Item 7. Management’s Discussion and Analysis
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion of the financial condition and results of operations of Energy Services in conjunction with the historical financial statements and related notes contained elsewhere herein. Among other things, those historical consolidated financial statements include more detailed information regarding the basis of presentation for the following information.
Restatement
The accompanying information gives effect to certain adjustments made to the previously reported financial statements for the years ended September 30, 2022 and 2021. Due to the restatement of these years, the data set forth in the accompanying management discussion and analysis may not be comparable to discussions and data in our Original Report.
Refer to “Explanatory Note” immediately preceding Item 1 of this Amendment No. 1 to the Annual Report on Form 10-K/A and Note 3, “Restatement of Previously Issued Financial Statements” in the accompanying consolidated financial statements for further details related to the restatement and impact on our financial statements.
Understanding Gross Margins
Our gross margin is gross profit expressed as a percentage of revenues. Cost of revenues consists primarily of salaries, wages and some benefits to employees, depreciation, fuel and other equipment costs, equipment rentals, subcontracted services, portions of insurance, facilities expense, materials and parts and supplies. Factors affecting gross margin include:
Seasonal . As discussed above, seasonal patterns can have a significant impact on gross margins. Usually, business is slower in the winter months versus the warmer months.
Weather . Adverse or favorable weather conditions can impact gross margin in each period. Periods of wet weather, snow or rainfall, as well as severe temperature extremes can severely impact production and therefore negatively impact revenues and margins. Conversely, periods of dry weather with moderate temperatures can positively impact revenues and margins due to the opportunity for increased production and efficiencies.
Revenue Mix . The mix of revenues between customer types and types of work for various customers will impact gross margins. Some projects will have greater margins while others that are extremely competitive in bidding may have narrower margins.
Service and Maintenance versus Installation . In general, installation work has a higher gross margin than maintenance work. This is because installation work usually is of a fixed price nature and therefore has higher risks involved. Accordingly, a higher portion of the revenue mix from installation work typically will result in higher margins.
Subcontract Work . Work that is subcontracted to other service providers generally has lower gross margins. Increases in subcontract work as a percentage of total revenues in each period may contribute to a decrease in gross margin.
Materials versus Labor . Typically, materials supplied on projects have lower margins than labor. Accordingly, projects with a higher material cost in relation to the entire job will have a lower overall margin.
Depreciation . Depreciation is included in our cost of revenue. This is a common practice in our industry but can make comparability to other companies difficult.
Margin Risk . Failure to properly execute a job including failure to properly manage and supervise a job could decrease the profit margin.
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of compensation and related benefits to management, administrative salaries and benefits, marketing, communications, office and utility costs, professional fees, bad debt expense, letter of credit fees, general liability insurance and miscellaneous other expenses.
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Results of Operations for the Fiscal Year Ended September 30, 2022, Compared to the Fiscal Year Ended September 30, 2021.
Revenue . A table comparing the components of the Company’s revenues for the fiscal years ended September 30, 2022, and 2021 is below:
Fiscal Year Ended
September 30, 2022
% of total
September 30, 2021
% of total
Change
% Change
Gas & Water Distribution
$
53,311,569
27.0
%
$
40,440,195
33.02
%
$
12,871,374
31.8
%
Gas & Petroleum Transmission
58,268,501
29.5
%
22,133,483
18.07
%
36,135,018
163.3
%
Electrical, Mechanical, and General
86,009,930
43.5
%
59,892,148
48.91
%
26,117,782
43.6
%
Total
$
197,590,000
100.0
%
$
122,465,826
100.0
%
$
75,124,174
61.3
%
Revenue increased by $75.1 million, or 61.3%, to $197.6 million for the fiscal year ended September 30, 2022, from $122.5 million for the fiscal year ended September 30, 2021.
Gas & Water Distribution revenues totaled $53.3 million for the fiscal year ended September 30, 2022, a $12.9 million increase from $40.4 million for the fiscal year ended September 30, 2021. The revenue increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, contributed revenues of $4.9 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline revenue, acquired on December 31, 2020, resulted in $3.1 million in additional revenue during fiscal year 2022 as compared to 2021.
Gas & Petroleum Transmission revenues totaled $58.3 million for the fiscal year ended September 30, 2022, a $36.1 million increase from $22.1 million for the fiscal year ended September 30, 2021. The revenue increase was primarily related to an increase in the number of bidding opportunities with both existing, long-term customers and newer customers.
Electrical, Mechanical, & General services and construction revenues totaled $86.0 million for the fiscal year ended September 30, 2022, a $26.1 million increase from $59.9 million for the fiscal year ended September 30, 2021. The revenue increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased revenues by $19.3 million in fiscal year 2022 as compared to 2021.
Cost of Revenues . A table comparing the components of the Company’s costs of revenues for fiscal years ended September 30, 2022 and 2021, is below:
Fiscal Year Ended
September 30, 2022
% of total
September 30, 2021
% of total
Change
% Change
Gas & Water Distribution
$
41,726,934
23.8
%
$
32,467,794
29.6
%
$
9,259,140
28.5
%
Gas & Petroleum Transmission
54,856,321
31.3
%
17,237,245
15.7
%
37,619,076
218.2
%
Electrical, Mechanical, and General
79,141,713
45.2
%
55,574,528
50.7
%
23,567,185
42.4
%
Unallocated Shop (Profit) Expense
(505,716)
(0.3)
%
4,265,237
3.9
%
(4,770,953)
(111.9)
%
Total
$
175,219,252
100.0
%
$
109,544,804
100.0
%
$
65,674,448
60.0
%
Total cost of revenues increased by $65.7 million or 60.0% to $175.2 million for the fiscal year ended September 30, 2022, from $109.5 million for the fiscal year ended September 30, 2021.
Gas & Water Distribution cost of revenues totaled $41.7 million for the fiscal year ended September 30, 2022, a $9.2 million increase from $32.5 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, had cost of revenues of $3.1 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline cost of revenues, acquired on December 31, 2020, resulted in $1.8 million in additional cost of revenues during fiscal year 2022 as compared to 2021.
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Gas & Petroleum Transmission cost of revenues totaled $54.9 million for the fiscal year ended September 30, 2022, a $37.7 million increase from $17.2 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily related to an increase in the number of bidding opportunities with both existing, long-term customers and newer customers. The Company has one gas transmission project that is projected to lose $2.1 million.
Electrical, Mechanical, & General services and construction cost of revenues totaled $79.1 million for the fiscal year ended September 30, 2022, a $23.5 million increase from $55.6 million for the fiscal year ended September 30, 2021. The cost of revenues increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased costs of revenues by $16.4 million in fiscal year 2022 as compared to 2021.
Gross Profit . A table comparing the components of the Company’s gross profit for fiscal years ended September 30, 2022, and 2021, is below:
Fiscal Year Ended
September 30, 2022
% of revenue
September 30, 2021
% of revenue
Change
% Change
Gas & Water Distribution
$
11,584,635
51.8
%
$
7,972,401
61.7
%
$
3,612,234
45.3
%
Gas & Petroleum Transmission
3,412,180
15.3
%
4,896,238
37.9
%
(1,484,058)
(30.3)
%
Electrical, Mechanical, and General
6,868,217
30.7
%
4,317,620
33.4
%
2,550,597
59.1
%
Unallocated Shop Profit (Expense)
505,716
2.3
%
(4,265,237)
(33.0)
%
4,770,953
(111.9)
%
Total
$
22,370,748
100.0
%
$
12,921,022
100.0
%
$
9,449,726
73.1
%
Gross profit percentage
11.3
%
10.6
%
Total gross profit increased by $9.5 million or 73.1% to $22.4 million for the fiscal year ended September 30, 2022, from $12.9 million for the fiscal year ended September 30, 2021.
Gas & Water Distribution gross profit totaled $11.6 million for the fiscal year ended September 30, 2022, a $3.6 million increase from $8.0 million for the fiscal year ended September 30, 2021. The gross profit increase was primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of Tri-State Paving, which primarily provides services for water utility companies. Tri-State Paving, acquired on April 29, 2022, contributed gross profit of $1.8 million for the fiscal year ended September 30, 2022. A full year of West Virginia Pipeline gross profit, acquired on December 31, 2020, resulted in $1.3 million in additional gross profit during the fiscal year 2022 as compared to 2021.
Gas & Petroleum Transmission gross profit totaled $3.4 million for the fiscal year ended September 30, 2022, a $1.5 million decrease from $4.9 million for the fiscal year ended September 30, 2021. The gross profit decrease was primarily related to one gas transmission project that is projected to lose $2.1 million.
Electrical, Mechanical, & General services and construction gross profit totaled $6.9 million for the fiscal year ended September 30, 2022, a $2.6 million increase from $4.3 million for the fiscal year ended September 30, 2021. The gross profit increase was primarily due to growth in general and civil construction opportunities for SQP, which began operations in March 2021 and increased gross profit by $3.0 million in the fiscal year 2022 as compared to 2021.
Gross profit attributed to unallocated shop operations totaled $506,000 for the fiscal year ended September 30, 2022, a $4.8 million increase from $4.3 million in unallocated shop expenses for the fiscal year ended September 30, 2021. The gross profit increase was primarily due to increased internal equipment charges to projects and better project costs tracking for the fiscal year ended September 30, 2022, as compared to 2021.
Selling and administrative expenses . Total selling and administrative expenses increased by $1.9 million to $15.9 million for the fiscal year ended September 30, 2022, from $14.0 million for the fiscal year ended September 30, 2021. Approximately $700,000 of the selling and administrative expense increase for the fiscal year ended September 30, 2022 as compared to the prior fiscal year, was from the operations of the new subsidiaries, Tri-State Paving and Ryan Construction. In addition, the Company incurred approximately $1.6 in million additional selling and administrative expenses related to a full twelve months of activity for West Virginia Pipeline and SQP in the fiscal year 2022 as compared to 2021.
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Income from operations . Income from operations was $6.5 million for the fiscal year ended September 30, 2022, a $7.6 million increase from a $1.1 million loss from operations for the fiscal year ended September 30, 2021. The increase was due to the items described above.
Interest Expense . Interest expense increased by $285,000 or 41.0% to $988,000 for the fiscal year ended September 30, 2022, from $703,000 for the fiscal year ended September 30, 2021. This increase was primarily due to increased line of credit borrowings and financing acquisitions.
Other Income. Gain on sale of equipment and interest income, partially offset by other expenses, totaled $508,000 for the fiscal year ended September 30, 2022, as compared to $910,000 for the fiscal year ended September 30, 2021. The decrease was primarily due to a decrease in interest earned on the Company’s captive insurance surety deposit.
Net Income (loss). Income (loss) before income taxes was $6.0 million for the fiscal year ended September 30, 2022, compared to ($917,000) for the fiscal year ended September 30, 2021. The increase was due to the items mentioned above.
The income tax expense for the fiscal year ended September 30, 2022 was $2.3 million and was due to an increase in taxable income. The income tax benefit for the fiscal year ended September 30, 2021, was ($29,000).
The effective income tax rate for the fiscal year ended September 30, 2022 was 37.6%. The effective income tax rate for the fiscal year ended September 30, 2021, was (3.2%). Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income or loss, non-taxable and non-deductible expenses.
Dividends on preferred stock for the fiscal years ended September 30, 2022, and 2021 were $0 and $284,000, respectively. There will be no further dividends paid on preferred stock after the October 6, 2021 redemption of all the Company’s preferred stock.
Net income (loss) available to common stockholders for the fiscal year ended September 30, 2022 was $3.8 million compared to ($1.2) million for the fiscal year ended September 30, 2021. The increase was due to the items mentioned above.
Comparison of Financial Condition at September 30, 2022 Compared to September 30, 2021.
The Company had total assets of $112.6 million at September 30, 2022, an increase of $42.4 million from the prior fiscal year-end balance of $70.2 million.
The aggregate balance of accounts receivable, retainages receivable, allowance for doubtful accounts and other receivables totaled $42.9 million at September 30, 2022, an increase of $20.4 million from the combined prior fiscal year-end balance of $22.5 million. The increase was primarily due to increased work in the fiscal year 2022 as compared to 2021. Specifically, $69.4 million in revenue was generated in the fourth quarter of fiscal year 2022 as compared to $39.6 million for the same period in 2021.
Net property, plant and equipment totaled $32.7 million at September 30, 2022, an increase of $9.7 million from the prior fiscal year-end balance of $23.0 million. Property, plant and equipment acquisitions totaled $15.6 million for the fiscal year 2022 while depreciation expense was $5.6 million, and the net impact of disposals was $316,000. Assets received as part of the Tri-State Paving and Ryan Construction acquisitions accounted for $8.9 million of the $15.6 million in total acquisitions.
Contract assets totaled $16.1 million at September 30, 2022, an increase of $7.4 million from the prior fiscal year-end balance of $8.7 million. This increase was primarily due to increased work and the timing of project billings and related increase in costs and estimated earnings in excess of billings at September 30, 2022 as compared to at September 30, 2021.
Goodwill and acquired intangible assets totaled $8.0 million at September 30, 2022, a $3.7 million increase from the prior fiscal year end balance of $4.2 million. The increase to goodwill and acquired intangible assets was primarily the result of the Tri-State Paving acquisition which goodwill and acquired intangible assets totaled $4.2 million at September 30, 2022, and was partially offset by $445,000 in amortization expense for fiscal year 2022.
Right-of-use assets acquired from operating leases totaled $1.6 million net of amortization expense, as compared to no right-to-use assets at the prior fiscal year end. The operating leases were primarily related to the business combinations completed in the fiscal year ended September 30, 2022.
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Prepaid expenses and other totaled $3.9 million at September 30, 2022, an increase of $401,000 from the prior fiscal year-end balance of $3.5 million. The increase was primarily due to the increase of various prepaid insurance accounts based on labor cost expensed or standard monthly charges.
Cash and cash equivalents totaled $7.4 million at September 30, 2022, a decrease of $799,000 from the prior fiscal year-end balance of $8.2 million. The decrease was primarily related to a net $8.3 million investment in property and equipment, $4.3 million in long-term debt repayments, and $1.2 million in preferred stock conversion payments, partially offset by a net $4.7 million increase in line of credit and short-term borrowings and $8.4 million in net cash provided by operating activities.
Liabilities totaled $84.4 million at September 30, 2022, an increase of $38.9 million from the prior fiscal year-end balance of $45.5 million.
Accounts payable totaled $20.3 million as of September 30, 2022, an increase of $13.0 million from the prior fiscal year-end balance of $7.3 million. The increase was due to more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021.
Lines of credit and short-term borrowings totaled $23.2 million at September 30, 2022, an increase of $8.2 million from the prior fiscal year-end balance of $15.0 million. This increase was primarily due to increased borrowings against the Company’s operating line of credit because or more work in progress at the end of the fiscal year 2022, as compared to the same period in fiscal 2021. The Company’s PPP Loans are included in short-term borrowings pending a final decision on forgiveness from the SBA.
Accrued expenses and other current liabilities totaled $11.3 million at September 30, 2022, an increase of $5.7 million from the prior fiscal year-end balance of $5.6 million. The increase was primarily due to increased labor and burden expenses incurred towards the end of the fiscal year 2022, as compared to the same period in fiscal 2021.
The aggregate balance of current maturities of long-term debt and long-term debt totaled $17.6 million at September 30, 2022, an increase of $5.2 million from the prior fiscal year-end balance of $12.4 million. The increase was primarily due to an $8.4 million increase related to financing the Tri-State Paving acquisition and $940,000 in equipment financing, partially offset by $4.3 million in payments on long-term debt.
Contract liabilities totaled $6.0 million at September 30, 2022, an increase of $2.8 million from the prior fiscal year-end balance of $3.2 million. This increase was due to increased billings in excess of costs and earnings when computing earned revenue on construction projects at September 30, 2022, as compared to at September 30, 2021.
Operating lease liabilities totaled $1.6 million at September 30, 2022, an increase of $1.6 million from the prior fiscal year end balance. See “Leases” on page 29 for a discussion of operating leases added in the fiscal year 2022.
Net deferred income tax payable totaled $4.5 million at September 30, 2022, an increase of $2.5 million from the prior fiscal year-end balance of $2.0 million. The increase was primarily related to a net operating loss (“NOL”) carryforward resulting from bonus depreciation on acquired assets.
Stockholders’ equity totaled $28.2 million at September 30, 2022, an increase of $3.6 million from the prior fiscal year-end balance of $24.7 million. This increase was primarily due to $3.8 million in net income and a $1.0 million increase in additional paid in capital related to stock issued as part of the Tri-State Paving acquisition, partially offset by $1.2 million in preferred stock redemption payments.
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Table of Contents
Liquidity and Capital Resources
Operating Line of Credit
On July 13, 2022, the Company received a one-year extension on its operating line of credit effective June 28, 2022. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component. The Company can borrow from the $12.5 million component first and then from the additional $2.5 million component if additional requirements are met. The covenant requirement for both components is below. Based on the borrowing base calculation, the Company borrowed all $12.5 million available on the line of credit as of September 30, 2022. The Company did not meet the requirements to borrow any from the $2.5 million component.
The interest rate on the line of credit is the “ Wall Street Journal ” Prime Rate (the index) with a floor of 4.99%. The interest rate at September 30, 2022, was 5.5%. Based on the borrowing base calculation, the Company was able to borrow up to $12.2 million as of September 30, 2021. The Company had $4.5 million in borrowings on the line of credit, leaving $7.7 million available on the line of credit as of September 30, 2021. The interest rate at September 30, 2021, was 4.99%.
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 1.5x 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 September 30, 2022. The Company projects to be in compliance with all covenants associated with the $12.5 million component for the next twelve months.
Insurance Premiums Financed
The Company also finances insurance policy premiums on a short-term basis through a financing company. These insurance policies include workers’ compensation, general liability, automobile, umbrella, and equipment policies. The Company makes a down payment in January and finances the remaining premium amount over ten monthly payments. In January 2022 and 2021, respectively, the Company financed $3.4 million and $3.2 million in insurance premiums. At September 30, 2022 and 2021, respectively, the remaining balance of the insurance premiums was $580,000 and $540,000.
Paycheck Protection Program Loans
Due to the economic uncertainties created by COVID-19 and limited operating funds available, the Company applied for loans under the PPP. On April 15, 2020, the Company and its subsidiaries, C.J. Hughes, Contractors Rental and Nitro, entered into separate PPP notes effective April 7, 2020, with the Lender, in an aggregate principal amount of $13.1 million pursuant to the PPP Loans. In a special meeting held on April 27, 2020, the Board of Directors of the Company unanimously voted to return $3.3 million of the PPP Loans after discussing the financing needs of the Company and subsidiaries. That left the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. During fiscal year 2021, the Company received notice that the SBA had granted forgiveness of the $9.8 million of PPP Loans and the SBA repaid the Lender in full. The forgiveness was recorded as other income for the fiscal year ended September 30, 2021.
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Table of Contents
During April 2023, management received notification from the SBA that one of the Company’s forgiveness applications related to the PPP Loans was under review. As part of the review, the SBA requested additional payroll information. Additionally, the SBA requested information regarding the ability of the Company’s affiliates to meet SBA size standards and/or PPP corporate maximum limits. The requested information was subsequently provided to the SBA through the Lender. The Company recognizes that there is a possibility that the SBA could reverse its previous determination on the forgiveness of the PPP Loans. As a result of this uncertainty, on May 12, 2023, the audit committee of the Board of Directors of Energy Services, after considering the recommendation of management, concluded: that (a) the Company’s previously issued audited consolidated financial statements for the fiscal years ended September 30, 2022 and 2021, and the related reports of its independent registered public accounting firm, Baker Tilly, included in the Company’s annual reports on Form 10-K for the fiscal years ended September 30, 2022 and 2021, and (b) the Company’s unaudited consolidated financial statements for the periods ended June 30, 2021, December 31, 2021, March 31, 2022, June 30, 2022 and December 31, 2022 as reported in the Company’s quarterly reports on Form 10-Q for those periods should no longer be relied upon and have been restated in this Amendment No. 1 to the Annual Report on Form 10-K/A. The Company has recorded a short-term borrowing due to the SBA inquiry for the full $9.8 million, plus accrued interest for all periods presented.
Borrowers must retain PPP documentation for at least six years after the date the loan is forgiven or paid in full, and the SBA and SBA Inspector General must be granted these files upon request. The SBA could revisit its forgiveness decision and determine that the Company does not qualify in whole or in part for loan forgiveness and demand repayment of the loans. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. Any penalties in addition to the potential repayment of the PPP Loans could negatively impact the Company’s business, financial condition and results of operations and prospects.
Long-Term Debt
On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with a bank to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to time based on changes in the U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of September 30, 2022, the Company had made principal payments of $333,000. The loan is collateralized by the building purchased under this agreement. The note is currently held by Peoples Bank, Inc., formerly First Bank of Charleston, Inc. (West Virginia).
On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month. The variable interest rate on the loan agreement is 7.25% at September 30, 2022 with monthly payments of $12,193. As of September 30, 2022, the Company had made principal payments of $687,000. The loan is collateralized by the building and property purchased under this agreement.
On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase of equipment, for a period of three months with an interest rate of 4.99%. After three months, all borrowings against the Equipment Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99% with monthly payments of $98,865. As of September 30, 2022, the Company had repaid this note in full.
On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West Virginia Pipeline, Inc. For the purchase price allocation, the $3.0 million note had a fair value of $2.85 million. As part of the $6.35 million acquisition price, the Company paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires annual payments of at least $500,000 with a fixed interest rate of 3.25% on the $3.0 million sellers’ note, which equates to 5.35% on the carrying value of the note. As of September 30, 2022, the Company had made annual installment payments of $500,000, interest payments of $152,000 and expensed $53,000 in accreted interest.
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On January 4, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank. This five-year agreement gave the Company access to a $3.0 million line of credit (“Equipment Line of Credit 2021”), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal . After twelve months, all borrowings against the Equipment Line of Credit 2021 were converted to a four-year term note agreement with a variable interest rate initially established at 4.25%. The loan is collateralized by the equipment purchased under this agreement. As of September 30, 2022, the Company borrowed $3.0 million against this line of credit with monthly payments of $68,150 that started in February 2022. The interest rate at September 30, 2022 was 7.25%. The Company has made principal payments of $451,000 on this note as of September 30, 2022.
On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition. This loan has monthly installment payments of $64,853 and has a fixed interest rate of 4.25%. The loan is collateralized by the Company’s equipment and receivables. As of September 30, 2022, the Company had made principal payments of $971,000.
On April 29, 2022, the Company entered into a $7.5 million Non-Revolving Note agreement with United Bank. This five-year agreement was used to finance the purchase of Tri-State Paving and has monthly payments of $129,910 with a fixed interest rate of 4.25%. The Company has made principal payments of $518,000 on this note as of September 30, 2022.
On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises, a related party, as partial consideration for the purchase of Tri-State Paving. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company recorded $7,800 in accreted interest and has not made any principal payments on this note as of September 30, 2022.
At September 30, 2022, future expected payments due on short-term and long-term debt are as follows:
2023
$
27,224,867
2024
4,061,665
2025
4,170,114
2026
3,569,091
2027
1,069,272
Thereafter
623,942
$
40,718,951
As of September 30, 2022, the Company had $7.4 million in cash and $5.0 million in working capital (defined as current assets less current liabilities).
Leases
The Company leases office space for SQP for $1,500 per month. The lease, signed on March 25, 2021, is for a period of two years with five one-year renewals available immediately following the end of the base term. Rental terms for the option periods shall be negotiated and agreed mutually between the parties and shall not exceed five percent increases to rent, if any. The lease is expensed monthly and not treated as a right-to-use asset as it does not have a material impact on the Company’s consolidated financial statements.
During the fiscal year ended September 30, 2022, the Company entered into two lease agreements for construction equipment for a combined $160,000. The leases have a term of twenty-two months with a stated interest rate of 0%, combined monthly installment payments of $6,645 and are cancellable at any time without penalty. The Company has the right to purchase the equipment at the expiration of the leases by applying the two-month deposit paid. The right-of-use assets and finance lease obligations associated with these lease agreements are included in the consolidated balance sheets within property, plant and equipment and long-term debt, respectively, and do not have a material impact on the Company’s consolidated financial statements.
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The Company has two right-of-use operating leases acquired on April 29, 2022, as part of the Tri-State Paving transaction. The first operating lease, for the Hurricane, WV facility, had a net present value of $236,000 at April 29, 2022, and a carrying value of $205,000 at September 30, 2022. The second operating lease, for the Chattanooga, Tennessee facility, had a net present value of $144,000 at April 29, 2022, and a carrying value of $119,000 at September 30, 2022. The 4.5% interest rate on the operating leases is based on the Company’s incremental borrowing rate at inception.
The Company has a right-of-use operating lease with Enterprise Fleet Management, Inc. acquired on August 11, 2022, as part of the Ryan Environmental acquisition. This lease agreement was initially for 31 vehicles to be used by Ryan Construction; however, the Company plans to add vehicles as it finds necessary. This lease had a net present value of $1.2 million at inception, which approximates the carrying value at September 30, 2022. The 4.5% interest rate on the operating lease is based on the Company’s incremental borrowing rate at inception.
The Company has a right-of-use operating lease with RICA Developers, LLC acquired on August 12, 2022, as part of the Ryan Environmental acquisition. This lease, for the Bridgeport, WV facility, had a net present value of $140,000 at inception and a carrying value of $113,000 at September 30, 2022. The 4.5% interest rate on the operating lease is based on the Company’s incremental borrowing rate at inception.
The maturities of the Company’s operating lease liabilities were as follows:
2023
$
588,653
2024
465,428
2025
373,397
2026
296,606
1,724,084
Less amounts representing interest
(119,807)
Present value of operating lease liabilities
$
1,604,277
Off-Balance Sheet Transactions
Due to the nature of our industry, we often enter into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected on our balance sheets. Though for the most part not material in nature, some of these are:
Rental Agreements
The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by the fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the consolidated statements of income (loss), was $9.8 million and $3.6 million for the twelve months ended September 30, 2022, and 2021, respectively.
Letters of Credit
Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors, vendors, etc. on various customer projects. At September 30, 2022, the Company did not have any outstanding letters of credit .
Performance Bonds
Some customers, particularly new ones or governmental agencies require the Company to post bid bonds, performance bonds and payment bonds (collectively, performance bonds). These performance bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. If the Company fails to perform under a contract or to pay subcontractors and vendors, the customer may demand that the insurer make payments or provide services under the bond. The Company must reimburse the insurer for any expenses or outlays it is required to make.
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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 on. 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 these letters or other collateral will reduce our borrowing capabilities. The Company does not anticipate any claims in the foreseeable future. At September 30, 2022, the Company had $82.8 million in performance bonds outstanding.
Concentration of Credit Risk
In the ordinary course of business, the Company grants credit under normal payment terms, generally without collateral, to our customers, which include natural gas and oil companies, general contractors, and various commercial and industrial customers located within the United States. Consequently, the Company is subject to potential credit risk related to business and economic factors that would affect these companies. However, the Company generally has certain statutory lien rights with respect to services provided. Under certain circumstances such as foreclosure, the Company may take title to the underlying assets in lieu of cash in settlement of receivables.
Please see the tables below for customers that represent 10.0% or more of the Company’s revenue or accounts receivable, net of retention for the fiscal years ended September 30, 2022, and 2021:
Revenue
FY 2022
FY 2021
TransCanada Corporation
16.6
%
11.0
%
All other
83.4
%
89.0
%
Total
100.0
%
100.0
%
* Less than 10.0% and included in “All other” if applicable
Accounts receivable, net of retention
FY 2022
FY 2021
TransCanada Corporation
11.6
%
13.2
%
Kentucky American Water
*
16.3
%
All other
88.4
%
70.5
%
Total
100.0
%
100.0
%
* Less than 10.0% and included in “All other” if applicable
Virtually all work performed for major customers was awarded under competitive bid fixed price or unit price arrangements. The loss of a major customer could have a severe impact on the profitability of operations of the Company. However, due to the nature of the Company’s operations, the major customers and sources of revenues may change from year to year.
Litigation
In February 2018, the Company filed a lawsuit against a former customer (“Defendant”) in the United States District Court for the Western District of Pennsylvania. The lawsuit is related to a dispute over work performed on a pipeline construction project. On November 21, 2022, a Judgment Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest. The amounts awarded by the Judgment Order have not been recognized in the Company’s consolidated financial statements as of September 30, 2022. The Company’s attorney’s fees have been expensed as incurred. On December 16, 2022, the Defendant filed a notice of appeal with the court.
On November 12, 2021, the Company received a withdrawal liability claim from a pension plan to which the Company made pension contributions for union construction employees performing covered work in a particular jurisdiction. The Company has not performed covered work in their jurisdiction since 2011; however, the Company disagrees with the withdrawal claim and believes it is covered by an exemption under federal law. The demand called for thirty-four quarterly installment payments of $41,000 starting December 15, 2021. The Company must comply with the demand under federal pension law; however, the Company firmly believes no withdrawal liability exists. The Company is in negotiations with the pension fund to resolve the matter and all future payments have been suspended as part of the negotiation. The Company has expensed all $164,000 in payments made through September 30, 2022 and does not expect any future liabilities related to this claim.
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Other than described above, at September 30, 2022, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties, or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At September 30, 2022, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.
Related Party Transactions
We intend that all transactions between us and our executive officers, directors, holders of 10% or more of the shares of any class of our common stock and affiliates thereof, will be on terms no less favorable than those terms given to unaffiliated third parties and will be approved by a majority of our independent outside directors not having any interest in the transaction.
On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 each month. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of September 30, 2022, the Company had paid approximately $333,000 in principal and approximately $370,000 in interest since the beginning of the loan. Mr. Douglas Reynolds, President of Energy Services, was a director and secretary of First Bank of Charleston. Mr. Samuel Kapourales, a director of Energy Services, was also a director of First Bank of Charleston. On October 15, 2018, First Bank of Charleston was merged into Premier Bank, Inc., a wholly owned subsidiary of Premier Financial Bancorp, Inc. Mr. Marshall Reynolds, Chairman of the Board of Energy Services, held the same position with Premier Financial Bancorp, Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and was a director of Premier Financial Bancorp, Inc. On September 17, 2021, Peoples Bancorp, Inc., parent company of Peoples Bank, completed an acquisition of Premier Financial Bancorp, Inc. and its wholly owned subsidiaries, Premier Bank and Citizens Deposit Bank & Trust. On October 26, 2021, Mr. Douglas Reynolds was elected a director of Peoples Bancorp, Inc., and its subsidiary Peoples Bank.
On April 29, 2022, the Company entered into a $1.0 million promissory note agreement with Corns Enterprises as partial consideration for the purchase of Tri-State Paving. This four-year agreement requires $250,000 principal installment payments on or before the end of each twelve (12) full calendar month period beginning April 29, 2022. Interest payments due shall be calculated on the principal balance remaining and shall be at the stated rate of 3.5% per year. The Company recorded $7,800 in accreted interest and has not made any principal payments on this note as of September 30, 2022.
Subsequent to the April 29, 2022 acquisition of Tri-State Paving, the Company entered into an operating lease for facilities in Hurricane, West Virginia with Corns Enterprises. This thirty-six-month lease is treated as a right to use asset and has payments of $7,000 per month. The total net present value at inception was $236,000 with a carrying value of $205,000 at September 30, 2022.
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 have jointly provided an unconditional guarantee for the $5.0 million of obligations associated with the Project.
Other than mentioned above, there were no new material related party transactions entered into during the fiscal year ended September 30, 2022.
Certain Energy Services subsidiaries routinely engage in transactions in the normal course of business with each other, including sharing employee benefit plan coverage, payment for insurance and other expenses on behalf of other affiliates, and other services incidental to business of each of the affiliates. All revenue and related expense transactions, as well as the related accounts payable and accounts receivable have been eliminated in consolidation.
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Inflation
Most significant project materials, such as pipe or electrical wire, are provided by the Company’s customers. The Company did experience costs increases on materials for fire protection projects, which had been bid several months prior, during the twelve months ended September 30, 2022. While significant to those smaller projects, the cost increases were immaterial to the overall operations of the Company. When possible, the Company attempts to lock in pricing with vendors and include qualifications regarding material costs increases in bids. Where allowed by contract, the Company will address fuel cost increases with customers. Significant inflation or supply chain issues could cause customers to delay or cancel planned projects; however, inflation did not have a significant effect on our results for the twelve months ended September 30, 2022, and 2021.
Critical Accounting Estimates
The discussion and analysis of the Company’s financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities known to exist at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. We evaluate our estimates on an ongoing basis, based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. There can be no assurance that actual results will not differ from those estimates. Management believes the following accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenues
The Company recognizes revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. For Lump Sum and Unit Price contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward complete satisfaction of the performance obligation(s) using an input (i.e., “cost to cost”) method. For Cost Plus and Time and Material (“T&M”) contracts, revenue is ordinarily recognized over time as control is transferred to the customers by measuring the progress toward satisfaction of the performance obligation(s) using an output method. The Company also does certain T&M service work that is generally completed in a short duration and is recognized at a point in time.
The accuracy of our revenue and profit recognition in a given period depends on the accuracy of our estimates of the cost to complete each project. We believe our experience allows us to create materially reliable estimates. There are a number of factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:
● the completeness and accuracy of the original bid;
● costs associated with scope changes;
● changes in costs of labor and/or materials;
● extended overhead and other costs due to owner, weather and other delays;
● subcontractor performance issues;
● changes in productivity expectations;
● site conditions that differ from those assumed in the original bid;
● changes from original design on design-build projects;
● the availability and skill level of workers in the geographic location of the project;
● a change in the availability and proximity of equipment and materials;
● our ability to fully and promptly recover on affirmative claims and back charges for additional contract costs; and
● the customer’s ability to properly administer the contract.
The foregoing factors, as well as the stage of completion of contracts in process and the mix of contracts at different margins may cause fluctuations in gross profit from period to period. Significant changes in cost estimates, particularly in our larger, more complex projects could have a significant effect on our profitability.
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Our contract assets include cost and estimated earnings in excess of billings that represent amounts earned and reimbursable under contracts, including claim recovery estimates, but have a conditional right for billing and payment such as achievement of milestones or completion of the project. With the exception of customer affirmative claims, generally, such unbilled amounts will become billable according to the contract terms and generally will be billed and collected over the next three months. Settlement with the customer of outstanding affirmative claims is dependent on the claims resolution process and could extend beyond one year. Based on our historical experience, we generally consider the collection risk related to billable amounts to be low. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income (loss) at the uncompleted performance obligation level for the amount of total estimated losses in the period that evidence indicates that the estimated total cost of a performance obligation exceeds its estimated total revenue. Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
The following table presents our costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings at September 30, 2022 and 2021:
September 30, 2022
September 30, 2021
Costs incurred on contracts in progress
$
192,957,145
$
64,903,618
Estimated earnings, net of estimated losses
28,150,060
13,280,334
221,107,205
78,183,952
Less billings to date
211,025,190
72,606,840
$
10,082,015
$
5,577,112
Costs and estimated earnings in excess of billed on
uncompleted contracts
$
16,109,593
$
8,730,402
Less billings in excess of costs and estimated earnings on
uncompleted contracts
6,027,578
3,153,290
$
10,082,015
$
5,577,112
Allowance for doubtful accounts
The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customers’ access to capital, our customers’ willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. While most of our customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves.
Materially incorrect estimates of bad debt reserves could result in an unexpected loss in profitability for the Company. Additionally, frequently changing reserves could be an indication of risky or unreliable customers. At September 30, 2022, the management review deemed that the allowance for doubtful accounts was adequate.
Please see the allowance for doubtful accounts table below:
Year Ended September 30,
2022
2021
Balance at beginning of year
$
70,310
$
70,310
Charged to expense
—
—
Deductions for uncollectible receivables written off, net of recoveries
—
—
Balance at end of year
$
70,310
$
70,310
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Impairment of goodwill and intangible assets
The Company follows the guidance of Accounting Standards Codification (“ASC”) 350-20-35-3 “Intangibles-Goodwill and Other (Topic 350)” which requires a company to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. Under the current guidance, companies can first choose to assess any impairment based on qualitative factors (Step 0). If a company fails this test or decides to bypass this step, it must proceed with a quantitative assessment of goodwill impairment. The Company did not have a goodwill impairment at September 30, 2022.
Materially incorrect estimates could cause an impairment of goodwill or intangible assets and result in a loss in profitability for the Company.
A table of the Company’s intangible assets subject to amortization is below:
Accumulated
Accumulated
Amortization and
Amortization and
Amortization and
Impairment
Remaining Life at
Impairment at
Impairment at
Twelve Months Ended
September 30,
Original
September 30,
September 30,
September 30,
Net Book
Intangible assets:
2022
Cost
2022
2021
2022
Value
West Virginia Pipeline:
Customer Relationships
99 months
$
2,209,724
$
386,693
$
165,725
$
220,968
$
1,823,031
Tradename
99 months
263,584
46,136
19,772
26,364
217,448
Non-competes
3 months
83,203
72,806
31,202
41,604
10,397
Revolt Energy:
Employment agreement/non-compete
19 months
100,000
77,779
13,889
63,890
22,221
Tri-State Paving:
Customer Relationships
115 months
1,649,159
66,781
—
66,781
1,582,378
Tradename
115 months
203,213
8,368
—
8,368
194,845
Non-competes
7 months
39,960
16,590
—
16,590
23,370
Total intangible assets
$
4,548,843
$
675,153
$
230,588
$
444,565
$
3,873,690
Depreciation and Amortization
The purpose of depreciation and amortization is to represent an accurate value of assets on the books. Every year, as assets are used, their values are reduced on the balance sheet and expensed on the income statement. As depreciation and amortization are a noncash expense, the amount must be estimated. Each year a certain amount of depreciation and amortization is written off and the book value of the asset is reduced.
Property and equipment are recorded at cost. Costs which extend the useful lives or increase the productivity of the assets are capitalized, while normal repairs and maintenance that do not extend the useful life or increase productivity of the asset are expensed as incurred. Property and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets: buildings 39 years; operating equipment and vehicles 5-7 years; and office equipment, furniture and fixtures 5-7 years.
Acquired intangible assets subject to amortization are amortized on a straight-line basis, which approximates the pattern in which the economic benefit of the respective intangible assets is realized, over their respective estimated useful lives. The definite-lived identifiable intangible assets recognized as part of the Company’s business combinations are recorded at their estimated fair value.
The Company’s depreciation expense for the twelve months ended September 30, 2022, and 2021 was $5.6 million and $4.7 million, respectively. In general, depreciation is included in “cost of revenues” on the Company’s consolidated statements of income (loss).
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The Company’s amortization expense for the twelve months ended September 30, 2022, and 2021 was $445,000 and $231,000, respectively. In general, amortization is included in “cost of revenues” on the Company’s consolidated statements of income (loss).
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 overvaluation could result in impairment charges and reduced profitability for the Company .
Income Taxes
The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. The Company’s provision for income taxes is computed by applying a federal rate of 21.0% and a state rate of 6.0% to taxable income or loss after consideration of non-taxable and non-deductible items.
The income tax expense for the fiscal year ended September 30, 2022 was $2.3 million and was due to an increase in taxable income. The income tax benefit for the fiscal year ended September 30, 2021, was ($29,000).
The effective income tax rate for the fiscal year ended September 30, 2022 was 37.6%. The effective income tax rate for the fiscal year ended September 30, 2021, was (3.2%). Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income or loss, non-taxable and non-deductible expenses.
Accounting for PPP Loans
The Company's accounting for PPP loans reflects management's best estimate of current and future amounts to be paid. The Company applies significant judgment regarding the determination of PPP loan forgiveness based on the rules established, and subsequently clarified by the SBA, including rules related to the Company's affiliations and meeting SBA size standards.
New Accounting Pronouncements
On October 28, 2021, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update (“ASU”) 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”. The amendments of this ASU require entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. The amendments improve comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a business combination and revenue contracts with customers not acquired in a business combination. The amendments are effective for public business entities for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2022. For all other entities they are effective for the fiscal years, including interim periods within those the fiscal years, beginning after December 15, 2023. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including in any interim period, for public business entities for periods for which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The Company is currently assessing the effect that ASU 2021-08 will have on their results of operations, financial position and cash flows; however, the Company does not expect a significant impact.
The FASB recently issued ASU 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”, which aims to provide increased transparency by requiring business entities to disclose information about certain types of government assistance they receive in the notes to the financial statements. Entities are required to provide the new disclosures prospectively for all transactions with a government entity that are accounted for under either a grant or a contribution accounting model and are reflected in the financial statements at the date of initially applying the new amendments, and to new transactions entered into after that date. Retrospective application of the guidance is permitted. The guidance in ASU 2021-10 is effective for financial statements of all entities for annual periods beginning after December 15, 2021, with early application permitted. ASU 2021-10 has not become effective for the Company; however, a significant impact is not expected.
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Subsequent Events
On October 10, 2022, the Company entered into a $3.1 million promissory note agreement with United Bank to finance the Ryan Environmental acquisition. This is a five-year agreement with a fixed interest rate of 6.0% and monthly payments of $59,932 beginning on November 10, 2022.
In February 2018, the Company filed a lawsuit against a former customer in the United States District Court for the Western District of Pennsylvania. The lawsuit is related to a dispute over work performed on a pipeline construction project. On November 16, 2022, a Judgement Order was issued, and the Company was awarded $13.1 million, of which $5.8 million was the jury award, $1.6 million was for attorney’s fees, and $5.7 million was for penalties and interest. None of the award had been recognized in the Company’s consolidated financial statements as of September 30, 2022. The Company’s attorney’s fees have been expensed as incurred. On December 16, 2022, the Defendant filed a notice of appeal with the court.
Management has evaluated all subsequent events for accounting and disclosure. There have been no other material events during the period, other than noted above, that would either impact the results reflected in the report or the Company’s results going forward.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
ITEM 8. Financial Statements and Supplementary Data
Financial Statements are included at page F-1 of this Amendment No.1 to the Annual Report on Form 10-K/A.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.