What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-13 compared with 2022-08-15 · 284 added, 344 removed, 257 unchanged (71% 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, Tri-State Paving, and C.J.

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

Hughes and C.J.

11 unchanged sentences

Company Overview

Energy Services of America Corporation (“Energy Services” or the “Company”), formed in 2006, is a contractor and service company that operates primarily in the mid-Atlantic region of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries.

Energy Services of America Corporation (“Energy Services” or the “Company”), formed in 2006, is a contractor and service company that operates primarily in the mid-Atlantic and central regions of the United States and provides services to customers in the natural gas, petroleum, water distribution, automotive, chemical, and power industries.

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

Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter.

For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work.

For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers, and other ancillary work with regards thereto.

Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.

The Company has also added the ability to install residential, commercial, and industrial solar systems and perform civil and general contracting services.

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

TransCanada Corporation

NiSource, Inc.

Marathon Petroleum

Mountaineer Gas

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Kentucky American Water

West Virginia American Water

Various state, county and municipal public service districts.

The majority of the Company’s customers are in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky.

However, the Company also performs work in other states including Alabama, Michigan, Illinois, Tennessee, and Indiana.

Energy Services’ sales force consists of industry professionals with significant relevant sales experience, who utilize industry contacts and available public data to determine how to market the Company’s line of products most appropriately.

The Company relies on direct contact between its sales force and customers’ engineering and contracting departments to obtain new business.

Hughes Construction Company, Inc.

5 unchanged sentences

Hughes, provides electrical, mechanical, HVAC/R, solar installation, and fire protection services to customers primarily in the automotive, chemical, and power industries.

Revolt Energy, LLC and Nitro Electric Company, LLC are newly formed, wholly owned subsidiaries of Nitro.

Pinnacle Technical Solutions, Inc.

2 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.

The Company believes its relationship with its unionized workforce is good.

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

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

5 unchanged sentences

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.

(“TSP” or “Tri-State Paving”), a wholly owned subsidiary of Energy Services, completed the acquisition of substantially all of the assets of Tri-State Paving & Sealcoating, LLC (“Tri-State Paving, LLC”) on April 29, 2022.

Tri-State Paving provides utility paving services to water distribution customers in the Charleston, West Virginia, Lexington, Kentucky, and Chattanooga, Tennessee markets.

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

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.

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 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.

The Company has also added the ability to install residential, commercial, and industrial solar systems and perform civil and general contracting services.

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

TransCanada Corporation

Columbia Gas Distribution

Marathon Petroleum

Mountaineer Gas

American Electric Power

Toyota Motor Manufacturing

Clearon Corporation

Kentucky American Water

West Virginia American Water

Various state, county and municipal public service districts.

The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky.

However, the Company also performs work in other states including Alabama, Michigan, Illinois, Tennessee, and Indiana.

Energy Services’ sales force consists of industry professionals with significant relevant sales experience, who utilize industry contacts and available public data to determine how to most appropriately market the Company’s line of products.

The Company relies on direct contact between its sales force and customers’ engineering and contracting departments in order to obtain new business.

Ryan Construction Services Inc.

(“Ryan Construction” or “RCS”), a wholly owned subsidiary of Energy Services, formed in August 2022 in connection with the acquisition of substantially all of the assets of Ryan Environmental, LLC and Ryan Environmental Transport, LLC, provides directional drilling services for broadband service providers along with offering natural gas distribution services, cathodic protection and corrosion prevention services, and civil construction services.

Ryan Construction operates primarily in West Virginia and Pennsylvania.

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

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

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

The Company believes its relationship with its unionized workforce is good.

COVID-19 Response

In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic.

This coronavirus and related variants have significantly impacted both the world and U.S.

In response the governments of many cities, counties, states, and other geographic regions have taken preventative or protective actions.

In the geographic regions in which the Company operates, state ordered business closures and masking policies have been lifted during 2021;

however, some businesses may implement their own policies related to masks and vaccination.

While a federal vaccine mandate enforceable by OSHA has been overturned, certain customers, or potential customers, may require all construction employees working on a project to be vaccinated.

Some of the procedures that the Company has implemented to help protect employees from COVID-19 and variant exposure are guidelines for social distancing, office sanitation, hand washing, mask wearing, limited office admittance, and immediate symptom reporting.

The Company has provided personal protective equipment and hand-sanitizers to employees, made arrangements for administrative personnel to work from home, and provided access to vaccines to employees.

The Company works closely with our customers to limit exposure risk and cooperate with symptom reporting and contact tracing.

Construction employees are required to meet all procedures established by our customers in addition to the Company’s own procedures.

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 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.

Given the uncertainty regarding the spread of this coronavirus and variants, 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.

Fluctuation of Results

4 unchanged sentences

The third and fourth calendar year quarters usually are less impacted by weather and usually have the largest number of projects underway.

Many projects are completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.

Many projects are

completed in the fourth calendar year quarter and revenues are often impacted by customers seeking to either spend their capital budget for the year or scale back projects due to capital budget overruns.

In addition to the fluctuations discussed above, the pipeline industry can be highly cyclical, reflecting variances in capital expenditures in proportion to energy price fluctuations.

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

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 December 31, 2022, and 2021 Overview

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

Three Months Ended

Nine Months Ended

Cost of revenues

Selling and administrative expenses

Income from (loss) operations

Income from operations

Other income (expense)

Interest income

Paycheck Protection Program loan forgiveness

Other nonoperating expense

Interest expense

Gain on sale of equipment

(Loss) gain on sale of equipment

Income before income taxes

Income tax (benefit) expense

Dividends on preferred stock

Net income available to common shareholders

Weighted average shares outstanding-basic

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:

Weighted average shares-diluted

Earnings per share-basic

Earnings per share-diluted

Results of Operations for the Three Months Ended December 31, 2022, Compared to the Three Months Ended December 31, 2021

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

Three Months Ended

June 30, 2022

June 30, 2021

Gas & Water Distribution

Gas & Petroleum Transmission

Electrical, Mechanical, and General

Nine Months Ended

June 30, 2022

June 30, 2021

Three Months Ended

December 31, 2022

December 31, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

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 $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 $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.

Total revenues increased by $17.4 million to $60.0 million for the three months ended December 31, 2022, as compared to $42.7 million for the three months ended December 31, 2021.

The increase was a result of increased work in all categories of business.

Gas & Water Distribution revenues totaled $12.5 million for the three months ended December 31, 2022, a $526,000 increase from $12.0 million for the three months ended December 31, 2021.

The revenue increase was primarily related to paving services performed on water projects, partially offset by reduced customer spending on certain blanket contracts.

Gas & Petroleum Transmission revenues totaled $16.8 million for the three months ended December 31, 2022, a $5.6 million increase from $11.2 million for the three months ended December 31, 2021.

The revenue increase was primarily related to transmission work that was awarded during the fiscal year ended September 30, 2022 and completed during the first quarter of fiscal year 2023.

Electrical, Mechanical, & General construction services revenues totaled $30.7 million for the three months ended December 31, 2022, an $11.3 million increase from $19.5 million for the three months ended December 31, 2021.

The revenue increase was primarily related to an increase in mechanical and electrical services performed during the three months ended December 31, 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 nine months ended June 30, 2022, compared to the three and nine months ended June 30, 2021, is below:

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

Three Months Ended

June 30, 2022

June 30, 2021

Gas & Water Distribution

Gas & Petroleum Transmission

Electrical, Mechanical, and General

Unallocated Shop Expense (Profit)

Nine Months Ended

June 30, 2022

June 30, 2021

Three Months Ended

December 31, 2022

December 31, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

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.

Unallocated Shop Expenses

Total cost of revenues increased by $16.7 million to $54.0 million for the three months ended December 31, 2022, as compared to $37.4 million for the three months ended December 31, 2021.

The cost of revenues increase was a result of increased work in all categories of business.

Gas & Water Distribution cost of revenues totaled $10.7 million for the three months ended December 31, 2022, a $1.3 million increase from $9.3 million for the three months ended December 31, 2021.

The cost of revenue increase was primarily related to paving services performed on water projects, partially offset by reduced customer spending on certain blanket contracts.

Gas & Petroleum Transmission cost of revenues totaled $14.0 million for the three months ended December 31, 2022, a $4.3 million increase from $9.7 million for the three months ended December 31, 2021.

The cost of revenue increase was primarily related to transmission work that was awarded during the fiscal year ended September 30, 2022 and completed during the first quarter of fiscal year 2023.

Electrical, Mechanical, & General construction services cost of revenues totaled $29.0 million for the three months ended December 31, 2022, a $10.9 million increase from $18.1 million for the three months ended December 31, 2021.

The cost of revenue increase was primarily related to an increase in mechanical and electrical services performed during the three months ended December 31, 2022, as compared to the same period in the prior year.

Unallocated shop expenses totaled $296,000 for the three months ended December 31, 2022, a $126,000 increase from $170,000 for the three months ended December 31, 2021.

The increase in unallocated shop expenses was due to decreased internal equipment charges to projects for the three months ended December 31, 2022, as compared to the same period in the prior year.

Gross Profit .

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:

A table comparing the Company's gross profit for the three months ended December 31, 2022, compared to the three months ended December 31, 2021, is below:

Three Months Ended

June 30, 2022

June 30, 2021

Gas & Water Distribution

Gas & Petroleum Transmission

Electrical, Mechanical, and General

Unallocated Shop Profit (Loss)

Nine Months Ended

June 30, 2022

June 30, 2021

Three Months Ended

December 31, 2022

December 31, 2021

Gas & Water Distribution

1 unchanged sentence

Electrical, Mechanical, and General

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.

Unallocated Shop Expenses

Gross profit percentage

Total gross profit increased by $678,000 to $6.0 million for the three months ended December 31, 2022, as compared to $5.3 million for the three months ended December 31, 2021.

Gas & Water Distribution gross profit totaled $1.8 million for the three months ended December 31, 2022, a $807,000 decrease from $2.6 million for the three months ended December 31, 2021.

The gross profit decrease was primarily related to less profitable water projects performed during the three months ended December 31, 2022 as compared to the same period in the prior year.

Gas & Petroleum Transmission gross profit totaled $2.8 million for the three months ended December 31, 2022, a $1.3 million increase from $1.5 million for the three months ended December 31, 2021.

The gross profit increase was primarily related to transmission work that was awarded during the fiscal year ended September 30, 2022 and completed during the first quarter of fiscal year 2023.

Electrical, Mechanical, & General construction services gross profit totaled $1.7 million for the three months ended December 31, 2022, a $301,000 increase from $1.4 million for the three months ended December 31, 2021.

The increase was primarily related to an increase in gross profit generated by mechanical and electrical services performed during the three months ended December 31, 2022, as compared to the same period in the prior year.

Selling and administrative expenses .

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 $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.

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.

Total selling and administrative expenses increased by $1.7 million to $5.3 million for the three months ended December 31, 2022, as compared to $3.6 million for the same period in the prior year.

Selling and administrative expense for operations acquired after December 31, 2021 totaled $915,000 for the three months ended December 31, 2022.

The remaining increase primarily related to additional personnel hired to secure and manage work for expected growth in fiscal year 2023.

Other nonoperating (expense) income .

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.

Other nonoperating expense totaled $81,000 for the three months ended December 31, 2022, a decrease of $72,000 from $153,000 for the same period in the prior year.

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 $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.

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.

Interest expense totaled $474,000 for the three months ended December 31, 2022, an increase of $276,000 from $198,000 for the same period in the prior year.

The increase in interest expense was primarily due to the financing of the recent acquisitions, an increase in line of credit borrowings due to increased work, and an increase in interest rates.

(Loss) Gain on sale of equipment .

Loss on sale of equipment totaled ($31,000) for the three months ended December 31, 2022, a decrease of $371,000 from a gain on sale of equipment of $340,000 for the same period in the prior year.

The Company sold certain underutilized or non-working pieces of equipment at auction during the three months ended December 31, 2021, with no comparable sale occuring during the three months ended December 31, 2022.

Income before income taxes was $84,000 for the three months ended December 31, 2022, compared to $1.7 million for the same period in the prior year.

The decrease was primarily related to the items mentioned above.

Income tax benefit for the three months ended December 31, 2022, was $80,000 compared to income tax expense of $494,000 for the same period in the prior year.

The decrease in income tax expense was due to the decrease in taxable income for the three months ended December 31, 2022 as compared to the prior period.

Net income for the three months ended December 31, 2022, was $164,000, as compared to $1.2 million for the same period in the prior year.

Comparison of Financial Condition at December 31, 2022, and September 30, 2022

The Company had total assets of $107.9 million at December 31, 2022, a decrease of $4.7 million from the prior fiscal year end balance of $112.6 million.

Accounts receivable, net of allowance for doubtful accounts, totaled $35.3 million at December 31, 2022, a decrease of $3.2 million from the prior fiscal year end balance of $38.5 million.

The decrease was primarily due to the timing of cash collections and project invoicing since September 30, 2022.

Contract assets totaled $14.4 million at December 31, 2022, a decrease of $1.7 million from the prior fiscal year end balance of $16.1 million.

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

Prepaid expenses and other totaled $3.2 million at December 31, 2022, a decrease of $775,000 from the prior fiscal year end balance of $3.9 million.

The decrease was primarily due to expensing prepaid insurance during the three months ended December 31, 2022.

Intangible assets, net totaled $3.7 million at December 31, 2022, a decrease of $133,000 from the prior fiscal year end balance of $3.9 million.

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

Right-of-use assets totaled $1.5 million at December 31, 2022, a decrease of $133,000 from the prior fiscal year end balance of $1.6 million.

The decrease was primarily due to the amortization of operating leases during the three months ended December 31, 2022.

The Company had property, plant and equipment of $33.2 million at December 31, 2022, an increase of $551,000 from the prior fiscal year end balance of $32.7 million.

The increase was due to $2.3 million in asset additions, partially offset by $1.7 million in depreciation and net equipment disposals of $124,000.

Retainage receivable totaled $5.0 million at December 31, 2022, an increase of $546,000 from the prior fiscal year end balance of $4.4 million.

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

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 $2.9 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.

Cash and cash equivalents totaled $7.5 million at December 31, 2022, an increase of $103,000 from the prior fiscal year end balance of $7.4 million.

The increase was primarily due to $3.1 million in proceeds from long-term debt and a net $1.6 million provided from operating activities, partially offset by a net $2.3 million investment in equipment, and $2.3 million in net short-term and long-term debt repayments.

Goodwill totaled $4.1 million at December 31, 2022, and September 30, 2022.

The Company had total liabilities of $69.4 million at December 31, 2022, a decrease of $4.9 million from the prior fiscal year end balance of $74.3 million.

Accounts payable totaled $15.0 million at December 31, 2022, a decrease of $5.3 million from the prior fiscal year end balance of $20.3 million.

The decrease was due to the timing of accounts payable payments as compared to September 30, 2022.

Accrued expenses and other current liabilities totaled $8.8 million at December 31, 2022, a decrease of $2.5 million from the prior fiscal year end balance of $11.3 million.

The decrease was due to the timing of accrued expense payments, as compared to September 30, 2022.

Lines of credit and short-term borrowings totaled $12.5 million at December 31, 2022, a decrease of $580,000 from the prior fiscal year end balance of $13.1 million.

The decrease was due to the repayment of insurance premiums financed.

Current and long-term operating lease liabilities totaled $1.5 million at December 31, 2022, a decrease of $133,000 from the prior fiscal year end balance of $1.6 million.

The decrease was due to payments made during the three months ended December 31, 2022.

Deferred tax liabilities totaled $4.0 million at December 31, 2022, a decrease of $422,000 from the prior fiscal year end balance of $4.5 million.

The decrease was primarily related to the reduction of the net operating loss carry forward during the three months ended December 31, 2022.

Long-term debt totaled $19.0 million at December 31, 2022, an increase of $1.5 million from the prior fiscal year end balance of $17.6 million.

The increase in long-term debt was primarily due to $3.2 million in new debt agreements, partially offset by $1.7 million in debt repayments.

The new long-term debt primarily related to the financing of the equipment obtained in the Ryan Construction acquisition, which was a cash transaction at the time of the acquisition.

Contract liabilities totaled $8.6 million at December 31, 2022, an increase of $2.6 million from the prior fiscal year end balance of $6.0 million.

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

Shareholders’ equity was $38.5 million at December 31, 2022, an increase of $164,000 from the prior fiscal year end balance of $38.3 million.

The increase was due to net income of $164,000 for the three months ended December 31, 2022.

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.

Operating Line of Credit and Short-Term Borrowings

On July 13, 2022, the Company received a one-year extension on its $15.0 million operating line of credit effective June 28, 2022.

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

The interest rate at December 31, 2022, was 7.5%.

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

The line of credit has a $12.5 million component and a $2.5 million component with additional borrowing requirements.

Based on the borrowing base calculation, the Company borrowed all $12.5 million available on the line of credit as of December 31, 2022 and September 30, 2022.

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

On January 19, 2023, the Company received an amendment to the agreement which increased the line of credit to $30.0 million.

The maturity date remains June 28, 2023, with a variable interest rate equal to the “Wall Street Journal” Prime Rate with a floor of 4.5%.

The modified financial covenants for the quarter ended December 31, 2022, and all subsequent quarters, are below:

● Minimum tangible net worth of $28.0 million,

● Minimum traditional debt service coverage of 1.50x on a rolling twelve- month basis,

● Minimum current ratio of 1.20x,

● Maximum debt to tangible net worth ratio (“TNW”) of 2.75x,

● Each ratio and covenant shall be determined, tested, and measured as of each calendar quarter beginning December 31, 2022,

● Borrower shall maintain a ratio of Maximum Senior Funded Debt (“SFD”) to Earnings before Interest, Taxes, Depreciation and Amortization (“EBDITA”) equal to or less than 3.5:1.

SFD shall mean any funded debt or lease of Borrower, other than subordinated debt.

The covenant shall be tested quarterly, as of the end of each fiscal quarter, with EBITDA based on the preceding four quarters.

The Company was compliance with all covenants at December 31, 2022, and the Company projects to meet all covenant requirements 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 eleven monthly payments.

At December 31, 2022 and September 30, 2022, respectively, the remaining balance of the insurance premiums was $0 and $580,000.

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.

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

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

As of December 31, 2022, the Company had made principal payments of $346,000.

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.

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

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

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

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 8.75% at December 31, 2022 with monthly payments of $12,464.

As of December 31, 2022, the Company had made principal payments of $746,000.

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% with monthly payments of $98,865.

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 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.

As of December 31, 2022, the Company had made annual installment payments of $1,250,000, interest payments of $172,000 and expensed $38,000 in accreted interest.

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

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

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

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.

As of December 31, 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 December 31, 2022 was 8.75%.

The Company has made principal payments of $609,000 on this note as of December 31, 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 variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal .

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 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.

As of December 31, 2022, the Company had made principal payments of $1.1 million.

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 $834,000 on this note as of December 31, 2022.

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

This five-year agreement financed the previous cash value of equipment purchased in the Ryan Construction acquisition.

This loan has monthly installment payments of $59,932 and has a fixed interest rate of 6.0%.

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

As of December 31, 2022, the Company had made principal payments of $89,000.

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.

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 $11,000 in accreted interest and has not made any principal payments on this note as of December 31, 2022.

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-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 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.

Operating Leases

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

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

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

The Company has two lease agreements for construction equipment with a combined amount of $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 related 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.

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 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 $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.

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

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

Major items excluded from the borrowing base calculation are receivables from bonded jobs and retainage as well as all items greater than ninety (90) days old.

Line of credit borrowings are collateralized by the Company’s accounts receivable.

Cash available under the line is calculated based on 70.0% of the Company’s eligible accounts receivable.

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

Minimum tangible net worth of $21.5 million to be measured quarterly,

Minimum traditional debt service coverage of 1.25x to be measured quarterly on a rolling twelve- month basis,

Minimum current ratio of 1.50x to be measured quarterly,

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.

The results of the review shall be satisfactory to the lender in its sole and unfettered discretion.

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

Minimum traditional debt service coverage of 2.0x to be measured quarterly on a rolling twelve-month basis,

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

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

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

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 $186,000 at December 31, 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 $103,000 at December 31, 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, and carrying value of $1.1 million at December 31, 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 $83,000 at December 31, 2022.

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

Off-Balance Sheet Arrangements

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

Rental Agreements

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

Rental expense can vary by reporting period 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 $2.7 million and $1.9 million for the three months ended December 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 June 30, 2022, the Company did not have any letters of credit outstanding.

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

Performance Bonds

Some customers, particularly new ones or governmental agencies require the Company to post bid bonds, performance bonds and payment bonds (collectively, performance bonds).

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

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

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

The Company must reimburse the insurer for any expenses or outlays it is required to make.

The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and number of contracts that can be bid.

Depending upon the size and conditions of a contract, the Company may be required to post letters of credit or other collateral in favor of the insurer.

Currently, the Company has an agreement with a surety company to provide bonding which will suit the Company’s immediate needs.

The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and value of contracts that can be bid.

Depending upon the size and conditions of a particular contract, the Company may be required to post letters of credit or other collateral in favor of the insurer.

Posting of these letters or other collateral will reduce our borrowing capabilities.

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

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

The Company does not anticipate any claims in the foreseeable future.

At December 31, 2022, the Company had $79.0 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 at or for the nine months ended June 30, 2022 and 2021:

Nine Months Ended

June 30, 2022

June 30, 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 for the three months ended December 31, 2022, and 2021:

Three Months Ended

December 31, 2022

December 31, 2021

TransCanada Corporation

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Accounts receivable, net of retention

June 30, 2022

June 30, 2021

TransCanada Corporation

December 31, 2022

December 31, 2021

WV American Water

Kentucky American Water

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

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The lawsuit is related to a dispute over work performed 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 consolidated financial statements.

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.

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 December 31, 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.

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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, currently included within prepaid assets in the accompanying consolidated balance sheets.

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.

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 December 31, 2022 and does not expect any future liabilities related to this claim.

Other than described above, at December 31, 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 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.

At December 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.

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

As of December 31, 2022, the Company had paid approximately $346,000 in principal and approximately $404,000 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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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.

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.

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 $186,000 at December 31, 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 three months December 31, 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 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.

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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 nine months ended June 30, 2022, and 2021.

however, inflation did not have a significant effect on our results for the three months ended December 31, 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 June 30, 2022, and September 30, 2021:

June 30, 2022

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

December 31, 2022

September 30, 2022

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

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

At December 31, 2022, the management review deemed that the allowance for doubtful accounts was adequate.

Please see the allowance for doubtful accounts table below:

June 30, 2022

December 31, 2022

September 30, 2022

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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 ASC Topic 350, Intangibles-Goodwill and Other , 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.

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

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 December 31, 2022 or September 30, 2022.

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

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Original Cost

June 30, 2022

December 31, 2022

September 30, 2022

December 31, 2022

West Virginia Pipeline:

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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 the nine months ended June 30, 2022, and 2021 was $4.0 million and $3.5 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 three months ended December 31, 2022 and 2021 was $1.8 million and $1.3 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 consolidated financial statements.

The Company’s intangible amortization expense for the three months ended December 31, 2022 and 2021 was $133,000 and $119,000, respectively.

In general, amortization is included in “selling and administrative expenses” 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.

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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 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.

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 (94.9%) and 29.7% for the three months ended December 31, 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 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 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.

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 December 31, 2022, the Company had a net deferred income tax liability of $4.0 million as compared to $4.5 million at September 30, 2022.

The Company’s deferred income tax liabilities at December 31, 2022 totaled $7.7 million and primarily related to depreciation on property and equipment.

The Company’s deferred income tax assets at December 31, 2022, totaled $3.7 million and primarily related to a NOL carryforward.

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

New Accounting Pronouncements

On October 28, 2021, the 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.

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Retrospective application of the guidance is permitted.

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

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Subsequent Events

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.

On January 18, 2023, the Company’s Board of Directors approved a special cash dividend of $0.05 per common share payable on February 15, 2023 to shareholders of record as of January 31, 2023.

On January 19, 2023, the Company received an amendment to increase its line of credit from $15.0 million to $30.0 million.

The maturity date remains June 28, 2023, with a variable interest rate equal to the “Wall Street Journal” Prime Rate with a floor of 4.5%.

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.

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 fourth fiscal quarter;

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

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.

The Company is seeing a significant increase in bid opportunities for natural gas transmission and distribution projects along with electrical, mechanical, and general construction projects.

The Company’s backlog at December 31, 2022, was $206.9 million, as compared to $101.6 million and $142.3 million at December 31, 2021, and September 30, 2022, 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