Our Company
We are a provider of professional, technical and consulting services to utilities, private industry, and public agencies at all levels of government. As resources and infrastructures undergo continuous change, we help organizations and their communities evolve and thrive by providing a wide range of technical services for energy solutions and government infrastructure. Through engineering, program management, policy advisory, and software and data management, we design and deliver trusted, comprehensive, innovative, and proven solutions to improve efficiency, resiliency, and sustainability in energy and infrastructure to our customers.
Our broad portfolio of services operates within two reporting segments: (1) Energy and (2) Engineering and Consulting. The interfaces and synergies between these segments are important elements of our strategy to design and deliver trusted, comprehensive, innovative, and proven solutions for our customers.
Our Energy segment provides specialized, innovative, comprehensive energy solutions to businesses, utilities, state agencies, municipalities, and non-profit organizations in theU.S. Our experienced engineers, consultants, and staff help our clients realize cost and energy savings by tailoring efficient and cost-effective solutions to assist in optimizing energy spend. Our energy efficiency services include comprehensive audit and surveys, program design, master planning, demand reduction, grid optimization, benchmarking analyses, design engineering, construction management, performance contracting, installation, alternative financing, measurement and verification services, and advances in software and data analytics. Our Engineering and Consulting segment provides civil engineering-related construction management, building and safety, city engineering, city planning, civil design, geotechnical, material testing and other engineering consulting services to our clients. Our engineering services include rail, port, water, mining and other civil engineering projects. We also provide economic and financial consulting to public agencies along with national preparedness and interoperability services, communications, and technology solutions. Lastly, we supplement the engineering services that we offer our clients by offering expertise and support for the various financing techniques public agencies utilize to finance their operations and infrastructure. We also support the mandated reporting and other requirements associated with these financings. We provide financial advisory services for municipal securities but do not provide underwriting services.
Historical and Current Impact of Covid-19
The coronavirus ("Covid-19") pandemic and efforts to limit its spread negatively
impacted our operations during our fiscal year 2020 and continued to impact us,
albeit to a lesser extent, during fiscal year 2021. In California and New York ,
the states in which we have historically derived a majority of our revenue,
mandatory shutdown orders were issued in March 2020 followed by phased
re-openings that began in May 2020 , followed by periods of curtailments as a
result of resurgences of Covid-19 cases, and subsequent re-openings through 2020
and 2021. Our largest program for the Los Angeles Department of Water and Power
("LADWP") resumed in the third quarter of fiscal 2021 and was the last program
suspended due to Covid-19. In addition, through fiscal year 2020 and 2021, none
of our contracts were cancelled due to Covid-19.
Through the current fiscal year 2022, though none of our current programs are
under suspension due to Covid-19 restrictions, certain market segments such as
small business customers of major utilities continue to experience lingering
impacts of the reduced economic activity due to the Covid-19 related mandates in
2020 and 2021. As of August 3, 2022 , none of our contracts were cancelled as a
result of Covid-19.
Asset and liability valuation and other estimates used in preparation of financial statements
As ofJuly 1, 2022 , we did not have any impairment with respect to goodwill or long-lived assets, including intangible assets. Because the full extent of the impact of a resurgence in the Covid-19 outbreak and efforts to slow its spread are unknown at this time, they could, under certain circumstances, cause impairment and result in a non-cash 33
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impairment charge being recorded in future periods. Changes to the estimated future profitability of the business may require that we establish an additional valuation allowance against all or some portion of our net deferred tax assets.
Impact on Clients and Subcontractors and Other Risks
We primarily work for utilities, municipalities and other public agencies. Should there be a resurgence related to Covid-19, some of these customers could experience significant budget shortfalls for the current year and beyond as a result of the measures taken to mitigate the resurgence effects of the Covid-19 pandemic and/or revenue shortfalls as a result of reduced economic activity. Although none of our contracts with governmental or public agencies were materially modified during our fiscal year 2020 or fiscal year 2021, these potential budget deficits could result in delayed funding for existing contracts, postponements of new contracts or price concessions. Further, most of our clients are not committed to purchase any minimum amount of services, as our agreements with them are based on a "purchase order" or "master service agreement" model. As a result, they may discontinue utilizing some or all of our services with little or no notice. In addition, we rely on subcontractors and material suppliers to complete a substantial portion of our work, especially in our Energy segment. If our significant subcontractors and material suppliers suffer significant economic harm and must limit or cease operations or file for bankruptcy as a result of the current economic slowdown, our subcontractors and material suppliers may not be able to fulfill their contractual obligations satisfactorily and we may not have the ability to select our subcontractors and material suppliers of choice for new contracts. If our subcontractors and material suppliers are not able to fulfill their contractual obligations, it could result in a significant increase in costs for us to complete the projects or cause significant delays to the realization of revenues under those projects. The ultimate impact of Covid-19 on our financial condition and results of operations will depend on all of the factors noted above, including other factors that we may not be able to forecast at this time. See the risk factor "The Covid-19 pandemic and health and safety measures intended to slow its spread have adversely affected, and may continue to adversely affect, our business, results of operations and financial condition." under Part I. Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2021 . While Covid-19 has had an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or duration of future impacts at this time. 34 Table of Contents Results of Operations
Second Quarter and First Half Overview
The following tables set forth, for the periods indicated, certain information derived from our consolidated statements of comprehensive income(1):
Three Months Ended
July 1, July 2,
2022 2021 $ Change % Change
(inthousands, except percentages)
Contract revenue$ 102,645 100.0 %$ 84,154 100.0 %$ 18,491 22.0 % Direct costs of contract revenue: Salaries and wages 21,284 20.7 16,366 19.4 4,918 30.1 Subcontractor services and other direct costs 49,771 48.5 36,902 43.9 12,869 34.9 Total direct costs of contract revenue 71,055 69.2
53,268 63.3 17,787 33.4 Gross profit 31,590 30.8 30,886 36.7 704 2.3 General and administrative expenses: Salaries and wages, payroll taxes and employee benefits 20,439 19.9 18,712 22.2 1,727 9.2 Facilities and facilities related 2,373 2.3 2,379 2.8 (6) (0.3) Stock-based compensation 1,714 1.7 5,933 7.1 (4,219) (71.1) Depreciation and amortization 4,426 4.3 4,224 5.0 202 4.8 Other 7,936 7.7 6,710 8.0 1,226 18.3
Total general and administrative expenses 36,888 35.9 37,958 45.1 (1,070) (2.8)
Income (loss) from operations (5,298) (5.2)
(7,072) (8.4) 1,774 (25.1) Other income (expense): Interest expense (1,030) (1.0) (1,099) (1.3) 69 (6.3) Other, net 329 0.3 (93) (0.1) 422 N/M
Total other income (expense) (701) (0.7) (1,192) (1.4) 491 (41.2)
Income (Loss) before income tax expense (5,999) (5.8) (8,264) (9.8)
2,265 (27.4)
Income tax expense (benefit) (1,673) (1.6) (3,663) (4.4) 1,990 (54.3) Net income (loss)$ (4,326) (4.2)$ (4,601) (5.5)$ 275 (6.0) (1) Percentages are expressed as a percentage of contract revenue and may not total due to rounding. N/M = Not meaningful 35 Table of Contents Six Months Ended July 1, July 2, 2022 2021 $ Change % Change (in thousands, except percentages) Contract revenue$ 194,483 100.0 %$ 163,240 100.0 %$ 31,243 19.1 % Direct costs of contract revenue: Salaries and wages 40,094 20.6 32,186 19.7 7,908 24.6 Subcontractor services and other direct costs 91,439 47.0 68,036 41.7 23,403 34.4 Total direct costs of contract revenue 131,533 67.6 100,222 61.4 31,311 31.2 Gross profit 62,950 32.4 63,018 38.6 (68) (0.1) General and administrative expenses: Salaries and wages, payroll taxes and employee benefits 39,796 20.5 38,156 23.4 1,640 4.3 Facilities and facilities related 4,771 2.5 5,022 3.1 (251) (5.0) Stock-based compensation 5,019 2.6 10,139 6.2 (5,120) (50.5) Depreciation and amortization 8,835 4.5 8,411 5.2 424 5.0 Other 15,435 7.9 12,551 7.7 2,884 23.0 Total general and administrative expenses 73,856 38.0 74,279 45.5 (423) (0.6) Income (loss) from operations (10,906) (5.6) (11,261)
(6.9) 355 (3.2) Other income (expense): Interest expense (1,781) (0.9) (2,163) (1.3) 382 (17.7) Other, net 526 0.3 (64) (0.0) 590 N/M
Total other income (expense) (1,255) (0.6) (2,227) (1.4) 972 (43.6) Income (Loss) before income tax expense (12,161) (6.3) (13,488) (8.3) 1,327 (9.8) Income tax expense (benefit) (4,062) (2.1) (5,121)
(3.1) 1,059 (20.7) Net income (loss)$ (8,099) (4.2)$ (8,367) (5.1)$ 268 (3.2) (2) Percentages are expressed as a percentage of contract revenue and may not total due to rounding. N/M = Not meaningful 36 Table of Contents The following tables provides information about disaggregated revenue of our two segments, Energy and Engineering and Consulting, by contract type, client type and geographical region: Three months ended July 1, 2022 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 7,587 $ 13,340$ 20,927 Unit-based 42,544 3,755 46,299 Fixed price 34,545 874 35,419 Total (1)$ 84,675 $ 17,970$ 102,645 Client Type Commercial$ 6,701 $ 1,476$ 8,177 Government 29,861 16,338 46,199 Utilities (2) 48,114 156 48,270 Total (1)$ 84,675 $ 17,970$ 102,645 Geography (3) Domestic$ 84,675 $ 17,970$ 102,645 Six months ended July 1, 2022 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 16,405 $ 26,341$ 42,746 Unit-based 85,501 6,739 92,240 Fixed price 57,655 1,842 59,497 Total (1)$ 159,561 $ 34,922$ 194,483 Client Type Commercial$ 14,790 $ 2,954$ 17,744 Government 48,220 31,791 80,011 Utilities (2) 96,551 177 96,728 Total (1)$ 159,561 $ 34,922$ 194,483 Geography (3) Domestic$ 159,561 $ 34,922$ 194,483 37 Table of Contents Three months ended July 2, 2021 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 9,056 $ 13,863$ 22,919 Unit-based 41,604 2,722 44,326 Fixed price 15,786 1,123 16,909 Total (1)$ 66,446 $ 17,708$ 84,154 Client Type Commercial$ 7,016 $ 1,372$ 8,388 Government 13,675 16,281 29,956 Utilities (2) 45,756 55 45,811 Total (1)$ 66,446 $ 17,708$ 84,154 Geography (3) Domestic$ 66,446 $ 17,708$ 84,154 Six months ended July 2, 2021 Engineering and Energy Consulting Total (in thousands) Contract Type Time-and-materials$ 15,956 $ 27,284$ 43,240 Unit-based 81,218 5,167 86,385 Fixed price 31,279 2,336 33,615 Total (1)$ 128,453 $ 34,787$ 163,240 Client Type Commercial$ 12,944 $ 2,469$ 15,413 Government 27,229 32,210 59,439 Utilities (2) 88,280 108 88,388 Total (1)$ 128,453 $ 34,787$ 163,240 Geography (3) Domestic$ 128,453 $ 34,787$ 163,240
(1) Amounts may not add to the totals due to rounding.
(2) Includes the portion of revenue related to small business programs paid by
the end user/customer.
(3) Revenue from our foreign operations were immaterial for the three and six
months ended
Three Months Ended
Contract revenue. Consolidated contract revenue increased$18.5 million , or 22.0%, in the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 , primarily due to incremental revenues in our Energy segment generated from new governmental construction management projects, combined with incremental revenues from the resumption of Covid-19 suspended projects for utilities. Contract revenue in our Energy segment increased$18.3 million , or 27.6%, in the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 , primarily as a result of incremental revenues generated from new governmental construction management projects, combined with incremental revenues from the resumption of Covid-19 suspended projects. Governmental revenues increased as a result of the start-up of newly awarded contracts. Covid-19 suspended projects resumed as a result of the lifting of business suspensions resulting from the Covid-19 pandemic and efforts to limit its spread that impacted projects during the first half of fiscal 2021. Contract revenue in our Engineering and Consulting segment was relatively flat for the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 .
Direct costs of contract revenue. Direct costs of consolidated contract revenue
increased
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increases in our contract revenues in our Energy segment as described above, as well as the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized. Direct costs of contract revenue in our Energy segment increased$18.4 million , or 41.6%, in the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 . Direct costs of contract revenue for the Engineering and Consulting segment decreased$0.6 million , or 6.7%, in the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 . Subcontractor services and other direct costs increased by$12.9 million , or 34.9%, and salaries and wages increased by$4.9 million , or 30.1%, in the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 , primarily due to the increases in contract revenues as described above combined with changes in the mix of those contract revenues to those which contain a higher percentage of material costs and installation subcontracting and lower percentage of labor costs, as well as the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized. Gross Profit. Gross profit increased 2.3% to$31.6 million , or 30.8% gross margin, for the three months endedJuly 1, 2022 , compared to gross profit of$30.9 million , or 36.7% gross margin, for the three months endedJuly 2, 2021 . The decrease in our gross margin was primarily driven by changes in the mix of revenues as described above combined with the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized. General and administrative expenses. General and administrative ("G&A") expenses decreased by$1.1 million , or 2.8%, in the three months endedJuly 1, 2022 compared to the three months endedJuly 2, 2021 . The decrease in G&A expenses consisted of a decrease of$3.1 million in unallocated corporate expense, partially offset by an increase of$1.0 million in the Energy segment and an increase of$1.0 million in the Engineering and Consulting segment. The decrease in G&A expenses was primarily attributed to lower stock-based compensation expenses, partially offset by higher salaries and wages, payroll taxes and employee benefits combined with higher computer-related expenses and professional service fees. Within G&A expenses, the decrease of$4.2 million in stock-based compensation was partially offset by an increase of$1.7 million in salaries and wages, payroll taxes and employee benefits, combined with an increase of$1.2 million in other general and administrative expenses, and an increase of$0.2 million in depreciation and amortization. Facilities and facility related expenses were relatively flat for the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 . The decrease in stock-based compensation expenses was primarily related to previously awarded stock grants reaching the end of their corresponding vesting periods. The increase in salaries and wages, payroll taxes and employee benefits was primarily due to increases in personnel. The increase in other general and administrative expenses was primarily due to higher computer-related expenses and professional service fees. The increase in depreciation and amortization was primarily related to higher depreciation of internally-developed computer software. Income (loss) from operations. Operating loss was$5.3 million for the three months endedJuly 1, 2022 as a result of the factors noted above. As a percentage of contract revenue, operating loss decreased from 8.4% to 5.2% for the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 . Total other expense, net. Total other expense, net, decreased$0.5 million , or 41.2%, for the three months endedJuly 1, 2022 , compared to the three months endedJuly 2, 2021 , as a result of income from indemnification agreements and lower interest expense related to principal reductions in term loans. Income tax expense (benefit). We recorded an income tax benefit of$1.7 million for the three months endedJuly 1, 2022 , compared to a tax benefit of$3.7 million for the three months endedJuly 2, 2021 . The decrease in the tax rate is primarily attributable to a one-time benefit derived from the CARES Act that was realized in the three months endedJuly 2, 2021 , and that did not recur in the three months endedJuly 1, 2022 . Net income (loss). Our net loss was$4.3 million for the three months endedJuly 1, 2022 , as compared to a net loss of$4.6 million for the three months endedJuly 2, 2021 . The improvement in net loss was primarily attributable to 39
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the increase in gross profit combined with lower G&A and lower total other expense, net, partially offset by lower income tax benefits.
Six Months Ended
Contract revenue. Consolidated contract revenue increased$31.2 million , or 19.1%, in the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 , primarily due to incremental revenues in our Energy segment generated from new governmental construction management projects, combined with incremental revenues from the resumption of Covid-19 suspended projects for utilities. Contract revenue in our Energy segment increased$31.2 million , or 24.3%, in the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 , primarily as a result of incremental revenues generated from new government projects, combined with incremental revenues from the resumption of Covid-19 suspended projects, as described above. Contract revenue in our Engineering and Consulting segment was relatively flat for the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 . Direct costs of contract revenue. Direct costs of consolidated contract revenue increased$31.3 million , or 31.2%, in the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 , primarily due to increases in our contract revenues in our Energy segment as described above as well as the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized. Direct costs of contract revenue in our Energy segment increased$32.5 million , or 39.6%, in the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 . Direct costs of contract revenue for the Engineering and Consulting segment decreased$1.2 million , or 6.9%, in the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 . Subcontractor services and other direct costs increased by$23.4 million , or 34.4%, and salaries and wages increased by$7.9 million , or 24.6%, in the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 , primarily due to the increases in contract revenues as described above combined with changes in the mix of those contract revenues to those which contain a higher percentage of material costs and installation subcontracting and lower percentage of labor costs, as well as the ramping up of new projects for which we saw higher project startup costs relative to the revenue recognized.
Gross Profit. Gross profit was relatively flat for the six months ended
General and administrative expenses. G&A expenses were relatively flat for the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 . G&A expenses consisted of a decrease of$3.5 million in unallocated corporate expense, partially offset by an increase of$1.7 million in the Energy segment combined with an increase of$1.4 million in the Engineering and Consulting segment. The decrease in G&A expenses was primarily attributed to lower stock-based compensation expenses, partially offset by higher computer-related expenses and higher professional service fee, combined with higher salaries and wages, payroll taxes and employee benefits. Within G&A expenses, the decrease of$5.1 million in stock-based compensation combined with the decrease of$0.3 million in facilities and facility related expense was partially offset by an increase of$2.9 million in other general and administrative expenses, combined with an increase of$1.6 million in salaries and wages, payroll taxes and employee benefits, and an increase of$0.4 million in depreciation and amortization. The decrease in stock-based compensation expenses was primarily related to previously awarded stock grants reaching the end of their corresponding vesting periods. The decrease in facilities and facility related expense was primarily attributed to satisfied facility leases that were not renewed. The increase in salaries and wages, payroll taxes and employee benefits was primarily due to increases in personnel. The increase in other general and administrative expenses was primarily due to higher computer- 40 Table of Contents
related expenses and professional service fees. The increase in depreciation and amortization was primarily related to higher depreciation of internally-developed computer software.
Income (loss) from operations. Operating loss was
Total other expense, net. Total other expense, net, decreased$1.0 million , or 43.6%, for the six months endedJuly 1, 2022 , compared to the six months endedJuly 2, 2021 , as a result of income from an indemnification agreement and lower interest expense related to principal reductions in term loans. Income tax expense (benefit). We recorded an income tax benefit of$4.1 million for the six months endedJuly 1, 2022 compared to a tax benefit of$5.1 million for the six months endedJuly 2, 2021 . The decrease in the tax rate is primarily attributable to a one-time benefit derived from the CARES Act that was realized in the six months endedJuly 2, 2021 , and that did not recur in the three months endedJuly 1, 2022 . Net income (loss). Our net loss was$8.1 million for the six months endedJuly 1, 2022 , as compared to a net loss of$8.4 million for the six monthsJuly 2, 2021 . The improvement in our net loss was primarily attributable to lower G&A combined with lower total other expense, net, partially offset by lower income tax benefit.
Liquidity and Capital Resources
Six Months Ended
July 1, July 2,
2022 2021
(in thousands)
Net cash provided by (used in):
Operating activities $ (3,569) $ (708)
Investing activities (4,271) (3,057)
Financing activities 2,430 (15,226)
Net increase (decrease) in cash and cash equivalents
Sources of Cash We believe that our cash and cash equivalents, cash generated by operating activities, and available borrowings under our Revolving Credit Facility and Delayed Draw Term Loan will be sufficient to finance our operating activities for at least the next 12 months. As a result of forecasted increased working capital requirements related to our California Investor-Owned Utility Contracts and other organic growth, onMarch 8, 2022 , we amended our Credit Agreement to, among other things, adjust certain covenants to ensure an adequate margin for compliance obligations through fiscal year 2022. OnAugust 2, 2022 , we amended our Credit Agreement to increase the purchase money indebtedness and Capitalized Lease Obligations (as defined in the Credit Agreement) limit. For more information, see Part I, Item 1, Note 6, "Debt Obligations", and Note 13, "Subsequent Events", of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. As ofJuly 1, 2022 , we had a fully drawn$100 million Term A Loan with$70.0 million outstanding, a$50.0 million Revolving Credit Facility with no borrowed amounts outstanding and$4.1 million in letters of credit issued, and a fully drawn$50.0 million Delayed Draw Term Loan with$42.5 million outstanding, each scheduled to mature onJune 26, 2024 . In addition, as ofJuly 1, 2022 , we had$5.8 million of cash and cash equivalents. Our primary source of liquidity for the next 12 months and beyond is cash generated from operations and borrowings under our Revolving Credit Facility. As ofJuly 1, 2022 , borrowings under our Credit Facilities, exclusive of the effects of upfront fees, undrawn fees and issuance cost amortization, bore interest at 3.9%. See Part I, Item 1, Note 6, "Debt Obligations", of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, and Part II, Item 8, Note 41
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5, "Debt Obligations", of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , for information regarding our indebtedness, including information about new borrowings and repayments, principal repayment terms, interest rates, covenants, and other key terms of our outstanding indebtedness.
Cash Flows from Operating Activities
Cash flows used in operating activities were$3.6 million for the six months endedJuly 1, 2022 , as compared to cash flows used in operating activities of$0.7 million for the six months endedJuly 2, 2021 . Cash flow from operating activities primarily consists of net income, adjusted for non-cash charges, such as depreciation and amortization and stock-based compensation, plus or minus changes in operating assets and liabilities. Cash flows used in operating activities for the six months endedJuly 1, 2022 , resulted primarily from the changing mix of revenues, combined with the increased demand for working capital related to the resumption of our utility programs that were suspended in 2021 and start-up costs associated with certain new contract awards. Changes in cash flows used in operating activities for the six months endedJuly 2, 2021 , resulted primarily due to the changing mix of revenues and start-up costs associated with certain new contract awards.
Cash Flows from Investing Activities
Cash flows used in investing activities were$4.3 million for the six months endedJuly 1, 2022 , as compared to cash flows used in investing activities of$3.1 million for the six months endedJuly 2, 2021 . Cash flows used in investing activities for the six months endedJuly 1, 2022 were primarily due to cash paid for the development of software, and the purchase of equipment. Cash flows used in investing activities for the six months endedJuly 2, 2021 were primarily due to cash paid for the development of software, the purchase of equipment and leasehold improvements.
Cash Flows from Financing Activities
Cash flows provided by financing activities were$2.4 million for the six months endedJuly 1, 2022 , as compared to cash flows used in financing activities of$15.2 million for the six months endedJuly 2, 2021 . Cash flows provided by financing activities for the six months endedJuly 1, 2022 , were primarily attributable to borrowings of$20.0 million under our Delayed Draw Term Loan, partially offset by payments of$10.2 million for contingent consideration related to prior acquisitions combined with repayments of$6.5 million under our term loan facility and revolving line of credit. Cash flows used in financing activities for the six months endedJuly 2, 2021 , were primarily attributable to payments of$6.6 million for contingent consideration related to prior acquisitions, repayments of$6.5 million under our term loan facility and revolving line of credit, payments of taxes on stock grants of$3.1 million , payments on notes payable of$1.5 million , partially offset by$1.4 million in proceeds from sales of common stock under our employee stock purchase plan and$1.4 million in proceeds from stock option exercise.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements or liabilities. In
addition, our policy is not to enter into futures or forward contracts. Finally,
we do not have any majority-owned subsidiaries or any interests in, or
relationships with, any special-purpose entities that are not included in the
consolidated financial statements. We have, however, an administrative services
agreement with Genesys in which we provide Genesys with ongoing administrative,
operational and other non-professional support services. We manage Genesys and
have the power to direct the activities that most significantly impact Genesys'
performance, in addition to being obligated to absorb expected losses from
Genesys. Accordingly, we are the primary beneficiary of Genesys and consolidate
Genesys as a variable interest entity.
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Short and Long-term Uses of Cash
General
Our principal uses of cash are to fund operating expenses and pay down outstanding debt. From time to time, we also use cash to help fund business acquisitions. Our cash and cash equivalents are impacted by the timing of when we pay expenses as reflected in the change in our outstanding accounts payable and accrued expenses. Contractual Obligations The following table sets forth our known contractual obligations as ofJuly 1, 2022 : Less than More than Contractual Obligations Total 1 Year 1 - 3 Years 3 - 5 Years 5 Years ( in thousands) Long term debt (1)$ 113,140 $ 16,019 $ 97,121 $ - $ -
Interest payments on debt outstanding (2) 7,631 4,005
3,626 - -
Operating leases 14,391 5,435 5,667 2,890 399
Finance leases 2,304 891 1,251 155 7Total contractual cash obligations$ 137,466 $ 26,350 $
107,665
(1) Long-term debt includes
We have assumed no future borrowings or repayments (other than at maturity)
for purposes of this table. Our term loans are scheduled to mature on June
26, 2024.
(2) Borrowings under our Delayed Draw Term Loan bear interest at a variable rate.
Future interest payments on our Credit Facilities are estimated using
floating rates in effect as of
We are obligated to pay earn-out payments in connection with our 2019 acquisition ofEnergy and Environmental Economics, Inc. ("E3, Inc. "). We are obligated to pay up to$12.0 million in cash ifE3, Inc. exceeds certain financial targets during the three years after theE3, Inc. closing date. As ofJuly 1, 2022 , we had estimated remaining contingent consideration payable of$0.9 million related to this acquisition. For the six months endedJuly 1, 2022 , our statement of operations includes$0.1 million of accretion (excluding fair value adjustments) related to the contingent consideration.
Outstanding Indebtedness
See Part I, Item 1, Note 6, "Debt Obligations", of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q, and Part II, Item 8, Note 5, "Debt Obligations", of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , for information regarding our indebtedness, including information about new borrowings and repayments, principal repayment terms, interest rates, covenants, and other key terms of our outstanding indebtedness. Interest Rate Swap
From time to time, we enter into interest rate swap agreements to moderate our
exposure to fluctuations in interest rates underlying our variable rate debt.
For more information, see Part I, Item 3, "Quantitative and Qualitative
Disclosures About Market Risk", and Note 5, "Derivatives", to the Notes of
Condensed Consolidated Financial Statements included in this Quarterly Report on
Form 10-Q.
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Impact of Inflation
Due to the average duration of our projects and our ability to negotiate prices
as contracts end and new contracts begin, our operations have not been
materially impacted by inflation. However, inflationary pressures, including
expectations of future inflation, may impact the customers of our utility
clients, which may lead to delayed or deferred decisions regarding expenditures
to improve energy efficiency, and therefore potentially impacting our future
revenues.
Components of Revenue and Expense
Contract Revenue
We generally provide our services under contracts, purchase orders or retainer letters. The agreements we enter into with our clients typically incorporate one of three principal types of pricing provisions: time-and-materials, unit-based, and fixed price. Revenue on our time-and-materials and unit-based contracts are recognized as the work is performed in accordance with specific terms of the contract. As ofJuly 1, 2022 , 22% of our contracts are time-and-materials contracts, 47% of our contracts are unit-based contracts, and 31% are fixed price contracts, compared to 26% for time-and-materials contracts, 53% for unit-based contracts, and 21% for fixed price contracts, as ofJuly 2, 2021 . Some of these contracts include maximum contract prices, but contract maximums are often adjusted to reflect the level of effort to achieve client objectives and thus the majority of these contracts are not expected to exceed the maximum. Contract revenue on our fixed price contracts is determined on the percentage of completion method based generally on the ratio of direct costs incurred to date to estimated total direct costs at completion. Many of our fixed price contracts involve a high degree of subcontracted fixed price effort and are relatively short in duration, thereby lowering the risks of not properly estimating the percent complete. Adjustments to contract cost estimates are made in the periods in which the facts requiring such revisions become known. When the revised estimate indicates a loss, such loss is recognized in the current period in its entirety. Claims and change orders that have not been finalized are evaluated to determine whether or not a change has occurred in the enforceable rights and obligations of the original contract. If these non-finalized changes qualify as a contract modification, a determination is made whether to account for the change in contract value as a modification to the existing contract, or a separate contract and revenue under the claims or change orders is recognized accordingly. Costs related to un-priced change orders are expensed when incurred, and recognition of the related revenue is based on the assessment above of whether or not a contract modification has occurred. Estimated profit for un-priced change orders is recognized only if collection is probable. Our contracts come up for renewal periodically and at the time of renewal may be subject to renegotiation, which could impact the profitability on that contract. In addition, during the term of a contract, public agencies may request additional or revised services which may impact the economics of the transaction. Most of our contracts permit our clients, with prior notice, to terminate the contracts at any time without cause. While we have a large volume of contracts, the renewal, termination or modification of a contract, in particular contracts with Consolidated Edison, theDormitory Authority-State of New York ("DASNY"), and utility programs associated withLos Angeles Department of Water and Power and Duke Energy Corp., may have a material effect on our consolidated operations. Some of our contracts include certain performance guarantees, such as a guaranteed energy saving quantity. Such guarantees are generally measured upon completion of a project. In the event that the measured performance level is less than the guaranteed level, any resulting financial penalty, including any additional work that may be required to fulfill the guarantee, is estimated and charged to direct expenses in the current period. We have not experienced any significant costs under such guarantees.
Direct Costs of Contract Revenue
Direct costs of contract revenue consist primarily of that portion of salaries
and wages that have been incurred in connection with revenue producing projects.
Direct costs of contract revenue also include material costs,
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subcontractor services, equipment and other expenses that are incurred in connection with revenue producing projects. Direct costs of contract revenue exclude that portion of salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all of our personnel are included in general and administrative expenses since no allocation of these costs is made to direct costs of contract revenue. Other companies may classify as direct costs of contract revenue some of the costs that we classify as general and administrative costs. We expense direct costs of contract revenue when incurred.
General and Administrative Expenses
G&A expenses include the costs of the marketing and support staffs, other marketing expenses, management and administrative personnel costs, payroll taxes, bonuses and employee benefits for all of our employees and the portion of salaries and wages not allocated to direct costs of contract revenue for those employees who provide our services. G&A expenses also include facility costs, depreciation and amortization, professional services, legal and accounting fees and administrative operating costs. Within G&A expenses, "Other" includes expenses such as professional services, legal and accounting, computer costs, travel and entertainment, marketing costs and acquisition costs. We expense general and administrative costs when incurred.
Critical Accounting Policies
We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with generally accepted accounting principles in theU.S. ("GAAP"). To prepare these financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses in the reporting period. Our actual results may differ from these estimates. We have adopted accounting policies and practices that are generally accepted in the industry in which we operate. There have been no material changes in our critical accounting policies and estimates from those disclosed in our Annual Report on Form 10-K for our fiscal year endedDecember 31, 2021 . Please refer to Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 for a discussion of our critical accounting policies and estimates.
Recent Accounting Standards
For a description of recently issued and adopted accounting pronouncements,
including adoption dates and expected effects on our results of operations and
financial condition, see Part I, Item 1, Note 2, "Recent Accounting
Pronouncements", of the Notes to Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q.
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