Bowman Consulting Group Ltd. (BWMN)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains “forward-looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed in the “Risk Factors” section and “Cautionary Statements about Forward-Looking Statements,” in this Annual Report on Form 10-K, all of which are difficult to predict. Considering these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements, except to the extent required by applicable laws or rules. Unless the context otherwise requires, references to “Bowman,” the “company,” the “Company,” “we,” “us,” and “our” refer 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, technology and program management services to customers who own, develop, and maintain the built environment. We provide planning, engineering, construction management, commissioning, environmental consulting, geospatial imaging, surveying, land procurement and other technical services to over 4,750 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 customer service line, geographic region, or end market. We are deliberate in our efforts to balance our sources of revenue and avoid reliance on any one significant customer, service line, geography or end market concentration. Our strategic focus is on penetrating and expanding our presence in markets which best afford us opportunities to secure assignments that provide reoccurring revenue and multi-year engagements thus resulting in dependable and predictable revenue streams and high employee utilization. We limit our exposure to risk by providing professional and related services exclusively. We do not engage in general contracting activities either directly, or through joint ventures, and therefore have no related exposure. We are not a partner in any design-build construction projects. We carry no heavy equipment inventory, and our risk of contract loss is generally limited to time associated with fixed fee professional services assignments.

Gross contract revenue for the years ended December 31, 2024, and 2023 was $426.6 million and $346.3 million, respectively. Gross contract revenue derived from our workforce (see Net service billing – non-GAAP below) represented 89.0% and 87.8% of gross contract revenue for the years ended December 31, 2024 and 2023, respectively. Our net income (loss) for the years ended December 31, 2024, and 2023 was $3.0 million and ($6.6) million, respectively. Our Adjusted EBITDA (see Adjusted EBITDA - non-GAAP below) was $59.5 million on net income of $3.0 million and $47.0 million on net loss of $6.6 million for the years ended December 31, 2024, and 2023, respectively.

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 of 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.

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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 fixed cost of labor and the utilization thereof. Maintaining an optimal level of utilization on a balanced pool of growing labor resources represents our greatest prospect for delivering increasing profitability.

We 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.

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.

The majority of our assignments are lump sum in nature representing approximately 60% and 62% of our gross contract revenue for the years ended December 31, 2024 and 2023, respectively. Recognizing revenue from lump sum assignments requires management estimates of both total contract value when there are contingent compensation elements of the fee arrangement and expected cost at completion. We closely monitor our progress to completion and adjust our estimates when necessary. We do not recognize revenue from work that is performed at risk with no documented customer commitment.

Contract Costs

Contract costs 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 with little or no mark-up 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, along with various geospatial systems and scanners. We present direct costs exclusive of depreciation and amortization and as such we do not present gross profit on our consolidated financial statements.

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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. This expense is based on the amortization of the grant date fair value of equity grants over the vesting period. Non-cash stock compensation cost for permanent equity is 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. Stock issued as consideration in connection with acquisitions where there is no service period, and no risk of forfeiture, is considered a component of the purchase price and does not run through our income statement as non-cash compensation expense.

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.

Tax (Benefit) 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

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 connects to, any GAAP results.

Net Service Billing

In the normal course of providing services to our customers, we routinely subcontract services and incur direct third-party contract expenses that may or may not be reimbursable and may or may not be billed to customers with mark-up. Gross revenue less revenue derived from pass-through sub-consultant fees and reimbursable expenses represents our net service billing, which is a non-GAAP financial measure, or that portion of our gross contract revenue attributable to services performed by our employees. Because the ratio of sub-contractor and direct expense costs to gross billing varies between contracts, gross revenue is not necessarily indicative of trends in our business. As a professional services company, we believe that metrics derived from net service billings more accurately demonstrate the productivity and profitability of our workforce. Our industry uses the calculation of net service billing to normalize peer performance assessments and provide meaningful insight into trends over time.

Adjusted EBITDA

We view Adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of normalized performance. We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization, plus expenses associated with discontinued operations, legal settlements not related to our general course of

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business professional services, and other costs not in the ordinary course of business, non-cash stock-based compensation (inclusive of expenses associated with the adjustment of our liability for common shares subject to redemption), and other adjustments such as costs associated with raising equity and other forms of capital. 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.

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. Discussed below are the accounting policies for which we believe our judgments and estimates have the greatest potential impact.

Revenue Recognition

To determine the proper revenue recognition method under ASC Topic 606, we evaluate whether two or more contracts should be combined and accounted for as one single contract and if so, whether to account for the combined or single contract as more than one performance obligation. For most of our contracts, we conclude there to be a single performance obligation because the promise to transfer individual goods or services is not separately identifiable from the commitment to the deliverable of the contract and, therefore, is not distinct.

Our performance obligations are satisfied as work progresses. We recognize revenue for our lump sum contracts ratably over time based on cost-basis percentage of completion, calculated as a percentage of direct costs incurred to date relative to estimated total direct costs of the performance obligation at completion. Contract costs include labor, sub-consultant costs and other direct costs as incurred. We recognize revenue from lump sum contracts as we advance our work and transfer results to the customer. Contract change orders covering changes in scope, specifications, design, performance or period of completion are common with our customers. In most cases, we account for contract modifications as part of the existing contracts because they are for services that are not distinct from the original contract.

We base contract estimates on various assumptions about future costs and other inputs. Uncertainties inherent in the estimating process present the possibility that actual completion costs may vary from estimates. When estimated total costs on contracts indicate a loss, we recognize these losses in the period in which we identify the loss. We record adjustments required to align revenue with costs in place on the cumulative catch-up basis in the period in which we identify the revisions. We apply changes to projected revenue from contingent fee awards or penalties during the period in which we determine such contingencies to be probable.

Goodwill and Intangible Assets

The purchase price of an acquired business is allocated to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based upon their respective fair values with any excess purchase price over such fair values being recorded as goodwill. We review goodwill and intangible assets acquired in a business combination determined to have indefinite useful life annually for impairment, or more frequently if impairment indicators arise. We do not amortize such assets. We do however amortize intangible assets with estimable useful lives over such lives and review such assets for impairment if indicators are present.

We perform an annual impairment test as of October 1 of each year with quarterly confirmations that no triggering events have occurred. As our business is highly integrated and its components have similar economic characteristics, we have concluded we operate as one reporting unit at the combined entity level. We evaluate goodwill for potential impairment on an annual basis or at other times during the year if indicators of impairment exist. We evaluate goodwill for potential impairment by comparing the carrying value of the reporting unit to its fair value. When we evaluate goodwill for potential impairment, generally, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine qualitatively that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or if we decide to bypass the qualitative assessment, we perform a quantitative analysis. The quantitative analysis is used to identify both the existence of impairment and the amount of the impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. The estimated fair value is based on forward-looking estimates of performance and cash flows of our reporting

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units, which are based on historical operating results, adjusted for current and expected future market conditions, as well as various internal projections and external sources. If the carrying value of the reporting unit exceeds its estimated fair value, an impairment loss would be recognized in our consolidated statement of operations in an amount equal to the excess of the carrying value over the estimated fair value, limited to the total amount of goodwill allocated to that reporting unit.

We performed our annual impairment analysis for the years ended December 31, 2024 and 2023 and did not identify any indicators of impairment.

Income Tax

We are subject to income taxes in the U.S. in which we operate and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties in the application of tax laws and regulations.

We account for income taxes under the provisions of ASC 740, "Income Taxes" ("ASC 740"). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to affect taxable income. The assessment of the realizability of deferred tax assets involves a high degree of judgment and complexity. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected either in income or as an adjustment to goodwill. This determination will be made by considering various factors, including our expected future results, that in our judgment will make it more likely than not that these deferred tax assets will be realized.

Our actual effective tax rate and income tax expense could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, tax planning and our forecasted financial condition, and results of operations in future periods. Although we believe current estimates are reasonable, actual results could differ from these estimates.

ASC 740 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Under ASC 740, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We receive an annual research and development tax credit in connection with certain at-risk work performed on behalf of customers. We reduce our current and deferred tax provision by the estimated net annual R&D tax credit projection, limited to the statutory allowance for utilization of the credit. We reconcile the tax credit and its impact during the subsequent year after calculating the credit in connection with our tax returns. We maintain what we believe to be an appropriate reserve against our accumulated credits. Estimates of our tax expense include both current and deferred tax expense along with all available tax incentives and credits.

The Organization for Economic Cooperation and Development has released Pillar Two Model Rules, a 15% minimum effective tax rate designed to ensure that large multinational enterprises pay a minimum level of tax on the income arising in each jurisdiction where they operate and mandates sharing of certain company information with taxing authorities on a local and global basis. Certain jurisdictions have enacted, and others have proposed, legislation to implement certain provisions of Pillar Two. We are continuing to monitor the implications resulting from the potential enactment of Pillar Two rules in the jurisdictions where we operate, and do not currently anticipate a material impact.

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Results of Operations

Consolidated results of operations

The following represents our consolidated results of operations for periods indicated (in thousands):

1Represents non-GAAP financial measures. See Other Financial Information and Non-GAAP key performance indicators below in results of operations.

Year ended December 31, 2024 as compared to the year ended December 31, 2023

Gross Contract Revenue

Gross contract revenue for the year ended December 31, 2024 increased $80.3 million or 23.2% to $426.6 million as compared to $346.3 million for the year ended December 31, 2023. For the year ended December 31, 2024, gross contract revenue attributable to work performed by our workforce increased $75.7 million, or 24.9% to $379.7 million or 89.0% of gross contract revenue as compared to $304.0 million or 87.8% for year ended December 31, 2023 (see Net service billing – non-GAAP). Of the $80.3 million increase in gross contract revenue during the year ended December 31, 2024, acquisitions completed in 2024 represented $42.5 million or 52.9% of the increase.

Changes in gross contract revenue (“GCR”) for the year ended December 31, 2024, disaggregated between our core and emerging end markets, were as follows (in thousands other than percentages):

1 Represents environmental, mining, water resources, imaging and mapping and other.

2.Acquired revenue in prior periods is as previously reported; four quarters post-closing, acquired revenue is thereafter reclassified as organic for the purpose of calculating organic growth rates.

3 Includes periodic reclassifications of revenue between categories from prior periods for consistency of presentation.

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For the year ended December 31, 2024, gross contract revenue from our building infrastructure market increased $24.7 million or 12.7% as compared to the year ended December 31, 2023. 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, 36.0% of gross contract revenue was derived from residential assignments including single family, multi-family and mixed-use housing stock, 45.0% from commercial assignments including retail, hospitality and quick-serve restaurants (QSR), office and industrial, data centers and healthcare, and 19.0% from municipal assignments. Within residential, 53.3% of gross contract revenue was derived from for-sale homebuilding assignments, 40.4% from residential multi-family and 6.3% from mixed use projects. While the homebuilding market shows signs of rebounding from prior year interest rate impacts, for-sale residential services represented just 9.9% of our total gross contract revenue for year ended December 31, 2024. Within commercial, 36.6% of revenue was derived from office and industrial assignments, 40.0% from retail, hospitality, and quick serve restaurants, 15.1% from data centers, 8.3% from healthcare. We continue to experience strong demand for our building infrastructure services and maintain a positive outlook on this market as we continue to experience strength in markets including data centers, quick serve restaurants, industrial distribution facilities, schools, and build-for-rent communities.

For the year ended December 31, 2024, revenue from transportation increased $14.9 million or 20.5% as compared to the year ended December 31, 2023. The increase was attributable to new contract awards in transportation both from public and private customers along with acquired transportation backlog which we were able to deliver to customers, within transportation, 61.8% of our gross contract revenue was derived directly from public sector customers including DOTs, tollway operators, transit authorities aviation operators and others with the remaining 38.2% derived from private sector customers. 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 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 have consolidated renewable energy into the power and utilities category (sometimes referred to herein as the power, utilities and energy market) of our revenue mix and have adjusted historical balances accordingly. For the year ended December 31, 2024, revenue from power and utilities increased $10.9 million or 16.9% as compared to the year ended December 31, 2023. The additional increase in gross contract revenue from the power and utilities market is principally attributable to acquisitions and 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. Within the power and utilities market, 75.4% of our gross contract revenue was derived from customers operating traditional power operations and 24.6% was derived from customers focused on renewables, EV infrastructure and energy transition operations. 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 emerging markets consist of mining, water resources, environmental consulting, imaging and mapping and other natural resources services. For the year ended December 31, 2024, revenue from emerging markets increased $29.8 million or 206.8% as compared to the year ended December 31, 2023. This increase is primarily due to the acquisition of Surdex Corporation; see Note 4 - Acquisitions for additional information. Emerging market sectors represent lines of business that have not yet grown to a size whereby we would distinguish them as a separate market. Gross contract revenue within our emerging markets was 43.7% from imaging and mapping, 19.9% from mining activities where we have specialized in copper mining, 26.3% from water resources activities, and 10.1% from environmental and other natural resources consulting. 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 various emerging market services.

For the years ended December 31, 2024 and 2023, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, represented 26.8% and 20.8% of our gross contract revenue,, respectively. A portion of that increase is due to the reclassification of Pike Corporation from the private sector to the public sector. This does not include work done indirectly on public sector projects. Gross contract revenue from projects for public sector customers are included in the end market most aligned with work performed.

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Contract costs (exclusive of depreciation and amortization)

Total contract costs, exclusive of depreciation and amortization, increased $33.6 million or 19.7% to $203.8 million for the year ended December 31, 2024, as compared to $170.2 million for the year ended December 31, 2023. For the years ended December 31, 2024 and 2023, total contract costs represented 47.8% and 49.1% of total contract revenue, respectively. For the years ended December 31, 2024 and 2023 total contract costs represented 53.7% and 56.0% of revenue attributable to our workforce, respectively (see Net Service Revenue). Total contract costs include both direct payroll costs, and sub-consultants and other expenses.

Total direct payroll costs increased $28.9 million or 22.6% to $156.9 million for the year ended December 31, 2024, as compared to $128.0 million for the year ended December 31, 2023 due to increased staffing resulting from acquisitions and organic growth. Total direct payroll accounted for 77.0% of total contract costs for the year ended December 31, 2024, an increase of 1.8 percentage points as compared to 75.2% for the year ended December 31, 2023.

Direct labor, the component of total direct payroll costs associated with the cost of labor relating to work performed on contracts (often referred to within our industry as utilization) increased $22.0 million or 22.9% to $118.0 million for the year ended December 31, 2024 as compared $96.0 million for the year ended December 31, 2023. For the year ended December 31, 2024 and 2023, direct labor costs represented 27.7% and 27.7% of gross contract revenue, respectively and represented 31.1% and 31.6% of the revenue attributable to our workforce, respectively. Labor costs not charged directly to customer contracts is considered indirect time and is treated as selling, general and administrative expense.

Other direct payroll costs, the component of total direct payroll costs associated with fringe and incentive compensation (cash and non-cash) increased by $6.9 million or 21.6% to $38.8 million for the year ended December 31, 2024 as compared to $31.9 million for the year ended December 31, 2023. This increase includes a $3.5 million increase in employee payroll taxes and a $1.1 million increase in health benefits for the year ended December 31, 2024, primarily due to the increase in the overall labor pool. This increase includes an increase of $1.1 million in the cost of non-cash stock compensation relating to direct payroll costs to $8.2 million for the year ended December 31, 2024, as compared to $7.1 million for the year ended December 31, 2023. The increase in non-cash stock compensation is likewise attributable to the increase in the overall labor pool.

Sub-consultants and expenses increased $4.6 million or 10.9% to $46.9 million for the year ended December 31, 2024, as compared to $42.3 million for the year ended December 31, 2023. For the years ended December 31, 2024 and 2023, sub-consultant and expenses represented 11.0% and 12.2% of gross contract revenue, respectively. We expect sub-consultant costs to be in the range of 10-15% of gross contract revenue depending on contract mix at any given time, with transportation contracts tending to have a slightly higher sub-consultant percentage. The growth in sub-consultants and expenses is directly in-line with the increase of gross contract revenue.

Operating Expense

Total operating expense increased $48.1 million or 27.2% to $224.8 million for the year ended December 31, 2024, as compared to $176.7 million for the year ended December 31, 2023.

Selling, general and administrative expenses increased $39.1 million or 24.7% to $197.5 million for the year ended December 31, 2024, as compared to $158.4 million for the year ended December 31, 2023. Indirect labor increased $19.2 million or 27.0% to $90.3 million for the year ended December 31, 2024, as compared to $71.1 million for the year ended December 31, 2023, as a result of increased staffing to accommodate growth. General overhead increased $15.1 million or 29.6% to $66.1 million for the year ended December 31, 2024, as compared to $51.0 million for the year ended December 31, 2023, due to increased costs associated with operating as a public company, geographic expansion, and the overall growth of the company. Non-cash stock compensation associated with indirect labor hours, those not charged to customer contracts, decreased ($0.1) million or (0.6%) to $17.5 million for the year ended December 31, 2024, as compared to $17.6 million for the year ended December 31, 2023.

Depreciation and amortization increased $9.1 million or 48.7% to $27.8 million for the year ended December 31, 2024, as compared to $18.7 million for the year ended December 31, 2023. This increase is primarily due to an increase in leased assets and intangible assets accumulated through acquisitions. We continue to increase the use of our finance lease facility as we continue to grow. Intangible assets have increased due to multiple acquisitions in 2024. Gains on the sale of certain IT equipment and automobiles increased $0.1 million or 25.0% to $0.5 million for the year ended December 31, 2024, as compared to $0.4 million for the year ended December 31, 2023.

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(Loss) Income from Operations

Loss from operations increased $1.3 million to ($2.0) million for the year ended December 31, 2024 as compared to ($0.7) million for the year ended December 31, 2023.

Other Expense

Other expense increased by $1.1 million to $6.9 million of expense for the year ended December 31, 2024 as compared to $5.8 million of expense for the year ended December 31, 2023. Interest expense increased by $2.6 million. This increase is primarily attributable to increases in finance leases and acquisitions.

Income Tax (Expense) Benefit

Income tax benefit for the year ended December 31, 2024 increased $12.2 million or 6,100% to $12.0 million benefit, as compared to ($0.2) million income tax expense for the year ended December 31, 2023. As an accrual basis taxpayer, this affects the timing of the payment of tax but not the expense of tax. Our effective tax rate for the year ended December 31, 2024 was 133.91%.

Income (Loss) Before Tax Expense and Net Income

Loss before tax expense increased by $2.5 million or 39.1% to $8.9 million loss for the year ended December 31, 2024, as compared to a $6.4 million loss for the year ended December 31, 2023. Net income (loss) increased by $9.6 million or 145.5% to $3.0 million of income for the year ended December 31, 2024, as compared to ($6.6) million of loss for the year ended December 31, 2023.

Other financial information and non-GAAP key performance indicators

Net service billing (non-GAAP)

Net service billing increased $75.7 million or 24.9% to $379.7 million for the year ended December 31, 2024, as compared to $304.0 million for the year ended December 31, 2023. Net service billing reconciles to gross contract revenue as follows (in thousands):

Net service billing increased by 1.2 percentage points to 89.0% of gross contract revenue for the year ended December 31, 2024, as compared to 87.8% for the year ended December 31, 2023. This change was within our expected range of 85% to 90% of gross contract revenue, and varies depending on contract mix.

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Adjusted EBITDA (non-GAAP)

Adjusted EBITDA increased $12.5 million or 26.6% to $59.5 million for the year ended December 31, 2024 as compared to $47.0 million for the year ended December 31, 2023. Adjusted EBITDA reconciles to net income as follows (in thousands):

For the years ended December 31, 2024 and 2023, Adjusted EBITDA includes $25.8 million and $25.0 million, respectively, relating to non-cash stock compensation expenses resulting from the on-going vesting of restricted stock awards.

Adjusted EBITDA Margin, net (non-GAAP)

Adjusted EBITDA Margin, net represents Adjusted EBITDA (as defined above) as a percentage of net service billing (as defined above). For the years ended December 31, 2024 and 2023, Adjusted EBITDA Margin, net was 15.7% and 15.5% respectively.

Backlog (other key performance metrics)

Our backlog increased $93 million or 30.5% to approximately $399 million during the year ended December 31, 2024, as compared to $306 million at December 31, 2023. At December 31, 2024 and 2023, our backlog was comprised as follows:

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 (as defined below), 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 December 31, 2024, we maintained a $100.0 million Revolving Credit Facility with Bank of America, our primary lender. See -"Credit Facilities and Other Financing" below for more information on our Revolving Credit Facility. Under the terms of our Revolving 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. Cash on hand includes the cash we keep in short-term investment accounts along with deposits and payments in transit in our

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operating sweep account. Our cash on hand decreased by $14.0 million at December 31, 2024 as compared to December 31, 2023.

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 debt 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. There can be no assurance that any opportunity in the process of being reviewed will close but we expect over time to utilize a meaningful portion our current liquidity and capital resources for acquisitions.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

During the year ended December 31, 2024, net cash provided by operating activities was $24.3 million, which primarily consisted of $3.0 million net income, adjusted for stock-based compensation expense of $25.7 million and depreciation and amortization expense of $28.4 million, offset by an increase in deferred taxes relating to the capitalization of research and development costs of $20.0 million, and an increase in a net cash inflow of $14.5 million from changes in operating assets and liabilities. The net inflow from changes in operating assets and liabilities was primarily due to a $9.3 million increase in accounts receivable resulting from increased billing to our customers as well as additional billing from the acquired companies, a $5.7 million increase in prepaid expenses and a $7.1 million net increase in contract assets and liabilities, offset by a $7.6 million increase in accounts payable and accrued expenses, inclusive of a long-term accrual relating to an uncertain tax position with respect to the capitalization of research and development expenses.

During the year ended December 31, 2023, net cash provided by operating activities was $11.7 million, which primarily consisted of ($6.6) million net loss, adjusted for stock-based compensation expense of $24.7 million and depreciation and amortization expense of $18.7 million, offset by an increase in deferred taxes relating to the capitalization of research and development costs of $25.5 million, and an increase in a net cash outflow of $0.3 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $13.6 million increase in accounts receivable resulting from increased billing to our customers as well as additional billing from the acquired companies, a $0.1 million decrease in prepaid expenses and a $14.6 million net increase in contract assets and liabilities, offset by a $27.7 million increase in accounts payable and accrued expenses, inclusive of a long-term accrual relating to an uncertain tax position with respect to the capitalization of research and development expenses.

Investing Activities

Net cash used in investing activities was $27.5 million for the year ended December 31, 2024, $27.4 million was related to acquisitions that occurred in 2024 and $0.1 million was for purchases of property and equipment.

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Financing Activities

Net cash used in financing activities was $10.8 million during the year ended December 31, 2024. This was primarily due to net borrowing of $8.3 million from our Revolving Credit Facility, $11.1 million of payments for the purchase of treasury stock, $23.3 million for repurchase of common stock, $9.0 million of payments on finance leases and $16.6 million of payments on notes payable and our fixed lines of credit, offset by $47.2 million of proceeds from a common share offering.

Credit Facilities and Other Financing

As of December 31, 2024, we maintained a $100.0 million revolving credit facility (the “Revolving Credit Facility 2024”) pursuant to a credit agreement with lenders, Bank of America N.A., as Administrative Agent, the Swingline Lender and L/C Issuer, and TD Bank, N.A. as syndication agent. The Revolving Credit Facility 2024 has a maturity date of May 2, 2029. Under the terms of the Revolving Credit Facility 2024, available cash in our primary operating account sweeps against the outstanding balance every evening. As of December 31, 2024, the balance on this Revolving Credit Facility 2024 was $37.0 million.

The Revolving Credit Facility 2024 is secured by all the assets of the Company and the subsidiary guarantors. Under the Revolving Credit Facility 2024, 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 Revolving Credit Facility 2024). At December 31, 2024, we were in compliance with all covenants.

We utilize master lease facilities primarily 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 December 31, 2024, we maintained a fleet of approximately 500 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 $0.6 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.

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 Facility.

Other Acquisitions

For information on the terms of additional promissory notes issued by the Company in connection with acquisitions during 2024 and 2023 that were not deemed significant acquisitions, see Note 4 – Acquisitions and Note 12 – Notes Payable.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.

Effects of Inflation

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains “forward-looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed in the “Risk Factors” section and “Cautionary Statements about Forward-Looking Statements,” in this Annual Report on Form 10-K, all of which are difficult to predict. Considering these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements, except to the extent required by applicable laws or rules. Unless the context otherwise requires, references to “Bowman,” the “company,” the “Company,” “we,” “us,” and “our” refer 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 over 4,750 customers operating in a diverse set of end markets. We work as both a prime and sub-consultant for a broad base of public and private sector customers that generally operate in highly regulated environments.

We have a diversified business that is not dependent on any one service line, geographic region, or end market. We are deliberate in our efforts to balance our sources of revenue and avoid reliance on any one significant customer, service line, geography or end market concentration. Our strategic focus is on penetrating and expanding our presence in markets which best afford us opportunities to secure assignments that provide reoccurring revenue and multi-year engagements thus resulting in dependable and predictable revenue streams and high employee utilization. We limit our exposure to risk by providing professional and related services exclusively. We do not engage in general contracting activities either directly, or through joint ventures, and therefore have no related exposure. We are not a partner in any design-build construction projects. We carry no heavy equipment inventory, and our risk of contract loss is generally limited to time associated with fixed fee professional services assignments.

Gross contract revenue for the years ended December 31, 2023, and 2022 was $346.3 million and $261.7 million, respectively. Gross contract revenue derived from our workforce represented 87.8% and 89.9% of gross contract revenue for the years ended December 31, 2023 and 2022, respectively (see Net service billing – non-GAAP below). Our net (loss) income for the years ended December 31, 2023, and 2022 was ($6.6) million and $5.0 million, respectively. Our Adjusted EBITDA (see Adjusted EBITDA - non-GAAP below) was $47.0 million on net loss of $6.6 million and $34.0 million on net income of $5.0 million for the years ended December 31, 2023, and 2022, respectively.

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 of 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

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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 fixed cost of labor and the utilization thereof. Maintaining an optimal level of utilization on a balanced pool of growing labor resources represents our greatest prospect for delivering increasing profitability.

We 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.

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.

The majority of our assignments are lump sum in nature representing approximately 62% and 70% of our gross contract revenue for the years ended December 31, 2023 and 2022, respectively. Recognizing revenue from lump sum assignments requires management estimates of both total contract value when there are contingent compensation elements of the fee arrangement and expected cost at completion. We closely monitor our progress to completion and adjust our estimates when necessary. We do not recognize revenue from work that is performed at risk with no documented customer commitment.

Contract Costs

Contract costs 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 with little or no mark-up 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, along with various geospatial systems and scanners. 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.

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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. This expense is based on the amortization of the grant date fair value of equity grants over the vesting period. Non-cash stock compensation cost for permanent equity is 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. Stock issued as consideration in connection with acquisitions where there is no service period, and no risk of forfeiture, is considered a component of the purchase price and does not run through our income statement as non-cash compensation expense.

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.

Tax (Benefit) 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

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 connects to, any GAAP results.

Net Service Billing

In the normal course of providing services to our customers, we routinely subcontract services and incur direct third-party contract expenses that may or may not be reimbursable and may or may not be billed to customers with mark-up. Gross revenue less revenue derived from pass-through sub-consultant fees and reimbursable expenses represents our net service billing, which is a non-GAAP financial measure, or that portion of our gross contract revenue attributable to services performed by our employees. Because the ratio of sub-contractor and direct expense costs to gross billing varies between contracts, gross revenue is not necessarily indicative of trends in our business. As a professional services company, we believe that metrics derived from net service billings more accurately demonstrate the productivity and profitability of our workforce. Our industry uses the calculation of net service billing to normalize peer performance assessments and provide meaningful insight into trends over time.

Adjusted EBITDA

We view Adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of normalized performance. We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization, plus expenses associated with discontinued operations, legal settlements not related to our general course of business professional services, and other costs not in the ordinary course of business, non-cash stock-based compensation (inclusive of expenses associated with the adjustment of our liability for common shares subject to redemption), and other adjustments such as costs associated with raising equity and other forms of capital. Our peers may define Adjusted EBITDA differently.

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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.

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. Discussed below are the accounting policies for which we believe our judgments and estimates have the greatest potential impact.

Revenue Recognition

To determine the proper revenue recognition method under ASC Topic 606, we evaluate whether two or more contracts should be combined and accounted for as one single contract and if so, whether to account for the combined or single contract as more than one performance obligation. For most of our contracts, we conclude there to be a single performance obligation because the promise to transfer individual goods or services is not separately identifiable from the commitment to the deliverable of the contract and, therefore, is not distinct.

Our performance obligations are satisfied as work progresses. We recognize revenue for our lump sum contracts ratably over time based on cost-basis percentage of completion, calculated as a percentage of direct costs incurred to date relative to estimated total direct costs of the performance obligation at completion. Contract costs include labor, sub-consultant costs and other direct costs as incurred. We recognize revenue from lump sum contracts as we advance our work and transfer results to the customer. Contract change orders covering changes in scope, specifications, design, performance or period of completion are common with our customers. In most cases, we account for contract modifications as part of the existing contracts because they are for services that are not distinct from the original contract.

We base contract estimates on various assumptions about future costs and other inputs. Uncertainties inherent in the estimating process present the possibility that actual completion costs may vary from estimates. When estimated total costs on contracts indicate a loss, we recognize these losses in the period in which we identify the loss. We record adjustments required to align revenue with costs in place on the cumulative catch-up basis in the period in which we identify the revisions. We apply changes to projected revenue from contingent fee awards or penalties during the period in which we determine such contingencies to be probable.

Goodwill and Intangible Assets

The purchase price of an acquired business is allocated to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based upon their respective fair values with any excess purchase price over such fair values being recorded as goodwill. We review goodwill and intangible assets acquired in a business combination determined to have indefinite useful life annually for impairment, or more frequently if impairment indicators arise. We do not amortize such assets. We do however amortize intangible assets with estimable useful lives over such lives and review such assets for impairment if indicators are present.

We perform an annual impairment test as of October 1 of each year with quarterly confirmations that no changes in circumstances have occurred. As our business is highly integrated and its components have similar economic characteristics, we have concluded we operate as one reporting unit at the combined entity level. We do not amortize goodwill, but rather evaluate goodwill for potential impairment on an annual basis or at other times during the year if indicators of impairment exist. We evaluate goodwill for potential impairment by comparing the carrying value of the reporting unit to its fair value. When we evaluate goodwill for potential impairment, generally, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine qualitatively that it is more likely than not that the fair value of a reporting unit is less than its carrying value, or if we decide to bypass the qualitative assessment, we perform a quantitative analysis. The quantitative analysis is used to identify both the existence of impairment and the amount of the impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. The estimated fair value is based on forward-looking estimates of performance and cash flows of our reporting units, which are based on historical operating results, adjusted for current and expected future market conditions, as well as various internal projections and external sources. If the carrying value of the reporting unit exceeds its estimated fair value, an impairment loss would be recognized in our consolidated statement of operations in an amount equal to the excess of the carrying value over the estimated fair value, limited to the total amount of goodwill allocated to that reporting unit.

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We performed our annual impairment analysis for the years ended December 31, 2023 and 2022 and did not identify any indicators of impairment.

Income Tax -

We are subject to income taxes in the U.S. in which we operate and record our tax provision for the anticipated tax consequences in our reported results of operations. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties in the application of tax laws and regulations.

We account for income taxes under the provisions of ASC 740, "Income Taxes" ("ASC 740"). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using tax rates in effect for the year in which the differences are expected to affect taxable income. The assessment of the realizability of deferred tax assets involves a high degree of judgment and complexity. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected to be realized. When we determine that it is more likely than not that we will be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would be made and reflected either in income or as an adjustment to goodwill. This determination will be made by considering various factors, including our expected future results, that in our judgment will make it more likely than not that these deferred tax assets will be realized.

Our actual effective tax rate and income tax expense could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, tax planning and our forecasted financial condition, and results of operations in future periods. Although we believe current estimates are reasonable, actual results could differ from these estimates.

ASC 740 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Under ASC 740, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

We receive an annual research and development tax credit in connection with certain at-risk work performed on behalf of customers. We reduce our current and deferred tax provision by the estimated net annual R&D tax credit projection, limited to the statutory allowance for utilization of the credit. We reconcile the tax credit and its impact during the subsequent year after calculating the credit in connection with our tax returns. We maintain what we believe to be an appropriate reserve against our accumulated credits. Estimates of our tax expense include both current and deferred tax expense along with all available tax incentives and credits.

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Results of Operations

Consolidated results of operations

The following represents our consolidated results of operations for periods indicated (in thousands):

1 Represents non-GAAP financial measures. See Other Financial Information and Non-GAAP key performance indicators below in results of operations.

Year ended December 31, 2023 as compared to the year ended December 31, 2022

Gross Contract Revenue

Gross contract revenue for the year ended December 31, 2023 increased $84.6 million or 32.3% to $346.3 million as compared to $261.7 million for the year ended December 31, 2022. For the year ended December 31, 2023, gross contract revenue attributable to work performed by our workforce increased $68.8 million, or 29.3% to $304.0 million or 87.8% of gross contract revenue as compared to $235.2 million or 89.9% for year ended December 31, 2022 (see Net service billing – non-GAAP). Of the $84.6 million increase in gross contract revenue during the year ended December 31, 2023, acquisitions completed in 2023 represented $30.5 million or 36.5% of the increase.

Changes in gross contract revenue (“GCR”) for the year ended December 31, 2023, disaggregated between our core and emerging end markets, were as follows (in thousands other than percentages):

1represents environmental, mining, water resources and other

2after four quarters post-closing, acquired revenue is reclassified as organic; this results in a change from previously reported numbers

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For the year ended December 31, 2023, gross contract revenue from our building infrastructure market increased $24.4 million or 14.3% as compared to the year ended December 31, 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, 35.7% of gross contract revenue was derived from residential assignments including single family, multi-family and mixed-use housing stock, 48.3% from commercial assignments including retail, hospitality and quick-serve restaurants (QSR), office and industrial, data centers and healthcare, and 16.0% from municipal assignments. Within residential, 43.9% of gross contract revenue was derived from for-sale homebuilding assignments, 47.0% from residential multi-family and 9.1% from mixed use projects. While the homebuilding market shows signs of rebounding from prior year interest rate impacts, for-sale residential services represented just 8.8% of our total gross contract revenue for year ended December 31, 2023. Within commercial, 42.1% of revenue was derived from office and industrial assignments, 39.1% from retail, hospitality, and quick serve restaurants, 11.6% from data centers, 5.1% from healthcare and 2.1% was from other projects. We continue to experience strong demand for our building infrastructure services and maintain a positive outlook on this market as we continue to experience strength in markets including data centers, quick serve restaurants, industrial distribution facilities, schools, and build-for-rent communities.

For the year ended December 31, 2023, revenue from transportation increased $28.0 million or 62.4% as compared to the year ended December 31, 2022. The increase was attributable to new contract awards in transportation both from public and private customers along with acquired transportation backlog which we were able to deliver to customers, within transportation, 66.7% of our gross contract revenue was derived directly from public sector customers including DOTs, tollway operators, transit authorities aviation operators and others with the remaining 33.3% derived from private sector customers. 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 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 have consolidated renewable energy into the power and utilities category (sometimes referred to herein as the power, utilities and energy market) of our revenue mix and have adjusted historical balances accordingly. For the year ended December 31, 2023, revenue from power and utilities increased $31.5 million or 96.4% as compared to the year ended December 31, 2022. The additional increase in gross contract revenue from the power and utilities market is principally attributable to acquisitions and 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. Within the power and utilities market, 78.3% of our gross contract revenue was derived from customers operating traditional power operations and 21.7% was derived from customers focused on renewables, EV infrastructure and energy transition operations. 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, environmental consulting, and other natural resources services. Adjusted for the change, for the year ended December 31, 2023, revenue from emerging markets increased $0.6 million or 4.6% as compared to the year ended December 31, 2022. Emerging market sectors represent lines of business that have not yet grown to a size whereby we would distinguish them as a separate market. Gross contract revenue within our emerging markets was 46.6% from mining activities where we have specialized in copper mining, 43.7% from water resources activities, and 9.7% from environmental and other natural resources consulting. 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 various emerging market services.

For the year ended December 31, 2023 and 2022, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, remained relatively unchanged at 20.8% and 21.0% of our gross contract revenue, respectively. 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 $43.6 million or 34.4% to $170.2 million for the year ended December 31, 2023, as compared to $126.6 million for the year ended December 31, 2022. For the year ended December 31, 2023 and 2022, total contract costs represented 49.1% and 48.4% of total contract revenue,

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respectively. For the years ended December 31, 2023 and 2022 total contract costs represented 56.0% and 53.8% of revenue attributable to our workforce, respectively (see Net Service Revenue). Total contract costs include both direct payroll costs, and sub-consultants and other expenses.

Total direct payroll costs increased $27.9 million or 27.9% to $128.0 million for the year ended December 31, 2023, as compared to $100.1 million for the year ended December 31, 2022 due to increased staffing resulting from acquisitions and organic growth. Total direct payroll accounted for 75.2% of total contract costs for the year ended December 31, 2023, a decrease of 3.9 percentage points as compared to 79.1% for the year ended December 31, 2022.

Direct labor, the component of total direct payroll costs associated with the labor time charged to contracts (often referred to within or industry as utilization) increased $21.7 million or 29.2% to $96.0 million for the year ended December 31, 2023 as compared $74.3 million for the year ended December 31, 2022. For the year ended December 31, 2023 and 2022, direct labor costs represented 27.7% and 28.4% of gross contract revenue, respectively and represented 31.6% and 31.6% of the revenue attributable to our workforce, respectively. Labor costs not charged directly to customer contracts is considered indirect time and is treated as selling, general and administrative expense.

Other direct payroll costs, the component of total direct payroll costs associated with fringe and incentive compensation (cash and non-cash) increased by $6.0 million or 23.2% to $31.9 million for the year ended December 31, 2023 as compared to $25.9 million for the year ended December 31, 2022. This increase includes a $3.4 million increase in employee payroll taxes and a $3.3 million increase in health benefits for the year ended December 31, 2023, primarily due to the increase in the overall labor pool. This increase includes an increase of $2.9 million in the cost of non-cash stock compensation relating to direct payroll costs to $7.1 million for the year ended December 31, 2023, as compared to $4.2 million for the year ended December 31, 2022. The increase in non-cash stock compensation is likewise attributable to the increase in the overall labor pool.

Sub-consultants and expenses increased $15.8 million or 59.6% to $42.3 million for the year ended December 31, 2023, as compared to $26.5 million for the year ended December 31, 2022. For the year ended December 31, 2023 and 2022, sub-consultant and expenses represented 12.2% and 10.1% of gross contract revenue, respectively. We expect sub-consultant costs to be in the range of 10-15% of gross contract revenue depending on contract mix at any given time, with transportation contracts tending to have a slightly higher sub-consultant percentage. The growth in sub-consultants and expenses is directly in-line with the increase of gross contract revenue.

Operating Expense

Total operating expense increased $46.7 million or 35.9% to $176.7 million for the year ended December 31, 2023, as compared to $130.0 million for the year ended December 31, 2022.

Selling, general and administrative expenses increased $40.6 million or 34.5% to $158.4 million for the year ended December 31, 2023, as compared to $117.8 million for the year ended December 31, 2022. Indirect labor increased $20.2 million or 39.7% to $71.1 million for the year ended December 31, 2023, as compared to $50.9 million for the year ended December 31, 2022, as a result of increased staffing to accommodate growth and a seasonally impacted decrease in utilization in December 2023. General overhead increased $11.1 million or 27.8% to $51.0 million for the year ended December 31, 2023, as compared to $39.9 million for the year ended December 31, 2022, due to increased costs associated with operating as a public company, geographic expansion, and the overall growth of the company. Non-cash stock compensation associated with indirect labor hours, those not charged to customer contracts, increased $6.7 million or 61.5% to $17.6 million for the year ended December 31, 2023, as compared to $10.9 million for the year ended December 31, 2022, primarily resulting from the increase in our overall labor pool. We believe our ability to provide long-term stock related compensation to our employees is a competitive advantage for attracting and retaining labor.

Depreciation and amortization increased $6.4 million or 52.0% to $18.7 million for the year ended December 31, 2023, as compared to $12.3 million for the year ended December 31, 2022. This increase is primarily due to an increase in leased assets and intangible assets accumulated through acquisitions. We continue to increase the use of our finance lease facility as we continue to grow. Intangible assets have increased due to multiple acquisitions in 2023. Gains on the sale of certain IT equipment and automobiles increased $0.3 million or 300% to $0.4 million for the year ended December 31, 2023, as compared to $0.1 million for the year ended December 31, 2022.

(Loss) Income from Operations

Loss from operations increased $5.8 million to ($0.7) million for the year ended December 31, 2023 as compared to $5.1 million for the year ended December 31, 2022 due to reduced revenue resulting from a seasonally affected reduction

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in labor utilization in December 2023, challenges associated with timely integration and rising overhead costs as described above.

Other Expense

Other expense increased by $2.4 million to $5.8 million of expense for the year ended December 31, 2023 as compared to $3.4 million of expense for the year ended December 31, 2022. Interest expense increased by $2.9 million. This increase is primarily attributable to increases in finance leases and acquisitions.

Income Tax (Expense) Benefit

Income tax benefit for the year ended December 31, 2023 decreased $3.5 million or 106.1% to ($0.2) million expense, as compared to $3.3 million benefit for the year ended December 31, 2022. Effective upon the completion of our initial public offering our tax status converted from cash basis to accrual basis, retroactive to January 1, 2021. This affects the timing of the payment of tax but not the expense of tax. Our effective tax rate for the year ended December 31, 2023 was (2.7%).

Income (Loss) Before Tax Expense and Net Income

Loss before tax expense increased by $8.1 million or 476.5% to $6.4 million loss for the year ended December 31, 2023, as compared to a $1.7 million income for the year ended December 31, 2022. Net loss increased by $11.6 million or 232.0% to ($6.6) million for the year ended December 31, 2023, as compared to $5.0 million for the year ended December 31, 2022.

Other financial information and non-GAAP key performance indicators

Net service billing (non-GAAP)

Net service billing increased $68.8 million or 29.3% to $304.0 million for the year ended December 31, 2023, as compared to $235.2 million for the year ended December 31, 2022. Net service billing reconciles to gross contract revenue as follows (in thousands):

Net service billing decreased by 2.1 percentage points to 87.8% of gross contract revenue for the year ended December 31, 2023, as compared to 89.9% for the year ended December 31, 2022. This change was within our expected range of 85% to 90% depending on contract mix.

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Adjusted EBITDA (non-GAAP)

Adjusted EBITDA increased $13.0 million or 38.2% to $47.0 million for the year ended December 31, 2023 as compared to $34.0 million for the year ended December 31, 2022. Adjusted EBITDA reconciles to net income as follows (in thousands):

For the years ended December 31, 2023 and 2022, Adjusted EBITDA includes $25.0 million and $15.4 million, respectively, relating to non-cash stock compensation expenses resulting from the on-going vesting of restricted stock awards.

Adjusted EBITDA Margin, net (non-GAAP)

Adjusted EBITDA Margin, net represents Adjusted EBITDA (as defined above) as a percentage of net service billing (as defined above). For the years ended December 31, 2023 and 2022, Adjusted EBITDA Margin, net was 15.5% and 14.5% respectively. Reduced revenue resulting from a seasonally affected reduction in labor utilization in December 2023 impacted Adjusted EBITDA margin. Since all labor was captured and there would have been no meaningful added cost associated with the lost revenue, margin would have been significantly higher had we not experienced the seasonally affected reduction to utilization.

Backlog (other key performance metrics)

Our backlog increased $63 million or 25.9% to approximately $306 million during the year ended December 31, 2023, as compared to $243 million at December 31, 2022. At December 31, 2023 and 2022, our backlog was comprised as follows:

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 (as defined below), 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 December 31, 2023, we maintained a $70.0 million Revolving Credit Facility with Bank of America, our primary lender. See -"Credit Facilities and Other Financing" below for more information on our Revolving Credit Facility. Under the terms of our Revolving Credit Facility, available cash in our primary operating account sweeps against the outstanding balance every evening. Our cash

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on hand therefore generally consists of petty cash and other non-operating funds not included in the nightly sweep. Cash on hand includes the cash we keep in short-term investment accounts along with deposits and payments in transit in our operating sweep account. Our cash on hand increased by $7.4 million at December 31, 2023 as compared to December 31, 2022.

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 debt 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. At this time, we have several acquisitions under consideration. There can be no assurance that any opportunity in the process of being reviewed will close but we expect over time to utilize a meaningful portion our current liquidity and capital resources for acquisitions.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

During the year ended December 31, 2023, net cash provided by operating activities was $11.7 million, which primarily consisted of ($6.6) million net loss, adjusted for stock-based compensation expense of $24.7 million and depreciation and amortization expense of $18.7 million, offset by an increase in deferred taxes relating to the capitalization of research and development costs of $25.5 million, and an increase in a net cash outflow of $0.3 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $13.6 million increase in accounts receivable resulting from increased billing to our clients as well as additional billing from the acquired companies, a $0.1 million decrease in prepaid expenses and a $7.1 million net increase in contract assets and liabilities, offset by a $27.7 million increase in accounts payable and accrued expenses, inclusive of a long-term accrual relating to an uncertain tax position with respect to the capitalization of research and development expenses.

During the year ended December 31, 2022, net cash provided by operating activities was $9.2 million, which primarily consisted of $5.0 million net income, adjusted for stock-based compensation expense of $15.1 million and depreciation and amortization expense of $12.3 million, offset by an increase in deferred taxes of $18.0 million, and an increase in a net cash outflow of $6.1 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $13.8 million increase in accounts receivable resulting from increased billing to our clients as well as additional billing from the acquired companies, a $2.0 million increase in prepaid expenses and a $5.9 million net increase in contract assets and liabilities, offset by a $15.8 million increase in accounts payable and accrued expenses, inclusive of a long-term accrual relating to an uncertain tax position with respect to the capitalization of research and development expenses.

Investing Activities

Net cash used in investing activities was $27.2 million for the year ended December 31, 2023, $25.7 million was related to acquisitions that occurred in 2023 and $2.1 million was for purchases of property and equipment.

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Financing Activities

Net cash provided by financing activities was $22.8 million during the year ended December 31, 2023. This was primarily due to net proceeds of $45.3 million from our Revolving Credit Facility, offset by $4.8 million of payments for the purchase of treasury stock, $0.7 million for repurchase of common stock, $6.8 million of payments on finance leases and $11.2 million of payments on notes payable and our fixed lines of credit.

Credit Facilities and Other Financing

As of December 31, 2023, we maintained a $70.0 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, as amended and restated the “Credit Agreement”) with Bank of America, our primary lender. The Credit Agreement has a maturity date of July 31, 2025. Under the terms of the Revolving Credit Facility, available cash in our primary operating account sweeps against the outstanding balance every evening. As of December 31, 2023, the balance on this Revolving Credit Facility was $45.3 million.

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 (the "First Amendment"). 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 Credit Agreement, the Company is required to comply with certain covenants, including covenants related to 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).

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 December 31, 2023, we were in compliance with all covenants.

We utilize master lease facilities primarily 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 December 31, 2023, we maintained a fleet of approximately 500 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 $0.6 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.

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.

Other Acquisitions

For information on the terms of additional promissory notes issued by the Company in connection with acquisitions during 2023 and 2022 that were not deemed significant acquisitions, see Note 4 – Acquisitions and Note 12 – Notes Payable

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.

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Effects of Inflation

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains “forward-looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed in the “Risk Factors” section and “Cautionary Statement about Forward-Looking Statements,” in this Annual Report on Form 10-K, all of which are difficult to predict. Considering these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements, except to the extent required by applicable laws or rules. Unless the context otherwise requires, references to “Bowman,” the “company,” the “Company,” “we,” “us,” and “our” refer 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 over 3,000 customers operating in a diverse set of end markets. We work as both a prime and sub-consultant for a broad base of public and private sector customers that generally operate in highly regulated environments.

We have a diversified business that is not dependent on any one service line, geographic region, or end market. We are deliberate in our efforts to balance our sources of revenue and avoid reliance on any one significant customer, service line, geography or end market concentration. Our strategic focus is on penetrating and expanding our presence in markets which best afford us opportunities to secure assignments that provide reoccurring revenue and multi-year engagements thus resulting in dependable and predictable revenue streams and high employee utilization. We limit our exposure to risk by providing professional and related services exclusively. We do not engage in general contracting activities either directly, or through joint ventures, and therefore have no related exposure. We are not a partner in any design-build construction projects. We carry no heavy equipment inventory, and our risk of contract loss is generally limited to time associated with fixed fee professional services assignments.

Gross contract revenue for the years ended December 31, 2022, and 2021 was $261.7 million and $150.0 million, respectively. Gross contract revenue derived from our workforce represented 89.9% and 89.9% of gross contract revenue for the years ended December 31, 2022 and 2021, respectively (see Net service billing – non-GAAP below). Our net income for the years ended December 31, 2022, and 2021 was $5.0 million and $0.3 million, respectively. Our Adjusted EBITDA (see Adjusted EBITDA - non-GAAP below) was $34.0 million on net income of $5.0 million and $16.5 million on net income of $0.3 million for the years ended December 31, 2022, and 2021, respectively.

COVID-19 Update

It is not possible at this time to estimate the full impact that COVID-19 will ultimately have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. We are evaluating, and will continue to evaluate, the impact of COVID-19 on projects, but the full effects COVID-19 will have on our operations are still unknown. As of the date of this report, we have not experienced any material and adverse effects on our business, financial condition and results of operations related to the COVID-19 pandemic. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, including new variants, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees and clients. The implementation of shelter-in-place orders within the cities and municipalities we operate in could further negatively impact future results as well as the re-designation of infrastructure spending to non-essential services. At this time, we are monitoring, and will continue to monitor, the safety of our employees during the COVID-19 pandemic.

Common Stock Offering

On February 8, 2022, we priced an underwritten follow-on offering of 900,000 shares of our common stock (the “Firm Shares”) at an offering price of $16.00 per share. The shares were sold pursuant to an effective registration statement on Form S-1 (Registration No. 333-262464). In addition, Gary Bowman, our President, Chairman and Chief Executive

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Officer, sold an aggregate of 150,000 shares of common stock in the offering. We granted the underwriters of the offering a 30-day option to purchase up to 157,500 shares of our common stock solely to cover over-allotments. On February 11, 2022, we closed on the underwritten follow-on offering and received net proceeds of approximately $13.7 million after deducting the underwriting discount and estimated offering expenses payable by the Company, and Mr. Bowman received aggregate proceeds of approximately $2.4 million. We did not receive any proceeds from the sale of shares of our common stock by Mr. Bowman.

On February 28, 2022, the underwriters exercised their option to purchase an additional 157,500 shares of our common stock at an offering price of $16.00 per share, resulting in additional gross proceeds of approximately $2.5 million. After giving effect to this exercise of the overallotment option, the total number of shares sold by us in the follow-on offering increased to 1,057,500 shares with total gross proceeds of approximately $16.9 million. The exercise of the over-allotment option closed on March 2, 2022, at which time we received net proceeds of approximately $2.4 million after underwriting discounts and commissions.

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 of 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 fixed cost of labor and the utilization thereof. Maintaining an optimal level of utilization on a balanced pool of growing labor resources represents our greatest prospect for delivering increasing profitability.

We 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.

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.

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The majority of our assignments are lump sum in nature representing approximately 70% and 66% of our gross contract revenue for the years ended December 31, 2022 and 2021, respectively. Recognizing revenue from lump sum assignments requires management estimates of both total contract value when there are contingent compensation elements of the fee arrangement and expected cost at completion. We closely monitor our progress to completion and adjust our estimates when necessary. We do not recognize revenue from work that is performed at risk with no documented customer commitment.

Contract Costs

Contract costs 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. This expense is based on the amortization of the grant date fair value of equity grants over the vesting period. Non-cash stock compensation cost for permanent equity is 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.

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.

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.

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Other Financial Data, Non-GAAP Measurements and Key Performance Indicators

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 connects to, any GAAP results.

Net Service Billing

In the normal course of providing services to our customers, we routinely subcontract services and incur direct third-party contract expenses that may or may not be reimbursable and may or may not be billed to customers with mark-up. Gross revenue less revenue derived from pass-through sub-consultant fees and reimbursable expenses represents our net service billing, which is a non-GAAP financial measure, or that portion of our gross contract revenue attributable to services performed by our employees. Because the ratio of sub-contractor and direct expense costs to gross billing varies between contracts, gross revenue is not necessarily indicative of trends in our business. As a professional services company, we believe that metrics derived from net service billings more accurately demonstrate the productivity and profitability of our workforce. Our industry uses the calculation of net service billing to normalize peer performance assessments and provide meaningful insight into trends over time.

Adjusted EBITDA

We view Adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of normalized performance. We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization, plus discontinued expenses, legal settlements, and other costs not in the ordinary course of business, non-cash stock-based compensation (inclusive of expenses associated with the adjustment of our liability for common shares subject to redemption), and other adjustments such as costs associated with preparing for our initial public offering. Our peers may define Adjusted EBITDA differently.

Adjusted EBITDA Margin, net

Adjusted EBITDA Margin, net, which is a non-GAAP financial measure, represents Adjusted EBITDA, as defined above, as a percentage of net service billings, as defined above.

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. Discussed below are the accounting policies for which we believe our judgments and estimates have the greatest potential impact.

Revenue Recognition

On January 1, 2019, we adopted ASC Topic 606. To determine the proper revenue recognition method under ASC Topic 606, we evaluate whether two or more contracts should be combined and accounted for as one single contract and if so, whether to account for the combined or single contract as more than one performance obligation. For most of our contracts, we conclude there to be a single performance obligation because the promise to transfer individual goods or services is not separately identifiable from the commitment to the deliverable of the contract and, therefore, is not distinct.

Our performance obligations are satisfied as work progresses. We recognize revenue for our lump sum contracts ratably over time based on cost-basis percentage of completion, calculated as a percentage of direct costs incurred to date relative to estimated total direct costs of the performance obligation at completion. Contract costs include labor, sub-consultant costs and other direct costs as incurred. We recognize revenue from lump sum contracts as we advance our work and transfer results to the customer. Contract change orders covering changes in scope, specifications, design, performance or period of completion are common with our customers. In most cases, we account for contract modifications as part of the existing contracts because they are for services that are not distinct from the original contract.

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We base contract estimates on various assumptions about future costs and other inputs. Uncertainties inherent in the estimating process present the possibility that actual completion costs may vary from estimates. When estimated total costs on contracts indicate a loss, we recognize these losses in the period in which we identify the loss. We record adjustments required to align revenue with costs in place on the cumulative catch-up basis in the period in which we identify the revisions. We apply changes to projected revenue from contingent fee awards or penalties during the period in which we determine such contingencies to be probable.

Goodwill and Intangible Assets

The purchase price of an acquired business is allocated to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based upon their respective fair values with any excess purchase price over such fair values being recorded as goodwill. We review goodwill and intangible assets acquired in a business combination determined to have indefinite useful life annually for impairment, or more frequently if impairment indicators arise. We do not amortize such assets. We do however amortize intangible assets with estimable useful lives over such lives and review such assets for impairment if indicators are present.

We perform an annual impairment test as of October 1 of each year. As our business is highly integrated and its components have similar economic characteristics, we have concluded we operate as one reporting unit at the combined entity level. We perform a Step 1 impairment analysis by comparing the fair value of the reporting unit to carrying value. The fair value of the reporting unit was determined utilizing multiple weighted valuation techniques. Impairment loss is the difference between the reporting unit’s fair value and carrying amount of goodwill, if the carrying value of the reporting unit exceeds its fair value.

We performed an impairment analysis for the years ended December 31, 2022 and 2021 and concluded that the fair value of the reporting unit was greater than carrying value, and as such, we did not record an impairment charge.

Income Tax

On January 1, 2018, we changed our election from an S-corporation to a C-corporation. As an S-corporation, we were a non-taxable entity with all taxable income or loss allocated to the shareholders. Upon conversion to a C-corporation, we became a taxable entity. On December 31, 2018, we recorded a $5.4 million deferred tax liability associated with our conversion. For the year ended December 31, 2020, we qualified under Internal Revenue Service 26 U.S. Code § 448, Limitation on use of cash method of accounting as a cash basis taxpayer based on our outstanding shares of common stock being at least 95% employee-owned with at least 95% of our gross revenue derived from engineering and consulting services. As such, we calculate our current tax expense on a cash basis and accrue future tax expenses resulting from associated timing differences as deferred tax liabilities. Upon the effective date of our initial public offering, we no longer qualified as a cash basis taxpayer and are subject to a four-year conversion payment of our deferred tax liability subject to Section 7.03(1) of Rev. Proc. 2015-13.

We receive an annual research and development tax credit in connection with certain at-risk work performed on behalf of customers. We reduce our current and deferred tax provision by the estimated net annual R&D tax credit projection, limited to the statutory allowance for utilization of the credit. We reconcile the tax credit and its impact during the subsequent year after calculating the credit in connection with our tax returns. We maintain what we believe to be an appropriate reserve against our accumulated credits. Estimates of our tax expense include both current and deferred tax expense along with all available tax incentives and credits.

Common Shares Subject to Repurchase Classified as a Liability and Redeemable Common Stock Classified as Temporary Equity

In February 2001, our shareholders entered into a shareholders’ Buy-Sell Agreement and subsequent Amendments. In addition, certain shareholders have entered into individual addenda to the shareholders’ Buy-Sell Agreement to establish superseding share-based rights (the “Addenda” and collectively with the Buy-Sell Agreement and the Amendments, the “Shareholders’ Buy-Sell Agreement”). Prior to our initial public offering on May 6, 2021, all current shareholders were a party to the Shareholders’ Buy-Sell Agreement, which included certain rights and protections with respect to transactions in our stock in the event of death, disability, retirement, and termination of employment. Upon the issuance of compensation-related restricted stock grants, employees entered into separate stock bonus agreements with terms that incorporated and superseded terms in the Shareholders’ Buy-Sell Agreement (individually a “Stock Bonus Agreement” and collectively the “Stock Bonus Agreements”). Because of these agreements, all Company shares were subject to repurchase provisions.

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As a result, we recorded a stock repurchase liability and temporary equity associated with certain provisions of the Shareholders’ Buy-Sell Agreement and Stock Bonus Agreements whereby we would be obligated to repurchase stock from certain shareholders upon death, disability, retirement, or termination of employment. ASC Topic 718 Stock Compensation (“ASC Topic 718”) and ASC Topic 480 Distinguishing Liabilities from Equity (“ASC Topic 480”) govern the classification of equity and the treatment of stock awarded, purchased, or otherwise acquired. Shares are classified as a liability pursuant to ASC Topic 718 when conditions exist whereby those shares are subject to a call feature determined to be probable of execution upon the occurrence of an event beyond the control of the issuer. Shares are classified as temporary equity pursuant to ASC Topic 480 when conditions exist whereby stock is subject to mandatory redemption by the issuer upon the occurrence of an event that is conditional and beyond the control of the issuer.

Changes in the periodic measurement of the fair value of the liability related to common shares subject to redemption pursuant to ASC Topic 718 are compensation costs. Changes in the periodic measurement of the fair value of the temporary equity pursuant to ASC Topic 480 reduce retained earnings or accumulated deficit, but do not appear as an expense on the income statement.

On December 22, 2020, in connection with the preparation for our initial public offering, we executed the Fourth Amendment to our Buy-Sell Agreement which modified the repurchase features resulting in the classification of certain of our shares as temporary equity and liabilities. At the same time, we modified certain Stock Bonus Agreements to eliminate superseding repurchase features causing the classification of those shares as liabilities independent of the Shareholders’ Buy-Sell Agreement. The shareholders terminated the Shareholders’ Buy-Sell Agreement and amended additional Stock Bonus Agreements on May 6, 2021.

Results of Operations

Consolidated results of operations

The following represents our consolidated results of operations for periods indicated (in thousands):

1 Represents non-GAAP financial measures. See Other Financial Information and Non-GAAP key performance indicators below in results of operations.

Year ended December 31, 2022 as compared to the year ended December 31, 2021

Gross Contract Revenue

Gross contract revenue for the year ended December 31, 2022 increased $111.7 million or 74.5% to $261.7 million as compared to $150.0 million for the year ended December 31, 2021. For the year ended December 31, 2022, gross contract revenue attributable to work performed by our workforce increased $100.3 million, or 74.4% to $235.2 million or 89.9% of gross contract revenue as compared to $134.9 million or 89.9% for year ended December 31, 2021 (see Net service billing – non-GAAP). Of the $111.7 million increase in gross contract revenue during the year ended December 31, 2022, acquisitions represented $66.5 million or 59.5% of the increase.

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Changes in gross contract revenue (“GCR”) for the year ended December 31, 2022, disaggregated between our core and emerging end markets, were as follows (in thousands other than percentages):

1represents renewable energy, mining, water resources and other

2after four quarters post-closing, acquired revenue is reclassified as organic; this results in a change from previously reported numbers

For the year ended December 31, 2022, gross revenue from our building infrastructure market increased $65.2 million as compared to the year ended December 31, 2021. The increase is attributable to a $28.3 million increase from residential and mixed-use projects including $16.8 million from multi-family and $9.6 million from single family, and a $36.9 million increase from commercial, municipal, and other projects with $27.0 million from office/ industrial. Gross revenue derived from the acquisitions was almost exclusively attributable to commercial projects. As the U.S. economy recovers from the COVID-19 pandemic, we are experiencing continued expansion of demand for our building infrastructure services.

For the year ended December 31, 2022, revenue from transportation increased $28.3 million as compared to the year ended December 31, 2021. The increase was primarily attributable to the acquisition of McMahon Associates, Inc. which accounted for $24.3 million of the increase. We believe the transportation market continues to present significant opportunity for future growth and we remain committed to investing in leadership, technical expertise, business development and acquisitions for this market.

For the year ended December 31, 2022, revenue from power and utilities increased $10.1 million as compared to the year ended December 31, 2021. The increase is primarily attributable to increased revenue from our Florida utility and undergrounding along with gas line replacement projects in Illinois, Ohio and Arizona. The power and utilities market continues to experience increasing infrastructure investment as changing weather patterns, energy transition mandates and other safety initiatives positively impact demand for the services we provide. As evidenced by recent increases in program commitments within the gas pipeline market, we believe trends in power and utilities provide meaningful opportunity for continued growth and we are committed to investing resources accordingly.

Our other emerging markets consist of renewable energy and energy efficiency, mining, water resources, and other natural resources services. For the year ended December 31, 2022, revenue from emerging markets increased $8.1 million as compared to the year ended December 31, 2021. Increased emerging market revenue included a $2.4 million increase from our mining services where we have specialized in copper mining, the demand for which is cyclical in nature, and a $2.9 million increase in renewable energy services, and a $2.8 million increase in other emerging market services including water resources and other natural resources. Scarcities in water resources and the increasing need for water management gives us confidence that the water resources market will grow and that we will be able to increase associated revenue accordingly. With recent and future acquisitions, we expect to experience continued growth from investment in renewable energy and energy transition.

For the years ended December 31, 2022 and 2021, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, represented 13.1% and 16.8% of our gross contract revenue, respectively. Gross contract revenue from projects for public sector clients are included in the end market most aligned with work performed.

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Contract costs (exclusive of depreciation and amortization)

Total contract costs, exclusive of depreciation and amortization, increased $52.1 million or 69.9% to $126.6 million for the year ended December 31, 2022, as compared to $74.5 million for the year ended December 31, 2021. For the year ended December 31, 2022 and 2021, total contract costs represented 48.4% and 49.7% of total contract revenue, respectively. For the years ended December 31, 2022 and 2021 total contract costs represented 53.8% and 55.3% of revenue attributable to our workforce, respectively (see Net Service Revenue). This decrease is primarily attributable to a decrease in proportion of sub-consultant expense to other contract costs which reflects a shift in contract mix. For the year ended December 31, 2022 sub-consultant expense increased $11.4 million or 75.5% to $26.5 million, as compared to $15.1 million for the year ended December 31, 2021.

Direct payroll costs increased $40.7 million or 68.5% to $100.1 million for the year ended December 31, 2022, as compared to $59.4 million for the year ended December 31, 2021 due to increased staffing and growth. Direct payroll accounted for 79.1% of total contract costs for the year ended December 31, 2022, a decrease of 0.6 percentage points as compared to 79.7% for the year ended December 31, 2021.

Direct labor, the component of direct payroll costs associated with the cost of labor relating to work performed on contracts increased $30.0 million or 67.7% to $74.3 million for the year ended December 31, 2022 as compared $44.3 million for the year ended December 31, 2021. For the year ended December 31, 2022 and 2021, direct labor costs represented 28.4% and 29.5% of gross contract revenue, respectively and represented 31.6% and 32.9% 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 $10.7 million or 70.4% to $25.9 million for the year ended December 31, 2022 as compared to $15.2 million for the year ended December 31, 2021. This increase includes a $2.5 million increase in employee payroll taxes and a $3.3 million increase in health benefits for the year ended December 31, 2022, primarily due to the increase in the overall labor pool. This increase includes an increase of $1.8 million in the cost of non-cash stock compensation to $4.2 million for the year ended December 31, 2022, as compared to $2.4 million for the year ended December 31, 2021. The increase in non-cash stock compensation is attributable to several new stock awards being granted to management as well as employees in connection with acquisitions.

Sub-consultants and expenses increased $11.4 million or 75.5% to $26.5 million for the year ended December 31, 2022, as compared to $15.1 million for the year ended December 31, 2021. For the year ended December 31, 2022 and 2021, sub-consultant and expenses represented 10.1% and 10.1% of gross contract revenue, respectively. The growth in sub-consultants and expenses is directly in-line with the increase of gross contract revenue.

Operating Expense

Total operating expense increased $54.7 million or 72.6% to $130.0 million for the year ended December 31, 2022, as compared to $75.3 million for the year ended December 31, 2021.

Selling, general and administrative expenses increased $48.8 million or 70.7% to $117.8 million for the year ended December 31, 2022, as compared to $69.0 million for the year ended December 31, 2021. Indirect labor increased $21.4 million or 72.5% to $50.9 million for the year ended December 31, 2022, as compared to $29.5 million for the year ended December 31, 2021, as a result of increased staffing to accommodate growth. General overhead increased $17.3 million or 76.5% to $39.9 million for the year ended December 31, 2022, as compared to $22.6 million for the year ended December 31, 2021, due to increased costs associated with operating as a public company and the overall growth of the company. Non-cash stock compensation increased $5.1 million or 87.9% to $10.9 million for the year ended December 31, 2022, as compared to $5.8 million for the year ended December 31, 2021, as several new stock awards were granted to management as well as employees in connection with acquisitions.

Depreciation and amortization increased $5.9 million or 92.2% to $12.3 million for the year ended December 31, 2022, as compared to $6.4 million for the year ended December 31, 2021. 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 2021 and 2022. Gains on the sale of certain IT equipment and automobiles remained unchanged for the year ended December 31, 2022 at $0.1 million of gain on the disposal of such assets.

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Income from Operations

Income from operations increased $4.9 million to $5.1 million for the year ended December 31, 2022 as compared to $0.2 million for the year ended December 31, 2021 due to organic growth and acquisitions.

Other Expense

Other expense increased by $2.0 million to $3.4 million of expense for the year ended December 31, 2022 as compared to $1.4 million of expense for the year ended December 31, 2021. Interest expense increased by $1.6 million and acquisition related costs increased by $0.8 million. This increase is primarily attributable to increases in finance leases and acquisitions.

Income Tax Benefit

Income tax benefit for the year ended December 31, 2022 increased $1.7 million or 106.3% to $3.3 million benefit, as compared to $1.6 million benefit for the year ended December 31, 2021. Effective upon the completion of our initial public offering our tax status converted from cash basis to accrual basis, retroactive to January 1, 2021. This affects the timing of the payment of tax but not the expense of tax. Our effective tax rate for the year ended December 31, 2022 was (188.3%).

Income (Loss) Before Tax Expense and Net Income

Income before tax expense increased by $3.0 million or 230.8% to $1.7 million income for the year ended December 31, 2022, as compared to a $1.3 million loss for the year ended December 31, 2021. Net income increased by $4.7 million or 1566.7% to $5.0 million for the year ended December 31, 2022, as compared to $0.3 million for the year ended December 31, 2021.

Other financial information and Non-GAAP key performance indicators

Net service billing (non-GAAP)

Net service billing increased $100.3 million or 74.4% to $235.2 million for the year ended December 31, 2022, as compared to $134.9 million for the year ended December 31, 2021. Net service billing reconciles to gross contract revenue as follows (in thousands):

Net service billing was 89.9% of gross contract revenue for the year ended December 31, 2022, which is the same as for the year ended December 31, 2021.

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Adjusted EBITDA (non-GAAP)

Adjusted EBITDA increased $17.5 million or 106.4% to $34.0 million for the year ended December 31, 2022 as compared to $16.5 million for the year ended December 31, 2021. Adjusted EBITDA reconciles to net income as follows (in thousands):

For the years ended December 31, 2022 and 2021, Adjusted EBITDA includes $15.4 million and $8.2 million, respectively, relating to non-cash stock compensation expenses resulting from the vesting of restricted stock awards.

Adjusted EBITDA Margin, net (non-GAAP)

Adjusted EBITDA Margin, net represents Adjusted EBITDA (as defined above) as a percentage of net service billing (as defined above). For the years ended December 31, 2022 and 2021, Adjusted EBITDA Margin, net was 14.5% and 12.2% respectively.

Backlog (other key performance metrics)

Our backlog increased $76 million or 45.5% to approximately $243 million during the year ended December 31, 2022, as compared to $167 million at December 31, 2021. At December 31, 2022 and 2021, our backlog was comprised as follows:

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 December 31, 2022, we maintained a $50.0 million revolving credit facility with Bank of America, our primary lender. See -"Credit Facilities and Other Financing" below for more information on our revolving credit facility. 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 $7.3 million at December 31, 2022 as compared to December 31, 2021.

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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 debt 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. At this time, we have several acquisitions under consideration. There can be no assurance that any opportunity in the process of being reviewed will close but we expect over time to utilize a meaningful portion our current liquidity and capital resources for acquisitions.

Additionally, 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 Exchange Act. 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. We have not repurchased any shares under this program to date.

Cash Flows

The following table summarizes our cash flows for the periods presented:

Operating Activities

During the year ended December 31, 2022, net cash provided by operating activities was $9.2 million, which primarily consisted of $5.0 million net income, adjusted for stock-based compensation expense of $15.1 million and depreciation and amortization expense of $12.3 million, offset by an increase in deferred taxes of $18.0 million, and an increase in a net cash outflow of $6.1 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $13.8 million increase in accounts receivable resulting from increased billing to our clients as well as additional billing from the acquired companies, a $2.0 million increase in prepaid expenses and a $5.9 million net increase in contract assets and liabilities, offset by a $15.8 million increase in accounts payable and accrued expenses.

During the year ended December 31, 2021, net cash provided by operating activities was $4.7 million, which primarily consisted of $0.3 million net income, adjusted for stock-based compensation expense of $8.2 million and depreciation and amortization expense of $6.4 million, offset by an increase in deferred taxes of $2.2 million, a decrease in a net cash outflow of $8.4 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $8.8 million increase in accounts receivable resulting from increased billing to our clients as well as additional billing from the acquired companies, a $2.3 million increase in prepaid expenses relating to the purchase of fiduciary directors and officer’s insurance and an increase in income tax receivable, and a $0.6 million net increase in contract assets and liabilities, partially offset by a $3.3 million increase in accounts payable and accrued expense.

Investing Activities

Net cash used in investing activities was $18.8 million for the year ended December 31, 2022, $18 million was related to acquisitions that occurred in 2022 and $0.9 million was for purchases of property and equipment.

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Financing Activities

Net cash provided by financing activities was $2.2 million during the year ended December 31, 2022. This was primarily due to net proceeds of $15.5 million from our February 2022 public offering, net of underwriting discounts commissions and other offering costs, offset by $3.3 million of payments for the purchase of treasury stock, $6.0 million of payments on finance leases and $5.3 million of payments on notes payable and our fixed lines of credit.

Credit Facilities and Other Financing

As of December 31, 2022, we maintained a $50.0 million revolving credit facility (the “Revolving Line”) and three non-revolving credit facilities (“Fixed Line 1”, “Fixed Line 2” and “Facility 4”) pursuant to credit agreements (the “Credit Agreements”) with Bank of America, our primary lender. Under the terms of the Revolving Line, available cash in our primary operating account sweeps against the outstanding balance every evening. As of December 31, 2022, we did not have a balance on this Revolving Line.

On November 11, 2022, we and certain of our 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 line of credit 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, 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 Amended and Restated Agreement).

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 December 31, 2022, 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 $0.6 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 Capital.

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 – Bank Revolving Line of Credit and Fixed Credit Facilities.

Promissory Notes – McMahon Acquisition

In the second quarter of 2022, we 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. We 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 bear a simple interest rate fixed at 3.50%. The first promissory note will have equal quarterly payments beginning on August 4, 2022 and ending May 4, 2025. The second promissory note will be 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.

Other Acquisitions

For information on the terms of additional promissory notes issued by the Company in connection with acquisitions during 2021 and 2022 that were not deemed significant acquisitions, see Note 4 – Acquisitions and Note 12 – Notes Payable

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Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.

Effects of Inflation

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains “forward-looking statements” reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to several factors. Factors that could cause or contribute to such differences include, but are not limited to, economic and competitive conditions, regulatory changes, and other uncertainties, as well as those factors discussed in the “Risk Factors” section and “Cautionary Statement about Forward-Looking Statements,” in this Annual Report on Form 10-K, all of which are difficult to predict. Considering these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. We assume no obligation to update any of these forward-looking statements, except to the extent required by applicable laws or rules. Unless the context otherwise requires, references to “Bowman,” the “company,” the “Company,” “we,” “us,” and “our” refer 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, geomatics, survey, land procurement and other technical services to over 3,000 customers operating in a diverse set of end markets. We work as both a prime and sub-consultant for a broad base of public and private sector customers that generally operate in highly regulated environments.

We have a diversified business that is not dependent on any one service line, geographic region, or end market. We are deliberate in our efforts to balance our sources of revenue and avoid reliance on any one significant customer, service line, geography or end market concentration. Our strategic focus is on penetrating and expanding our presence in markets which best afford us opportunities to secure assignments that provide reoccurring revenue and multi-year engagements thus resulting in dependable and predictable revenue streams and high employee utilization. We limit our exposure to risk by providing professional and related services exclusively. We do not engage in general contracting activities either directly, or through joint ventures, and therefore have no related exposure. We are not a partner in any design-build construction projects. We carry no heavy equipment inventory, and our risk of contract loss is generally limited to time associated with fixed fee professional services assignments.

Gross contract revenue for the years ended December 31, 2021 and 2020 was $150.0 million and $122.0 million, respectively. Gross contract revenue derived from our workforce represented 89.9% and 85.0% of gross contract revenue for the years ended December 31, 2021 and 2020, respectively (see Net service billing – non-GAAP below). Our Adjusted EBITDA was $16.5 million on net income of $0.3 million and $13.9 million on net income of $1.0 million for the years ended December 31, 2021 and 2020, respectively.

COVID-19 Update

It is not possible at this time to estimate the full impact that COVID-19 will ultimately have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted. We are evaluating, and will continue to evaluate, the impact of COVID-19 on projects, but the full effects COVID-19 will have on our operations are still unknown. Early on in the course of the pandemic we were considered an essential service in all states and local jurisdictions where we operate. While there was some degree of disruption in all markets, we were able to continue serving customers without interruption. As of the date of this report, we have not experienced any material and adverse effects on our business, financial condition and results of operations related to the COVID-19 pandemic. We did not qualify for the PPP Loan program under the CARES Act. We took advantage of the opportunity to defer $2.5 million of employer payroll taxes during the year ended December 31, 2020, as afforded us under the CARES Act. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, including new variants, the extent and effectiveness of containment actions, and the impact of these and other factors on our employees and clients. The implementation of shelter-in-place orders within the cities and municipalities we operate in could further negatively impact future results as well as the re-designation of infrastructure spending to non-essential services. At this time, we are monitoring, and will continue to monitor, the safety of our employees during the COVID-19 pandemic.

Common Stock Offering

On February 8, 2022, we priced an underwritten follow-on offering of 900,000 shares of our common stock (the “Firm Shares”) at an offering price of $16.00 per share. The shares were sold pursuant to an effective registration statement on Form S-1 (Registration No. 333-262464). In addition, Gary Bowman, our President, Chairman and Chief Executive Officer, sold an aggregate of 150,000 shares of common stock in the offering. We granted the underwriters of the offering a 30-day option to purchase up to 157,500 shares of our common stock solely to cover over-allotments. On February 11, 2022, we closed on the underwritten follow-on offering and received

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net proceeds of approximately $13.7 million after deducting the underwriting discount and estimated offering expenses payable by the Company, and Mr. Bowman received aggregate proceeds of approximately $2.4 million. We did not receive any proceeds from the sale of shares of our common stock by Mr. Bowman.

On February 28, 2021, the underwriters exercised their option to purchase an additional 157,500 shares of our common stock at an offering price of $16.00 per share, resulting in additional gross proceeds of approximately $2.5 million. After giving effect to this exercise of the overallotment option, the total number of shares sold by us in the follow-on offering increased to 1,057,500 shares with total gross proceeds of approximately $16.9 million. The exercise of the over-allotment option closed on March 2, 2022, at which time we received net proceeds of approximately $2.4 million after underwriting discounts and commissions.

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 of this information together for planning and monitoring our operations, as well as determining certain management and employee compensation.

We present our financial statements for the year ended December 31, 2020 as combined and for the year ended December 31, 2021 as consolidated, reflecting results for the Company, our subsidiaries and entities under common control performing similar services. In    the accompanying combined and consolidated financial statements, we eliminate all intercompany transactions between the entities. Consolidation of entities under common control would not have altered the presentation of financial statements since all appropriate adjustments and eliminations are included in the combined and condensed consolidated financial statements. In connection with our initial public offering, we executed consolidating transactions that eliminated the need to present combined and consolidated financial statements upon effectiveness of our initial public offering, other than for historical comparisons (see “Consolidating Transactions in Connection with our Initial Public Offering”).

The Company operates as a single business segment represented by our core business of providing multi-disciplinary professional engineering solutions to customers. While we evaluate revenue and other key performance indicators relating to various divisions of labor, our leadership neither manages the business nor deliberately allocates resources by service line, geography, or end market. Our financial statements present results as a single operating segment.

Components of Income and 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 heavy impacted by the mix of labor utilized to complete the tasks and the efficiency of those resources in completing the tasks. Our largest direct contract cost is consistently our labor. To grow our revenue and maximize overall profitability we carefully monitor and manage our fixed cost of labor and the utilization thereof. Maintaining an optimal level of utilization on a balanced pool of growing labor resources represents our greatest prospect for delivering increasing profitability.

We 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.

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.

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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.

The majority of our assignments are lump sum in nature representing approximately 66% and 63% of our gross contract revenue for the years ended December 31, 2021 and 2020, respectively. Recognizing revenue from lump sum assignments requires management estimates of both total contract value when there are contingent compensation elements of the fee arrangement and expected cost at completion. We closely monitor our progress to completion and adjust our estimates when necessary. We do not recognize revenue from work that is performed at risk with no documented customer commitment.

Contract Costs

Contract costs 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. For the year ended December 31, 2020, non-cash stock compensation was determined by the change in the fair market measurement of the liability to common shares subject to repurchase. Subsequently, the expense is based on the amortization of the grant date fair value of equity grants over the vesting period. Non-cash stock compensation cost for permanent equity will be the grant date fair value of the awards, or the Black-Sholes-Merton value of stock options on the grant date, recognized ratably over the vesting periods of each award.

Future non-cash stock compensation expense for unvested shares awarded prior to December 31, 2020 is based on a $12.80 per share fair value on the date of modification. 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.

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.

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Other Financial Data, Non-GAAP Measurements and Key Performance Indicators

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 connects to, any GAAP results.

Net Service Billing

In the normal course of providing services to our customers, we routinely subcontract services and incur direct third-party contract expenses that may or may not be reimbursable and may or may not be billed to customers with mark-up. Gross revenue less revenue derived from pass-through sub-consultant fees and reimbursable expenses represents our net service billing, which is a non-GAAP financial measure, or that portion of our gross contract revenue attributable to services performed by our employees. Because the ratio of sub-contractor and direct expense costs to gross billing varies between contracts, gross revenue is not necessarily indicative of trends in our business. As a professional services company, we believe that metrics derived from net service billings more accurately demonstrate the productivity and profitability of our workforce. Our industry uses the calculation of net service billing to normalize peer performance assessments and provide meaningful insight into trends over time.

Adjusted EBITDA

We view Adjusted EBITDA, which is a non-GAAP financial measure, as an important indicator of normalized performance. We define Adjusted EBITDA as net income before interest expense, income taxes and depreciation and amortization, plus discontinued expenses, legal settlements, and other costs not in the ordinary course of business, non-cash stock-based compensation (inclusive of expenses associated with the adjustment of our liability for common shares subject to redemption), and other adjustments such as costs associated with preparing for our initial public offering. Our peers may define Adjusted EBITDA differently.

Adjusted EBITDA Margin, net

Adjusted EBITDA Margin, net, which is a non-GAAP financial measure, represents Adjusted EBITDA, as defined above, as a percentage of net service billings, as defined above.

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. Discussed below are the accounting policies for which we believe our judgments and estimates have the greatest potential impact.

Revenue Recognition

On January 1, 2019, we adopted Accounting Standards Codification Topic 606 (“ASC Topic 606”). To determine the proper revenue recognition method under ASC Topic 606, we evaluate whether two or more contracts should be combined and accounted for as one single contract and if so, whether to account for the combined or single contract as more than one performance obligation. For most of our contracts, we conclude there to be a single performance obligation because the promise to transfer individual goods or services is not separately identifiable from the commitment to the deliverable of the contract and, therefore, is not distinct.

Our performance obligations are satisfied as work progresses. We recognize revenue for our lump sum contracts ratably over time based on cost-basis percentage of completion, calculated as a percentage of direct costs incurred to date relative to estimated total direct costs of the performance obligation at completion. Contract costs include labor, sub-consultant costs and other direct costs as incurred. We recognize revenue from lump sum contracts as we advance our work and transfer results to the customer. Contract change orders covering changes in scope, specifications, design, performance or period of completion are common with our customers. In most cases, we account for contract modifications as part of the existing contracts because they are for services that are not distinct from the original contract.

We base contract estimates on various assumptions about future costs and other inputs. Uncertainties inherent in the estimating process present the possibility that actual completion costs may vary from estimates. When estimated total costs on contracts indicate a loss, we recognize these losses in the period in which we identify the loss. We record adjustments required to align revenue with costs in place on the cumulative catch-up basis in the period in which we identify the revisions. We apply changes to projected revenue from contingent fee awards or penalties during the period in which we determine such contingencies to be probable.

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Goodwill and Intangible Assets

The purchase price of an acquired business is allocated to the tangible assets and separately identifiable intangible assets acquired, less liabilities assumed, based upon their respective fair values with any excess purchase price over such fair values being recorded as goodwill. We review goodwill and intangible assets acquired in a business combination determined to have indefinite useful life annually for impairment, or more frequently if impairment indicators arise. We do not amortize such assets. We do however amortize intangible assets with estimable useful lives over such lives and review such assets for impairment if indicators are present.

We perform an annual impairment test as of October 1 of each year. As our business is highly integrated and its components have similar economic characteristics, we have concluded we operate as one reporting unit at the combined entity level. We perform a Step 1 impairment analysis by comparing the fair value of the reporting unit to carrying value. We engaged a third-party valuation firm to assist management with the determination of fair value for the years ended December 31, 2021 and 2020. The fair value of the reporting unit was determined utilizing multiple weighted valuation techniques. Impairment loss is the difference between the reporting unit’s fair value and carrying amount of goodwill, if the carrying value of the reporting unit exceeds its fair value.

We performed an impairment analysis for the years ended December 31, 2021 and 2020 and concluded that the fair value of the reporting unit was greater than carrying value, and as such, we did not record an impairment charge.

Income Tax

On January 1, 2018, we changed our election from an S-corporation to a C-corporation. As an S-corporation, we were a non-taxable entity with all taxable income or loss allocated to the shareholders. Upon conversion to a C-corporation, we became a taxable entity. On December 31, 2018, we recorded a $5.4 million deferred tax liability associated with our conversion. For the year ended December 31, 2020, we qualified under Internal Revenue Service 26 U.S. Code § 448, Limitation on use of cash method of accounting as a cash basis taxpayer based on our outstanding shares of common stock being at least 95% employee-owned with at least 95% of our gross revenue derived from engineering and consulting services. As such, we calculate our current tax expense on a cash basis and accrue future tax expenses resulting from associated timing differences as deferred tax liabilities. Upon the effective date of our initial public offering, we no longer qualified as a cash basis taxpayer and will be subject to a four-year conversion payment of our deferred tax liability subject to Section 7.03(1) of Rev. Proc. 2015-13.

We receive an annual research and development tax credit in connection with certain at-risk work performed on behalf of customers. We reduce our current and deferred tax provision by the estimated net annual R&D tax credit projection, limited to the statutory allowance for utilization of the credit. We reconcile the tax credit and its impact during the subsequent year after calculating the credit in connection with our tax returns. We maintain what we believe to be an appropriate reserve against our accumulated credits. Estimates of our tax expense include both current and deferred tax expense along with all available tax incentives and credits.

Common Shares Subject to Repurchase Classified as a Liability and Redeemable Common Stock Classified as Temporary Equity

In February 2001, our shareholders entered into a shareholders’ Buy-Sell Agreement and subsequent Amendments. In addition, certain shareholders have entered into individual addenda to the shareholders’ Buy-Sell Agreement to establish superseding share-based rights (the “Addenda” and collectively with the Buy-Sell Agreement and the Amendments, the “Shareholders’ Buy-Sell Agreement”). Prior to our initial public offering on May 6, 2021, all current shareholders were a party to the Shareholders’ Buy-Sell Agreement, which included certain rights and protections with respect to transactions in our stock in the event of death, disability, retirement, and termination of employment. Upon the issuance of compensation-related restricted stock grants, employees entered into separate stock bonus agreements with terms that incorporated and superseded terms in the Shareholders’ Buy-Sell Agreement (individually a “Stock Bonus Agreement” and collectively the “Stock Bonus Agreements”). Because of these agreements, all Company shares were subject to repurchase provisions.

As a result, we recorded a stock repurchase liability and temporary equity associated with certain provisions of the Shareholders’ Buy-Sell Agreement and Stock Bonus Agreements whereby we would be obligated to repurchase stock from certain shareholders upon death, disability, retirement, or termination of employment. Accounting Standards Codification Topic 718 Stock Compensation (“ASC Topic 718”) and Accounting Standards Codification Topic 480 Distinguishing Liabilities from Equity (“ASC Topic 480”) govern the classification of equity and the treatment of stock awarded, purchased, or otherwise acquired. Shares are classified as a liability pursuant to ASC Topic 718 when conditions exist whereby those shares are subject to a call feature determined to be probable of execution upon the occurrence of an event beyond the control of the issuer. Shares are classified as temporary equity pursuant to ASC Topic 480 when conditions exist whereby stock is subject to mandatory redemption by the issuer upon the occurrence of an event that is conditional and beyond the control of the issuer.

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Changes in the periodic measurement of the fair value of the liability related to common shares subject to redemption pursuant to ASC Topic 718 are compensation costs. Changes in the periodic measurement of the fair value of the temporary equity pursuant to ASC Topic 480 reduce retained earnings or accumulated deficit, but do not appear as an expense on the income statement.

On December 22, 2020, in connection with the preparation for our initial public offering, we executed the Fourth Amendment to our Buy-Sell Agreement which modified the repurchase features resulting in the classification of certain of our shares as temporary equity and liabilities. At the same time, we modified certain Stock Bonus Agreements to eliminate superseding repurchase features causing the classification of those shares as liabilities independent of the Shareholders’ Buy-Sell Agreement. The shareholders terminated the Shareholders’ Buy-Sell Agreement and amended additional Stock Bonus Agreements on May 6, 2021.

Results of Operations

Consolidated results of operations

The following represents our consolidated results of operations for periods indicated (in thousands):

Year ended December 31, 2021 as compared to the year ended December 31, 2020

Gross Contract Revenue

Gross contract revenue for the year ended December 31, 2021 increased $28.0 million or 23% to $150.0 million as compared to $122.0 million for the year ended December 31, 2020. For the year ended December 31, 2021, gross contract revenue attributable to work performed by our workforce increased $31.2 million, or 30.1% to $134.9 million or 89.9% of gross contract revenue as compared to $103.7 million or 85.0% for year ended December 31, 2020 (see Net service billing – non-GAAP). Of the $28.0 million increase in gross contract revenue during the year ended December 31, 2021, acquisitions represented $11.8 million or 42.1% of the increase.

Changes in gross contract revenue (“GCR”) for the year ended December 31, 2021, disaggregated between our core and emerging end markets, were as follows (in thousands other than percentages):

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For the year ended December 31, 2021, gross revenue from our building infrastructure market (formerly referred to as communities, homes and buildings) increased $28.4 million as compared to the year ended December 31, 2020. The increase is attributable to a $10.2 million increase from residential and mixed-use projects including $7.0 million from multi-family and $2.0 million from single family, and a $18.1 million increase from commercial, municipal, and other projects with $8.4 million from office/ industrial and $9.3 million from big box/ chain retail. Gross revenue derived from the acquisitions was almost exclusively attributable to commercial projects. As the U.S. economy recovers from the COVID-19 pandemic, we are experiencing continued expansion of demand for our building infrastructure services.

For the year ended December 31, 2021, revenue from transportation decreased $2.7 million as compared to the year ended December 31, 2020. The reduction was primarily attributable to the completion of large transportation projects in Texas, Florida and Virginia along with a delay in starts for new projects in connection with uncertainty around government infrastructure stimulus. We believe the transportation market continues to present significant opportunity for future growth and we remain committed to investing in leadership, technical expertise, business development and acquisitions for this market.

For the year ended December 31, 2021, revenue from power and utilities increased $2.1 million as compared to the year ended December 31, 2020. The increase is primarily attributable to increased revenue our Florida utility and undergrounding along with gas line replacement projects in Illinois, Ohio and Arizona. The power and utilities market continues to experience increasing infrastructure investment as changing weather patterns, energy transition mandates and other safety initiatives positively impact demand for the services we provide. As evidenced by recent increases in program commitments within the gas pipeline market, we believe trends in power and utilities provide meaningful opportunity for continued growth and we are committed to investing resources accordingly.

Our other emerging markets consist of renewable energy and energy efficiency, mining, water resources, and other natural resources services. For the year ended December 31, 2021, revenue from emerging markets increased $0.1 million as compared to the year ended December 31, 2020. Increased emerging market revenue included a $0.2 million increase from our mining services where we have specialized in copper mining, the demand for which is cyclical in nature and had been negatively impacted by the COVID-19 pandemic, and a $0.2 million increase in renewable energy services, offset by a $0.4 million decrease in other emerging market services including water resources and other natural resources. Scarcities in water resources and the increasing need for water management gives us confidence that the water resources market will grow and that we will be able to increase associated revenue accordingly. With recent and future acquisitions, we expect to experience continued growth from investment in renewable energy and energy transition.

For the year ended December 31, 2021 and 2020, public sector customers, defined as direct contracts with municipalities, public agencies, or governmental authorities, represented 13.1% and 16.8% of our gross contract revenue, respectively. Gross contract revenue from projects for public sector clients are included in the end market most aligned with work performed.

Contract costs (exclusive of depreciation and amortization)

Total contract costs, exclusive of depreciation and amortization, increased $8.0 million or 12.0% to $74.5 million for the year ended December 31, 2021, as compared to $66.5 million for the year ended December 31, 2020. For the year ended December 31, 2021 and 2020, total contract costs represented 49.7% and 54.5% of total contract revenue, respectively. For the year ended December 31, 2021 and 2020 total contract costs represented 55.3% and 64.1% of revenue attributable to our workforce, respectively (see Net Service Revenue). This decrease is primarily attributable to a decrease in sub-consultant expense which reflects a shift in contract mix. For the year ended December 31, 2021 sub-consultant expense decreased $3.3 million or 17.9% to $15.1 million, as compared to $18.4 million for the year ended December 31, 2020.

Direct payroll costs increased $11.3 million or 23.5% to $59.4 million for the year ended December 31, 2021, as compared to $48.1 million for the year ended December 31, 2020. Direct payroll accounted for 79.7% of total contract costs for the year ended December 31, 2021, an increase of 7.3 percentage points as compared to 72.4% for the year ended December 31, 2020.

Direct labor, the component of direct payroll costs associated with the cost of labor relating to work performed on contracts increased $7.8 million or 21.4% to $44.3 million for the year ended December 31, 2021 as compared $36.5 million for the year ended December 31, 2020. For the year ended December 31, 2021 and 2020, direct labor costs represented 29.5% and 29.9% of gross contract revenue, respectively and represented 32.9% and 35.2% of the revenue attributable to our workforce, respectively.

Other direct payroll costs, the component of direct payroll costs associated with fringe and incentive compensation (cash and non-cash) increased by $3.5 million or 29.9% to $15.2 million as compared to $11.7 million. This increase includes an increase of $0.7 million in the cost of non-cash stock compensation to $2.4 million for the year ended December 31, 2021, as compared to $1.7 million for the year ended December 31, 2020. The increase in non-cash stock compensation is attributable to new stock awards granted during the year ended December 31, 2021. This increase also includes $0.9 million in additional bonus accrual for our variable compensation program due to improved company metrics.

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Sub-consultants and other direct expenses decreased $3.3 million or 17.9% to $15.1 million for the year ended December 31, 2021, as compared to $18.4 million for the year ended December 31, 2020. For the year ended December 31, 2021 and 2020, sub-consultant and other expenses represented 10.1% and 15.0% of gross contract revenue, respectively. This decrease is not indicative of an anticipated long-term shift in the composition of our gross contract revenue, and we expect to experience periodic volatility in concentration of sub-consultant utilization.

Operating Expense

Total operating expense increased $21.5 million or 40.0% to $75.2 million for the year ended December 31, 2021, as compared to $53.7 million for the year ended December 31, 2020.

Selling, general and administrative expenses increased $17.5 million or 34.0% to $69.0 million for the year ended December 31, 2021, as compared to $51.5 million for the year ended December 31, 2020. Indirect labor increased $6.2 million or 26.6% to $29.5 million as compared to $23.3 million as a result of increased staffing to accommodate growth. General overhead increased $4.2 million or 22.8% to $22.6 million as compared to $18.4 million due to increased costs associated with operating as a public company and the overall growth of the company. During the year ended December 31, 2021, in connection with our initial public offering, several new stock awards and event related bonuses were granted to employees. As a result, non-cash stock compensation increased $2.4 million or 70.6% to $5.8 million as compared to $3.4 million. Other compensation, associated with performance bonuses, increased $3.3 million to $4.6 million as compared to $1.3 million.

Depreciation and amortization increased $4.1 million or 178.3% to $6.4 million as compared to $2.3 million as a result of the conversion of our equipment and vehicle operating leases to capital leases on September 30, 2020. Gains on the sale of certain IT equipment and automobiles remained unchanged for the year ended December 31, 2021 at $0.1 million of gain on the disposal of such assets.

Income from Operations

Income from operations decreased $1.7 million or 89.5% to $0.2 million for the year ended December 31, 2021 as compared to $1.9 million for the year ended December 31, 2020. The decrease in income from operations is the result of increases in expenses, including public company costs, new stock awards ad event related bonuses, which resulted in increases in costs that exceeded increases in gross revenue.

Other (Income) Expense

Other (income) expense decreased by $1.5 million to $1.4 million of expense for the year ended December 31, 2021 as compared to $0.1 million of income for the year ended December 31, 2020. Income derived from incentives and rebates related to health insurance decreased by $0.4 million, interest income decreased by $0.2 million, interest expense increased by $0.4 million and acquisition related costs increased by $0.6 million. The decrease in interest income is attributable to several notes with shareholders being settled in the year ended December 31, 2020, prior to the IPO. The increase in interest expense is due to the conversion of our equipment and vehicle leases from operating to capital leases on September 30, 2020.

Income Tax Expense (Benefit)

Income tax expense (benefit) for the year ended December 31, 2021 increased $2.6 million or 260.0% to $1.6 million benefit, as compared to $1.0 million expense for the year ended December 31, 2020. Effective upon the completion of our initial public offering our tax status converted from cash basis to accrual basis, retroactive to January 1, 2021. This affects the timing of the payment of tax but not the expense of tax.  Our effective tax rate for the year ended December 31, 2021 was 123.4%. Our income tax expense includes an estimated $1.7 million research and development tax credit earned by the Company for work performed at risk.

Income (Loss) Before Tax and Net Income

Income before tax expense decreased by $3.3 million or 165.0% to $1.3 million loss for the year ended December 31, 2021, as compared to a $2.0 million gain for the year ended December 31, 2020. Net income decreased by $0.7 million or 70% to $0.3 million for the year ended December 31, 2021, as compared to $1.0 million for the year ended December 31, 2020.

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Other financial information and Non-GAAP key performance indicators

Net service billing (non-GAAP)

Net service billing increased $31.2 million or 30.1% to $134.9 million for the year ended December 31, 2021, as compared to $103.7 million for the year ended December 31, 2020. Net service billing reconciles to gross contract revenue as follows (in thousands):

Net service billing increased by 4.9 percentage points to 89.9% of gross contract revenue for the year ended December 31, 2021, as compared to 85.0% for the year ended December 31, 2020. This increase reflects a shift in contract mix and was positively affected by a net service billing to gross contract revenue ratio of 96.8% from acquired revenue.

Net service billing for acquired companies was $11.5 million or 96.9% of gross contract revenue for the year ended December 31, 2021. Net service billing, net of acquired companies, increased $19.7 million or 19.0% for the year ended December 31, 2021 to $123.4 million or 89.4% of gross contract revenue. Net service billing for the year ended December 31, 2021, net of acquired companies, increased 19.0% as compared to the year ended December 31, 2020.

Adjusted EBITDA (non-GAAP)

Adjusted EBITDA increased $2.6 million or 18.7% to $16.5 million for the year ended December 31, 2021 as compared to $13.9 million for the year ended December 31, 2020. Adjusted EBITDA reconciles to net income as follows (in thousands):

For the years ended December 31, 2021 and 2020, Adjusted EBITDA includes $8.2 million and $5.1 million, respectively, relating to non-cash stock compensation expenses resulting from the vesting of restricted stock awards. For the year ended December 31, 2020, Adjusted EBITDA includes $2.5 million relating to non-recurring lease expenses. On September 30, 2020, we refinanced our outstanding operating leases to capital leases (see Credit Facilities and Other Financing herein). Accordingly, we increased our short and long-term capital lease debt and eliminated all future rent expense relating to these operating leases. To present a meaningful representation of the impact of the new capital leasing structure on our consolidated financial results, and normalize the presentation of EBITDA, we added the non-recurring operating lease expenses to Adjusted EBITDA for the year ended December 31, 2020.

Adjusted EBITDA Margin, net (non-GAAP)

Adjusted EBITDA Margin, net represents Adjusted EBITDA (as defined above) as a percentage of net service billing (as defined above). For the years ended December 31, 2021 and 2020, Adjusted EBITDA Margin, net was 12.2% and 13.4% respectively. This decrease is in large part the result of increased costs associated with operating as a public company and the increase in non-cash stock compensation expense.

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Backlog (other key performance metrics)

Our gross backlog increased $54 million or 47.8% to approximately $167 million during the year ended December 31, 2021, as compared to $113 million at December 31, 2020. At December 31, 2021 and 2020 our backlog was comprised as follows:

As of December 31, 2021, we had net backlog of approximately $145 million representing 86.5% of gross backlog.  Net backlog is our gross backlog exclusive of subconsultant costs and other direct expenses.  Our net backlog at December 31, 2021 was comprised as follows:

Liquidity and Capital Resources

Our principal sources of liquidity are our cash and cash equivalents balances, cash flow from operations, borrowing capacity under our asset-based credit facility, lease financing and proceeds from stock sales. Our principal uses of cash are operating expenses, working capital requirements, capital expenditures, repayment of debt, and acquisition related payments. On December 31, 2021, we maintained a $17.0 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 increased by $20.2 million at December 31, 2021 as compared to December 31, 2020. Prior to September 30, 2020, we typically funded capital expenditures for vehicles, IT and design infrastructure, geomatics technology and field survey production equipment through operating lease facilities. On September 30, 2020, we refinanced our primary operating leases to capital leases. Our three primary lease finance providers are Huntington Technology Finance, Honour Capital LLC and Enterprise Leasing. We regularly monitor our capital requirements and believe our sources of liquidity, including cash flow from operations, existing cash and borrowing availability under our credit and lease facilities will be sufficient to fund our projected cash requirements and strategic initiatives for the next year.

We are actively pursuing acquisitions as part of our strategic growth initiative. At any given time, we are assessing multiple opportunities at varying stages of due diligence. These acquisition opportunities range in size, timing of closing, valuation and composition of consideration. In connection with acquisitions, we use a combination of cash, bank financing, seller financing, and equity to satisfy the purchase price. At this time, we have several acquisitions under consideration. There can be no assurance that any opportunity in the process of being reviewed will close but we expect over time to utilize a meaningful portion our current liquidity and capital resources for acquisitions.

The recent COVID-19 pandemic has not had a material impact on our capital expenditures for the years ended December 31, 2021 and 2020. While we are not a capital-intensive business, we generally budget for capital spending of approximately 2-3% of gross revenue per year for IT and geomatics equipment, tenant improvements and vehicles.

Cash Flows

The following table summarizes our cash flows for the periods presented:

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Operating Activities

During the year ended December 31, 2021, net cash provided by operating activities was $4.7 million, which primarily consisted of $0.3 million net income, adjusted for stock-based compensation expense of $8.2 million and depreciation and amortization expense of $6.4 million, offset by an increase in deferred taxes of $2.2 million, a decrease in a net cash outflow of $8.4 million from changes in operating assets and liabilities. The net outflow from changes in operating assets and liabilities was primarily due to a $8.8 million increase in accounts receivable resulting from increased billing to our clients as well as additional billing from the acquired companies, a $2.3 million increase in prepaid expenses relating to the purchase of fiduciary directors and officer’s insurance and an increase in income tax receivable, and a $0.6 million net increase in contract assets and liabilities, partially offset by a $3.3 million increase in accounts payable and accrued expense.

During the year ended December 31, 2020, net cash provided by operating activities was $10.8 million, which primarily consisted of our $1.0 million net profit, adjusted for stock-based compensation of $5.1 million, depreciation and amortization of $2.3 million and a net cash outflow of $1.3 million from changes in operating assets and liabilities. The net cash outflow from changes in operating assets and liabilities was primarily due to a $1.5 million decrease in accounts receivable, a $0.5 million decrease in accounts payable and accrued expense and a $0.6 million decrease in prepaid expense offset by a $2.9 million increase in net contract assets and liabilities.

Investing Activities

Net cash used in investing activities increased by $19.1 million to $21.5 million for the year ended December 31, 2021 as compared to $2.4 million for the year ended December 31, 2020. The increase in net cash used for investing is primarily attributable to the acquisitions inclusive of $20.3 million cash paid to sellers in connection with closing.

Financing Activities

Net cash provided by financing activities during the year ended December 31, 2021 was $37.0 million compared to net cash used in financing activities of $8.5 for the year ended December 31, 2020, an increase of $45.5 million. The increase in net cash provided by financing is primarily attributable to net proceeds of $47.1 million from our initial public offering, net of underwriting discounts commissions and other offering costs, offset by $0.6 million of payments for the purchase of treasury stock, $4.7 million of payments on capital leases and $5.3 million of payments under our notes payable and revolving line of credit in connection with our public offering.

Credit Facilities and Other Financing

Line of Credit

On December 31, 2021, we maintained a $17.0 million revolving credit facility with Bank of America, our primary lender. Under the terms of the credit facility, available cash in our primary operating account sweeps against the outstanding balance every evening. As of December 31, 2021, we did not have a balance on this revolving line of credit as we used a portion of the net proceeds from our initial public offering to satisfy this obligation.

In 2017, we entered into a credit agreement (the Credit Agreement) with Bank of America (the Bank) which included a revolving line of credit (the Revolving Line) and a non-revolving line of credit (the Fixed Line #1). The Revolving Line allowed for repayments and re-borrowings. The maximum advance was equal to the lesser of $12.4 million (the Credit Limit) or the Borrowing Base as defined in the Credit Agreement. The Borrowing Base is computed based upon a percentage of eligible receivables within each aging category under 120 days and is further refined for customer type. Receivables in excess of 120 days and those from related parties or affiliates are not eligible receivables for the Borrowing Base.

During the year ended December 31, 2019, the Credit Limit increased to $15.0 million and the maturity date extended to July 31, 2021. During the year ended December 31, 2019, a second non-revolving line of credit was established (Fixed Line #2). During the year ended December 31, 2020, the credit limit increased to $17.0 million and we entered into an additional credit agreement with Bank of America (Facility #4). Both of these credit agreements contain certain financial covenants with which we were in compliance at December 31, 2021 and 2020.

The Revolving Line requires monthly payments of interest at the London Interbank Offered Rate (LIBOR) daily floating rate, plus an applicable rate which varies between 2.35% and 2.95% based on the Company achieving certain leverage ratios as defined in the Credit Agreement. On December 31, 2021 and December 31, 2020, the interest rate was 3.25% and 3.60%, respectively. All outstanding principal is due upon expiration, which is July 31, 2023 unless the agreement is renewed, or an event of default occurs. The Revolving Line appears as line of credit on our combined and condensed consolidated balance sheets.

On July 30, 2021, we entered into a Sixth Amendment to the Credit Agreement whereby the maturity date of the Revolving Line was extended to July 31, 2023. The Sixth Amendment eliminated the adjusted debt to EBITDA covenant along with certain

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administrative requirements and established the Secured Overnight Financing Rate (SOFR) as the future replacement for LIBOR. Additional modifications to the Revolving Line included expanded allowances for acquisition and reduced interest rate spreads, among other things.

Fixed Line #1 has a maximum advance of $1.0 million, does not allow for re-borrowings, and is included in notes payable. Beginning October 1, 2017, the Company began paying interest on a monthly basis at a rate per year equal to LIBOR plus 2.75%. On December 31, 2021 and December 31, 2020, the interest rate was 2.85% and 2.91%, respectively. Commencing August 31, 2018, we began paying the outstanding principal balance in sixty equal monthly installments through maturity in August 2023. On December 31, 2021 and December 31, 2020, the outstanding balance on Fixed Line #1 was $0.3 million and $0.5 million, respectively.

Fixed Line #2 has a maximum advance of $1.0 million, does not allow for re-borrowings and is included in notes payable. As of the year ended December 31, 2019 the company had not yet drawn on this line. Beginning April 1, 2020, we began paying interest monthly at a rate per year equal to LIBOR plus 2.00%. On December 31, 2021 and December 31, 2020, the interest rate was 2.10% and 2.20%. Commencing the earlier of i) the date no remaining amount is available under the Fixed Line or, ii) August 31, 2020, we were obligated to pay the then outstanding principal balance in sixty equal monthly installments through maturity in September 2025. On December 31, 2021 and 2020, the outstanding balance on Fixed Line #2 was $0.7 million and $0.9 million, respectively.

Facility #4 is a term loan with a principal loan amount of $1.0 million and included in notes payable. The loan is repaid over thirty-six months beginning April 13, 2020 through maturity on March 13, 2023. The payments consist of principal and interest in equal combined installments of $29,294. The interest rate on this loan is 3.49%. On December 31, 2021 and 2020, the outstanding balance on Facility #4 was $0.4 million and $0.8 million, respectively.

We secure our obligations under the Credit Agreement with substantially all our assets and those of our subsidiaries. Our obligations to certain other stockholders of the Company are subordinate to our obligations under the Credit Agreement and Fixed Line loans. We must maintain certain financial covenants defined in the Credit Agreement. As of December 31, 2021, we were in compliance with such financial covenants.

Interest expense on the Revolving and Fixed Lines totaled $0.1 million and $0.3 million during the years ended December 31, 2021 and 2020. As of December 31, 2021, we did not have a balance on this revolving line of credit as we used a portion of the net proceeds from our initial public offering to satisfy this obligation.

Lease Facilities

We have master lease facilities with Huntington Technology Finance, Honour Capital LLC and Enterprise Leasing. The Huntington Technology Finance lease facility finances our acquisition of IT infrastructure, geomatics and survey equipment, furniture and other long-lived assets. The Honour Capital lease facility finances the purchase of engineering and survey equipment, IT hardware, licenses, service contracts and other long-lived assets. The Enterprise lease facility finances the acquisition of field trucks and other service vehicles. We maintain a fleet of over 200 vehicles at any given time. Both leasing facilities allow for both operating and capital leasing. We treat operating lease payments as rental expenses included in selling, general and administrative expenses and allocate capital lease payments between amortization and interest.

On September 30, 2020, we converted our Huntington and Enterprise operating leases to capital leases and recorded the associated equipment purchases and capital lease liability, current and non-current. The payment terms on the lease agreements range between 30 and 50 months with payments totaling approximately $0.5 million per month. We use an incremental borrowing on our revolving line of credit to calculate the present value on new leases.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, no special purpose entities, and no activities that include non-exchange-traded contracts accounted for at fair value.

Effects of Inflation

Based on our analysis of the periods presented, we believe that inflation has not had a material effect on our operating results. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

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