BOWMAN CONSULTING GROUP LTD. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains "forward-looking statements" reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed in the "Risk Factors" section and "Cautionary Statement about Forward-Looking Statements," in this Annual Report on Form 10-K, all of which are difficult to predict. Considering these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements, except to the extent required by applicable laws or rules. Unless the context otherwise requires, references to "Bowman," the "company," the "Company," "we," "us," and "our" refer toBowman Consulting Group Ltd. , its wholly owned subsidiaries and combined entities under common control, or either or all of them as the context may require.
Overview
Bowman is a professional services firm delivering innovative engineering solutions to customers who own, develop, and maintain the built environment. We provide planning, engineering, construction management, commissioning, environmental consulting, geomatics, survey, land procurement and other technical services to over 3,000 customers operating in a diverse set of end markets. We work as both a prime and sub-consultant for a broad base of public and private sector customers that generally operate in highly regulated environments. We have a diversified business that is not dependent on any one service line, geographic region, or end market. We are deliberate in our efforts to balance our sources of revenue and avoid reliance on any one significant customer, service line, geography or end market concentration. Our strategic focus is on penetrating and expanding our presence in markets which best afford us opportunities to secure assignments that provide reoccurring revenue and multi-year engagements thus resulting in dependable and predictable revenue streams and high employee utilization. We limit our exposure to risk by providing professional and related services exclusively. We do not engage in general contracting activities either directly, or through joint ventures, and therefore have no related exposure. We are not a partner in any design-build construction projects. We carry no heavy equipment inventory, and our risk of contract loss is generally limited to time associated with fixed fee professional services assignments. Gross contract revenue for the years endedDecember 31, 2021 and 2020 was$150.0 million and$122.0 million , respectively. Gross contract revenue derived from our workforce represented 89.9% and 85.0% of gross contract revenue for the years endedDecember 31, 2021 and 2020, respectively (see Net service billing - non-GAAP below). Our Adjusted EBITDA was$16.5 million on net income of$0.3 million and$13.9 million on net income of$1.0 million for the years endedDecember 31, 2021 and 2020, respectively.
COVID-19 Update
It is not possible at this time to estimate the full impact that COVID-19 will ultimately have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. We are evaluating, and will continue to evaluate, the impact of COVID-19 on projects, but the full effects COVID-19 will have on our operations are still unknown. Early on in the course of the pandemic we were considered an essential service in all states and local jurisdictions where we operate. While there was some degree of disruption in all markets, we were able to continue serving customers without interruption. As of the date of this report, we have not experienced any material and adverse effects on our business, financial condition and results of operations related to the COVID-19 pandemic. We did not qualify for the PPP Loan program under the CARES Act. We took advantage of the opportunity to defer$2.5 million of employer payroll taxes during the year endedDecember 31, 2020 , as afforded us under the CARES Act. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, including new variants, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees and clients. The implementation of shelter-in-place orders within the cities and municipalities we operate in could further negatively impact future results as well as the re-designation of infrastructure spending to non-essential services. At this time, we are monitoring, and will continue to monitor, the safety of our employees during the COVID-19 pandemic.
Common Share Offering
OnFebruary 8, 2022 , we priced an underwritten follow-on offering of 900,000 shares of our common stock (the "Firm Shares") at an offering price of$16.00 per share. The shares were sold pursuant to an effective registration statement on Form S-1 (Registration No. 333-262464). In addition,Gary Bowman , our President, Chairman and Chief Executive Officer, sold an aggregate of 150,000 shares of common stock in the offering. We granted the underwriters of the offering a 30-day option to purchase up to 157,500 shares of our common stock solely to cover over-allotments. OnFebruary 11, 2022 , we closed on the underwritten follow-on offering and received 39 -------------------------------------------------------------------------------- net proceeds of approximately$13.7 million after deducting the underwriting discount and estimated offering expenses payable by the Company, andMr. Bowman received aggregate proceeds of approximately$2.4 million . We did not receive any proceeds from the sale of shares of our common stock byMr. Bowman . OnFebruary 28, 2021 , the underwriters exercised their option to purchase an additional 157,500 shares of our common stock at an offering price of$16.00 per share, resulting in additional gross proceeds of approximately$2.5 million . After giving effect to this exercise of the overallotment option, the total number of shares sold by us in the follow-on offering increased to 1,057,500 shares with total gross proceeds of approximately$16.9 million . The exercise of the over-allotment option closed onMarch 2, 2022 , at which time we received net proceeds of approximately$2.4 million after underwriting discounts and commissions.
Assessment methods
We use a variety of financial and other information in monitoring the financial condition and operating performance of our business. Some of the information we use to evaluate our operations is financial information that is in accordance with Generally Accepted Accounting Principles (GAAP), while other information may be financial in nature and either built upon GAAP results or may not be in accordance with GAAP (Non-GAAP). We use all of this information together for planning and monitoring our operations, as well as determining certain management and employee compensation. We present our financial statements for the year endedDecember 31, 2020 as combined and for the year endedDecember 31, 2021 as consolidated, reflecting results for the Company, our subsidiaries and entities under common control performing similar services. In the accompanying combined and consolidated financial statements, we eliminate all intercompany transactions between the entities. Consolidation of entities under common control would not have altered the presentation of financial statements since all appropriate adjustments and eliminations are included in the combined and condensed consolidated financial statements. In connection with our initial public offering, we executed consolidating transactions that eliminated the need to present combined and consolidated financial statements upon effectiveness of our initial public offering, other than for historical comparisons (see "Consolidating Transactions in Connection with our Initial Public Offering"). The Company operates as a single business segment represented by our core business of providing multi-disciplinary professional engineering solutions to customers. While we evaluate revenue and other key performance indicators relating to various divisions of labor, our leadership neither manages the business nor deliberately allocates resources by service line, geography, or end market. Our financial statements present results as a single operating segment.
Components of income and expenses
Income
We generate revenue from services performed by our employees, pass-through fees from sub-consultants, and reimbursable contract costs. On our consolidated financial statements, we report gross revenue, which represents total revenue billed to customers excluding taxes collected from customers. Gross revenue less revenue derived from pass-through sub-consultant fees, reimbursable expenses and other direct expenses represents our net service billing, or that portion of our gross revenue attributable to services performed by our employees. Our industry uses the calculation underlying net service billing to normalize peer performance assessments and provide meaningful insight into trends over time. Refer to - Other Financial Data, Non-GAAP measurements and Key Performance Indicators below for further discussion of the use of this Non-GAAP financial measure. We generally do not generate profit from the pass-through of sub-consultants and reimbursable expenses. As such, contract profitability is most heavy impacted by the mix of labor utilized to complete the tasks and the efficiency of those resources in completing the tasks. Our largest direct contract cost is consistently our labor. To grow our revenue and maximize overall profitability we carefully monitor and manage our fixed cost of labor and the utilization thereof. Maintaining an optimal level of utilization on a balanced pool of growing labor resources represents our greatest prospect for delivering increasing profitability.
We conclude contracts that contain two types of tariff characteristics:
Hourly contracts, also referred to as time and materials, are common for professional and technical consulting assignments both short-term and multi-year in duration. Under these types of contracts, there is no predetermined maximum fee and we generally experience no risk associated with cost overruns. For hourly contracts, we negotiate billing rates and charge our customers based upon the actual hours expended toward a deliverable. These contracts may have not-to-exceed parameters requiring us to receive additional authorizations from our customer to continue working, but we likewise do not have to continue working without assurances of payment for such additional work.
Lump sum contracts, also known as fixed fees, generally require the performance of some or all of the obligations under the contract for a specified amount, subject to price adjustments only if the scope of the project changes or requirements unforeseen events arise.
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Our fixed price contracts generally include a specific scope of work and defined deliverables. Fixed price contracts can involve both hourly and fixed price tasks.
The majority of our assignments are lump sum in nature representing approximately 66% and 63% of our gross contract revenue for the years endedDecember 31, 2021 and 2020, respectively. Recognizing revenue from lump sum assignments requires management estimates of both total contract value when there are contingent compensation elements of the fee arrangement and expected cost at completion. We closely monitor our progress to completion and adjust our estimates when necessary. We do not recognize revenue from work that is performed at risk with no documented customer commitment.
Contract costs
Contract costs include direct labor costs, subcontractor costs and other direct expenses excluding depreciation and amortization.
Direct payroll costs represent the portion of salaries and wages incurred in connection with the production of deliverables under customer assignments and contracts. Direct payroll costs include allocated fringe costs (i.e. health benefits, employer payroll taxes, and retirement plan contributions), paid leave and incentive compensation. Sub-consultants and direct expenses include both sub-consultants and other outside costs associated with performance under our contracts. Sub-consultant and direct costs are generally reimbursable by our customers under the terms of our contracts. Performance under our contracts does not involve significant machinery or other long term depreciable assets. Most of the equipment we employ involves desktop computers and other shared ordinary course IT equipment. We present direct costs exclusive of depreciation and amortization and as such we do not present gross profit on our consolidated financial statements.
Exploitation charges
Operating expenses include selling, general and administrative expenses, non-cash stock compensation, depreciation and settlements and other non-core expenses.
Selling, general and administrative expenses represent corporate and other general overhead expenses, salaries and wages not allocated to customer projects including management and administrative personnel costs, incentive compensation, personal leave, office lease and occupancy costs, legal, professional and accounting fees. Non-cash stock compensation represents the expenses incurred with respect to shares and options issued by the Company, both vested and unvested, to employees as long-term incentives. For the year endedDecember 31, 2020 , non-cash stock compensation was determined by the change in the fair market measurement of the liability to common shares subject to repurchase. Subsequently, the expense is based on the amortization of the grant date fair value of equity grants over the vesting period. Non-cash stock compensation cost for permanent equity will be the grant date fair value of the awards, or the Black-Sholes-Merton value of stock options on the grant date, recognized ratably over the vesting periods of each award.
Future non-cash stock compensation expense for unvested shares granted prior to
Depreciation expense represents the depreciation expense for our real estate and general computer equipment, capital lease assets, leasehold improvements and intangible assets.
(Gain) loss on sale represents gains or losses inclusive of foreign exchange and accumulated depreciation recapture resulting from the disposal of an asset upon the sale or retirement of such asset.
Other (income) Expenses
Other (income) expenses include other non-operating and non-essential expenses.
Tax expenditure
Income tax (benefit) expense, current and deferred, includes estimated federal,
state and local tax expense associated with our net income, as apportioned to
the states in which we operate. Estimates of our tax expense include both
current and deferred tax expense along with all available tax incentives and
credits.
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Other financial data, non-GAAP measures and key performance indicators
Back
We measure the value of our undelivered gross revenue in real time to calculate our backlog and predict future revenue. Backlog includes awarded, contracted and otherwise secured commitments along with revenue we expect to realize over time for predictable long-term and reoccurring assignments. We report backlog quarterly as of the end of the last day of the reporting period. We use backlog to predict revenue growth and anticipate appropriate future staffing needs. Backlog definitions and methods of calculation vary within our industry. As such, backlog is not a reliable metric on which to evaluate us relative to our peers. Backlog neither derives from, nor connects to, any GAAP results.
Net service billing
In the normal course of providing services to our customers, we routinely subcontract services and incur direct third-party contract expenses that may or may not be reimbursable and may or may not be billed to customers with mark-up. Gross revenue less revenue derived from pass-through sub-consultant fees and reimbursable expenses represents our net service billing, which is a non-GAAP financial measure, or that portion of our gross contract revenue attributable to services performed by our employees. Because the ratio of sub-contractor and direct expense costs to gross billing varies between contracts, gross revenue is not necessarily indicative of trends in our business. As a professional services company, we believe that metrics derived from net service billings more accurately demonstrate the productivity and profitability of our workforce. Our industry uses the calculation of net service billing to normalize peer performance assessments and provide meaningful insight into trends over time.
Adjusted EBITDA
We view Adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of normalized performance. We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization, plus discontinued expenses, legal settlements, and other costs not in the ordinary course of business, non-cash stock-based compensation (inclusive of expenses associated with the adjustment of our liability for common shares subject to redemption), and other adjustments such as costs associated with preparing for our initial public offering. Our peers may define Adjusted EBITDA differently.
Adjusted EBITDA margin, net
Adjusted EBITDA Margin, net, which is a non-GAAP financial measure, represents Adjusted EBITDA, as defined above, as a percentage of net service billings, as defined above.
Significant Accounting Policies and Estimates
We use estimates in the determination of certain financial results. Estimates used in financial reporting utilize only information available to us at the time of formulation. These estimates are subject to change as new information becomes available. Discussed below are the accounting policies for which we believe our judgments and estimates have the greatest potential impact.
Revenue recognition
OnJanuary 1, 2019 , we adopted Accounting Standards Codification Topic 606 ("ASC Topic 606"). To determine the proper revenue recognition method under ASC Topic 606, we evaluate whether two or more contracts should be combined and accounted for as one single contract and if so, whether to account for the combined or single contract as more than one performance obligation. For most of our contracts, we conclude there to be a single performance obligation because the promise to transfer individual goods or services is not separately identifiable from the commitment to the deliverable of the contract and, therefore, is not distinct. Our performance obligations are satisfied as work progresses. We recognize revenue for our lump sum contracts ratably over time based on cost-basis percentage of completion, calculated as a percentage of direct costs incurred to date relative to estimated total direct costs of the performance obligation at completion. Contract costs include labor, sub-consultant costs and other direct costs as incurred. We recognize revenue from lump sum contracts as we advance our work and transfer results to the customer. Contract change orders covering changes in scope, specifications, design, performance or period of completion are common with our customers. In most cases, we account for contract modifications as part of the existing contracts because they are for services that are not distinct from the original contract. We base contract estimates on various assumptions about future costs and other inputs. Uncertainties inherent in the estimating process present the possibility that actual completion costs may vary from estimates. When estimated total costs on contracts indicate a loss, we recognize these losses in the period in which we identify the loss. We record adjustments required to align revenue with costs in place on the cumulative catch-up basis in the period in which we identify the revisions. We apply changes to projected revenue from contingent fee awards or penalties during the period in which we determine such contingencies to be probable. 42
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The purchase price of an acquired business is allocated to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based upon their respective fair values with any excess purchase price over such fair values being recorded as goodwill. We review goodwill and intangible assets acquired in a business combination determined to have indefinite useful life annually for impairment, or more frequently if impairment indicators arise. We do not amortize such assets. We do however amortize intangible assets with estimable useful lives over such lives and review such assets for impairment if indicators are present. We perform an annual impairment test as ofOctober 1 of each year. As our business is highly integrated and its components have similar economic characteristics, we have concluded we operate as one reporting unit at the combined entity level. We perform a Step 1 impairment analysis by comparing the fair value of the reporting unit to carrying value. We engaged a third-party valuation firm to assist management with the determination of fair value for the years endedDecember 31, 2021 and 2020. The fair value of the reporting unit was determined utilizing multiple weighted valuation techniques. Impairment loss is the difference between the reporting unit's fair value and carrying amount of goodwill, if the carrying value of the reporting unit exceeds its fair value. We performed an impairment analysis for the years endedDecember 31, 2021 and 2020 and concluded that the fair value of the reporting unit was greater than carrying value, and as such, we did not record an impairment charge.
Income tax
OnJanuary 1, 2018 , we changed our election from an S-corporation to a C-corporation. As an S-corporation, we were a non-taxable entity with all taxable income or loss allocated to the shareholders. Upon conversion to a C-corporation, we became a taxable entity. OnDecember 31, 2018 , we recorded a$5.4 million deferred tax liability associated with our conversion. For the year endedDecember 31, 2020 , we qualified under Internal Revenue Service 26 U.S. Code § 448, Limitation on use of cash method of accounting as a cash basis taxpayer based on our outstanding shares of common stock being at least 95% employee-owned with at least 95% of our gross revenue derived from engineering and consulting services. As such, we calculate our current tax expense on a cash basis and accrue future tax expenses resulting from associated timing differences as deferred tax liabilities. Upon the effective date of our initial public offering, we no longer qualified as a cash basis taxpayer and will be subject to a four-year conversion payment of our deferred tax liability subject to Section 7.03(1) ofRev. Proc . 2015-13. We receive an annual research and development tax credit in connection with certain at-risk work performed on behalf of customers. We reduce our current and deferred tax provision by the estimated net annual R&D tax credit projection, limited to the statutory allowance for utilization of the credit. We reconcile the tax credit and its impact during the subsequent year after calculating the credit in connection with our tax returns. We maintain what we believe to be an appropriate reserve against our accumulated credits. Estimates of our tax expense include both current and deferred tax expense along with all available tax incentives and credits.
Redeemable ordinary shares classified as liabilities and redeemable ordinary shares classified as temporary equity
InFebruary 2001 , our shareholders entered into a shareholders' Buy-Sell Agreement and subsequent Amendments. In addition, certain shareholders have entered into individual addenda to the shareholders' Buy-Sell Agreement to establish superseding share-based rights (the "Addenda" and collectively with the Buy-Sell Agreement and the Amendments, the "Shareholders' Buy-Sell Agreement"). Prior to our initial public offering onMay 6, 2021 , all current shareholders were a party to the Shareholders' Buy-Sell Agreement, which included certain rights and protections with respect to transactions in our stock in the event of death, disability, retirement, and termination of employment. Upon the issuance of compensation-related restricted stock grants, employees entered into separate stock bonus agreements with terms that incorporated and superseded terms in the Shareholders' Buy-Sell Agreement (individually a "Stock Bonus Agreement" and collectively the "Stock Bonus Agreements"). Because of these agreements, all Company shares were subject to repurchase provisions. As a result, we recorded a stock repurchase liability and temporary equity associated with certain provisions of the Shareholders' Buy-Sell Agreement and Stock Bonus Agreements whereby we would be obligated to repurchase stock from certain shareholders upon death, disability, retirement, or termination of employment. Accounting Standards Codification Topic 718 Stock Compensation ("ASC Topic 718") and Accounting Standards Codification Topic 480 Distinguishing Liabilities from Equity ("ASC Topic 480") govern the classification of equity and the treatment of stock awarded, purchased, or otherwise acquired. Shares are classified as a liability pursuant to ASC Topic 718 when conditions exist whereby those shares are subject to a call feature determined to be probable of execution upon the occurrence of an event beyond the control of the issuer. Shares are classified as temporary equity pursuant to ASC Topic 480 when conditions exist whereby stock is subject to mandatory redemption by the issuer upon the occurrence of an event that is conditional and beyond the control of the issuer. 43
-------------------------------------------------------------------------------- Changes in the periodic measurement of the fair value of the liability related to common shares subject to redemption pursuant to ASC Topic 718 are compensation costs. Changes in the periodic measurement of the fair value of the temporary equity pursuant to ASC Topic 480 reduce retained earnings or accumulated deficit, but do not appear as an expense on the income statement. OnDecember 22, 2020 , in connection with the preparation for our initial public offering, we executed the Fourth Amendment to our Buy-Sell Agreement which modified the repurchase features resulting in the classification of certain of our shares as temporary equity and liabilities. At the same time, we modified certain Stock Bonus Agreements to eliminate superseding repurchase features causing the classification of those shares as liabilities independent of the Shareholders' Buy-Sell Agreement. The shareholders terminated the Shareholders' Buy-Sell Agreement and amended additional Stock Bonus Agreements onMay 6, 2021 .
Operating results
Consolidated operating results
The following represents our consolidated results of operations for periods
indicated (in thousands):
For The Year Ended December 31,
2021 2020
Gross contract revenue $ 149,970 $ 122,020
Contract costs (exclusive of depreciation and
amortization) 74,532 66,512
Operating expense 75,278 53,639
Income from operations 160 1,869
Other (income) expense 1,440 (110 )
Income tax expense (benefit) (1,579 ) 989
Net income $ 299 $ 990
Net margin 0.2 % 0.8 %
Other financial information 1
Net service billing $ 134,854 $ 103,660
Adjusted EBITDA 16,485 13,888
Adjusted EBITA margin, net 12.2 % 13.4 %
1 Represents non-GAAP financial measures. See Other financial information and
Non-GAAP Key Performance Indicators below in Results of Operations.
Year ended
Gross contract revenue
Gross contract revenue for the year endedDecember 31, 2021 increased$28.0 million or 23% to$150.0 million as compared to$122.0 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 , gross contract revenue attributable to work performed by our workforce increased$31.2 million , or 30.1% to$134.9 million or 89.9% of gross contract revenue as compared to$103.7 million or 85.0% for year endedDecember 31, 2020 (see Net service billing - non-GAAP). Of the$28.0 million increase in gross contract revenue during the year endedDecember 31, 2021 , acquisitions represented$11.8 million or 42.1% of the increase. Changes in gross contract revenue ("GCR") for the year endedDecember 31, 2021 , disaggregated between our core and emerging end markets, were as follows (in thousands other than percentages): For the Year EndedDecember 31 ,
Consolidated gross revenue from 2021 contracts %GCR 2020
%GCR Change % Change Building Infrastructure 1$ 105,242 70.2 %$ 76,873 63.0 %$ 28,369 36.9 % Transportation 16,537 11.0 % 19,157 15.7 % (2,620 ) (13.7 %) Power & Utilities 22,525 15.0 % 20,377 16.7 % 2,148 10.5 % Other emerging markets 2 5,666 3.8 % 5,613 4.6 % 53 0.9 % Total:$ 149,970 100.0 %$ 122,020 100.0 %$ 27,950 22.9 % Organic$ 138,136 92.1 %$ 122,020 100.0 %$ 16,116 13.2 % Acquired 11,834 7.9 % - 0.0 % 11,834 100.0 %
1 formerly called Communities, Houses and Buildings
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2 represents renewable energy, mining, water resources and others
For the year endedDecember 31, 2021 , gross revenue from our building infrastructure market (formerly referred to as communities, homes and buildings) increased$28.4 million as compared to the year endedDecember 31, 2020 . The increase is attributable to a$10.2 million increase from residential and mixed-use projects including$7.0 million from multi-family and$2.0 million from single family, and a$18.1 million increase from commercial, municipal, and other projects with$8.4 million from office/ industrial and$9.3 million from big box/ chain retail. Gross revenue derived from the acquisitions was almost exclusively attributable to commercial projects. As theU.S. economy recovers from the COVID-19 pandemic, we are experiencing continued expansion of demand for our building infrastructure services. For the year endedDecember 31, 2021 , revenue from transportation decreased$2.7 million as compared to the year endedDecember 31, 2020 . The reduction was primarily attributable to the completion of large transportation projects inTexas ,Florida andVirginia along with a delay in starts for new projects in connection with uncertainty around government infrastructure stimulus. We believe the transportation market continues to present significant opportunity for future growth and we remain committed to investing in leadership, technical expertise, business development and acquisitions for this market. For the year endedDecember 31, 2021 , revenue from power and utilities increased$2.1 million as compared to the year endedDecember 31, 2020 . The increase is primarily attributable to increased revenue ourFlorida utility and undergrounding along with gas line replacement projects inIllinois ,Ohio andArizona . The power and utilities market continues to experience increasing infrastructure investment as changing weather patterns, energy transition mandates and other safety initiatives positively impact demand for the services we provide. As evidenced by recent increases in program commitments within the gas pipeline market, we believe trends in power and utilities provide meaningful opportunity for continued growth and we are committed to investing resources accordingly. Our other emerging markets consist of renewable energy and energy efficiency, mining, water resources, and other natural resources services. For the year endedDecember 31, 2021 , revenue from emerging markets increased$0.1 million as compared to the year endedDecember 31, 2020 . Increased emerging market revenue included a$0.2 million increase from our mining services where we have specialized in copper mining, the demand for which is cyclical in nature and had been negatively impacted by the COVID-19 pandemic, and a$0.2 million increase in renewable energy services, offset by a$0.4 million decrease in other emerging market services including water resources and other natural resources. Scarcities in water resources and the increasing need for water management gives us confidence that the water resources market will grow and that we will be able to increase associated revenue accordingly. With recent and future acquisitions, we expect to experience continued growth from investment in renewable energy and energy transition. For the year endedDecember 31, 2021 and 2020, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, represented 13.1% and 16.8% of our gross contract revenue, respectively. Gross contract revenue from projects for public sector clients are included in the end market most aligned with work performed.
Contract costs (excluding amortization and depreciation)
Total contract costs, exclusive of depreciation and amortization, increased$8.0 million or 12.0% to$74.5 million for the year endedDecember 31, 2021 , as compared to$66.5 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 and 2020, total contract costs represented 49.7% and 54.5% of total contract revenue, respectively. For the year endedDecember 31, 2021 and 2020 total contract costs represented 55.3% and 64.1% of revenue attributable to our workforce, respectively (see Net Service Revenue). This decrease is primarily attributable to a decrease in sub-consultant expense which reflects a shift in contract mix. For the year endedDecember 31, 2021 sub-consultant expense decreased$3.3 million or 17.9% to$15.1 million , as compared to$18.4 million for the year endedDecember 31, 2020 . Direct payroll costs increased$11.3 million or 23.5% to$59.4 million for the year endedDecember 31, 2021 , as compared to$48.1 million for the year endedDecember 31, 2020 . Direct payroll accounted for 79.7% of total contract costs for the year endedDecember 31, 2021 , an increase of 7.3 percentage points as compared to 72.4% for the year endedDecember 31, 2020 . Direct labor, the component of direct payroll costs associated with the cost of labor relating to work performed on contracts increased$7.8 million or 21.4% to$44.3 million for the year endedDecember 31, 2021 as compared$36.5 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 and 2020, direct labor costs represented 29.5% and 29.9% of gross contract revenue, respectively and represented 32.9% and 35.2% of the revenue attributable to our workforce, respectively. Other direct payroll costs, the component of direct payroll costs associated with fringe and incentive compensation (cash and non-cash) increased by$3.5 million or 29.9% to$15.2 million as compared to$11.7 million . This increase includes an increase of$0.7 million in the cost of non-cash stock compensation to$2.4 million for the year endedDecember 31, 2021 , as compared to$1.7 million for the year endedDecember 31, 2020 . The increase in non-cash stock compensation is attributable to new stock awards granted during the year endedDecember 31, 2021 . This increase also includes$0.9 million in additional bonus accrual for our variable compensation program due to improved company metrics. 45 -------------------------------------------------------------------------------- Sub-consultants and other direct expenses decreased$3.3 million or 17.9% to$15.1 million for the year endedDecember 31, 2021 , as compared to$18.4 million for the year endedDecember 31, 2020 . For the year endedDecember 31, 2021 and 2020, sub-consultant and other expenses represented 10.1% and 15.0% of gross contract revenue, respectively. This decrease is not indicative of an anticipated long-term shift in the composition of our gross contract revenue, and we expect to experience periodic volatility in concentration of sub-consultant utilization.
Exploitation charges
Total operating expenses increased
Selling, general and administrative expenses increased$17.5 million or 34.0% to$69.0 million for the year endedDecember 31, 2021 , as compared to$51.5 million for the year endedDecember 31, 2020 . Indirect labor increased$6.2 million or 26.6% to$29.5 million as compared to$23.3 million as a result of increased staffing to accommodate growth. General overhead increased$4.2 million or 22.8% to$22.6 million as compared to$18.4 million due to increased costs associated with operating as a public company and the overall growth of the company. During the year endedDecember 31, 2021 , in connection with our initial public offering, several new stock awards and event related bonuses were granted to employees. As a result, non-cash stock compensation increased$2.4 million or 70.6% to$5.8 million as compared to$3.4 million . Other compensation, associated with performance bonuses, increased$3.3 million to$4.6 million as compared to$1.3 million . Depreciation and amortization increased$4.1 million or 178.3% to$6.4 million as compared to$2.3 million as a result of the conversion of our equipment and vehicle operating leases to capital leases onSeptember 30, 2020 . Gains on the sale of certain IT equipment and automobiles remained unchanged for the year endedDecember 31, 2021 at$0.1 million of gain on the disposal of such assets.
Income from operations
Income from operations decreased$1.7 million or 89.5% to$0.2 million for the year endedDecember 31, 2021 as compared to$1.9 million for the year endedDecember 31, 2020 . The decrease in income from operations is the result of increases in expenses, including public company costs, new stock awards ad event related bonuses, which resulted in increases in costs that exceeded increases in gross revenue. Other (Income) Expense Other (income) expense decreased by$1.5 million to$1.4 million of expense for the year endedDecember 31, 2021 as compared to$0.1 million of income for the year endedDecember 31, 2020 . Income derived from incentives and rebates related to health insurance decreased by$0.4 million , interest income decreased by$0.2 million , interest expense increased by$0.4 million and acquisition related costs increased by$0.6 million . The decrease in interest income is attributable to several notes with shareholders being settled in the year endedDecember 31, 2020 , prior to the IPO. The increase in interest expense is due to the conversion of our equipment and vehicle leases from operating to capital leases onSeptember 30, 2020 . Income Tax Expense (Benefit) Income tax expense (benefit) for the year endedDecember 31, 2021 increased$2.6 million or 260.0% to$1.6 million benefit, as compared to$1.0 million expense for the year endedDecember 31, 2020 . Effective upon the completion of our initial public offering our tax status converted from cash basis to accrual basis, retroactive toJanuary 1, 2021 . This affects the timing of the payment of tax but not the expense of tax. Our effective tax rate for the year endedDecember 31, 2021 was 123.4%. Our income tax expense includes an estimated$1.7 million research and development tax credit earned by the Company for work performed at risk.
Profit (loss) before tax and net profit
Income before tax expense decreased by$3.3 million or 165.0% to$1.3 million loss for the year endedDecember 31, 2021 , as compared to a$2.0 million gain for the year endedDecember 31, 2020 . Net income decreased by$0.7 million or 70% to$0.3 million for the year endedDecember 31, 2021 , as compared to$1.0 million for the year endedDecember 31, 2020 . 46
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Other Non-GAAP Financial Information and Key Performance Indicators
Net Service Billing (non-GAAP)
Net service billing increased$31.2 million or 30.1% to$134.9 million for the year endedDecember 31, 2021 , as compared to$103.7 million for the year endedDecember 31, 2020 . Net service billing reconciles to gross contract revenue as follows (in thousands): For The Year Ended December 31, 2021 2020 Gross revenue$ 149,970 $ 122,020 Less: sub-consultants and other direct expenses 15,116 18,360 Net services billing$ 134,854 $ 103,660 Net service billing increased by 4.9 percentage points to 89.9% of gross contract revenue for the year endedDecember 31, 2021 , as compared to 85.0% for the year endedDecember 31, 2020 . This increase reflects a shift in contract mix and was positively affected by a net service billing to gross contract revenue ratio of 96.8% from acquired revenue. Net service billing for acquired companies was$11.5 million or 96.9% of gross contract revenue for the year endedDecember 31, 2021 . Net service billing, net of acquired companies, increased$19.7 million or 19.0% for the year endedDecember 31, 2021 to$123.4 million or 89.4% of gross contract revenue. Net service billing for the year endedDecember 31, 2021 , net of acquired companies, increased 19.0% as compared to the year endedDecember 31, 2020 .
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA increased$2.6 million or 18.7% to$16.5 million for the year endedDecember 31, 2021 as compared to$13.9 million for the year endedDecember 31, 2020 . Adjusted EBITDA reconciles to net income as follows (in thousands): For The Year Ended December 31, 2021 2020 $ Change % Change Net Income $ 299 $ 990$ (691 ) (69.8 %) + interest expense 918 565 353 62.4 % + depreciation & amortization 6,371 2,277 4,094 179.8 % + tax expense (1,579 ) 989 (2,568 ) (259.6 %) EBITDA $ 6,009 $ 4,821$ 1,188 24.6 % + non-reoccuring operating lease rent - 2,521 (2,521 ) (100.0 %) + non-cash stock compensation 8,217 5,085 3,132 61.6 % + transaction related expenses 1,555 - 1,555 100.0 % + settlements and other non-core expenses - 1,461 (1,461 ) (100.0 %) + acquisition expenses 704 - 704 100.0 % Adjusted EBITDA$ 16,485 $ 13,888 $ 2,597 18.7 % Adjusted EBITDA margin, net 12.2 % 13.4 % For the years endedDecember 31, 2021 and 2020, Adjusted EBITDA includes$8.2 million and$5.1 million , respectively, relating to non-cash stock compensation expenses resulting from the vesting of restricted stock awards. For the year endedDecember 31, 2020 , Adjusted EBITDA includes$2.5 million relating to non-recurring lease expenses. OnSeptember 30, 2020 , we refinanced our outstanding operating leases to capital leases (see Credit Facilities and Other Financing herein). Accordingly, we increased our short and long-term capital lease debt and eliminated all future rent expense relating to these operating leases. To present a meaningful representation of the impact of the new capital leasing structure on our consolidated financial results, and normalize the presentation of EBITDA, we added the non-recurring operating lease expenses to Adjusted EBITDA for the year endedDecember 31, 2020 .
Adjusted EBITDA margin, net (non-GAAP)
Adjusted EBITDA Margin, net represents Adjusted EBITDA (as defined above) as a percentage of net service billing (as defined above). For the years endedDecember 31, 2021 and 2020, Adjusted EBITDA Margin, net was 12.2% and 13.4% respectively. This decrease is in large part the result of increased costs associated with operating as a public company and the increase in non-cash stock compensation expense. 47
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Order book (other key performance indicators)
Our gross backlog increased$54 million or 47.8% to approximately$167 million during the year endedDecember 31, 2021 , as compared to$113 million atDecember 31, 2020 . AtDecember 31, 2021 and 2020 our backlog was comprised as follows:December 31, 2021 Building Infrastructure 1 62.3 % Transportation 19.0 % Power & Utilities 16.2 % Other Emerging Markets 2.5 % As ofDecember 31, 2021 , we had net backlog of approximately$145 million representing 86.5% of gross backlog. Net backlog is our gross backlog exclusive of subconsultant costs and other direct expenses. Our net backlog atDecember 31, 2021 was comprised as follows:December 31, 2021 Building Infrastructure 1 65.9 % Transportation 12.0 % Power & Utilities 19.2 % Other Emerging Markets 2.9 %
1 Formerly known as Communities, Dwellings and Buildings
Cash and capital resources
Our principal sources of liquidity are our cash and cash equivalents balances, cash flow from operations, borrowing capacity under our asset-based credit facility, lease financing and proceeds from stock sales. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures, repayment of debt, and acquisition related payments. OnDecember 31, 2021 , we maintained a$17.0 million revolving credit facility withBank of America , our primary lender. Under the terms of our credit facility, available cash in our primary operating account sweeps against the outstanding balance every evening. Our cash on hand therefore generally consists of petty cash and other non-operating funds not included in the nightly sweep. Our cash on hand increased by$20.2 million atDecember 31, 2021 as compared toDecember 31, 2020 . Prior toSeptember 30, 2020 , we typically funded capital expenditures for vehicles, IT and design infrastructure, geomatics technology and field survey production equipment through operating lease facilities. OnSeptember 30, 2020 , we refinanced our primary operating leases to capital leases. Our three primary lease finance providers areHuntington Technology Finance ,Honour Capital LLC andEnterprise Leasing . We regularly monitor our capital requirements and believe our sources of liquidity, including cash flow from operations, existing cash and borrowing availability under our credit and lease facilities will be sufficient to fund our projected cash requirements and strategic initiatives for the next year. We are actively pursuing acquisitions as part of our strategic growth initiative. At any given time, we are assessing multiple opportunities at varying stages of due diligence. These acquisition opportunities range in size, timing of closing, valuation and composition of consideration. In connection with acquisitions, we use a combination of cash, bank financing, seller financing, and equity to satisfy the purchase price. At this time, we have several acquisitions under consideration. There can be no assurance that any opportunity in the process of being reviewed will close but we expect over time to utilize a meaningful portion our current liquidity and capital resources for acquisitions. The recent COVID-19 pandemic has not had a material impact on our capital expenditures for the years endedDecember 31, 2021 and 2020. While we are not a capital-intensive business, we generally budget for capital spending of approximately 2-3% of gross revenue per year for IT and geomatics equipment, tenant improvements and vehicles.
Cash flow
The following table summarizes our cash flows for the periods presented:
For The Year Ended December 31 ,
Consolidated Statement of Cash Flows (amounts
in thousands) 2021
2020
Net cash provided by (used in) operating activities $ 4,717 $
10,770
Net cash provided by (used in) investing
activities (21,534 ) (2,414 )
Net cash provided by (used in) financing
activities 37,050 (8,479 )
Change in cash and cash equivalents 20,233 (123 )
Cash and cash equivalents, end of period 20,619 386
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Operational activities
During the year endedDecember 31, 2021 , net cash provided by operating activities was$4.7 million , which primarily consisted of$0.3 million net income, adjusted for stock-based compensation expense of$8.2 million and depreciation and amortization expense of$6.4 million , offset by an increase in deferred taxes of$2.2 million , a decrease in a net cash outflow of$8.4 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a$8.8 million increase in accounts receivable resulting from increased billing to our clients as well as additional billing from the acquired companies, a$2.3 million increase in prepaid expenses relating to the purchase of fiduciary directors and officer's insurance and an increase in income tax receivable, and a$0.6 million net increase in contract assets and liabilities, partially offset by a$3.3 million increase in accounts payable and accrued expense. During the year endedDecember 31, 2020 , net cash provided by operating activities was$10.8 million , which primarily consisted of our$1.0 million net profit, adjusted for stock-based compensation of$5.1 million , depreciation and amortization of$2.3 million and a net cash outflow of$1.3 million from changes in operating assets and liabilities. The net cash outflow from changes in operating assets and liabilities was primarily due to a$1.5 million decrease in accounts receivable, a$0.5 million decrease in accounts payable and accrued expense and a$0.6 million decrease in prepaid expense offset by a$2.9 million increase in net contract assets and liabilities.
Investing activities
Net cash used in investing activities increased by$19.1 million to$21.5 million for the year endedDecember 31, 2021 as compared to$2.4 million for the year endedDecember 31, 2020 . The increase in net cash used for investing is primarily attributable to the acquisitions inclusive of$20.3 million cash paid to sellers in connection with closing.
Fundraising activities
Net cash provided by financing activities during the year endedDecember 31, 2021 was$37.0 million compared to net cash used in financing activities of$8.5 for the year endedDecember 31, 2020 , an increase of$45.5 million . The increase in net cash provided by financing is primarily attributable to net proceeds of$47.1 million from our initial public offering, net of underwriting discounts commissions and other offering costs, offset by$0.6 million of payments for the purchase of treasury stock,$4.7 million of payments on capital leases and$5.3 million of payments under our notes payable and revolving line of credit in connection with our public offering.
Credit facilities and other financing
Credit line
OnDecember 31, 2021 , we maintained a$17.0 million revolving credit facility withBank of America , our primary lender. Under the terms of the credit facility, available cash in our primary operating account sweeps against the outstanding balance every evening. As ofDecember 31, 2021 , we did not have a balance on this revolving line of credit as we used a portion of the net proceeds from our initial public offering to satisfy this obligation. In 2017, we entered into a credit agreement (the Credit Agreement) withBank of America (the Bank) which included a revolving line of credit (the Revolving Line) and a non-revolving line of credit (the Fixed Line #1). The Revolving Line allowed for repayments and re-borrowings. The maximum advance was equal to the lesser of$12.4 million (the Credit Limit) or the Borrowing Base as defined in the Credit Agreement. The Borrowing Base is computed based upon a percentage of eligible receivables within each aging category under 120 days and is further refined for customer type. Receivables in excess of 120 days and those from related parties or affiliates are not eligible receivables for the Borrowing Base. During the year endedDecember 31, 2019 , the Credit Limit increased to$15.0 million and the maturity date extended toJuly 31, 2021 . During the year endedDecember 31, 2019 , a second non-revolving line of credit was established (Fixed Line #2). During the year endedDecember 31, 2020 , the credit limit increased to$17.0 million and we entered into an additional credit agreement withBank of America (Facility #4). Both of these credit agreements contain certain financial covenants with which we were in compliance atDecember 31, 2021 and 2020. The Revolving Line requires monthly payments of interest at the London Interbank Offered Rate (LIBOR) daily floating rate, plus an applicable rate which varies between 2.35% and 2.95% based on the Company achieving certain leverage ratios as defined in the Credit Agreement. OnDecember 31, 2021 andDecember 31, 2020 , the interest rate was 3.25% and 3.60%, respectively. All outstanding principal is due upon expiration, which isJuly 31, 2023 unless the agreement is renewed, or an event of default occurs. The Revolving Line appears as line of credit on our combined and condensed consolidated balance sheets. OnJuly 30, 2021 , we entered into a Sixth Amendment to the Credit Agreement whereby the maturity date of the Revolving Line was extended toJuly 31, 2023 . The Sixth Amendment eliminated the adjusted debt to EBITDA covenant along with certain 49
-------------------------------------------------------------------------------- administrative requirements and established the Secured Overnight Financing Rate (SOFR) as the future replacement for LIBOR. Additional modifications to the Revolving Line included expanded allowances for acquisition and reduced interest rate spreads, among other things. Fixed Line #1 has a maximum advance of$1.0 million , does not allow for re-borrowings, and is included in notes payable. BeginningOctober 1, 2017 , the Company began paying interest on a monthly basis at a rate per year equal to LIBOR plus 2.75%. OnDecember 31, 2021 andDecember 31, 2020 , the interest rate was 2.85% and 2.91%, respectively. CommencingAugust 31, 2018 , we began paying the outstanding principal balance in sixty equal monthly installments through maturity inAugust 2023 . OnDecember 31, 2021 andDecember 31, 2020 , the outstanding balance on Fixed Line #1 was$0.3 million and$0.5 million , respectively. Fixed Line #2 has a maximum advance of$1.0 million , does not allow for re-borrowings and is included in notes payable. As of the year endedDecember 31, 2019 the company had not yet drawn on this line. BeginningApril 1, 2020 , we began paying interest monthly at a rate per year equal to LIBOR plus 2.00%. OnDecember 31, 2021 andDecember 31, 2020 , the interest rate was 2.10% and 2.20%. Commencing the earlier of i) the date no remaining amount is available under the Fixed Line or, ii)August 31, 2020 , we were obligated to pay the then outstanding principal balance in sixty equal monthly installments through maturity inSeptember 2025 . OnDecember 31, 2021 and 2020, the outstanding balance on Fixed Line #2 was$0.7 million and$0.9 million , respectively. Facility #4 is a term loan with a principal loan amount of$1.0 million and included in notes payable. The loan is repaid over thirty-six months beginningApril 13, 2020 through maturity onMarch 13, 2023 . The payments consist of principal and interest in equal combined installments of$29,294 . The interest rate on this loan is 3.49%. OnDecember 31, 2021 and 2020, the outstanding balance on Facility #4 was$0.4 million and$0.8 million , respectively. We secure our obligations under the Credit Agreement with substantially all our assets and those of our subsidiaries. Our obligations to certain other stockholders of the Company are subordinate to our obligations under the Credit Agreement and Fixed Line loans. We must maintain certain financial covenants defined in the Credit Agreement. As ofDecember 31, 2021 , we were in compliance with such financial covenants. Interest expense on the Revolving and Fixed Lines totaled$0.1 million and$0.3 million during the years endedDecember 31, 2021 and 2020. As ofDecember 31, 2021 , we did not have a balance on this revolving line of credit as we used a portion of the net proceeds from our initial public offering to satisfy this obligation. Lease Facilities We have master lease facilities withHuntington Technology Finance ,Honour Capital LLC andEnterprise Leasing . TheHuntington Technology Finance lease facility finances our acquisition of IT infrastructure, geomatics and survey equipment, furniture and other long-lived assets.The Honour Capital lease facility finances the purchase of engineering and survey equipment, IT hardware, licenses, service contracts and other long-lived assets. The Enterprise lease facility finances the acquisition of field trucks and other service vehicles. We maintain a fleet of over 200 vehicles at any given time. Both leasing facilities allow for both operating and capital leasing. We treat operating lease payments as rental expenses included in selling, general and administrative expenses and allocate capital lease payments between amortization and interest. OnSeptember 30, 2020 , we converted our Huntington and Enterprise operating leases to capital leases and recorded the associated equipment purchases and capital lease liability, current and non-current. The payment terms on the lease agreements range between 30 and 50 months with payments totaling approximately$0.5 million per month. We use an incremental borrowing on our revolving line of credit to calculate the present value on new leases.
Off-balance sheet arrangements
We have no material off-balance sheet arrangements, no special purpose entities,
and no activities that include non-exchange-traded contracts accounted for at
fair value.
Effects of Inflation
Based on our analysis of the periods presented, we believe that inflation has
not had a material effect on our operating results. There can be no assurance
that future inflation will not have an adverse impact on our operating results
and financial condition.
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