What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-11 compared with 2021-03-17 · 133 added, 146 removed, 314 unchanged (47% of the section changed)

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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, geotechnical, material testing and other engineering consulting services to our clients.

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.

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Impact of Covid-19 on Our Business

On January 30, 2020, the spread of a novel strain of coronavirus (“Covid-19”) was declared a Public Health Emergency of International Concern by the World Health Organization (“WHO”).

On March 11, 2020, WHO characterized the Covid-19 outbreak as a pandemic.

The Covid-19 pandemic has resulted in governmental authorities around the world implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or total lock-down orders and business limitations and shutdowns (subject to exceptions for certain essential operations and businesses).

Although some of these measures have since been lifted or scaled back, ongoing resurgences of Covid-19 in the United States has resulted in the reimposition of certain restrictions and may lead to other restrictions being reimplemented in response to efforts to reduce the spread of Covid-19.

The Covid-19 outbreak and restrictions intended to slow the spread of Covid-19 have caused economic and social disruption on an unprecedented scale.

It is unclear how long these restrictions will remain in place and they may remain in place in some form for an extended period of time.

Given the uncertainties associated with the duration of the pandemic, we cannot reasonably estimate the ultimate impacts of Covid-19 and efforts to limit its spread on our business, financial condition, results of operations or cash flows for the foreseeable future or whether our assumptions used to estimate our future liquidity requirements will be correct .

Health and Safety

In response to the Covid-19 pandemic, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of Covid-19 to our employees, including requiring the majority of our employees to work remotely, suspending non-essential travel and restricting in-person work-related meetings.

to continue to implement these measures until we determine that the Covid-19 pandemic is adequately contained for purposes of our business, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, business partners and third-party service providers.

Financial Position and Results of Operations

The Covid-19 pandemic and efforts to limit its spread negatively impacted our business during our fiscal year 2020.

The coronavirus (“Covid-19”) pandemic and efforts to limit its spread negatively impacted our operations during 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.

In New York, phased re-openings began in June 2020 and our business in New York has been improving since and all of our New York utility programs have restarted.

In New York, phased re-openings began in June 2020, and all of our New York utility programs have restarted.

In California, phased re-openings began in May 2020, followed by periods of curtailments as a result of resurgences of Covid-19 cases, and subsequent re-openings.

As a result, the most significant pandemic related impacts to our business are now occurring in California to our direct install business.

In the Energy segment, we have experienced and expect to continue to experience a negative impact on our direct install programs that serve small businesses as a result of restrictions put in place by governmental authorities that have required temporary shutdowns of all “non-essential” businesses.

In fiscal year 2019, we derived approximately 40% of our gross revenue from our direct install programs that serve small businesses, and a significant portion of our direct install work on these programs was suspended for varying periods of time during fiscal year 2020.

With the exception of our direct install programs in California, phased re-openings have continued to progress since the second quarter of 2020.

Our other programs, which generated approximately 60% of our revenue in fiscal 2019, are either businesses that have been determined to be “essential” by government authorities or have continued to progress during the pandemic.

In the Engineering and Consulting segment, our revenues have been less affected by Covid-19 than our revenues in the Energy segment.

As a result, the most significant pandemic related impacts to our business occurred in California to our direct install business.

During the last week of June 2021, our largest program for the Los Angeles Department of Water and Power (“LADWP”) resumed, which was our last remaining program that was still suspended due to Covid-19.

As of March 9, 2022, none of our contracts have been cancelled due to Covid-19.

In the Energy segment, we experienced a negative impact on our direct install programs that serve small businesses as a result of restrictions put in place by governmental authorities that required temporary shutdowns of all “non-essential” businesses which resulted in a significant portion of our direct install work on these programs being suspended for varying periods of time during fiscal year 2020 and continuing in California through our first half of fiscal 2021.

During non-Covid-19 impacted years, such as fiscal year 2019, we derived approximately 40% of our gross revenue from our direct install programs that serve small businesses and 60% from our other programs.

Our other programs are either services that have been determined to be “essential” by government authorities, can be performed remotely or outside of any Covid-related restrictions, or have continued to progress during the pandemic.

In the Engineering and Consulting segment, our revenues have been less affected by Covid-19 than the revenues in the Energy segment.

The services in this segment have generally been deemed “essential” by the government and have continued to operate while abiding social distancing measures.

As of March 15, 2021, though some of our work has been suspended as a result of the Covid-19 pandemic and efforts to limit its spread, none of our contracts have been cancelled and proposal activities for new programs have continued to advance.

We estimate that pandemic related slowdowns and work suspensions reduced our fiscal 2020 revenue by approximately 20% from our planned pre-pandemic levels for 2020.

In response to the Covid-19 pandemic and efforts to prevent its spread, we began taking a number of steps during the first quarter of fiscal 2020 aimed at preserving liquidity and positioning ourselves to resume our growth trajectory after work restrictions are lifted.

These steps include:

● Executing a reduction in workforce, primarily through an unpaid furlough, impacting approximately 300 members of our staff.

The largest reductions were a result of government-mandated work restrictions impacting our direct install programs in California and New York.

During our second fiscal quarter, furloughed employees began to return to work as government authorities began lifting restrictions through phased re-openings and, by the end of the third fiscal quarter, the majority of our furloughed employees had returned to work ;

● A temporary freeze on all non-critical spending for travel, capital expenditures, and other discretionary expenses;

● A temporary cash wage reduction for salaried employees, ranging from 0% for lower salary bands up to 75% for senior management, all of which had been restored by the end of July 2020;

● Suspension of cash fees for our Board of Directors, which was lifted during our third fiscal quarter;

● Implementing a temporary hiring freeze;

● Amending our credit facility for increased flexibility.

We believe our financial position is sufficiently flexible to enable us to maneuver in the current economic environment.

Throughout our fiscal year 2020, we enhanced liquidity by minimizing working capital and significantly improving cash collections.

In addition, in May 2020, we amended our credit facility to temporarily modify, among other things, certain covenants to increase our financial flexibility.

Combined with availability under our credit facilities, we believe our enhanced liquidity position provides a cushion against liquidity disruptions.

We have continuously monitored our liquidity position during the Covid-19 pandemic in order to be flexible during these uncertain times and to position ourselves to resume our growth trajectory as work restrictions are lifted.

As part of this effort, we amended our credit facility in April 2021 for increased covenant flexibility as a result of forecasted increased working capital requirements related to $781 million in new California Investor Owned Utility contracts signed in December 2020.

Asset and liability valuation and other estimates used in preparation of financial statements

As of January 1, 2021, we did not have any impairment with respect to our goodwill or long-lived assets, including intangible assets.

Because the full extent and duration of the impact of 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 impairment charge being recorded in future periods.

As of December 31, 2021, 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 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 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.

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We primarily work for utilities, municipalities and other public agencies.

We expect many governmental and other public agencies could have significant budget shortfalls for 2020 and potentially beyond as a result of the economic slowdown from the measures taken to mitigate the Covid-19 pandemic.

Although none of our contracts with governmental or other public agencies were materially modified during our fiscal year 2020, these potential budget deficits could result in delayed funding for existing contracts with us, postponements of new contracts or price concessions.

Further, most of our clients are not committed to purchase any minimum amount of our services, as our agreements with them are based on a “purchase order” model.

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 Covid-19 pandemic and/or revenue shortfalls as a result of reduced economic activity.

Although none of our material contracts with governmental or public agencies were materially modified during our fiscal years 2020 or 2021, these potential budget deficits could result in delayed funding for existing contracts with us, 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.

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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 this Annual Report on Form 10-K.

“Risk Factors” included in this Annual Report on Form 10-K.

While Covid-19 has had, and we expect it to continue to have, an adverse effect on our business, financial condition and results of operations, we are unable to predict the extent or duration of these impacts at this time.

Health and Safety

In response to the Covid-19 pandemic, we have taken and will continue to take precautionary measures intended to help minimize the risk of Covid-19 to our employees, including requiring the majority of our employees to work remotely, suspending non-essential travel and restricting in-person work-related meetings.

We expect to continue to implement these measures until it has determined that the Covid-19 pandemic is adequately contained for purposes of our business, and may take further actions as government authorities require or recommend or as it determines to be in the best interests of our employees, customers, business partners and third-party service providers.

Recent Developments

During our fourth quarter of fiscal 2020, we signed a total of $781 million in new California Investor Owned Utility (“IOU”) Contracts.

These six contracts are three to five years in duration, and on a weighted average basis, represent approximately $150 million per year in incremental contract revenue on average over the next three to five years if we successfully execute the work.

The new work is expected to begin slowly and accelerate throughout 2021, with most of the contribution expected in the back half of the year.

We anticipate increased working capital requirements

related to these newly signed $781 million in California Owned Utility Contracts, and thus may seek to modify certain terms under our bank borrowing facilities to ensure an adequate margin for certain covenant compliance obligations.

On March 8, 2022, we amended our credit facility to provide for increased liquidity and covenant flexibility as a result of forecasted increased working capital requirements related to additional organic growth, including the resumption of the LADWP small business program.

The amendment also revises the pricing structure of borrowings under our Credit Agreement from utilizing as a reference rate the London Inter-Bank Offered Rate (“LIBOR”) to utilizing the Secured Overnight Financing Rate (“SOFR”).

For additional information, see Part II, Item 8, Note 15, “ Subsequent Events” of the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K.

Results of Operations

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Contract revenue

Direct costs of contract revenue (inclusive of directly related depreciation and amortization):

Direct costs of contract revenue:

Salaries and wages

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Salaries and wages, payroll taxes and employee benefits

Facilities and facility related

Facilities and facilities related

Stock-based compensation

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Total general and administrative expenses

Income from operations

Income (loss) from operations

Other income (expense):

Interest expense, net

Total other expense, net

Income before income taxes

Interest expense

Total other income (expense)

Income (Loss) before income tax expense

Income tax expense (benefit)

Net income (loss)

(1) Percentages are expressed as a percentage of contract revenue and may not total due to rounding.

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Contract revenue.

Consolidated contract revenue decreased $37.2 million, or 9.5%, in fiscal year 2021 compared to fiscal year 2020, primarily due to decreased contract revenues from our construction management activities in our Energy segment and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020, partially offset by increased planning and advisory contract revenues including software licensing.

Contract revenue related to Energy segment construction management projects decreased as a result of the completion of a number of Energy segment projects and delays in the start-up of construction of new Energy segment projects.

Contract revenue in our Energy segment decreased $37.8 million, or 11.7%, in fiscal year 2021 compared to fiscal year 2020, primarily as a result of decreased contract revenues from construction management activities as described above and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020, partially offset by increased planning and advisory contract revenues including software licensing.

Contract revenue in our Engineering and Consulting segment was relatively flat in fiscal year 2021 compared to fiscal year 2020.

Direct costs of contract revenue.

Direct costs of consolidated contract revenue decreased $43.7 million, or 16.7%, in fiscal year 2021 compared to fiscal year 2020, primarily as a result of decreased construction management activities in our Energy segment and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020.

Direct cost of contract revenue in our Energy segment decreased $41.0 million, or 18.2%, in fiscal year 2021 compared to fiscal year 2020, primarily as a result of the reasons described above.

Direct costs of contract revenue for the Engineering and Consulting segment decreased $2.7 million, or 7.4%, for the fiscal year 2021 compared to fiscal year 2020, primarily due to a reduction in scope of work from one of our customers combined with the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020.

Salaries and wages were relatively flat in fiscal year 2021 compared to the fiscal year 2020.

Subcontractor services and other direct costs decreased $44.2 million, or 22.5%, in fiscal year 2021 compared to fiscal year 2022, primarily due to the decrease in construction management activities.

As a percentage of contract revenue, salaries and wages increased to 18.6% of contract revenue for fiscal year 2021 from 16.7% for fiscal year 2020 and subcontractor services and other direct costs decreased to 43.0% of contract revenue for fiscal year 2021 from 50.2% of contract revenue for the fiscal year 2020, for the reasons noted above.

Gross Profit .

Gross profit increased 5.0% to $135.9 million, or 38.4% gross margin, for fiscal 2021 compared to $129.4 million, or a 33.1% gross margin for fiscal 2020.

The increase in our gross margin was primarily driven by changes in the mix of revenues resulting from the reduction in construction management services which have a relatively lower gross margin profile due to their relatively higher content of pass-through subcontractor and materials costs.

General and administrative expenses.

General and administrative (“G&A”) expenses decreased by $1.1 million, or 0.7%, in the fiscal year 2021 compared to the fiscal year 2020.

The decrease in G&A expenses consisted of a decrease of $2.6 million in the Energy segment combined with a decrease of $1.7 million in the unallocated corporate expenses, partially offset by an increase of $3.3 million in the Engineering and Consulting segment.

The decrease in G&A expenses in the Energy segment and unallocated corporate expenses was primarily attributed to lower amortization of intangibles combined with lower other general and administrative expenses, partially offset by higher wage and related benefit costs.

The increase in G&A expenses in the Engineering and Consulting segment was primarily attributed to higher wage and related benefit costs.

The increase in wage and related benefit costs was primarily attributed to having restored wage reductions taken during our second quarter of fiscal 2020 aimed at preserving liquidity as a result of the Covid-19 pandemic.

Within G&A expenses, the increase of $2.6 million for salaries and wages, payroll taxes and employee benefits, combined with the increase of $0.5 million in stock-based compensation was offset by the decrease of $0.6 million in facilities and facility related expenses, combined with the decrease of $1.6 million in depreciation and amortization and the decrease of $1.9 million in other general and administrative expenses.

The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to having restored, during our third quarter of fiscal year 2020, certain actions taken during the second quarter of our fiscal year 2020 aimed at preserving liquidity in the early stages of the Covid-19 pandemic, such as a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs.

The increase in stock-based compensation expenses was primarily related to new stock grants to current employees and executives.

The decrease in facilities and facilities related expenses was attributed to satisfied facility leases that were not renewed.

The decrease in depreciation and amortization was primarily related to lower amortization of intangible assets derived from prior acquisitions.

The decrease in other general and administrative expenses was primarily related to decreased earn-out expenses, partially offset by increases in professional services combined with increases in computer-related expenses.

Income (loss) from operations .

Operating loss was $8.7 million for fiscal 2021, compared to a loss of $16.2 million for fiscal 2020, as a result of the factors noted above.

As a percentage of contract revenue, the operating loss was 2.5% for fiscal 2021 compared to an operating loss of 4.2% for fiscal 2020.

The increase in operating margin was attributable to increased gross profit combined with lower G&A expenses.

Total other expense, net.

Total other expense, net, was $3.7 million for fiscal 2021 compared to $3.4 million for fiscal 2020.

The increase in total other expense, net is primarily due to lower interest income partially offset by lower interest expense as a result of lower borrowings under our credit facilities and the impact of having one fewer week in fiscal year 2021 as compared to fiscal year 2020.

Income tax expense (benefit).

We recorded an income tax benefit of $4.0 million for fiscal year 2021 compared to a tax benefit of $5.2 million for fiscal year 2020.

The decrease in the income tax benefit is primarily attributable to the increase in valuation allowance recorded against certain state-specific deferred tax assets combined with a reduction in energy efficiency deductions, partially offset by additional tax benefits related to the net operating loss carryback provision of the CARES Act.

Net income (loss) .

Our net loss was $8.4 million for fiscal 2021, as compared to a net loss of $14.5 million for fiscal 2020.

The reduction in our net loss was primarily driven by increased gross profit margins combined with lower operating expenses.

Fiscal Year 2020 Compared to Fiscal Year 2019

Contract revenue.

Consolidated contract revenue decreased $52.1 million, or 11.8%, in fiscal year 2020 compared to fiscal year 2019, primarily due to decreased contract revenues from our direct install programs for small businesses in our Energy segment, partially offset by $31.2 million of incremental contract revenue generated from government projects and $22.0 million of incremental contract revenue from the acquisitions of Energy and Environmental Economics, Inc.

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General and administrative (“G&A”) expenses increased by $20.0 million, or 15.9%, in the fiscal year 2020 compared to the fiscal year 2019.

The increase in G&A expenses consisted of an increase of $12.2 million in the Energy segment and an increase of $8.5 million in the unallocated

corporate expenses, partially offset by a decrease of $0.7 million in the Engineering and Consulting segment.

The increase in G&A expenses consisted of an increase of $12.2 million in the Energy segment and an increase of $8.5 million in the unallocated corporate expenses, partially offset by a decrease of $0.7 million in the Engineering and Consulting segment.

The increase in G&A expenses in the Energy segment was primarily attributed to incremental expenses of $13.0 million from the addition of E3, Inc.

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and Onsite Energy, partially offset by our actions related to placing a temporary cash wage reduction for salaried employees, as well as instituting a reduction in workforce, primarily through unpaid furloughs, aimed at preserving liquidity as a result of the Covid-19 pandemic.

During the second half of the three months ended July 3, 2020, furloughed employees began to return to work as government authorities began loosening restrictions through phased re-openings and, by the end of the third fiscal quarter, the majority of furloughed employees had returned to work.

During the second half of the three months ended July 3, 2020, furloughed employees

began to return to work as government authorities began loosening restrictions through phased re-openings and, by the end of the third fiscal quarter, the majority of furloughed employees had returned to work.

In addition, as the initial impact of Covid-19 was ascertained and operations were adjusted accordingly, salaries were reinstituted in June 2020 with the exception of corporate staff, whose salaries were reinstituted at the end of July 2020.

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As a result of the above factors, our net loss was $14.5 million for the fiscal year ended 2020, as compared to a net income of $4.8 million for the fiscal year 2019.

Fiscal Year 2019 Compared to Fiscal Year 2018

Contract revenue.

Consolidated contract revenue increased $170.8 million, or 62.4%, in fiscal year 2019 compared to fiscal year 2018, primarily as a result of a full year of contract revenue related to our acquisition of Lime Energy Co.

(“Lime Energy”) in October 1, 2018, compared to a partial year of such revenues in the prior year, and increases in contract revenue related to our acquisitions of E3, Inc., Onsite Energy, and the Weidt Group during fiscal year 2019.

This increase was partially offset by a decrease in contract revenue in the Engineering and Consulting segment due to normal fluctuations in the level of services provided.

Contract revenue in our Energy segment increased $173.9 million, or 88.0%, in fiscal year 2019 compared to fiscal year 2018.

Contract revenue in our Engineering and Consulting segment decreased $3.0 million, or 4.0%, in fiscal year 2019 compared to fiscal year 2018.

Contract revenue for the Energy segment increased as a result of the reasons mentioned above as Lime Energy, E3 Inc., Onsite Energy, and the Weidt Group are included in our Energy segment.

Contract revenue for the Engineering and Consulting segment decreased primarily as a result of lower subcontracted revenue during fiscal year 2019.

Direct costs of contract revenue.

Direct costs of consolidated contract revenue increased $128.8 million, or 71.4%, in fiscal year 2019 compared to fiscal year 2018, primarily as a result of a full year of direct costs of contract revenue related to Lime Energy, compared to a partial year of such costs in the prior year, and an increase in direct costs of contract revenues related to our acquisitions of E3, Inc., Onsite Energy, and the Weidt Group during fiscal year 2019.

Direct cost of contract revenue in our Energy segment increased $129.4 million, or 94.7%, to $266.0 million for fiscal year 2019 from $136.6 million for fiscal year 2018 as a result of the acquisitions in the Energy segment mentioned above which collectively contributed $132.3 million in direct costs of contract revenue in fiscal year 2019.

Direct costs of contract revenue for the Engineering and Consulting segment decreased $1.3 million, or 3.0%, to $41.4 million for fiscal year 2019 from $42.7 million for fiscal year 2018 in conjunction with the decrease in revenue in this segment.

Subcontractor services and other direct costs increased by $110.2 million and salaries and wages increased by $17.9 million compared to the prior year.

Within direct costs of contract revenue, salaries and wages decreased to 14.6% of contract revenue for fiscal year 2019 from 17.1% for fiscal year 2018.

Subcontractor services and other direct costs increased to 55.0% of contract revenue for fiscal year 2019 from 48.7% of contract revenue for fiscal year 2018.

Salaries and wages within direct costs of contract revenue decreased as a percentage of contract revenue and subcontractor services increased as a percentage of contract revenue, primarily as a result of increased mix of revenues derived from the Lime acquisition which contain a higher percentage of material costs and installation subcontracting and a lower percentage of labor costs compared to the previous year.

General and administrative expenses.

General and administrative (“G&A”) expenses increased by $45.4 million, or 56.6%, to $125.6 million for fiscal year 2019 from $80.2 million for fiscal year 2018.

The increase in G&A expenses consisted of an increase of $43.3 million in the Energy segment and an increase of $2.4 million in the unallocated corporate expenses, partially offset by a decrease of $3.0 million in the Engineering and Consulting segment.

The increase in G&A expenses in the Energy segment was primarily attributed of a full year of G&A expenses related to our acquisition of Lime Energy, compared to a partial year of such expenses in the prior year, and an increase in G&A expenses related to our acquisitions of E3, Inc., Onsite Energy, and The Weidt Group during fiscal year 2019, which collectively contributed $40.9 million in G&A expenses in fiscal year 2019.

The increase in our unallocated corporate expenses is primarily attributable to increased acquisition-related costs related to E3, Inc., Onsite Energy, and the Weidt Group.

The decrease in G&A expenses in the Engineering and Consulting segment was primarily attributed to lower contract revenues in that segment as described above.

Of the $42.7 million increase in G&A expenses, $18.3 million resulted from an increase in salaries and wages, payroll taxes and employee benefits, $5.9 million resulted from an increase in stock-based compensation, $9.0 million resulted from an increase in depreciation and amortization, $6.7 million resulted from an increase in other general and administrative expenses and $3.0 million resulted from an increase in facilities and facility related expenses.

The increase in salaries and wages, payroll taxes and employee benefits was primarily attributable to the addition of employees from the acquisitions of Lime Energy, The Weidt Group, Onsite Energy, and E3, Inc.

The increase in facilities and facility related expenses was primarily due to the addition of offices in connection with our fiscal year 2019 acquisitions.

The increase in stock-based compensation expenses was primarily related to an increase in stock grants to current employees and executives.

The increase in depreciation and amortization was primarily due to an increase in amortization of intangible assets derived from the acquisitions of Lime Energy, The Weidt Group, Onsite Energy, and E3, Inc.

The increase in other general and administrative expenses was primarily due to acquisition costs related to the acquisition of the Weidt Group, Onsite Energy, and E3, Inc.

Income from operations.

Our operating income decreased by $0.8 million, or 6.3% as a result of the factors noted above.

As a percentage of contract revenue, operating income decreased to 2.7% in fiscal year 2019 compared to

4.7% in fiscal year 2018.

This decrease was primarily attributable to higher direct costs of contract revenue, as a percentage of revenue, partially offset by lower G&A expenses, as a percentage of contract revenue.

Total other expense, net.

Total other expense, net, increased to $4.7 million for fiscal year 2019 as compared $610,000 for fiscal year 2018.

This increase in total other expense, net is primarily the result of higher interest expense during fiscal year 2019 as a result of borrowings under our credit facilities related to our acquisitions of Lime Energy, the Weidt Group, Onsite Energy, and E3, Inc.

Income tax (benefit) expense.

We recorded an income tax benefit of $0.2 million for fiscal year 2019, as compared to $2.1 million expense for fiscal year 2018.

The effective tax rate for fiscal year 2019 was (4.0)%, as compared to 17.5% for fiscal year 2018.

The decrease in the year-over-year effective tax rate for fiscal year 2019 and the difference between the tax expense recorded and the expense that would be recorded by applying the federal statutory rate was primarily attributable to increased deductions for stock options, increased research and development credits, and the impact of the energy efficient commercial building deductions recognized in 2019.

As a result of the above factors, our net income was $4.8 million for fiscal year 2019, as compared to net income of $10.0 million for fiscal year 2018.

Liquidity and Capital Resources

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Net increase (decrease) in cash and cash equivalents

We believe that our cash and cash equivalents on hand, cash generated by operating activities and available borrowings under our revolving credit facility will be sufficient to finance our operating activities for at least the next 12 months.

However, as a result of forecasted increased working capital requirements related to our newly signed $781 million in California Owned Utility Contracts, we may seek to modify certain terms under our bank borrowing facilities to ensure an adequate margin for certain covenant compliance obligations.

As of January 1, 2021, we had $28.4 million of cash and cash equivalents.

Our cash increased by $22.9 million since December 27, 2019.

We generated cash flow from operations of $47.0 million during fiscal year 2020, partially offset by net cash used for capital expenditures.

Our primary source of liquidity is cash generated from operations.

In addition, as of January 1, 2021, we had $85.0 million outstanding in Term A Loan, a $50.0 million Revolving Credit Facility with no amounts outstanding and $2.7 million in letters of credit issued, and a $50.0 million Delayed Draw Term Loan with $27.0 million outstanding, each scheduled to mature on June 26, 2024.

However, as described in Part II, Item 8, Note 5, “Debt Obligations”, of the Notes to Consolidated Financial Statements included in this quarterly report on Form 10-Q, we are not able to access additional borrowings under the Delayed Draw Term Loan during our Covenant Relief Period.

Sources of Cash

We believe that our cash and cash equivalents on hand, 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 the $781 million in California Investor Owned Utility Contracts and other organic growth, we amended our credit agreement to, among other things, ensure an adequate margin for certain covenant compliance obligations.

As of December 31, 2021, we had $11.2 million of cash and cash equivalents.

In addition, as of December 31, 2021, we had a $100 million Term A Loan with $75.0 million outstanding, a $50.0 million Revolving Credit Facility with no borrowed amounts outstanding and $4.1 million in letters of credit issued.

We also had a $50.0 million Delayed Draw Term Loan with $20.0 million available for draw subject to the satisfaction of certain covenants and $24.0 million outstanding.

Each of our Term A Loan, Revolving Credit Facility, and Delayed Draw Term Loan mature on June 26, 2024.

source of liquidity for the next 12 months and beyond is cash generated from operations and borrowings under our Revolving Credit Facility.

As of December 31, 2021, borrowings under our Credit Facilities, exclusive of the effects of upfront fees, undrawn fees and issuance cost amortization, bore interest at 2.37%.

See Part II, Item 8, Note 5, Debt Obligations , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, 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 provided by operating activities were $47.0 million for fiscal year 2020, as compared to $11.6 million and $7.6 million for fiscal years 2019 and 2018, respectively.

Cash flows provided by operating activities were $9.8 million, $47.0 million, and $11.6 million for fiscal years 2021, 2020, and 2019, respectively.

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.

Changes in cash flows provided by operating activities for fiscal year 2020 resulted primarily due to improvements in cash collections, reductions in working capital requirements as a result of the reduction of revenues from the suspension of our small business energy programs, and incremental operating cash flow from our acquisitions of E3, Inc.

Cash flows provided by operating activities for fiscal year 2021 resulted primarily from the changing mix of revenues, partially offset by increased demand for working capital related to the resumption of our utility programs that were suspended in 2020 and start-up costs associated with certain new contract awards.

Cash flows provided by operating activities for fiscal year 2020 resulted primarily as a result of improvements in cash collections, reductions in working capital requirements as a result of the reduction of revenues from the suspension of our small business energy programs, and incremental operating cash flow from our acquisitions of E3, Inc.

and Onsite Energy.

Cash flows provided by operating activities for fiscal year 2019 resulted primarily as a result of our fiscal year 2019 acquisitions, combined with a decrease in accounts receivable and an increase in accrued liabilities, partially offset by an increase in contract assets.

provided by operating activities for fiscal year 2018 resulted primarily from our net income, as adjusted for non-cash activity such as depreciation and amortization and stock-based compensation and collections of accounts receivable, partially offset by increases in contract assets combined with decreases in accrued liabilities and accounts payable.

Cash Flows used in Investing Activities

Cash Flows from Investing Activities

Cash flows used in investing activities were $8.5 million for fiscal year 2021, as compared to $5.0 million and $78.3 million for fiscal years 2020 and 2019, respectively.

Cash flows used in investing activities for fiscal year 2021 were primarily due to cash paid for software development cost and the purchase of equipment.

Cash flows used in investing activities for fiscal year 2020 were primarily due to cash paid for the purchase of equipment, the enhancement of internal operating software, and leasehold improvements.

Cash flows used in investing activities for fiscal year 2019 were primarily due to cash paid for the acquisitions of The Weidt Group, Onsite Energy, and E3, Inc.

Cash flows used in investing activities for fiscal year 2018 were primarily due to cash paid for the acquisition of Lime Energy.

Cash Flows used in Financing Activities

Cash flows used in financing activities were $19.0 million for fiscal year 2020, as compared to cash flows provided by financing activities of $56.9 million and $119.7 million for fiscal years 2019 and 2018, respectively.

Cash Flows from Financing Activities

Cash flows used in financing activities were $18.5 million and $19.0 million for fiscal year 2021 and 2020, as compared to cash flows provided by financing activities of $56.9 million for fiscal 2019.

Cash flows used in financing activities for fiscal year 2021 were primarily attributable to repayments of $13.0 million under our term loan facility and revolving line of credit, increases of $6.6 million for contingent consideration related to prior acquisitions, payments of taxes on stock grants of $3.1 million, payments on notes payable of $1.9 million, partially offset by $2.7 million in proceeds from sales of common stock under our employee stock purchase plan and $1.9 million in proceeds from stock option exercise.

Cash flows used in financing activities for fiscal year 2020 were primarily attributable to repayments of $42.0 million under our term loan facility and revolving line of credit, a payment of $2.9 million in employee payroll taxes related to the vesting of performance-based restricted stock units, and payments of $1.4 million for contingent consideration related to prior acquisitions, partially offset by $24.0 million of borrowings under our revolving line of credit.

Cash flows provided by financing activities for fiscal year 2019 were primarily attributable to borrowings under our credit facilities related to our acquisitions of The Weidt Group, Onsite Energy, and E3, Inc.

Cash flows provided by financing activities for fiscal year 2018 were primarily attributable to borrowings under our Delayed Draw Term Loan Facility and the net proceeds from our equity offering, each related to our acquisition of Lime Energy.

Off-Balance Sheet Arrangements

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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 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.

Short and Long-term Liquidity

Short and Long-term Uses of Cash

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 of January 1, 2021:

The following table sets forth our known contractual obligations as of December 31, 2021:

Contractual Obligations

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Total contractual cash obligations

(1) Long-term debt includes $85.0 million outstanding on our Term A Loan, no amounts outstanding on our Revolving Credit Facility, and $27.0 million outstanding on our Delayed Draw Term Loan as of January 1, 2021.

(1) Long-term debt includes $75.0 million outstanding on our Term A Loan, no amounts outstanding on our Revolving Credit Facility, and $24.0 million outstanding on our Delayed Draw Term Loan as of December 31, 2021.

We have assumed no future borrowings or repayments (other than at maturity) for purposes of this table.

(2) Borrowings under our Delayed Draw Term Loan bear interest at a variable rate.

Future interest payments on our Delayed Draw Term Loan Facility are estimated using floating rates in effect as of January 1, 2021.

Future interest payments on our Delayed Draw Term Loan Facility are estimated using floating rates in effect as of December 31, 2021.

(3) Long-term debt and interest payments on debt outstanding do not include $20 million drawn on March 8, 2022 from our Delayed Draw Term Loan Facility in connection with the fifth amendment to the Amended and Restated Credit Agreement.

For more information, see Part II, Item 8, Note 15, “ Subsequent Events ”, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

We are obligated to pay earn-out payments in connection with our 2019 and 2017 acquisitions of E3, Inc.

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closing date, and (ii) $12.0 million in cash based on future work obtained from the business of Integral Analytics during the four years after the closing of the acquisition, payable in installments, if certain financial targets are met during the four years.

As of January 1, 2021, we had contingent consideration payable of $15.3 million related to these acquisitions.

As of December 31, 2021, we had contingent consideration payable of $11.0 million related to these acquisitions.

For fiscal 2021, our statement of operations includes $2.3 million of accretion (excluding fair value adjustments) related to the contingent consideration.

Outstanding Indebtedness

See part II, Item 8, Note 5, “ Debt Obligations ”, of the Notes to consolidated financial statements included in this Annual Report on Form 10-K 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.

Subsequent to December 31, 2021, we borrowed and repaid $5.0 million under our Revolving Credit Facility.

On March 8, 2022, after giving effect to the Fifth Amendment, we had $50.0 million in borrowing capacity available under our credit facilities.

See part II, Item 8, Note 5, “ Debt Obligations ”, and Note 15, “ Subsequent Events ”, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K 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.

Insurance Premiums

We have also financed, from time to time, insurance premiums by entering into unsecured notes payable with insurance companies.

See part II, Item 8, Note 5, “ Debt Obligations ”, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding our financing arrangements related to our insurance premiums including principal repayment terms, interest rates, and other related key terms.

Interest Rate Swap

We have entered into an interest rate swap agreement to moderate our exposure to fluctuations in interest rates underlying our variable rate debt.

For more information, see Part II, Item 7A, “ Quantitative and Qualitative Disclosures About Market Risk ”, and Note 4, “ Derivatives ”, to the Notes of Consolidated Financial Statements included in this Annual Report on Form 10-K.

See Part II, Item 7A, “ Quantitative and Qualitative Disclosures About Market Risk ”, and Note 4, “ Derivative Financial Instruments ”, to the Notes of Consolidated Financial Statements included in this Annual Report on Form 10-K for information regarding our interest rate swap.

Impact of Inflation

Due to the average duration of our projects and our ability to negotiate prices as contracts end and new contracts begin, we believe our operations have not been, and, in the foreseeable future, are not expected to be, materially impacted by inflation.

Components of Revenue and Expense

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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 of January 1, 2021, approximately 26% of our contracts are time-and-materials contracts and approximately 46% of our contracts are unit-based contracts, compared to approximately 17% for time-and-materials contracts and approximately 65% for unit-based contracts as of December 27, 2019.

The shifts in percentages are attributable to the impact resulting from the Covid-19 pandemic and efforts to limit its spread that started in March 2020 which resulted in decreases in our direct install programs for small businesses.

As of December 31, 2021, approximately 24% of our contracts are time-and-materials contracts and approximately 54% of our contracts are unit-based contracts, compared to approximately 26% for time-and-materials contracts and approximately 46% for unit-based contracts as of January 1, 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.

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Revenue on time-and-materials and unit-based contracts is recognized as the work is performed in accordance with the specific rates and terms of the contract.

We recognize revenues for time-and-materials contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also include in revenue all reimbursable costs incurred during a reporting period.

We recognize revenues for time-and-materials contracts based upon the actual hours incurred during a reporting period at contractually agreed upon rates per hour and also includes in revenue all reimbursable costs incurred during a reporting period.

Certain of our time-and-materials contracts are subject to maximum contract values and, accordingly, when revenue is expected to exceed the maximum contract value, these contracts are generally recognized under the percentage-of-completion method, consistent with fixed price contracts.

For unit-based contracts, we recognize the contract price of units of a basic production product as revenue when the production product is delivered during a period.

Revenue recognition for software licenses issued by the Energy segment is generally recognized utilizing the unit-based revenue recognition method at a point in time, upon acceptance of the software by the customer and in recognition of the fulfillment of the performance obligation.

Certain additional performance obligations beyond the base software license may be separated from the gross license fee and recognized on a straight-line basis over time.

Revenue for amounts that have been billed but not earned is deferred and such deferred revenue is referred to as contract liabilities in the accompanying condensed consolidated balance sheets.

Revenue for amounts that have been billed but not earned is deferred, and such deferred revenue is referred to as contract liabilities in the accompanying consolidated balance sheets.

We also derive revenue from software licenses and professional services and maintenance fees.

In accordance with ASC 606, we perform an assessment of each contract to identify the performance obligations, determine the overall transaction price for the contract, allocate the transaction price to the performance obligations, and recognize the revenue when the performance obligations are satisfied.

We utilize the residual approach by which it estimates the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.

The software license revenue is typically recognized at a point in time when control is transferred to the client, which is defined as the point in time when the client can use and benefit from the license.

The software license is delivered before related services are provided and is functional without services, updates, or technical support.

Related professional services include training and support services in which the standalone selling price is determined based on an input measure of hours incurred to total estimated hours and is recognized over time, usually which is the life of the contract.

To determine the proper revenue recognition method for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single contract and whether the combined contract should be accounted for as one performance obligation.

With respect to our contracts, it is rare that multiple contracts should be combined into a single performance obligation.

This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

This evaluation requires significant judgment and the decision to combine a group of

contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period.

Contracts are considered to have a single performance obligation if the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts, which is mainly because we provide a significant service of integrating a complex set of tasks and components into a single project or capability.

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Management determines allowances for doubtful accounts through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience.

Historical credit losses have been minimal with governmental entities and large public utilities, but

disputes may arise related to these receivable amounts.

Historical credit losses have been minimal with governmental entities and large public utilities, but disputes may arise related to these receivable amounts.

Accounts receivable are written off when deemed uncollectible.

Recoveries of accounts receivable previously written off are recorded when received.

In addition to the above, we derive revenue from software licenses and professional services and maintenance fees.

We utilize the residual approach by which we estimate the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract.

The software license is delivered before related services are provided and is functional without services, updates, or technical support.

For further information on the types of contracts under which we perform our services, see Part II, Item 8, Note 1, Organization and Operations of the Company, of the Notes to consolidated financial statements included in this Annual Report on Form 10-K.

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The new standard does not change how a goodwill impairment is identified.

We will continue to perform our quantitative and qualitative goodwill impairment test by comparing the fair value of each reporting unit to its carrying amount, but if we are required to recognize a goodwill impairment charge, under the new standard the amount of the charge will be calculated by subtracting the reporting unit’s fair value from its carrying amount.

We will continue to

perform our quantitative and qualitative goodwill impairment test by comparing the fair value of each reporting unit to its carrying amount, but if we are required to recognize a goodwill impairment charge, under the new standard the amount of the charge will be calculated by subtracting the reporting unit’s fair value from its carrying amount.

Under the prior standard, if we were required to recognize a goodwill impairment charge, Step 2 required us to calculate the implied value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination and the amount of the charge was calculated by subtracting the reporting unit’s implied fair value of goodwill from its actual goodwill balance.

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In the event that the current implied fair value of the goodwill is less than the carrying value, an impairment charge is recognized.

Inherent in such fair value determinations are significant judgments and estimates, including but not limited to assumptions about our future revenue, profitability and cash flows, our operational plans and our interpretation of

current economic indicators and market valuations.

To the extent these assumptions are incorrect or economic conditions that would impact the future operations of our reporting units change, any goodwill may be deemed to be impaired, and an impairment charge could have in a material impact on our financial position or results of operation.

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We recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

For further discussion of our acquisitions, see Part II, Item 8, Note 13, “ Business Combinations ” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

During fiscal years 2021 and 2020, we did not have any acquisitions.

During fiscal year 2019, we completed three acquisitions;

On October 28, 2019, we acquired all of the capital stock of E3, Inc.

On July 2, 2019, we acquired substantially all of the assets and liabilities of Onsite Energy.

On March 8, 2019, we acquired substantially all of the assets of the energy practice division of The Weidt Group.

Income taxes are accounted for under the asset and liability method.

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Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, we would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income.

For acquired business entities, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period and they relate to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement period

adjustment and we record the offset to goodwill.

We record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis