Energy Services of America CORP - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Energy Services of America CORP	tm2015296d1_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Energy Services of America CORP	tm2015296d1_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Energy Services of America CORP	tm2015296d1_ex31-1.htm
EX-10.2 - EXHIBIT 10.2 - Energy Services of America CORP	tm2015296d1_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - Energy Services of America CORP	tm2015296d1_ex10-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2020

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 3^rd 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 x 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 x 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	x	Smaller reporting company	x
		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 x

As of May 14, 2020, 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		13

Item 3. Quantitative and Qualitative Disclosures About Market Risk		32

Item 4. Controls and Procedures		32

Part II: Other Information

Item 1. Legal Proceedings		32

Item 1A. Risk Factors		32

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 6. Exhibits		34

Signatures		35

Part 1. Financial Information

Item 1. Financial Statements (Unaudited):

Energy Services of America Corporation

Consolidated Balance Sheets

	March 31,			September 30,
Assets	2020			2019
	(Unaudited)
Current assets
Cash and cash equivalents	$	4,050,411		$	4,578,275
Accounts receivable-trade		9,735,920			21,678,622
Allowance for doubtful accounts		(70,310	)		(70,310	)
Retainages receivable		3,025,015			3,521,561
Other receivables		10,408			10,008
Contract assets		3,124,595			6,659,707
Prepaid expenses and other		4,956,339			2,734,974
Total current assets		24,832,378			39,112,837

Property, plant and equipment, at cost		52,262,808			51,268,358
less accumulated depreciation		(35,167,807	)		(34,453,157	)
Total fixed assets		17,095,001			16,815,201

Total assets	$	41,927,379		$	55,928,038

Liabilities and shareholders' equity
Current liabilities
Current maturities of long-term debt	$	2,508,986		$	4,403,573
Lines of credit and short term borrowings		3,539,373			4,025,710
Accounts payable		3,508,937			2,919,618
Accrued expenses and other current liabilities		2,059,634			3,509,373
Contract liabilities		3,035,812			3,455,288
Total current liabilities		14,652,742			18,313,562

Long-term debt, less current maturities		4,253,641			11,024,296
Deferred income taxes payable		1,214,087			1,925,823
Total liabilities		20,120,470			31,263,681

Shareholders' equity

Preferred stock, $.0001 par value
Authorized 1,000,000 shares, 206 issued at March 31, 2020
and September 30, 2019		-			-

Common stock, $.0001 par value
Authorized 50,000,000 shares 14,839,836 issued and 13,657,009
outstanding at March 31, 2020 and 14,839,836 issued and		1,484			1,484
13,924,789 outstanding at September 30, 2019

Treasury stock, 1,182,827 shares at March 31, 2020 and		(118	)		(91	)
915,047 at September 30, 2019

Additional paid in capital		60,700,817			60,938,896
Retained deficit		(38,895,274	)		(36,275,932	)
Total shareholders' equity		21,806,909			24,664,357

Total liabilities and shareholders' equity	$	41,927,379		$	55,928,038

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Income

Unaudited

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	March 31,			March 31,			March 31,			March 31,
	2020			2019			2020			2019
Revenue	$	18,072,400		$	46,955,444		$	43,915,707		$	96,069,583

Cost of revenues		18,001,931			46,364,050			41,488,496			91,643,344

Gross profit		70,469			591,394			2,427,211			4,426,239

Selling and administrative expenses		2,345,509			2,012,282			4,941,281			4,768,673
Loss from operations		(2,275,040	)		(1,420,888	)		(2,514,070	)		(342,434	)

Other income (expense)
Interest income		-			16,501			53,249			58,023
Other nonoperating expense		(42,741	)		(20,581	)		(76,679	)		(53,576	)
Interest expense		(112,017	)		(209,125	)		(298,862	)		(413,474	)
Gain on sale of equipment		223,775			111,817			519,766			137,569
		69,017			(101,388	)		197,474			(271,458	)

Loss before income taxes		(2,206,023	)		(1,522,276	)		(2,316,596	)		(613,892	)

Income tax benefit		(511,412	)		(397,818	)		(547,871	)		(120,818	)

Net loss		(1,694,611	)		(1,124,458	)		(1,768,725	)		(493,074	)

Dividends on preferred stock		77,250			77,250			154,500			154,500


Loss available to common shareholders	$	(1,771,861	)	$	(1,201,708	)	$	(1,923,225	)	$	(647,574	)

Weighted average shares outstanding-basic		13,783,546			14,060,456			13,877,243			14,102,117

Weighted average shares-diluted		13,783,546			14,060,456			13,877,243			14,102,117

Loss per share
available to common shareholders	$	(0.129	)	$	(0.085	)	$	(0.139	)	$	(0.046	)

Loss per share-diluted
available to common shareholders	$	(0.129	)	$	(0.085	)	$	(0.139	)	$	(0.046	)

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Cash Flows

Unaudited

	Six Months Ended			Six Months Ended
	March 31,			March 31,
Cash flows from operating activities:	2020			2019

Net loss	$	(1,768,725	)	$	(493,074	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation expense		2,217,791			2,062,589
Gain on sale of equipment		(519,766	)		(137,569	)
Provision for deferred taxes		(97,483	)		(76,050	)
Decrease in contracts receivable		11,942,702			3,789,321
Decrease in retainage receivable		496,546			216,266
(Increase) decrease in other receivables		(400	)		88,709
Decrease (increase) in contract assets		3,535,112			(8,168,213	)
Increase in prepaid expenses		(2,221,365	)		(1,008,410	)
Increase in accounts payable		589,319			2,479,674
(Decrease) increase in accrued expenses		(2,063,992	)		2,037,763
Decrease increase in contract liabilities		(419,476	)		(736,120	)
Decrease in income taxes payable		-			(545,237	)
Net cash provided by (used in) operating activities		11,690,263			(490,351	)

Cash flows from investing activities:
Investment in property and equipment		(2,008,710	)		(1,811,044	)
Proceeds from sales of property and equipment		657,269			402,909
Net cash used in investing activities		(1,351,441	)		(1,408,135	)


Cash flows from financing activities:
Dividends on common stock		(696,117	)		-
Preferred dividends paid		(154,500	)		(154,500	)
Treasury stock purchased by company		(238,106	)		(204,569	)
Borrowings on lines of credit and short term debt, net of (repayments)		(486,337	)		6,033,594
Principal payments on long term debt		(9,291,626	)		(2,075,128	)
Net cash (used in) provided by financing activities		(10,866,686	)		3,599,397

(Decrease) increase in cash and cash equivalents		(527,864	)		1,700,911
Cash and cash equivalents beginning of period		4,578,275			1,065,550
Cash and cash equivalents end of period	$	4,050,411		$	2,766,461

Supplemental schedule of noncash investing and financing activities:
Purchases of property & equipment under financing agreements	$	626,384		$	29,534
Insurance premiums financed	$	3,063,543		$	3,159,083
Accrued dividends on preferred stock	$	77,250		$	77,250

Supplemental disclosures of cash flows information:

Cash paid during the year for:
Interest	$	298,862		$	413,474
Income taxes	$	139,600		$	630,670

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Changes in Shareholders’ Equity

For the six months ended March 31, 2020 and 2019

	Common Stock					Additional Paid			Retained Earnings			Treasury			Total Shareholders'
	Shares			Amount		in Capital			(deficit)			Stock			Equity

Balance at September 30, 2018		14,194,517		$	1,484	$	61,239,470		$	(37,959,842	)	$	(65	)	$	23,281,047

Net loss		-			-		-			(493,074	)		-			(493,074	)

Accrued preferred dividends		-			-		-			(154,500	)		-			(154,500	)

Treasury stock purchased by company		(171,329	)		-		(204,552	)		-			(17	)		(204,569	)

Balance at March 31, 2019		14,023,188		$	1,484	$	61,034,918		$	(38,607,416	)	$	(82	)	$	22,428,904

Balance at September 30, 2019		13,924,789		$	1,484	$	60,938,896		$	(36,275,932	)	$	(91	)	$	24,664,357

Net loss		-			-		-			(1,768,725	)		-			(1,768,725	)

Accrued preferred dividends		-			-		-			(154,500	)		-			(154,500	)

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		(267,780	)		-		(238,079	)		-			(27	)		(238,106	)

Balance at March 31, 2020		13,657,009		$	1,484	$	60,700,817		$	(38,895,274	)	$	(118	)	$	21,806,909

The Accompanying Notes are an Integral Part of These Financial Statements

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”) was formed in 2006 as a special purpose acquisition corporation, or blank check company, and became an operating entity on August 15, 2008. 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. C.J. Hughes operates primarily in the mid-Atlantic region of the United States. 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, is an electrical and mechanical contractor that provides its services to the power, chemical and automotive industries. Nitro operates primarily in the mid-Atlantic region of the United States. 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 of the C.J. Hughes, Nitro, and Contractors Rental production personnel are union members of various related construction trade unions and are subject to collective bargaining agreements that expire at varying time intervals.

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

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, 2019 and 2018 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 20, 2019. 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 six months ended March 31, 2020 and 2019 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 and its wholly owned subsidiary, C.J. Hughes and its subsidiaries, Nitro, Pinnacle, and Contractors Rental. All significant intercompany accounts and transactions have been eliminated in the consolidation. Unless the context requires otherwise, references to Energy Services include Energy Services and C.J. Hughes and C.J. Hughes’ subsidiaries.

Reclassifications

Certain reclassifications may have been made in prior years’ financial statements to conform to classifications used in the current year.

2. REVENUE RECOGNITION

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

Identify the contract

Identify performance obligations

Determine the transaction price

Allocate the transaction price

Recognize revenue

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.

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: Petroleum and Gas, Water, Sewer and other services, and Electrical and Mechanical services. Our contract types are: Lump Sum, Unit Price, and Cost Plus and Time and Materials (“T&M”). The following tables present our disaggregated revenue for the three and six months ended March 31, 2020 and 2019:

Three Months Ended March 31, 2020

		Petroleum & Gas		Water, Sewer and Other		Electrical and Mechanical		Total revenue from contracts
Lump sum contracts	$	-	$	-	$	7,376,887	$	7,376,887
Unit price contracts		5,255,940		2,236,483		-		7,492,423
Cost plus and T&M contracts		-		59,684		3,143,406		3,203,090
Total revenue from contracts	$	5,255,940	$	2,296,167	$	10,520,293	$	18,072,400

Earned over time	$	3,509,619	$	2,296,167	$	10,375,828	$	16,181,614
Earned at point in time		1,746,321		-		144,465		1,890,786
Total revenue from contracts	$	5,255,940	$	2,296,167	$	10,520,293	$	18,072,400

Three Months Ended March 31, 2019

		Petroleum & Gas		Water, Sewer and Other		Electrical and Mechanical		Total revenue from contracts
Lump sum contracts	$	-	$	-	$	10,433,076	$	10,433,076
Unit price contracts		28,756,835		2,128,672		-		30,885,507
Cost plus and T&M contracts		1,192,750		259,700		4,184,411		5,636,861
Revenue from contracts in progress	$	29,949,585	$	2,388,372	$	14,617,487	$	46,955,444

Earned over time	$	28,659,296	$	2,388,372	$	14,430,794	$	45,478,462
Earned at point in time		1,290,289		-		186,693		1,476,982
Total revenue from contracts	$	29,949,585	$	2,388,372	$	14,617,487	$	46,955,444

Six Months Ended March 31, 2020

	Petroleum & Gas		Water, Sewer and Other		Electrical and Mechanical		Total revenue from contracts
Lump sum contracts	$	-	$	-	$	14,825,399	$	14,825,399
Unit price contracts		14,504,192		5,637,249		-		20,141,441
Cost plus and T&M contracts		116,428		225,102		8,607,337		8,948,867
Revenue from contracts in progress	$	14,620,620	$	5,862,351	$	23,432,736	$	43,915,707

Earned over time	$	10,323,832	$	5,862,351	$	22,975,533	$	39,161,716
Earned at point in time		4,296,788		-		457,203		4,753,991
Total revenue from contracts	$	14,620,620	$	5,862,351	$	23,432,736	$	43,915,707

Six Months Ended March 31, 2019

		Petroleum & Gas		Water, Sewer and Other		Electrical and Mechanical		Total revenue from contracts
Lump sum contracts	$	-	$	-	$	18,649,764	$	18,649,764
Unit price contracts		57,572,138		5,599,629		-		63,171,767
Cost plus and T&M contracts		3,287,810		643,866		10,316,376		14,248,052
Revenue from contracts in progress	$	60,859,948	$	6,243,495	$	28,966,140	$	96,069,583

Earned over time	$	58,288,480	$	6,243,495	$	28,512,418	$	95,615,861
Earned at point in time		2,571,468		-		453,722		453,722
Total revenue from contracts	$	60,859,948	$	6,243,495	$	28,966,140	$	96,069,583

4. CONTRACT BALANCES

The Company’s accounts receivable consists of amounts that have been billed to customers. Collateral is generally not required. A majority 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 two-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 six months ended March 31, 2020, we recognized revenue of $3.3 million that was included in the contract liability balance at September 30, 2019.

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

	September 30, 2019		March 31, 2020		Change

Accounts receivable-trade, net of allowance for doutful accounts	$	21,608,312	$	9,665,610	$	(11,942,702	)

Retentions receivable	$	3,521,561	$	3,025,015	$	(496,546	)

Contract assets Cost and estimated eanings in excess of billings	$	6,659,707	$	3,124,595	$	(3,535,112	)

Contract liabilites Billings in excess of cost and estimated earnings	$	3,455,288	$	3,035,812	$	(419,476	)

5. PERFORMANCE OBLIGATIONS

The Company provides construction services that can be classified into several groups: petroleum and gas, water, sewer and other, and electrical and mechanical services. 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 three and six months ended March 31, 2020, we recognized revenue of $168,000 and $804,000 respectively, as a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2019. 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 March 31, 2020, the Company had $31.2 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 March 31, 2020 and September 30, 2019 are summarized as follows:

	March 31,		September 30,
	2020		2019
Costs incurred on contracts in progress	$	50,876,649	$	163,768,655
Estimated earnings, net of estimated losses		9,702,298		18,215,388
		60,578,947		181,984,043
Less billings to date		60,490,164		178,779,624
	$	88,783	$	3,204,419

Costs and estimated earnings in excess of billed on
uncompleted contracts	$	3,124,595	$	6,659,707

Less billings in excess of costs and estimated earnings on
uncompleted contracts		3,035,812		3,455,288

	$	88,783	$	3,204,419

Backlog at March 31, 2020 and September 30, 2019 was $92.4 million and $63.0 million, respectively.

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.

As noted above, there is a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is 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 $8.6 million at March 31, 2020 was $8.5 million. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $16.0 million at September 30, 2019 was $16.0 million.

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

8. LOSS PER SHARE

The amounts used to compute the loss per share for the three and six months ended March 31, 2020 and 2019 are summarized below.

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	March 31,			March 31,			March 31,			March 31,
	2020			2019			2020			2019
Net loss	$	(1,694,611	)	$	(1,124,458	)	$	(1,768,725	)	$	(493,074	)

Dividends on preferred stock		77,250			77,250			154,500			154,500

Loss available to common shareholders	$	(1,771,861	)	$	(1,201,708	)	$	(1,923,225	)	$	(647,574	)

Weighted average shares outstanding		13,783,546			14,060,456			13,877,243			14,102,117

Weighted average shares outstanding-diluted		13,783,546			14,060,456			13,877,243			14,102,117

Loss per share available to common shareholders	$	(0.129	)	$	(0.085	)	$	(0.139	)	$	(0.046	)

Loss per share available to common shareholders-diluted	$	(0.129	)	$	(0.085	)	$	(0.139	)	$	(0.046	)

9. INCOME TAXES

The components of income taxes are as follows:

	Three months ended March 31,
	2020			2019
Federal
Current	$	(405,543	)	$	(301,962	)
Deferred		6,642			3,488
Total		(398,901	)		(298,474	)

State
Current	$	(114,383	)	$	(96,715	)
Deferred		1,872			(2,629	)
Total		(112,511	)		(99,344	)

Total income tax benefit	$	(511,412	)	$	(397,818	)

	Six months ended March 31,
	2020			2019
Federal
Current	$	(351,303	)	$	(34,942	)
Deferred		(76,036	)		(59,319	)
Total		(427,339	)		(94,261	)

State
Current	$	(99,085	)	$	(9,826	)
Deferred		(21,447	)		(16,731	)
Total		(120,532	)		(26,557	)

Total income tax benefit	$	(547,871	)	$	(120,818	)

The effective income tax rate for the three months ended March 31, 2020 was (23.2%), as compared to (26.1%) for the same period in 2019. The effective income tax rate for the six months ended March 31, 2020 was (23.6%), as compared to (19.7%) for the same period in 2019. 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.

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

	March 31,			September 30,
	2020			2019
Deferred income tax liabilities
Long-term
Property and equipment	$	2,385,515		$	2,539,639
Other		(19,805	)		(19,805	)
Total deferred income tax liabilities	$	2,365,710		$	2,519,834


Deferred income tax assets
Other		537,370			594,011
Net operating loss carryforward		614,253			-
Total deferred income tax assets		1,151,623			594,011

Total net deferred income tax liabilities	$	1,214,087		$	1,925,823

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, 2016.

The Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted on December 22, 2017. Consequent to the passage of the Act, the Company’s deferred tax assets and liabilities were adjusted for the effects of the Act’s changes in the tax law and rates.

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 general and administrative expenses.

10. SHORT-TERM AND LONG-TERM DEBT

Short-term debt consists of the following:

On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank, Inc., (“United Bank”), to provide the Company with a $15.0 million revolving line of credit. This line had 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%. The effective date of this agreement was February 27, 2018. Operating Line of Credit (2018) expired on February 28, 2019 but was extended through April 28, 2019. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019. On May 12, 2020, the Company received a two-month extension of the line of credit through June 28, 2020.

As of the September 30, 2019 borrowing base calculation, the Company could borrow up to $11.5 million on the line of credit. The Company had borrowed $3.5 million on the line of credit, leaving $8.0 million available. Subsequent to September 30, 2019, the Company repaid $3.5 million against the line of credit. As of the March 31, 2020 borrowing base calculation, the Company could borrow up to $5.5 million on the line of credit. The Company had line of credit borrowings of $1.5 million, leaving $4.0 million available.

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. Major items excluded from the calculation are receivables from bonded jobs and retainage as well as items greater than 90 days old.

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

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

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

Minimum current ratio of 1.50x to be measured quarterly

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

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

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

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

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

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at March 31, 2020.

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. It is typical that the Company makes a down payment in January and finances the remaining premium amount over nine or ten monthly payments. In January 2019, The Company financed $3.2 million in insurance premium policies. At September 30, 2019, the balance of the remaining premiums to be paid was $526,000, which was paid in the three months ended March 31, 2020. In January 2020, the Company financed $3.1 million in insurance premium policies. At March 31, 2020, the balance of the remaining premiums to be paid was $2.0 million, which will be paid in equal monthly installments through November 2020.

A summary of short-term and long-term debt as of March 31, 2020 and September 30, 2019 is as follows:

	March 31,		September 30,
	2020		2019
Line of credit payable to bank, monthly interest at 5.50%, final payment due by April 28, 2020.	$	1,500,000	$	3,500,000

Notes payable to finance companies, due in monthly installments totaling $100,951 including interest ranging from 0.00% to 6.03%, final payments due April 2020 through August 2026, secured by equipment.		1,799,172		1,691,991

Note payable to finance company for insurance premiums financed, due in monthly installments totaling $254,922, including interest rate at 3.50%, final payment due November 2020.		2,039,373		525,710

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.		990,196		1,012,126

Notes payable to bank, due in monthly installments totaling $12,028, including interest at 5.0%, final payment due November 2025 secured by building and property.		699,165		751,987

Notes payable to bank, due in monthly installments totaling $98,865, including interest at 4.99%, final payment due September 2022 secured by equipment.		2,518,693		3,040,600

Notes payable to bank, due in monthly installments totaling $46,482, including interest at 5.00%, final payment due September 2021 secured by equipment.		755,401		1,011,160

Notes payable to bank, due in monthly installments totaling $191,012, including interest at 5.50%, final payment due May 2024 secured by equipment.		-		7,920,005

Total debt		10,302,000		19,453,579

Less current maturities		6,048,359		8,429,283

Total long term debt	$	4,253,641	$	11,024,296

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, 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 is engaged in providing contracting services for energy related companies. Currently Energy Services primarily services the gas, petroleum, power, chemical and automotive industries, though it does some other incidental work such as water and sewer projects. 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. The Company builds, but does not own, natural gas pipelines for its customers that are part of both interstate and intrastate pipeline systems that move natural gas from producing regions to consumption regions as well as build and replace gas line services to individual customers of the various utility companies.

The Company’s consolidated operating revenues for the three months ended March 31, 2020 were $18.1 million of which 58.2% was attributable to electrical and mechanical services, 29.1% to gas & petroleum work and 12.7% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the three months ended March 31, 2019 were $47.0 million of which 63.8% was attributable to gas & petroleum work, 31.1% to electrical and mechanical services and 5.1% to water and sewer installations and other ancillary services.

The Company’s consolidated operating revenues for the six months ended March 31, 2020 were $43.9 million of which 53.4% was attributable to electrical and mechanical services, 33.3% to gas & petroleum work and 13.3% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the six months ended March 31, 2019 were $96.1 million of which 63.5% was attributable to gas & petroleum work, 30.2% to electrical and mechanical services and 6.3% to water and sewer installations and other ancillary services.

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

Mountaineer Gas

TransCanada Corporation

Columbia Gas Distribution

Marathon Petroleum

American Electric Power

Toyota Motor Manufacturing

Bayer Chemical

Dow Chemical

Kentucky American Water

Various state, county and municipal public service districts.

The Company enters into various types of contracts, including competitive unit price, cost-plus (or time and materials basis) and fixed price (lump sum) contracts. The terms of the contracts will vary from job to job and customer to customer though most contracts are on the basis of either unit pricing, in which the Company agrees to do the work for a price per unit of work performed or for a fixed amount for the entire project. Most of the Company’s projects are completed within one year of the start of the work. On occasion, the Company’s customers will require the posting of performance and/or payment bonds upon execution of the contract, depending upon the nature of the work performed. The Company generally recognizes revenue on unit price and cost-plus contracts when units are complete, or services are performed. Fixed price contracts usually result in recording revenues as work on the contract progresses on a percentage of completion basis. Under this accounting method, revenue is recognized based on the percentage of total costs incurred to date in proportion to total estimated costs at completion. Many contracts also include retention provisions under which a percentage of the contract price is withheld until the project is complete and has been accepted by the customer.

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.

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 causes 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. Accordingly, our operating results in any particular quarter or year may not be indicative of the results that can be expected for any other quarter or any other year.

Second Quarter and Six Months Overview

The following is an overview of results from operations for the three and six months ended March 31, 2020 and 2019.

	Three Months Ended			Three Months Ended			Six Months Ended			Six Months Ended
	March 31,			March 31,			March 31,			March 31,
	2020			2019			2020			2019
Revenue	$	18,072,400		$	46,955,444		$	43,915,707		$	96,069,583

Cost of revenues		18,001,931			46,364,050			41,488,496			91,643,344

Gross profit		70,469			591,394			2,427,211			4,426,239

Selling and administrative expenses		2,345,509			2,012,282			4,941,281			4,768,673
Loss from operations		(2,275,040	)		(1,420,888	)		(2,514,070	)		(342,434	)

Other income (expense)
Interest income		-			16,501			53,249			58,023
Other nonoperating expense		(42,741	)		(20,581	)		(76,679	)		(53,576	)
Interest expense		(112,017	)		(209,125	)		(298,862	)		(413,474	)
Gain on sale of equipment		223,775			111,817			519,766			137,569
		69,017			(101,388	)		197,474			(271,458	)

Loss before income taxes		(2,206,023	)		(1,522,276	)		(2,316,596	)		(613,892	)

Income tax benefit		(511,412	)		(397,818	)		(547,871	)		(120,818	)

Net loss		(1,694,611	)		(1,124,458	)		(1,768,725	)		(493,074	)

Dividends on preferred stock		77,250			77,250			154,500			154,500

Loss available to common shareholders	$	(1,771,861	)	$	(1,201,708	)	$	(1,923,225	)	$	(647,574	)

Weighted average shares outstanding-basic		13,783,546			14,060,456			13,877,243			14,102,117

Weighted average shares-diluted		13,783,546			14,060,456			13,877,243			14,102,117

Loss per share available to common shareholders	$	(0.129	)	$	(0.085	)	$	(0.139	)	$	(0.046	)

Loss per share-diluted available to common shareholders	$	(0.129	)	$	(0.085	)	$	(0.139	)	$	(0.046	)

Results of Operations for the Three and Six Months Ended March 31, 2020 Compared to the Three and Six Months Ended March 31, 2019

Revenues. Total revenues decreased by $28.9 million or 61.5% to $18.1 million for the three months ended March 31, 2020 from $47.0 million for the same period in 2019. The decrease was primarily attributable to a $24.7 million revenue decrease in petroleum and gas work, a $4.1 million revenue decrease in electrical and mechanical services and a $92,000 revenue decrease in water and sewer projects and other ancillary services. Total revenues decreased by $52.2 million or 54.3% to $43.9 million for the six months ended March 31, 2020 from $96.1 million for the same period in 2019. The decrease was primarily attributable to a $46.2 million revenue decrease in petroleum and gas work, a $5.5 million revenue decrease in electrical and mechanical services and a $382,000 revenue decrease in water and sewer projects and other ancillary services.

The revenue decrease in petroleum and gas work was primarily related to a twenty-mile pipeline project in northern West Virginia that was in progress during the six months ended March 31, 2019 and completed in September 2019. The project ran over budget due to environmental delays and adverse working conditions related to weather. Generally, the Company’s major projects will extend into the first quarter of the next fiscal year. However, the Company’s major projects in fiscal year 2019 completed in or before September 2019. The Company had a limited number of new projects that started in the first six months of fiscal year 2020. The COVID-19 pandemic did not begin to affect the Company until mid-March 2020.

Cost of Revenues. Total cost of revenues decreased by $28.4 million or 61.2% to $18.0 million for the three months ended March 31, 2020 from $46.4 million for the same period in 2019. The decrease was primarily attributable to a $25.5 million cost decrease in petroleum and gas work, a $3.9 million cost decrease in electrical and mechanical services, partially offset by a $813,000 cost increase in equipment and tool shop operations not allocated to projects and a $223,000 cost increase in water and sewer projects and other ancillary services. Total cost of revenues decreased by $50.1 million or 54.7% to $41.5 million for the six months ended March 31, 2020 from $91.6 million for the same period in 2019. The decrease was primarily attributable to a $46.0 million cost decrease in petroleum and gas work, a $5.0 million cost decrease in electrical and mechanical services, a $14,000 cost decrease in water and sewer projects and other ancillary services, partially offset by a $891,000 cost increase in equipment and tool shop operations not allocated to projects.

The cost of revenues decrease in petroleum and gas work was primarily related to a twenty-mile pipeline project in northern West Virginia that was in progress during the six months ended March 31, 2019 and completed in September 2019. The project ran over budget due to environmental delays and adverse working conditions related to weather. Generally, the Company’s major projects will extend into the first quarter of the next fiscal year. However, the Company’s major projects in fiscal year 2019 completed in or before September 2019. The Company had a limited number of new projects that started in the first six months of fiscal year 2020. The COVID-19 pandemic did not begin to affect the Company until mid-March 2020.

Gross Profit. Total gross profit decreased by $521,000 or 88.1% to $70,000 for the three months ended March 31, 2020 from $591,000 for the same period in 2019. The decrease was primarily attributable to a $813,000 gross profit decrease related to equipment and tool shop operations costs not allocated to projects, a $315,000 gross profit decrease in water and sewer projects and other ancillary services, a $175,000 gross profit decrease in electrical and mechanical services, partially offset by a $782,000 gross profit increase in petroleum and gas work.

Total gross profit decreased by $2.0 million or 45.2% to $2.4 million for the six months ended March 31, 2020 from $4.4 million for the same period in 2019. The decrease was primarily attributable to a $891,000 gross profit decrease related to equipment and tool shop operations costs not allocated to projects, a $484,000 gross profit decrease in electrical and mechanical services, a $367,000 gross profit decrease in water and sewer projects and other ancillary services, and a $256,000 gross profit decrease in petroleum and gas work.

The overall gross profit decrease for the three and six months ended March 31, 2020 compared to the same period in 2019 was primarily related to the decrease in revenues mentioned above. Generally, the Company’s major projects will extend into the first quarter of the next fiscal year. However, the Company’s major projects in fiscal year 2019 completed in or before September 2019. The Company had a limited number of new projects that started in the first six months of fiscal year 2020.

Also, the decreased amount of work during the six months ended March 31, 2020 resulted in less of the Company’s owned equipment being used on projects and reduced the internal equipment charges from shop operations to projects compared to prior periods. The shop operation relies on internal equipment charges to recover shop operation costs such as depreciation and maintenance. In addition, the Company invested in general maintenance and repairs on Company owned equipment in preparation for new projects starting in the third quarter of fiscal year 2020.

Selling and administrative expenses. Total selling and administrative expenses increased by $333,000 or 16.6% to $2.3 million for the three months ended March 31, 2020 from $2.0 million for the same period in 2019.

Total selling and administrative expenses increased by $173,000 or 3.6% to $4.9 million for the six months ended March 31, 2020 from $4.8 million for the same period in 2019.

The increase in selling and administrative expenses was primarily related to fewer projects in progress during the three and six months ended March 31, 2020 and the reassignment of project management personnel to assist in obtaining new work.

Interest Expense. Interest expense decreased by $97,000 or 46.4% to $112,000 for the three months ended March 31, 2020 from $209,000 for the same period in 2019.

Interest expense decreased by $115,000 or 27.7% to $299,000 for the six months ended March 31, 2020 from $413,000 for the same period in 2019.

This decrease in interest expense for the three and six months ended March 31, 2020 was primarily due to the repayment of the line of credit and short-term borrowings and additional principal payments on long-term debt.

Net Loss. Loss before income taxes was ($2.2) million for the three months ended March 31, 2020, compared to loss before taxes of ($1.5) million for the same period in 2019. Loss before income taxes was ($2.3) million for the six months ended March 31, 2020, compared to loss before taxes of ($614,000) for the same period in 2019. The loss before income taxes was due to the items mentioned above.

Income tax benefit for the three months ended March 31, 2020 was $511,000 compared to income tax benefit of $398,000 for the same period in 2019. Income tax benefit for the six months ended March 31, 2020 was $548,000 compared to income tax benefit of $121,000 for the same period in 2019. The greater income tax benefit for the three and six months ended March 31, 2020 was primarily due to a decrease in taxable income as compared to the same periods in 2019.

Dividends on preferred stock for the three months ended March 31, 2020 and 2019 were $77,250. Dividends on preferred stock for the six months ended March 31, 2020 and 2019 were $154,500.

Net loss available to common shareholders for the three months ended March 31, 2020 was ($1.8) million compared to net loss available to common shareholders of ($1.2) million for the same period in 2019. Net loss available to common shareholders for the six months ended March 31, 2020 was ($1.9) million compared to net loss available to common shareholders of ($648,000) for the same period in 2019.

Comparison of Financial Condition at March 31, 2020 and September 30, 2019

The Company had total assets of $41.9 million at March 31, 2020, a decrease of $14.0 million from the prior fiscal year end balance of $55.9 million. Accounts receivable, which totaled $9.7 million at March 31, 2020, decreased by $11.9 million from the prior fiscal year end balance of $21.7 million. The decrease was primarily due to the collection of receivables from September 30, 2019. Contract assets totaled $3.1 million at March 31, 2020, a decrease of $3.6 million from the prior fiscal year end balance of $6.7 million. The decrease was due to a difference in the timing of project billings at March 31, 2020 compared to September 30, 2019. Cash and cash equivalents totaled $4.1 million at March 31, 2020, a decrease of $528,000 from the prior fiscal year end balance. The decrease was primarily due to the decrease in accounts receivable, partially offset by the repayments of short-term and long-term debt. Retainages receivable totaled $3.0 million at March 31, 2020, a decrease of $497,000 from the prior fiscal year end balance of $3.5 million. The decrease was due to the timing of retainage billings and receipts compared to September 30, 2019. Prepaid expenses and other totaled $5.0 million at March 31, 2020, an increase of $2.2 million from the prior fiscal year end balance of $2.7 million. This increase was primarily due to the financing of the Company’s insurance policies, partially offset by a reduction in prepaid insurance that was expensed during the six months ended March 31, 2020. The Company had property, plant and equipment of $17.1 million at March 31, 2020, an increase of $280,000 from the prior fiscal year end balance. This increase was due to equipment acquisitions of $2.6 million, partially offset by depreciation of $2.2 million and net equipment disposals of $137,000.

The Company had total liabilities of $20.1 million at March 31, 2020, a decrease of $11.2 million from the prior fiscal year end balance of $31.3 million. Long-term debt totaled $4.3 million at March 31, 2020, a decrease of $6.7 million from the prior fiscal year end balance of $11.0 million. The decrease in long-term debt was due to scheduled debt payments and the repayment of Term Note (2019). Current maturities of long-term debt totaled $2.5 million at March 31, 2020, a decrease of $1.9 million from the prior fiscal year end balance of $4.4 million. The decrease was primarily due to scheduled debt payments and the repayment of Term Note (2019). Accrued expenses and other current liabilities totaled $2.1 million at March 31, 2020, a decrease of $1.4 million from the prior fiscal year end balance of $3.5 million. The decrease was primarily due to the payment of accrued expenses in the six months ended March 31, 2020. Deferred tax liabilities totaled $1.2 million at March 31, 2020, a decrease of $712,000 from the prior fiscal year end balance of $1.9 million. The decrease was primarily related to a $614,000 net operating loss carry forward resulting from the net loss available to common shareholders for the six months ended March 31, 2020. Lines of credit and short-term borrowings totaled $3.5 million at March 31, 2020, a decrease of $486,000 from the prior fiscal year end balance of $4.0 million. This decrease was primarily due to net line of credit repayments of $2.0 million, partially offset by net short term borrowings related to insurance premiums financed of $1.5 million. Contract liabilities totaled $3.0 million at March 31, 2020, a decrease of $419,000 from the prior fiscal year end total of $3.5 million. The decrease was due to a difference in the timing of project billings at March 31, 2020 compared to at September 30, 2019. Accounts payable totaled $3.5 million at March 31, 2020, an increase of $589,000 from the prior fiscal year end balance of $2.9 million. The increase was due to the timing of accounts payable payments as compared to September 30, 2019.

Shareholders’ equity was $21.8 million at March 31, 2020, a decrease of $2.9 million from the prior fiscal year end balance of $24.7 million. This decrease was due to the net loss available to common shareholders of $1.9 million, $238,000 in common stock repurchased by the Company and $696,000 in special dividends paid to common shareholders for the six months ended March 31, 2020.

Liquidity and Capital Resources

Indebtedness

On January 31, 2014, the Company entered into a financing arrangement (“Term Note”) with United Bank, Inc. and Summit Community Bank. The financing arrangement was a five-year term loan in the amount of $8.8 million. This note was paid in full during the second quarter of fiscal year 2019.

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 March 31, 2020, the Company had made principal payments of $210,000. The loan is collateralized by the building purchased under this agreement.

On September 16, 2015, the Company entered into a $1.2 million 41-month term note agreement with United Bank, Inc. to refinance the five-year term note agreement for $1.6 million with First Guaranty Bank. The agreement had an interest rate of 5.0%. The note was paid in full during the second quarter of fiscal year 2019. The loan was collateralized by the Company’s accounts receivable and equipment.

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 March 31, 2020, the Company had borrowed $2.46 million against this note and made principal payments of $1.7 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 5.0% with monthly payments of $12,028. As of March 31, 2020, the Company had made principal payments of $400,000. 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 March 31, 2020, the Company had borrowed $5.0 million against this note and made principal payments of $2.5 million. The loan is collateralized by the equipment purchased under this agreement.

On May 30, 2019, the Company entered into Term Note 2019 with United Bank which refinanced the $10.0 million borrowed on Operating Line of Credit (2019) to a five-year term note with a fixed interest rate of 5.50%. The purpose of this note was to finance a specific construction project completed in September 2019. The loan was collateralized by the Company’s equipment. The refinancing effectively reset the Company’s line of credit borrowings to zero as of May 30, 2019 and did not affect the conditions of subsequent borrowings. The Company paid off Term Note (2019) in January 2020.

Operating Line of Credit

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

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

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

Minimum current ratio of 1.50x to be measured quarterly

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

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

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

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

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

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at March 31, 2020.

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

Our work often requires us to lease various equipment, vehicles, and facilities. These leases usually are short-term in nature, with duration of two year or less, though at times we may enter into longer term leases when warranted. By leasing, we are able to reduce our capital outlay requirements for equipment, vehicles and facilities that we may only need for short periods of time. As of March 31, 2020, the Company had one operating lease commitment of $51,000 that will expire in May 2020.

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 March 31, 2020, the Company did not have any letters of credit outstanding.

Performance Bonds

Some customers, particularly new ones or governmental agencies require the Company to post bid bonds, performance bonds and payment bonds (collectively, performance bonds). These bonds are obtained through insurance carriers and guarantee to the customer that we will perform under the terms of a contract and that we will pay subcontractors and vendors. 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 March 31, 2020, the Company had $3.6 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.

The Company had one customer that exceeded 10.0% of revenues for the six months ended March 31, 2020. This customer, Marathon Petroleum, represented 10.3% of revenues. The Company had two customers that exceeded 10.0% of receivables at March 31, 2020. These customers, Marathon Petroleum and Stenco Construction, represented 13.1% and 10.2%, respectively, of receivables net of retention at March 31, 2020.

The Company had one customer that exceeded 10.0% of revenues for the six months ended March 31, 2019. The customer, Goff Full Stream Interconnect, represented 41.8% of revenues. The Company had three customers that exceeded 10.0% of receivables at March 31, 2019. These customers, Marathon Petroleum, Goff Full Stream Interconnect and Dow Chemical, represented 22.9%, 14.9%, and 11.7% of receivables net of retention at March 31, 2019, respectively.

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 $13.7 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at March 31, 2020, 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 March 31, 2020, 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. Nester Logan and Mr. Samuel Kapourales, directors of Energy Services, were also directors 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. Keith Molihan and Mr. Neal Scaggs are both directors of Energy Services and hold the same position with Premier Financial Bancorp, Inc. The interest rate on the loan agreement is 4.82% with monthly payments of $7,800. As of March 31, 2020, we have paid approximately $210,000 in principal and approximately $282,000 in interest since the beginning of the loan. There were no new material related party transactions entered into during the quarter ended March 31, 2020.

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 six months ended March 31, 2020 and 2019, inflation did not have a significant effect on our results.

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:

Identify the contract

Identify performance obligations

Determine the transaction price

Allocate the transaction price

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).

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 contract performed by the Company.

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.

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: Petroleum and Gas, Water, Sewer and other services, and Electrical and 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.

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 March 31, 2020, the Company does not have a material amount of costs expensed that would otherwise be capitalized and amortized.

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.

Contract Assets:

Contract Liabilities:

Income Taxes

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 March 31, 2020.

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 March 31, 2020. 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 March 31, 2020, the management review deemed that the allowance for doubtful accounts was adequate.

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

New Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. In addition, the amendments eliminate at a minimum from the phrase an entity shall disclose at a minimum to promote the appropriate exercise of discretion by entities when considering fair value measurement disclosures and to clarify that materiality is an appropriate consideration of entities and their auditors when evaluating disclosure requirements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. For all entities, amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level III fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is currently evaluating the impact, if any, that adoption will have on its consolidated financial statements.

Subsequent Events

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. During March 2020 many state and local governments, in addition to the federal government, have reacted to the public health crisis, creating significant uncertainties in the U.S. economy. In response to this coronavirus outbreak, the governments of many countries, states, cities 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. 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. On May 8, 2020, the U.S. government reported the national unemployment rate for April 2020 was 14.7%.

While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, the coronavirus outbreak will have a significant effect on the Company's 2020 operating results. As of March 31, 2020, the Company has seen a decline in business as certain customers decided to cancel or delay construction projects as a result of the COVID-19 pandemic. This resulted in the lay-off of approximately forty (40) construction employees; however, some of these employees have since been rehired. 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.

The United States Congress, on March 27, 2020, passed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act authorized the U.S. Small Business Administration (“SBA”) to guarantee loans under a new 7(a) loan program known as the Paycheck Protection Program (“PPP”). An eligible business can apply for a PPP loan up to the greater of: 2.5 times its average monthly payroll costs, or $10.0 million. PPP loans have (a) an interest rate of 1.0%, (b) a two-year loan term to maturity, and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers.

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 (the “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 (the “Board”) 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 would leave the Company and subsidiaries with $9.8 million in PPP Loans to fund operations. The Company believes that the PPP Loan proceeds are critical to the continuing operations of the Company.

Subject to the terms of the Notes, the PPP Loan bears interest at a fixed rate of one percent (1%) per annum, with the first six months of interest and principal deferred. Commencing seven months after the effective date of the PPP Loan, the Company is required to pay the Lender equal monthly payments of principal and interest as required to fully amortize the PPP Loan by April 7, 2022. The PPP Loan is unsecured and guaranteed by the U.S. Small Business Administration.

The Company may apply to the Lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of the payroll costs, covered mortgage obligations, covered rent obligations and covered utility payments incurred by the Company during the eight-week period beginning on the date of first disbursement to the Company under the PPP Loan, calculated in accordance with the terms of the CARES Act. The PPP Loan may be forgiven so long as employee and compensation levels of the Company are maintained and 75% of the PPP Loan proceeds are used for payroll expenses, with the remaining 25% of the PPP Loan proceeds used for other qualifying expenses. No assurance is provided that the Company will obtain forgiveness of the PPP Loan in whole or in part, but the Company intends to use the proceeds from the PPP Loan in accordance with the PPP Loan program. The Notes contain customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the Notes. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Company, and/or Lender’s exercise of any of the rights and remedies available under the PPP Loan documents or under applicable law.

On April 27, 2020, the Company’s Board voted unanimously to immediately suspend the Company’s stock repurchase plan that was made effective on August 22, 2019. The Board believes it is prudent to suspend the program due to current economic uncertainties.

On April 28, 2020, the Company’s $15.0 million operating line of credit with United Bank, Inc. expired.

On May 6, 2020, the Company repaid the $1.5 million outstanding balance on the expired line of credit. The Company did not use PPP Loan proceeds to make the repayment.

On May 12, 2020, the Company received a two-month extension on the line of credit through June 28, 2020. While the Company anticipates that the line of credit will be renewed after the extension expires, current economic uncertainties could affect the lender’s decision making.

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. As of March 31, 2020, the Company has seen a decline in business as certain customers decided to cancel or delay construction projects as a result of the COVID-19 pandemic. This resulted in the lay-off of approximately forty (40) construction employees; however, some of these employees have since been rehired. While it is unknown how long these conditions will last and what the complete financial effect will be to the Company, the coronavirus outbreak will have a significant effect on the Company's 2020 operating results.

The Company has received approximately $25.0 million in new contract awards for multiple projects with various start dates between late March 2020 and June 2020. The start dates on these projects have not been significantly affected by COVID-19 as of May 14, 2020. On May 12, 2020, the Company’s $15.0 million line of credit was extended through June 28, 2020. While the Company anticipates that the line of credit will be renewed after the extension expires, current economic uncertainties could affect the lender’s decision making. Even with the extension, the Company has concerns as to whether the current eligible borrowing base on the line of credit can fully fund construction projects. Due to the uncertain access to outside capital, the parent company and subsidiaries accepted $9.8 million, collectively, in PPP Loan proceeds. The Company believes that the PPP Loan proceeds are critical to the continuing operations of the Company.

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 makes 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.

The Company believes it meets the SBA’s certification requirement based on its limited access to capital, weakening business operations and small market value as described above. The Company’s shares of common stock do not trade on a national exchange. However, no assurance can be given as to the outcome of the SBA’s audit of the Company’s PPP Loan. The SBA could determine that the Company does not qualify in whole or in part for loan forgiveness. In addition, it is unknown what type of penalties could be assessed against the Company if the SBA disagrees with the Company’s certification. The Company could be required to return its PPP Loan. 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.

Currently, the Company is receiving bid opportunities from existing and potentially new customers. However, with potential economic uncertainties, such as a worsening of the COVID-19 pandemic, the continued depressed prices of oil and natural gas and environmental regulations, the demand for our customers’ projects could wane and their ability to fund planned projects could be reduced. Also, a shortage of qualified labor could lead to inefficient production and could make bidding and managing projects more difficult. The Company’s backlog at March 31, 2020 was $92.4 million. 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 second quarter of fiscal year 2020 that has materially affected, or is reasonably likely to materially affect, Energy Services of America Corporation’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. Legal Proceedings

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 December 20, 2019. The Company is supplementing the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended September 30, 2019 with the following risk factors.

We have operations in multiple states and face risks related to the Coronavirus/COVID 19 global pandemic that could impact our results of operations.

Our business could be adversely affected by the effects of the widespread outbreak of Coronavirus (“COVID-19”). The outbreak of COVID-19 and other adverse public health developments will have a material and adverse effect on our business operations. These could include disruptions or restrictions on our ability to travel or to complete our projects, as well as temporary closures of our facilities or the facilities of our suppliers or customers. Any disruption of our suppliers or customers would likely impact our operating results. In addition, the continued outbreak of COVID-19 could continue to adversely affect the economies of the states that we operate in resulting in a long-term economic downturn that could impact our operating results.

The SBA intends to audit the Company’s PPP Loan and if the SBA disagrees with the Company’s certification the Company could be subject to penalties and the return of the PPP Loan which could negatively impact the Company’s business, financial condition and results of operations and prospects.

On April 15, 2020, the Company and subsidiaries C.J. Hughes Construction Company, Contractors Rental Corporation and Nitro Construction Services, Inc. entered into separate Paycheck Protection Program Notes (the “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 Paycheck Protection Program under the CARES Act (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. The Company and subsidiaries retained $9.8 million of its PPP Loan to fund operations. The Company may apply to the Lender for forgiveness of the PPP Loan, with the amount which may be forgiven equal to the sum of the payroll costs, covered mortgage obligations, covered rent obligations and covered utility payments incurred by the Company during the eight-week period beginning on the date of first disbursement to the Company under the PPP Loan, calculated in accordance with the terms of the CARES Act. The PPP Loan may be forgiven so long as employee and compensation levels of the Company are maintained and 75% of the PPP Loan proceeds are used for payroll expenses, with the remaining 25% of the PPP Loan proceeds used for other qualifying expenses. The Company intends to use the proceeds from the PPP Loan in accordance with the PPP Loan program.

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) The repurchases of Energy Services of America Corporation’s shares of its common stock during the three months ended March 31, 2020 was as follows:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Value of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
January 1, 2020-January 31, 2020		49,072	$	0.78	$	38,403		1,299,088
February 1, 2020-February 29, 2020		59,301		0.95		56,453		1,239,787
March 1, 2020-March 31, 2020		124,720		0.91		113,277		1,115,067
Total		233,093	$	0.89		208,133

(1)

On August 3, 2018, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would repurchase up to 10%, or approximately 1,423,984 shares, of the Company's issued and outstanding stock. The repurchase program started on August 15, 2018 and expired on August 15, 2019. On August 22, 2019, the Company announced that the Board of Directors authorized a stock repurchase program under which the Company would repurchase up to 10%, or approximately 1,393,393 shares of the Company's issued and outstanding stock. The repurchase program started on August 26, 2019 and will expire on August 26, 2020. On April 27, 2020, the Company suspended its stock repurchase program.

ITEM 6. Exhibits

10.1	Form of Note between United Bank and Energy Services of America Corporation and subsidiaries, individually, for the Payroll Protection Program (“PPP Loan”) SBA Loan.

10.2	List of PPP Loans received and returned by company.

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

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: May 15, 2020	By:	/s/ Douglas V. Reynolds
		Douglas V. Reynolds
		Chief Executive Officer


Date: May 15, 2020	By:	/s/ Charles P. Crimmel
		Charles P. Crimmel
		Chief Financial Officer

Energy Services of America CORP - FORM 10-Q - May 15, 2020

Attached files

Energy Services of America CORP Reports