What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-12 · 256 added, 258 removed, 345 unchanged (60% of the section changed)

2 unchanged sentences

Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.

The term “Energy Services” refers to the Company, West Virginia Pipeline, SQP and C.J.

The term “Energy Services” refers to the Company, West Virginia Pipeline, SQP, Tri-State Paving, and C.J.

Hughes and C.J.

23 unchanged sentences

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

On December 31, 2020, Energy Services completed an asset purchase of West Virginia Pipeline, Inc.

(“West Virginia Pipeline”), a West Virginia corporation located in Princeton, West Virginia.

West Virginia Pipeline, Inc.

(“West Virginia Pipeline”), a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia.

West Virginia Pipeline’s employees are non-union, and the company is managed independently from C.J.

Hughes and Nitro.

On March 22, 2021, the Company established a new wholly owned subsidiary, SQP Construction Group, Inc.

(“SQP”), that operates as a general contractor primarily in West Virginia.

The employees of West Virginia Pipeline are non-union and are managed independently from the Company’s union subsidiaries.

SQP Construction Group, Inc.

(“SQP”), a wholly owned subsidiary of Energy Services, operates as a general contractor primarily in West Virginia.

SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers.

As a general contractor, SQP manages the overall construction project and subcontracts most of the work.

On April 30, 2021, the Company’s Nitro subsidiary completed an asset purchase of Revolt Energy, Inc.

(“Revolt Energy”), a West Virginia corporation located in Nitro, WV.

Revolt Energy previously operated primarily as a residential solar installation company in southern West Virginia.

As a division of Nitro, Revolt Energy continues to perform residential solar installations and has expanded its solar installation services to include commercial and industrial customers.

Revolt Energy’s construction employees are members of the International Brotherhood of Electrical Workers.

On June 30, 2021, the Company provided notice to all holders of the Company’s 6.0% Convertible Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) that, subject to applicable law and in accordance with the Company’s certificate of incorporation, the Company intended to redeem all 206 shares of the Series A Preferred Stock, at a price equal to $25,000 per preferred share plus all accrued and unpaid dividends whether or not declared up to and excluding the Redemption Date of September 1, 2021 (the “Redemption Price”).

On October 6, 2021, the Company’s transfer agent completed the redemption, which resulted in the issuance of 2,626,492 new shares of the Company’s common stock, the issuance of 317,500 common shares that were included in Series A Preferred Stock units, and cash redemption payments of $1.3 million.

The Company’s total outstanding common shares after redemption was 16,247,898 as of October 6, 2021.

On February 16, 2022, the stockholders of Energy Services approved the Company's 2022 Equity Incentive Plan (the "Plan"), which provides for the grant of stock-based awards to officers and employees of the Company and its subsidiaries.

The employees of SQP are non-union and are managed independently from the Company’s union subsidiaries.

Tri-State Paving & Sealcoating, Inc.

(“Tri-State Paving” or “TSP”) is a wholly owned subsidiary of Energy Services that provides utility paving services to water distribution customers in the Charleston, West Virginia, Lexington, Kentucky, and Chattanooga, Tennessee markets.

The employees of TSP are non-union and are managed independently from the Company’s union subsidiaries.

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

On February 16, 2022, the stockholders of Energy Services approved the Company’s 2022 Equity Incentive Plan (the “Plan”), which provides for the grant of stock-based awards to officers and employees of the Company and its subsidiaries.

The maximum number of shares of stock, in the aggregate, that may be granted under the Plan as stock options, restricted stock or restricted stock units is 1,500,000 shares.

A description of the material terms of the Plan is contained in the Company’s definitive proxy statement for the Annual Meeting of Stockholders filed with the Securities and Exchange Commission on January 11, 2022.

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

On April 29, 2022, Tri-State Paving Acquisition Company ("TSP"), a West Virginia corporation and a newly formed wholly owned subsidiary of the Company, completed the acquisition of Tri-State Paving & Sealcoat, LLC ("Tri-State Paving"), a West Virginia corporation located in Hurricane, WV.

TSP acquired substantially all the assets of Tri-State Paving for $7.5 million in cash, a $1.0 million seller note, and $1.0 million in the Company's common stock, which resulted in the issuance of 419,287 new common shares.

TSP will provide utility paving services to water distribution customers in the Charleston, WV, Lexington, KY, and Chattanooga, TN markets.

The employees of TSP will be non-union and managed independently from the Company's union subsidiaries.

Energy Services provides contracting services for utilities and energy related companies including gas, petroleum power, chemical, water & sewer and automotive industries.

For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies.

To date, no grants of stock-based awards have been made.

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

On April 29, 2022, the Company completed the acquisition of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”), located in Hurricane, West Virginia.

Tri-State Paving, LLC was later renamed Corns Enterprises.

Pursuant to the Asset Purchase Agreement signed on April 6, 2022, and amended on April 29, 2022, the Company acquired substantially all the assets (including but not limited to customer contracts, employees, and equipment) of Tri-State Paving, LLC for $7.5 million in cash, a $1.0 million promissory note, and $1.0 million in Energy Services Common Stock.

The $7.5 million in cash was funded through a loan with United Bank, Inc., Huntington, West Virginia.

The transaction resulted in the issuance of 419,287 common shares, bringing the total outstanding common shares to 16,667,185 as of April 29, 2022.

Corns continued his role as President of the Company’s new subsidiary, Tri-State Paving & Sealcoating, Inc., which earned revenues of $2.0 million for the three and nine months ended June 30, 2022.

On July 6, 2022, the Company issued a press release announcing that the Company’s Board of Directors authorized a share repurchase program (the “Program”), pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate repurchase not to exceed 1,000,000 shares, which is approximately 6.0% of its outstanding common stock.

The Program does not obligate the Company to purchase any particular number of shares, and there is no guarantee as to the exact number of shares to be repurchased by the Company.

To date, no repurchases have been made in connection with the Program.

Energy Services provides contracting services for utilities and energy related companies including gas, petroleum, power, chemical, water utility, and automotive industries.

For the gas and petroleum transmission industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines, compressor stations, and storage facilities.

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 gas distribution and water utility industries, the Company is primarily engaged in the construction and replacement and repair of natural gas and water distribution pipelines.

The Company also provides paving services for water utility customers.

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.

10 unchanged sentences

Kentucky American Water

WV American Water

West Virginia American Water

Various state, county and municipal public service districts.

18 unchanged sentences

The Company also followed the paid sick and expanded family and medical leave guidelines set forth in the Families First Coronavirus Response Act, which expired on December 31, 2020.

During the three and six months ended March 31, 2022, the Company had employees test positive for or were exposed to COVID-19;

During the three and nine months ended June 30, 2022, the Company had employees test positive for or were exposed to COVID-19;

however, it did not have a material effect on the Company’s financial statements.

9 unchanged sentences

As a result, our volume of business may be adversely affected by where our customers are in the cycle and thereby their financial condition as to their capital needs and access to capital to finance those needs.

Three and Six Months Ended March 31, 2022, and 2021 Overview

The following is an overview of results from operations for the three and six months ended March 31, 2022, and 2021:

Three and Nine Months Ended June 30, 2022, and 2021 Overview

The following is an overview of results from operations for the three and nine months ended June 30, 2022, and 2021:

Three Months Ended

Six Months Ended

Nine Months Ended

Cost of revenues

Selling and administrative expenses

(Loss) income from operations

Income from (loss) operations

Other income (expense)

Interest income

Paycheck Protection Program loan forgiveness

Other nonoperating expense

1 unchanged sentence

Gain on sale of equipment

(Loss) income before income taxes

Income before income taxes

Income tax (benefit) expense

Net (loss) income

Dividends on preferred stock

Net (loss) income available to common shareholders

Net income available to common shareholders

Weighted average shares outstanding-basic

Weighted average shares-diluted

(Loss) earnings per share available to common shareholders

(Loss) earnings per share-diluted available to common shareholders

Results of Operations for the Three and Six Months Ended March 31, 2022, Compared to the Three and Six Months Ended March 31, 2021

A table comparing the Company’s revenues for the three and six months ended March 31, 2022, compared to the three and six months ended March 31, 2021, is below:

Weighted average shares outstanding-diluted

Earnings per share available to common shareholders

Earnings per share-diluted available to common shareholders

Results of Operations for the Three and Nine Months Ended June 30, 2022, Compared to the Three and Nine Months Ended June 30, 2021

A table comparing the Company’s revenues for the three and nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

Six Months Ended

March 31, 2022

March 31, 2021

Nine Months Ended

June 30, 2022

June 30, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

Total revenues increased by $9.8 million to $35.4 million for the three months ended March 31, 2022, as compared to $25.6 million for the three months ended March 31, 2021.

Total revenues increased by $20.5 million to $78.1 million for the six months ended March 31, 2022, as compared to $57.6 million for the six months ended March 31, 2021.

Total revenues increased by $25.9 million to $51.2 million for the three months ended June 30, 2022, as compared to $25.3 million for the three months ended June 30, 2021.

Total revenues increased by $46.3 million to $129.2 million for the nine months ended June 30, 2022, as compared to $82.9 million for the nine months ended June 30, 2021.

The increases were a result of increased work in all categories of business.

Gas & Water Distribution revenues totaled $10.7 million for the three months ended March 31, 2022, a $2.1 million increase from $8.6 million for the three months ended March 31, 2021.

Gas & Water Distribution revenues totaled $22.6 million for the six months ended March 31, 2022, a $6.9 million increase from $15.7 million for the six months ended March 31, 2021.

The revenue increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews.

Revenues for West Virginia Pipeline were $1.5 million and $3.8 million, respectively, for the three and six months ended March 31, 2022, as compared to $1.2 million for the three and six months ended March 31, 2021.

Inclement weather in January and February 2022 had a negative impact on distribution work available during the three months ended March 31, 2022;

however, favorable weather conditions during the first quarter of fiscal year 2022 allowed the Company to increase the amount of distribution work performed during the six months ended March 31, 2022, as compared to the same period in the prior year.

Gas & Petroleum Transmission revenues totaled $8.5 million for the three months ended March 31, 2022, a $4.8 million increase from $3.7 million for the three months ended March 31, 2021.

Gas & Petroleum Transmission revenues totaled $19.8 million for the six months ended March 31, 2022, a $7.4 million increase from $12.4 million for the six months ended March 31, 2021.

Gas & Water Distribution revenues totaled $13.7 million for the three months ended June 30, 2022, a $1.9 million increase from $11.8 million for the three months ended June 30, 2021.

Gas & Water Distribution revenues totaled $36.3 million for the nine months ended June 30, 2022, an $8.8 million increase from $27.5 million for the nine months ended June 30, 2021.

The revenue increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and acquisitions.

The latest acquisition, Tri-State Paving, works primarily for water utility companies and added $2.0 million in revenue for the three and nine months ended June 30, 2022.

Gas & Petroleum Transmission revenues totaled $15.4 million for the three months ended June 30, 2022, a $13.4 million increase from $2.0 million for the three months ended June 30, 2021.

Gas & Petroleum Transmission revenues totaled $35.2 million for the nine months ended June 30, 2022, a $20.9 million increase from $14.3 million for the nine months ended June 30, 2021.

The revenue increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.

Electrical, Mechanical, & General services and construction revenues totaled $16.2 million for the three months ended March 31, 2022, a $2.9 million increase from $13.3 million for the three months ended March 31, 2021.

Electrical, Mechanical, & General services and construction revenues totaled $35.7 million for the six months ended March 31, 2022, a $6.2 million increase from $29.5 million for the six months ended March 31, 2021.

The revenue increases were primarily related to general building and civil construction revenues which increased $3.8 million and $7.8 million, respectively, during the three and six months ended March 31, 2022, as compared to the same periods in the prior year.

Electrical, Mechanical, & General services and construction revenues totaled $22.1 million for the three months ended June 30, 2022, a $10.6 million increase from $11.5 million for the three months ended June 30, 2021.

Electrical, Mechanical, & General services and construction revenues totaled $57.7 million for the nine months ended June 30, 2022, a $16.7 million increase from $41.0 million for the nine months ended June 30, 2021.

The revenue increases were primarily related to general building and civil construction revenues which increased $6.5 million and $14.3 million, respectively, during the three and nine months ended June 30, 2022, as compared to the same period in the prior year.

Cost of Revenues.

A table comparing the Company’s costs of revenues for the three and six months ended March 31, 2022, compared to the three and six months ended March 31, 2021, is below:

A table comparing the Company’s costs of revenues for the three and nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

Unallocated Shop Expenses

Six Months Ended

March 31, 2022

March 31, 2021

Unallocated Shop Expense (Profit)

Nine Months Ended

June 30, 2022

June 30, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

Unallocated Shop Expenses

Total cost of revenues increased by $8.8 million to $32.5 million for the three months ended March 31, 2022, as compared to $23.7 million for the three months ended March 31, 2021.

Total cost of revenues increased by $17.0 million to $69.9 million for the six months ended March 31, 2022, as compared to $52.9 million for the six months ended March 31, 2021.

The increases were a result of increased work in all categories of business exclusive of unallocated shop expenses.

Gas & Water Distribution cost of revenues totaled $9.2 million for the three months ended March 31, 2022, a $2.0 million increase from $7.2 million for the three months ended March 31, 2021.

Gas & Water Distribution cost of revenues totaled $18.5 million for the six months ended March 31, 2022, a $5.2 million increase from $13.3 million for the six months ended March 31, 2021.

The increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews.

Inclement weather in January and February 2022 had a negative impact on distribution work available during the three months ended March 31, 2022;

Gas & Petroleum Transmission cost of revenues totaled $7.6 million for the three months ended March 31, 2022, a $4.8 million increase from $2.8 million for the three months ended March 31, 2021.

Gas & Petroleum Transmission cost of revenues totaled $17.3 million for the six months ended March 31, 2022, a $7.9 million increase from $9.5 million for the six months ended March 31, 2021.

The increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.

Legal expenses related to a lawsuit on a transmission project, referenced on page 33, increased by $240,000 and $600,000, respectively, for the three months and six months ended March 31, 2022, as compared to the same periods in the prior year.

Electrical, Mechanical, & General services and construction cost of revenues totaled $15.3 million for the three months ended March 31, 2022, a $3.0 million increase from $12.3 million for the three months ended March 31, 2021.

Electrical, Mechanical, & General services and construction cost of revenues totaled $33.4 million for the six months ended March 31, 2022, a $5.9 million increase from $27.5 million for the six months ended March 31, 2021.

The costs of revenue increases were primarily related to general building and civil construction cost of revenues which increased $3.4 million and $6.8 million, respectively, during the three and six months ended March 31, 2022, as compared to the same periods in the prior year.

Unallocated shop expenses totaled $427,000 for the three months ended March 31, 2022, a $1.0 million decrease from $1.4 million for the three months ended March 31, 2022.

Unallocated shop expenses totaled $597,000 for the six months ended March 31, 2022, a $2.1 million decrease from $2.7 million for the six months ended March 31, 2022.

The decrease in unallocated shop expenses was due to increased internal equipment charges to projects for the three and six months ended March 31, 2022, as compared to the same periods in the prior year and a focused effort to manage project and shop costs.

Unallocated Shop Expense (Profit)

Total cost of revenues increased by $22.2 million to $44.8 million for the three months ended June 30, 2022, as compared to $22.6 million for the three months ended June 30, 2021.

Total cost of revenues increased by $39.1 million to $114.6 million for the nine months ended June 30, 2022, as compared to $75.5 million for the nine months ended June 30, 2021.The increases were a result of increased work in all categories excluding profit generated by internal charges from the Company’s equipment and shop activities.

Gas & Water Distribution cost of revenues totaled $10.9 million for the three months ended June 30, 2022, a $1.6 million increase from $9.3 million for the three months ended June 30, 2021.

Gas & Water Distribution cost of revenues totaled $29.4 million for the nine months ended June 30, 2022, a $6.8 million increase from $22.6 million for the nine months ended June 30, 2021.

The cost of revenue increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and acquisitions.

The latest acquisition, Tri-State Paving, works primarily for water utility companies and added $1.3 million in cost of revenues for the three and nine months ended June 30, 2022.

Gas & Petroleum Transmission cost of revenues totaled $14.3 million for the three months ended June 30, 2022, a $12.6 million increase from $1.7 million for the three months ended June 30, 2021.

Gas & Petroleum Transmission cost of revenues totaled $31.6 million for the nine months ended June 30, 2022, a $20.4 million increase from $11.2 million for the nine months ended June 30, 2021.

The cost of revenue increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.

Electrical, Mechanical, & General services and construction cost of revenues totaled $20.4 million for the three months ended June 30, 2022, a $9.9 million increase from $10.5 million for the three months ended June 30, 2021.

Electrical, Mechanical, & General services and construction cost of revenues totaled $53.9 million for the nine months ended June 30, 2022, a $15.9 million increase from $38.0 million for the nine months ended June 30, 2021.

The costs of revenue increases were primarily related to general building and civil construction cost of revenues which increased $5.5 million and $12.3 million, respectively, during the three and nine months ended June 30, 2022, as compared to the same period in the prior year.

Unallocated shop expenses totaled ($852,000) for the three months ended June 30, 2022, a $1.8 million decrease from $1.0 million for the three months ended June 30, 2022.

Unallocated shop expenses totaled ($255,000) for the nine months ended June 30, 2022, a $3.9 million decrease from $3.7 million for the nine months ended June 30, 2022.

The decrease in unallocated shop expenses was due to increased internal equipment charges to projects for the three and nine months ended June 30, 2022, as compared to the same period in the prior year and a focused effort to manage project and shop costs.

Gross Profit.

A table comparing the Company’s gross profit for the three and six months ended March 31, 2022, compared to the three and six months ended March 31, 2021, is below:

A table comparing the Company’s gross profit for the three and nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:

Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

Unallocated Shop Expenses

Six Months Ended

March 31, 2022

March 31, 2021

Unallocated Shop Profit (Loss)

Nine Months Ended

June 30, 2022

June 30, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

Unallocated Shop Expenses

Total gross profit increased by $1.0 million to $2.9 million for the three months ended March 31, 2022, as compared to $1.9 million for the three months ended March 31, 2021.

Total gross profit increased by $3.5 million to $8.2 million for the six months ended March 31, 2022, as compared to $4.7 million for the six months ended March 31, 2021.

Gas & Water Distribution gross profit totaled $1.5 million for the three months ended March 31, 2022, a $100,000 increase from $1.4 million for the three months ended March 31, 2021.

Gas & Water Distribution gross profit totaled $4.1 million for the six months ended March 31, 2022, a $1.6 million increase from $2.5 million for the six months ended March 31, 2021.

The gross profit increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution.

Inclement weather in January and February 2022 had a negative impact on distribution work available during the three months ended March 31, 2022;

however, favorable weather conditions during the first quarter of fiscal year 2022 allowed the Company to increase distribution work performed and work more efficiently and productively during the six months ended March 31, 2022, as compared to the same period in the prior year.

Gas & Petroleum Transmission gross profit totaled $955,000 for the three months ended March 31, 2022, a $40,000 increase from $915,000 for the three months ended March 31, 2021.

Gas & Petroleum Transmission gross profit totaled $2.5 million for the six months ended March 31, 2022, a $454,000 decrease from $2.9 million for the six months ended March 31, 2021.

The Company’s gross profit on transmission work performed during the three and six months ended March 31, 2022 was impacted by legal expenses related to a lawsuit on a transmission project, referenced on page 33, which increased by $240,000 and $600,000, respectively, for the three months and six months ended March 31, 2022, as compared to the same periods in the prior year.

Electrical, Mechanical, & General services and construction gross profit totaled $883,000 for the three months ended March 31, 2022, a $140,000 decrease from $1.0 million for the three months ended March 31, 2021.

Electrical, Mechanical, & General services and construction gross profit totaled $2.2 million for the six months ended March 31, 2022, a $206,000 increase from $2.0 million for the six months ended March 31, 2021.

The decrease for the three months ended March 31, 2022, as compared to the same period in the prior year, was primarily due to a gross loss from a start-up electrical division that will expand the Company’s geographical reach into Michigan.

The increase for the six months ended March 31, 2022, as compared to the same period in the prior year, was primarily related to an increase in gross profit generated by general and civil construction services, partially offset by gross losses generated by start-up mechanical and electrical divisions.

Unallocated shop expenses gross profit totaled ($427,000) for the three months ended March 31, 2022, a $1.0 million increase from ($1.4 million) for the three months ended March 31, 2021.

Unallocated shop expenses gross profit totaled ($597,000) for the six months ended March 31, 2022, a $2.1 million increase from ($2.7 million) for the six months ended March 31, 2021.

The increase in unallocated shop gross profit was due to increased internal equipment charges to projects for the three and six months ended March 31, 2022, as compared to the same periods in the prior year and a focused effort to manage project and shop costs.

Unallocated Shop Profit (Loss)

Total gross profit increased by $3.7 million to $6.4 million for the three months ended June 30, 2022, as compared to $2.7 million for the three months ended June 30, 2021.

Total gross profit increased by $7.2 million to $14.6 million for the nine months ended June 30, 2022, as compared to $7.4 million for the nine months ended June 30, 2021.

Gas & Water Distribution gross profit totaled $2.8 million for the three months ended June 30, 2022, a $345,000 increase from $2.4 million for the three months ended June 30, 2021.

Gas & Water Distribution gross profit totaled $6.9 million for the nine months ended June 30, 2022, a $2.0 million increase from $4.9 million for the nine months ended June 30, 2021.

The gross profit increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and acquisitions.

The latest acquisition, Tri-State Paving, works primarily for water utility companies and added $700,000 in gross profit for the three and nine months ended June 30, 2022.

Gas & Petroleum Transmission gross profit totaled $1.2 million for the three months ended June 30, 2022, a $882,000 increase from $276,000 for the three months ended June 30, 2021.

Gas & Petroleum Transmission gross profit totaled $3.6 million for the nine months ended June 30, 2022, a $428,000 increase from $3.2 million for the nine months ended June 30, 2021.

The gross profit increases were primarily related to transmission work that was awarded due to increased construction opportunities from the Company’s existing transmission clients.

Electrical, Mechanical, & General services and construction gross profit totaled $1.6 million for the three months ended June 30, 2022, a $638,000 increase from $1.0 million for the three months ended June 30, 2021.

Electrical, Mechanical, & General services and construction gross profit totaled $3.9 million for the nine months ended June 30, 2022, a $844,000 increase from $3.0 million for the nine months ended June 30, 2021.

The increases were primarily related to an increase in gross profit generated by general and civil construction services, partially offset by gross losses generated by start-up mechanical and electrical divisions.

Unallocated shop gross profit totaled $852,000 for the three months ended June 30, 2022, a $1.8 million increase from ($1.0 million) for the three months ended June 30, 2021.

Unallocated shop gross profit totaled $255,000 for the nine months ended June 30, 2022, a $3.9 million increase from ($3.7 million) for the nine months ended June 30, 2021.

The increase in unallocated shop gross profit was due to increased internal equipment charges to projects for the three and nine months ended June 30, 2022, as compared to the same periods in the prior year and a focused effort to manage project and shop costs.

Selling and administrative expenses .

Total selling and administrative expenses decreased by $400,000 to $3.4 million for the three months ended March 31, 2022, as compared to $3.8 million for the same period in the prior year.

Total selling and administrative expenses decreased by $370,000 to $7.0 million for the six months ended March 31, 2022, as compared to $7.4 million for the same period in the prior year.

A one-time $651,000 Qualified Non-Elective Contribution (“QNEC”) adjustment to the Company’s 401(k) plan (“Plan”) attributable to the 2021 Plan year increased selling and administrative costs for the three and six months ended March 31, 2021.

Exclusive of the QNEC adjustment, employee compensation decreased by approximately $850,000 for the six months ended March 31, 2022, as compared to the same period in the prior year primarily due to a reduction in incentive compensation and increased labor charges to projects.

Selling and administrative expenses increased by $380,000 and $1.1 million, respectively, for the three and six months ended March 31, 2022, as compared to the same period in the prior year for new business operations acquired or established during fiscal year 2021.

These operations did not incur selling and administrative expenses during the full six months ended March 31, 2021.

Total selling and administrative expenses increased by $613,000 to $3.8 million for the three months ended June 30, 2022, as compared to $3.2 million for the same period in the prior year.

Total selling and administrative expenses increased by $243,000 to $10.9 million for the nine months ended June 30, 2022, as compared to $10.6 million for the same period in the prior year.

Selling and administrative expenses increased by $200,000 for the three months ended June 30, 2022, as compared to the same period in the prior year for new business operations acquired in fiscal year 2022.

Also, selling and administrative expenses for companies started in fiscal year 2021 grew by $250,000 for the three months ended June 30, 2022, as compared to the same period in the prior year.

Selling and administrative expenses increased by $1.5 million for the nine months ended June 30, 2022, as compared to the same period in the prior year for growth related to new business, partially offset by a $990,000 reduction in incentive compensation and increased labor charges to projects.

Interest income.

Interest income totaled $4 and $600, respectively, for the three and six months ended March 31, 2022, as compared to $0 and $152,000 for the same periods in the prior year.

Interest income totaled $0 and $600, respectively, for the three and nine months ended June 30, 2022, as compared to $0 and $152,000 for the same periods in the prior year.

The decrease in interest income was primarily due to the timing of recognizing interest earned from the Company’s captive insurance surety deposit.

Interest expense.

Interest expense totaled $145,000 for the three months ended March 31, 2022, an increase of $2,000 from $143,000 for the same period in the prior year.

Interest expense totaled $343,000 for the six months ended March 31, 2022, an increase of $123,000 from $220,000 for the same period in the prior year.

The increase in interest expense was primarily due to the financing of the West Virginia Pipeline acquisition.

Paycheck Protection Program loan forgiveness.

The Company recorded $9.8 million in non-taxable income related to PPP loan forgiveness during the three and nine months ended June 30, 2021, to extinguish all PPP loan debt.

Other nonoperating (expense) income.

Other nonoperating expense totaled $110,000 for the three months ended March 31, 2022, an increase of $77,000 from $33,000 for the same period in the prior year.

Other nonoperating expense totaled $263,000 for the six months ended March 31, 2022, an increase of $177,000 from $86,000 for the same period in the prior year.

Other nonoperating expense totaled $175,000 for the three months ended June 30, 2022, an increase of $139,000 from $36,000 for the same period in the prior year.

Other nonoperating expense totaled $438,000 for the nine months ended June 30, 2022, an increase of $317,000 from $121,000 for the same period in the prior year.

The increases were primarily related to an increase in intangible asset amortization expense.

Interest expense.

Interest expense totaled $206,000 for the three months ended June 30, 2022, an increase of $69,000 from $137,000 for the same period in the prior year.

Interest expense totaled $549,000 for the nine months ended June 30, 2022, an increase of $192,000 from $357,000 for the same period in the prior year.

The increase in interest expense was primarily due to the financing of the recent acquisitions.

Gain on sale of equipment.

Gain on sale of equipment totaled $20,000 for the three months ended March 31, 2022, a decrease of $459,000 from $479,000 for the same period in the prior year.

Gain on sale of equipment totaled $360,000 for the six months ended March 31, 2022, a decrease of $132,000 from $492,000 for the same period in the prior year.

Gain on sale of equipment totaled $58,000 for the three months ended June 30, 2022, a decrease of $77,000 from $135,000 for the same period in the prior year.

Gain on sale of equipment totaled $418,000 for the nine months ended June 30, 2022, a decrease of $210,000 from $628,000 for the same period in the prior year.

The decrease was related to a decrease in equipment sold.

Net (loss) income .

Loss before income taxes was ($786,000) for the three months ended March 31, 2022, compared to loss before income taxes of ($1.6 million) for the same period in the prior year.

Income before income taxes was $879,000 for the six months ended March 31, 2022, compared to loss before income taxes of ($2.4 million) for the same period in the prior year.

The increase in income before income taxes for the three and six months ended March 31, 2022, as compared to the same periods in the prior year, was due to the items mentioned above.

Income tax benefit for the three months ended March 31, 2022, was ($200,000) compared to income tax benefit of ($336,000) for the same period in the prior year.

Income tax expense for the six months ended March 31, 2022, was $294,000 compared to income tax benefit of ($405,000) for the same period in the prior year.

The effective income tax rate for the three months ended March 31, 2022, was (25.5) %, as compared to (20.4) % for the same period in the prior year.

The effective income tax rate for the six months ended March 31, 2022, was 33.4 %, as compared to (17.1) % for the same period in the prior year.

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 employees on construction projects and entertainment expenses are only partially deductible from taxable income and can have a significant impact on the effective tax rate.

For the three months ended March 31, 2022, the non-deductible portion of per diem and entertainment expenses resulted in an approximate $106,000 increase in taxable income as compared to $221,000 for the same period in 2021.

For the six months ended March 31, 2022, the non-deductible portion of per diem and entertainment expenses resulted in an approximate $235,000 increase in taxable income as compared to $297,000 for the same period in 2021.

There were no dividends on preferred stock for the three and six months ended March 31, 2022, due to the redemption date on the preferred stock being September 1, 2021.

Dividends on preferred stock for the three and six months ended March 31, 2021, were $77,250 and $154,500, respectively.

Net loss available to common shareholders for the three months ended March 31, 2022, was ($586,000), as compared to ($1.4 million) for the same period in the prior year.

Net income available to common shareholders for the six months ended March 31, 2022, was $585,000, as compared to a net loss available to common shareholders of ($2.1 million) for the same period in the prior year.

Comparison of Financial Condition at March 31, 2022, and September 30, 2021

The Company had total assets of $66.4 million at March 31, 2022, a decrease of $3.8 million from the prior fiscal year end balance of $70.2 million.

Accounts receivable, which totaled $16.6 million at March 31, 2022, decreased by $4.5 million from the prior fiscal year end balance of $21.1 million.

The decrease was primarily due to the timing of cash collections and project invoicing since September 30, 2021.

Contract assets totaled $7.7 million at March 31, 2022, a decrease of $1.0 million from the prior fiscal year end balance of $8.7 million.

The decrease was due to a difference in the timing of project billings at March 31, 2022, compared to September 30, 2021.

Other receivables totaled $49,000 at March 31, 2022, a $494,000 decrease from the prior fiscal year end balance of $543,000.

The decrease was primarily due to the receipt of insurance premium refunds receivable.

The Company had property, plant and equipment of $22.6 million at March 31, 2022, a decrease of $372,000 from the prior fiscal year end balance of $23.0 million.

The decrease was due to $2.6 million in depreciation expense and net equipment disposals of $200,000, partially offset by $2.4 million in property, plant and equipment acquisitions.

Intangible assets, net totaled $2.2 million at March 31, 2022, a decrease of $196,000 from the prior fiscal year end balance of $2.4 million.

The decrease was due to the amortization of intangible assets during the six months ended March 31, 2022.

Prepaid expenses and other totaled $5.3 million at March 31, 2022, an increase of $1.8 million from the prior fiscal year end balance of $3.5 million.

The increase was primarily due to prepaid insurance premiums financed for calendar year 2022, partially offset by insurance premiums expensed during the three months ended March 31, 2022.

Retainage receivable totaled $1.9 million at March 31, 2022, a $1.0 million increase from the prior fiscal year end balance of $918,000.

Income before income taxes was $2.3 million for the three months ended June 30, 2022, compared to $9.3 million for the same period in the prior year.

Income before income taxes was $3.2 million for the nine months ended June 30, 2022, compared to $6.9 million for the same period in the prior year.

The decrease in income before income taxes for the three and nine months ended June 30, 2022, as compared to the same periods in the prior year, was due primarily to the $9.8 million in PPP loan forgiveness.

Income tax expense for the three months ended June 30, 2022, was $651,000 compared to income tax benefit of ($54,000) for the same period in the prior year.

Income tax expense for the nine months ended June 30, 2022, was $945,000 compared to income tax benefit of ($459,000) for the same period in the prior year.

There were no dividends on preferred stock for the three and nine months ended June 30, 2022, due to the redemption date on the preferred stock being September 1, 2021.

Dividends on preferred stock for the three and nine months ended June 30, 2021, were $77,250 and $231,750, respectively.

Net income available to common shareholders for the three months ended June 30, 2022, was $1.6 million, as compared to $9.2 million for the same period in the prior year.

Net income available to common shareholders for the nine months ended June 30, 2022, was $2.2 million, as compared to $7.1 million for the same period in the prior year.

Comparison of Financial Condition at June 30, 2022, and September 30, 2021

The Company had total assets of $87.1 million at June 30, 2022, an increase of $16.9 million from the prior fiscal year end balance of $70.2 million.

The Company had property, plant and equipment of $29.6 million at June 30, 2022, an increase of $6.6 million from the prior fiscal year end balance of $23.0 million.

The increase was due to $5.7 million in assets acquired in the purchase of assets from Tri-State Paving, LLC and $5.1 million in other additions.

The increase was partially offset by $4.0 million in depreciation and net equipment disposals of $200,000.

Contract assets totaled $11.9 million at June 30, 2022, an increase of $3.2 million from the prior fiscal year end balance of $8.7 million.

The increase was due to a difference in the timing of project billings at June 30, 2022, compared to September 30, 2021.

Accounts receivable totaled $24.2 million at June 30, 2022, an increase of $3.1 million from the prior fiscal year end balance of $21.1 million.

The increase was primarily due to the timing of cash collections and project invoicing since September 30, 2021.

Goodwill totaled $4.1 million at June 30, 2022, an increase of $2.3 million from the prior fiscal year end balance of $1.8 million.

The increase was due to the Tri-State Paving acquisition.

Retainage receivable totaled $3.1 million at June 30, 2022, an increase of $2.2 million from the prior fiscal year end balance of $918,000.

The increase was primarily due to more current year projects that require retainages to be withheld.

Cash and cash equivalents totaled $8.4 million at March 31, 2022, an increase of $136,000 from the prior fiscal year end balance of $8.2 million.

The increase was primarily due to $7.7 million provided from operating activities, partially offset by $1.2 million in cash payments for redeemed preferred stock, $4.8 million in debt repayments, and a net $1.5 million investment in property and equipment.

Goodwill resulting from the West Virginia Pipeline and Revolt Energy acquisitions totaled $1.8 million at March 31, 2022, unchanged from the prior fiscal year end balance.

The Company had total liabilities of $32.4 million at March 31, 2022, a decrease of $3.1 million from the prior fiscal year end balance of $35.5 million.

Lines of credit and short-term borrowings totaled $2.2 million at March 31, 2022, a decrease of $2.8 million from the prior fiscal year end balance of $5.0 million.

The decrease was due to a $4.5 million line of credit repayment, partially offset by $1.7 million of insurance premiums financed, net of repayments.

Long-term debt totaled $10.7 million at March 31, 2022, a decrease of $1.7 million from the prior fiscal year end balance of $12.4 million.

The decrease in long-term debt was primarily due to $2.0 million in debt repayments, partially offset by $350,000 in new equipment debt.

Accounts payable totaled $6.8 million at March 31, 2022, a decrease of $439,000 from the prior fiscal year end balance of $7.3 million.

The decrease was due to the timing of accounts payable payments as compared to September 30, 2021.

Contract liabilities totaled $4.2 million at March 31, 2022, an increase of $1.0 million from the prior fiscal year end balance of $3.2 million.

The increase was due to a difference in the timing of project billings at March 31, 2022, as compared to September 30, 2021.

Accrued expenses and other current liabilities totaled $6.1 million at March 31, 2022, an increase of $522,000 from the prior fiscal year end balance of $5.6 million.

Intangible assets, net totaled $4.0 million at June 30, 2022, an increase of $1.6 million from the prior fiscal year end balance of $2.4 million.

The increase was due to acquisition of Tri-State Paving, partially offset by the amortization of intangible assets during the nine months ended June 30, 2022.

Prepaid expenses and other totaled $4.5 million at June 30, 2022, an increase of $1.0 million from the prior fiscal year end balance of $3.5 million.

The increase was primarily due to prepaid insurance premiums financed for calendar year 2022, partially offset by insurance premiums expensed during the nine months ended June 30, 2022.

Right-of-use assets totaled $348,000 at June 30, 2022, an increase of $348,000 from the prior fiscal year end balance.

The increase was primarily due to operating leases for facilities acquired related to the Tri-State Paving acquisition.

Cash and cash equivalents totaled $5.4 million at June 30, 2022, a decrease of $2.8 million from the prior fiscal year end balance of $8.2 million.

The increase was primarily due to $10.6 million provided from operating activities, partially offset by $1.2 million in cash payments for redeemed preferred stock, $3.3 million in net long-term debt repayments, $4.9 million in net short-term debt repayments, and a net $4.0 million used in investing activities.

Other receivables totaled $54,000 at June 30, 2022, a $490,000 decrease from the prior fiscal year end balance of $543,000.

The decrease was primarily due to the receipt of insurance premium refunds receivable.

The Company had total liabilities of $50.4 million at June 30, 2022, an increase of $15.9 million from the prior fiscal year end balance of $35.5 million.

Long-term debt totaled $18.8 million at June 30, 2022, an increase of $6.4 million from the prior fiscal year end balance of $12.4 million.

The increase in long-term debt was primarily due to $8.9 million in debt acquired to finance the Tri-State Paving acquisition, $462,000 in new equipment debt, and $365,000 in debt related to operating leases liabilities, partially offset by $3.3 million in debt repayments.

Accounts payable totaled $11.3 million at June 30, 2022, an increase of $4.0 million from the prior fiscal year end balance of $7.3 million.

The increase was due to the timing of accounts payable payments as compared to September 30, 2021.

Contract liabilities totaled $6.0 million at June 30, 2022, an increase of $2.8 million from the prior fiscal year end balance of $3.2 million.

The increase was due to a difference in the timing of project billings at June 30, 2022, as compared to September 30, 2021.

Accrued expenses and other current liabilities totaled $7.8 million at June 30, 2022, an increase of $2.2 million from the prior fiscal year end balance of 5.6 million.

The increase was due to the timing of accrued expense payments, as compared to September 30, 2021.

Deferred tax liabilities totaled $2.3 million at March 31, 2022, an increase of $232,000 from the prior fiscal year end balance of $2.0 million.

The increase was primarily related to the reduction of the net operating loss carry forward during the six months ended March 31, 2022.

Shareholders’ equity was $34.0 million at March 31, 2022, a decrease of $625,000 from the prior fiscal year end balance of $34.6 million.

The decrease was due to $1.2 million in preferred stock redemption payments, partially offset by the net income available to common shareholders of $585,000 for the six months ended March 31, 2022.

Deferred tax liabilities totaled $2.9 million at June 30, 2022, an increase of $845,000 from the prior fiscal year end balance of $2.0 million.

The increase was primarily related to the reduction of the net operating loss carry forward during the nine months ended June 30, 2022.

Income tax payable totaled $100,000 at June 30, 2022, an increase of $100,000 from the prior fiscal year end balance.

The increase was related to the net operating loss deduction limitations.

Lines of credit and short-term borrowings totaled $3.5 million at June 30, 2022, a decrease of $1.5 million from the prior fiscal year end balance of $5.0 million.

The decrease was due to $2.4 million net line of credit repayments, partially offset by $900,000 of insurance premiums financed, net of repayments.

Shareholders’ equity was $36.7 million at June 30, 2022, an increase of $2.1 million from the prior fiscal year end balance of $34.6 million.

The increase was due to net income of $2.2 million for the nine months ended June 30, 2022, and $1.0 million in additional paid in capital related to the Tri-State Paving acquisition, partially offset by $1.2 million in preferred stock redemption payments.

Liquidity and Capital Resources

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Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly.

As of March 31, 2022, the Company had made principal payments of $306,000.

As of June 30, 2022, the Company had made principal payments of $319,000.

The loan is collateralized by the building purchased under this agreement.

The note is currently held by Peoples Bank, Inc.

On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank, Inc.

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The interest rate on the loan agreement is 4.25% with monthly payments of $11,602.

As of March 31, 2022, the Company had made principal payments of $628,000.

As of June 30, 2022, the Company had made principal payments of $658,000.

The loan is collateralized by the building and property purchased under this agreement.

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After three months, all borrowings against the Equipment Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99% with monthly payments of $98,865.

As of March 31, 2022, the Company had borrowed $5.0 million against this note and made principal payments of $4.7 million.

The loan is collateralized by the equipment purchased under this agreement.

As of June 30, 2022, the Company had repaid this note in full.

On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West Virginia Pipeline, Inc.

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The unsecured five-year term note requires annual payments of at least $500,000 with a fixed interest rate of 3.25% on the $3.0 million sellers’ note, which equates to 5.35% on the carrying value of the note.

As of March 31, 2022, the Company had made annual installment payments of $500,000, interest payments of $129,000 and expensed $37,500 in accreted interest.

As of June 30, 2022, the Company had made annual installment payments of $500,000, interest payments of $138,000 and expensed $45,000 in accreted interest.

On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank, Inc.

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The loan is collateralized by the equipment purchased under this agreement.

As of March 31, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,073 that started in February 2022.

The Company has made principal payments of $114,000 on this note as of March 31, 2022.

As of June 30, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,073 that started in February 2022.

The Company has made principal payments of $287,000 on this note as of June 30, 2022.

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank, Inc.

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The loan is collateralized by the Company’s equipment and receivables.

As of March 31, 2022, the Company had made principal payments of $640,000.

As of June 30, 2022, the Company had made principal payments of $805,000.

On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank, Inc.

This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $140,000 with a variable interest rate of 4.5%.

The Company has made principal payments of 224,000 on this note as of June 30, 2022.

On April 29, 2022, the Company entered into a $1.0 million Promissory Note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri- State Paving.

This four-year agreement, with a fair value of $936,000, requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022.

Interest payments due shall be calculated on the principal balance remaining and shall be at the annual rate of 3.5% which equates to 6.85% on the carrying value of the note.

The Company recorded $2,700 in accreted interest and has not made any principal payments on this note as of June 30, 2022.

The Company leases office space for SQP Construction Group for $1,500 per month.

The lease, signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term.

Rental terms for the option periods shall be negotiated and agreed mutually between the parties and shall not exceed five percent increases to rent, if any.

The lease is expensed monthly and not treated as a right-of-use asset as it does not have a material impact on the Company’s consolidated financial statements.

During the nine months ended June 30, 2022, the Company entered into two lease agreements of construction equipment for a combined $160,000.

The leases have a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and are cancellable at any time without penalty.

The Company has the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid.

The right-of-use assets and operating lease obligations associated with these lease agreements are included in the consolidated balance sheets within property, plant and equipment and long-term debt, respectively, and do not have a material impact on the Company’s financial statements.

The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving, LLC transaction.

The first operating lease, for the Hurricane, WV facility, had a net present value of $236,000 at April 29, 2022, and a carrying value of $219,000 at June 30, 2022.

The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $129,000 at April 29, 2022, and a carrying value of $124,000 at June 30, 2022.

The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate .

Operating Line of Credit

On August 3, 2021, the Company received a one-year extension on its line of credit (“Operating Line of credit (2021)”) effective June 28, 2021.

On July 13, 2022, the Company received a one-year extension on its line of credit (“Operating Line of credit (2022)”) effective June 28, 2022.

The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each with separate borrowing requirements.

The interest rate on the line of credit is the “ Wall Street Journal ” Prime Rate (the index) with a floor of 4.99%.

Based on the borrowing base calculation, the Company was able to borrow up to $9.4 million and had no borrowings on the line of credit as of March 31, 2022.

The interest rate at March 31, 2022, was 4.99%.

Based on the borrowing base calculation, the Company was able to borrow up to $11.9 million and had $2.1 million borrowed, leaving $9.8 million available on the line of credit as of June 30, 2022.

The interest rate at June 30, 2022, was 4.99%.

Based on the borrowing base calculation, the Company was able to borrow up to $12.2 million as of September 30, 2021.

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Minimum current ratio of 1.50x to be measured quarterly,

Maximum debt to tangible net worth ratio (“TNW”) of 2.0x to be measured semi-annually,

Maximum debt to tangible net worth ratio (“TNW”) of 1.5 to be measured semi-annually,

Full review of accounts receivable aging report and work in progress.

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Minimum tangible net worth of $24.0 million to be measured quarterly.

The Company believes it was in compliance with all covenants for the $12.5 million and $2.5 million components of Operating Line of Credit (2021) at March 31, 2022.

The Company was not in compliance with all covenants but received a waiver on the $12.5 million component of the line of credit at June 30, 2022.

The Company projects to be in compliance with all covenants for the next twelve months.

Off-Balance Sheet Arrangements

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Though for the most part not material in nature, some of these are:

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”.

ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

Among other things, lessees are required to recognize the following for all leases (except for short-term leases) at the commencement date:

a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;

and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

It is the Company’s preference to acquire equipment needed for long-term use through purchase, by cash or finance.

For equipment needed on a short-term basis, the Company will enter into short-term rental agreements with the equipment provider where the agreement is cancellable at any time.

The adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.

The Company leases office space for SQP Construction Group for $1,500 per month.

The lease, signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term.

Rental terms for the option periods shall be negotiated and agreed mutually between the parties and shall not exceed five percent increases to rent, if any.

The lease is expensed monthly and not treated as a right-to-use asset as it does not have a material impact on the Company’s consolidated financial statements.

During the six months ended March 31, 2022, the Company entered into two lease agreements of construction equipment for a combined $160,000.

The leases have a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and are cancellable at any time without penalty.

The Company has the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid.

The right-of-use assets and finance lease obligations associated with these lease agreements are included in the consolidated balance sheets within property, plant and equipment and long-term debt, respectively, and do not have a material impact on the Company’s financial statements.

The Company rents equipment for use on construction projects with rental agreements being week to week or month to month.

Rental expense can vary by fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment.

Rental expense, which is included in cost of goods sold on the consolidated statements of income, was $3.5 million and $1.9 million for the six months ended March 31, 2022, and 2021, respectively.

Letters of Credit

Certain customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors and vendors on various customer projects.

At March 31, 2022, the Company did not have any letters of credit outstanding.

At June 30, 2022, the Company did not have any letters of credit outstanding.

Performance Bonds

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The Company does not anticipate any claims against outstanding performance bonds in the foreseeable future.

At March 31, 2022, the Company had $39.9 million in performance bonds outstanding.

At June 30, 2022, the Company had $59.6 million in performance bonds outstanding.

Concentration of Credit Risk

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Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.

Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable net of retention for the six months ended March 31, 2022, and 2021:

Six Months Ended

March 31, 2022

March 31, 2021

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

Nine Months Ended

June 30, 2022

June 30, 2021

TransCanada Corporation

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Accounts receivable net of retention

March 31, 2022

March 31, 2021

Mountaineer Gas Company

June 30, 2022

June 30, 2021

TransCanada Corporation

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

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On November 9, 2021, the Company was awarded $5.8 million, none of which has been recognized in the Company’s consolidated financial statements.

The Defendant filed motions to request a new trial or a renewed judgement as a matter of law.

All counter motions, and replies related to the previously mentioned motions have been filed with the court as of May 12, 2022.

The Company anticipates that a final judgement order will be issued in the third calendar quarter of 2022.

The Defendant filed motions to request a new trial or a renewed judgement as a matter of law, which were denied by the judge.

As of August 15, 2022, the Company has filed motions to submit claims for interest and legal fees to the court and expects all responses to those claims to be filed by mid-September 2022.

The Company anticipates that a final judgement order will be issued by the end of calendar year 2022.

A party to a civil lawsuit usually has 30 days from the entry of judgment to file a notice of appeal.

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If successfully arbitrated, the Company expects to receive repayment of all installment payments made, currently included within prepaid assets in the accompanying consolidated balance sheets.

Other than described above, at March 31, 2022, the Company was not involved in any legal proceedings other than in the ordinary course of business.

Other than described above, at June 30, 2022, the Company was not involved in any legal proceedings other than in the ordinary course of business.

The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business.

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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 March 31, 2022, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

At June 30, 2022, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

Related Party Transactions

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The interest rate on the loan agreement is 4.82% with monthly payments of $7,800.

As of March 31, 2022, the Company had paid approximately $306,000 in principal and approximately $373,000 in interest since the beginning of the loan.

As of June 30, 2022, the Company had paid approximately $319,000 in principal and approximately $373,000 in interest since the beginning of the loan.

Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston.

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Douglas Reynolds was elected a director of Peoples Bancorp, Inc., and its subsidiary Peoples Bank.

For the purchase price allocation, the $3.0 million note had a fair value of $2.85 million.

As part of the $6.35 million acquisition price, the Company paid $3.5 million in cash in addition to the note.

As of March 31, 2022, the Company had made annual installment payments of $500,000, interest payments of $129,000 and expensed $37,500 in accreted interest.

Other than mentioned above, there were no new material related party transactions entered into during the six months ended March 31, 2022.

On April 29, 2022, the Company entered into a $1.0 million Promissory Note agreement with Corns Enterprises as partial consideration for the purchase of Tri- State Paving.

This four-year agreement, with a fair value of $936,000, requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022.

Interest payments due shall be calculated on the principal balance remaining and shall be at the annual rate of 3.5% which equates to 6.85% on the carrying value of the note.

The Company recorded $2,700 in accreted interest and has not made any principal payments on this note as of June 30, 2022.

Subsequent to the April 29, 2022, acquisition of Tri-State Paving, the Company entered into a operating lease for facilities in Hurricane, West Virginia with Corns Enterprises.

This thirty-six-month lease is treated as a right-of-use asset and has payments of $7,000 per month.

The total net present value of all payments was $236,000 with a carrying value of $230,000 at June 30, 2022.

Other than mentioned above, there were no new material related party transactions entered into during the nine months ended June 30, 2022.

Certain Energy Services subsidiaries routinely engage in transactions in the normal course of business with each other, including sharing employee benefit plan coverage, payment for insurance and other expenses on behalf of other affiliates, and other services incidental to business of each of the affiliates.

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Most significant project materials, such as pipe or electrical wire, are provided by the Company’s customers.

The Company did experience costs increases on materials for fire protection projects, which had been bid several months prior, during the three months and six months ended March 31, 2022.

The Company did experience costs increases on materials for fire protection projects, which had been bid several months prior, during the three months and nine months ended June 30, 2022.

While significant to those smaller projects, the costs increases were immaterial to the overall operations of the Company.

When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material costs increases in bids.

Where allowed by contract, the Company will address fuel cost increases with customers.

Significant inflation or supply chain issues could cause customers to delay or cancel planned projects;

however, inflation did not have a significant effect on our results for the three and six months ended March 31, 2022, and 2021.

however, inflation did not have a significant effect on our results for the three and nine months ended June 30, 2022, and 2021.

Critical Accounting Estimates

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Generally, unearned project-related costs will be earned over the next twelve months.

The following table presents our costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings at March 31, 2022, and September 30, 2021:

March 31, 2022

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

June 30, 2022

September 30, 2021

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Additionally, frequently changing reserves could be an indication of risky or unreliable customers.

At March 31, 2022 and September 30, 2021, the management review deemed that the allowance for doubtful accounts was adequate.

At June 30, 2022, the management review deemed that the allowance for doubtful accounts was adequate.

Please see the allowance for doubtful accounts table below:

March 31, 2022

June 30, 2022

September 30, 2021

Balance at beginning of period

Balance at beginning of year

Charged to expense

Deductions for uncollectible receivables written off, net of recoveries

Balance at end of year period

Balance at end of year

Impairment of goodwill and intangible assets

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If a company fails this test or decides to bypass this step, it must proceed with a two-step quantitative assessment of goodwill impairment.

The Company did not have a goodwill impairment at March 31, 2022.

The Company did not have a goodwill impairment at June 30, 2022.

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

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Amortization and

Impairment Six

Impairment Nine

Remaining Life at

Amortization at

Amortization and

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Impairment at

Intangible assets:

Original Cost

March 31, 2022

June 30, 2022

September 30, 2021

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Employment agreement/non-compete

Tri-State Paving

Customer Relationships

Total intangible assets

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and office equipment, furniture and fixtures 5-7 years.

The Company’s depreciation expense for the six months ended March 31, 2022, and 2021 was $2.6 million and $2.2 million, respectively.

The Company’s depreciation expense for the nine months ended June 30, 2022, and 2021 was $4.0 million and $3.5 million, respectively.

In general, depreciation is included in “cost of revenues” on the Company’s consolidated statements of income.

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The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0%.

Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were (25.5%) and (20.4%) for the three months ended March 31, 2022, and 2021, respectively.

The effective income tax rate for the six months ended March 31, 2022, was 33.4 %, as compared to (17.1) % for the same period in the prior year.

Our tax rate is affected by recurring items, such as non-deductible portions of per diem paid to construction personnel, which we expect to be fairly

consistent in the near term.

Our tax estimates are also affected by discrete items that may occur in any given year but are not consistent from year to year.

Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were 28.7% and (0.6%) for the three months ended June 30, 2022, and 2021, respectively.

The effective income tax rate for the nine months ended June 30, 2022, was 30.0%, as compared to (6.7%) for the same period in the prior year.

Our tax rate is affected by recurring items, such as non-deductible expenses, which we expect to be fairly consistent in the near term.

On June 16, 2021, the Company received notice that the SBA had granted forgiveness and repaid $9.8 million of Paycheck Protection Program (“PPP”) borrowings to its lender.

The forgiveness was recorded as “other nonoperating income” for the three and nine months ended June 30, 2021.

According to the CARES Act passed by Congress in March 2020, PPP loan forgiveness is not taxable.

In accordance with the Consolidated Appropriations Act, 2021, the Company’s PPP related expenditures in fiscal year 2020 were considered deductible expenses for federal income tax purposes.

The PPP forgiveness had a significant impact on the effective income tax rate for the three and nine months ended June 30, 2021, as taxable income was decreased by $9.8 million.

Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.

At March 31, 2022, the Company had a net deferred income tax liability of $2.3 million as compared to $2.0 million at September 30, 2021.

The Company’s deferred income tax liabilities at March 31, 2022, was $4.4 million and primarily related to depreciation on property and equipment.

The Company’s deferred income tax assets at March 31, 2022, was $2.1 million and primarily related to a net operating loss (“NOL”) carryforward.

At June 30, 2022, the Company had a net deferred income tax liability of $2.9 million as compared to $2.0 million at September 30, 2021.

The Company’s deferred income tax liabilities at June 30, 2022, was $5.0 million and primarily related to depreciation on property and equipment.

The Company’s deferred income tax assets at June 30, 2022, was $2.1 million and primarily related to a net operating loss (“NOL”) carryforward.

The Company believes that it is more likely than not that all NOL carryforwards will be realized.

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Subsequent Events

TSP will provide utility paving services to water distribution customers in the Charleston, WV, Lexington, KY, and Chattanooga, TN markets.

The employees of TSP will be non-union and managed independently from the Company's union subsidiaries.

The Program does not obligate the Company to purchase any particular number of shares, and there is no guarantee as to the exact number of shares to be repurchased by the Company.

To date, no share purchases have been made in connection with the with Program.

On August 11, 2022, the Company acquired substantially all the assets of Ryan Environmental, LLC (“Debtor”), located in Bridgeport, West Virginia after having its bid previously accepted by the United States Bankruptcy Court for the Northern District of West Virginia.

In the transaction, the Company paid $2.5 million at closing for substantially all the vehicles, equipment, small tools, and accounts receivable.

In separate transactions, the Company will assume the Debtor’s vehicle leases with Enterprise Fleet Management for approximately $1.1 million and purchased equipment from a related party of the Debtor for approximately $1.0 million.

Management has evaluated all subsequent events for accounting and disclosure.

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These statements are forward looking, and actual results may differ materially.

As a contractor providing electrical, mechanical, HVAC/R and underground piping installation and maintenance services to customers in the petroleum, natural gas, public utilities and power industries, the Company and its subsidiaries are considered an “Essential Business” in the various states in which it operates.

Given the uncertainty regarding the spread of COVID-19, the related financial impact on the Company’s results of operations, financial position, and liquidity or capital resources cannot be reasonably estimated at this time.

The Company was not significantly impacted by COVID-19 during the three and six months ended March 31, 2022.

Transmission pipeline construction opportunities have increased compared to fiscal year 2021 and the Company has been successful in securing several transmission projects for fiscal year 2022.

The Company is also experiencing a greater demand for its gas and water distribution services.

Several potentially significant electrical and mechanical projects have been delayed until the Company’s third and fourth fiscal quarter;

Several potentially significant electrical and mechanical projects have been delayed until the Company’s fourth fiscal quarter;

however, electrical, mechanical, and general construction opportunities have increased in fiscal year 2022.

The Company’s backlog at March 31, 2022, was $120.3 million, as compared to $61.2 million and $72.2 million at March 31, 2021, and September 30, 2021, respectively.

The Company’s backlog at June 30, 2022, was $135.0 million, as compared to $73.1 million and $72.2 million at June 30, 2021, and September 30, 2021, respectively.

While adding additional projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis