Energy Services of America Corporation Employee Stock Purchase Plan (2)
10.6.2   Energy Services of America Corporation Long Term Incentive Plan (3)
14   Code of Ethics (1)
21   List of subsidiaries
23   Consent of Arnett Carbis Toothman LLP
31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)Incorporated by reference to the Registration Statement on Form S-1 of Energy Services of America Corp. (file no. 333-133111), originally filed with the Securities and Exchange Commission on April 7, 2006, as amended.
(2)Filed as Appendix A to the Schedule 14-A filed with the Securities and Exchange Commission on October 16, 2008.
(3)Filed as Appendix A to the Schedule 14-A filed with the Securities and Exchange Commission on July 2, 2010.
(4)Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities Exchange Commission on August 8, 2013.

 

(b) The exhibits listed under (a)(3) above are filed herewith.
(c)Not applicable.

 

ITEM 16.Form 10-K Summary

 

None.

 

47

 

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    ENERGY SERVICES OF AMERICA CORPORATION
     
Date: December 20, 2019 By: /s/ Douglas V. Reynolds
    Douglas V. Reynolds
    President and Chief Executive Officer
    (Duly Authorized Representative)

 

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

  Name   Position   Date
           
By /s/ Marshall T. Reynolds   Chairman of the Board     December 20, 2019
  Marshall T. Reynolds        
           
By /s/ Jack Reynolds   Director   December 20, 2019
  Jack R. Reynolds        
           
By /s/ Charles P. Crimmel   Chief Financial Officer   December 20, 2019
  Charles P. Crimmel   (Principal Financial and Accounting Officer)    
           
By /s/ Neal W. Scaggs   Director   December 20, 2019
  Neal W. Scaggs        
           
By /s/ Joseph L. Williams   Director   December 20, 2019
  Joseph L. Williams        
           
By /s/ Keith Molihan   Director   December 20, 2019
  Keith Molihan        
           
           
By /s/ Frank S. Lucente   Director   December 20, 2019
  Frank S. Lucente        
           
By /s/ Bruce H. Elliott   Director   December 20, 2019
  Bruce H. Elliott          
           
By /s/ Samuel G. Kapourales   Director   December 20, 2019
  Samuel G. Kapourales        
           
By /s/ Charles Abraham   Director   December 20, 2019
  Charles Abraham        
           
By /s/ Douglas V. Reynolds   President and Chief Executive Officer, and   December 20, 2019
  Douglas V. Reynolds   Director    
    (Principal Executive Officer)    

 

48

 

 

actcpas.com

 

101 Washington Street East

P.O. Box 2629

Charleston, WV 25329

304.346.0441 office│ 304.346.8333 fax

800.642.3601

 

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

 

 

To the Shareholders and Board of Directors

Energy Services of America Corporation

Huntington, West Virginia

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Energy Services of America Corporation and subsidiaries (the Company) as of September 30, 2019 and 2018, the related consolidated statements of income, changes in shareholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

We have served as the Company's auditor since 2008.

 

Charleston, West Virginia

December 20, 2019

 

F-1

 

 

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED BALANCE SHEETS

As of September 30, 2019 and 2018

 

Assets   2019    2018 
Current assets          
Cash and cash equivalents  $4,578,275   $1,065,550 
Accounts receivable-trade   21,678,622    22,227,555 
Allowance for doubtful accounts   (70,310)   (83,885)
Retainages receivable   3,521,561    4,919,351 
Other receivables   10,008    266,179 
Contract assets   6,659,707    5,353,375 
Prepaid expenses and other   2,734,974    4,117,276 
Total current assets   39,112,837    37,865,401 
           
Property, plant and equipment, at cost   51,268,358    48,278,427 
less accumulated depreciation   (34,453,157)   (31,462,438)
Total fixed assets   16,815,201    16,815,989 
           
Total assets  $55,928,038   $54,681,390 
           
Liabilities and shareholders' equity          
Current liabilities          
Current maturities of long-term debt  $4,403,573   $3,221,268 
Lines of credit and short term borrowings   4,025,710    6,069,247 
Accounts payable   2,919,618    6,204,870 
Accrued expenses and other current liabilities   3,509,373    4,301,515 
Contract liabilities   3,455,288    3,261,201 
Income tax payable   -    545,237 
Total current liabilities   18,313,562    23,603,338 
           
Long-term debt, less current maturities   11,024,296    6,468,630 
Deferred income taxes payable   1,925,823    1,328,375 
Total liabilities   31,263,681    31,400,343 
           
Shareholders' equity          
           
Preferred stock, $.0001 par value          
Authorized 1,000,000 shares, 206 issued at September 30, 2019 and 2018   -    - 
           
Common stock, $.0001 par value Authorized 50,000,000 shares 14,839,836 issued and 13,924,789 outstanding at September 30, 2019 and 14,839,836 issued and 14,194,517 outstanding at September 30, 2018   1,484    1,484 
        
Treasury stock, 915,047 shares at September 30, 2019 and 645,319 at September 30, 2018   (91)   (65)
           
Additional paid in capital   60,938,896    61,239,470 
Retained earnings (deficit)   (36,275,932)   (37,959,842)
Total shareholders' equity   24,664,357    23,281,047 
           
Total liabilities and shareholders' equity  $55,928,038   $54,681,390 

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

F-2

 

 

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

For the years ended September 30, 2019 and 2018

 

   2019   2018 
Revenue  $174,541,155   $135,482,771 
           
Cost of revenues   161,861,357    123,833,517 
           
Gross profit   12,679,798    11,649,254 
           
Selling and administrative expenses   8,857,386    7,728,182 
Income from operations   3,822,412    3,921,072 
           
Other income (expense)          
Interest income   58,023    132,342 
Other nonoperating expense   (112,814)   (174,576)
Interest expense   (1,064,222)   (916,675)
Gain on sale of equipment   258,082    456,894 
    (860,931)   (502,015)
           
Income before income taxes   2,961,481    3,419,057 
           
Income tax expense   968,571    910,034 
           
Net income   1,992,910    2,509,023 
           
Dividends on preferred stock   309,000    309,000 
           
           
Net income available to common shareholders  $1,683,910   $2,200,023 
           
Weighted average shares outstanding-basic   14,064,871    14,234,571 
           
Weighted average shares-diluted   17,498,204    17,667,904 
           
Earnings per share available to common shareholders  $0.120   $0.155 
          
Earnings per share-diluted available to common shareholders  $0.096   $0.125 

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

F-3

 

 

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended September 30, 2019 and 2018

 

Cash flows from operating activities:  2019   2018 
Net income  $1,992,910   $2,509,023 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
           
Depreciation expense   4,157,849    4,209,056 
Gain on sale of equipment   (258,082)   (456,894)
Provision for deferred taxes   597,448    (139,467)
Decrease in contracts receivable   535,358    888,402 
Decrease (increase) in retainage receivable   1,397,790    (1,145,459)
Decrease (increase) in other receivables   256,171    (32,656)
Increase in contract assets   (1,306,332)   (2,491)
Decrease in prepaid expenses   1,382,302    948,740 
Increase (decrease) in accounts payable   (3,285,252)   682,727 
Decrease in accrued expenses   (792,142)   (29,767)
Increase in contract liabilities   194,087    1,087,236 
Decrease in income taxes payable   (545,237)   545,237 
Net cash provided by operating activities   4,326,870    9,063,687 
           
Cash flows from investing activities:          
Investment in property and equipment   (3,364,985)   (1,883,126)
Proceeds from sales of property and equipment   629,228    544,595 
Net cash used in investing activities   (2,735,757)   (1,338,531)
           
           
Cash flows from financing activities:          
Preferred dividends paid   (309,000)   (309,000)
Treasury stock purchased by company   (300,600)   (49,795)
Borrowings on lines of credit and short term debt, net of (repayments)   7,956,463    (3,363,721)
Principal payments on long term debt   (5,425,251)   (4,612,615)
Net cash provided by (used in) financing activities   1,921,612    (8,335,131)
           
Increase (decrease) in cash and cash equivalents   3,512,725    (609,975)
Cash and cash equivalents beginning of period   1,065,550    1,675,525 
Cash and cash equivalents end of period  $4,578,275   $1,065,550 
           
Supplemental schedule of noncash investing and financing activities:          
Purchases of property & equipment under financing agreements  $1,163,222   $37,112 
Insurance premiums financed  $3,159,083   $3,130,859 
Accrued dividends on preferred stock  $77,250   $77,250 
Line of credit refinance to long-term debt  $10,000,000   $- 
           
Supplemental disclosures of cash flows information:          
           
Cash paid during the year for:          
Interest  $1,064,222   $916,675 
Income taxes  $798,430   $346,065 

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

F-4

 

 

ENERGY SERVICES OF AMERICA CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the years ended September 30, 2019 and 2018

 

                                  Total  
    Common Stock     Additional Paid     Retained     Treasury     Shareholders'  
    Shares     Amount     in Capital     Earnings (deficit)     Stock     Equity  
Balance at September 30, 2017     14,239,836     $ 1,484     $ 61,289,260     $ (40,159,865 )   $ (60 )   $ 21,130,819  
                                                 
Net income     -       -       -       2,509,023       -       2,509,023  
                                                 
Accrued preferred dividends     -       -       -       (309,000 )     -       (309,000 )
                                                 
Treasury stock purchased by company     (45,319 )     -       (49,790 )     -       (5 )     (49,795 )
                                                 
Balance at September 30, 2018     14,194,517     $ 1,484     $ 61,239,470     $ (37,959,842 )   $ (65 )   $ 23,281,047  
                                                 
Balance at September 30, 2018     14,194,517     $ 1,484     $ 61,239,470     $ (37,959,842 )   $ (65 )   $ 23,281,047  
                                                 
Net income     -       -       -       1,992,910       -       1,992,910  
                                                 
Accrued preferred dividends     -       -       -       (309,000 )     -       (309,000 )
                                                 
Treasury stock purchased by company     (269,728 )     -       (300,574 )     -       (26 )     (300,600 )
                                                 
Balance at September 30, 2019     13,924,789     $ 1,484     $ 60,938,896     $ (36,275,932 )   $ (91 )   $ 24,664,357  

 

The Accompanying Notes are an Integral Part of These Financial Statements

 

F-5

 

 

ENERGY SERVICES OF AMERICA CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1. BUSINESS AND ORGANIZATION:

 

Energy Services of America Corporation (“Energy Services” or the “Company”) was formed in 2006 as a special purpose acquisition corporation, or blank check company, and became an operating entity on August 15, 2008. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C. J. Hughes, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro operates primarily in the mid-Atlantic region of the United States. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All of the C.J. Hughes, Nitro, and Contractors Rental production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals. S.T. Pipeline, Inc., is a wholly owned subsidiary of the Company whose operations was liquidated on May 14, 2013. It was previously presented as a discontinued operation through September 30, 2018, but now is no longer presented separately in Energy Services’ 2019 financial statement presentation.

 

The Company’s stock is quoted under the symbol “ESOA” on the OTC QB marketplace operated by the OTC Markets Group.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Revenue Recognition

 

On October 1, 2018, the Company adopted an Accounting Standard Update, Revenue from Contracts with Customers (Topic 606). The core principle of Topic 606 is that revenue will be recognized when promised goods or services are transferred to customers in an amount that reflects consideration for which entitlement is expected in exchange for those goods or services. We adopted Topic 606 using a modified retrospective transition approach and elected to apply Topic 606 to contracts with customers that are not substantially complete, i.e. less than 90% complete, as of October 1, 2018.

 

The 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.

 

F-6

 

 

The Company does have certain service and maintenance contracts in which each customer purchase order is considered its own performance obligation recognized over time and would be recognized depending on the type of contract mentioned above. The Company also does certain T&M service work that is generally completed in a short duration and is recognized at a point in time.

 

All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors and outside equipment providers, direct overhead costs and internal equipment expense (primarily depreciation, fuel, maintenance and repairs).

 

The company recognizes revenue, but not profit, on certain uninstalled materials. Revenue on these uninstalled materials is recognized when the cost is incurred (when control is transferred), but the associated profit is not recognized until the end of the project. The costs of uninstalled materials will be tracked separately within the Company’s accounting software.

 

Pre-contract and bond costs, if required, on projects are generally immaterial to the total value of the Company’s contracts and are expensed when incurred. Project mobilization costs are also generally immaterial and charged to project costs as incurred. As a practical expedient, the Company recognizes these incremental costs as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less. For projects expected to last greater than one year, mobilization costs will be capitalized as incurred and amortized over the expected duration of the project. For these projects, mobilization costs will be tracked separately in the Company’s accounting software. This includes costs associated with setting up a project lot or lay-down yard, equipment, tool and supply transportation, temporary facilities and utilities and worker qualification and safety training.

 

Contracts may require the Company to warranty that work is performed in accordance with the contract; however, the warranty is not priced separately, and the Company does not offer customers an option to purchase a warranty. As of September 30, 2019, the Company does not have a material amount of costs expensed that would otherwise be capitalized and amortized.

 

Principles of Consolidation

 

The consolidated financial statements of Energy Services include the accounts of Energy Services and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services and its consolidated subsidiaries.

 

Use of Estimates and Assumptions

 

The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and loss during the reporting period. Actual results could differ materially from those estimates.

 

Cash and Cash Equivalents

 

Energy Services considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

 

F-7

 

 

Fair Value Measurements

 

The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

 

Under the FASB’s authoritative guidance on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Fair Value Measurements Topic of the FASB Accounting Standards Codification establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

 

As noted above, there is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

 

Level 1 — Quoted prices for identical assets and liabilities traded in active exchange markets, such as the New York Stock Exchange.

 

Level 2 — Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data. Level 2 also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.

 

Level 3 — Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for nonbinding single dealer quotes not corroborated by observable market data.

 

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The carrying amount for borrowings under the Company’s revolving credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Company’s long term fixed-rate debt to unrelated parties was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $16.0 million at September 30, 2019 was $16.0 million. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $10.3 million at September 30, 2018 was $10.2 million.

 

All receivables and payables are carried at net realizable value which approximates fair value because of their short duration to maturity.

 

F-8

 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s accounts receivable consists of amounts that have billed to customers. Collateral is generally not required. A majority of the Company’s contracts have monthly billing terms and payment terms within 30 to 45 days after invoices have been issued. The Company attempts to negotiate two-week billing terms and 15-day payment terms on larger projects. The timing of billings to customers may generate contract assets or contract liabilities. Certain construction contracts include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and are therefore not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the customer. We have determined there are no significant financing components in our contracts for the year ended September 20, 2019.

 

Retainage billed but not paid pursuant to contract provisions will be due upon completion of the contracts. Based on the Company’s experience management considers all amounts classified as retainage receivable to be collectible. All retainage receivable amounts are expected to be collected within the next fiscal year.

 

The Company provides an allowance for doubtful accounts when collection of an account or note receivable is considered doubtful, and receivables are written off against the allowance when deemed uncollectible. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates including, among others, the customer’s access to capital, the customer’s willingness or ability to pay, general economic conditions and the ongoing relationship with the customer.

 

Property and Equipment

 

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.

 

Impairment of Long-Lived Assets

 

A long-lived asset shall be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value is required.

 

Claims

 

Claims are amounts in excess of the agreed contract price that a contractor seeks to collect from customers or others for customer-caused delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. The Company records revenue on claims that have a high probability of success. Revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred.

 

F-9

 

 

Self -Insurance

 

The Company has its workers compensation, general liability and auto insurance through a captive insurance company. While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs the Company does have to maintain a surety deposit to guarantee payments of premiums. The surety deposit had a balance of $1.9 million as of September 30, 2019, which is in “Prepaid expenses and other” on the Company’s Consolidated Balance Sheets. The surety deposit had a balance of $2.1 million as of September 30, 2018. Should the captive experience severe losses over an extended period, it could have a detrimental effect on the Company.

 

Advertising

 

All advertising costs are expensed as incurred. Total advertising expense was $71,000 and $101,000 for the years ended September 30, 2019 and 2018, respectively.

 

Stock Compensation Plans

 

The Company has issued restricted stock under its Long-Term Incentive Plan; however, there were no issuances in fiscal years 2019 or 2018. The Company accounts for its equity-based compensation as prescribed by U.S. Generally Accepted Accounting Principles for share-based payments. The Company has adopted a fair value-based method of accounting for employee equity-based plans, whereby compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. As a result, compensation expense relating to stock compensation plans will be reflected in net income as part of “Salaries and employee benefits” on the Consolidated Statements of Income.

 

Income Taxes

 

The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ending prior to September 30, 2016. The Company follows the liability method of accounting for income taxes in accordance with U.S. Generally Accepted Accounting Principles. Under this method, deferred tax assets and liabilities are recorded for future tax consequences of temporary differences between financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that are expected to be in effect when the underlying assets or liabilities are recovered or settled. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

 

U.S. GAAP also prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or to be taken on a tax return. This evaluation is a two-step process.  First, the recognition process determines if it is more likely than not that a tax position will be sustained based on the merits of the tax position upon examination by the appropriate taxing authority.  Second, a measurement process is calculated to determine the amount of benefit/expense to recognize in the financial statements if a tax position meets the more likely than not recognition threshold.  The tax position is measured at the greatest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.  Any interest and penalty related to the unrecognized tax benefits, as the result of recognition of tax obligations resulting from uncertain tax positions, are included in the provision for income taxes. The Company had not recognized any uncertain tax positions at September 30, 2019.

 

Earnings Per Common Share

 

Basic earnings per share is computed using the weighted average number of common shares outstanding during the year, and diluted earnings per share is computed using the weighted average number of common shares outstanding during the year adjusted for all potentially dilutive common stock equivalents, except in cases where the effect of the common stock equivalent would be anti-dilutive.

 

F-10

 

 

Collective Bargaining Agreements

 

Certain Energy Services subsidiaries are party to collective bargaining agreements with unions representing certain of their employees. The agreements require such subsidiaries to pay specified wages and provide certain benefits to the union employees. These agreements expire at various times and have typically been renegotiated and renewed on terms that are similar to the ones contained in the expiring agreements.

 

Under certain collective bargaining agreements, the applicable Energy Services subsidiary is required to make contributions to multi-employer pension plans. If the subsidiary were to cease participation in one or more of these plans, a liability could potentially be assessed related to any underfunding of these plans. The amount of such assessment, were one to be made, cannot be reasonably estimated.

 

 

Litigation Costs

 

The Company reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. Litigation costs are expensed as incurred.

 

New Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Among other things, lessees will be required to recognize the following for all leases (except for short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company expects that the adoption of ASU 2016-02 will not have a material impact on its financial statements or disclosure.

 

Subsequent Events

 

Management has evaluated subsequent events through December 20, 2019, the date which the financial statements were available for issue.  There have been no material events noted during the period that would either impact the results reflected in the report or the Company’s results going forward.

 

On December 11, 2019, the Company declared a $0.05 special dividend to be paid on December 31, 2019 for stockholders as of December 23, 2019. The payment of cash dividends in the future will be contingent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any future dividends will be within the discretion of our board of directors.

 

Subsequent to September 30, 2019, the Company had purchased 25,297 shares of common stock as of December 1, 2019, at a purchase value of $20,723.

 

F-11

 

 

3. REVENUE RECOGNITION

 

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. As the adoption of Topic 606 did not have a material impact on the Company’s financial statements, there were no adjustments to previously stated balances.

 

Revenue Recognition: As of October 1, 2018, we began to separately present contract assets and liabilities on the Company’s consolidated balance sheet. Contract assets include costs and estimated earnings in excess of billings that were previously separately presented. Contract liabilities include billings in excess of costs and estimated earnings that were previously separately presented as well as provisions for losses, when occurred, that were previously included in accrued expenses and other current liabilities.

 

The accounting policies that were affected by Topic 606 and the changes thereto are as follows:

 

Revenue Recognition: Our revenue is primarily derived from construction contracts that can span several quarters. We recognize revenue in accordance with Topic 606. Topic 606 provides for a five-step model for recognizing revenue from contracts with customers as follows:

 

  1. Identify the contract

  2. Identify performance obligations

  3. Determine the transaction price

  4. Allocate the transaction price

  5. Recognize revenue

 

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

 

  the completeness and accuracy of the original bid;

  costs associated with scope changes;

  changes in costs of labor and/or materials;

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

  subcontractor performance issues;

  changes in productivity expectations;

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

  changes from original design on design-build projects;

  the availability and skill level of workers in the geographic location of the project;

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

  our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and

  the customer’s ability to properly administer the contract.

 

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

 

F-12

 

 

The transaction price is the amount of consideration to which we expect to be entitled in exchange for transferring goods and services to the customer. The consideration promised in a contract with customers may include both fixed amounts and variable amounts (e.g. bonuses/incentives or penalties/liquidated damages) to the extent that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved (i.e., probable and estimable). When a contract has a single performance obligation, the entire transaction price is attributed to that performance obligation. When a contract has more than one performance obligation, the transaction price is allocated to each performance obligation based on estimated relative standalone selling prices of the goods or services at the inception of the contract, which typically is determined using cost plus an appropriate margin.

 

Subsequent to the inception of a contract, the transaction price could change for various reasons, including the executed or estimated amount of change orders and unresolved contract modifications and claims to or from owners. Changes that are accounted for as an adjustment to existing performance obligations are allocated on the same basis at contract inception. Otherwise, changes are accounted for as separate performance obligation(s) and the separate transaction price is allocated as discussed above. Changes are made to the transaction price from unapproved change orders to the extent the amount can be reasonably estimated, and recovery is probable. On certain projects we have submitted and have pending unresolved contract modifications and affirmative claims (“affirmative claims”) to recover additional costs and the associated profit, if applicable, to which the Company believes it is entitled under the terms of contracts with customers, subcontractors, vendors or others. The owners or their authorized representatives and/or other third parties may be in partial or full agreement with the modifications or affirmative claims or may have rejected or disagree entirely or partially as to such entitlement.

 

Costs to obtain our contracts (“pre-bid costs”) that are not expected to be recovered from the customer are expensed as incurred and included in selling and administrative expenses on our consolidated statements of income. Costs to mobilize equipment and labor to a job site prior to substantive work beginning (“mobilization costs”) are capitalized as incurred and amortized over the expected duration of the contract. As of June 30, 2019, we had no material capitalized mobilization costs.

 

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

 

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

 

F-13

 

 

 

4. DISAGGREGATION OF REVENUE

 

We disaggregate our revenue based on our operating groups and contract types as it is the format that is regularly reviewed by management. Our reportable operating groups are: Petroleum and Gas, Water, Sewer and other services, and Electrical and Mechanical services. Our contract types are: Lump Sum, Unit Price, and Cost Plus and T&M. The following tables present our disaggregated revenue for the twelve months ended September 30, 2019 and 2018: 

 

Twelve Months Ended September 30, 2019
 
   Petroleum &
Gas
   Water, Sewer and
Other
   Electrical and
Mechanical
   Total revenue
from contracts
 
Lump sum contracts  $-   $-   $21,305,113   $21,305,113 
Unit price contracts   87,105,923    3,718,956    -    90,824,879 
Cost plus and T&M contracts   3,138,455    407,221    15,286,061    18,831,737 
Revenue from contracts in progress  $90,244,378   $4,126,177   $36,591,174   $130,961,729 
                     
Lump sum contracts  $-   $-   $13,643,771   $13,643,771 
Unit price contracts   13,343,837    7,314,400    -    20,658,237 
Cost plus and T&M contracts   1,919,411    692,831    6,665,176    9,277,418 
Revenue from completed contracts  $15,263,248   $8,007,231   $20,308,947   $43,579,426 
Total revenue from contracts  $105,507,626   $12,133,408   $56,900,121   $174,541,155 
                     
Earned over time  $105,507,626   $12,133,408   $55,727,239   $173,368,273 
Earned at point in time   -    -    1,172,882    1,172,882 
Total revenue from contracts  $105,507,626   $12,133,408   $56,900,121   $174,541,155 

 

Twelve Months Ended September 30, 2018
 
   Petroleum &
Gas
   Water, Sewer and
Other
   Electrical and
Mechanical
   Total revenue
from contracts
 
Lump sum contracts  $-   $-   $21,309,454   $21,309,454 
Unit price contracts   53,615,010    5,393,359    -    59,008,369 
Cost plus and T&M contracts   6,999,890    561,538    16,729,671    24,291,099 
Revenue from contracts in progress  $60,614,900   $5,954,897   $38,039,125   $104,608,922 
                     
Lump sum contracts  $-   $-   $14,619,398   $14,619,398 
Unit price contracts   9,070,997    3,190,889    -    12,261,886 
Cost plus and T&M contracts   -    96,960    3,895,605    3,992,565 
Revenue from completed contracts  $9,070,997   $3,287,849   $18,515,003   $30,873,849 
Total revenue from contracts  $69,685,897   $9,242,746   $56,554,128   $135,482,771 
                     
Earned over time  $69,685,897   $9,242,746   $55,454,524   $134,383,167 
Earned at point in time   -    -    1,099,604    1,099,604 
Total revenue from contracts  $69,685,897   $9,242,746   $56,554,128   $135,482,771 

 

F-14

 

 

5. CONTRACT BALANCES

 

Accounts receivable, which are included in current assets on the Consolidated Balance Sheets, totaled $21.7 million at September 30, 2019, a $549,000 decrease from $22.2 million at September 30, 2018. The decrease was mainly due to timing of billings and receipts. Contract assets, which are included in current assets on the Consolidated Balance Sheets, totaled $6.7 million at September 30, 2019, a $1.3 million increase from $5.4 million at September 30, 2018. This was due to an increase in costs and estimated earnings in excess of billings on uncompleted projects. Contract liabilities, which are included in current liabilities on the Consolidated Balance Sheets, totaled $3.5 million at September 30, 2019, a $194,000 increase from $3.3 million at September 30, 2018. This was due to an increase in billings in excess of costs and estimated earnings on uncompleted projects.

 

During the twelve months ended September 30, 2019, we recognized revenue of $2.0 million that was included in the contract liability balance at September 30, 2018.

 

Accounts receivable, net of allowance for doubtful accounts, contract assets and contract liabilities consisted of the following:

 

   September 30, 2018   September 2019   Change 
Accounts receivable-trade, net of allowance for doubtful accounts  $22,143,670   $21,608,312   $(535,358)
                
Contract assets               
Cost and estimated eanings in excess of billings  $5,353,375   $6,659,707   $1,306,332 
                
Contract liabilites               
Billings in excess of cost and estimated earnings  $3,261,201   $3,455,288   $194,087 

 

6. PERFORMANCE OBLIGATIONS

 

For the year ended September 30, 2019, we recognized revenue of $85,000 a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2018. The changes in contract transaction price were from items such as changes in projected profit, executed or estimated change orders, and unresolved contract modifications and claims.

 

At September 30, 2019, the Company had $7.5 million in remaining unsatisfied performance obligations, in which revenue is expected to be recognized in less than twelve months.

 

F-15

 

 

7. ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Activity in the Company’s allowance for doubtful accounts consists of the following:

 

   Year Ended September 30, 
   2019   2018 
Balance at beginning of year  $83,885   $108,200 
Charged to expense   -    - 
Deductions for uncollectible receivables written off, net of recoveries   (13,575)   (24,315)
Balance at end of year  $70,310   $83,885 

 

8. UNCOMPLETED CONTRACTS

 

Costs and estimated earnings in excess of billings on uncompleted contracts are included in contract assets on the consolidated balance sheet. Billings in excess of costs and estimated earnings on uncompleted contracts are included in contract liabilities on the consolidated balance sheets.

 

Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows:

 

   Year Ended September 30, 
   2019   2018 
Costs incurred on contracts in progress  $163,768,655   $154,793,209 
Estimated earnings, net of estimated losses   18,215,388    11,687,859 
    181,984,043    166,481,068 
Less billings to date   178,779,624    164,388,894 
   $3,204,419   $2,092,174 
           
Costs and estimated earnings in excess of billed on uncompleted contracts  $6,659,707   $5,353,375 
           
Less billings in excess of costs and estimated earnings on uncompleted contracts   3,455,288    3,261,201 
           
   $3,204,419   $2,092,174 

 

9. CLAIMS

 

The Company does not have any claims receivable as of September 30, 2019. Claims receivable is a component of contract assets.

 

F-16

 

 

10. PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consist of the following:

 

   Year Ended September 30, 
   2019   2018 
Land  $2,464,512   $2,333,106 
Buildings and leasehold improvements   5,348,851    4,761,019 
Operating equipment and vehicles   42,703,353    40,434,150 
Office equipment, furniture and fixtures   751,642    747,330 
Assets not yet in service   -    2,822 
    51,268,358    48,278,427 
Less accumulated depreciation   34,453,157    31,462,438 
           
Property, plant and equipment, net  $16,815,201   $16,815,989 

 

11. SHORT-TERM DEBT

 

Short-term debt consists of the following:

 

On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank, Inc., (“United Bank”), to provide the Company with a $15.0 million revolving line of credit. This line had a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. The interest rate on the line of credit is the “Wall Street Journal” Prime Rate (the index) with a floor of 4.99%. The effective date of this agreement was February 27, 2018 and it replaced the $15.0 million revolving line of credit (“Operating Line of Credit (2017)”) entered into with United Bank effective February 27, 2017. Operating Line of Credit (2018) expired on February 28, 2019 but was extended through April 28, 2019. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019.

 

The Company had borrowed $5.5 million against the Operating Line of Credit (2018) as of September 30, 2018 and had up to $7.0 million available to borrow against the first $12.5 million depending on the Company’s borrowing base report. The Company had borrowed an additional $4.5 million for a total of $10.0 million against the Operating Line of Credit (2019) as of May 30, 2019. On May 30, 2019, the Company entered into Term Note 2019 with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note is to finance a specific construction project completed in September 2019. Company anticipates paying off Term Note (2019) in less than one year. The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect the conditions of subsequent borrowings. Based on the borrowing base calculation, the Company could borrow up to $11.5 million as of September 30, 2019. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available on the line of credit.

 

Major items excluded from the borrowing base calculation are receivables from bonded jobs and retainage as well as all items greater than ninety (90) days old. Line of credit borrowings are collateralized by the Company’s accounts receivable. Cash available under the line is calculated based on 70.0% of the Company’s eligible accounts receivable. Major items excluded from the calculation are receivables from bonded jobs and retainage as well as items greater than 90 days old.

 

F-17

 

 

Under the terms of the agreement, the Company must meet the following loan covenants to access the first $12.5 million:

 

1.Minimum tangible net worth of $19.0 million to be measured quarterly
2.Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis
3.Minimum current ratio of 1.50x to be measured quarterly
4.Maximum debt to tangible net worth ratio (“TNW”) of 2.0x to be measured semi-annually
5.Full review of accounts receivable aging report and work in progress. The results of the review shall be satisfactory to the lender in its sole and unfettered discretion.

 

Under the terms of the agreement, the Company must meet the following additional requirements for draw requests causing the borrowings to exceed $12.5 million:

 

1.Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis
2.Minimum tangible net worth of $21.0 million to be measured quarterly

 

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at September 30, 2019.

 

The Company also finances insurance policy premiums on a short-term basis through a financing company. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. It is typical that the Company makes a down payment in January and finances the remaining premium amount over nine or ten monthly payments. In January 2019, The Company financed $3.2 million in insurance premium policies. At September 30, 2019, the balance of the remaining premiums to be paid was $526,000.

 

F-18

 

 

12. SHORT-TERM AND LONG-TERM DEBT

 

A summary of short-term and long-term debt as of September 30, 2019 and 2018 is as follows:

 

   2019   2018 
Line of credit payable to bank, monthly interest at 5.50%, final payment due by April 28, 2020.  $3,500,000   $5,500,000 
           
Notes payable to finance companies, due in monthly installments  totaling $83,042 including interest ranging from 0.00% to 6.03%, final payments due October 2019 through August 2026, secured by equipment.   1,691,991    1,332,993 
           
Note payable to finance company for insurance premiums financed, due in monthly installments  totaling $267,677 in FY 2019 and $288,581 in FY 2018, including interest rate at 2.77%, final payment due November 2019.   525,710    569,247 
           
Notes payable to bank, due in monthly installments totaling  $7,799, including interest at 4.82%, final  payment due November 2034 secured by  building and property.   1,012,126    1,054,248 
           
Notes payable to bank, due in monthly installments totaling  $11,828, including interest at 5.00%, final  payment due November 2025 secured by  building and property.   751,987    851,768 
           
Notes payable to bank, due in monthly installments totaling  $172,473, including interest at 6.50%, final  payment due February 2019 secured by  equipment.   -    702,097 
           
Notes payable to bank, due in monthly installments totaling  $30,914, including interest at 5.00%, final  payment due February 2019 secured by  equipment.   -    154,116 
           
Notes payable to bank, due in monthly installments totaling  $98,865, including interest at 4.99%, final  payment due September 2022 secured by  equipment.   3,040,600    4,045,025 
           
Notes payable to bank, due in monthly installments totaling  $46,482, including interest at 5.00%, final  payment due September 2021 secured by  equipment.   1,011,160    1,549,651 
           
Notes payable to bank, due in monthly installments totaling  $191,012, including interest at 5.50%, final  payment due September 2021 secured by  equipment.   7,920,005    - 
           
Total debt   19,453,579    15,759,145 
           
Less current maturities   8,429,283    9,290,515 
           
Total long term debt  $11,024,296   $6,468,630 

 

Future expected payments due on long-term debt are as follows:

 

2020  $8,429,283 
2021   3,977,300 
2022   3,286,263 
2023   2,419,847 
2024   273,646 
Thereafter   1,067,240 
   $19,453,579 

 

F-19

 

 

13. INCOME TAXES

 

The components of income taxes are as follows:

 

   Year Ended September 30, 
   2019   2018 
Federal          
Current  $289,476   $836,977 
Deferred   466,009    (333,740)
Total   755,485    503,237 
           
State          
Current   81,647    212,524 
Deferred   131,439    194,273 
Total   213,086    406,797 
           
Total income tax expense  $968,571   $910,034 

 

The provision for income taxes differs from the amount computed by applying a prorated federal rate of 21.0% for fiscal year 2019 and a statutory federal rate of 24.5% for fiscal year 2018 on income from operations, as indicated in the following analysis:

 

   Year Ended September 30, 
   2019   2018 
Statutory rate   21.00%   24.50%
State income taxes   6.00%   8.99%
Meals and other   5.70%   11.84%
Rate change effect on deferred taxes   0.00%   -18.71%
Effective tax rate   32.70%   26.62%

 

Deferred income taxes provide for significant differences between the basis of assets and liabilities for financial reporting and income tax reporting. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized.

 

F-20

 

 

The income tax effects of temporary differences giving rise to the deferred tax assets and liabilities are as follows:

 

   Year Ended September 30, 
   2019   2018 
Deferred income tax liabilities          
Long-term          
Property and equipment  $2,539,639   $2,023,641 
Other   (19,805)   4,639 
Total deferred income tax liabilities   2,519,834    2,028,280 
           
Deferred income tax assets          
Long-term          
Other   594,011    699,905 
Total deferred income tax assets   594,011    699,905 
           
Total net deferred income tax liabilities  $1,925,823   $1,328,375 

 

The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. Consequent to the passage of the Act, the Company’s deferred tax assets and liabilities were adjusted for the effects of the Act’s changes in the tax law and rates. For the year ended September 30, 2018, the Company realized approximately $588,000 in income tax benefits recorded to income tax expense to reflect the impact of the Act’s rate change on the Company’s net deferred tax assets.

 

The Company does not believe that it has any unrecognized tax benefits included in its consolidated financial statements that require recognition. The Company has not had any settlements in the current period with taxing authorities, nor has it recognized tax benefits as a result of a lapse of the applicable statute of limitations. The Company recognizes interest and penalties accrued related to unrecognized tax benefits, if applicable, in general and administrative expenses.

 

F-21

 

 

14. EARNINGS PER SHARE

 

Earnings per share for the years ended September 30, 2019 and 2018 are as follow:

 

   Twelve Months Ended   Twelve Months Ended 
   September 30,   September 30, 
   2019   2018 
Net income  $1,992,910   $2,509,023 
           
Dividends on preferred stock   309,000    309,000 
           
Income available to common shareholders  $1,683,910   $2,200,023 
           
Weighted average shares outstanding   14,064,871    14,234,571 
           
Weighted average shares outstanding-diluted   17,498,204    17,667,904 
           
Earnings per share available to common shareholders  $0.120   $0.155 
           
Earnings per share available to common shareholders-diluted  $0.096   $0.125 

 

15. STOCK PURCHASE PLAN

 

At the annual meeting of the shareholders on November 19, 2008 the shareholders approved the establishment of an employee stock purchase plan. The stock purchase plan authorizes the issuance of up to 1,200,000 shares of common stock for purchase by eligible employees. A participant’s stock purchased during a calendar year may not exceed the lesser of (a) a percentage of the participant’s compensation or a total amount as specified by the compensation committee of the Board, or (b) $25,000. The stock will be offered at a purchase price of at least 85% of its fair market value on the date of purchase. The major plan provisions cover the purposes of the plan, effective date and duration, administration, eligibility, stock type, stock purchase limitations, price of stock, participation election, payroll deductions, payment for stock, date of purchase, termination of agreement, termination of employment, recapitalization, change of control, assignability, Stockholder rights, compliance with Internal Revenue Code Section 423, amendment and termination, application of funds, tax withholdings, governing laws, employment at will and arbitration. There have been no agreements with any employees made under this plan as of the year ended September 30, 2019.

 

F-22

 

 

On August 3, 2018, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would purchase up to 10%, or approximately 1,423,984 shares, of the Company’s issued and outstanding stock. The repurchase program started on August 15,2018 and expired on August 15, 2019. The program resulted in the repurchase of 305,908 shares.

  

On August 22, 2019, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would purchase up to 10%, or approximately 1,393,393 shares, of the Company’s issued and outstanding stock. The purchase program started on August 26, 2019 and will expire on August 26, 2020. The program resulted in the repurchase of 9,139 shares through September 30, 2019.

 

Subsequent to September 30, 2019, the Company had purchased 25,297 shares of common stock as of December 1, 2019, at a purchase value of $20,723.

 

16. LONG TERM INCENTIVE PLAN

  

At the annual meeting of the shareholders on August 11, 2010, the shareholders approved the Energy Services of America Corporation Long Term Incentive Plan (the “LTIP”), to provide employees and directors of the Company with additional incentives to promote the growth and performance of the Company. At September 30, 2011, future awards of 1,149,000 shares could be made under the plan.

 

On August 11, 2010, a total of 51,000 shares were granted to six officers of the Company at a grant date fair value per share of $4.22. These grants vested over a period of three years. Market value of the grants was $215,220 and was recognized as compensation expense over the vesting period. For the years ended September 30, 2019 and 2018, respectively, $0 and $0 were recognized as compensation expense and $0 and $0 as deferred tax benefit as a result of these grants. All stock grants have vested or been forfeited as of September 30, 2019.

 

F-23

 

 

17. RELATED PARTY TRANSACTIONS

 

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

 

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Nester Logan and Mr. Samuel Kapourales, directors of Energy Services, were also directors of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, holds the same position with Premier Financial Bancorp Inc. Mr. Keith Molihan and Mr. Neal Scaggs are both directors of Energy Services and hold the same position with Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of September 30, 2019, we have paid approximately $189,000 in principal and approximately $256,000 in interest since the beginning of the loan. There were no new material related party transactions during fiscal year ended September 30, 2019.

 

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

 

18. LEASE OBLIGATIONS

 

The Company leases various pieces of equipment under operating lease agreements with terms up to 36 months. Total operating lease payments were $169,000 and $36,000 for fiscal years ended September 30, 2019 and 2018, respectively.

 

The future minimum lease payments under operating leases as of September 30, 2019, are as follows:

 

2020   $62,260 
    $62,260 

 

The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense was $10.0 million and $5.2 million for fiscal years ended September 30, 2019 and 2018, respectively.

 

F-24

 

 

19. MAJOR CUSTOMERS

 

The Company had two customers that exceeded 10.0% of revenues for the year ended September 30, 2019. The two customers, Full Stream Goff Connector, LLC and TransCanada Corporation, represented 29.0% and 11.8% of revenues. The Company had two customers that exceeded 10.0% of receivables net of retention. These two customers, Full Stream Goff Connector, LLC and TransCanada Corporation, represented 22.0% and 12.2% of receivables net of retention, respectively. The Company had two customers that exceeded 10.0% of revenues for the year ended September 30, 2018. The two customers, Full Stream Goff Connector, LLC and Toyota Motor Manufacturing, represented 17.3% and 13.3% of revenues. The Company had two customers that exceeded 10.0% of receivables net of retention. These two customers, Full Stream Goff Connector, LLC and TransCanada Corporation, represented 25.5% and 22.3% of receivables net of retention, respectively.

 

The Company’s consolidated operating revenues for the year ended September 30, 2019 were $174.5 million of which 60.4% was attributable to gas and petroleum contract work, 32.6% to electrical and mechanical contract services and 7.0% to water and sewer contract installations and other ancillary services. The Company’s consolidated operating revenues for the year ended September 30, 2018 were $135.5 million of which 51.5% was attributable to gas and petroleum contract work, 41.7% to electrical and mechanical contract services and 6.8% to water and sewer contract installations and other ancillary services.

 

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.

 

F-25

 

 

20. RETIREMENT AND EMPLOYEE BENEFIT PLANS

 

In 2019 and 2018, C. J. Hughes Construction Company, Inc., maintained a tax-qualified 401(k) retirement plan for union employees. Employees can contribute up to 15% of eligible wages, provided the compensation deferred for a plan year did not exceed the indexed dollar amount set by the Internal Revenue Service which was $19,000 for 2019 and $18,500 for 2018. C. J. Hughes matches $0.25 on each dollar contributed up to 6% of eligible wages. C. J. Hughes contributed $12,390 and $9,966 to the union plan for fiscal years ended September 30, 2019 and 2018, respectively.

 

Additionally, each plan year, C. J. Hughes may make a discretionary profit-sharing contribution for participants who are actively employed on the last day of the plan year. No discretionary profit-sharing contribution was made for the 2019 or 2018 plan year.

 

Effective January 1, 2010, Energy Services of America became the successor plan sponsor of the C. J. Hughes Construction Company, Inc. 401(k) Plan for non-union employees (the “Plan”). The Plan was renamed the Energy Services of America Staff Retirement Plan. Employees are eligible to participate in the Plan upon completion of six months of service but must wait until a quarterly entry to join the Plan. Employees may contribute eligible wages up to the maximum indexed dollar amount set by the Internal Revenue Service which was $19,000 for 2019 and $18,500 for 2018. Energy Services may make annual discretionary matching contributions and/or profit-sharing contributions to the Plan. The matching contribution formula for the Plan was 100% of each dollar contributed for the first 3% of eligible wages and 50% of each dollar contributed for the next 3% of eligible wages. The Company’s matching contribution is used by the Plan’s third-party administrator to purchase Energy Services of America stock from the open market. No restrictions on the match exist after it has been contributed. No profit-sharing contribution was made for the 2019 or 2018 plan year.

 

Energy Services of America and its wholly owned subsidiaries contributed $281,000 and $238,000, respectively, for the fiscal years ended September 30, 2019 and 2018 to the Plan.

 

The Company contributes to a number of multi-employers defined benefit pension plans under the terms of collective-bargaining agreements that cover its union-represented employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects:

 

Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.

 

If the Company chooses to stop participating in some of its multi-employer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

 

F-26

 

 

The following table presents our participation in these plans:

 

   EIN/Pension  Pension Protection Act ("PPA")
Certified Zone Status (1)
  FIP/RP Status
Pending/
  Contibutions of
Energy Services of America
Companies
   Surcharge   Expiration Date of
Collective Bargaining
Pension Fund  Plan Number  2018  2017   Implemented (2)  2018   2017   2016   Imposed   Agreement
                                 
Central States, Southeast and Southwest Areas Pension Fund  36-6044243/001  Red   Red   Implemented  $189,644   $-   $-    no   Various
                                      
National Automatic Sprinkler Industry Pension Fund  52-6054620/001  Red   Red   Implemented   131,141    99,731    -    no   Various
                                      
Iron Workers District Council of Southern Ohio &Vicinity Pension Trust  31-6038516/001  Yellow   Yellow   Implemented   122,683    57,960    -    no   Various
                                      
Carpenters Pension Fund of WV  55-6027998/001  Red   Red   Implemented   746,743    444,455    -    no   Various
                                      
Plumbers & Pipefitters National Pension Fund  52-6152779/001  Yellow   Yellow   Implemented   786,940    1,929,939    1,034,996    no   Various
                                      
Sheet Metal Workers' National Pension Fund  52-6112463/001  Yellow   Yellow   Implemented   125,982    153,542    182,991    no   Various
                                      
Sheet Metal Workers Local Pension Fund  34-6666753/001  Red   Red   Implemented   71,143    11,483    -    no   Various
                                      
Plumbers and Pipefitters Local 152 Pension Fund  55-6029095/001  Red   Red   Implemented   19,511    -    -    no   Various