Energy Services of America CORP - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2019

Energy Services of America Corporation

(Exact Name of Registrant as Specified in Its Charter)

(304) 522-3868

(Registrant’s Telephone Number Including Area Code)

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):

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 August 1, 2019, there were 13,935,788 outstanding shares of the Registrant’s Common Stock.

Securities registered pursuant to Section 12(b) of the Act:

Part 1. Financial Information

Item 1. Financial Statements (Unaudited):

Energy Services of America Corporation

Consolidated Balance Sheets

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Income

Unaudited

The Accompanying Notes are an Integral Part of These Financial Statements

Energy Services of America Corporation

Consolidated Statements of Cash Flows

Unaudited

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 nine months ended June 30, 2019 and 2018

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. Wholly owned subsidiary C.J. Hughes 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. Wholly owned subsidiary S.T. Pipeline, formerly presented as a discontinued operation, has been absorbed into Energy Services in 2019 for financial statement presentation.

The Company’s stock is quoted under the symbol “ESOA” on the OTC QB market place 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, 2018 and 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on December 28, 2018. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to the interim financial reporting rules and regulations of the SEC. The financial statements reflect all adjustments (consisting primarily of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s financial position and results of operations. The operating results for the three and nine months ended June 30, 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 have been made in prior years’ financial statements to conform to classifications used in the current year.

2. 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.

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 Material (T&M). The following tables present our disaggregated revenue for the three and nine months ended June 30, 2019 and 2018:  

4. CONTRACT BALANCES

Accounts receivable, which are included in current assets on the Consolidated Balance Sheets, totaled $16.0 million at June 30, 2019, a $6.2 million decrease from $22.2 million at September 30, 2018. The decrease was mainly due to timing of billings and receipts. Contract assets, which are included in current assets on the Consolidated Balance Sheets, totaled $17.3 million at June 30, 2019, an $11.9 million increase from $5.4 million at September 30, 2018. This was due to an increase in costs and estimated earnings in excess of billings on uncompleted projects. Contract liabilities, which are included in current liabilities on the Consolidated Balance Sheets, totaled $3.8 million at June 30, 2019, a $538,000 increase from $3.3 million at September 30, 2018. This was due to an increase in billings in excess of costs and estimated earnings on uncompleted projects.

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 nine months ended June 30, 2019, we recognized revenue of $2.0 million that was included in the contract liability balance at September 30, 2018.

Accounts receivable, contract assets and contract liabilities consisted of the following:

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).

The Company’s accounts receivable consists of amounts that have 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. Certain construction contracts include retention provisions to provide assurance to our customers that we will perform in accordance with the contract terms and are therefore not considered a financing benefit. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the customer. We have determined there are no significant financing components in our contracts during the three and nine months ended June 30, 2019.

During the three and nine months ended June 30, 2019, we recognized revenue of ($130,000) and $240,000, respectively, as a result of changes in contract transaction price related to performance obligations that were satisfied prior to September 30, 2018. The changes in contract transaction price were from items such as changes in projected profit, executed or estimated change orders, and unresolved contract modifications and claims.

The Company does not sell warranties for its construction services. At June 30, 2019, the Company had $17.4 million in remaining unsatisfied performance obligations, in which revenue is expected to be recognized in less than twelve months.

6. UNCOMPLETED CONTRACTS

Costs, estimated earnings, and billings on uncompleted contracts as of June 30, 2019 and September 30, 2018 are summarized as follows:

Backlog at June 30, 2019 and September 30, 2018 was $49.8 million and $71.1 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 $17.2 million at June 30, 2019 was $17.1 million. The fair value of the aggregate principal amount of the Company’s fixed-rate debt of $10.3 million at September 30, 2018 was $10.2 million.

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

8. EARNINGS PER SHARE

The amounts used to compute the earnings per share for the three and nine months ended June 30, 2019 and 2018 are summarized below.

9. INCOME TAXES

The components of income taxes are as follows:

The effective income tax rate for the nine months ended June 30, 2019 was 102.2%, as compared to 6.2% for the same period in 2018. 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 increase in the effective income tax rate was primarily due to permanent, non-deductible per-diem expenses.

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

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. For the year ended September 30, 2018, the Company realized approximately $588,000 in income tax benefits recorded to income tax expense to reflect the impact of the Act’s rate change on the Company’s net deferred tax assets.

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. 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 and it replaced the $15.0 million revolving line of credit (“Operating Line of Credit (2017)”) entered into with United Bank, Inc. effective February 27, 2017. This agreement expired on February 28, 2019 but was extended through April 28, 2019 by the Company’s lenders. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019.

The Company had borrowed $5.5 million against the Operating Line of Credit (2018) as of September 30, 2018 and had up to $7.0 million available to borrow against the first $12.5 million depending on the Company’s borrowing base report. The Company had borrowed an additional $4.5 million for a total of $10.0 million against the Operating Line of Credit (2019) as of May 30, 2019. On May 30, 2019, the Company entered into a financing agreement (“Term Note (2019)”) 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 is to finance a specific construction project currently in progress and the Company anticipates paying off Term Note (2019) in less than one year. As of June 30, 2019, the Company borrowed $3.0 million against Operating Line of Credit (2019) and had up to $9.5 million available to borrow against the first $12.5 million depending on the Company’s borrowing base report.

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:

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:

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at June 30, 2019.

The Company also finances insurance policy premiums on a short-term basis through a financing company. These insurance policies included: 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 and had an outstanding balance of $1.3 million at June 30, 2019.

A summary of short-term and long-term debt as of June 30, 2019 and September 30, 2018 is as follows:

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 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. Wholly owned subsidiary C.J. Hughes 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. Wholly owned subsidiary S.T. Pipeline, formerly presented as a discontinued operation, has been absorbed into Energy Services in 2019 for financial statement presentation.

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 June 30, 2019 were $40.2 million of which 57.1% was attributable to gas & petroleum work, 34.9% to electrical and mechanical services, and 8.0% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the nine months ended June 30, 2019 were $136.3 million of which 61.6% was attributable to gas & petroleum work, 31.5% to electrical and mechanical services, and 6.9% to water and sewer installations and other ancillary services.

The Company’s consolidated operating revenues for the three months ended June 30, 2018 were $29.5 million of which 53.9% was attributable gas & petroleum work, 39.1% to electrical and mechanical services, and 7.0% to water and sewer installations and other ancillary services. The Company’s consolidated operating revenues for the nine months ended June 30, 2018 were $85.2 million of which 51.4% was attributable to electrical and mechanical services, 41.0% to gas & petroleum work, and 7.6% to water and sewer installations and other ancillary services.

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

Goff Full Stream

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.

Third Quarter Overview

The following is an overview of results from operations for the three and nine months ended June 30, 2019 and 2018.

Results of Operations for the Three and Nine Months Ended June 30, 2019 Compared to the Three and Nine Months Ended June 30, 2018

Revenues. Total revenues increased by $10.7 million or 36.0% to $40.2 million for the three months ended June 30, 2019 from $29.5 million for the same period in 2018. The increase was primarily attributable to a $7.0 million revenue increase in petroleum and gas work, a $2.5 million revenue increase in electrical and mechanical services and a $1.1 million revenue increase in water and sewer projects and other ancillary services.

Total revenues increased by $51.1 million or 59.9% to $136.3 million for the nine months ended June 30, 2019 from $85.2 million for the same period in 2018. The increase was primarily attributable to a $49.0 million revenue increase in petroleum and gas work and a $2.9 million revenue increase in water and sewer projects and other ancillary services, partially offset by a $795,000 revenue decrease in electrical and mechanical services.

Cost of Revenues. Total cost of revenues increased by $10.7 million or 41.2% to $36.9 million for the three months ended June 30, 2019 from $26.2 million for the same period in 2018. The increase was primarily attributable to a $7.2 million cost increase in petroleum and gas work, a $3.3 million cost increase in electrical and mechanical services, a $183,000 cost increase in water and sewer projects and other ancillary services and a $155,000 cost increase in equipment and tool shop operations not allocated to projects.

Total cost of revenues increased by $49.8 million or 63.2% to $128.6 million for the nine months ended June 30, 2019 from $78.8 million for the same period in 2018. The increase was primarily attributable to a $48.4 million cost increase in petroleum and gas work, a $1.2 million cost increase in water and sewer projects and other ancillary services, a $367,000 cost increase in electrical and mechanical services, partially offset by a $95,000 cost decrease in equipment and tool shop operations not allocated to projects.

Gross Profit. Total gross profit decreased by $132,000 or 3.9% to $3.3 million for the three months ended June 30, 2019 from $3.4 million for the same period in 2018. The decrease was primarily attributable to a $796,000 gross profit decrease in electrical and mechanical services, a $155,000 gross profit decrease related to equipment and tool shop operations costs not allocated to projects and a $147,000 gross profit decrease in petroleum and gas work, partially offset by a $965,000 gross profit increase in water and sewer projects and other ancillary services.

Total gross profit increased by $1.3 million or 19.7% to $7.7 million for the nine months ended June 30, 2019 from $6.4 million for the same period in 2018. The increase was primarily attributable to a $1.7 million gross profit increase in water and sewer projects and other ancillary services, a $617,000 gross profit increase in petroleum and gas work and a $95,000 gross profit increase related to equipment and tool shop operations costs not allocated to projects, partially offset by a $1.2 million gross profit decrease in electrical and mechanical services.

Selling and administrative expenses. Total selling and administrative expenses increased by $248,000 or 14.0% to $2.0 million for the three months ended June 30, 2019 from $1.8 million for the same period in 2018. The increase was primarily related to additional operations personnel needed to secure and manage projects.

Total selling and administrative expenses increased by $1.1 million or 18.3% to $6.8 million for the nine months ended June 30, 2019 from $5.7 million for the same period in 2018. The increase was primarily related to additional operations personnel needed to secure and manage projects and payment of performance bonuses, which were significantly less in 2018.

Interest Expense. Interest expense increased by $140,000 or 73.5% to $331,000 for the three months ended June 30, 2019 from $191,000 for the same period in 2018. This increase was primarily due to additional line of credit borrowings and the addition of Term Note (2019), partially offset by a decrease in the remaining long-term debt.

Interest expense increased by $15,000 or 2.0% to $745,000 for the nine months ended June 30, 2019 from $730,000 for the same period in 2018. This increase was primarily due to additional line of credit borrowings and the addition of Term Note (2019), partially offset by a decrease in the remaining long-term debt.

Net Income (loss). Income before income taxes was $942,000 for the three months ended June 30, 2019, compared to $1.4 million for the same period in 2018. Income before income taxes was $328,000 for the nine months ended June 30, 2019, compared to $317,000 for the same period in 2018. The income before income taxes was due to the items mentioned above.

Income tax expense for the three months ended June 30, 2019 was $456,000 compared to $276,000 for the same period in 2018. The increase in income tax expense was primarily due to the increase in taxable income. Income tax expense for the nine months ended June 30, 2019 was $335,000 compared to $20,000 for the same period in 2018. The increase in income tax expense was primarily due to the increase in taxable income.

The effective income tax rate for the three months ended June 30, 2019 was 48.4%, as compared to 20.1% for the same period in 2018. The effective income tax rate for the nine months ended June 30, 2019 was 102.2%, as compared to 6.2% for the same period in 2018. 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 increase in the effective income tax rates was primarily due to permanent, non-deductible per-diem expenses.

The US Tax Cuts and Jobs Act of 2017 (the “Act”) was enacted in December 2017. As a result, the top corporate income tax rate was reduced from 35% to 21% beginning with tax years after December 31, 2017. As a fiscal year filer, the Act will require the Company used a “blended” tax rate of 24.5% for fiscal year 2018. Beginning with fiscal year 2019, the Company’s federal tax rate will be 21%.

Dividends on preferred stock for the three and nine months ended June 30, 2019 and 2018 were $77,250 and $231,750, respectively.

Net income available to common shareholders for the three months ended June 30, 2019 was $409,000 compared to $1.0 million for the same period in 2018. Net loss available to common shareholders for the nine months ended June 30, 2019 was $239,000 compared to a net income available to common shareholders of $65,000 for the same period in 2018.

Comparison of Financial Condition at June 30, 2019 and September 30, 2018

The Company had total assets of $62.6 million at June 30, 2019, an increase of $7.9 million from the prior fiscal year end balance of $54.7 million. Contract assets totaled $17.2 million at June 30, 2019, an increase of $11.8 million from the prior fiscal year end balance of $5.4 million. The increase was due to a difference in the timing of project billings at June 30, 2019 compared to September 30, 2018. Cash and cash equivalents totaled $3.1 million at June 30, 2019, an increase of $2.0 million from the prior fiscal year end balance of $1.1 million. The increase was primarily due to the decrease in accounts receivable and the increase in accounts payable. Retainages receivable totaled $6.1 million at June 30, 2019, an increase of $1.2 million from the prior fiscal year end balance of $4.9 million. The increase was due to the timing of retainage billings compared to September 30, 2018. Accounts receivable, which totaled $16.0 million at June 30, 2019, decreased by $6.2 million from the prior fiscal year end balance of $22.2 million. The decrease was primarily due to the timing of billings on significant projects at June 30, 2019 and the collection of receivables from September 30, 2018. Prepaid expenses and other totaled $3.5 million at June 30, 2019, a decrease of $644,000 from the prior fiscal year end balance of $4.1 million. This decrease 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 nine months ended June 30, 2019. Other receivables totaled $10,000 at June 30, 2019, a decrease of $256,000 from the prior fiscal year end balance of $266,000. The decrease was due to the collection of other receivables from September 30, 2018. The Company had property, plant and equipment of $16.6 million at June 30, 2019, a decrease of $185,000 from the prior fiscal year end balance of $16.8 million. This decrease was due to depreciation of $3.1 million and net equipment disposals of $305,000, partially offset by equipment acquisitions of $3.2 million.

The Company had total liabilities of $39.8 million at June 30, 2019, an increase of $8.4 million from the prior fiscal year end balance of $31.4 million. Long-term debt totaled $12.9 million at June 30, 2019, an increase of $6.4 million from the prior fiscal year end balance of $6.5 million. The increase in long-term debt was due to the addition of Term Note (2019), partially offset by principal repayments on debt. Accounts payable totaled $8.1 million at June 30, 2019, an increase of $1.9 million from the prior fiscal year end balance of $6.2 million. The increase was due to significant project costs during fiscal year 2019. Current maturities of long-term debt totaled $4.3 million at June 30, 2019, an increase of $1.1 million from the prior fiscal year end balance of $3.2 million. The increase was due to the addition of Term Note (2019), partially offset by two term notes paid off during fiscal year 2019. Accrued expenses and other current liabilities totaled $4.9 million at June 30, 2019, an increase of $610,000 from the prior fiscal year end balance of $4.3 million. The increase was primarily due to significant project costs during fiscal year 2019. Contract liabilities totaled $3.8 million at June 30, 2019, an increase of $538,000 from the prior fiscal year end total of $3.3 million. The increase was due to a difference in the timing of project billings at June 30, 2019 compared to at September 30, 2018. Deferred tax liabilities totaled $1.4 million at June 30, 2019, an increase of $99,000 from the prior fiscal year end balance of $1.3 million. Lines of credit and short-term borrowings totaled $4.3 million at June 30, 2019, a decrease of $1.8 million from the prior fiscal year end balance of $6.1 million. This decrease was primarily due to $2.5 million in line of credit repayments, partially offset by a $745,000 increase in short term borrowings related to insurance premiums financed. Income taxes payable totaled $0 at June 30, 2019, a decrease of $545,000 from the prior fiscal year end balance of $545,000. The decrease was due to the payment of income taxes from September 30, 2018 and estimated tax payments for fiscal year 2019.

Shareholders’ equity was $22.8 million at June 30, 2019, a decrease of $529,000 from the prior fiscal year end balance of $23.3 million. This decrease was due to the net loss available to common shareholders of $239,000 for the nine months ended June 30, 2019 and $290,000 in common stock repurchased by the Company.

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. In addition, the Company entered into a separate five-year term loan agreement with First Guaranty Bank for $1.6 million, which was later refinanced by United Bank. The loan was collateralized by the Company’s accounts receivable and equipment.

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. 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 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 will be converted to a five-year term note agreement with an interest rate of 5.0%. As of June 30, 2019, the Company had borrowed $2.46 million against this line of credit and made principal payments of $1.3 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. The loan is collateralized by the building and property purchased under this agreement.

On June 28, 2017, the Company entered into a $5.0 million Non-Revolving Note agreement with United Bank, Inc. This five-year agreement gave the Company access to a $5.0 million line of credit (“Equipment Line of Credit 2017”), specifically for the purchase of equipment, for a period of three months with an interest rate of 4.99%. After three months, all borrowings against the Equipment Line of Credit 2017 were converted to a five-year term note agreement with an interest rate of 4.99%. As of June 30, 2019, the Company had borrowed $5.0 million against this line of credit and made principal payments of $1.7 million. The loan is collateralized by the equipment purchased under this agreement.

On May 30, 2019, the Company entered into a financing agreement (“Term Note (2019)”) 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 is to finance a specific construction project currently in progress and the Company anticipates paying off Term Note (2019) in less than one year. Covenants for the loan are the same as the $12.5 million component of Line of Credit (2019). The loan is collateralized by the Company’s equipment.

Operating Line of Credit

On March 21, 2018, the Company entered into a financing agreement (“Operating Line of Credit (2018)”) with United Bank, Inc. 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 and it replaced the $15.0 million revolving line of credit (“Operating Line of Credit (2017)”) entered into with United Bank, Inc. effective February 27, 2017. This agreement expired on February 28, 2019 but was extended through April 28, 2019 by the Company’s lenders. The Company received a twelve-month extension (“Operating Line of Credit (2019)”) through April 28, 2020 on May 7, 2019.

The Company had borrowed $5.5 million against the Operating Line of Credit (2018) as of September 30, 2018 and had up to $7.0 million available to borrow against the first $12.5 million depending on the Company’s borrowing base report. The Company had borrowed an additional $4.5 million for a total of $10.0 million against the Operating Line of Credit (2019) as of May 30, 2019. On May 30, 2019, the Company entered into a financing agreement (“Term Note (2019)”) 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 is to finance a specific construction project currently in progress and the Company anticipates paying off Term Note (2019) in less than one year. As of June 30, 2019, the Company borrowed $3.0 million against Operating Line of Credit (2019) and had up to $9.5 million available to borrow against the first $12.5 million depending on the Company’s borrowing base report.

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:

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:

The Company was in compliance with all covenants for the $12.5 million component of Operating Line of Credit (2019) at June 30, 2019.

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 June 30, 2019, the Company had operating lease commitments of $68,000 with various expiration dates through March 2021.

Letters of Credit

Certain of our customers or vendors may require letters of credit to secure payments that the vendors are making on our behalf or to secure payments to subcontractors and vendors on various customer projects. At June 30, 2019, 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.

In February 2014, the Company entered into an agreement with a surety company to provide bonding which will suit the Company’s immediate needs. The ability to obtain bonding for future contracts is an important factor in the contracting industry with respect to the type and number of contracts that can be bid.

Depending upon the size and conditions of a contract, the Company may be required to post letters of credit or other collateral in favor of the insurer. Posting of these letters or other collateral will reduce our borrowing capabilities. The Company does not anticipate any claims against outstanding performance bonds in the foreseeable future. At June 30, 2019, the Company had $10.3 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 nine months ended June 30, 2019. The customer, Goff Full Stream Interconnect, represented 35.8% of revenues. The Company had two customers that exceeded 10.0% of receivables at June 30, 2019. These customers, TransCanada and Mountaineer Gas, represented 25.0%, and 18.1% of receivables net of retention at June 30, 2019, respectively.

The Company had three customers that exceeded 10.0% of revenues for the nine months ended June 30, 2018. The customers, Toyota Motor Mfg., Marathon Petroleum, and Dow Chemical, represented 19.2%, 13.7%, and 10.4% of revenues, respectively. The Company had two customers that exceeded 10.0% of receivables at June 30, 2018. The customers, Dow Chemical and Mountaineer Gas, represented 13.6% and 10.5%, respectively, of receivables net of retention at June 30, 2018.

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 $6.9 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at June 30, 2019, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At June 30, 2019, 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 June 30, 2019, we have paid approximately $176,000 in principal and approximately $244,000 in interest since the beginning of the loan.

There were no new material related party transactions during the nine months ended June 30, 2019.

Inflation

Due to relatively low levels of inflation during the nine months ended June 30, 2019 and 2018, 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 include costs and estimated earnings in excess of billings that were previously separately presented. Contract liabilities 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:

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 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.

The transaction price is the amount of consideration to which we expect 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). 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.

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.

Costs to obtain our contracts (“pre-bid costs”) that are not expected to be recovered from the customer are expensed as incurred and included in selling and administrative expenses on our consolidated statements of income. Costs to mobilize equipment and labor to a job site prior to substantive work beginning (“mobilization costs”) are capitalized as incurred and amortized over the expected duration of the contract. As of June 30, 2019, we had no material capitalized mobilization costs.

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

Contract Liabilities: Our contract liabilities consist of provisions for losses and billings in excess of costs and estimated earnings. Provisions for losses are recognized in the consolidated statements of income 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.

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 $1.9 million as of June 30, 2019. Should the captive insurance company experience severe losses over an extended period, it could have a detrimental effect on the Company.

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 factors such as a customer’s access to capital, the customer’s willingness or ability to pay, general economic conditions and the ongoing relationship with the customer. 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 become unable to pay the amounts owed, this could cause reduced cash flows and losses in excess of our current reserves. At June 30, 2019, management concluded that the allowance for doubtful accounts was adequate.

New Accounting Pronouncements

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 will be 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. The Company is currently evaluating the impact, if any, that adoption will have on its consolidated financial statements.

Outlook

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

The Company prepares weekly cash forecasts for our own benefit and for submission to our lenders. We anticipate that our current cash and the cash to be generated from collection of our receivables along with the existing Operating Line of Credit (2019) with United Bank, Inc., which was extended to April 28, 2020, will be adequate to meet our cash needs for the Company’s 2019 fiscal year. The Company may borrow against the line of credit provided it meets certain borrowing base requirements, with $15.0 million being the maximum allowed. If the Company has borrowed more than the borrowing base allows, the Company must repay the excess borrowings to United Bank, Inc. As of June 30, 2019, the Company had borrowings of $3.0 million against the Operating Line of Credit (2019).

Currently, the Company is receiving bid opportunities from existing and potentially new customers. However, with potential economic uncertainties, such as the 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 June 30, 2019 was $49.8 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 third quarter of fiscal year 2019 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

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 $6.9 million in the lawsuit, none of which has been recognized in the Company’s financial statements. Other than described above, at June 30, 2019, the Company was not involved in any legal proceedings other than in the ordinary course of business. The Company is a party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. These actions typically seek, among other things, compensation for alleged personal injury, breach of contract and/or property damages, punitive damages, civil penalties or other losses, or injunctive or declaratory relief. With respect to all such lawsuits, claims, and proceedings, we record reserves when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. At June 30, 2019, the Company does not believe that any of these proceedings, separately or in aggregate, would be expected to have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A. Risk Factors

Please see the information disclosed in the “Risk Factors” section of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on December 28, 2018. There have been no material changes to the risk factors since the filing of the Annual Report on Form 10-K.

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

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

(b) None.

(c) The repurchases of Energy Services of America Corporation’s shares of its common stock during the three months ended June 30, 2019 was as follows:

ITEM 6. Exhibits

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.