Energy Services of America (ESOA) 10-Q 2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

 ☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2021.

Energy Services of America Corporation

(Exact Name of Registrant as Specified in Its Charter)

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

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

(304) 522-3868

(Registrant’s Telephone Number Including Area Code)

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

Title of Each Class	Trading Symbols	Name of Each Exchange On Which Registered
None	None	None

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

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

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

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

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

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

As of August 15, 2021, there were 13,621,406 outstanding shares of the Registrant’s Common Stock.

Part 1: Financial Information
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets	1
Consolidated Statements of Income	2
Consolidated Statements of Cash Flows	3
Consolidated Statements of Changes in Shareholders’ Equity	4
Notes to Unaudited Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3. Quantitative and Qualitative Disclosures About Market Risk	38
Item 4. Controls and Procedures	38
Part II: Other Information
Item 1. Legal Proceedings	39
Item 1A. Risk Factors	39
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 6. Exhibits	39
Signatures	40

Part 1. Financial Information

Item 1. Financial Statements (Unaudited):

Energy Services of America Corporation

Consolidated Balance Sheets

	June 30,		September 30,
	2021		2020
Assets	(Unaudited)
Current assets
Cash and cash equivalents	$	2,270,648	$	11,216,820
Accounts receivable-trade		14,310,834		18,246,989
Allowance for doubtful accounts		(70,310)		(70,310)
Retainages receivable		1,007,946		2,483,809
Other receivables		1,112,957		9,458
Contract assets		7,220,307		6,545,863
Prepaid expenses and other		4,114,448		3,338,943
Total current assets		29,966,830		41,771,572
Property, plant and equipment, at cost		59,615,461		53,324,843
less accumulated depreciation		(37,124,573)		(36,933,129)
Net fixed assets		22,490,888		16,391,714
Acquired intangible assets, net		400,000		—
Goodwill		4,220,828		—
Total assets	$	57,078,546	$	58,163,286
Liabilities and shareholders’ equity
Current liabilities
Current maturities of long-term debt	$	3,305,516	$	4,028,900
Lines of credit and short term borrowings		2,345,385		509,843
Accounts payable		3,115,084		5,222,222
Accrued expenses and other current liabilities		2,902,809		4,237,172
Contract liabilities		3,628,628		4,851,900
Income tax payable		50,000		—
Total current liabilities		15,347,422		18,850,037
Long-term debt, less current maturities		7,074,679		11,233,705
Net deferred income tax liability		1,710,059		2,255,515
Total liabilities		24,132,160		32,339,257
Shareholders’ equity
Preferred stock, $.0001 par value Authorized 1,000,000 shares, 206 issued at June 30, 2021 and September 30, 2020		—		—
Common stock, $.0001 par value Authorized 50,000,000 shares 14,839,836 issued and 13,621,406 outstanding at June 30, 2021 and September 30, 2020		1,484		1,484
Treasury stock, 1,218,430 shares at June 30, 2021 and September 30, 2020		(122)		(122)
Additional paid in capital		60,670,699		60,670,699
Retained deficit		(27,725,675)		(34,848,032)
Total shareholders’ equity		32,946,386		25,824,029
Total liabilities and shareholders’ equity	$	57,078,546	$	58,163,286

The Accompanying Notes are an Integral Part of These Financial Statements

1

Energy Services of America Corporation

Consolidated Statements of Income

Unaudited

	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Revenue	$	25,285,951	$	30,762,725	$	82,901,159	$	74,678,432
Cost of revenues		22,580,340		27,936,548		75,478,966		69,425,044
Gross profit		2,705,611		2,826,177		7,422,193		5,253,388
Selling and administrative expenses		3,207,864		2,532,141		10,627,607		7,473,422
(Loss) income from operations		(502,253)		294,036		(3,205,414)		(2,220,034)
Other nonoperating income (expense)
Interest income		108		83		151,877		53,332
Paycheck Protection Program loan forgiveness		9,799,100		—		9,799,100		—
Other nonoperating expense		(35,833)		(53,793)		(121,343)		(130,472)
Interest expense		(136,995)		(101,335)		(356,505)		(400,197)
Gain on sale of equipment		135,269		43,296		627,580		563,062
		9,761,649		(111,749)		10,100,709		85,725
Income (loss) before income taxes		9,259,396		182,287		6,895,295		(2,134,309)
Income tax (benefit) expense		(53,844)		200,242		(458,812)		(347,629)
Net income (loss)		9,313,240		(17,955)		7,354,107		(1,786,680)
Dividends on preferred stock		77,250		77,250		231,750		231,750
Income (loss) available to common shareholders	$	9,235,990	$	(95,205)	$	7,122,357	$	(2,018,430)
Weighted average shares outstanding-basic		13,621,406		13,627,293		13,621,406		13,844,340
Weighted average shares-diluted		17,089,722		13,627,293		17,089,722		13,844,340
Earnings (loss) per share available to common shareholders	$	0.678	$	(0.007)	$	0.523	$	(0.146)
Earnings (loss) per share-diluted available to common shareholders	$	0.540	$	(0.007)	$	0.417	$	(0.146)

The Accompanying Notes are an Integral Part of These Financial Statements

2

Energy Services of America Corporation

Consolidated Statements of Cash Flows

Unaudited

	Nine Months Ended		Nine Months Ended
	June 30,		June 30,
	2021		2020
Cash flows from operating activities:
Net income (loss)	$	7,354,107	$	(1,786,680)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation expense		3,469,723		3,315,541
Paycheck Protection Program loan forgiveness		(9,799,100)		—
Gain on sale of equipment		(627,580)		(563,062)
Provision for deferred taxes		(717,269)		15,618
Decrease in contracts receivable		3,936,155		3,742,051
Decrease in retainage receivable		1,475,863		1,761,554
Increase in other receivables		(1,103,499)		(300)
(Increase) decrease in contract assets		(674,444)		1,350,722
Increase in prepaid expenses		(775,505)		(1,517,581)
(Decrease) increase in accounts payable		(2,107,138)		3,218,314
Decrease in accrued expenses		(1,085,299)		(1,191,013)
(Decrease) increase in contract liabilities		(1,223,272)		2,478,050
Increase in income taxes payable		50,000		—
Net cash (used in) provided by operating activities		(1,827,258)		10,823,214
Cash flows from investing activities:
Acquisition of Revolt Energy		(150,000)		—
Acquisition of West Virginia Pipeline, net of cash received of $250,000		(3,250,000)		—
Investment in property and equipment		(7,385,469)		(2,666,570)
Proceeds from sales of property and equipment		693,291		718,006
Net cash used in investing activities		(10,092,178)		(1,948,564)
Cash flows from financing activities:
Dividends on common stock		—		(696,117)
Preferred dividends paid		(309,000)		(309,000)
Treasury stock purchased by company		—		(268,228)
Borrowings on lines of credit and short term debt, net of (repayments)		5,335,542		(2,751,102)
Proceeds from long term debt		—		9,839,100
Principal payments on long term debt		(2,053,278)		(10,007,813)
Net cash provided by (used in) financing activities		2,973,264		(4,193,160)
(Decrease) increase in cash and cash equivalents		(8,946,172)		4,681,490
Cash and cash equivalents beginning of period		11,216,820		4,578,275
Cash and cash equivalents end of period	$	2,270,648	$	9,259,765
Supplemental schedule of noncash investing and financing activities:
Purchases of property & equipment under financing agreements	$	349,139	$	626,384
Insurance premiums financed	$	3,213,402	$	3,063,543
Note payable to finance West Virginia Pipeline acquisition	$	3,000,000	$	—
Note payable to refinance short-term borrowing	$	3,500,000	$	—
Accrued dividends on preferred stock	$	231,750	$	231,750
Debt assumed in acquisitions	$	205,829	$	—
Supplemental disclosures of cash flows information:
Cash paid during the year for:
Interest	$	356,505	$	400,197
Income taxes	$	229,611	$	147,418

The Accompanying Notes are an Integral Part of These Financial Statements

3

Energy Services of America Corporation

Consolidated Statements of Changes in Shareholders’ Equity

For the nine months ended June 30, 2021, and 2020

										Total
	Common Stock			Additional Paid		Retained		Treasury		Shareholders’
	Shares	Amount		in Capital		Deficit		Stock		Equity
Balance at September 30, 2019	13,924,789	$	1,484	$	60,938,896	$	(36,275,932)	$	(91)	$	24,664,357
Net loss	—		—		—		(1,786,680)		—		(1,786,680)
Accrued preferred dividends	—		—		—		(231,750)		—		(231,750)
Dividends on common stock ($0.05 per share on 13,922,336 shares; 317,500 common shares are part of preferred units and were not eligible for the common dividend)	—		—		—		(696,117)		—		(696,117)
Treasury stock purchased by company	(303,383)		—		(268,197)		—		(31)		(268,228)
Balance at June 30, 2020	13,621,406	$	1,484	$	60,670,699	$	(38,990,479)	$	(122)	$	21,681,582
Balance at September 30, 2020	13,621,406	$	1,484	$	60,670,699	$	(34,848,032)	$	(122)	$	25,824,029
Net income	—		—		—		7,354,107		—		7,354,107
Accrued preferred dividends	—		—		—		(231,750)		—		(231,750)
Balance at June 30, 2021	13,621,406	$	1,484	$	60,670,699	$	(27,725,675)	$	(122)	$	32,946,386

The Accompanying Notes are an Integral Part of These Financial Statements

4

ENERGY SERVICES OF AMERICA CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.  BUSINESS AND ORGANIZATION

Energy Services of America Corporation (“Energy Services” or the “Company”) 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. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, solar installation, and fire protection services to customers primarily in the automotive, chemical, and power industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All C.J. Hughes, Nitro, and Contractors Rental construction personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.

On December 31, 2020, Energy Services completed the purchase of West Virginia Pipeline, Inc. (“West Virginia Pipeline”), a West Virginia corporation located in Princeton, West Virginia. West Virginia Pipeline, a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. West Virginia Pipeline’s employees are non-union, and the company is managed independently from C.J. Hughes and Nitro.

On March 22, 2021, the Company established a new wholly owned subsidiary, SQP Construction Group, Inc. (“SQP”), that operates as a general contractor primarily in West Virginia. SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers. As a general contractor, SQP manages the overall construction project and subcontracts most of the work.

On April 30, 2021, the Company’s Nitro subsidiary completed an asset purchase of Revolt Energy, Inc. (“Revolt Energy”), a West Virginia corporation located in Nitro, WV. Revolt Energy previously operated primarily as a residential solar installation company in southern West Virginia. As a division of Nitro, Revolt Energy continues to perform residential solar installations and has expanded its solar installation services to include commercial and industrial customers. Revolt Energy’s construction employees are members of the International Brotherhood of Electrical Workers.

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

Some or all of the 206 outstanding shares of Series A Preferred Stock may be converted into common stock of the Company (“Common Stock”) at the election of each shareholder. The conversion formula for each share of the Series A Preferred Stock is $25,000 plus all accrued but unpaid dividends up to, but excluding, September 1, 2021 divided by the Conversion Price of $1.50.  Cash will be issued in lieu of fractional shares at a rate of $1.50 multiplied by the fractional share rounded to the nearest cent. Any shareholder electing conversion, in whole or in part, must return a notice of conversion to the Company at least two business days prior to the Redemption Date of September 1, 2021. If the notice of conversion is not received by the Company by the required date, a complete redemption of the Series A Preferred Stock will occur at the Redemption Price.

Full conversion of the Series A Preferred Stock would result in the issuance of approximately 3,468,316 new shares of the Company’s common stock, which are included in the Company’s diluted earnings per share calculation.

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

5

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the Company’s audited consolidated financial statements and footnotes thereto for the years ended September 30, 2020, and 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on January 4, 2021.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the interim financial reporting rules and regulations of the SEC. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations. The operating results for the three and nine months ended June 30, 2021, and 2020 are not necessarily indicative of the results to be expected for the full year or any other interim period.  

Principles of Consolidation

The consolidated financial statements of Energy Services include the accounts of Energy Services, its wholly owned subsidiaries West Virginia Pipeline, SQP and C.J. Hughes and its subsidiaries, Contractors Rental, Nitro, and Pinnacle. All significant intercompany accounts and transactions have been eliminated in the consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services, West Virginia Pipeline, SQP, and C.J. Hughes and its subsidiaries.

2.  REVENUE RECOGNITION

Our revenue is primarily derived from construction contracts that can span several quarters. We recognize revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606” or “Topic 606”) which provides for a five-step model for recognizing revenue from contracts with customers as follows:

1. Identify the contract

2. Identify performance obligations

3. Determine the transaction price

4. Allocate the transaction price

5. Recognize revenue

The accuracy of our revenue and profit recognition in any 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 multiple factors that can contribute to changes in estimates of contract cost and profitability. The most significant of these include:

● the completeness and accuracy of the original bid;

● costs associated with scope changes;

● changes in costs of labor and/or materials;

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

● subcontractor performance issues;

● changes in productivity expectations;

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

● changes from original design on design-build projects;

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

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

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

● the customer’s ability to properly administer the contract.

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

6

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

3.  DISAGGREGATION OF REVENUE

We disaggregate our revenue based on our operating groups and contract types as it is the format that is regularly reviewed by management. Our reportable operating groups are Gas & Water Distribution, Gas & Petroleum Transmission, Electrical, Mechanical, & General services and construction. The operating groups for the three and nine months ended June 30, 2020, have been revised to reflect the current presentation. Our contract types are: Lump Sum, Unit Price, Cost Plus and Time and Materials (“T&M”).  The following tables present our disaggregated revenue for the three and nine months ended June 30, 2021, and 2020:

	Three Months Ended June 30, 2021
					Electrical,
	Gas &Water		Gas & Petroleum		Mechanical, &		Total revenue
	Distribution		Transmission		General		from contracts
Lump sum contracts	$	—	$	—	$	6,622,372	$	6,622,372
Unit price contracts		11,645,327		1,967,647		—		13,612,974
Cost plus and T&M contracts		135,659		—		4,914,946		5,050,605
Total revenue from contracts	$	11,780,986	$	1,967,647	$	11,537,318	$	25,285,951
Earned over time	$	10,783,990	$	1,967,647	$	11,283,091	$	24,034,728
Earned at point in time		996,996		—		254,227		1,251,223
Total revenue from contracts	$	11,780,986	$	1,967,647	$	11,537,318	$	25,285,951

7

	Three Months Ended June 30, 2020
					Electrical,
	Gas &Water		Gas & Petroleum		Mechanical, &		Total revenue
	Distribution		Transmission		General		from contracts
Lump sum contracts	$	—	$	—	$	9,042,393	$	9,042,393
Unit price contracts		4,736,935		12,936,299		—		17,673,234
Cost plus and T&M contracts		130,250		—		3,916,848		4,047,098
Total revenue from contracts	$	4,867,185	$	12,936,299	$	12,959,241	$	30,762,725
Earned over time	$	2,024,539	$	12,936,299	$	12,658,556	$	27,619,394
Earned at point in time		2,842,646		—		300,685		3,143,331
Total revenue from contracts	$	4,867,185	$	12,936,299	$	12,959,241	$	30,762,725

	Nine Months Ended June 30, 2021
					Electrical,
	Gas & Water		Gas & Petroleum		Mechanical, &		Total revenue
	Distribution		Transmission		General		from contracts
Lump sum contracts	$	—	$	—	$	26,305,242	$	26,305,242
Unit price contracts		26,961,292		13,134,007		—		40,095,299
Cost plus and T&M contracts		556,471		1,209,244		14,734,903		16,500,618
Total revenue from contracts	$	27,517,763	$	14,343,251	$	41,040,145	$	82,901,159
Earned over time	$	20,638,965	$	13,134,007	$	40,339,679	$	74,112,651
Earned at point in time		6,878,798		1,209,244		700,466		8,788,508
Total revenue from contracts	$	27,517,763	$	14,343,251	$	41,040,145	$	82,901,159

	Nine Months Ended June 30, 2020
					Electrical,
	Gas & Water		Gas & Petroleum		Mechanical, &		Total revenue
	Distribution		Transmission		General		from contracts
Lump sum contracts	$	—	$	—	$	23,867,792	$	23,867,792
Unit price contracts		16,750,984		21,063,691		—		37,814,675
Cost plus and T&M contracts		355,352		116,428		12,524,185		12,995,965
Total revenue from contracts	$	17,106,336	$	21,180,119	$	36,391,977	$	74,678,432
Earned over time	$	10,083,330	$	21,063,691	$	35,634,089	$	66,781,110
Earned at point in time		7,023,006		116,428		757,888		7,897,322
Total revenue from contracts	$	17,106,336	$	21,180,119	$	36,391,977	$	74,678,432

4.  CONTRACT BALANCES

The Company’s accounts receivable consists of amounts that have been billed to customers. Collateral is generally not required. Most of the Company’s contracts have monthly billing terms and payment terms within 30 to 45 days after invoices have been issued. The Company attempts to negotiate 2-week billing terms and 15-day payment terms on larger projects. The timing of billings to customers may generate contract assets or contract liabilities.

During the nine months ended June 30, 2021, we recognized revenue of $5.0 million that was included in the contract liability balance at September 30, 2020.

8

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

	September 30, 2020		June 30, 2021		Change
Accounts receivable-trade, net of allowance for doubtful accounts	$	18,176,679	$	14,240,524	$	(3,936,155)
Contract assets
Cost and estimated earnings in excess of billings	$	6,545,863	$	7,220,307	$	674,444
Contract liabilities
Billings in excess of cost and estimated earnings	$	4,851,900	$	3,628,628	$	(1,223,272)

5.  PERFORMANCE OBLIGATIONS

The Company provides construction services that can be classified into several groups: Gas & Water Distribution, Gas & Petroleum Transmission, Electrical. Mechanical, & General services and construction. Generally, our contracts contain one performance obligation that is satisfied over time because our performance typically creates or enhances an asset that the customer controls as the asset is created or enhanced. We recognize revenue as performance obligations are satisfied and control of the promised good and service is transferred to the customer. 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. Under the cost-to-cost method, costs incurred to-date are generally the best depiction of transfer of control. All contract costs, including those associated with affirmative claims, change orders and back charges, are recorded as incurred and revisions to estimated total costs are reflected as soon as the obligation to perform is determined. Contract costs consist of direct costs on contracts, including labor and materials, amounts payable to subcontractors, direct overhead costs and equipment expense (primarily depreciation, fuel, maintenance and repairs).

During the nine months ended June 30, 2021, we recognized revenue of $1.0 million as a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2020. The changes in contract transaction price were from items such as changes in projected profit, executed or estimated change orders, and unresolved contract modifications and claims.

The Company does not sell warranties for its construction services. At June 30, 2021, the Company had $23.1 million in remaining unsatisfied performance obligations, in which revenue is expected to be recognized in less than twelve months.

6.  UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts as of June 30, 2021, and September 30, 2020, are summarized as follows:

	June 30,		September 30,
	2021		2020
Costs incurred on contracts in progress	$	67,396,751	$	74,996,405
Estimated earnings, net of estimated losses		13,168,286		16,067,668
		80,565,037		91,064,073
Less billings to date		76,973,358		89,370,110
	$	3,591,679	$	1,693,963
Costs and estimated earnings in excess of billed on uncompleted contracts
	$	7,220,307	$	6,545,863
Less billings in excess of costs and estimated earnings on uncompleted contracts		3,628,628		4,851,900
	$	3,591,679	$	1,693,963

Backlog at June 30, 2021, and September 30, 2020, was $73.1 million and $63.8 million, respectively.

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7.  FAIR VALUE MEASUREMENTS

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

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

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

Level 2 — Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data.

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

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

The carrying amount for borrowings under the Company’s revolving credit facility approximates fair value because of the variable market interest rate charged to the Company for these borrowings. The fair value of the Company’s long term fixed-rate debt to unrelated parties was estimated using a discounted cash flow analysis and a yield rate that was estimated based on the borrowing rates for bank loans with similar terms and maturities. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $7.4 million at June 30, 2021, was $7.3 million. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $15.8 million at September 30, 2020, was $14.8 million.

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

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8.  EARNINGS (LOSS) PER SHARE

The amounts used to compute the earnings (loss) per share for the three and nine months ended June 30, 2021, and 2020 are summarized below.

	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Net income (loss)	$	9,313,240	$	(17,955)	$	7,354,107	$	(1,786,680)
Dividends on preferred stock		77,250		77,250		231,750		231,750
Net income (loss) available to common shareholders	$	9,235,990	$	(95,205)	$	7,122,357	$	(2,018,430)
Weighted average shares outstanding-basic		13,621,406		13,627,293		13,621,406		13,844,340
Weighted average shares-diluted		17,089,722		13,627,293		17,089,722		13,844,340
Earnings (loss) per share available to common shareholders	$	0.678	$	(0.007)	$	0.523	$	(0.146)
Earnings (loss) per share available to common shareholders-diluted	$	0.540	$	(0.007)	$	0.417	$	(0.146)

9.  INCOME TAXES

The components of income taxes are as follows:

	Three Months Ended June 30,
	2021		2020
Federal
Current	$	(433,621)	$	92,332
Deferred		390,724		63,854
Total	$	(42,897)	$	156,186
State
Current	$	(120,532)	$	26,045
Deferred		109,585		18,011
Total	$	(10,947)	$	44,056
Total income tax (benefit) expense	$	(53,844)	$	200,242

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	Nine Months Ended June 30,
	2021		2020
Federal
Current	$	(917,344)	$	(258,971)
Deferred		559,471		(12,182)
Total	$	(357,873)	$	(271,153)
State
Current	$	(258,738)	$	(73,040)
Deferred		157,799		(3,436)
Total	$	(100,939)	$	(76,476)
Total income tax benefit	$	(458,812)	$	(347,629)

The effective income tax rate for the three months ended June 30, 2021, was (0.6)%, as compared to 109.8% for the same period in 2020. The effective income tax rate for the nine months ended June 30, 2021, was (6.7%), as compared to 16.3% for the same period in 2020. Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income and non-deductible expenses.

On June 16, 2021, the Company received notice that the SBA had granted forgiveness and repaid $9.8 million of Payroll 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.

Per diem paid to employees on construction projects and entertainment expenses are only partially deductible from taxable income and can have a significant impact on the effective tax rate. For the nine months ended June 30, 2021, the non-deductible portion of per diem and entertainment expenses resulted in an approximate $402,000 increase in taxable income as compared to $312,000 for the same period in 2020.

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

	June 30,		September 30,
	2021		2020
Deferred income tax liabilities
Long-term
Property and equipment	$	3,375,025	$	2,746,331
Other		23,235		—
Total deferred income tax liabilities	$	3,398,260	$	2,746,331
Deferred income tax assets
Long-term
Other	$	427,260	$	490,816
Net operating loss carryforward		1,260,941		—
Total deferred income tax assets	$	1,688,201	$	490,816
Total net deferred income tax liabilities	$	1,710,059	$	2,255,515

The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ended prior to September 30, 2017.

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

10.  SHORT-TERM AND LONG-TERM DEBT

Short-term debt consists of the following:

On August 3, 2021, the Company received a one-year extension on its line of credit (“Operating Line of credit (2021)”) effective June 28, 2021. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. 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 $6.4 million as of June 30, 2021.  The Company had $1.0 million in borrowings on the line of credit, leaving $5.4 million available on the line of credit as of June 30, 2021. The interest rate at June 30, 2021, was 4.99%.  Based on the borrowing base calculation, the Company was able to borrow up to $11.1 million as of September 30, 2020.  The Company had no borrowings on the line of credit, leaving $11.1 million available on the line of credit as of September 30, 2020. The interest rate at September 30, 2020, 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:

1. Minimum tangible net worth of $19.0 million to be measured quarterly,

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

3. Minimum current ratio of 1.50x to be measured quarterly,

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

5. Full review of accounts receivable aging report and work in progress. The results of the review shall be satisfactory to the lender in its sole and unfettered discretion.

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

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

2. Minimum tangible net worth of $21.0 million to be measured quarterly.

The Company believes it was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2021) at June 30, 2021.

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 2021, the Company financed $3.2 million in insurance premiums. At June 30, 2021, the remaining balance of the insurance premiums was $1.3 million.

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A summary of short-term and long-term debt as of June 30, 2021, and September 30, 2020, is as follows:

	June 30,		September 30,
	2021		2020
Line of credit payable to bank, monthly interest at 4.99%, renewed on August 3, 2021, effective June 28, 2021, final payment due by June 28, 2022, guaranteed by certain directors of the Company.	$	1,000,000	$	—
Note payable to bank, due in monthly installments of $64,853 interest at 4.25%, final payment due by March 25, 2026 secured by receivables and equipment, guaranteed by certain directors of the Company.		3,342,069		—
Notes payable to finance companies, due in monthly installments totaling $70,062 at June 30, 2021 and $44,781 at September 30, 2020, including interest ranging from 0.00% to 6.03%, final payments due July 2021 through August 2026, secured by equipment.		1,273,164		1,334,566
Note payable to finance company for insurance premiums financed, due in monthly installments totaling $272,000 in FY 2021 and $254,922 in FY 2020, including interest rate at 3.50%, final payment made November 2020.		1,345,385		509,843
Notes payable to bank, due in monthly installments totaling $7,799, including interest at 4.82%, final payment due November 2034 secured by building and property.		922,931		967,665
Notes payable to bank, due in monthly installments totaling $11,602, including interest at 4.25%, final payment due November 2025 secured by building and property, guaranteed by certain directors of the Company.		559,583		644,172
Notes payable to bank for $9.84 million in Paycheck Protection Program (“PPP”) loan funds, of which $9.8 million was forgiven in June 2021. Remaining $40,000 was forgiven in July 2021		40,000		9,839,100
Notes payable to bank, due in monthly installments totaling $98,865, including interest at 4.99%, final payment due September 2022 secured by equipment, guaranteed by certain directors of the Company.		1,155,461		1,983,911
Notes payable to bank, due in monthly installments totaling $46,482, including interest at 5.00%, final payment due September 2021 secured by equipment, guaranteed by certain directors of the Company.		86,987		493,191
Notes payable to David and Daniel Bolton, due in annual installments totaling $500,000, including interest at 3.25%, final payment due December 31, 2026, unsecured		3,000,000		—
Total debt	$	12,725,580	$	15,772,448
Less current maturities		5,650,901		4,538,743
Total long term debt	$	7,074,679	$	11,233,705

On June 16, 2021, the Company received notice that the SBA had granted forgiveness and repaid $9.8 million of the PPP borrowings to its lender. The forgiveness was recorded as “other nonoperating income” for the three and nine months ended June 30, 2021.

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11. ACQUISITIONS

On December 31, 2020, Energy Services completed an asset purchase of West Virginia Pipeline, which became a wholly owned subsidiary of Energy Services that operates as a gas and water distribution contractor primarily in southern West Virginia. Energy Services paid $3.5 million in cash and acquired a $3.0 million seller note with a term of five years with an interest rate of 3.25%. Previous owners, David Bolton and Daniel Bolton, have continued their roles as President and Vice President, respectively. The Company incurred approximately $150,000 in expenses related to the acquisition. West Virginia Pipeline earned revenues of $2.0 million and $3.2 million, respectively, for the three and nine months ended June 30, 2021.

On April 30, 2021, the Company’s Nitro subsidiary completed an asset purchase of Revolt Energy, Inc. (“Revolt Energy”), a solar installation company located in Nitro, WV for $150,000 in cash. After the acquisition, Revolt Energy began to operate as a division within Nitro. Revolt Energy earned revenues of $300,000 for the three months ended June 30, 2021.

ASC 805-10-50-2 requires public companies that present comparative financial statements to present pro forma financial statements as though the business combination that occurred during the current fiscal year had occurred as of the beginning of the comparable prior annual reporting period. As allowed under ASC 805-10-50-2, the Company finds this information impracticable to provide for the interim periods presented due to the lack of availability of meaningful financial statements of the acquired companies that comply with U.S. Generally Accepted Accounting Principles.

Energy Services accounts for business combinations under the acquisition method in accordance with ASC Topic 805, Business Combinations. Accordingly, for each transaction, the purchase price is allocated to the fair value of the assets acquired and liabilities assumed as of the date of the acquisition. In conjunction with the adoption of Accounting Standards Update (“ASU”) 2015-16, upon receipt of final fair value estimates during the measurement period, which must be within one year of the acquisition date, Energy Services records any adjustments to the preliminary fair value estimates in the reporting period in which the adjustments are determined. The Company is continuing to finalize the purchase price allocations related to the West Virginia Pipeline and Revolt Energy acquisitions.

Based on management’s preliminary valuation of tangible and intangible assets acquired and liabilities assumed, the purchase prices each acquisition is allocated in the tables below. These allocations are subject to change.

West Virginia Pipeline

Goodwill	$	4,220,829
Equipment and vehicles		1,565,000
Building		220,243
Land		64,757
Non-compete agreement		150,000
Customer list		150,000
Cash received in acquisition		250,000
Debt assumed in acquisition		(120,829)
Purchase price	$	6,500,000

Revolt Energy

Equipment and vehicles	$	135,000
Non-compete agreement		100,000
Debt assumed in acquisition		(85,000)
Purchase price	$	150,000

West Virginia Pipeline’s past financial performance, experienced management and workforce and relationships with its customers made it an attractive acquisition for the Company. Going back to 1963, West Virginia Pipeline has a long history of excellent work performance in southern West Virginia. Their geographic region compliments Energy Services as the two companies rarely competed for work previously. The $4.2 million in goodwill generated by the acquisition is largely the result of the high return on capital

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generated by West Virginia Pipeline. While West Virginia Pipeline will be managed separately from the Company’s other union operations, it is expected that relationships built by all the companies will help provide new opportunities within the organization.

Revolt Energy’s reputation as a leading solar installation company in southern West Virginia made it an attractive acquisition and greatly eased Nitro’s entry into the growing solar installation industry. Prior to the acquisition, Revolt installed the solar panels and subcontracted the electrical work. The acquisition will now allow Nitro to self-perform the complete solar installation process. Nitro’s and Revolt’s common union affiliations align to give Nitro flexibility on both solar installations and commercial electrical work.

12. SUBSEQUENT EVENTS

On July 1, 2021, the Company submitted equipment purchase invoices to United Bank in order to receive $3.0 million in loan proceeds from the Equipment Line of Credit 2021 agreement signed on January 5, 2021.

On July 7, 2021, the Company received notification from United Bank that the remaining $40,000 in PPP loans borrowings were forgiven by the SBA.

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

Management has evaluated subsequent events through August 16, 2021, the date which the financial statements were available for issue. 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.

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ITEM 2. 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 “Financial Statements” appearing in this report as well as 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. The term “Energy Services” refers to the Company, West Virginia Pipeline, SQP and C.J. Hughes and C.J. Hughes’ wholly owned subsidiaries on a consolidated basis.

Forward Looking Statements

Within Energy Services’ consolidated financial statements and this discussion and analysis of the financial condition and results of operations, there are included statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “project,” “forecast,” “may,” “will,” “should,” “could,” “expect,” “believe,” “intend” and other words of similar meaning.

These forward-looking statements are not guarantees of future performance and involve or rely on a number of risks, uncertainties, and assumptions that are difficult to predict or beyond Energy Services’ control. Energy Services has based its forward-looking statements on management’s beliefs and assumptions based on information available to management at the time the statements are made. Actual outcomes and results may differ materially from what is expressed, implied and forecasted by forward-looking statements and any or all of Energy Services’ forward-looking statements may turn out to be wrong. The accuracy of such statements can be affected by inaccurate assumptions and by known or unknown risks and uncertainties.

All of the forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements or that are otherwise included in this report. In addition, Energy Services does not undertake and expressly disclaims any obligation to update or revise any forward-looking statements to reflect events or circumstances after the date of this report or otherwise.

Company Overview

Energy Services of America Corporation (“Energy Services” or the “Company”) 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. C.J. Hughes Construction Company, Inc. (“C.J. Hughes”), a wholly owned subsidiary of the Company, is a general contractor primarily engaged in pipeline construction for utility companies. Contractors Rental Corporation (“Contractors Rental”), a wholly owned subsidiary of C.J. Hughes, provides union building trade employees for projects managed by C.J. Hughes. Nitro Construction Services, Inc. (“Nitro”), a wholly owned subsidiary of C.J. Hughes, provides electrical, mechanical, HVAC/R, solar installation, and fire protection services to customers primarily in the automotive, chemical, and power industries. Pinnacle Technical Solutions, Inc. (“Pinnacle”), a wholly owned subsidiary of Nitro, operates as a data storage facility within Nitro’s office building. Pinnacle is supported by Nitro and has no employees of its own. All C.J. Hughes, Nitro, and Contractors Rental construction personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.

On December 31, 2020, Energy Services completed the purchase of West Virginia Pipeline, Inc. (“West Virginia Pipeline”), a West Virginia corporation located in Princeton, West Virginia. West Virginia Pipeline, a wholly owned subsidiary of Energy Services, operates as a gas and water distribution contractor primarily in southern West Virginia. West Virginia Pipeline’s employees are non-union, and the company is managed independently from C.J. Hughes and Nitro.

On March 22, 2021, the Company established a new wholly owned subsidiary, SQP Construction Group, Inc. (“SQP”), that operates as a general contractor primarily in West Virginia. SQP engages in the construction and renovation of buildings and other civil construction projects for state and local government agencies and commercial customers. As a general contractor, SQP manages the overall construction project and subcontracts most of the work.

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On April 30, 2021, the Company’s Nitro subsidiary completed an asset purchase of Revolt Energy, Inc. (“Revolt Energy”), a West Virginia corporation located in Nitro, WV. Revolt Energy previously operated primarily as a residential solar installation company in southern West Virginia. As a division of Nitro, Revolt Energy continues to perform residential solar installations and has expanded its solar installation services to include commercial and industrial customers. Revolt Energy’s construction employees are members of the International Brotherhood of Electrical Workers.

Energy Services provides contracting services for utilities, energy, and manufacturing related companies including gas distribution and transmission, petroleum, power, chemical, water & sewer and automotive industries. For the gas industry, the Company is primarily engaged in the construction, replacement and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. Energy Services is involved in the construction of both interstate and intrastate pipelines, with an emphasis on the latter. For the oil industry, the Company provides a variety of services relating to pipeline, storage facilities and plant work. For the power, chemical, and automotive industries, the Company provides a full range of electrical and mechanical installations and repairs including substation and switchyard services, site preparation, equipment setting, pipe fabrication and installation, packaged buildings, transformers and other ancillary work with regards thereto. Energy Services’ other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction. The majority of the Company’s customers are located in West Virginia, Virginia, Ohio, Pennsylvania, and Kentucky.

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

Bayer Chemical

Dow Chemical

Kentucky American Water

WV American Water

Various state, county and municipal public service districts.

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

COVID-19 Response

In March 2020, the World Health Organization recognized the novel strain of coronavirus, COVID-19, as a pandemic. This coronavirus outbreak has significantly impacted both the world and U.S. economies. In response to this coronavirus outbreak, the governments of many cities, counties, states and other geographic regions have taken preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forego their time outside of their homes which has created significant uncertainties in the U.S. economy. In certain geographic regions in which the Company operates, temporary closures of businesses have been ordered or suggested and numerous other businesses have temporarily closed voluntarily. Further, individuals’ ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of travel-related businesses.

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Some of the procedures that the Company has implemented to help protect employees from COVID-19 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 and has made arrangements for administrative personnel to work from home. 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. As of June 30, 2021, the Company has not had significant issues with COVID-19 exposure among its employees.

As of June 30, 2021, most of the Company’s existing customers had resumed projects that were affected by the March 2020 shutdowns. As a result, the Company has increased its employment level of construction personnel as compared to March 31, 2020. Given the uncertainty regarding the spread of this coronavirus, 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.

Seasonality: Fluctuation of Results

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

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

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Three and Nine Months Ended June 30, 2021, and 2020 Overview

The following is an overview of results from operations for the three and nine months ended June 30, 2021, and 2020:

	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended
	June 30,		June 30,		June 30,		June 30,
	2021		2020		2021		2020
Revenue	$	25,285,951	$	30,762,725	$	82,901,159	$	74,678,432
Cost of revenues		22,580,340		27,936,548		75,478,966		69,425,044
Gross profit		2,705,611		2,826,177		7,422,193		5,253,388
Selling and administrative expenses		3,207,864		2,532,141		10,627,607		7,473,422
(Loss) income from operations		(502,253)		294,036		(3,205,414)		(2,220,034)
Other nonoperating income (expense)
Interest income		108		83		151,877		53,332
Paycheck Protection Program loan forgiveness		9,799,100		—		9,799,100		—
Other nonoperating expense		(35,833)		(53,793)		(121,343)		(130,472)
Interest expense		(136,995)		(101,335)		(356,505)		(400,197)
Gain on sale of equipment		135,269		43,296		627,580		563,062
		9,761,649		(111,749)		10,100,709		85,725
Income (loss) before income taxes		9,259,396		182,287		6,895,295		(2,134,309)
Income tax (benefit) expense		(53,844)		200,242		(458,812)		(347,629)
Net income (loss)		9,313,240		(17,955)		7,354,107		(1,786,680)
Dividends on preferred stock		77,250		77,250		231,750		231,750
Income (loss) available to common shareholders	$	9,235,990	$	(95,205)	$	7,122,357	$	(2,018,430)
Weighted average shares outstanding-basic		13,621,406		13,627,293		13,621,406		13,844,340
Weighted average shares-diluted		17,089,722		13,627,293		17,089,722		13,844,340
Earnings (loss) per share available to common shareholders	$	0.678	$	(0.007)	$	0.523	$	(0.146)
Earnings (loss) per share-diluted available to common shareholders	$	0.540	$	(0.007)	$	0.417	$	(0.146)

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Results of Operations for the Three and Nine Months Ended June 30, 2021, Compared to the Three and Nine Months Ended June 30, 2020

Revenues. A table comparing the Company’s revenues for the three and nine months ended June 30, 2021, compared to the three and nine months ended June 30, 2020, is below:

	Three Months Ended		Three Months Ended
	June 30, 2021		June 30, 2020		Change		Pct.
Gas & Water Distribution	$	11,780,986	$	4,867,185	$	6,913,801	142.0	%
Gas & Petroleum Transmission		1,967,647		12,936,299		(10,968,652)	-84.8	%
Electrical, Mechanical, & General		11,537,318		12,959,241		(1,421,923)	-11.0	%
Total	$	25,285,951	$	30,762,725	$	(5,476,774)	-17.8	%

	Nine Months Ended		Nine Months Ended
	June 30, 2021		June 30, 2020		Change		Pct.
Gas & Water Distribution	$	27,517,763	$	17,106,336	$	10,411,427	60.9	%
Gas & Petroleum Transmission		14,343,251		21,180,119		(6,836,868)	-32.3	%
Electrical, Mechanical, & General		41,040,145		36,391,977		4,648,168	12.8	%
Total	$	82,901,159	$	74,678,432	$	8,222,727	11.0	%

Total revenues decreased by $5.5 million for the three months ended June 30, 2021, and increased by $8.2 million for the nine months ended June 30, 2021, as compared to the same periods in 2020.

Gas & Water Distribution revenues totaled $11.8 million for the three months ended June 30, 2021, a $6.9 million increase from $4.9 million for the three months ended June 30, 2020. Gas & Water Distribution revenues totaled $27.5 million for the nine months ended June 30, 2021, a $10.4 million increase from $17.1 million for the nine months ended June 30, 2020. The revenue increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of West Virginia Pipeline. West Virginia Pipeline, acquired on December 31, 2020, contributed revenues of $2.0 million and $3.2 million, respectively, for the three and nine months ended June 30, 2021.

Gas & Petroleum Transmission revenues totaled $2.0 million for the three months ended June 30, 2021, a $10.9 million decrease from $12.9 million for the three months ended June 30, 2020. Gas & Petroleum Transmission revenues totaled $14.3 million for the nine months ended June 30, 2021, a $6.9 million decrease from $21.2 million for the nine months ended June 30, 2020. The revenue decreases were primarily related to fewer project bid opportunities combined with greater competition from non-union and larger union bidders during the three and nine months ended June 30, 2021. The Company was awarded smaller transmission projects that were delayed by the customer until the Company’s fourth quarter of fiscal year 2021.

Electrical, Mechanical, & General services and construction revenues totaled $11.5 million for the three months ended June 30, 2021, a $1.5 million decrease from $13.0 million for the three months ended June 30, 2020. Electrical, Mechanical, & General services and construction revenues totaled $41.0 million for the nine months ended June 30, 2021, a $4.6 million increase from $36.4 million for the nine months ended June 30, 2020. The revenue decrease for the three months ended June 30, 2021, as compared to 2020, was due to a large automotive project, which started in fiscal year 2020, that was nearing completion in the third quarter of fiscal year 2021 thereby reducing revenue. The revenue increase for the nine months ended June 30, 2021, as compared to 2020 was primarily related to significant increases in electrical and mechanical work, partially offset by a decline in HVAC work, during the first and second fiscal year quarters in 2021 as compared to 2020.

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Cost of Revenues. A table comparing the Company’s costs of revenues for the three and nine months ended June 30, 2021, compared to the three and nine months ended June 30, 2020, is below:

	Three Months Ended		Three Months Ended
	June 30, 2021		June 30, 2020		Change		Pct.
Gas & Water Distribution	$	9,345,937	$	3,870,974	$	5,474,963	141.4	%
Gas & Petroleum Transmission		1,692,010		10,372,985		(8,680,975)	-83.7	%
Electrical, Mechanical, & General		10,546,397		12,455,899		(1,909,502)	-15.3	%
Unallocated Shop Expenses		995,996		1,236,690		(240,694)	-19.5	%
	$	22,580,340	$	27,936,548	$	(5,356,208)	-19.2	%

	Nine Months Ended		Nine Months Ended
	June 30, 2021		June 30, 2020		Change		Pct.
Gas & Water Distribution	$	22,612,678	$	14,433,245	$	8,179,433	56.7	%
Gas & Petroleum Transmission		11,153,690		16,526,653		(5,372,963)	-32.5	%
Electrical, Mechanical, & General		38,021,128		34,564,453		3,456,675	10.0	%
Unallocated Shop Expenses		3,691,470		3,900,693		(209,223)	-5.4	%
	$	75,478,966	$	69,425,044	$	6,053,922	8.7	%

Total cost of revenues decreased by $5.4 million for the three months ended June 30, 2021, and increased by $6.1 million for the nine months ended June 30, 2021, as compared to the same periods in 2020.

Gas & Water Distribution cost of revenues totaled $9.3 million for the three months ended June 30, 2021, a $5.4 million increase from $3.9 million for the three months ended June 30, 2020. Gas & Water Distribution cost of revenues totaled $22.6 million for the nine months ended June 30, 2021, an $8.2 million increase from $14.4 million for the nine months ended June 30, 2020. The cost of revenues increases were primarily related to the Company’s overall commitment to growing this line of business through adding new distribution crews and the acquisition of West Virginia Pipeline. West Virginia Pipeline, acquired on December 31, 2020, incurred cost of revenues of $1.1 million and $1.9 million, respectively, for the three and nine months ended June 30, 2021.

Gas & Petroleum Transmission cost of revenues totaled $1.7 million for the three months ended June 30, 2021, an $8.7 million decrease from $10.4 million for the three months ended June 30, 2020. Gas & Petroleum Transmission cost of revenues totaled $11.2 million for the nine months ended June 30, 2021, a $5.3 million decrease from $16.5 million for the nine months ended June 30, 2020. The cost of revenues decreases were primarily related to fewer project bid opportunities combined with greater competition from non-union and larger union bidders during the three and nine months ended June 30, 2021.

Electrical, Mechanical, & General services and construction cost of revenues totaled $10.5 million for the three months ended June 30, 2021, a $2.0 million decrease from $12.5 million for the three months ended June 30, 2020. Electrical, Mechanical, & General services & construction cost of revenues totaled $38.0 million for the nine months ended June 30, 2021, a $3.4 million increase from $34.6 million for the nine months ended June 30, 2020. The cost of revenues decrease for the three months ended June 30, 2021, as compared to 2020, was due to a large automotive project, which started in fiscal year 2020, that was nearing completion in the third quarter of fiscal year 2021 thereby reducing revenue. The cost of revenues increase for the nine months ended June 30, 2021, as compared to 2020 was primarily related to significant increases in electrical and mechanical work, partially offset by a decline in HVAC work, during the first and second fiscal year quarters in 2021 as compared to 2020.

Unallocated shop expenses totaled $996,000 for the three months ended June 30, 2021, a $241,000 decrease from $1.2 million for the three months ended June 30, 2020.  Unallocated shop expenses totaled $3.7 million for the nine months ended June 30, 2021, a $209,000 decrease from $3.9 million for the nine months ended June 30, 2020. The decreases in unallocated shop expenses were due to increased internal equipment charges to projects for the three and nine months ended June 30, 2021, as compared to 2020. The changes in these expenses for the three and nine months ended June 30, 2021, compared to 2020 directly resulted in the unallocated shop expense gross profit changes discussed below.

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Gross Profit. A table comparing the Company’s gross profit for the three and nine months ended June 30, 2021, compared to the three and nine months ended June 30, 2020, is below:

	Three Months Ended			Three Months Ended
	June 30, 2021			June 30, 2020			Change		Pct.
Gas & Water Distribution	$	2,435,049		$	996,211		$	1,438,838	144.4	%
Gas & Petroleum Transmission		275,637			2,563,314			(2,287,677)	-89.2	%
Electrical, Mechanical, & General		990,921			503,342			487,579	96.9	%
Unallocated Shop Expenses		(995,996)			(1,236,690)			240,694	-19.5	%
	$	2,705,611		$	2,826,177		$	(120,566)	-4.3	%
Gross Profit Percentage		10.7	%		9.2	%

	Nine Months Ended			Nine Months Ended
	June 30, 2021			June 30, 2020			Change		Pct.
Gas & Water Distribution	$	4,905,085		$	2,673,091		$	2,231,994	83.5	%
Gas & Petroleum Transmission		3,189,561			4,653,466			(1,463,905)	-31.5	%
Electrical, Mechanical, & General		3,019,017			1,827,524			1,191,493	65.2	%
Unallocated Shop Expenses		(3,691,470)			(3,900,693)			209,223	-5.4	%
	$	7,422,193		$	5,253,388		$	2,168,805	41.3	%
Gross Profit Percentage		9.0	%		7.0	%

Total gross profit decreased by $121,000 and increased by $2.2 million, respectively, for the three and nine months ended June 30, 2021, as compared to the same periods in 2020.

Gas & Water Distribution gross profit totaled $2.4 million for the three months ended June 30, 2021, a $1.4 million increase from $996,000 for the three months ended June 30, 2020. Gas & Water Distribution gross profit totaled $4.9 million for the nine months ended June 30, 2021, a $2.2 million increase from $2.7 million for the nine months ended June 30, 2020. 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 the acquisition of West Virginia Pipeline. West Virginia Pipeline, acquired on December 31, 2020, contributed gross profit of $900,000 and $1.3 million, respectively, for the three and nine months ended June 30, 2021.

Gas & Petroleum Transmission gross profit totaled $275,000 for the three months ended June 30, 2021, a $2.3 million decrease from $2.6 million for the three months ended June 30, 2020. Gas & Petroleum Transmission gross profit totaled $3.2 million for the nine months ended June 30, 2021, a $1.5 million decrease from $4.7 million for the nine months ended June 30, 2020. The gross profit decreases were primarily related to fewer project bid opportunities combined with greater competition from larger union and non-union bidders during the three and nine months ended June 30, 2021. The Company was awarded smaller transmission projects that were delayed by the customer until the Company’s fourth quarter of fiscal year 2021.

Electrical, Mechanical, & General services and construction gross profit totaled $991,000 for the three months ended June 30, 2021, a $488,000 increase from $503,000 for the three months ended June 30, 2020. Electrical, Mechanical, & General services and construction gross profit totaled $3.0 million for the nine months ended June 30, 2021, a $1.2 million increase from $1.8 million for the nine months ended June 30, 2020. More efficient production accounted for the increased gross profit for the three months ended June 30, 2021, as compared to 2020. The gross profit increases for the nine months ended June 30, 2021, as compared to 2020 were primarily related to a significant increase in electrical and mechanical work performed along with more efficient production.

Unallocated shop expenses gross profit totaled ($996,000) for the three months ended June 30, 2021, a $241,000 increase from ($1.2 million) for the three months ended June 30, 2020.  Unallocated shop expenses gross profit totaled ($3.7 million) for the nine months ended June 30, 2021, a $209,000 increase from ($3.9 million) for the nine months ended June 30, 2020. The gross profit increases were due to increased internal equipment charges to projects for the three and nine months ended June 30, 2021, as compared to 2020.

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Selling and administrative expenses. Total selling and administrative expenses increased by $676,000 to $3.2 million for the three months ended June 30, 2021, from $2.5 million for the same period in 2020. Approximately $586,000 of the selling and administrative expense increase for the three months ended June 30, 2021, was from the operations of the new subsidiaries, West Virginia Pipeline and SQP.

Total selling and administrative expenses increased by $3.2 million to $10.6 million for the nine months ended June 30, 2021, from $7.4 million for the same period in 2020. The Company incurred higher labor costs for the nine months ended June 30, 2021, compared to the same period in 2020 primarily due to the Company investing approximately $767,000 in personnel to increase management, estimating and customer base in the transmission division, developing a quality assurance/quality control program, expanding its mechanical services, and improving production tracking. Additionally, incentive compensation increased by $481,000 for the nine months ended June 30, 2021, compared the same period in 2020. The overall increase in selling and administrative expense, including an increase in incentive compensation, related to an initiative launched by the Company to increase and incentivize operational talent within the Company and increase revenue and profit margins.

A one-time $651,000 Qualified Non-Elective Contribution (“QNEC”) adjustment to the Company’s 401(k) plan (“Plan”) attributable to the 2021 Plan year increased selling and administrative costs for the nine months ended June 30, 2021, as compared to 2020. The reason for the QNEC adjustment was to correct Plan participant’s balances due to a third-party administrator’s actions.

Approximately $784,000 of the selling and administrative expense increase for the nine months ended June 30, 2021, was from the operations of the new subsidiaries, West Virginia Pipeline and SQP along with approximately $150,000 in acquisition costs related to WV Pipeline.

Interest Expense. Interest expense increased by $36,000 to $137,000 for the three months ended June 30, 2021, from $101,000 for the same period in 2020. The increase in interest expense was primarily due to the financing of the West Virginia Pipeline acquisition.

Interest expense decreased by $43,000 to $357,000 for the nine months ended June 30, 2021, from $400,000 for the same period in 2020. The decrease in interest expense was primarily due to the timing of debt repayment and debt proceeds received in fiscal year 2021 compared to 2020.

Other income (expenses) Other income totaled $9.8 million for the three months ended June 30, 2021, as compared to other expenses of ($112,000) for the three months ended June 30, 2020. Other income totaled $10.1 million for the nine months ended June 30, 2021, compared to other income of $86,000 for the nine months ended June 30, 2020. The increase in other income was primarily related to PPP loan debt forgiveness recognized during the three and nine months ended June 30, 2021.

Net income (loss). Income before income taxes was $9.3 million for the three months ended June 30, 2021, compared to loss before income taxes of ($18,000) for the same period in 2020. Income before income taxes was $7.4 million for the nine months ended June 30, 2021, compared to loss before income taxes of ($1.8 million) for the same period in 2020. The income (loss) before income taxes for the respective periods were due to the items mentioned above.

Income tax benefit for the three months ended June 30, 2021, was ($54,000) compared to income tax expense of $200,000 for the same period in 2020. Income tax benefit for the nine months ended June 30, 2021, was ($459,000) compared to income tax benefit of ($348,000) for the same period in 2020.

The effective income tax rate for the three months ended June 30, 2021, was (0.6%), as compared to 109.8% for the same period in 2020. The effective income tax rate for the nine months ended June 30, 2021, was (6.7%), as compared to 16.3% for the same period in 2020. Effective income tax rates are estimates and may vary from period to period due to changes in the amount of taxable income and non-deductible expenses.

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.

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Per diem paid to employees on construction projects and entertainment expenses are only partially deductible from taxable income and can have a significant impact on the effective tax rate. For the nine months ended June 30, 2021, the non-deductible portion of per diem and entertainment expenses resulted in an approximate $402,000 increase in taxable income as compared to $312,000 for the same period in 2020.

Dividends on preferred stock for the three and nine months ended June 30, 2021, and 2020 were $77,250 and $231,750, respectively.

Net income available to common shareholders for the three months ended June 30, 2021, was $9.2 million compared to net loss available to common shareholders of ($95,000) for the same period in 2020. Net income available to common shareholders for the nine months ended June 30, 2021, was $7.1 million compared to net loss available to common shareholders of ($2.0 million) for the same period in 2020.The main reason for the increase in net income available to common shareholders was PPP loan forgiveness. Without forgiveness the Company would have had an operational loss.

Comparison of Financial Condition at June 30, 2021, and September 30, 2020

The Company had total assets of $57.1 million at June 30, 2021, a decrease of $1.1 million from the prior fiscal year end balance of $58.2 million.

Cash and cash equivalents totaled $2.3 million at June 30, 2021, a decrease of $8.9 million from the prior fiscal year end balance of $11.2 million. The decrease was primarily due to a $7.4 million cash investment in property and equipment in addition to a net $1.8 million negative cash flow from operating activities.

Accounts receivable, which totaled $14.3 million at June 30, 2021, decreased by $3.9 million from the prior fiscal year end balance of $18.2 million. The decrease was primarily due to the collection of receivables from September 30, 2020, partially offset by the timing of current year billings.

Retainages receivable totaled $1.0 million at June 30, 2021, a $1.5 million decrease from the prior fiscal year end balance of $2.5 million. The decrease was primarily due to the collection of retainages receivable from September 30, 2020, and fewer current year projects that require retainages to be withheld.

The Company had property, plant and equipment of $22.5 million at June 30, 2021, an increase of $6.1 million from the prior fiscal year end balance of $16.4 million. The increase was due to $9.6 million in property, plant and equipment acquisitions, of which $1.9 million related to the acquisition of West Virginia Pipeline, partially offset by depreciation of $3.4 million.

Goodwill and acquired intangible assets resulting from the West Virginia Pipeline and Revolt Energy acquisitions totaled $4.6 million at June 30, 2021, as compared to no goodwill and acquired intangible assets at the prior fiscal year end.

Other receivables totaled $1.1 million at June 30, 2021, a $1.1 million increase from the prior fiscal year end balance of $9,000. The increase was primarily due to $671,000 in captive insurance refunds receivable and $348,000 in insurance premium refunds receivable.

Prepaid expenses and other totaled $4.1 million at June 30, 2021, an increase of $776,000 from the prior fiscal year end balance of $3.3 million. The increase was primarily due to prepaid insurance premiums, net of accruals, that were financed during the nine months ended June 30, 2021.

Contract assets totaled $7.2 million at June 30, 2021, an increase of $674,000 from the prior fiscal year end balance of $6.5 million. The increase was due to a difference in the timing of project billings at June 30, 2021, compared to September 30, 2020.

The Company had total liabilities of $24.1 million at June 30, 2021, a decrease of $8.2 million from the prior fiscal year end balance of $32.3 million.

Long-term debt totaled $10.4 million at June 30, 2021, a decrease of $4.9 million from the prior fiscal year end balance of $15.3 million. The decrease in long-term debt was primarily due to the $9.8 million forgiveness of PPP loans and $2.0 million in debt repayments, partially offset by $6.5 million in notes payable related to the West Virginia Pipeline acquisition and $349,000 in new equipment debt.

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Accounts payable totaled $3.1 million at June 30, 2021, a decrease of $2.1 million from the prior fiscal year end balance of $5.2 million. The decrease was due to the timing of accounts payable payments as compared to September 30, 2020.

Accrued expenses and other current liabilities totaled $2.9 million at June 30, 2021, a decrease of $1.3 million from the prior fiscal year end balance of $4.2 million. The decrease was due to the timing of accrued expense payments as compared to September 30, 2020.

Contract liabilities totaled $3.6 million at June 30, 2021, a decrease of $1.3 million from the prior fiscal year end total of $4.9 million. The decrease was due to a difference in the timing of project billings at June 30, 2021 compared to at September 30, 2020.

Deferred tax liabilities totaled $1.7 million at June 30, 2021, a decrease of $545,000 from the prior fiscal year end balance of $2.3 million. The decrease was primarily related to the net operating loss carry forward for the nine months ended June 30, 2021.

Lines of credit and short-term borrowings totaled $2.3 million at June 30, 2021, an increase of $1.8 million from the prior fiscal year end balance of $510,000. The increase was primarily due to net line of credit borrowings of $1.0 million and a $836,000 increase in insurance premiums financed, net of repayments.

Shareholders’ equity was $32.9 million at June 30, 2021, an increase of $7.1 million from the prior fiscal year end balance of $25.8 million. This increase was due to the net income available to common shareholders of $7.1 million for the nine months ended June 30, 2021.

Liquidity and Capital Resources

Indebtedness

On December 16, 2014, the Company’s Nitro subsidiary entered into a 20-year $1.2 million loan agreement with First Bank of Charleston, Inc. (West Virginia) to purchase the office building and property it had previously been leasing for $6,300 monthly. The interest rate on this loan agreement is 4.82% with monthly payments of $7,800. The interest rate on this note is subject to change from time to time based on changes in The U.S. Treasury yield, adjusted to a constant maturity of three years as published by the Federal Reserve weekly. As of June 30, 2021, the Company had made principal payments of $268,000. The loan is collateralized by the building purchased under this agreement.

On September 16, 2015, the Company entered into a $2.5 million Non-Revolving Note agreement with United Bank, Inc. This six-year agreement gave the Company access to a $2.5 million line of credit (“Equipment Line of Credit”), specifically for the purchase of equipment, for the period of one year with an interest rate of 5.0%. After the first year, all borrowings against the Equipment Line of Credit were converted to a five-year term note agreement with an interest rate of 5.0%. As of June 30, 2021, the Company had borrowed $2.46 million against this note and made principal payments of $2.4 million. The loan is collateralized by the equipment purchased under this agreement.

On November 13, 2015, the Company entered into a 10-year $1.1 million loan agreement with United Bank, Inc. to purchase the fabrication shop and property Nitro had previously been leasing for $12,900 each month. The interest rate on the new loan agreement is 4.25% with monthly payments of $11,602. As of June 30, 2021, the Company had made principal payments of $540,000. The loan is collateralized by the building and property purchased under this agreement.

On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase of equipment, for a period of three months with an interest rate of 4.99%.  After three months, all borrowings against the Equipment Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99%. As of June 30, 2021, the Company had borrowed $5.0 million against this note and made principal payments of $3.8 million. The loan is collateralized by the equipment purchased under this agreement.

On December 31, 2020, West Virginia Pipeline Acquisition Company, later renamed West Virginia Pipeline, Inc., entered into a $3.0 million sellers’ note agreement with David and Daniel Bolton for the remaining purchase price of West Virginia Pipeline, Inc. As part of the $6.5 million acquisition, the acquisition company paid $3.5 million in cash in addition to the note. The unsecured five-year term note requires equal annual payments with a fixed interest rate of 3.25%. As of June 30, 2021, the Company has made interest payments of $51,000 and plans to make the first installment payment in December 2021.

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On January 5, 2021, the Company entered into a $3.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement gave the Company access to a $3.0 million line of credit (“Equipment Line of Credit 2021”), specifically for the purchase of equipment, for a period of twelve months with a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal. After twelve months, all borrowings against the Equipment Line of Credit 2021 will be converted to a four-year term note agreement with a variable interest rate initially established at 4.25%. The loan will be collateralized by the equipment purchased under this agreement. As of June 30, 2021, the Company had not borrowed against this line of credit.

On April 2, 2021, the Company entered into a $3.5 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement repaid the outstanding $3.5 million line of credit that was used for the down payment on the West Virginia Pipeline acquisition. This loan has a variable interest rate initially established at 4.25% as based on the Prime Rate as published by The Wall Street Journal. The loan is collateralized by the Company’s equipment and receivables. As of June 30, 2021, the Company had made principal payments of $158,000.

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 Paycheck Protection Program (“PPP”). On April 15, 2020, Energy Services of America Corporation and subsidiaries C.J. Hughes Construction Company, Contractors Rental Corporation and Nitro Construction Services, Inc. entered into separate Paycheck Protection Program notes effective April 7, 2020, with United Bank, Inc. as the lender (“Lender”) in an aggregate principal amount of $13,139,100 pursuant to the PPP (collectively, the “PPP Loan”). 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 Loan funds 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.

The SBA has announced, in consultation with the Department of the Treasury, that it will review all loans in excess of $2 million, following the lender’s submission of the borrower’s loan forgiveness application. The SBA will be reviewing a borrower’s required certification that current economic uncertainty at the time of the loan made the PPP loan request necessary to support the ongoing operations of the applicant. Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. The SBA has noted it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to the SBA, upon request, the basis for its certification.

On June 16, 2021, the Company received notice that the SBA had granted forgiveness and repaid $9.8 million of the PPP borrowings to the Lender. The forgiveness was recorded as “other nonoperating income” for the three and nine months ended June 30, 2021. The forgiveness application for the remaining $40,000 had been resubmitted to the Lender and SBA as of June 30, 2021, and forgiveness notice was received in July 2021.

Borrowers must retain PPP documentation for at least 6 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 still 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 return of the PPP Loan could negatively impact the Company’s business, financial condition and results of operations and prospects.

Operating Line of Credit

On August 3, 2021, the Company received a one-year extension on its line of credit (“Operating Line of credit (2020)”) effective June 28, 2021. The $15.0 million revolving line of credit has a $12.5 million component and a $2.5 million component, each with separate borrowing requirements. 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 $6.4 million as of June 30, 2021. The Company had $1.0 million in borrowings on the line of credit, leaving $5.4 million available on the line of credit as of June 30, 2021. The interest rate at June 30, 2021, was 4.99%. Based on the borrowing base calculation, the Company was able to borrow up to $11.1 million as of September 30, 2020. The Company had no borrowings on the line of credit, leaving $11.1 million available on the line of credit as of September 30, 2020. The interest rate at September 30, 2020, was 4.99%.

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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:

1. Minimum tangible net worth of $19.0 million to be measured quarterly,

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

3. Minimum current ratio of 1.50x to be measured quarterly,

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

5. Full review of accounts receivable aging report and work in progress. The results of the review shall be satisfactory to the lender in its sole and unfettered discretion.

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

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

2. Minimum tangible net worth of $21.0 million to be measured quarterly.

The Company believes it was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2020) at June 30, 2021.

Off-Balance Sheet Arrangements

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 in our balance sheets. Though for the most part not material in nature, some of these are:

Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years. Among other things, lessees are required to recognize the following for all leases (except for short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. It is the Company’s preference to acquire equipment needed for long-term use through purchase, by cash or finance. For equipment needed on a short-term basis, the Company will enter into short-term rental agreements with the equipment provider where the agreement is cancellable at any time. The adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.

The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the Consolidated Income Statement, was $2.5 million and $2.1 million for the nine months ended June 30, 2021, and 2020, 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 and vendors on various customer projects. At June 30, 2021, the Company did not have any letters of credit outstanding.

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Performance Bonds

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

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. 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, 2021, the Company had $12.1 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 nine months ended June 30, 2021, and 2020:

	Nine Months Ended
Revenue	June 30, 2021		June 30, 2020
TransCanada	*		19.1	%
All other	100.0	%	80.9	%
Total	100.0	%	100.0	%

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

	At
Accounts receivable net of retention	June 30, 2021		June 30, 2020
NIPSCO	11.5	%	*
TransCanada	*		26.9	%
Shimizu North American	*		17.1	%
Stenco Construction	*		13.1	%
All other	88.5	%	42.9	%
Total	100.0	%	100.0	%

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

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Litigation

In February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction project. The Company is seeking $10.0 million in the lawsuit, none of which has been recognized in the Company’s financial statements. The Company expects the case to go to trial in October 2021 barring a mediation settlement between the parties. Other than described above, at June 30, 2021, 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 June 30, 2021, 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. 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, holds the same position with Premier Financial Bancorp Inc. Mr. Neal Scaggs is a director of Energy Services and holds the same position with Premier Financial Bancorp, Inc. Mr. Douglas Reynolds is the president and a director of Energy Services and a director of Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of June 30, 2021, we have paid approximately $268,000 in principal and approximately $340,000 in interest since the beginning of the loan.

On December 31, 2020, the Company entered into a 5-year $3.0 million unsecured loan agreement with David Bolton and Daniel Bolton to complete the asset purchase of West Virginia Pipeline, Inc. The agreement allows for annual payments of at least $500,000 due on each anniversary date of the purchase with final payment due by December 31, 2026. The interest rate on the loan agreement is 3.25%. As part of the purchase agreement, David Bolton and Daniel Bolton agreed to continue in their roles as president and vice president, respectively, for at least one year. As of June 30, 2021, the Company had paid approximately $49,000 in interest and no principal payments made since the beginning of the loan.

Other than mentioned above, there were no new material related party transactions entered into during the three and nine months ended June 30, 2021.

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

Inflation

Due to relatively low levels of inflation during the three and nine months ended June 30, 2021, and 2020, inflation did not have a significant effect on our results.

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Critical Accounting Policies

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

Revenue Recognition

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

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

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

Revenue Recognition:

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

1. Identify the contract,

2. Identify performance obligations,

3. Determine the transaction price,

4. Allocate the transaction price

5. Recognize revenue.

Identify the Contract

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

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

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

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

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

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

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

Identify Performance Obligations

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

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

● A good or service (or a bundle of goods or services) that is distinct;

● A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

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

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

● The entity provides a significant service of integrating the goods or services with other goods or services promised in the contract into a bundle of goods or services that represent the combined output or outputs for which the customer has contracted. In other words, the entity is using the goods or services as inputs to produce or deliver the combined output or outputs specified by the customer. Combined output or outputs might include more than one phase, element, or unit.

● One or more of the goods or services significantly modifies or customizes, or are significantly modified or customized by, one or more of the other goods or services promised in the contract.

● The goods or services are highly interdependent or highly interrelated. In other words, each of the goods or services is significantly affected by one or more of the other goods or services in the contract. For example, in some cases, two or more goods or services are significantly affected by each other because the entity would not be able to fulfill its promise by transferring each of the goods or services independently.

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

● Negotiated at the same time with the same customer (or related party) with a single commercial objective in mind;

● The consideration to be paid for one contract is dependent on another contract;

● The promised goods and services in the contracts are a single performance obligation in accordance with the guidance.

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

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

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Determine Transaction Price

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

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

The following are examples of variable considerations within a contract:

● Claims and pending change orders;

● Unpriced change orders;

● Incentive and penalty provisions within the contract;

● Shared savings;

● Price concessions;

● Liquidating damages; and

● Unit price contracts with variable consideration.

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

Allocate Transaction Price

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

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

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

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

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

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

● The amount of consideration is highly susceptible to factors outside the entity’s influence,

● The uncertainty is not expected to be resolved for a long period of time,

● The entity’s experience with similar types of contracts is limited,

● The entity has a practice of offering a broad range of price concessions or changing the payment terms frequently; and

● The contract has a broad range of possible consideration amounts.

Recognize Revenue

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

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

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

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

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

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

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Contracts may require the Company to warranty that work is performed in accordance with the contract; however, the warranty is not priced separately, and the Company does not offer customers an option to purchase a warranty. As of June 30, 2021, the Company does not have a material amount of costs expensed that would otherwise be capitalized and amortized.

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

● the completeness and accuracy of the original bid;

● costs associated with scope changes;

● changes in costs of labor and/or materials;

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

● subcontractor performance issues;

● changes in productivity expectations;

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

● changes from original design on design-build projects;

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

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

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

● the customer’s ability to properly administer the contract.

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

Contract Assets:

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

Contract Liabilities:

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

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Income Taxes

The Company and all subsidiaries file a consolidated federal and various state income tax returns on a fiscal year basis. With few exceptions, the Company is no longer subject to U.S. federal, state, or local income tax examinations for years ended prior to September 30, 2017.

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

U.S. GAAP also prescribes a comprehensive model for how companies should recognize, measure, present and disclose in their financial statements uncertain tax positions taken or to be taken on a tax return. This evaluation is a two-step process. First, the recognition process determines if it is more likely than not that a tax position will be sustained based on the merits of the tax position upon examination by the appropriate taxing authority. Second, a measurement process is calculated to determine the amount of benefit/expense to recognize in the financial statements if a tax position meets the more likely than not recognition threshold. The tax position is measured at the greatest amount of benefit/expense that is more likely than not of being realized upon ultimate settlement. Any interest and penalty related to the unrecognized tax benefits, as the result of recognition of tax obligations resulting from uncertain tax positions, are included in the provision for income taxes. The Company had not recognized any uncertain tax positions at June 30, 2021.

Claims

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

Self-Insurance

The Company has its workers’ compensation, general liability and auto insurance through a captive insurance company. While the Company believes that this arrangement has been very beneficial in reducing and stabilizing insurance costs; the Company does have to maintain a surety deposit to guarantee payments of premiums. That account had a balance of $2.0 million as of June 30, 2021. Should the captive insurance company experience severe losses over an extended period, it could have a detrimental effect on the Company.

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

The Company provides an allowance for doubtful accounts when collection of an account is considered doubtful. Inherent in the assessment of the allowance for doubtful accounts are certain judgments and estimates relating to, among others, our customers’ access to capital, our customers’ willingness or ability to pay, general economic conditions and the ongoing relationship with the customers. While most of our customers are large well capitalized companies, should they experience material changes in their revenues and cash flows or incur other difficulties and not be able to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves. At June 30, 2021, the management review deemed that the allowance for doubtful accounts was adequate.

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Operating Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Among other things, lessees are required to recognize the following for all leases (except for short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. It is the Company’s preference to acquire equipment needed for long-term use through purchase, by cash or finance. For equipment needed on a short-term basis, the Company will enter into short-term rental agreements with the equipment provider where the agreement is cancellable at any time. The adoption of ASU 2016-02 had an immaterial impact, if any, on its consolidated financial statements.

The Company rents equipment for use on construction projects with rental agreements being week to week or month to month. Rental expense can vary by fiscal year due to equipment requirements on construction projects and the availability of Company owned equipment. Rental expense, which is included in cost of goods sold on the Consolidated Income Statement, was $2.5 million and $2.1 million for the nine months ended June 30, 2021, and 2020, respectively.

Goodwill and other intangible assets

Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset. The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis, including the identification of our reporting units, identification and allocation of the assets and liabilities to each of our reporting units and determination of fair value. In estimating the fair value of a reporting unit for the purposes of our annual or periodic impairment analyses, we make estimates and significant judgments about the future cash flows of that reporting unit. Our cash flow forecasts are based on assumptions that represent the highest and best use for our reporting units. Changes in judgment on these assumptions and estimates could result in further goodwill impairment charges.

New Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”. ASU 2017-04 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The update was issued to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company has adopted ASU 2017-04 and it did not have a material impact on its financial statements or disclosure.

Subsequent Events

On July 1, 2021, the Company submitted equipment purchase invoices to United Bank in order to receive $3.0 million in loan proceeds from the Equipment Line of Credit 2021 agreement signed on January 5, 2021.

On July 7, 2021, the Company received notification from United Bank that the remaining $40,000 in PPP loans borrowings were forgiven by the SBA.

On August 3, 2021, the Company received a one-year extension on its line of credit (“Operating Line of credit (2020)”) effective June 28, 2021.

Management has evaluated subsequent events through August 16, 2021, the date which the financial statements were available for issue. 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.

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Outlook

The following statements are based on current expectations. These statements are forward looking, and actual results may differ materially.

As a contractor providing electrical, mechanical, HVAC and underground piping installation and maintenance services to customers in the petroleum, natural gas, public utilities and power industries, the Company and its subsidiaries are considered an “Essential Business” in the various states in which it operates. While it is unknown how long the COVID-19 virus will last and what the complete financial effect will be to the Company, the coronavirus outbreak is expected to have a significant effect on the Company’s 2021 operating results. As of June 30, 2021, many of the Company’s existing customers had resumed projects that were affected by the March 2020 shutdowns. As a result, the Company has increased its employment level of construction personnel as compared to June 30, 2020. Given the uncertainty regarding the spread of this coronavirus, 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.

Currently, the Company is receiving bid opportunities from existing and potentially new customers; however, gas transmission bid opportunities have been fewer and are being released later than expected. The Company is experiencing greater competition due to both the number of non-union and larger union competitors bidding on and driving down pricing on smaller transmission projects. The Company is working to increase the number of transmission customers in which it has master services agreements in order to increase bidding opportunities. The Company is experiencing a greater demand for its gas and water distribution services. The Company’s backlog at June 30, 2021, was $73.1 million, with $13.0 million in contracts awarded subsequent to June 30, 2021. While adding additional projects appears likely, no assurances can be given that the Company will be successful in bidding on projects that become available. Moreover, even if the Company obtains contracts, there can be no guarantee that the projects will go forward.

ITEM 3. Quantitative and Quantitative Disclosures About Market Risk

Not required for a smaller reporting company.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that Energy Services of America Corporation files or submits under the Securities Exchange Act of 1934, is (1) recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in Energy Services of America Corporation’s internal control over financial reporting during Energy Services of America Corporation’s third quarter of fiscal year 2021 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

In February 2018, the Company filed a lawsuit against a former customer related to a dispute over changes on a pipeline construction project. The Company is seeking $10.0 million in the lawsuit, none of which has been recognized in the Company’s financial statements. The Company expects the case to go to trial in October 2021 barring a mediation settlement between the parties. Other than described above, at June 30, 2021, 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 June 30, 2021, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A. Risk Factors

Please see the information disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on January 4, 2021. There have been no material changes to the risk factors since the filing of the Annual Report on Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) There have been no unregistered sales of equity securities during the period covered by the report.

(b) None.

(c) There were no repurchases of Energy Services of America Corporation’s shares of its common stock during the three months ended June 30, 2021.

ITEM 6. Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

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

ENERGY SERVICES OF AMERICA CORPORATION

Date: August 16, 2021	By:	/s/ Douglas V. Reynolds
		Douglas V. Reynolds
		Chief Executive Officer
Date: August 16, 2021	By:	/s/ Charles P. Crimmel
		Charles P. Crimmel
		Chief Financial Officer

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