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Item 7. Management’s Discussion and Analysis

2022-12-22 compared with 2021-12-29 · 278 added, 233 removed, 228 unchanged (69% of the section changed)

29 unchanged sentences

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.

Results of Operations for the Year Ended September 30, 2021, Compared to the Year Ended September 30, 2020.

Selling and Administrative Expenses

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

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

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

6 unchanged sentences

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

Gas & Water Distribution revenues totaled $40.4 million for fiscal year ended September 30, 2021, a $16.0 million increase from $24.5 million for fiscal year ended September 30, 2020.

The revenue increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of West Virginia Pipeline.

West Virginia Pipeline, acquired on December 31, 2020, contributed revenues of $5.7 million for the fiscal year ended September 30, 2021.

Gas & Petroleum Transmission revenues totaled $22.1 million for fiscal year ended September 30, 2021, a $20.9 million decrease from $43.0 million for fiscal year ended September 30, 2020.

The revenue decrease was primarily related to fewer project bid opportunities combined with greater competition from non-union and larger union bidders during fiscal year ended September 30, 2021.

The Company was awarded several transmission projects that were delayed by the customer until later in the Company’s fourth quarter of fiscal year 2021.

Those projects are expected to be completed in the Company’s first quarter of fiscal year 2022.

Electrical, Mechanical, & General services and construction revenues totaled $59.9 million for fiscal year ended September 30, 2021, an $8.2 million increase from $51.7 million for fiscal year ended September 30, 2020.

The revenue increase was primarily due to a large automotive project, which started in fiscal year 2020 and was completed in fiscal year 2021.

In addition, the Company had a significant amount of outage work that started in the fourth quarter of fiscal year 2021.

SQP, started in March 2021, accounted for $3.1 million in revenue for fiscal year 2021.

Please see page F-31 of the Notes to Consolidated Financial Statements for a quarterly summary of revenues earned.

Gas & Water Distribution revenues totaled $53.3 million for the fiscal year ended September 30, 2022, a $12.9 million increase from $40.4 million for the fiscal year ended September 30, 2021.

The revenue increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies.

Tri-State Paving, acquired on April 29, 2022, contributed revenues of $4.9 million for the fiscal year ended September 30, 2022.

A full year of West Virginia Pipeline revenue, acquired on December 31, 2020, resulted in $3.1 million in additional revenue during fiscal year 2022 as compared to 2021.

Gas & Petroleum Transmission revenues totaled $58.3 million for the fiscal year ended September 30, 2022, a $36.1 million increase from $22.1 million for the fiscal year ended September 30, 2021.

The revenue increase was primarily related to an increase in the amount of bidding opportunities with both existing, long-term customers and newer customers.

Electrical, Mechanical, & General services and construction revenues totaled $86.0 million for the fiscal year ended September 30, 2022, a $26.1 million increase from $59.9 million for the fiscal year ended September 30, 2021.

The revenue increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased revenues by $19.3 million in fiscal year 2022 as compared to 2021.

Cost of Revenues .

6 unchanged sentences

Electrical, Mechanical, and General

Unallocated Shop Expenses

Total cost of revenues increased by $3.8 million or 3.6% to $109.5 million for fiscal year ended September 30, 2021, from $105.7 million for the fiscal year ended September 30, 2020.

Gas & Water Distribution cost of revenues totaled $32.5 million for the fiscal year ended September 30, 2021, a $12.4 million increase from $20.1 million for fiscal year ended September 30, 2020.

The cost of revenues increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of West Virginia Pipeline.

West Virginia Pipeline, acquired on December 31, 2020, incurred cost of revenues of $3.4 million for fiscal year ended September 30, 2021.

Gas & Petroleum Transmission cost of revenues totaled $17.2 million for fiscal year ended September 30, 2021, a $15.2 million decrease from $32.4 million for fiscal year ended September 30, 2020.

The cost of revenues decrease was primarily related to fewer project bid opportunities combined with greater competition from non-union and larger union bidders during fiscal year ended September 30, 2021.

Electrical, Mechanical, & General services and construction cost of revenues totaled $55.6 million for fiscal year ended September 30, 2021, a $7.1 million increase from $48.5 million for fiscal year ended September 30, 2020.

The cost of revenues increase was primarily due to a large automotive project, which started in fiscal year 2020 and was completed in fiscal year 2021.

In addition, the Company had a significant amount of outage work that started in the fourth quarter of fiscal year 2021.

SQP, started in March 2021, accounted for $2.7 million in cost of revenues for fiscal year 2021.

Unallocated shop expenses totaled $4.3 million for fiscal year ended September 30, 2021, a $487,000 decrease from $4.8 million for fiscal year ended September 30, 2020.

The decrease in unallocated shop expenses was due to increased internal equipment charges to projects for fiscal year ended September 30, 2021, as compared to 2020.

Unallocated Shop (Profit) Expense

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

Gas & Water Distribution cost of revenues totaled $41.7 million for the fiscal year ended September 30, 2022, a $9.2 million increase from $32.5 million for the fiscal year ended September 30, 2021.

Tri-State Paving, acquired on April 29, 2022, had cost of revenues of $3.1 million for the fiscal year ended September 30, 2022.

A full year of West Virginia Pipeline cost of revenues, acquired on December 31, 2020, resulted in $1.8 million in additional cost of revenues during fiscal year 2022 as compared to 2021.

Gas & Petroleum Transmission cost of revenues totaled $54.9 million for the fiscal year ended September 30, 2022, a $37.7 million increase from $17.2 million for the fiscal year ended September 30, 2021.

The cost of revenues increase was primarily related to an increase in the amount of bidding opportunities with both existing, long-term customers and newer customers.

The Company has one gas transmission project that is projected to lose $2.1 million.

Electrical, Mechanical, & General services and construction cost of revenues totaled $79.1 million for the fiscal year ended September 30, 2022, a $23.5 million increase from $55.6 million for the fiscal year ended September 30, 2021.

The cost of revenues increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased costs of revenues by $16.4 million in fiscal year 2022 as compared to 2021.

Gross Profit .

6 unchanged sentences

Electrical, Mechanical, and General

Unallocated Shop Expenses

Unallocated Shop Profit (Expense)

Gross profit percentage

Total gross profit decreased by $580,000 or (4.3%) to $12.9 million for fiscal year ended September 30, 2021, from $13.5 million for fiscal year ended September 30, 2020.

Gas & Water Distribution gross profit totaled $8.0 million for fiscal year ended September 30, 2021, a $3.6 million increase from $4.4 million for fiscal year ended September 30, 2020.

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

West Virginia Pipeline, acquired on December 31, 2020, contributed gross profit of $2.4 million for fiscal year ended September 30, 2021.

Gas & Petroleum Transmission gross profit totaled $4.9 million for fiscal year ended September 30, 2021, a $5.8 million decrease from $10.7 million for fiscal year ended September 30, 2020.

The gross profit decrease was primarily related to fewer project bid opportunities combined with greater competition from larger union and non-union bidders during fiscal year ended September 30, 2021.

Electrical, Mechanical, & General services and construction gross profit totaled $4.3 million for fiscal year ended September 30, 2021, a $1.1 million increase from $3.2 million for fiscal year ended September 30, 2020.

An increase in volume combined with more efficient production accounted for the increased gross profit.

SQP, started in March 2021, accounted for $388,000 in gross profit for fiscal year 2021.

Gross loss attributed to unallocated shop expenses totaled $4.3 million for fiscal year ended September 30, 2021, a $487,000 decrease from $4.8 million for fiscal year ended September 30, 2020.

The gross loss decrease was primarily due to increased internal equipment charges to projects for fiscal year ended September 30, 2021, as compared to 2020.

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

Gas & Water Distribution gross profit totaled $11.6 million for the fiscal year ended September 30, 2022, a $3.6 million increase from $8.0 million for the fiscal year ended September 30, 2021.

Tri-State Paving, acquired on April 29, 2022, contributed gross profit of $1.8 million for the fiscal year ended September 30, 2022.

A full year of West Virginia Pipeline gross profit, acquired on December 31, 2020, resulted in $1.3 million in additional gross profit during the fiscal year 2022 as compared to 2021.

Gas & Petroleum Transmission gross profit totaled $3.4 million for the fiscal year ended September 30, 2022, a $1.5 million decrease from $4.9 million for the fiscal year ended September 30, 2021.

The gross profit decrease was primarily related to one gas transmission project that is projected to lose $2.1 million.

Electrical, Mechanical, & General services and construction gross profit totaled $6.9 million for the fiscal year ended September 30, 2022, a $2.6 million increase from $4.3 million for the fiscal year ended September 30, 2021.

The gross profit increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased gross profit by $3.0 million in the fiscal year 2022 as compared to 2021.

Gross profit attributed to unallocated shop operations totaled $506,000 for the fiscal year ended September 30, 2022, a $4.8 million increase from $4.3 million in unallocated shop expenses for the fiscal year ended September 30, 2021.

The gross profit increase was primarily due to increased internal equipment charges to projects and better project costs tracking for the fiscal year ended September 30, 2022, as compared to 2021.

Selling and administrative expenses .

Total selling and administrative expenses increased by $4.0 million to $13.8 million for fiscal year ended September 30, 2021, from $9.8 million for fiscal year ended September 30, 2020.

Approximately $1.2 million of the selling and administrative expense increase for fiscal year ended September 30, 2021, was from the operations of the new subsidiaries, West Virginia Pipeline and SQP.

In addition, the Company incurred approximately $150,000 in acquisition costs during the fiscal year ended September 30, 2021.

The Company incurred higher labor costs for fiscal year ended September 30, 2021, compared to fiscal year ended September 30, 2020, primarily due to the Company investing approximately $962,000 in personnel to enhance project management and estimating in the transmission division, develop a quality assurance/quality control program, expand its mechanical services, and improve production tracking.

Additionally, incentive compensation increased by $481,000 for fiscal year ended September 30, 2021, as compared to fiscal year ended September 30, 2020.

The overall increase in selling and administrative expense, including an increase in incentive compensation, related to an initiative launched by the Company to increase and incentivize operational talent within the Company in order to increase revenue and profit margins.

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 fiscal year ended September 30, 2021, as compared to fiscal year ended September 30, 2020.

The reason for the QNEC adjustment was to correct Plan participant’s balances due to a third-party administrator’s actions.

(Loss) income from operations .

Loss from operations was ($893,000) for fiscal year ended September 30, 2021, a $4.6 million decrease from a $3.7 million income from operations for the fiscal year ended September 30, 2020.

Total selling and administrative expenses increased by $1.9 million to $15.9 million for the fiscal year ended September 30, 2022, from $14.0 million for the fiscal year ended September 30, 2021.

Approximately $700,000 of the selling and administrative expense increase for the fiscal year ended September 30, 2022 as compared to the prior fiscal year, was from the operations of the new subsidiaries, Tri-State Paving and Ryan Construction.

In addition, the Company incurred approximately $1.6 in million additional selling and administrative expenses related to a full twelve months of activity for West Virginia Pipeline and SQP in the fiscal year 2022 as compared to 2021.

Income from operations .

Income from operations was $6.5 million for the fiscal year ended September 30, 2022, a $7.6 million increase from a $1.1 million loss from operations for the fiscal year ended September 30, 2021.

The increase was due to the items described above.

Interest Expense .

Interest expense increased by $331,000 or 59.3% to $888,000 for the fiscal year ended September 30, 2022, from $557,000 for the fiscal year ended September 30, 2021.

This increase was primarily due to increased line of credit borrowings and financing the West Virginia Pipeline acquisition and equipment purchases.

Other income (expenses).

Other income totaled $10.0 million for fiscal year ended September 30, 2021, as compared to other expenses of ($93,000) for fiscal year ended September 30, 2020.

The increase in other income was primarily related to $9.8 million of PPP loan debt forgiveness recognized during the fiscal year ended September 30, 2021.

This increase was primarily due to increased line of credit borrowings and financing the financing of acquisitions.

Other Income.

Other income totaled $507,000 for the fiscal year ended September 30, 2022, as compared to other income of $10.7 million for the fiscal year ended September 30, 2021.

The decrease in other income was primarily related to $9.8 million of PPP loan debt forgiveness recognized during the fiscal year ended September 30, 2021.

Please see the “Paycheck Protection Program Loans” disclosure on page 9.

Income before income taxes was $9.1 million for fiscal year ended September 30, 2021, compared to $3.6 million for fiscal year ended September 30, 2020.

The increase in income before income taxes was primarily due to PPP loan debt forgiveness, which was a one-time event that will not be repeated.

Income tax benefit for fiscal year ended September 30, 2021, was ($29,000) compared to income tax expense of $1.1 million for fiscal year ended September 30, 2020.

The effective income tax rate for fiscal year ended September 30, 2021, was (0.32%), as compared to 32.0% for fiscal year ended September 30, 2020.

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.

Income before income taxes was $6.1 million for the fiscal year ended September 30, 2022, compared to $9.1 million for the fiscal year ended September 30, 2021.

The $3.0 million decrease was primarily due to a one-time $9.8 million PPP loan debt forgiveness in the fiscal year 2021, partially offset by a $7.6 million increase in income from operations.

The income tax expense for fiscal year ended September 30, 2022 was $2.3 million compared to an income tax benefit of ($29,000) for the fiscal year ended September 30, 2021.

The increase was due to an increase in taxable income.

According to the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) passed by Congress in March 2020, PPP loan forgiveness is not taxable.

In accordance with the Consolidated Appropriations Act, 2021 , the Company’s PPP related expenditures in 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 fiscal year ended September 30, 2021, as taxable income was decreased by $9.8 million.

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 fiscal years ended September 30, 2021, and 2020, the non-deductible portion of per diem and entertainment expenses resulted in an approximate increase in taxable income of $515,000 and $530,000, respectively.

Dividends on preferred stock for fiscal years ended September 30, 2021, and 2020 were $284,238 and $309,000, respectively.

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

The effective income tax rate for the fiscal year ended September 30, 2022 was 37.0%.

The effective income tax rate for the fiscal year ended September 30, 2021, was (0.32%).

The PPP forgiveness had a significant impact on the effective income tax rate for the fiscal year ended September 30, 2021, as taxable income was decreased by $9.8 million.

Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income or loss, non-taxable items and nondeductible expenses.

Dividends on preferred stock for the fiscal years ended September 30, 2022, and 2021 were $0 and $284,000, respectively.

There will be no further dividends paid on preferred stock after the October 6, 2021 redemption of all the Company’s preferred stock.

Net income available to common shareholders for fiscal year ended September 30, 2021, was $8.8 million compared to $2.1 million for fiscal year ended September 30, 2020.

Net income available to common stockholders for the fiscal year ended September 30, 2022 was $3.9 million compared to $8.8 million for the fiscal year ended September 30, 2021.

The decrease was due to the items mentioned above.

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

The Company had total assets of $70.2 million at September 30, 2021, an increase of $12.0 million from the prior fiscal year end balance of $58.2 million.

Net property, plant and equipment totaled $22.9 million at September 30, 2021, an increase of $6.5 million from the prior fiscal year end balance of $16.4 million.

Property, plant and equipment acquisitions totaled $11.3 million for fiscal year 2021 while depreciation expense was $4.7 million, and the net impact of disposals was $76,000.

Assets received as part of the West Virginia Pipeline and Revolt Energy acquisitions accounted for $2.1 million of the $11.3 million in total acquisitions.

Goodwill and acquired intangible assets resulting from the West Virginia Pipeline and Revolt Energy acquisitions totaled $4.2 million at September 30, 2021, as compared to no goodwill and acquired intangible assets at the prior fiscal year end.

Contract assets totaled $8.7 million at September 30, 2021, an increase of $2.2 million from the prior fiscal year end balance of $6.5 million.

This increase was primarily due to the timing of project billings and related increase in costs and estimated earnings in excess of billings at September 30, 2021 as compared to at September 30, 2020.

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $22.5 million at September 30, 2021, an increase of $1.8 million from the combined prior fiscal year end balance of $20.7 million.

The increase was primarily due to a $2.5 million increase in accounts receivable related to the new subsidiaries, West Virginia Pipeline and SQP.

Prepaid expenses and other totaled $3.5 million at September 30, 2021, an increase of $200,000 from the prior fiscal year end balance of $3.3 million.

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

The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $42.9 million at September 30, 2022, an increase of $20.4 million from the combined prior the fiscal year-end balance of $22.5 million.

The increase was primarily due to increased work in the fiscal year 2022 as compared to 2021.

Specifically, $69.4 million in revenue was generated in the fourth quarter of fiscal year 2022 as compared to $39.6 million for the same period in 2021.

Net property, plant and equipment totaled $32.7 million at September 30, 2022, an increase of $9.7 million from the prior the fiscal year-end balance of $23.0 million.

Property, plant and equipment acquisitions totaled $15.6 million for the fiscal year 2022 while depreciation expense was $5.6 million, and the net impact of disposals was $316,000.

Assets received as part of the Tri-State Paving and Ryan Construction acquisitions accounted for $8.9 million of the $15.6 million in total acquisitions.

Contract assets totaled $16.1 million at September 30, 2022, an increase of $7.4 million from the prior the fiscal year-end balance of $8.7 million.

This increase was primarily due to increased work and the timing of project billings and related increase in costs and estimated earnings in excess of billings at September 30, 2022 as compared to at September 30, 2021.

Goodwill and acquired intangible assets totaled $8.0 million at September 30, 2022, a $3.7 million increase from the prior fiscal year end balance of $4.2 million.

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

Right-of-use assets acquired from operating leases totaled $1.6 million net of amortization expense, as compared to no right-to-use assets at the prior the fiscal year end.

The operating leases were primarily related to the business combinations completed in the fiscal year ended September 30, 2022.

Prepaid expenses and other totaled $3.9 million at September 30, 2022, an increase of $401,000 from the prior the fiscal year-end balance of $3.5 million.

The increase was primarily due to the increase of various prepaid insurance accounts based on labor cost expensed or standard monthly charges.

Cash and cash equivalents totaled $8.2 million at September 30, 2021, a decrease of $3.0 million from the prior fiscal year end balance of $11.2 million.

The decrease was primarily related to a $6.0 million investment in property and equipment and $2.8 million in long-term debt repayments, partially offset by a $4.5 million increase in line of credit borrowings and $800,000 net cash provided by operating activities.

Liabilities totaled $35.5 million at September 30, 2021, an increase of $3.2 million from the prior fiscal year end balance of $32.3 million .

Lines of credit and short-term borrowings totaled $5.0 million at September 30, 2021, an increase of $4.5 million from the prior fiscal year end balance of $510,000.

This increase was primarily due to borrowings against the Company’s operating line of credit.

Accounts payable totaled $7.3 million as of September 30, 2021, an increase of $2.1 million from the prior fiscal year end balance of $5.2 million.

The increase was due to the timing of payments to material and equipment providers.

New subsidiaries, West Virginia Pipeline and SQP, accounted for $1.1 million of the increase.

Accrued expenses and other current liabilities totaled $5.6 million at September 30, 2021, an increase of $1.4 million from the prior fiscal year end balance of $4.2 million.

The increase was primarily due to increased labor and burden expenses incurred towards the end of fiscal year 2021 compared to 2020.

The aggregate balance of current maturities of long-term debt and long-term debt totaled $12.4 million at September 30, 2021, a decrease of $2.8 million from the prior fiscal year end balance of $15.3 million.

The decrease was primarily due to forgiveness received on $9.8 million in PPP loans and $2.8 million in debt repayments, partially offset by a $6.4 million increase related to financing the West Virginia Pipeline acquisition and a $3.0 million increase related to the financing of equipment.

Contract liabilities totaled $3.2 million at September 30, 2021, a decrease of $1.7 million from the prior fiscal year end balance of $4.9 million.

This decrease was due to a lower amount of overbillings when comparing the billed revenue and percentage of cost completed on construction projects in 2021 as compared to 2020.

Net deferred income tax payable totaled $2.0 million at September 30, 2021, a decrease of $222,000 from the prior fiscal year end balance of $2.3 million.

The decrease was primarily due to a loss from operations net of non-taxable income recognized from PPP loan forgiveness and deferred income tax payable resulting from bonus depreciation on property, plant and equipment acquisitions in fiscal year 2021.

Shareholders’ equity totaled $34.6 million at September 30, 2021, an increase of $8.8 million from the prior fiscal year end balance of $25.8 million.

This increase was primarily due to $9.8 million in income related to PPP loan forgiveness, partially offset by a loss of ($742,000) prior to PPP loan forgiveness, and $284,000 in accrued preferred dividends.

Cash and cash equivalents totaled $7.4 million at September 30, 2022, a decrease of $799,000 from the prior the fiscal year-end balance of $8.2 million.

The decrease was primarily related to a net $8.3 million investment in property and equipment, $4.3 million in long-term debt repayments, and $1.2 million in preferred stock conversion payments, partially offset by a net $4.7 million increase in line of credit and short-term borrowings and $8.3 million in net cash provided by operating activities.

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

Accounts payable totaled $20.3 million as of September 30, 2022, an increase of $13.0 million from the prior the fiscal year-end balance of $7.3 million.

The increase was due to more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021.

Lines of credit and short-term borrowings totaled $13.1 million at September 30, 2022, an increase of $8.1 million from the prior the fiscal year-end balance of $5.0 million.

This increase was primarily due to increased borrowings against the Company’s operating line of credit because or more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021.

Accrued expenses and other current liabilities totaled $11.3 million at September 30, 2022, an increase of $5.7 million from the prior the fiscal year-end balance of $5.6 million.

The increase was primarily due to increased labor and burden expenses incurred towards the end of the fiscal year 2022, as compared to the same period in fiscal 2021.

The aggregate balance of current maturities of long-term debt and long-term debt totaled $17.6 million at September 30, 2022, an increase of $5.2 million from the prior the fiscal year-end balance of $12.4 million.

The increase was primarily due to a $8.4 million increase related to financing the Tri-State Paving acquisition and $940,000 in equipment financing, partially offset by $4.3 million in payments on long-term debt.

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

This increase was due to increased billings in excess of costs and earnings when computing earned revenue on construction projects at September 30, 2022, as compared to at September 30, 2021.

Operating lease liabilities totaled $1.6 million at September 30, 2022, an increase of $1.6 million from the prior fiscal year end balance.

See “Leases” on page 29 for a discussion of operating leases added in the fiscal year 2022.

Net deferred income tax payable totaled 4.5 million at September 30, 2022, an increase of $2.5 million from the prior the fiscal year-end balance of $2.0 million.

The increase was primarily related to a net operating loss (“NOL”) carryforward resulting from bonus depreciation on acquired assets.

Stockholders’ equity totaled $38.3 million at September 30, 2022, an increase of $3.7 million from the prior the fiscal year-end balance of $34.6 million.

This increase was primarily due to $3.9 million in net income and a $1.0 million increase in additional paid in capital related to stock issued as part of the Tri-State Paving acquisition, partially offset by $1.2 million in preferred stock redemption payments.

Liquidity and Capital Resources

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc.

(West Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly.

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

The interest rate on this note is subject to change from time to time based on changes in The U.S.

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

As of September 30, 2021, the Company had made principal payments of $281,000.

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

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank, Inc.

This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%.

After the first year, all borrowings against the Equipment Line of Credit were converted to a five-year term note agreement with an interest rate of 5.0%.

As of September 30, 2021, the Company had borrowed $2.46 million against this note and had paid off the loan, which was collateralized by the equipment purchased under this agreement.

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

to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month.

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

As of September 30, 2021, the Company had made principal payments of $569,000.

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

On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank, Inc.

This five-year agreement gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase of equipment, for a period of three months with an interest rate of 4.99%.

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

As of September 30, 2021, the Company had borrowed $5.0 million against this note and made principal payments of $4.2 million.

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

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

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

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

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

As of September 30, 2021, the Company has made interest payments of $73,000 and expensed $22,500 in accreted interest.

The Company made the first installment payment in December 2021.

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

This five-year agreement gave the Company access to a $3.0 million line of credit (“Equipment Line of Credit 2021”), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal .

After twelve months, all borrowings against the Equipment Line of Credit 2021 will be converted to a four-year term note agreement with a variable interest rate initially established at 4.25%.

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

As of September 30, 2021, the Company borrowed $3.0 million against this line of credit with payments set to begin in February 2022.

The Company has made interest payments of $34,000 on this note as of September 30, 2021.

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

This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition.

This loan has a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal .

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

As of September 30, 2021, the Company had made principal payments of $316,000.

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.

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.

Operating Line of Credit and Short-Term Borrowings

On July 13, 2022, the Company received a one-year extension on its operating line of credit effective June 28, 2022.

The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component.

The Company can borrow from the $12.5 million component first and then from the additional $2.5 million component if additional requirements are met.

The covenant requirements for both components are below.

Based on the borrowing base calculation, the Company borrowed all $12.5 million available on the line of credit as of September 30, 2022.

The Company did not meet the requirements to borrow any from the $2.5 million component.

The Company expects to receive an amendment to increase its line of credit by December 31, 2022.

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

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

The Company had $4.5 million in borrowings on the line of credit, leaving $7.7 million available on the line of credit as of September 30, 2021.

The interest rate at September 30, 2022, was 5.5%.

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

The Company had no borrowings on the line of credit, as of September 30, 2020.

The Company had $4.5 million in borrowings on the line of credit, leaving $7.7 million available on the line of credit as of September 30, 2021.

The interest rate at September 30, 2021, was 4.99%.

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

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2021) at September 30, 2021 except for the debt service coverage ratio, for which the Company obtained a waiver from its lender.

As of September 30, 2021, the Company had $8.2 million in cash and $18.4 million in working capital.

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

The Company projects to be in compliance with all covenants associated with the $12.5 million component for the next twelve months.

The Company also finances insurance policy premiums on a short-term basis through a financing company.

These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies.

The Company makes a down payment in January and finances the remaining premium amount over ten monthly payments.

In January 2022 and 2021, respectively, the Company financed $3.4 million and $3.2 million in insurance premiums.

At September 30, 2022 and 2021, respectively, the remaining balance of the insurance premiums was $580,000 and $540,000.

Long-Term Debt

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with a bank to purchase the office building and property it had previously been leasing for $6,300 monthly.

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

The interest rate on this note is subject to change from time to time based on changes in the U.S.

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

As of September 30, 2022, the Company had made principal payments of $333,000.

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

The note is currently held by Peoples Bank, Inc., formerly First Bank of Charleston, Inc.

(West Virginia).

On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month.

The variable interest rate on the loan agreement is 7.25% at September 30, 2022 with monthly payments of $12,193.

As of September 30, 2022, the Company had made principal payments of $687,000.

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

On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank.

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

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

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

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

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

As of September 30, 2022, the Company had made annual installment payments of $500,000, interest payments of $152,000 and expensed $53,000 in accreted interest.

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

After twelve months, all borrowings against the Equipment Line of Credit 2021 were converted to a four-year term note agreement with a variable interest rate initially established at 4.25%.

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

As of September 30, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022.

The interest rate at September 30, 2022 was 7.25%.

The Company has made principal payments of $451,000 on this note as of September 30, 2022.

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

This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition.

This loan has monthly installment payments of $64,853 and has a fixed interest rate of 4.25%.

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

As of September 30, 2022, the Company had made principal payments of $971,000.

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

This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%.

The Company has made principal payments of $518,000 on this note as of September 30, 2022.

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

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

Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year.

The Company recorded $7,800 in accreted interest and has not made any principal payments on this note as of September 30, 2022.

The maturities of long-term and short-term debt, which includes line of credit borrowings, term notes payable to banks, and notes payable on various equipment purchases, were as follows :

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

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

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

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

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

During fiscal year ended September 30, 2022, the Company entered into two lease agreements for construction equipment for a combined $160,000.

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

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

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

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

The first operating lease, for the Hurricane, WV facility, had a net present value of $236,000 at April 29, 2022, and a carrying value of $205,000 at September 30, 2022.

The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at April 29, 2022, and a carrying value of $119,000 at September 30, 2022.

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

The Company has a right-of-use operating lease with Enterprise Fleet Management, Inc.

acquired on August 11, 2022, as part of the Ryan Environmental acquisition.

This lease agreement was initially for 31 vehicles to be used for Ryan Construction;

however, the Company plans to add vehicles as it finds necessary.

This lease had a net present value of $1.2 million at inception, which approximates the carrying value at September 30, 2022.

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

The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022, as part of the Ryan Environmental acquisition.

This lease, for the Bridgeport, WV facility, had a net present value of $140,000 at inception and a carrying value of $113,000 at September 30, 2022.

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

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

Less amounts representing interest

Present value of operating lease liabilities

Off-Balance Sheet Transactions

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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 agree 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.

Rental Agreements

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

Rental expense can vary by 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 Income Statement, was $3.6 million and $4.2 million for the twelve months ended September 30, 2021, and 2020, respectively.

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

Rental expense, which is included in cost of goods sold on the consolidated statements of income, was $9.8 million and $3.6 million for the twelve months ended September 30, 2022, and 2021, respectively.

Letters of Credit

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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.

These performance bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors.

If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond.

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TransCanada Corporation

Marathon Petroleum

* Less than 10.0% and included in "All other"

if applicable

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

Accounts receivable, net of retention

Kentucky American Water

TransCanada Corporation

Marathon Petroleum

Shimizu North American LLC

* Less than 10.0% and included in "All other"

if applicable

Kentucky American Water

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

Virtually all work performed for major customers was awarded under competitive bid fixed price or unit price arrangements.

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In February 2018, the Company filed a lawsuit against a former customer (“Defendant”) in the United States District Court for the Western District of Pennsylvania.

The lawsuit is related to a dispute over changes on a pipeline construction project.

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

The Defendant has filed motions to request a new trial or a renewed judgement as a matter of law, which has not been ruled upon.

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

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

The lawsuit is related to a dispute over work performed on a pipeline construction project.

On November 21, 2022, a Judgment Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest.

The amounts awarded by the Judgment Order have not been recognized in the Company’s consolidated financial statements as of September 30, 2022.

The Company’s attorney’s fees have been expensed as incurred.

On December 16, 2022, the Defendant filed a notice of appeal with the court.

On November 12, 2021, the Company received a withdrawal liability claim from a pension plan to which the Company made pension contributions for union construction employees performing covered work in a particular jurisdiction.

The Company has not performed covered work in their jurisdiction since 2011;

however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law.

The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021.

The Company must comply with the demand under federal pension law;

however, the Company firmly believes no withdrawal liability exists.

The Company is in negotiations with the pension fund to resolve the matter and all future payments have been suspended as part of the negotiation.

The Company has expensed all $164,000 in payments made through September 30, 2022 and does not expect any future liabilities related to this claim.

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

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As of September 30, 2022, the Company had paid approximately $333,000 in principal and approximately $370,000 in interest since the beginning of the loan.

Douglas Reynolds,

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

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

Samuel Kapourales, a director of Energy Services, was also a director 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 fair acquisition, the acquirer paid $3.5 million in cash in addition to the note.

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

As of September 30, 2021, the Company has made interest payments of $73,000 and expensed $22,500 in accreted interest.

The Company made the first installment payment in December 2021.

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

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

Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year.

The Company recorded $7,800 in accreted interest and has not made any principal payments on this note as of September 30, 2022.

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

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

The total net present value at inception was $236,000 with a carrying value of $205,000 at September 30, 2022.

SQP made an equity investment of $156,000 in 1030 Quarrier Development, LLC (“Development”) in August 2022.

Development is a variable interest entity (“VIE”) that is 75% owned by 1030 Quarrier Ventures, LLC (“Ventures”) and 25% owned by SQP.

SQP is not the primary beneficiary of the VIE and therefore, will not consolidate Development into its consolidated financial statements.

Instead, SQP will apply the equity method of accounting for its investment in Development.

Development, a 1% owner, and United Bank, a 99% owner, formed 1030 Quarrier Landlord, LLC (“Landlord”).

Landlord decided to pursue the following development project (the “Project”):

a historical building at 1030 Quarrier Street, Charleston, West Virginia as well as associated land (the “Property”) was purchased to be developed/rehabilitated into a commercial project including apartments and commercial space.

Upon the completion of development, the Property will be used to generate rental income.

SQP has been awarded the construction contract for the Project.

United Bank provided $5.0 million in loans to fund the Project.

SQP and Ventures has jointly provided an unconditional guarantee for the $5.0 million of obligations associated with the Project.

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

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

Therefore, inflation did not have a significant effect on our results for the fiscal years ended September 30, 2021, and 2020.

However, significant inflation or supply chain issues could cause customers to delay or cancel planned projects.

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

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

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

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

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

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

Critical Accounting Estimates

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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 earning in excess of billings and billings in excess of costs and estimated earnings at September 30, 2021, and 2020:

Year Ended September 30,

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

September 30, 2022

September 30, 2021

Costs incurred on contracts in progress

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

Please see the table below:

Please see the allowance for doubtful accounts table below:

Year Ended September 30,

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Impairment of goodwill and intangible assets

The Company follows the guidance of ASC 350-20-35-3 Intangibles-Goodwill and Other (Topic 350) which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value.

The Company follows the guidance of Accounting Standards Codification (“ASC”) 350-20-35-3 “Intangibles-Goodwill and Other (Topic 350)” which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value.

Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0).

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

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

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

Based on management's preliminary valuation of tangible and intangible assets acquired and liabilities assumed, the West Virginia Pipeline and Revolt Energy acquisitions resulted in goodwill of $4.2 million and intangible assets of $400,000.

A subsequent independent, third-party fair value evaluation analysis of the purchase price allocations resulted in the reclassification of $2.3 million from goodwill to intangible assets, primarily customer relationships.

At September 30, 2021, goodwill and intangible assets were $1.8 million and $2.4 million, respectively.

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

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

Remaining Life at

Amortization and

Remaining Life at

Impairment at

Twelve Months Ended

September 30,

Impairment FY

September 30,

Intangible assets:

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Revolt Energy:

Employment agreement/non-compete

Tri-State Paving:

Customer Relationships

Total intangible assets

The purpose of depreciation is to represent an accurate value of assets on the books.

Depreciation and Amortization

The purpose of depreciation and amortization is to represent an accurate value of assets on the books.

Every year, as assets are used, their values are reduced on the balance sheet and expensed on the income statement.

As depreciation is a noncash expense, the amount must be estimated.

Each year a certain amount of depreciation is written off and the book value of the asset is reduced.

As depreciation and amortization are a noncash expense, the amount must be estimated.

Each year a certain amount of depreciation and amortization is written off and the book value of the asset is reduced.

Property and equipment are recorded at cost.

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

The Company’s depreciation expense for fiscal years ended September 30, 2021, and 2020 was $4.7 million and $4.4 million, respectively.

Acquired intangible assets subject to amortization are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible assets is realized, over their respective estimated useful lives.

The definite-lived identifiable intangible assets recognized as part of the Company’s business combinations are recorded at their estimated fair value.

The Company’s depreciation expense for the twelve months ended September 30, 2022, and 2021 was $5.6 million and $4.7 million, respectively.

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

Materially incorrect estimates of depreciation and/or the useful lives of assets could significantly impact the value of property, plant, and equipment on the Company’s financial statements.

The Company’s amortization expense for the twelve months ended September 30, 2022, and 2021 was $445,000 and $231,000, respectively.

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

Materially incorrect estimates of depreciation and amortization and/or the useful lives of assets could significantly impact the value of long-lived assets on the Company’s consolidated financial statements.

A material over valuation could result in impairment charges and reduced profitability for the Company .

Our income tax expense and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid.

The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid.

Significant judgments and estimates are required in the determination of the consolidated income tax expense.

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

Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were (.32%) and 32.0% for fiscal years 2021 and 2020, respectively.

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

For the fiscal years ended September 30, 2021, and 2020, the non-deductible portion of per diem and entertainment expenses resulted in approximate increases in taxable income of $515,000 and $530,000, respectively.

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

In fiscal year 2021, $9.8 million in PPP loan forgiveness was excluded from taxable income.

Additionally, the Company is expecting to receive approximately a $250,000 federal income tax credit related to a solar installation project at its Nitro, WV facility.

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.

The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0% to taxable income or loss after consideration of non-taxable and non-deductible items.

Permanent income tax differences result in an increase or decrease to taxable income and impact the Company’s effective tax rates, which were 37.0% and (0.3%) for the twelve months ended September 30, 2022 and 2021, respectively.

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

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

The forgiveness was recorded as “other nonoperating income” for the twelve months ended September 30, 2021.

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

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

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

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

At September 30, 2022, the Company had a net deferred income tax liability of $4.5 million as compared to $2.0 million at September 30, 2021.

The Company’s deferred income tax liabilities at September 30, 2021 was $4.9 million and primarily related to depreciation on property and equipment.

The Company’s deferred income tax assets at September 30, 2021 was $2.9 million and primarily related to a net operating loss (“NOL ”) carryforward.

The Company’s deferred income tax liabilities at September 30, 2022 totaled $7.7 million and primarily related to depreciation on property and equipment.

The Company’s deferred income tax assets at September 30, 2022, totaled $3.2 million and primarily related to a NOL carryforward.

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

The Company’s tax provision is evaluated as part of its annual audit;

however, a material difference between the provision and actual income tax filings could result in adjustments to income tax benefits or expenses and deferred tax assets and liabilities.

Changes in tax laws and rates may also affect recorded deferred tax assets and liabilities and our effective tax rate in the future.

New Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, “ Intangibles-Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment ”.

ASU 2017-04 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The update was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value;

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

The Company has adopted ASU 2017-04 and it did not have a material impact on its financial statements or disclosure.

On October 28, 2021, the FASB released ASU 2021-08, “ Business Combinations (Topic 805):

On October 28, 2021, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”.

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The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination.

The amendments are effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2022.

For all other entities they are effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.

The amendments are effective for public business entities for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2022.

For all other entities they are effective for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2023.

Entities should apply the amendments prospectively to business combinations that occur after the effective date.

Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance.

The Company is currently assessing the effect that ASU 2021-08 will have on their results of operations, financial position and cash flows;

however, the Company does not expect a significant impact.

The FASB recently issued ASU 2021-10, “Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance”, which aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements.

Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date.

Retrospective application of the guidance is permitted.

The guidance in ASU 2021-10 is effective for financial statements of all entities for annual periods beginning after December 15, 2021, with early application permitted.

ASU 2021-10 has not become effective for the Company;

however, a significant impact is not expected.

Subsequent Events

On October 6, 2021, the Company’s transfer agent completed the previously disclosed Series A Preferred Stock 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 approximately $1.3 million.

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

On November 9, 2021, the Company was awarded $5.8 million in a lawsuit related to construction services performed for a former customer (“Defendant”), none of which has been recognized in the Company’s financial statements.

The Defendant has filed motions to request a new trial or a renewed judgement as a matter of law, which has not been ruled upon.

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

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

The Company has not performed covered work in their jurisdiction since 2011;

however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law.

The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021.

The Company must comply with the demand under federal pension law;

however, the Company firmly believes no withdrawal liability exists and plans to seek arbitration to resolve the matter.

If successfully arbitrated, the Company expects to receive repayment of all installment payments made.

Management has evaluated subsequent events through December 29, 2021, 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 this report or the Company’s results going forward.

On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank to finance the Ryan Environmental acquisition.

This is a five-year agreement with a fixed interest rate of 6.0% and monthly payments of $59,932 beginning on November 10, 2022.

In February 2018, the Company filed a lawsuit against a former customer in the United States District Court for the Western District of Pennsylvania.

The lawsuit is related to a dispute over work performed on a pipeline construction project.

On November 16, 2022, a Judgement Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest.

None of the award had been recognized in the Company’s consolidated financial statements as of September 30, 2022.

The Company’s attorney’s fees have been expensed as incurred.

On December 16, 2022, the Defendant filed a notice of appeal with the court.

Management has evaluated all subsequent events for accounting and disclosure.

There have been no other material events during the period, other than noted above, that would either impact the results reflected in the report or the Company’s results going forward.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-K

Item 7. Management’s Discussion and Analysis