Bowman Consulting Group Ltd. (BWMN) FY 2022 MD&A

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

43

Table of Content

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.

44

Table of Content

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.

45

Table of Content

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.

46

Table of Content

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.

47

Table of Content

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.

48

Table of Content

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.

49

Table of Content

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.

50

Table of Content

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.

51

Table of Content

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.

52

Table of Content

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.

53

Table of Content

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

54

Table of Content

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.