Bowman Consulting Group Ltd. - Quarter Report: 2023 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________________________________
FORM 10-Q
_____________________________________________
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended June 30, 2023
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File Number: 001-40371
_____________________________________________
BOWMAN CONSULTING GROUP LTD.
(Exact Name of Registrant as Specified in its Charter)
_____________________________________________
| Delaware | 54-1762351 | ||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
12355 Sunrise Valley Drive, Suite 520 Reston, Virginia | 20191 | ||||
| (Address of principal executive offices) | (Zip Code) | ||||
Registrant’s telephone number, including area code: (703) 464-1000
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.01 par value | BWMN | The Nasdaq Global Market | ||||||||||||
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 filing requirements for the past 90 days. Yes x No o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | o | Accelerated filer | x | ||||||||
| Non-accelerated filer | o | Smaller reporting company | x | ||||||||
| Emerging growth company | x | ||||||||||
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ o No x
As of August 8, 2023, the registrant had 14,602,711 shares of common stock outstanding.
Table of Contents
| Page | ||||||||
i
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
BOWMAN CONSULTING GROUP LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except per share data)
| June 30, 2023 | December 31, 2022 | ||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current Assets | |||||||||||
| Cash and equivalents | $ | 9,746 | $ | 13,282 | |||||||
| Accounts receivable, net | 81,874 | 64,443 | |||||||||
| Contract assets | 26,050 | 16,321 | |||||||||
| Notes receivable - officers, employees, affiliates, current portion | 938 | 1,016 | |||||||||
| Prepaid and other current assets | 11,723 | 7,068 | |||||||||
| Total current assets | 130,331 | 102,130 | |||||||||
| Non-Current Assets | |||||||||||
| Property and equipment, net | 26,874 | 25,104 | |||||||||
| Operating lease, right-of-use assets | 39,476 | 30,264 | |||||||||
| Goodwill | 77,106 | 53,210 | |||||||||
| Notes receivable | 903 | 903 | |||||||||
| Notes receivable - officers, employees, affiliates, less current portion | 1,387 | 1,417 | |||||||||
| Other intangible assets, net | 39,763 | 27,950 | |||||||||
| Deferred tax asset, net | 21,098 | 13,759 | |||||||||
| Other assets | 1,082 | 1,020 | |||||||||
| Total Assets | $ | 338,020 | $ | 255,757 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current Liabilities | |||||||||||
| Revolving Credit Facility | $ | 21,189 | $ | – | |||||||
| Accounts payable and accrued liabilities | 32,878 | 40,293 | |||||||||
| Contract liabilities | 10,046 | 6,370 | |||||||||
| Notes payable, current portion | 12,438 | 10,168 | |||||||||
| Operating lease obligation, current portion | 8,153 | 6,949 | |||||||||
| Finance lease obligation, current portion | 6,001 | 5,297 | |||||||||
| Total current liabilities | 90,705 | 69,077 | |||||||||
| Non-Current Liabilities | |||||||||||
| Other non-current obligations | 28,827 | 356 | |||||||||
| Notes payable, less current portion | 16,734 | 16,276 | |||||||||
| Operating lease obligation, less current portion | 36,610 | 28,087 | |||||||||
| Finance lease obligation, less current portion | 14,619 | 14,254 | |||||||||
| Pension and post-retirement obligation, less current portion | 4,881 | 4,848 | |||||||||
| Total liabilities | $ | 192,376 | $ | 132,898 | |||||||
| Shareholders' Equity | |||||||||||
Preferred Stock, $0.01 par value; 5,000,000 shares authorized, no shares issued and outstanding | $ | – | $ | – | |||||||
Common stock, $0.01 par value; 30,000,000 shares authorized; 17,130,179 shares issued and 14,600,293 outstanding, and 15,949,805 shares issued and 13,556,550 outstanding, respectively | 171 | 159 | |||||||||
| Additional paid-in-capital | 189,351 | 162,922 | |||||||||
| Accumulated other comprehensive income | 557 | 578 | |||||||||
Treasury stock, at cost; 2,529,886 and 2,393,255, respectively | (24,417) | (20,831) | |||||||||
| Stock subscription notes receivable | (125) | (173) | |||||||||
| Accumulated deficit | (19,893) | (19,796) | |||||||||
| Total shareholders' equity | $ | 145,644 | $ | 122,859 | |||||||
| TOTAL LIABILITIES AND EQUITY | $ | 338,020 | $ | 255,757 | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
BOWMAN CONSULTING GROUP LTD.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Amounts in thousands except per share data)
(Unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Gross Contract Revenue | $ | 82,755 | $ | 62,399 | $ | 158,855 | $ | 114,860 | |||||||||||||||
Contract costs: (exclusive of depreciation and amortization below) | |||||||||||||||||||||||
| Direct payroll costs | 32,075 | 25,071 | 60,919 | 45,746 | |||||||||||||||||||
| Sub-consultants and expenses | 8,963 | 5,983 | 17,501 | 10,743 | |||||||||||||||||||
| Total contract costs | 41,038 | 31,054 | 78,420 | 56,489 | |||||||||||||||||||
| Operating Expenses: | |||||||||||||||||||||||
| Selling, general and administrative | 38,340 | 28,065 | 71,965 | 50,868 | |||||||||||||||||||
| Depreciation and amortization | 4,719 | 2,823 | 8,285 | 5,213 | |||||||||||||||||||
| (Gain) on sale | (226) | (27) | (237) | (32) | |||||||||||||||||||
| Total operating expenses | 42,833 | 30,861 | 80,013 | 56,049 | |||||||||||||||||||
| Income (loss) from operations | (1,116) | 484 | 422 | 2,322 | |||||||||||||||||||
| Other expense | 1,143 | 994 | 2,358 | 1,491 | |||||||||||||||||||
| Income (loss) before tax expense | (2,259) | (510) | (1,936) | 831 | |||||||||||||||||||
| Income tax (benefit) expense | (1,625) | (190) | (1,839) | (306) | |||||||||||||||||||
| Net income (loss) | $ | (634) | $ | (320) | $ | (97) | $ | 1,137 | |||||||||||||||
| Earnings allocated to non-vested shares | – | – | $ | – | $ | 191 | |||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | (634) | $ | (320) | $ | (97) | $ | 946 | |||||||||||||||
| Earnings (loss) per share | |||||||||||||||||||||||
| Basic | $ | (0.05) | $ | (0.03) | $ | (0.01) | $ | 0.09 | |||||||||||||||
| Diluted | $ | (0.05) | $ | (0.03) | $ | (0.01) | $ | 0.09 | |||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | 12,276,173 | 10,761,172 | 12,022,550 | 10,346,089 | |||||||||||||||||||
| Diluted | 12,276,173 | 10,761,172 | 12,022,550 | 10,427,602 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
BOWMAN CONSULTING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net Income (loss) | $ | (634) | $ | (320) | $ | (97) | $ | 1,137 | |||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||
| Pension and post-retirement adjustments | (11) | – | (21) | – | |||||||||||||||||||
| Other comprehensive income (loss) | (11) | – | (21) | – | |||||||||||||||||||
| Income tax provision related to items of other comprehensive income (loss) | – | – | – | – | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | (11) | – | (21) | – | |||||||||||||||||||
| Comprehensive income (loss), net of tax | $ | (645) | (320) | $ | (118) | 1,137 | |||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
BOWMAN CONSULTING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended June 30, 2023 and 2022
(Amounts in thousands except per share data)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Stock Subscription Notes Receivable | Accumulated Deficit | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | 14,809,363 | $ | 148 | $ | 139,996 | (2,247,354) | $ | (18,476) | $ | – | $ | (253) | $ | (23,344) | $ | 98,071 | |||||||||||||||||||||||||||||||||||||
| Issuance of new common shares in common stock offering | — | — | — | – | – | – | – | – | — | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares | 476,796 | 5 | 7,936 | – | – | – | – | – | 7,941 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | – | – | – | (91,264) | (1,381) | – | – | – | (1,381) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under stock compensation plan | 290,416 | 3 | (3) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under employee stock purchase plan | 25,858 | – | 311 | – | – | – | – | – | 311 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | – | – | 3,799 | – | – | – | – | – | 3,799 | ||||||||||||||||||||||||||||||||||||||||||||
| Collection on stock subscription notes receivable | – | – | – | – | – | – | 23 | – | 23 | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (320) | (320) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 15,602,433 | $ | 156 | $ | 152,039 | (2,338,618) | $ | (19,857) | $ | – | $ | (230) | $ | (23,664) | $ | 108,444 | |||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 16,019,601 | $ | 160 | $ | 167,440 | (2,425,755) | $ | (21,498) | $ | 568 | $ | (151) | $ | (19,259) | $ | 127,260 | |||||||||||||||||||||||||||||||||||||
| Issuance of new common shares | 504,637 | 3 | 14,867 | – | – | – | – | – | 14,870 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | – | – | – | (104,131) | (2,919) | – | – | – | (2,919) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under stock compensation plan | 566,882 | 6 | (6) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under employee stock purchase plan | 15,058 | – | 379 | – | – | – | – | – | 379 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | – | – | 6,337 | – | – | – | – | – | 6,337 | ||||||||||||||||||||||||||||||||||||||||||||
| Collections on stock subscription notes receivable | – | – | – | – | – | – | 26 | – | 26 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of conversion feature of convertible note | 24,001 | 2 | 334 | – | – | – | – | – | 336 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | – | – | – | – | – | (11) | – | – | (11) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (634) | (634) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 17,130,179 | $ | 171 | $ | 189,351 | (2,529,886) | $ | (24,417) | $ | 557 | $ | (125) | $ | (19,893) | $ | 145,644 | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
BOWMAN CONSULTING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2023 and 2022
(Amounts in thousands except per share data)
(Unaudited)
| Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income | Stock Subscription Notes Receivable | Accumulated Deficit | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | 13,690,868 | $ | 137 | $ | 120,842 | (2,201,289) | $ | (17,488) | $ | – | $ | (277) | $ | (24,801) | $ | 78,413 | |||||||||||||||||||||||||||||||||||||
| Issuance of new common shares in common stock offering | 1,057,500 | 11 | 15,464 | – | – | – | – | – | 15,475 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares | 486,629 | 5 | 8,110 | – | – | – | – | – | 8,115 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | – | – | – | (137,329) | (2,369) | – | – | – | (2,369) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under stock compensation plan | 321,373 | 3 | (3) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under employee stock purchase plan | 46,063 | – | 593 | – | – | – | – | – | 593 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | – | – | 7,025 | – | – | – | – | – | 7,025 | ||||||||||||||||||||||||||||||||||||||||||||
| Collection on stock subscription notes receivable | – | – | – | – | – | – | 47 | – | 47 | ||||||||||||||||||||||||||||||||||||||||||||
| Conversion of redeemable common stock to permanent equity | – | – | 8 | – | – | – | – | – | 8 | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | – | – | – | – | – | – | – | 1,137 | 1,137 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 15,602,433 | $ | 156 | $ | 152,039 | (2,338,618) | $ | (19,857) | $ | – | $ | (230) | $ | (23,664) | $ | 108,444 | |||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | 15,949,805 | $ | 159 | $ | 162,922 | (2,393,255) | $ | (20,831) | $ | 578 | $ | (173) | $ | (19,796) | $ | 122,859 | |||||||||||||||||||||||||||||||||||||
| Issuance of new common shares | 504,637 | 3 | 14,873 | – | – | – | – | – | 14,876 | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of treasury stock | – | – | – | (136,631) | (3,586) | – | – | – | (3,586) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under stock compensation plan | 620,639 | 6 | (6) | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of new common shares under employee stock purchase plan | 31,097 | 1 | 762 | – | – | – | – | – | 763 | ||||||||||||||||||||||||||||||||||||||||||||
| Stock based compensation | – | – | 10,466 | – | – | – | – | – | 10,466 | ||||||||||||||||||||||||||||||||||||||||||||
| Collections on stock subscription notes receivable | – | – | – | – | – | – | 48 | – | 48 | ||||||||||||||||||||||||||||||||||||||||||||
| Exercises of conversion feature of convertible note | 24,001 | 2 | 334 | – | – | — | – | – | 336 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | – | – | – | – | – | (21) | – | – | (21) | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | – | – | – | – | – | – | – | (97) | (97) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 17,130,179 | $ | 171 | $ | 189,351 | (2,529,886) | $ | (24,417) | $ | 557 | $ | (125) | $ | (19,893) | $ | 145,644 | |||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
BOWMAN CONSULTING GROUP LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash Flows from Operating Activities: | |||||||||||
| Net Income (loss) | $ | (97) | $ | 1,137 | |||||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 4,620 | 3,971 | |||||||||
| Amortization of intangible assets | 3,665 | 1,241 | |||||||||
| Gain on sale of assets | (237) | (32) | |||||||||
| Bad debt | 289 | 365 | |||||||||
| Stock based compensation | 11,169 | 7,274 | |||||||||
| Accretion of discounts on notes payable | 264 | – | |||||||||
| Deferred taxes | (7,339) | – | |||||||||
| Deferred rent | – | (237) | |||||||||
| Changes in operating assets and liabilities, net of acquisition of businesses | |||||||||||
| Accounts receivable | (10,885) | (10,254) | |||||||||
| Contract assets | (5,267) | (510) | |||||||||
| Prepaid expenses and other assets | (4,174) | (5,124) | |||||||||
| Accounts payable and accrued expenses | 9,535 | 5,877 | |||||||||
| Contract liabilities | 523 | 560 | |||||||||
| Net cash provided by operating activities | 2,066 | 4,268 | |||||||||
| Cash Flows from Investing Activities: | |||||||||||
| Purchases of property and equipment | (632) | (368) | |||||||||
| Fixed assets converted to lease financing | – | 22 | |||||||||
| Proceeds from sale of assets and disposal of leases | 237 | 32 | |||||||||
| Payments received under loans to shareholders | 108 | 118 | |||||||||
| Acquisitions of businesses, net of cash acquired | (15,408) | (7,950) | |||||||||
| Collections under stock subscription notes receivable | 48 | 47 | |||||||||
| Net cash used in investing activities | (15,647) | (8,099) | |||||||||
| Cash Flows from Financing Activities: | |||||||||||
Proceeds from common stock offering, net of underwriting discounts and commissions and other offering costs | – | 15,475 | |||||||||
| Borrowings under revolving credit facility | 21,189 | – | |||||||||
| Repayments under fixed line of credit | (283) | (365) | |||||||||
| Repayment under notes payable | (4,743) | (1,433) | |||||||||
| Payments on finance leases | (3,309) | (2,921) | |||||||||
| Payments for purchase of treasury stock | (3,586) | (2,368) | |||||||||
| Proceeds from issuance of common stock | 777 | 607 | |||||||||
| Net cash provided by financing activities | 10,045 | 8,995 | |||||||||
| Net increase (decrease) in cash and cash equivalents | (3,536) | 5,164 | |||||||||
| Cash and cash equivalents, beginning of period | 13,282 | 20,619 | |||||||||
| Cash and cash equivalents, end of period | $ | 9,746 | $ | 25,783 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for interest | $ | 1,547 | $ | 713 | |||||||
| Cash paid for income taxes | $ | 745 | 383 | ||||||||
| Non-cash investing and financing activities: | |||||||||||
| Property and equipment acquired under finance lease | $ | (4,385) | $ | (4,262) | |||||||
| Issuance of notes payable for acquisitions | $ | (7,825) | $ | (3,697) | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
BOWMAN CONSULTING GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business and Basis of Presentation
Nature of Business
Bowman Consulting Group Ltd. (along with its consolidated subsidiaries, “Bowman” or “we” or the “Company”) incorporated in the Commonwealth of Virginia on June 5, 1995 and reincorporated in the State of Delaware on November 13, 2020. Bowman is a professional services firm delivering innovative solutions to the marketplace of customers who own, develop and maintain the built environment. Within that arena, we provide planning, design, engineering, geospatial, survey, construction management, environmental consulting and land procurement services to markets that encompass the buildings in which people live, work and learn in; as well as the systems that provide water, electricity and other vital services, and the roads, bridges, and transportation systems used to get from place to place. We provide services to customers through fixed-price and time-and-material based contracts containing multiple milestones and independently priced deliverables. Typically, contract awards are on a negotiated basis, ranging in value from a few thousand dollars to multiple millions of dollars and can have varying durations depending on the size, scope, and complexity of the project.
The Company’s workforce typically provides the full scope of engineering and other contract services. However, with respect to certain specialty services or other compliance requirements within a particular contract, we may engage third-party sub-consultants. The Company’s headquarters is located in Reston, VA and the Company has over 70 offices throughout the United States and one office in Mexico.
Common Stock Offering
On February 11, 2022, the Company closed on an offering of common stock in which it issued and sold 900,000 shares at an offering price of $16.00 per share, resulting in net proceeds of $13.7 million after deducting underwriting discounts and commissions, but before expenses of the offering.
On February 28, 2022, the underwriters exercised their option to purchase an additional 157,500 shares of the Company’s 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 the Company in this common stock offering increased to 1,057,500 shares with total gross proceeds of approximately $16.9 million. The exercise of the over-allotment option closed on March 2, 2022, at which time the Company received net proceeds of $2.4 million after underwriting discounts and commissions.
Deferred offering costs consist primarily of accounting, legal and other fees related to the common stock offering. Prior to the offering, all deferred offering costs were capitalized within prepaid and other current assets in the consolidated balance sheet. No deferred offering costs were capitalized in the consolidated balance sheet as of June 30, 2023.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements and footnotes of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial information. In the opinion of management, the interim financial information includes all adjustments of a normal recurring nature necessary for a fair presentation of the results of operations, financial position, changes in shareholders’ equity and cash flows. The results of operations for the current period are not necessarily indicative of the results for the full year or the results for any future periods.
The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 filed with the SEC on March 15, 2023.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
7
2. Significant Accounting Policies
The following is a summary of the significant accounting policies and principles used in the preparation of the condensed consolidated financial statements:
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act (“JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934 (the “Exchange Act”)) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company that is either not an emerging growth company or, an emerging growth company that has opted out of using the extended transition period, difficult or impossible because of the potential differences in accounting standards used.
Revenue Recognition
As discussed in Note 1, the Company provides a variety of engineering and related professional services to customers located throughout the United States. The Company enters into agreements with clients that create enforceable rights and obligations and for which it is probable that the Company will collect the consideration to which it will be entitled as services transfer to the customer. It is customary practice for the Company to have written agreements with its customers and revenue on oral or implied arrangements is generally not recognized. The Company recognizes revenue based on the consideration specified in the applicable agreement. Excluded from the transaction price are amounts collected on behalf of third parties for sales and similar taxes.
Long-term contracts typically contain billing terms that provide for invoicing once a month and payment on a net 30-day basis. Exceptions to monthly billing terms are to ensure that the Company performs satisfactorily rather than representing a significant financing component. For example, fixed price contracts may provide for milestone billings based upon the attainment of specific project objectives to ensure the Company meets its contractual requirements rather than having billing monthly. Additionally, contracts may include retentions or holdbacks paid at the end of a project to ensure that Company meets the contract requirements. The Company does not assess whether a contract contains a significant financing component if the Company expects, at contract inception, that the period between payment by the customer and the transfer of promised services to the customer will be less than one year.
As a professional services engineering firm, the Company generally recognizes revenue over time as control transfers to a customer based upon the extent of progress towards satisfaction of the performance obligation.
For services delivered under fixed price contracts, the Company uses the ratio of actual costs incurred to total estimated costs since costs incurred (an input method) which represents a reasonable measure of progress towards the satisfaction of a performance in order to estimate the portion of revenue earned. This method faithfully depicts the transfer of value to the customer when the Company is satisfying a performance obligation that entails a number of interrelated tasks or activities for a combined output that requires the Company to coordinate the work of employees and sub-consultants. Contract costs typically include direct labor, subcontract and consultant costs, materials and indirect costs related to contract performance. Changes in estimated costs to complete these obligations result in adjustments to revenue on a cumulative catch-up basis, which causes the effect of revised estimates to be recognized in the current period. Changes in estimates can routinely occur over the contract term for a variety of reasons including, changes in scope, unanticipated costs, delays or favorable or unfavorable progress than original expectations. In situations where the estimated costs to perform exceeds the consideration to be received, the Company accrues the entire estimated loss during the period the loss becomes known.
When a performance obligation is billed using a time-and-material type contract, the Company measures its progress to complete based upon the hours incurred for the period times contractually agreed upon billing rates plus any materials delivered or consumed in the project. When applicable, the Company will recognize revenue under these contracts as invoiced under the practical expedient.
8
In certain situations, it is possible that two or more contracts should be combined and accounted for as a single contract, or a single contract should be accounted for as multiple performance obligations. This requires significant judgment and could impact the amount and timing of revenue recognition. Such determinations are made using management’s best estimate and knowledge of contracts and related performance obligations.
The Company’s contracts may contain variable consideration in the form of unpriced or pending change orders or claims that either increase or decrease the contract price. Variable consideration is generally estimated using the expected value method but may from time to time be estimated using the most likely amount method depending on the circumstance. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are based upon historical experience and known trends.
The Company recognizes claims against vendors, sub-consultants, and others as a reduction in costs when the contract establishes enforceability, and the amounts of recovery are reasonably estimable and probable. Reduction in costs are recognized at the lesser of the amount management expects to recover or costs incurred.
Contract related assets and liabilities are classified as current assets and current liabilities. Significant balance sheet accounts related to the revenue cycle are as follows:
Accounts receivables, net:
Accounts receivable, net (contract receivables) includes amounts billed under the contract terms. The amounts are stated at their net realizable value. The Company maintains an allowance for doubtful accounts to provide for the estimated number of receivables that will not be collected. The Company considers several factors in its estimate of the allowance, including knowledge of a client’s financial condition, its historical collection experience, and other factors relevant to assessing the collectability of such receivables.
Contract Assets:
Contract Assets are recorded when progress to completion revenue earned on contracts exceeds amounts billed under the contract. It may also include contract retainages that can be billed once contract stipulations are satisfied.
Contract Liabilities:
Contract Liabilities are recorded when amounts billed under a contract exceeds the progress to completion revenue earned under the contract.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates and assumptions that were used.
Concentration of Credit Risk and other Concentrations
The Company’s financial instruments that are exposed to concentrations of credit risk consist of cash and accounts receivable.
Cash balances at various times during the year may exceed the amount insured by the Federal Deposit Insurance Corporation. The Company’s cash deposits are held in institutions whose credit ratings are monitored by management, and the Company has not incurred any losses related to such deposits.
The Company can, at times, be subject to a concentration of credit risk with respect to outstanding accounts receivable. However, the Company believes no such concentration existed during the six months ended June 30, 2023, or the year ended December 31, 2022. The Company’s customers are located throughout the United States. Although the Company generally grants credit without collateral, management believes that its contract acceptance, billing, and collection policies are adequate to minimize material credit risk. Also, for non-governmental customers, the Company can often place mechanics liens against the real property associated with the contract in the event of non-payment.
9
Fair Value Measurements
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) provides the framework for measuring and reporting financial assets and liabilities at fair value. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The codification establishes a three-level disclosure hierarchy to indicate the level of judgment used to estimate fair value measurements:
Level 1: Quoted prices in active markets for identical assets or liabilities as of the reporting date;
Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices (such as interest rate and yield curves);
Level 3: Uses inputs that are unobservable, supported by little or no market activity and reflect significant management judgment.
As of June 30, 2023 and December 31, 2022:
•The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the relatively short duration of these instruments;
•The carrying amounts of debt obligations approximate their fair values as the terms are comparable to terms currently offered by local financial institutions for arrangements with similar terms to industry peers with comparable credit characteristics. Accordingly, the debt obligations involve Level 2 fair value inputs;
•The liability related to shares subject to repurchase was recognized at fair value using Level 1 inputs as there is an active market for the Company’s publicly traded stock. There was no remaining liability as of December 31, 2022. For further discussion, see Note 15, Employee Stock Purchase and Stock Incentive Plans.
Income Taxes
The Company recognizes deferred income tax assets or liabilities for expected future tax consequences of events recognized in the consolidated financial statements or tax returns. Under this method, deferred income tax assets or liabilities are determined based upon the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply when the differences settle or become realized. Valuation allowances are provided when it is more likely than not that a deferred tax asset is not realizable or recoverable in the future. As of June 30, 2023, no valuation allowances are required, and all deferred tax assets are realizable.
The Company assesses uncertain tax positions to determine whether the position will more likely than not be sustained upon examination by the Internal Revenue Service or other taxing authorities. If the Company cannot reach a more-likely-than-not determination, no benefit is recorded. If the Company determines that the tax position is more likely than not to be sustained, the Company records the largest amount of benefit that is more likely than not to be realized when the tax position is settled. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. Beginning January 1, 2022, the Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the option to deduct research and development expenditures in the current year and now requires taxpayers to capitalize and amortize research and development costs pursuant to Internal Revenue Code Section 174. The capitalized expenses are amortized over a 5-year period for domestic expenses and a 15-year period for foreign expenses. As a result of this provision of the TCJA, we have established a $20.6 million uncertain tax position related to capitalized and amortizable research and development ("R&D") costs as of period ended June 30, 2023.
The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. The Company’s effective tax rate for the six months ended June 30, 2023 and 2022 was 95.0% and (37.9)%, respectively. The change in the Company’s effective tax rate is predominantly due to changes in the estimated annual effective tax rate. The most prominent factors include an increase in projected R&D credits generated for 2023, a change in the projected limitations of the deductible executive compensation, and an overall reduction in forecasted income for 2023 relative to 2022. With respect to the projected R&D credit, the Company anticipates the 2023 generated R&D credit to be $3.8 million as of June 30, 2023, as compared to the projected R&D credit to be generated for fiscal year 2022 was $2.0 million as of June 30, 2022. Similarly, the Company anticipates the annual projected limitation
10
on the deductibility of executive compensation to be $9.8 million for 2023 as compared to $3.7 million for 2022. These factors as well as the forecasted change in book income predominantly resulted in the change in the estimated annual effective tax rate.
Furthermore, the Company also recognized net discrete benefits of $1.6 million for the six months ended June 30, 2023, as compared to net discrete benefit of $0.5 million for the six months ended June 30, 2022. The discrete benefits are predominantly the result of a windfall tax benefit for restricted stock awards and other non-recurring adjustments. More specifically, the windfall tax adjustment for restricted stock awards recognized at a value higher than the grant date fair value is $2.0 million for the six months ended June 30, 2023, and $0.5 million for the six months ended June 30, 2022. In addition, the Company recognized a one-time adjustment to the state income taxes payable, resulting in $0.2 million net discrete expense. These factors increased the rate by 82.6% and reduced the rate by 57.3% for the quarters ended June 30, 2023, and June 30, 2022, respectively.
For year ended December 31, 2022, the Company filed Form 3115, Application for Change in Accounting Method, with the Internal Revenue Service requesting to change its method of deducting stock-based compensation expense from an impermissible method to a permissible method; on July 27, 2022, the Form 3115 was approved by the Internal Revenue Service, which resulted in a reversal of a $1.9 million uncertain tax position to a deferred tax liability. In addition, the Company recorded a $0.4 million uncertain tax position during the year ended December 31, 2022, related to the annual limitation on the deductibility of executive compensation claimed on a prior period U.S. federal income tax return.
The Company files income tax returns in the U.S. federal jurisdiction and certain states in which it operates. Based on the timing of the filing of certain tax returns, the Company’s federal income tax returns for tax years 2019 and thereafter remain subject to examination by the U.S. Internal Revenue Service. The statute of limitations on the Company’s state income tax returns generally conforms to the federal three-year statute of limitations.
Segments
The Company operates in one segment based upon the financial information used by its chief operating decision maker in evaluating the financial performance of its business and allocating resources. The single segment represents the Company’s core business of providing engineering and related professional services to its customers.
Recently Issued Accounting Guidance
Accounting guidance recently adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) to replace the incurred loss impairment methodology under U.S. GAAP. This ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which could result in earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model will require the Company to use a forward-looking expected credit loss impairment methodology for the recognition of credit losses for financial instruments at the time the financial asset is originated or acquired, and require a loss be incurred before it is recognized. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The new standard will apply to accounts receivable, notes, and other financial instruments. This standard is effective for the Company beginning January 1, 2023. Adoption of ASU 2016-13 will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. The Company adopted the new guidance starting January 1, 2023. The impact of this ASU is reflected in the consolidated financial statements and was not material.
The Company does not believe that any recently issued standards other than those noted above would have a material effect on its consolidated financial statements.
3. Earnings per Share
Basic earnings per share is calculated by dividing net income attributable to the Company available to common stockholders by the weighted average number of common shares outstanding for the three and six months ended June 30, 2023 and 2022. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were either exercised or converted into common stock or resulted in the issuance of common stock that would share in the earnings of the Company. The dilutive effect of options is reflected in diluted earnings per share by application of the treasury stock method. The dilutive effect of shares to be purchased under the Company’s Employee
11
Stock Purchase Plan is reflected in diluted earnings per share by the weighted-average number of shares outstanding that would have been outstanding during the period. The dilutive effect of convertible debt is reflected in diluted earnings per share by application of the if-converted method. The Company uses the two-class method to determine earnings per share.
For calculating basic earnings per share, for the three and six months ended June 30, 2023, the weighted average number of shares outstanding exclude 1,871,892 and 1,811,416 non-vested restricted shares and 8,566 and 9,125 unexercised substantive options. The computation of diluted earnings per share for the three and six months ended June 30, 2023 did not assume the effect of restricted shares or substantive options because the effects were antidilutive.
For calculating basic earnings per share, for the three and six months ended June 30, 2022, the weighted average number of shares outstanding exclude 2,073,783 and 2,077,218 non-vested restricted shares and 13,448 and 14,013 unexercised substantive options. The computation of diluted earnings per share for the three and six months ended June 30, 2022 did not assume the effect of restricted shares or substantive options because the effects were antidilutive.
The following table represents a reconciliation of the net income and weighted average shares outstanding for the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2023 and 2022 (in thousands, except share data):
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Numerator | |||||||||||||||||||||||
| Net income (loss) | $ | (634) | $ | (320) | $ | (97) | $ | 1,137 | |||||||||||||||
| Earnings allocated to non-vested shares | – | – | – | 191 | |||||||||||||||||||
| Subtotal | $ | (634) | $ | (320) | $ | (97) | $ | 946 | |||||||||||||||
| Denominator | |||||||||||||||||||||||
| Weighted average common shares outstanding | 12,276,173 | 10,761,172 | 12,022,550 | 10,346,089 | |||||||||||||||||||
| Effect of dilutive nominal options | – | – | – | – | |||||||||||||||||||
| Effect of dilutive contingently earned shares | – | – | – | 81,513 | |||||||||||||||||||
| Dilutive average shares outstanding | 12,276,173 | 10,761,172 | 12,022,550 | 10,427,602 | |||||||||||||||||||
| Basic earnings per share | $ | (0.05) | $ | (0.03) | $ | (0.01) | $ | 0.09 | |||||||||||||||
| Dilutive earnings per share | $ | (0.05) | $ | (0.03) | $ | (0.01) | $ | 0.09 | |||||||||||||||
4. Acquisitions
Business Combinations
McMahon Associates, Inc.
In the second quarter of 2022, the Company signed a purchase agreement to acquire McMahon Associates, Inc. (“McMahon”), with an effective date of May 4, 2022. McMahon is a company that specializes in transportation planning and engineering based in Fort Washington, PA. The Company paid total consideration of $18.2 million, which was comprised of 476,796 shares of common stock, at $16.64 per share, for a total of $7.9 million, plus $10.3 million in cash, two promissory notes and assumed liabilities. The shares are subject to a six-month lock-up. The first and second promissory notes bears a simple interest rate fixed at 3.50%. The first promissory note has equal quarterly payments beginning on August 4, 2022 and ending May 4, 2025.The second promissory note was payable in one installment of principal and interest on March 15, 2023. For tax purposes, the acquisition is treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase price allocation consists primarily of goodwill. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The purchase price allocation has been completed and the amounts are deemed final.
12
The following summarizes the final calculations of the fair values of McMahon’s assets acquired and liabilities assumed as of the acquisition date (in thousands):
| June 30, 2023 | |||||
| Total Purchase Price | $ | 18,189 | |||
| Purchase Price Allocation: | |||||
| Accounts Receivable, net | 8,456 | ||||
| Contract assets | 1,017 | ||||
| Prepaid and other current assets | 291 | ||||
| Property and equipment, net | 949 | ||||
| Intangible assets | 3,392 | ||||
| Other assets | 96 | ||||
| Notes receivable - officers, employees, affiliates, current portion | 19 | ||||
| Accounts payable and accrued liabilities, current portion | (3,688) | ||||
| Contract liabilities | (841) | ||||
| Finance leases - non-current | (134) | ||||
| Post-retirement obligations, less current portion | (5,782) | ||||
| Total identifiable assets | $ | 3,775 | |||
| Goodwill | 14,414 | ||||
| Net assets acquired | $ | 18,189 | |||
For the six months ended June 30, 2023, the Company recorded no measurement period adjustments.
The consolidated financial statements of the Company include the results of operations since the date the business was acquired. The following table presents the results of operations of the acquired business for the three and six months ended June 30, 2023 (in thousands):
| For the Three Months Ended June 30, 2023 | For the Six Months Ended June 30, 2023 | |||||||
| Gross Contract Revenue | $ | 9,569 | $ | 19,983 | ||||
| Pre-tax Net Income | $ | 328 | $ | 1,626 | ||||
The following table presents the unaudited, pro forma consolidated results of operations for the year ended December 31, 2022 and December 31, 2021, respectively, assuming that the McMahon acquisition described above occurred at January 1, 2021. These unaudited pro forma results are presented for informational purposes only and are not meant to represent actual operating results that would have been achieved had the related events occurred on such date (in thousands):
| For the Year Ended | |||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| Gross Contract Revenue | $ | 273,924 | $ | 183,595 | |||||||
| Net Income | $ | 5,948 | $ | 2,164 | |||||||
The pro forma information provided is compiled from the pre-acquisition financial information and includes pro forma adjustments to reflect additional amortization that would have been expensed assuming the respective assets had been acquired as of January 1, 2021. These results include additional non-cash stock compensation expense assuming acquired employees who received stock grants received those grants on January 1, 2021 and reflect the income tax effect of pro forma adjustments based on the statutory rate of 28.9%.
13
Project Design Consultants, LLC.
In the third quarter of 2022, the Company signed a purchase agreement to acquire Project Design Consultants, LLC (“PDC”), with an effective date of July 15, 2022. PDC is a civil engineering and land surveying firm based in San Diego, CA. The Company paid total consideration of $14.2 million, which was comprised of cash, two promissory notes, a convertible note and assumed liabilities. The two promissory notes bear a simple interest rate fixed at 4.75%. The first promissory note is payable in equal quarterly payments of principal and interest beginning on October 15, 2022 and ending July 15, 2025 .The second promissory note is payable in two installments of principal and interest due on March 15, 2023 and on the first anniversary of the closing date. The convertible note bears simple interest fixed at 4.75% and is convertible into shares of common stock at any time, at a conversion price of $14.00 per share. Subject to the exercise of the conversion, the convertible note will have quarterly payments of principal, interest or both beginning October 2022 and ending April 2027. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The following summarizes the preliminary calculations of the fair values of PDC assets acquired and liabilities assumed as of the acquisition date (in thousands):
| June 30, 2023 | |||||
| Total Purchase Price | $ | 14,178 | |||
| Purchase Price Allocation: | |||||
| Accounts receivable | 2,199 | ||||
| Contract assets | 926 | ||||
| Prepaid and other current assets | 161 | ||||
| Property and equipment, net | 489 | ||||
| Intangible assets | 10,344 | ||||
| Accounts payable and accrued liabilities, current portion | (1,118) | ||||
| Contract liabilities | (1,362) | ||||
| Other non-current obligations | (273) | ||||
| Finance leases - non-current | 36 | ||||
| Total identifiable assets | $ | 11,402 | |||
| Goodwill | 2,776 | ||||
| Net assets acquired | $ | 14,178 | |||
For the three months ended June 30, 2023, the Company recorded no measurement period adjustments.
The purchase price allocation consists primarily of goodwill and intangible assets and is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of PDC’s assets acquired and liabilities assumed. The Company is still in the process of finalizing the valuation of intangible assets. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
Identified intangible assets are comprised of customer relationships and contract rights for a total amount of $10.3 million, to be amortized over estimated useful lives of 10 years and 3 years, respectively.
The consolidated financial statements of the Company include the results of operations since the date the business was acquired. The following table presents the results of operations of the acquired business from the date of acquisition for the three and six months ended June 30, 2023 (in thousands):
14
| For the Three Months Ended June 30, 2023 | For the Six Months Ended June 30, 2023 | |||||||
| Gross Contract Revenue | $ | 3,727 | $ | 6,833 | ||||
| Pre-tax Net Income | $ | 1,478 | $ | 2,117 | ||||
Anchor Consultants, LLC.
In the third quarter of 2022, the Company signed a purchase agreement to acquire Anchor Consultants, LLC (“Anchor”), with an effective date of August 26, 2022. Anchor is an engineering firm based in Chadds Ford, PA specializing in the planning, permitting, design and construction management of infrastructure that forms the waterfront of the nation’s inland waterways. The Company paid total consideration of $4.0 million, which was comprised of cash, promissory notes, a convertible note and assumed liabilities. The promissory note bears a simple interest rate fixed at 5.50% with equal quarterly payments beginning on November 26, 2022 and ending on August 26, 2025. The convertible note bears a simple interest rate fixed at 5.50% and is convertible into shares of common stock at anytime at a conversion price of $18.00 per share. Subject to the exercise of the conversion, the convertible note has quarterly payments of principal, interest or both beginning November 2022 and ending May 2027. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase price allocation consists primarily of goodwill and intangible assets, in the amount of $4.0 million, and is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of Anchor’s assets acquired and liabilities assumed. The Company is still in the process of finalizing the valuation of intangible assets. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
SEI Engineering, LLC
In the fourth quarter of 2022, the Company signed a purchase agreement to acquire SEI Engineering, LLC (“SEI”), with an effective date of November 2, 2022. SEI is a professional firm based in Paonia, CO. The Company paid total consideration of $0.8 million, which was comprised of $0.4 million in cash, two promissory notes, and assumed liabilities. The two promissory notes bears a simple interest rate fixed at 6.25%. The first promissory note is payable in equal quarterly payments of principal and interest beginning on February 4, 2023 and ending November 4, 2025. The second promissory note was payable in one installment of principal and interest due on March 15, 2023. For tax purposes, the acquisition will be treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase price allocation consists primarily of goodwill, and is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of SEI’s assets acquired and liabilities assumed. The Company is still in the process of finalizing the valuation of intangible assets. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
Spatial Acuity, LLC
In the fourth quarter of 2022, the Company signed a purchase agreement to acquire Spatial Acuity, LLC (“Spatial”), with an effective date of November 2, 2022. Spatial is a professional firm based in Austin, TX. The Company paid total consideration of $4.1 million, which was comprised of 134,042 shares of common stock, at $15.15 per share, for a total of $2.0 million, plus $2.1 million in cash, two promissory notes, and assumed liabilities. The shares are subject to a six-month lock-up. The two promissory notes bears a simple interest rate fixed at 6.25%. The first promissory note is payable in equal quarterly payments of principal and interest beginning on February 4, 2023 and ending November 4, 2025. The second promissory note was payable in one installment of principal and interest due on March 15, 2023. For tax purposes, the
15
acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase agreement includes a contingent consideration feature, which affords the sellers the opportunity to earn additional consideration up to $3.0 million in the form of the Company's common stock, cash and a non-negotiable promissory note, based on certain financial performance thresholds measured quarterly from January 1, 2023 through June 30, 2025. Contingent liability of $0.5 million was recorded as of June 30, 2023. The Company will continue to evaluate its estimated liability to the contingent consideration and adjust the balance as necessary.
The purchase price allocation consists primarily of goodwill and is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of assets acquired and liabilities assumed. The Company is still in the process of finalizing the valuation of intangible assets. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
H2H Geoscience Engineering, PLLC
In the fourth quarter of 2022, the Company signed a purchase agreement to acquire H2H Geoscience Engineering, PLLC (“H2H”), with an effective date of December 2, 2022. H2H is a professional firm based in Troy, NY. The Company paid total consideration of $3.7 million, which was comprised of $1.4 million in cash, a promissory note, a convertible note and assumed liabilities. The promissory note bears a simple interest rate fixed at 7.00%. The promissory note is payable in equal quarterly payments of principal and interest beginning on March 2, 2023 and ending December 2, 2024. The convertible note bears simple interest fixed at 7.00% and is convertible into shares of common stock at any time, at a conversion price of $18.00 per share. Subject to the exercise of the conversion, the convertible note has quarterly payments of principal, interest or both beginning December 2, 2024 and ending September 2, 2027. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
For the six months ended June 30, 2023, the Company recorded measurement period adjustment of $49,000 to accounts payable with a corresponding adjustment to goodwill. The change did not result in a change to operating income.
The purchase price allocation consists primarily of goodwill, and is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of H2H’s assets acquired and liabilities assumed. The Company is still in the process of finalizing the valuation of intangible assets. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill.
Richter & Associates, Inc.
In the second quarter of 2023, the Company signed a purchase agreement to acquire Richter & Associates, Inc. (“Richter”), with an effective date of April 3, 2023. Richter is a professional firm based in Rockville, MD. The Company paid total consideration of $5.4 million which was comprised of 75,784 shares of common stock, at $29.00 per share, for a total of $2.2 million, plus $3.2 million in cash, promissory note and assumed liabilities. The shares are subject to a six-month lock-up. The promissory note bears a simple interest rate fixed at 11.00%. The promissory note is payable in equal quarterly payments of principal and interest beginning on July 3, 2023 and ending April 3, 2025. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase price allocation consists primarily of goodwill and intangible assets in the amount of $3.2 million. This is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
16
The Company has not completed its final assessment of the fair values of Richter’s assets acquired and liabilities assumed. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill and intangible assets.
Fisher Engineering, Inc.
In the second quarter of 2023, the Company signed a purchase agreement to acquire Fisher Engineering, Inc. (“Fisher”), with an effective date of May 12, 2023. Fisher is a professional firm with offices throughout the United States. The Company paid total consideration of $5.2 million which was comprised of 31,521 shares of common stock, at $27.66 per share, for a total of $0.9 million, plus $4.3 million in cash, promissory note and assumed liabilities. The shares are subject to a six-month lock-up. The promissory note bears a simple interest rate fixed at 8.25%. The promissory note is payable in equal quarterly payments of principal and interest beginning on August 12, 2023 and ending May 12, 2026. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase agreement includes a contingent consideration feature, which affords the sellers the opportunity to earn additional consideration up to $2.0 million in the form of cash and a promissory note, based on certain financial performance thresholds measured yearly from May 1, 2023 through April 30, 2026. Contingent liability of $1.8 million was recorded as of June 30, 2023. The Company will continue to evaluate its estimated liability to the contingent consideration and adjust the balance as necessary.
The purchase price allocation consists primarily of goodwill of $4.2 million. This is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of Fisher’s assets acquired and liabilities assumed. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill and intangible assets.
Hole Montes, Inc.
In the second quarter of 2023, the Company signed a purchase agreement to acquire Hole Montes, Inc. (“Hole Montes”), with an effective date of May 16, 2023. Hole Montes is a professional firm based in Naples and Fort Myers, FL. The Company paid total consideration of $7.4 million, which was comprised of 129,221 shares of common stock, at $27.60 per share, for a total of $3.6 million, plus $3.8 million in cash, two promissory notes, and assumed liabilities. The shares are subject to a six-month lock-up. The two promissory notes bears a simple interest rate fixed at 8.25%. The first promissory note is payable in equal quarterly payments of principal and interest beginning on August 16, 2023 and ending November 16, 2025. The second promissory note will be payable in one installment of principal and interest due on March 1, 2024. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase agreement includes a contingent consideration feature, which affords the sellers the opportunity to earn additional consideration up to $0.9 million in the form of the Company's common stock, cash and a non-negotiable promissory note, based on certain financial performance thresholds measured quarterly from April 1, 2023 through September 30, 2024. Contingent liability of $0.9 million was recorded as of June 30, 2023. The Company will continue to evaluate its estimated liability to the contingent consideration and adjust the balance as necessary.
The purchase price allocation consists primarily of goodwill of $4.2 million. This is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of Hole Montes’ assets acquired and liabilities assumed. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill and intangible assets.
17
MTX Surveying, LLC
In the second quarter of 2023, the Company signed a purchase agreement to acquire MTX Surveying, LLC (“MTX”), with an effective date of June 2, 2023. MTX is a professional firm based in Marshall, TX. The Company paid total consideration of $11.7 million, which was comprised of 143,333 shares of common stock, at $28.09 per share, for a total of $4.0 million, plus $7.7 million in cash, promissory note, and assumed liabilities. The shares are subject to a six-month lock-up. The promissory note bears a simple interest rate fixed at 5.00%. The promissory note is payable in equal quarterly payments of principal and interest beginning on September 2, 2023 and ending June 2, 2026. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase agreement includes a contingent consideration feature, which affords the sellers the opportunity to earn additional consideration up to $3.0 million in the form of the Company's common stock, cash and a non-negotiable promissory note, based on certain financial performance thresholds measured quarterly from July 1, 2023 through December 31, 2024. Contingent liability of $3.0 million was recorded as of June 30, 2023. The Company will continue to evaluate its estimated liability to the contingent consideration and adjust the balance as necessary.
The purchase price allocation consists primarily of goodwill of $8.1 million. This is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of MTX’s assets acquired and liabilities assumed. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill and intangible assets.
Advanced Applied Engineering, Inc. dba Infrastructure Engineers
In the second quarter of 2023, the Company signed a purchase agreement to acquire Advanced Applied Engineering, Inc. (“Infrastructure”), with an effective date of June 12, 2023. Infrastructure is a professional firm based in Brea, CA. The Company paid total consideration of $8.5 million, which was comprised of 141,794 shares of common stock, at $29.81 per share, for a total of $4.2 million, plus $4.3 million in cash, promissory note, and assumed liabilities. The shares are subject to a six-month lock-up. The promissory note bears a simple interest rate fixed at 8.25%. The promissory note is payable in equal quarterly payments of principal and interest beginning on September 12, 2023 and ending December 12, 2024. For tax purposes, the acquisition was treated as an asset acquisition, resulting in a step up in tax basis. Accordingly, there are no material deferred tax assets or liabilities to be recorded through purchase accounting.
The purchase agreement includes a contingent consideration feature, which affords the sellers the opportunity to earn additional consideration up to $1.5 million in the form of the Company's common stock and a non-negotiable promissory note, based on certain financial performance thresholds measured quarterly from July 1, 2023 through December 31, 2024. Contingent liability of $1.5 million was recorded as of June 30, 2023. The Company will continue to evaluate its estimated liability to the contingent consideration and adjust the balance as necessary.
The purchase price allocation consists primarily of goodwill of $6.5 million. This is based upon preliminary information that is subject to change when additional information is obtained. Goodwill results from an assembled workforce, which does not qualify for separate recognition, as well as expected future synergies from combining operations. All of the goodwill recognized is expected to be deductible for tax purposes.
The Company has not completed its final assessment of the fair values of MTX’s assets acquired and liabilities assumed. The final purchase allocation could result in adjustments to certain assets and liabilities, including the residual amount allocated to goodwill and intangible assets.
Results from Acquisitions
The condensed consolidated financial statements of the Company include the results of operations from any business acquired from their respective dates of acquisition. The following table presents the results of operations of business acquired from their respective dates of acquisition for the three and six months ended June 30, 2023 (in thousands):
18
| For the Three Months Ended June 30, 2023 | For the Six Months Ended June 30, 2023 | |||||||
Gross Contract Revenue1 | $ | 5,769 | $ | 5,769 | ||||
| Pre-tax Net Income | $ | 1,940 | $ | 1,940 | ||||
1 Gross contract revenue includes adjustments as required by ASC 606, Revenue from Contracts with Customers based on opening balance sheet provided by the acquired companies. There is no assurance these adjustments will be consistent in future periods. Opening balance sheet balances are subject to adjustment prior to being finalized.
The following table presents the unaudited, pro forma condensed consolidated results of operations for the three and six months ended June 30, 2023 and June 30, 2022 assuming that the companies acquired in the second quarter of 2023, described above, occurred on January 1, 2022. The unaudited pro forma results are presented for informational purposes only and are not meant to represent actual operating results that would have been achieved had the related events occurred on such date (in thousands):
| For the Six Months Ended June 30, 2023 | ||||||||
| 2023 | 2022 | |||||||
Gross Contract Revenue2 | $ | 182,656 | $ | 135,669 | ||||
| Pre-tax Net Income (loss) | $ | 3,402 | $ | (94) | ||||
2 Gross contract revenue in these pro forma financials does not conform to GAAP as required by ASC 606, Revenue from Contract with Customers, as it is impracticable to obtain the historical information necessary to apply this accounting standard. The historical estimates required to be able to accurately determine the percent complete accounting on the contracts that comprise the revenue is not available for the required periods.
The pro forma information provided is compiled from the pre-acquisition financial information and includes pro forma adjustments to reflect additional depreciation and amortization that would have been expensed assuming the respective assets had been acquired as of January 1, 2022. These results also include additional non-cash stock compensation expense assuming acquired employees who received stock grants received those grants on January 1, 2022.
5. Disaggregation of Revenue and Contract Balances
The Company disaggregates revenues by contract type, see Revenue Recognition in Note 2 for further details. For the three and six months ended June 30, 2023, the Company derived 88.8% and 89.2% of its revenue from contracts classified as lump sum, and 11.2% and 10.8% of its revenue from time and material contracts, respectively. The Company had approximately $234.6 million in remaining performance obligations as of June 30, 2023 of which it expects to recognize approximately 93.9% within the next twelve months and the remaining 6.1% in the next twelve to twenty-four months.
Disaggregated revenues by contract type were as follows (in thousands):
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||
| Fixed fee | $ | 73,508 | 88.8 | % | $ | 58,488 | 93.7 | % | $ | 141,753 | 89.2 | % | $ | 108,074 | 94.1 | % | |||||||||||||||||||||||||||||||
| Time-and-materials | 9,247 | 11.2 | % | 3,911 | 6.3 | % | 17,102 | 10.8 | % | 6,786 | 5.9 | % | |||||||||||||||||||||||||||||||||||
| Gross contract revenue | $ | 82,755 | 100.0 | % | $ | 62,399 | 100.0 | % | $ | 158,855 | 100.0 | % | $ | 114,860 | 100.0 | % | |||||||||||||||||||||||||||||||
The Company recognized $0.2 million and $2.8 million of revenue for the three and six months ended June 30, 2023, respectively, which was included in the contract liabilities balance as of December 31, 2022, and $1.1 million and $2.5 million of revenue for the three and six months ended June 30, 2022, respectively, which was included in the contract liabilities balance as of December 31, 2021.
19
6. Contracts in Progress
The following table reflects the calculation of the net balance of contract assets and contract liabilities. Costs and estimated earnings on contracts in progress consist of the following (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Costs incurred on uncompleted contracts | $ | 387,057 | $ | 279,173 | |||||||
| Estimated contract earnings in excess of costs | 404,240 | 398,791 | |||||||||
| Estimated contract earnings to date | 791,297 | 677,964 | |||||||||
| Less: billed to date | (775,293) | (668,013) | |||||||||
| Net contract assets | $ | 16,004 | $ | 9,951 | |||||||
7. Notes Receivable
The Company has unsecured notes receivable from related parties, certain non-executive officers of the Company and an unrelated third party. The following is a summary of these notes receivable (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
Officers, employees and affiliated entities - Interest accrues annually at rates ranging from 0.0% - 5.5%. The notes receivable mature through December 2024. | $ | 2,325 | $ | 2,433 | |||||||
Unrelated third party - Currently no interest is being accrued on this note. The note receivable matures in December 2023. | 903 | 903 | |||||||||
| Total: | 3,228 | 3,336 | |||||||||
| Less: current portion | |||||||||||
| Officers, employees and affiliates | (938) | (1,016) | |||||||||
| Noncurrent portion | $ | 2,290 | $ | 2,320 | |||||||
Each borrower may prepay all or part of the outstanding balance at any time prior to the date of maturity. During the six months ended June 30, 2023, interest accrued on the notes receivable at the stipulated rates between 0.0% and 5.50%.
8. Property and Equipment, Net
Property and equipment for fixed assets are as follows (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Computer equipment | $ | 2,218 | $ | 2,101 | |||||||
| Survey equipment | 5,409 | 5,088 | |||||||||
| Vehicles | 1,852 | 1,032 | |||||||||
| Furniture and fixtures | 2,446 | 2,398 | |||||||||
| Leasehold improvements | 8,194 | 7,727 | |||||||||
| Software | 435 | 316 | |||||||||
Fixed assets pending lease financing 1 | 316 | 181 | |||||||||
| Total: | 20,870 | 18,843 | |||||||||
| Less: accumulated depreciation | (13,506) | (12,319) | |||||||||
| Property and Equipment, net of finance leased assets | $ | 7,364 | $ | 6,524 | |||||||
1assets acquired which will be re-financed under the Company's finance lease facilities
20
Depreciation expense for fixed assets for the three and six months ended June 30, 2023 was $0.7 million and $1.2 million, respectively. Depreciation expense for fixed assets for the three and six months ended June 30, 2022 was $0.3 million and $0.6 million, respectively.
Property and equipment for finance leased assets are as follows (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Equipment | $ | 17,722 | $ | 16,256 | |||||||
| Vehicles | 8,838 | 6,787 | |||||||||
| Total: | 26,560 | 23,043 | |||||||||
| Less: accumulated amortization on leased assets | (7,050) | (4,463) | |||||||||
| Finance Leased Assets, net | $ | 19,510 | $ | 18,580 | |||||||
Amortization expense for finance leased assets for the three and six months ended June 30, 2023 was $1.8 million and $3.4 million, respectively. Amortization expense for finance leased assets for the three and six months ended June 30, 2022 was $1.8 million and $3.4 million, respectively.
9. Goodwill
Changes in the carrying amount of goodwill were as follows (in thousands):
| Goodwill | |||||
| Balance as of December 31, 2022 | $ | 53,210 | |||
| Goodwill Acquired | 23,896 | ||||
| Balance as of June 30, 2023 | $ | 77,106 | |||
There were no impairments of goodwill during the periods presented.
10. Intangible Assets
Total intangible assets consisted of the following at June 30, 2023 and December 31, 2022 (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
| Gross Amount | Accumulated Amortization | Net Balance | Gross Amount | Accumulated Amortization | Net Balance | ||||||||||||||||||||||||||||||
| Customer relationships | $ | 35,909 | $ | (3,825) | $ | 32,084 | $ | 23,595 | $ | (2,330) | $ | 21,265 | |||||||||||||||||||||||
| Contract rights | 10,471 | (4,568) | 5,903 | 7,281 | (2,416) | 4,865 | |||||||||||||||||||||||||||||
| Leasehold | 187 | (66) | 121 | 187 | (48) | 139 | |||||||||||||||||||||||||||||
| Domain name | 281 | – | 281 | 281 | – | 281 | |||||||||||||||||||||||||||||
| Licensing rights | 1,374 | – | 1,374 | 1,400 | – | 1,400 | |||||||||||||||||||||||||||||
| Total | $ | 48,222 | $ | (8,459) | $ | 39,763 | $ | 32,744 | $ | (4,794) | $ | 27,950 | |||||||||||||||||||||||
The domain name and licensing rights acquired for a total of $1.7 million, have indefinite useful lives.
The following table summarizes the weighted average useful lives of intangible assets by asset class used for straight-line expense purposes:
| June 30, 2023 | December 31, 2022 | ||||||||||
| Customer relationships | 8.10 | 11.97 | |||||||||
| Contract rights | 1.08 | 2.47 | |||||||||
| Leasehold | 5.74 | 8.05 | |||||||||
21
Amortization expense for the three and six months ended June 30, 2023 was $2.3 million and $3.7 million, respectively. Amortization expense for the three and six months ended June 30, 2022 was $0.8 million and $1.2 million, respectively.
Future amortization for the remainder of 2023 and for the succeeding years is as follows (in thousands):
| 2023 | 6,256 | ||||
| 2024 | 7,403 | ||||
| 2025 | 5,930 | ||||
| 2026 | 5,390 | ||||
| 2027 | 2,142 | ||||
| Thereafter | 10,987 | ||||
| Total | $ | 38,108 | |||
11. Revolving Credit Facility and Fixed Credit Facilities
The Company has one revolving credit facility (the “Revolving Credit Facility”) and three non-revolving credit facilities (“Fixed Line #1”, " Fixed Line #2” and “Fixed Line #4” collectively, the “Fixed Lines”) with Bank of America, N.A. On June 30, 2023 and June 30, 2022, the interest rate on the Revolving Credit Facility was 9.25% and 2.11%, respectively. All outstanding principal on the Revolving Credit Facility is due on September 30, 2024. On June 30, 2023 and December 31, 2022, there was $21.2 million and no outstanding balance on the Revolving Credit Facility, respectively.
On November 11, 2022, the Company and certain of its subsidiaries, as guarantors, entered into an Amended and Restated Credit Agreement with Bank of America, N.A. (the "Amended and Restated Agreement") as well as an Amended and Restated Pledge and Security Agreement. The Amended and Restated Agreement increased the maximum principal amount of the Revolving Credit Facility to $50 million, is secured by all the assets of the Company and the subsidiary guarantors and has a maturity date of September 30, 2024. Under the Amended and Restated Agreement, the Company is required to comply with certain covenants, including covenant on indebtedness, investments, liens and restricted payments, as well as maintain certain financial covenants, including a fixed charge coverage ratio and leverage ratio of debt to EBITDA (as defined in the Amended and Restated Agreement). On August 2, 2023, subsequent to the reporting period, the Company entered into a First Amendment to the Amended and Restated Credit Agreement whereby the maximum principal amount of the Revolving Credit Facility was increased to $70 million, the term was extended to July 31, 2025, and certain provisions relating to interest rate spreads and used fees were modified (see Footnote 17 - Subsequent Events).
Fixed Line #1 had a maximum advance of $1.0 million and does not allow for re-borrowings and is included in Notes Payable (see Note 12). The Company pays interest on a monthly basis at a rate equal to SOFR Simple APR plus 2.0%. On June 30, 2023 and 2022, the interest rate was 7.06% and 3.51%, respectively. Commencing the earlier of i) the date no remaining amount is available under the Fixed Line or, ii) August 31, 2018, the Company was obligated to pay the then outstanding principal balance in sixty equal monthly installments through maturity in August 2023. On each of June 30, 2023 and December 31, 2022, the outstanding balance on Fixed Line #1 was $49,000 and $0.1 million, respectively.
Fixed Line #2 had a maximum advance of $1.0 million and does not allow for re-borrowings and is included in Notes Payable (see Note 12). Commencing the earlier of i) the date no remaining amount is available under the Fixed Line or, ii) August 31, 2020, the Company was obligated to pay the then outstanding principal balance in sixty equal monthly installments through maturity in September 2025. On each of June 30, 2023 and December 31, 2022, the outstanding balance on Fixed Line #2 was $0.4 million and $0.5 million, respectively.
Facility #4 is a term loan with a principal loan amount of $1.0 million and is included in Notes Payable (see Note 12). The loan was to be repaid over thirty-six equal monthly installments beginning April 13, 2020, through maturity on March 13, 2023. The interest rate on this loan was 3.49%. As of June 30, 2023, Facility #4 was paid in full and there was no outstanding balance.
The Company secures its obligations under the Amended and Restated Agreement with substantially all assets of the Company. Obligations of the Company to certain other shareholders of the Company are subordinated to the Company’s obligations under the Amended and Restated Agreement and Fixed Line loans. The Company must maintain, on a combined basis certain financial covenants defined in the Amended and Restated Agreement.
22
Interest expense on the Revolving Credit Facility and Fixed Lines totaled $12,000 and $0.2 million during the three and six months ended June 30, 2023, respectively. Interest expense on the Revolving Credit Facility and Fixed Lines totaled $11,000 and $21,000 during the three and six months ended June 30, 2022, respectively.
12. Notes Payable
Notes payable consist of the following (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Related parties: | |||||||||||
Shareholders - Interest accrues annually at rates ranging from 3.25% - 11.00%. The notes payable mature on various dates through June 2026. | $ | 15,942 | $ | 11,515 | |||||||
Owners of Acquired Entities - Interest accrues annually at rates ranging from 3.25% - 7.00% annually. The notes payable mature on various dates through October 2024. | 6,803 | 8,134 | |||||||||
Convertible Notes Payable - Interest accrues annually at rates ranging from 4.75% - 7.00% annually. The convertible notes payable mature on various dates through May 2027. | 6,339 | 6,675 | |||||||||
| Unrelated third parties: | |||||||||||
| Note payable for purchase of software and vehicles | 40 | 55 | |||||||||
| Note payable for purchase of intangible asset | 50 | 50 | |||||||||
| Fixed line notes payable - see note 11 | 491 | 773 | |||||||||
| Discounts on notes payable issued as consideration in acquisitions: | |||||||||||
| Shareholders | (135) | (177) | |||||||||
| Owners of acquired entities | (358) | (581) | |||||||||
| Total | 29,172 | 26,444 | |||||||||
| Less: current portion | (12,438) | (10,168) | |||||||||
| Noncurrent portion | $ | 16,734 | $ | 16,276 | |||||||
The Company’s President, Chairman and Chief Executive Officer guarantees certain of the notes payable, and certain of the notes payable are subordinate to the terms of the Credit Agreement disclosed in Note 11.
Interest expense attributable to the notes payable totaled $0.5 million and $0.9 million for the three and six months ended June 30, 2023, respectively. Interest expense attributable to the notes payable totaled $0.1 million and $0.2 million for the three and six months ended June 30, 2022, respectively.
Future principal payments on notes payable for remainder of 2023 and succeeding years are as follows (in thousands):
| 2023 | $ | 7,221 | |||
| 2024 | 11,230 | ||||
| 2025 | 7,105 | ||||
| 2026 | 2,917 | ||||
| 2027 | 1,192 | ||||
| Thereafter | – | ||||
| Total | $ | 29,665 | |||
23
Convertible Notes Payable
In July 2022, the Company issued a $4.0 million 4.75% unsubordinated convertible note with a maturity date in July 2027 as partial consideration for the acquisition of PDC (Note 4). The convertible note is convertible into shares of common stock at the option of the holders, at any time, at a conversion price of $14.00 per share upon proper notice. Subject to the exercise of the conversion, the convertible note is payable in quarterly payments of principal, interest or both beginning in October 2022 and ending in April 2027. At any time, upon business days’ notice to the Company, the holders may request that a prepayment of the principal or all or part of a regularly scheduled quarterly payment of the principal be made in the form of common stock of the Company, with the number of shares of common stock equal to the amount of the requested prepayment divided by the stock conversion price. If the request is made with respect to a regularly scheduled quarterly payment of principal, then the accrued interest shall be paid in cash. An election was made by the holders, and on April 5, 2023, $0.3 million of the note was converted to 24,001 shares of common stock at $14.00 per share.
In August 2022, the Company issued a $1.1 million 5.50% unsubordinated convertible note with a maturity date in May 2027 as partial consideration for the acquisition of Anchor (Note 4). The convertible note is convertible into shares of common stock at the option of the holders, at any time, at a conversion price of $18.00 per share upon proper notice. Subject to the exercise of the conversion, the convertible note has quarterly payments of principal, interest or both beginning in November 2022 and ending in May 2027. At any time, upon business days’ notice to the Company, the holders may request that a prepayment of the principal or all or part of a regularly scheduled quarterly payment of the principal be made in the form of common stock of the Company, with the number of shares of common stock equal to the amount of the requested prepayment divided by the stock conversion price. If the request is made with respect to a regularly scheduled quarterly payment of principal, then the accrued interest shall be paid in cash. As of June 30, 2023, there has been no election by the holders to convert any portions of the convertible note to common stock.
In December 2022, the Company issued a $1.6 million 7.00% unsubordinated convertible note with a maturity date in September 2027 as partial consideration for the acquisition of H2H (Note 4). The convertible note will be convertible into shares of common stock at the option of the holders, at any time, at a conversion price of $18.00 per share upon proper notice. Subject to the exercise of the conversion, the convertible note has quarterly payments of principal, interest or both beginning in December 2024 and ending in September 2027. At any time, upon business days’ notice to the Company, the holders may request that a prepayment of the principal or all or part of a regularly scheduled quarterly payment of the principal be made in the form of common stock of the Company, with the number of shares of common stock equal to the amount of the requested prepayment divided by the stock conversion price. If the request is made with respect to a regularly scheduled quarterly payment of principal, then the accrued interest shall be paid in cash. As of June 30, 2023, there has been no election by the holders to convert any portions of the convertible note to common stock.
13. Pension and Post-retirement Benefit Obligations
The Company sponsors various non-qualified defined benefit pension plans in the U.S. (the "Plan"). Individual benefits under the Plan generally are based on the employee’s years of creditable service and compliance with non-competes. The plan is unfunded and there are no plan assets.
The following table details the components of net periodic benefit costs for the Company's pension plan for the three and six months ended June 30, 2023 and 2022:
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
| (Amounts in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Components of net periodic benefit cost: | |||||||||||||||||||||||
| Service costs | $ | 53 | $ | – | $ | 64 | $ | – | |||||||||||||||
| Interest costs | 25 | – | 93 | – | |||||||||||||||||||
| Amortization of net gain | (10) | – | (21) | – | |||||||||||||||||||
| Net periodic benefit cost | $ | 68 | $ | – | $ | 136 | $ | – | |||||||||||||||
There are no required minimum contributions for the pension plans.
24
14. Related Party Transactions
The Company leases commercial office space from BCG Chantilly, LLC (BCC), an entity in which Mr. Bowman, Mr. Bruen and Mr. Hickey collectively own a 63.6% interest. As of June 30, 2023 and December 31, 2022 there were no amounts due to or receivables due from BCC. Rent expense for each of the three and six months ended June 30, 2023 was $21,000 and $41,000, respectively. Rent expense for each of the three and six months ended June 30, 2022 was $21,000 and $41,000, respectively.
Bowman Lansdowne Development, LLC (BLD) is an entity in which Mr. Bowman has an ownership interest. On each of June 30, 2023 and December 31, 2022, the Company’s notes receivable included $0.5 million from BLD, with a maturity date of January 31, 2024.
Lansdowne Development Group, LLC (LDG) is an entity in which BLD has a minority ownership interest. On each of June 30, 2023 and December 31, 2022, our accounts receivable included $0.1 million, due from LDG. On June 30, 2023 and December 31, 2022, notes receivable included $0.4 million and $0.4 million, respectively from LDG, with a maturity date of January 31, 2024.
Bowman Realty Investments 2010, LLC (BR10) is an entity in which Mr. Bowman has an ownership interest. On each of June 30, 2023 and December 31, 2022, the Company’s notes receivable included $0.2 million, from BR10, with a maturity date of January 31, 2024.
Alwington Farm Developers, LLC (AFD) is an entity in which BR10 has a minority ownership interest. On each of June 30, 2023 and December 31, 2022, notes receivable included $1.2 million, from AFD, with a maturity date of December 31, 2024.
MREC Shenandoah VA, LLC (“MREC Shenandoah”) is an entity in which Lake Frederick Holdings, LLC (“Lake Frederick Holdings”) owns a 92% interest and Shenandoah Station Partners LLC, an entity owned in part by BLD and in part by Bowman Realty Investments 2013 LLC "Bowman Realty" (BR13), owns an 8% interest. Mr. Bowman owns a 100% interest in, and is the manager of, Lake Frederick Holdings. Mr. Bowman is the sole member of Bowman Realty 2013 (BR13). Since 2020, the Company has provided engineering services to MREC Shenandoah in exchange for cash payments. During the three and six months ended June 30, 2023, and 2022 the Company invoiced $0.1 million and $0.1 million, respectively, and received payments of $0.1 million and $0.1 million, respectively.
During the six months ended June 30, 2023 and 2022, the Company provided administrative, accounting and project management services to certain of the related party entities. The cost of these services was $29,000 and $33,000, respectively. These entities were billed $30,000 and $38,000, respectively.
Gregory Bowman, the son of Mr. Bowman, is a full-time employee of the Company. Gregory Bowman was paid $71,000 and $65,000 for the six months ended June 30, 2023 and 2022, respectively.
On each of June 30, 2023 and December 31, 2022, the Company was due $0.1 million and $0.2 million, respectively, from shareholders under the terms of stock subscription notes receivable.
On June 30, 2023 and December 31, 2022, the Company owed $0.1 million and $0.2 million, respectively, to a retired shareholder and former director in connection with a 2015 acquisition.
On June 30, 2023 and December 31, 2022, the Company owed certain of our current and former shareholders $8.1 million and $11.5 million, respectively. The notes result from repurchases of stock from shareholders upon termination of employment and promissory notes issued in connection with acquisitions.
In August 2022, the Company agreed to reimburse Mr. Bowman at a fixed hourly rate for the business use of an aircraft owned by Sunrise Asset Management, a company owned 100% by Mr. Bowman. The Company paid $0.1 million for the six months ended June 30, 2023.
25
15. Employee Stock Purchase and Stock Incentive Plans
Employee Stock Purchase Plan
Effective April 30, 2021, the Company established the Bowman Consulting Group Ltd. 2021 Employee Stock Purchase Plan (“ESPP”). Under the ESPP, eligible employees who elect to participate are granted the right to purchase shares of common stock at a 15% discount of the weighted average selling price of the Company stock for the 30 days prior to the last day of the offering period.
The following table summarizes the stock issuance activity under the ESPP for the six months ended June 30, 2023 (in thousands, except share data):
| June 30, 2023 | |||||
| Total purchase price paid by employees for shares sold | $ | 763 | |||
| Number of shares sold | 31,097 | ||||
Stock Options
Effective May 11, 2021 the Company established the Bowman Consulting Group Ltd. 2021 Omnibus Equity Incentive Plan (“the Plan”). The plan is administered by the board of directors (the “Board”), who on its own action or through its designee may make grants of restricted stock options, including Incentive Stock Options (“ISO”), and non-qualified stock options (“NQSO”). The purpose of the Plan is to grant equity incentive awards to eligible participants to attract, motivate and retain key personnel. The Plan supersedes and replaces any prior plan for stock options except that the prior plan shall remain in effect with respect to options granted under such prior plan until such options have been exercised, expired or canceled.
The number of shares for which each option shall be granted, whether the option is an ISO or NQSO, the option price, the exercisability of the option, and all other terms and conditions of the option are determined by the Board at the time the option is granted. The options generally vest over a period between and five years.
For the six months ended June 30, 2023, no new options were granted.
A summary of the status of stock options exercised, including the substantive options discussed in Note 3, is as follows:
Number of shares | Weighted Average Exercise Price | ||||||||||
| Outstanding at December 31, 2022 | 10,030 | $ | 5.99 | ||||||||
| Granted | – | – | |||||||||
| Exercised | (2,419) | 5.96 | |||||||||
| Expired or cancelled | – | – | |||||||||
| Outstanding at June 30, 2023 | 7,611 | $ | 6.00 | ||||||||
26
The following summarizes information about options outstanding and exercisable at January 1, 2023 and June 30, 2023:
| Options Outstanding and Exercisable | |||||||||||||||||||||||||||||
Exercise Price | Total Outstanding | Weighted Average Remaining Life (Years) | Weighted Average Exercise Price | Total Exercisable | |||||||||||||||||||||||||
| December 31, 2022 | $ | 6.28 | 10,030 | 5.0 | $ | 5.99 | 10,030 | ||||||||||||||||||||||
| June 30, 2023 | $ | 6.28 | 7,611 | 5.0 | $ | 6.00 | 7,611 | ||||||||||||||||||||||
The intrinsic value of these options on June 30, 2023 and December 31, 2022 was $25.60 and $15.57, respectively.
The Company received cash payments of $14,601 from the exercise of options under the Stock Option Plan in the six months ended June 30, 2023.
The Company did not record any compensation costs related to stock options during the three and six months ended June 30, 2023.
As of June 30, 2023, there is no unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the Stock Option Plan. The remaining unexercised shares are from substantive options in which the non-recourse notes may be pre-paid, therefore the Company recognized the total calculated compensation expense at the time of issuance.
Restricted Stock
Effective May 11, 2021, the Company established the Bowman Consulting Group Ltd. 2021 Omnibus Equity Incentive Plan (“the Plan”). The Plan is administered by the Board through which they can issue restricted stock awards. As of June 30, 2023, 4,128,557 shares of common stock are authorized and reserved for issuance under the Plan. This reserve automatically increases on each January 1, for the duration of the Plan, in an amount equal to 5% of the total number of shares outstanding on December 31st of the preceding calendar year. The Plan supersedes and replaces any prior plan for stock bonus grants to employees of the Company except that the prior plan shall remain in effect with respect to awards granted under such prior plan until such awards have been forfeited or fully vested.
During the six months ended June 30, 2023, the Board granted 632,091 shares of restricted stock under the Plan. The shares have a vesting period of up to four years during which there are certain restrictions as described in the Plan and Stock Bonus Agreements. The grant date fair value of the award is the closing price of the shares on such date, or if there are no sales on such date, on the next preceding day on which there were sales.
Effective April 2003, the Company adopted the Bowman Consulting Group Ltd. Stock Bonus Plan (“the Stock Bonus Plan”), which allowed for the awarding of restricted stock to employees. The Stock Bonus Plan was superseded by the Bowman Consulting Group Ltd. 2021 Omnibus Equity Incentive Plan except that the Stock Bonus Plan shall remain in effect with respect to awards granted under it until such awards have been forfeited or fully vested.
During the six months ended June 30, 2023 no new restricted stock awards were granted under the Stock Bonus Plan.
27
The following table summarizes the activity of restricted shares subject to forfeiture:
Number of shares | Weighted Average Grant Price | ||||||||||
| Outstanding at January 1, 2023 | 1,837,309 | 14.33 | |||||||||
| Granted | 632,091 | 39.84 | |||||||||
| Vested | (648,215) | 12.26 | |||||||||
| Cancelled | (11,452) | 18.00 | |||||||||
| Outstanding at June 30, 2023 | 1,809,733 | 17.79 | |||||||||
On November 10, 2021 the Company’s Board adopted the 2021 Executive Officers Long Term Incentive Plan (the “Officers LTIP”). The Officers LTIP is established under the Plan and is subject to the terms and conditions thereof. The purpose of this plan is to attract, retain and motivate key officers and employees through the grant of equity-based awards that reward Company performance over a period greater than one year and align their interests with long-term stockholder value.
During the six months ended June 30, 2023, the compensation committee approved the grants of 245,710 performance-based stock units to certain executive officers of the Company under the Officers LTIP. The performance based restricted stock units are subject to a market condition, with a vesting period of 2.91 years. The number of units earned is based on total shareholder return (“TSR”) of the Company’s common stock relative to the TSR of the components of a custom peer group during the performance period from February 10, 2023 to December 31, 2025. The performance stock units are valued using a Monte Carlo simulation with model inputs of opening average share value, valuation date stock price, expected volatilities, correlation coefficient, risk-free interest rate, and expected dividend yield for the Company and the custom peer group.
The following table summarizes the activity of performance stock units subject to forfeiture:
Number of shares | Weighted Average Grant Price | ||||||||||
| Outstanding at January 1, 2023 | 447,429 | 12.95 | |||||||||
| Granted | 245,710 | 22.94 | |||||||||
| Vested | – | – | |||||||||
| Cancelled | – | – | |||||||||
| Outstanding at June 30, 2023 | 693,139 | 16.49 | |||||||||
The Company recognizes forfeitures as they occur.
The following table represents the change in the liability to common shares subject to repurchase and the associated non-cash compensation expense for the six months ended June 30, 2023 and the year ended December 31, 2022 (in thousands):
| June 30, 2023 | December 31, 2022 | ||||||||||
| Beginning Balance | $ | – | $ | 7 | |||||||
| Non-cash compensation from ratable vesting | $ | – | – | ||||||||
Non-cash compensation from change in fair value of liability | $ | – | – | ||||||||
| Other stock activity, net | $ | – | (7) | ||||||||
| Reclassification upon modification | – | – | |||||||||
| Ending balance | $ | – | $ | – | |||||||
As of June 30, 2023, the Company had 2,502,872 shares underlying unvested stock awards that vest between July 1, 2023 and December 31, 2027.
28
The future expense of the unvested awards for the remainder of 2023 and succeeding years is as follows (in thousands):
| 2023 | $ | 12,414 | |||
| 2024 | 15,728 | ||||
| 2025 | 7,177 | ||||
| 2026 | 694 | ||||
| Thereafter | 13 | ||||
| Total | $ | 36,026 | |||
16. Leases
We lease certain office space, equipment and vehicles. These leases are either non-cancelable, cancellable only by the payment of penalties or cancellable upon notice provided. All lease payments are based on the lapse of time and certain leases are subject to annual escalations for increases in base rents. The Company's lease terms includes options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
The Company recognizes a right-of-use asset and lease liability for its operating leases at the commencement date equal to the present value of the contractual minimum lease payments over the lease term. The present value is calculated using the rate implicit in the lease, if known, or the Company's incremental borrowing rate. The discount rate used for operating leases is primarily determined based on an analysis of the Company's borrowing rate, while the discount rate used for finance leases is primarily determined by the rate specified in the lease.
Operating and Finance Leases
The Company's operating leases primarily include material leases of buildings (consisting primarily of office lease commitments) and equipment. These leases are classified as operating leases and are recognized as right-of-use assets and operating lease liabilities on the consolidated balance sheets.
The Company's finance leases primarily include equipment and vehicles in certain contracts with payment terms on the lease agreements that range between 30 and 50 months.
The following tables present our balance sheet information related to leases:
29
| As of | As of | |||||||||||||||||||
| (Amounts in thousands) | Balance Sheet Classification | June 30, 2023 | December 31, 2022 | |||||||||||||||||
| Assets: | ||||||||||||||||||||
| Operating lease assets | Operating lease, right-of-use assets | $ | 39,476 | $ | 30,264 | |||||||||||||||
| Finance lease assets | $ | 19,510 | $ | 18,580 | ||||||||||||||||
| Total lease assets | $ | 58,986 | $ | 48,844 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Operating lease liabilities | Operating lease obligation, current portion | $ | (8,153) | $ | (6,949) | |||||||||||||||
| Finance lease liabilities | Finance lease obligation, current portion | $ | (6,001) | $ | (5,297) | |||||||||||||||
| Total current lease liabilities | $ | (14,154) | $ | (12,246) | ||||||||||||||||
| Non-current: | ||||||||||||||||||||
| Operating lease liabilities | Operating lease obligation, less current portion | $ | (36,610) | $ | (28,087) | |||||||||||||||
| Finance lease liabilities | Finance lease obligation, less current portion | $ | (14,619) | $ | (14,254) | |||||||||||||||
| Total non-current lease liabilities | $ | (51,229) | $ | (42,341) | ||||||||||||||||
The following tables present selected financial information:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| (Amounts in thousands) | June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | |||||||||||||||||||
| Operating lease cost | |||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 2,711 | $ | 1,948 | $ | 5,204 | $ | 3,679 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | 1,778 | 1,776 | 3,448 | 3,401 | |||||||||||||||||||
| Interest on lease liabilities | 367 | 227 | 723 | 439 | |||||||||||||||||||
| Sublease Income | (22) | – | (22) | – | |||||||||||||||||||
| Total lease cost | $ | 4,834 | $ | 3,951 | $ | 9,353 | $ | 7,519 | |||||||||||||||
| Six Months Ended | |||||||||||
| (Amounts in thousands) | June 30, 2023 | June 30, 2022 | |||||||||
| Cash paid for amounts included in the measurements of lease liabilities | |||||||||||
| Operating cash flows from operating leases | $ | 8,510 | $ | 7,008 | |||||||
| Operating cash flows from finance leases | 722 | 439 | |||||||||
| Financing cash flows from finance leases | 3,285 | 2,963 | |||||||||
| Right-of-use assets obtained in exchange for new operating leases | 13,255 | 25,733 | |||||||||
| Right-of-use assets obtained in exchange for new finance leases | 4,377 | 4,618 | |||||||||
30
| As of | As of | ||||||||||
| June 30, 2023 | December 31, 2022 | ||||||||||
| Weighted average remaining lease term (in years): | |||||||||||
| Operating leases | 5.49 | 5.62 | |||||||||
| Finance leases | 3.00 | 3.28 | |||||||||
| Weighted average discount rates: | |||||||||||
| Operating leases | 6.9 | % | 7.1 | % | |||||||
| Finance leases | 7.4 | % | 7.4 | % | |||||||
Future minimum commitments under leases for the succeeding years are as follows (in thousands):
| (Amounts in thousands) | |||||||||||
| Year ending December 31, | Operating Lease | Finance Lease | |||||||||
| 2023 (six months remaining) | $ | 5,404 | $ | 3,788 | |||||||
| 2024 | 10,511 | 6,900 | |||||||||
| 2025 | 9,795 | 6,640 | |||||||||
| 2026 | 8,127 | 3,205 | |||||||||
| 2027 | 7,101 | 237 | |||||||||
| Thereafter | 13,383 | – | |||||||||
| Total lease payments | $ | 54,321 | $ | 20,770 | |||||||
| Less: Amounts representing interest | $ | (9,558) | $ | (2,580) | |||||||
| Total lease liabilities | $ | 44,763 | $ | 18,190 | |||||||
The above table is exclusive of the $2.4 million bargain purchase price associated with the $20.8 million total liability to finance leases as presented on the consolidated balance sheet.
17. Subsequent Events
On August 2, 2023, the Company and certain of its subsidiaries, as guarantors, entered into a First Amendment to the Amended and Restated Credit Agreement dated as of November 11, 2022 with Bank of America, N.A. ( the "Amended and Restated Agreement"). The Amendment increased the maximum principal amount of the Revolving Credit Facility to $70 million, is secured by all the assets of the Company and the subsidiary guarantors and has a maturity date of July 31, 2025. Under the Amended and Restated Agreement, the Company is required to comply with certain covenants, including covenant on indebtedness, investments, liens and restricted payments, as well as maintain certain financial covenants, including a fixed charge coverage ratio and leverage ratio of debt to EBITDA (as defined in the Amended and Restated Agreement).
31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. 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 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Annual Report on Form 10-K”) filed with the US Securities and Exchange Commission and elsewhere in this Quarterly Report on Form 10-Q, particularly in “Cautionary Statement about Forward-Looking Statements,” 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 to Bowman 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, geospatial, survey, land procurement and other technical services to 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 three months ended June 30, 2023 and 2022 was $82.8 million and $62.4 million, respectively, representing year over year growth of 32.6%. Gross contract revenue derived from our workforce represented 89.2% and 90.3% of gross contract revenue for the three months ended June 30, 2023 and 2022, respectively (see Net service billing – non-GAAP below). Our net loss for the three months ended June 30, 2023 and 2022 was $0.6 million and $0.3 million, respectively. Our Adjusted EBITDA for the three months ended June 30, 2023 and 2022 was $11.1 million on net loss of $0.6 million and $7.6 million on net loss of $0.3 million, respectively. (see Adjusted EBITDA – non-GAAP below)
Gross contract revenue for the six months ended June 30, 2023 and 2022 was $158.9 million and $114.9 million, respectively, representing year over year growth of 38.3%. Gross contract revenue derived from our workforce represented 89.0% and 90.6% of gross contract revenue for the six months ended June 30, 2023 and 2022, respectively (see Net service billing – non-GAAP below). Our net income (loss) for the six months ended June 30, 2023 and 2022 was ($0.1) million and $1.1 million, respectively. Our Adjusted EBITDA for the six months ended June 30, 2023 and 2022 was $20.7 million on net loss of $0.1 million and $15.0 million on net income of $1.1 million, respectively. (see Adjusted EBITDA – non-GAAP below)
Subsequent Events
On August 2, 2023, the Company and certain of its subsidiaries, as guarantors, entered into the First Amendment to the Amended and Restated Credit Agreement dated as of November 11, 2022 with Bank of America, N.A. (the "Amended and Restated Agreement"). The First Amendment increased the maximum principal amount of the Revolving Credit Facility to $70 million, is secured by all the assets of the Company and the subsidiary guarantors and extended the maturity date of the Revolving Credit Facility to July 31, 2025. Under the Amended and Restated Agreement, the
32
Company is required to comply with certain covenants, including covenant on indebtedness, investments, liens and restricted payments, as well as maintain certain financial covenants, including a fixed charge coverage ratio and leverage ratio of debt to EBITDA (as defined in the Amended and Restated Agreement).
Methods of Evaluation
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 this information together for planning and monitoring our operations, as well as determining certain management and employee compensation.
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 Expense
Revenue
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 heavily 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 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 enter into contracts that contain two types of pricing 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. Hourly assignments represented approximately $9.2 million and $17.1 million or 11% of our gross contract revenue for each of the three and six months ended June 30, 2023, respectively. For each of the three and six months ended June 30, 2022, hourly assignments represented approximately $3.9 million and $6.8 million or 6% of our gross contract revenue, respectively.
Lump sum contracts, also referred to as fixed fee, typically 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 unforeseen requirements arise. Our fixed fee contracts generally include a specific scope of work and defined deliverables. Lump sum contracts can involve both hourly and fixed fee tasks. Most of our assignments are lump sum in nature representing approximately $73.5 million and $141.8 million or 89% and 89% of our gross contract revenue for the three and six months ended June 30, 2023, respectively. For each of the three and six months ended June 30, 2022, assignments that are lump sum in nature represented approximately $57.8 million and $107.5 million or 94% of our gross contract revenue, 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.
33
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 consists of direct payroll costs, sub-consultant costs and other direct expenses exclusive of 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.
Operating Expense
Operating expenses consists of selling, general and administrative costs, non-cash stock compensation, depreciation and amortization 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. Non-cash stock compensation cost 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 is the cumulative total of the unvested portion of all issued and outstanding awards and their individual grant date fair values. Stock awards will continue to be an important part of our long-term retention and rewards philosophy.
Depreciation and amortization represent the depreciation and amortization expense of our property and general IT equipment, capital lease assets, tenant 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) Expense
Other (income) expense consists of other non-operating and non-core expenses, including transaction related costs associated with acquisitions.
Tax Expense
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.
Other Financial Data, Non-GAAP Measurements and Key Performance Indicators
34
Backlog
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 reconciles 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, non-core legal settlements and other costs not in the ordinary course of business, non-cash stock-based compensation, and other acquisition related adjustments. 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.
Results of Operations
Combined results of operations
The following represents our condensed consolidated results of operations for periods indicated (in thousands):
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Gross contract revenue | $ | 82,755 | $ | 62,399 | $ | 158,855 | $ | 114,860 | |||||||||||||||
Contract costs (exclusive of depreciation and amortization) | 41,038 | 31,054 | 78,420 | 56,489 | |||||||||||||||||||
| Operating expense | 42,833 | 30,861 | 80,013 | 56,049 | |||||||||||||||||||
| Income (loss) from operations | (1,116) | 484 | 422 | 2,322 | |||||||||||||||||||
| Other expense | 1,143 | 994 | 2,358 | 1,491 | |||||||||||||||||||
| Income tax expense (benefit) | (1,625) | (190) | (1,839) | (306) | |||||||||||||||||||
| Net income (loss) | $ | (634) | $ | (320) | $ | (97) | $ | 1,137 | |||||||||||||||
| Net margin | (0.8) | % | (0.5) | % | (0.1) | % | 1.0 | % | |||||||||||||||
Other financial information 1 | |||||||||||||||||||||||
| Net service billing | $ | 73,792 | $ | 56,416 | $ | 141,354 | $ | 104,117 | |||||||||||||||
| Adjusted EBITDA | 11,053 | 7,576 | 20,725 | 14,983 | |||||||||||||||||||
| Adjusted EBITDA margin, net | 15.0 | % | 13.4 | % | 14.7 | % | 14.4 | % | |||||||||||||||
35
1Represents non-GAAP financial measures. See Other Financial Information and Non-GAAP key performance indicators below.
Three months ended June 30, 2023 as compared to the three months ended June 30, 2022
Gross Contract Revenue
Gross contract revenue for the three months ended June 30, 2023, increased $20.4 million or 32.7% to $82.8 million as compared to $62.4 million for the three months ended June 30, 2022. For the three months ended June 30, 2023, gross contract revenue attributable to work performed by our workforce increased $17.4 million, or 30.9% to $73.8 million or 89.2% of gross contract revenue as compared to $56.4 million or 90.4% of gross contract revenue for the three months ended June 30, 2022 (see Net service billing – non-GAAP). Of the $20.4 million increase in gross contract revenue during the three months ended June 30, 2023, acquisitions represented $12.2 million of the increase. To evaluate the Company’s growth, revenue from acquisitions is treated as acquired for a period of four quarters post-closing, after which it is considered organic. For each measurement and comparison period, historical balances of acquired and organic revenue bases are adjusted to reflect revenue accordingly.
Changes in gross contract revenue disaggregated between our core and emerging end markets were as follows (in thousands other than percentages):
| For the Three Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| Consolidated Gross Contract Revenue | 2023 | %GCR | 2022 | %GCR | Change | % Change | |||||||||||||||||||||||||||||
| Building Infrastructure | $ | 48,616 | 58.7 | % | $ | 42,571 | 68.2 | % | $ | 6,045 | 14.2 | % | |||||||||||||||||||||||
| Transportation | 15,870 | 19.2 | % | 9,276 | 14.9 | % | 6,594 | 71.1 | % | ||||||||||||||||||||||||||
| Power & Utilities | 15,585 | 18.8 | % | 9,326 | 14.9 | % | 6,259 | 67.1 | % | ||||||||||||||||||||||||||
Other Emerging Markets 1 | 2,684 | 3.3 | % | 1,226 | 2.0 | % | 1,458 | 118.9 | % | ||||||||||||||||||||||||||
| Total: | $ | 82,755 | 100.0 | % | $ | 62,399 | 100.0 | % | $ | 20,356 | 32.6 | % | |||||||||||||||||||||||
| Organic | $ | 70,414 | 85.1 | % | $ | 62,249 | 99.8 | % | $ | 8,165 | 13.1 | % | |||||||||||||||||||||||
Acquired 2 | 12,341 | 14.9 | % | 150 | 0.2 | % | 12,191 | n/a | |||||||||||||||||||||||||||
| Total: | $ | 82,755 | 100.0 | % | $ | 62,399 | 100.0 | % | $ | 20,356 | 32.6 | % | |||||||||||||||||||||||
1Represents mining, water resources and other. Effective December 31, 2022, we reclassified renewables as power & utilities. For the three months ended June 30, 2022, $1.4 million of renewables revenue was reclassified accordingly for consistency.
2After four quarters post-closing, acquired revenue is reclassified as organic; this results in a change from previously reported numbers. McMahon Associates, Inc. has reached its full four quarter milestone and was reclassified as organic.
For the three months ended June 30, 2023, gross contract revenue from our building infrastructure market increased $6.0 million or 14.2% as compared to the three months ended June 30, 2022. Building Infrastructure includes commercial, municipal and residential infrastructure. The increase in building infrastructure revenue is the result of organic growth and acquisitions. Within the building infrastructure market, 40.8% of gross contract revenue was derived from residential activities, 45.5% from commercial activities including in-building services, aviation related work, and 13.7% from municipal activities. Within residential, 53.0% of gross contract revenue was derived from for-sale homebuilding activity, 38.6% from residential multi-family and 8.5% from mixed use projects. While the homebuilding market shows signs of weakness, for-sale residential services represented 12.7% of our total gross contract revenue for the three months ended June 30, 2023. We continue to experience strong demand for our building infrastructure services and maintain a positive outlook on this market and expect it to represent most of our gross revenue for the remainder of 2023. We continue to experience strength in markets including data centers, quick serve restaurants, industrial distribution facilities, schools, and build-for-rent communities.
For the three months ended June 30, 2023, revenue from transportation increased $6.6 million or 71.1% as compared to the three months ended June 30, 2022. The increase was principally attributable to the acquisition of McMahon Associates, Inc. Contract awards in transportation, such as Cook County DOT, Illinois DOT, and Illinois Tollway Authority along with clients such as TXDOT, MassDOT and PennDOT added through various acquisitions are beginning to generate meaningful new transportation revenue. We expect to continue to increase our transportation revenue and improve the diversification of our revenue. We believe the transportation market continues to present significant opportunity for future
36
growth and we remain committed to investing in leadership, technical expertise, business development and acquisitions for this market.
With the convergence of renewable energy with traditional transmission infrastructure and the continued growth we are projecting in the clean energy transition, we are now consolidating renewable energy into the power and utilities category of our revenue mix and have adjusted historical balances accordingly. We will continue to disclose the impact of renewables as a part of the power and utilities market. Adjusted for the change, for the three months ended June 30, 2023, revenue from power and utilities increased $6.3 million or 67.1% as compared to the three months ended June 30, 2022. Renewable energy and energy transition represented approximately $2.7 million and $1.4 million of the adjusted power and utilities revenue for the three months ended June 30, 2023 and 2022, respectively. Including the recent acquisition of Richter, the additional increase in gross contract revenue from the power and utilities market is principally attributable to increased revenue associated with the expansion of a multi-year utility undergrounding assignment in Florida, along with additional increases derived from gas pipeline and electric transmission projects nationally. 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. Based on recent increases in program commitments within the gas pipeline replacement 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 mining, water resources, and other natural resources services. Adjusted for the change, for the three months ended June 30, 2023, revenue from emerging markets increased $1.5 million or 118.9% as compared to the three months ended June 30, 2022. Gross contract revenue in our emerging markets was 45.3% from mining activities where we have specialized in copper mining and 54.7% from water resources activities. Scarcities in water resources and the increasing need for water management gives us confidence that we will be able to increase revenue accordingly. With recent and future acquisitions, we expect to experience continued growth from investment in renewable energy and energy transition.
For the three months ended June 30, 2023 and 2022, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, represented 17.1% and 20.0% of our gross contract revenue, respectively. This increase is principally attributable to our acquisition program. This does not include work done indirectly on public sector projects. Gross contract revenue from projects for public sector clients are included in the end market most aligned with work performed.
Contract costs (exclusive of depreciation and amortization)
Total contract costs, exclusive of depreciation and amortization, increased $9.9 million or 31.8% to $41.0 million for the three months ended June 30, 2023, as compared to $31.1 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, total contract costs represented 49.6% and 49.8% of total contract revenue, respectively. For the three months ended June 30, 2023 and 2022 total contract costs represented 55.6% and 55.0% of revenue attributable to our workforce, respectively (see Net Service Revenue).
Direct payroll costs increased $7.0 million or 27.9% to $32.1 million for the three months ended June 30, 2023, as compared to $25.1 million for the three months ended June 30, 2022. Direct payroll accounted for 78.2% of total contract costs for the three months ended June 30, 2023, a decrease of 2.5 percentage points as compared to 80.7% for the three months ended June 30, 2022.
Direct labor, the component of direct payroll costs associated with the cost of labor relating to work performed on contracts increased $5.6 million or 31.5% to $23.4 million for the three months ended June 30, 2023 as compared to $17.8 million for the three months ended June 30, 2022. The increase in direct labor is primarily due to an increase in staffing to accommodate growth. For the three months ended June 30, 2023 and 2022, direct labor costs represented 28.3% and 28.6% of gross contract revenue, respectively and represented 31.7% and 31.6% 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 $1.5 million or 20.8% to $8.7 million as compared to $7.2 million. This increase includes a $1.0 million increase in payroll taxes and health care as well as a $0.2 million increase in personal leave, primarily due to the increase in overall labor .
37
Sub-consultants and other direct expenses increased $3.0 million or 50.0% to $9.0 million for the three months ended June 30, 2023 as compared to $6.0 million for the three months ended June 30, 2022. For the three months ended June 30, 2023 and 2022, sub-consultant and other direct expenses represented 10.8% and 9.6% of gross contract revenue, respectively. This increase 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.
Operating Expense
Total operating expense increased $11.9 million or 38.5% to $42.8 million for the three months ended June 30, 2023 as compared to $30.9 million for the three months ended June 30, 2022.
Selling, general and administrative expenses increased $10.2 million or 36.3% to $38.3 million for the three months ended June 30, 2023, as compared to $28.1 million for the three months ended June 30, 2022. Indirect labor increased $5.2 million or 45.6% to $16.6 million as compared to $11.4 million primarily due to an increase in staffing to accommodate growth. General overhead increased $2.8 million or 29.2% to $12.4 million as compared to $9.6 million due to increased costs associated with the overall growth of the company. Non-cash stock compensation increased $1.8 million or 62.1% to $4.7 million as compared to $2.9 million as several new stock awards were granted to Company leadership as well as employees in connection with acquisitions.
Depreciation and amortization increased $1.9 million or 67.9% to $4.7 million for the three months ended June 30, 2023 as compared to $2.8 million for the three months ended June 30, 2022. This increase is primarily due to an increase in leased assets and intangible assets. We continue to increase the use of our finance lease facility as we continue to grow. Intangible assets have increased due to multiple acquisitions throughout 2023. Gains on the sale of certain IT equipment and automobiles increased $0.2 million for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.
Other Expense
Other expense increased by $0.1 million to $1.1 million of expense for the three months ended June 30, 2023 as compared to $1.0 million for the three months ended June 30, 2022. This increase is primarily attributable to an increase in interest expense of $0.8 million due to an increase in finance leases and a decrease in acquisition related expenses of $0.5 million.
Income Tax (Benefit) Expense
Income tax benefit for the three months ended June 30, 2023, increased $1.4 million to a $1.6 million benefit, as compared to $0.2 million benefit for the three months ended June 30, 2022, see note 2, Income Taxes. Our effective tax rate for the three months ended June 30, 2023, is 71.9% as compared to 37.1% for the three months ended June 30, 2022.
Income (Loss) Before Tax and Net Income (Loss)
Loss before tax increased by $1.8 million for the three months ended June 30, 2023, to ($2.3) million of loss compared to ($0.5) million for the three months ended June 30, 2022. Net loss increased by $0.3 million to $0.6 million for the three months ended June 30, 2023, as compared to $0.3 million for the three months ended June 30, 2022.
38
Other financial information and Non-GAAP key performance indicators
Net service billing (non-GAAP)
Net service billing increased $17.4 million or 30.9% to $73.8 million for the three months ended June 30, 2023, as compared to $56.4 million for the three months ended June 30, 2022. Net service billing reconciles to gross contract revenue as follows (in thousands):
| For the Three Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Gross contract revenue | $ | 82,755 | $ | 62,399 | |||||||
| Less: sub-consultants and other direct expenses | 8,963 | 5,983 | |||||||||
| Net service billing | $ | 73,792 | $ | 56,416 | |||||||
Net service billing as a percentage of gross contract revenue decreased 2.1% for the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.
Because sub-consultants and reimbursable expenses are most often pass-through items with little or no mark-up, they generally have a dilutive effect on gross, operating, and net margins while having little accretive effect on profitability. As such, where possible, we focus our resources and business development efforts principally on increasing revenue derived from our own workforce. Management primarily focuses its internal performance metrics on net service billing.
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA increased $3.5 million or 45.9% to $11.1 million for the three months ended June 30, 2023 as compared to $7.6 million for the three months ended June 30, 2022. Adjusted EBITDA reconciles to net income as follows (in thousands):
| For the Three Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Net Service Billing | $ | 73,792 | $ | 56,416 | $ | 17,376 | 30.8 | % | |||||||||||||||
| Net Income (loss) | $ | (634) | $ | (320) | $ | (314) | 98.1 | % | |||||||||||||||
| + interest expense | 1,112 | 350 | 762 | 217.7 | % | ||||||||||||||||||
| + depreciation & amortization | 4,719 | 2,823 | 1,896 | 67.2 | % | ||||||||||||||||||
| + tax expense | (1,625) | (190) | (1,435) | 755.3 | % | ||||||||||||||||||
| EBITDA | $ | 3,572 | $ | 2,663 | $ | 909 | 34.1 | % | |||||||||||||||
| + non-cash stock compensation | 6,888 | 4,038 | 2,850 | 70.6 | % | ||||||||||||||||||
| + transaction related expenses | 123 | – | 123 | 100.0 | % | ||||||||||||||||||
| + settlements and other non-core expenses | 113 | 215 | (102) | (47.4) | % | ||||||||||||||||||
| + acquisition expenses | 357 | 660 | (303) | (45.9) | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 11,053 | $ | 7,576 | $ | 3,477 | 45.9 | % | |||||||||||||||
| Adjusted EBITDA margin, net | 15.0 | % | 13.4 | % | |||||||||||||||||||
For the three months ended June 30, 2023 and 2022, Adjusted EBITDA includes add backs of $6.9 million and $4.0 million, respectively, relating to non-cash stock compensation expenses resulting from the vesting of restricted stock awards. For the three months ended June 30, 2023 and 2022, Adjusted EBITDA also includes $0.4 million and $0.7 million, respectively, relating to non-recurring acquisition expenses.
Pursuant to the accounting for business combinations, we have up to one year from the date of closing to finalize the purchase accounting for an acquisition. From time to time, adjustments are made which impact the treatment of assets, liabilities and expenses associated with acquisitions. Non-recurring costs specifically allocatable to an acquisition are treated as add-backs to adjusted EBITDA in the period recognized.
39
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 three months ended June 30, 2023 and 2022, Adjusted EBITDA Margin, net was 15.0% and 13.4% respectively.
Six months ended June 30, 2023 as compared to the six months ended June 30, 2022
Gross Contract Revenue
Gross contract revenue for the six months ended June 30, 2023, increased $44.0 million or 38.3% to $158.9 million as compared to $114.9 million for the six months ended June 30, 2022. For the six months ended June 30, 2023, gross contract revenue attributable to work performed by our workforce increased $37.3 million, or 35.8% to $141.4 million or 89.0% of gross contract revenue as compared to $104.1 million or 90.6% of gross contract revenue for the six months ended June 30, 2022 (see Net service billing – non-GAAP). Of the $44.0 million increase in gross contract revenue during the six months ended June 30, 2023, acquisitions represented $18.8 million of the increase. To evaluate the Company’s growth, revenue from acquisitions is treated as acquired for a period of four quarters post-closing, after which it is considered organic. For each measurement and comparison period, historical balances of acquired and organic revenue bases are adjusted to reflect revenue accordingly.
Changes in gross contract revenue disaggregated between our core and emerging end markets were as follows (in thousands other than percentages):
| For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||
| Consolidated Gross Contract Revenue | 2023 | %GCR | 2022 | %GCR | Change | % Change | |||||||||||||||||||||||||||||
| Building Infrastructure | $ | 92,953 | 58.5 | % | $ | 81,332 | 70.8 | % | $ | 11,621 | 14.3 | % | |||||||||||||||||||||||
| Transportation | 31,889 | 20.1 | % | 13,247 | 11.5 | % | 18,642 | 140.7 | % | ||||||||||||||||||||||||||
| Power & Utilities | 28,909 | 18.2 | % | 18,075 | 15.7 | % | 10,834 | 59.9 | % | ||||||||||||||||||||||||||
Other Emerging Markets 1 | 5,104 | 3.2 | % | 2,206 | 2.0 | % | 2,898 | 131.4 | % | ||||||||||||||||||||||||||
| Total: | $ | 158,855 | 99.9 | % | $ | 114,860 | 100.0 | % | $ | 43,995 | 38.3 | % | |||||||||||||||||||||||
| Organic | $ | 139,857 | 88.0 | % | $ | 114,710 | 99.9 | % | $ | 25,147 | 21.9 | % | |||||||||||||||||||||||
Acquired 2 | 18,998 | 12.0 | % | 150 | 0.1 | % | 18,848 | 16.4 | % | ||||||||||||||||||||||||||
| Total: | $ | 158,855 | 100.0 | % | $ | 114,860 | 100.0 | % | $ | 43,995 | 38.3 | % | |||||||||||||||||||||||
1Represents mining, water resources and other. Effective December 31, 2022, we reclassified renewables as power & utilities. For the six months ended June 30, 2022, $2.5 million of renewables revenue was reclassified accordingly for consistency.
2After four quarters post-closing, acquired revenue is reclassified as organic; this results in a change from previously reported numbers. McMahon Associates, Inc. has reached its full four quarter milestone and was reclassified as organic.
For the six months ended June 30, 2023, gross contract revenue from our building infrastructure market increased $11.6 million or 14.3% as compared to the six months ended June 30, 2022. Building Infrastructure includes commercial, municipal and residential infrastructure. The increase in building infrastructure revenue is the result of organic growth and acquisitions. Within the building infrastructure market, 41.3% of gross contract revenue was derived from residential activities, 45.7% from commercial activities including in-building services, aviation related work, and 13.0% from municipal activities. Within residential, 45.8% of gross contract revenue was derived from for-sale homebuilding activity, 44.2% from residential multi-family and 10.1% from mixed use projects. While the homebuilding market shows signs of weakness, for-sale residential services represented just 10.7% of our total gross contract revenue for six months ended June 30, 2023. We continue to experience strong demand for our building infrastructure services and maintain a positive outlook on this market and expect it to represent most of our gross revenue for the remainder of 2023. We continue to experience strength in markets including data centers, quick serve restaurants, industrial distribution facilities, schools, and build-for-rent communities.
For the six months ended June 30, 2023, revenue from transportation increased $18.6 million or 140.7% as compared to the six months ended June 30, 2022. The increase was principally attributable to the acquisition of McMahon Associates, Inc. Contract awards in transportation, such as Cook County DOT, Illinois DOT, and Illinois Tollway Authority along with clients such as TXDOT, MassDOT and PennDOT added through various acquisitions are beginning to generate meaningful new transportation revenue. We expect to continue to increase our transportation revenue and improve the diversification
40
of our revenue. 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.
With the convergence of renewable energy with traditional transmission infrastructure and the continued growth we are projecting in the clean energy transition, we are now consolidating renewable energy into the power and utilities category of our revenue mix and have adjusted historical balances accordingly. We will continue to disclose the impact of renewables as a part of the power and utilities market. Adjusted for the change, for the six months ended June 30, 2023, revenue from power and utilities increased $10.8 million or 59.9% as compared to the six months ended June 30, 2022. Renewable energy and energy transition represented approximately $5.5 million and $2.5 million of the adjusted power and utilities revenue for the six months ended June 30, 2023 and 2022, respectively. Including the recent acquisition of Richter, the additional increase in gross contract revenue from the power and utilities market is principally attributable to increased revenue associated with the expansion of a multi-year utility undergrounding assignment in Florida, along with additional increases derived from gas pipeline and electric transmission projects nationally. 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. Based on recent increases in program commitments within the gas pipeline replacement 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 mining, water resources, and other natural resources services. Adjusted for the change, for the six months ended June 30, 2023, revenue from emerging markets increased $2.9 million or 131.4% as compared to the six months ended June 30, 2022. Gross contract revenue in our emerging markets was 60.9% from mining activities where we have specialized in copper mining and 39.1% from water resources activities. Scarcities in water resources and the increasing need for water management gives us confidence that we will be able to increase revenue accordingly. With recent and future acquisitions, we expect to experience continued growth from investment in renewable energy and energy transition.
For the six months ended June 30, 2023 and 2022, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, represented 20.5% and 17.9% of our gross contract revenue, respectively. This increase is principally attributable to our acquisition program. This does not include work done indirectly on public sector projects. Gross contract revenue from projects for public sector clients are included in the end market most aligned with work performed.
Contract costs (exclusive of depreciation and amortization)
Total contract costs, exclusive of depreciation and amortization, increased $21.9 million or 38.8% to $78.4 million for the six months ended June 30, 2023, as compared to $56.5 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, total contract costs represented 49.4% and 49.2% of total contract revenue, respectively. For the six months ended June 30, 2023 and 2022 total contract costs represented 55.5% and 54.3% of revenue attributable to our workforce, respectively (see Net Service Revenue).
Direct payroll costs increased $15.2 million or 33.3% to $60.9 million for the six months ended June 30, 2023, as compared to $45.7 million for the six months ended June 30, 2022. Direct payroll accounted for 77.7% of total contract costs for the six months ended June 30, 2023, a decrease of 3.3 percentage points as compared to 81.0% for the six months ended June 30, 2022.
Direct labor, the component of direct payroll costs associated with the cost of labor relating to work performed on contracts increased $12.1 million or 36.4% to $45.3 million for the six months ended June 30, 2023 as compared to $33.2 million for the six months ended June 30, 2022. The increase in direct labor is primarily due to an increase in staffing to accommodate growth. For the six months ended June 30, 2023 and 2022, direct labor costs represented 28.5% and 28.9% of gross contract revenue, respectively and represented 32.0% and 31.9% 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 $3.0 million or 23.8% to $15.6 million as compared to $12.6 million. This increase includes a $1.8 million increase in fringe benefits primarily due to the increase in overall labor. This increase also includes $1.2 million in increased non-cash compensation expense as several new stock awards were granted to management as well as employees in connection with acquisitions.
41
Sub-consultants and other direct expenses increased $6.8 million or 63.6% to $17.5 million for the six months ended June 30, 2023 as compared to $10.7 million for the six months ended June 30, 2022. For the six months ended June 30, 2023 and 2022, sub-consultant and other direct expenses represented 11.0% and 9.4% of gross contract revenue, respectively. This increase 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.
Operating Expense
Total operating expense increased $24.0 million or 42.9% to $80.0 million for the six months ended June 30, 2023 as compared to $56.0 million for the six months ended June 30, 2022.
Selling, general and administrative expenses increased $21.1 million or 41.5% to $72.0 million for the six months ended June 30, 2023, as compared to $50.9 million for the six months ended June 30, 2022. Indirect labor increased $11.1 million or 54.4% to $31.5 million as compared to $20.4 million primarily due to an increase in staffing to accommodate growth. General overhead increased $5.5 million or 30.2% to $23.7 million as compared to $18.2 million due to increased costs associated with the overall growth of the company. Non-cash stock compensation increased $2.6 million or 49.1% to $7.9 million as compared to $5.3 million as several new stock awards were granted to Company leadership as well as employees in connection with acquisitions.
Depreciation and amortization increased $3.1 million or 59.6% to $8.3 million for the six months ended June 30, 2023 as compared to $5.2 million for the six months ended June 30, 2022. This increase is primarily due to an increase in leased assets and intangible assets. We continue to increase the use of our finance lease facility as we continue to grow. Intangible assets have increased due to multiple acquisitions throughout 2023. Gains on the sale of certain IT equipment and automobiles increased $0.2 million for the six months ended June 30, 2023.
Other (Income) Expense
Other expense increased by $0.9 million to $2.4 million of expense for the six months ended June 30, 2023 as compared to $1.5 million for the six months ended June 30, 2022. This increase is primarily attributable to an increase in interest expense due to an increase in finance leases, acquisitions and the line of credit.
Income Tax (Benefit) Expense
Income tax benefit for the six months ended June 30, 2023, increased $1.5 million to a $1.8 million benefit, as compared to $0.3 million benefit for the six months ended June 30, 2022, see note 2, Income Taxes. Our effective tax rate for the six months ended June 30, 2023, is 95.0% as compared to (37.9%) for the six months ended June 30, 2022.
Income (Loss) Before Tax and Net Income (Loss)
Income (loss) before tax increased by ($2.7) million for the six months ended June 30, 2023, to ($1.9) million of loss compared to $0.8 million income for the six months ended June 30, 2022. Net income (loss) increased by ($1.2) million to ($0.1) million for the six months ended June 30, 2023, as compared to $1.1 million for the six months ended June 30, 2022.
Other financial information and Non-GAAP key performance indicators
Net service billing (non-GAAP)
Net service billing increased $37.3 million or 35.8% to $141.4 million for the six months ended June 30, 2023, as compared to $104.1 million for the six months ended June 30, 2022. Net service billing reconciles to gross contract revenue as follows (in thousands):
| For the Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Gross contract revenue | $ | 158,855 | $ | 114,860 | |||||||
| Less: sub-consultants and other direct expenses | 17,501 | 10,743 | |||||||||
| Net service billing | $ | 141,354 | $ | 104,117 | |||||||
42
Net service billing as a percentage of gross contract revenue decreased 1.6% for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.
Because sub-consultants and reimbursable expenses are most often pass-through items with little or no mark-up, they generally have a dilutive effect on gross, operating, and net margins while having little accretive effect on profitability. As such, where possible, we focus our resources and business development efforts principally on increasing revenue derived from our own workforce. Management primarily focuses its internal performance metrics on net service billing.
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA increased $5.7 million or 38.3% to $20.7 million for the six months ended June 30, 2023 as compared to $15.0 million for the six months ended June 30, 2022. Adjusted EBITDA reconciles to net income as follows (in thousands):
| For the Six Months Ended June 30, | |||||||||||||||||||||||
| 2023 | 2022 | $ Change | % Change | ||||||||||||||||||||
| Net Service Billing | $ | 141,354 | $ | 104,117 | $ | 37,237 | 35.8 | % | |||||||||||||||
| Net Income (loss) | $ | (97) | $ | 1,137 | $ | (1,234) | (108.5) | % | |||||||||||||||
| + interest expense | 2,007 | 685 | 1,322 | 193.0 | % | ||||||||||||||||||
| + depreciation & amortization | 8,285 | 5,213 | 3,072 | 58.9 | % | ||||||||||||||||||
| + tax expense | (1,839) | (306) | (1,533) | 501.0 | % | ||||||||||||||||||
| EBITDA | $ | 8,356 | $ | 6,729 | $ | 1,627 | 24.2 | % | |||||||||||||||
| + non-cash stock compensation | 11,322 | 7,274 | 4,048 | 55.7 | % | ||||||||||||||||||
| + transaction related expenses | 123 | – | 123 | 100.0 | % | ||||||||||||||||||
| + settlements and other non-core expenses | 113 | 215 | (102) | (47.4) | % | ||||||||||||||||||
| + acquisition expenses | 811 | 765 | 46 | 6.0 | % | ||||||||||||||||||
| Adjusted EBITDA | $ | 20,725 | $ | 14,983 | $ | 5,742 | 38.3 | % | |||||||||||||||
| Adjusted EBITDA margin, net | 14.7 | % | 14.4 | % | |||||||||||||||||||
For the six months ended June 30, 2023 and 2022, Adjusted EBITDA includes add backs of $11.3 million and $7.3 million, respectively, relating to non-cash stock compensation expenses resulting from the vesting of restricted stock awards. For the six months ended June 30, 2023, Adjusted EBITDA includes $0.8 million, respectively, relating to non-recurring acquisition expenses. For the six months ended June 30, 2022, Adjusted EBITDA also includes $1.0 million relating to non-recurring acquisition expense and a legal settlement.
Pursuant to the accounting for business combinations, we have up to one year from the date of closing to finalize the purchase accounting for an acquisition. From time to time, adjustments are made which impact the treatment of assets, liabilities and expenses associated with acquisitions. Non-recurring costs specifically allocatable to an acquisition are treated as add-backs to adjusted EBITDA in the period recognized.
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 six months ended June 30, 2023 and 2022, Adjusted EBITDA Margin, net was 14.7% and 14.4% respectively.
43
Backlog (other key performance metrics)
Backlog (other key performance metrics)
Our backlog increased $51.3 million or 21.3% to $294.7 million during the six months ended June 30, 2023, as compared to $243.4 million at December 31, 2022. Our backlog increased $89.1 million or 43.3% as compared to $205.6 million at June 30, 2022. At June 30, 2023 and December 31, 2022 our backlog was comprised as follows:
| June 30, 2023 | December 31, 2022 | ||||||||||
Building Infrastructure | 56 | % | 51 | % | |||||||
| Transportation | 25 | % | 31 | % | |||||||
| Power & Utilities | 16 | % | 13 | % | |||||||
| Other Emerging Markets | 3 | % | 5 | % | |||||||
Liquidity and Capital Resources
Our principal sources of liquidity are our cash and cash equivalents balances, cash flow from operations, borrowing capacity under our Revolving Credit Facility, lease financing, proceeds from stock sales and other structured debt securities. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures, repayment of debt, acquisitions, and acquisition related payments. On June 30, 2023, we maintained a $50.0 million Revolving Credit Facility with Bank 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 decreased by $3.5 million at June 30, 2023 as compared to December 31, 2022.
On August 2, 2023, the Company and certain of its subsidiaries, as guarantors, entered into a First Amendment to the Amended and Restated Credit Agreement dated as of November 11, 2022 with Bank of America, N.A. (the "Amended and Restated Agreement"). The First Amendment increased the maximum principal amount of the Revolving Credit Facility to $70 million, is secured by all the assets of the Company and the subsidiary guarantors and extended the maturity date of the Revolving Credit Facility to July 31, 2025. Under the Amended and Restated Agreement, the Company is required to comply with certain covenants, including covenant on indebtedness, investments, liens and restricted payments, as well as maintain certain financial covenants, including a fixed charge coverage ratio and leverage ratio of debt to EBITDA (as defined in the Amended and Restated Agreement).
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. To the extent we experience any potential liquidity or capital shortfalls relating to growth and acquisition, we currently expect to rely on debt financing to meet those shortfalls. We use our equity as a component of consideration in acquisitions. In addition, depending on market conditions, we may opportunistically access the public debts and equity markets.
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. Currently, 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 of our current liquidity and capital resources for acquisitions. For a discussion of the acquisitions that were completed during the three months ended June 30, 2023, none of which were deemed significant, see Note 4 - Acquisitions.
On November 10, 2022, our board of directors authorized a program to repurchase up to $10.0 million of our common stock. The common stock may be purchased from time to time depending upon market conditions and may be purchased in the open market and through one or more trading plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The plan does not obligate us to repurchase any specific number or any specific dollar amount of shares and may be suspended at any time at our discretion. To date, we have not repurchased any shares under this authorization.
44
Cash Flows
The following table summarizes our cash flows for the periods presented:
| For the Six Months Ended June 30, | |||||||||||
| Condensed Consolidated Statements of Cash Flows (amounts in thousands) | 2023 | 2022 | |||||||||
| Net cash provided by operating activities | $ | 2,066 | $ | 4,268 | |||||||
| Net cash used in investing activities | (15,647) | (8,099) | |||||||||
| Net cash provided by financing activities | 10,045 | 8,995 | |||||||||
| Change in cash, cash equivalents and restricted cash | (3,536) | 5,164 | |||||||||
| Cash and cash equivalents, end of period | 9,746 | 25,783 | |||||||||
Operating Activities
During the six months ended June 30, 2023, net cash provided by operating activities was $2.1 million, which primarily consisted of ($0.1) million net loss, adjusted for stock-based compensation expense of $11.2 million, depreciation and amortization expense of $8.3 million, and deferred taxes of ($7.3) million, offset by a net cash outflow of ($10.1) million from changes in operating assets and liabilities. Cash provided by operating activities before changes in operating assets and liabilities was $12.4 million. We believe this is significant given our high rate of growth. The net outflow from changes in operating assets and liabilities was primarily due to a ($10.9) million decrease in accounts receivable, a ($4.2) million decrease in prepaid expenses and other assets, and ($4.7) million decrease in contract assets and liabilities, partially offset by a $9.5 million increase in accounts payable and accrued expenses.
During the six months ended June 30, 2022, net cash provided by operating activities was $4.3 million, which primarily consisted of our $1.1 million net profit, adjusted for stock-based compensation expense of $7.3 million, and depreciation and amortization expense of $5.2 million, offset by a net cash outflow of $9.5 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $10.3 million increase in accounts receivable resulting from increased billing to our clients, and a $5.1 million increase in prepaid expenses and other assets, partially offset by a $5.9 million increase in accounts payable and accrued expenses
Investing Activities
Net cash used in investing activities increased by $7.5 million to $15.6 million for the six months ended June 30, 2023 as compared to $8.1 million for the six months ended June 30, 2022. The increase in net cash used for investing is primarily attributable to acquisitions that occurred in the first half of 2023.
Financing Activities
Net cash provided by financing activities during the six months ended June 30, 2023 was $10.0 million compared to $9.0 million for the six months ended June 30, 2022, an increase of $1.0 million. The increase in net cash provided by financing is primarily attributable to the $21.2 million proceeds from the Revolving Credit Facility offset by an increase in repayments of notes payable of ($3.3) million during the six months ended June 30, 2023, compared to the $15.5 million from our common stock offering net of underwriting discounts commissions and other offering costs during the six months ended June 30, 2022.
Credit Facilities and Other Financing
As of June 30, 2023, we maintained a $50.0 million revolving credit facility (the “Revolving Credit Facility”) and two non-revolving credit facilities (“Fixed Line 1” and “Fixed Line 2”) pursuant to an Amended and Restated Credit Agreement (collectively with the Revolving Credit Facility, the “Credit Agreement”) with Bank of America, our primary lender. The Credit Agreement had a maturity date of September 30, 2024. Under the terms of the Revolving Credit Facility, available cash in our primary operating account sweeps against the outstanding balance every evening. As of June 30, 2023, the balance on this Revolving Credit Facility was $21.2 million.
On August 2, 2023, the Company and certain of its subsidiaries, as guarantors, entered into the First to Amended and Restated Agreement. The First Amendment increased the maximum principal amount of the Revolving Credit Facility to
45
$70 million, is secured by all the assets of the Company and the subsidiary guarantors and extended the maturity date of the Revolving Credit Facility to July 31, 2025. Under the Amended and Restated Agreement, the Company is required to comply with certain covenants, including covenant on indebtedness, investments, liens and restricted payments, as well as maintain certain financial covenants, including a fixed charge coverage ratio and leverage ratio of debt to EBITDA (as defined in the Amended and Restated Agreement).
The Credit Agreement is secured by all the assets of the Company and the subsidiary guarantors. Under the Credit Agreement, we are required to comply with certain covenants, including covenants on indebtedness, investments, liens and restricted payments, as well as to maintain certain financial covenants, including a fixed charge coverage ratio and leverage ratio of debt to EBITDA (as defined in the Credit Agreement). At June 30, 2023, we were in compliance with all covenants.
We utilize master lease facilities with Honour Capital LLC (“Honour”) and Enterprise Leasing (“Enterprise”). The Honour Capital lease facility finances our acquisition of IT infrastructure, geospatial and survey equipment, furniture and other long-lived assets. The Enterprise lease facility finances the acquisition of field trucks and other service vehicles. At June 30, 2023, we maintained a fleet of approximately 400 vehicles. All of our leasing facilities allow for both operating and finance leasing. We allocate finance lease payments between amortization and interest. The payment terms on the lease agreements range between 30 and 50 months with payments totaling approximately $0.7 million per month. We utilize a third-party valuation specialist to formulate the incremental borrowing rates for the Company, to calculate the present value on new leases. On October 31, 2022, pursuant to a Bill of Sale among Huntington Technology Finance (“Huntington”), as Seller/Lessor, the Company, as Lessee, and Honour, as Buyer, approximately $9.5 million of equipment leased by the Company and financed by Huntington was purchased by Honour.
We regularly evaluate our options with respect to capital and our requirements for operations and growth. We do not limit our consideration to traditional bank financing, but rather include other structured debt and equity as option for additional capital.
For more information about our credit facilities, see Note 11 – Revolving Credit Facility and Fixed Credit Facilities.
Registration Statement
We have on file with the Securities and Exchange Commission (the “SEC”) a shelf registration statement on Form S-3, which enables us to issue shares of our common stock and preferred stock, warrants and rights to purchase any of such securities and/or debt securities, either individually or in units, in one or more offerings. We will file a prospectus supplement containing the amount and type of securities each time we issue securities under our shelf registration statement on Form S-3. No securities were issued under this registration statement through the date of this filing.
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.
Critical 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.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies relating to the use of estimates described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K filed with the SEC dated March 15, 2023.
Cautionary Statement about Forward-Looking Statements
Our disclosure and analysis in this Quarterly Report on Form 10-Q, contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingencies, goals, targets or future development and/ or otherwise are not statements of historical fact. In some cases, you can identify forward-looking
46
statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should,” “could” or the negative of such terms or similar expressions. The absence of these words does not mean that a statement is not forward-looking. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, our expectations regarding our recent and future acquisitions; our expectations regarding the impact of any completed or planned acquisition; our intentions regarding our growth strategies and investment of resources, including the markets in which we intend to focus our growth initiatives; our expectations regarding trends and opportunities for future growth and expansion, including our projections of growth in energy transitions; our expectations regarding the use of our current liquidity and capital resources for acquisitions; and our belief that our sources of liquidity will be sufficient to fund our projected cash requirements and strategic initiatives for the next year. Any forward-looking statements are qualified in their entirety by reference to the factors discussed in the Risk Factors section of our Annual Report on Form 10-K and throughout this Quarterly Report on Form 10-Q.
These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. Important factors that could cause such differences include:
•our ability to retain the continued service of our key professionals and to identify, hire, retain and utilize additional qualified personnel;
•changes in demand from the clients that we serve;
•any material outbreak or material escalation of international hostilities, including developments in the conflict involving Russia and the Ukraine and the economic consequences of related events such as the imposition of economic sanctions and resulting market volatility;
•changes in general domestic and international economic conditions such as inflation rates, interest rates, tax rates, higher labor and healthcare costs, recessions, and changing government policies, laws and regulations;
•the U.S. government and other governmental and quasi-governmental budgetary and funding approval process;
•our ability to execute our acquisitions strategy, including successful completion of acquisitions and the integration of new acquisitions into our operations and financial reporting;
•the possibility that our contracts may be terminated by our clients;
•our ability to win new contracts and renew existing contracts;
•competitive pressures and trends in our industry and our ability to successfully compete with our competitors;
•our dependence on a limited number of clients;
•our ability to complete projects timely, in accordance with our customers’ expectations, or profitability;
•our ability to successfully manage our growth strategy;
•our ability to raise capital in the future;
•the credit and collection risks associated with our clients;
•our ability to comply with procurement laws and regulations;
•changes in laws, regulations, or policies;
•weather conditions and seasonal revenue fluctuations may adversely impact our financial results;
•the enactment of legislation that could limit the ability of local, state and federal agencies to contract for our privatized services;
•our ability to complete our backlog of uncompleted projects as currently projected;
•the risk of employee misconduct or our failure to comply with laws and regulations;
•our ability to control, and operational issues pertaining to, business activities that we conduct with business partners and other third parties;
•our need to comply with a number of restrictive covenants and similar provisions in our credit facility that generally limit our ability to (among other things) incur additional indebtedness, create liens, make acquisitions,
47
pay dividends and undergo certain changes in control, which could affect our ability to finance future operations, acquisitions or capital needs;
•significant influence by our principal stockholder and the existence of certain anti-takeover measures in our governing documents; and
•the factors identified in our Annual Report on Form 10-K, including those discussed under the heading “Risk Factors”, and in our other filings with the SEC.
Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except to the extent required by applicable laws or rules. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor of our business or to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, as defined in Rule 12b-2 of the Securities and Exchange Act of 1934 (the “Exchange Act”), we are not required to provide the information required by this item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Our disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by the Company in reports it files or submits under the Exchange Act is accumulated and communicated to management, recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
48
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are subject to various legal proceedings that arise in the normal course of our business activities. As of the date of this Quarterly Report on Form 10-Q, we are not party to any litigation, the outcome of which if determined adversely to us, would individually or in the aggregate be reasonably expected to have a material adverse effect on our results of operations or financial position.
Item 1A. Risk Factors
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this item.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the three months ended June 30, 2023, we issued the following securities that were not registered under the Securities Act:
On April 3, 2023, we issued 75,784 shares of common stock at $29.00 per share, for a total of $2.2 million, as partial consideration for our acquisition of Richter & Associates, Inc.
On May 12, 2023, we issued 31,521 shares of common stock at $27.66 per share, for a total of $0.9 million, as partial consideration for our acquisition of Fisher Engineering, Inc.
On May 16, 2023, we issued 129,221 shares of common stock at $27.60 per share, for a total of $3.6 million, as partial consideration for our acquisition of Hole Montes, Inc.
On June 2, 2023, we issued 143,333 shares of common stock at $28.09 per share, for a total of $4.0 million, as partial consideration for our acquisition of MTX Surveying, LLC.
For a description of each of the foregoing acquisitions and convertible promissory notes, see note 4, Acquisitions and note 12, Notes Payable, appearing in Part I of this Quarterly Report on Form 10-Q.
Each of the foregoing issuances were made in private placements exempt from registration under Section 4(a)(2) of the Securities Act. Accordingly, there were no underwriters, underwriting discounts or commissions.
Issuer Purchase of Equity Securities
The following table summarizes the purchases of our common stock made by us during the three months ended June 30, 2023:
| Period | Total Number of Shares Purchased (1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) | ||||||||||||||||||||||
| 04/1/23 - 04/30/23 | 18,877 | 28.73 | - | 10,000,000 | ||||||||||||||||||||||
| 05/1/23 - 05/31/23 | 85,254 | 27.88 | - | 10,000,000 | ||||||||||||||||||||||
| 06/1/23 - 06/30/23 | - | - | - | 10,000,000 | ||||||||||||||||||||||
| Total | 104,131 | 28.04 | - | 10,000,000 | ||||||||||||||||||||||
(1) This column reflects shares owned and tendered by employees to satisfy the required withholding taxes related to share-based payment awards, which are not deducted from shares available to be purchased under publicly announced programs.
(2) On November 10, 2022, our board of directors authorized a program to repurchase up to $10.0 million of our common stock. The common stock may be repurchased from time to time depending upon market conditions and may be purchased in the open market and through one or more trading plans designed to comply with Rule 10b5-1 under the Exchange Act.
49
The plan does not obligate us to repurchase any specific number or any specific dollar amount of shares and may be suspended at any time at our discretion. As of June 30, 2023, we have not repurchased any shares under this authorization.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
None
Item 5. Other Information.
As previously disclosed, on August 2, 2023, the Company and certain of its subsidiaries entered into an amendment to the Amended and Restated Credit Agreement dated November 11, 2022 with Bank of America, N.A. The Amendment extends the initial term of the Amended and Restated Credit Agreement to July 31, 2025 from September 30, 2024. In addition, the Amendment increases the maximum principal amount of the revolving line of credit to $70 million from $50 million. Under the Amendment, monthly payments of interest on the revolving line are based on Term SOFR, plus an applicable rate which varies between 2.10% and 2.60% based on the Company ratio of Funded Debt to EBITDA (as each is defined in the Amended and Restated Credit Agreement).
During the quarter ended June 30, 2023, the following officers and directors of Company each adopted a trading arrangement for the sale of securities of the Company’s common stock (each, a “10b5-1 Plan”) that is intended to satisfy the affirmative defense conditions of the Securities Exchange Rule Act 10b5-1(c).
On May 15, 2023, Michael Bruen, the Company’s Chief Operating Officer and Director, adopted a 10b5-1 Plan related to the sales of up to 30,000 shares of the Company’s common stock. Subject to the terms and conditions of Mr. Bruen’s 10b5-1 Plan, a brokerage firm may periodically effect the transactions from September 2023 through February 2024.
On May 17, 2023, Bruce Labovitz, the Company’s Chief Financial Officer, adopted a 10b5-1 Plan related to the sales of up to 38,000 shares of the Company’s common stock. Subject to the terms and conditions of Mr. Labovitz’s 10b5-1 Plan, a brokerage firm may periodically effect the transactions from August 2023 through March 2024.
On June 13, 2023, Raymond Vicks, Jr., an independent Director of the Company, adopted a 10b5-1 Plan related to the sales of up to 3,902 shares of the Company’s common stock. Subject to the terms and conditions of Mr. Vick’s 10b5-1 Plan, a brokerage firm may periodically effect the transactions from September 2023 through May 2024.
On June 16, 2023, Robert Hickey, the Company’s Chief Legal Officer and Secretary, terminated a 10b5-1 Plan that he had previously adopted on December 16, 2022. Mr. Hickey’s former plan related to the sale of up to 32,000 shares of common stock pursuant to the terns of the plan from June 2023 through May 2024. Subsequent to the termination, Mr. Hickey adopted a new 10b5-1 Plan which provides for the sale of up to 24,000 shares of the Company’s common stock pursuant to the terms of the 10b5-1 Plan from September 2023 through May 2024.
50
Item 6. Exhibits.
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.
Exhibit Number | Description | |||||||
| 10.1* | ||||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1*+ | ||||||||
| 32.2*+ | ||||||||
| 101: | XBRL. | |||||||
| 101.INS | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | |||||||
_____________________
*Filed herewith.
*+ This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C. 1350 and is not being “filed” for purposes of Section 18 of the Securities and Exchange Act of 1934.
51
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| BOWMAN CONSULTING GROUP LTD. | ||||||||
Date: August 8, 2023 | By: | /s/ Gary Bowman | ||||||
| Gary Bowman | ||||||||
President, CEO and Chairman (Principal Executive Officer) | ||||||||
Date: August 8, 2023 | By: | /s/ Bruce Labovitz | ||||||
| Bruce Labovitz | ||||||||
Chief Financial Officer (Principal Financial Officer) | ||||||||
52