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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 2, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to          

Commission file number 001-33076

WILLDAN GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

14-1951112

(State or Other Jurisdiction of
Incorporation or Organization)

(IRS Employer Identification No.)

2401 East Katella Avenue, Suite 300
Anaheim, California

92806

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (800424-9144

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

WLDN

The Nasdaq Stock Market LLC

(Nasdaq Global Market)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer

Non-accelerated filer 

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of November 4, 2020, there were 12,073,949 shares of common stock, $0.01 par value per share, of Willdan Group, Inc. issued and outstanding.

Table of Contents

WILLDAN GROUP, INC.

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

Page

PART I. FINANCIAL INFORMATION

3

Item 1. Financial Statements (unaudited)

3

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 3. Quantitative and Qualitative Disclosures About Market Risk

56

Item 4. Controls and Procedures

58

PART II. OTHER INFORMATION

59

Item 1. Legal Proceedings

59

Item 1A. Risk Factors

59

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

59

Item 3. Defaults upon Senior Securities

60

Item 4. Mine Safety Disclosures

60

Item 5. Other Information

60

Item 6. Exhibits

61

i

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q (this “10-Q”) contains statements that constitute forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995, as amended. These statements concern our business, operations and financial performance and condition as well as our plans, objectives and expectations for our business operations and financial performance and condition, which are subject to risks and uncertainties. All statements other than statements of historical fact included in this 10-Q are forward-looking statements. These statements may include words such as “aim,” “anticipate,” “assume,” “believe,” “can have,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “likely,” “may,” “objective,” “plan,” “potential,” “positioned,” “predict,” “should,” “target,” “will,” “would” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events or trends. For example, all statements we make relating to our plans and objectives for future operations, growth or initiatives and strategies are forward-looking statements.

These forward-looking statements are based on current expectations, estimates, forecasts and projections about our business and the industry in which we operate and our management’s beliefs and assumptions. We derive many of our forward-looking statements from our own operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that predicting the impact of known factors is very difficult, and we cannot anticipate all factors that could affect our actual results.

All of our forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from our expectations. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to:

the extent to which the coronavirus (“Covid-19”) pandemic and measures taken to contain its spread ultimately impact our business, results of operation and financial condition, including the speed with which our various direct install programs for small businesses are able to resume normal operations following government mandated shutdowns and phased re-openings;
our ability to adequately complete projects in a timely manner;
our ability to compete successfully in the highly competitive energy efficiency services market, which represented 84% of our consolidated revenue in fiscal year 2019;
our reliance on work from our top ten clients, which accounted for 51% of our consolidated contract revenue for fiscal year 2019;
changes in state, local and regional economies and government budgets;
our ability to win new contracts, to renew existing contracts and to compete effectively for contracts awarded through bidding processes;
our ability to successfully integrate our acquisitions and execute on our growth strategy;
our ability to make principal and interest payments on our outstanding debt as they come due and to comply with the financial covenants contained in our debt agreements; and
our ability to obtain financing and to refinance our outstanding debt as it matures.

The factors noted above and risks included in our other SEC filings may be increased or intensified as a result of the Covid-19 pandemic, including the resurgence of the Covid-19 virus in the United States and any future resurgences. The extent to which the Covid-19 pandemic ultimately impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted. See the risk factor in Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended April 3, 2020,

1

Table of Contents

The Covid-19 pandemic and health and safety measures intended to reduce its spread have adversely affected, and may continue to adversely affect, our business, results of operations and financial condition.” for more information. The above is not a complete list of factors or events that could cause actual results to differ from our expectations, and we cannot predict all of them. All written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements disclosed elsewhere in this Quarterly Report on Form 10-Q, under Part I, Item 1A. “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 27, 2019 and under Part II, Item 1A. “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2020, as such disclosures may be amended, supplemented or superseded from time to time by other reports we file with the Securities and Exchange Commission, including subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and public communications. You should evaluate all forward-looking statements made in this Quarterly Report on Form 10-Q and otherwise in the context of these risks and uncertainties.

Potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on any forward-looking statements we make. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are not guarantees of future performance or developments and involve known and unknown risks, uncertainties and other factors that are in many cases beyond our control. Except as required by law, we undertake no obligation to update or revise any forward-looking statements publicly, whether as a result of new information, future developments or otherwise.

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)

(Unaudited)

    

October 2,

    

December 27,

2020

2019

Assets

Current assets:

Cash and cash equivalents

$

11,238

$

5,452

Accounts receivable, net of allowance for doubtful accounts of $1,854 and $1,147 at October 2, 2020 and December 27, 2019, respectively

 

51,422

 

57,504

Contract assets

 

64,333

 

101,418

Other receivables

 

5,794

 

4,845

Prepaid expenses and other current assets

 

4,696

 

6,254

Total current assets

 

137,483

 

175,473

Equipment and leasehold improvements, net

 

12,614

 

12,051

Goodwill

130,625

127,647

Right-of-use assets

21,468

22,297

Other intangible assets, net

67,393

76,837

Other assets

 

15,582

 

16,296

Deferred income taxes, net

13,291

9,312

Total assets

$

398,456

$

439,913

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

33,930

$

34,000

Accrued liabilities

 

37,630

 

67,615

Contingent consideration payable

6,684

5,155

Contract liabilities

 

7,157

 

5,563

Notes payable

 

13,861

 

13,720

Finance lease obligations

282

375

Lease liability

6,011

5,550

Total current liabilities

 

105,555

 

131,978

Contingent consideration payable

4,668

4,891

Notes payable

101,382

116,631

Finance lease obligations, less current portion

 

243

 

191

Lease liability, less current portion

16,869

18,411

Other noncurrent liabilities

363

533

Total liabilities

 

229,080

 

272,635

Commitments and contingencies

Stockholders’ equity:

Preferred stock, $0.01 par value, 10,000 shares authorized, no shares issued and outstanding

 

 

Common stock, $0.01 par value, 40,000 shares authorized; 12,074 and 11,497 shares issued and outstanding at October 2, 2020 and December 27, 2019, respectively

 

121

 

115

Additional paid-in capital

 

145,344

 

132,547

Accumulated other comprehensive loss

(602)

(396)

Retained earnings

 

24,513

 

35,012

Total stockholders’ equity

 

169,376

 

167,278

Total liabilities and stockholders’ equity

$

398,456

$

439,913

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(Unaudited)

Three Months Ended

Nine Months Ended

October 2,

September 27,

October 2,

September 27,

    

2020

    

2019

    

2020

    

2019

Contract revenue

$

104,508

$

117,494

$

294,083

$

313,683

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

Salaries and wages

 

16,332

 

16,145

 

48,897

 

46,679

Subcontractor services and other direct costs

 

53,520

 

66,677

 

150,295

 

175,248

Total direct costs of contract revenue

 

69,852

 

82,822

 

199,192

 

221,927

General and administrative expenses:

Salaries and wages, payroll taxes and employee benefits

 

17,530

 

15,761

 

53,273

 

46,167

Facilities and facility related

 

2,661

 

2,250

 

7,997

 

6,069

Stock-based compensation

 

3,978

 

4,107

 

12,803

 

8,148

Depreciation and amortization

 

4,339

 

5,788

 

14,324

 

11,308

Other

 

4,547

 

5,471

 

17,003

 

16,230

Total general and administrative expenses

 

33,055

 

33,377

 

105,400

 

87,922

Income (Loss) from operations

 

1,601

 

1,295

 

(10,509)

 

3,834

Other income (expense):

Interest expense, net

 

(1,213)

 

(1,257)

 

(3,983)

 

(3,599)

Other, net

 

666

 

2

 

712

 

31

Total other income (expense), net

 

(547)

 

(1,255)

 

(3,271)

 

(3,568)

Income (Loss) before income taxes

 

1,054

 

40

 

(13,780)

 

266

Income tax benefit

 

(1,586)

 

(376)

 

(3,281)

 

(1,373)

Net income (loss)

2,640

416

(10,499)

1,639

Other comprehensive income (loss):

Unrealized gain (loss) on derivative contracts, net of tax

160

(42)

(206)

(480)

Comprehensive income (loss)

$

2,800

$

374

$

(10,705)

$

1,159

Earnings (Loss) per share:

Basic

$

0.22

$

0.04

$

(0.90)

$

0.15

Diluted

$

0.21

$

0.04

$

(0.90)

$

0.14

Weighted-average shares outstanding:

Basic

 

11,992

 

11,217

 

11,723

 

11,097

Diluted

 

12,417

 

11,789

 

11,723

 

11,714

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

Accumulated

Additional

Other

Common Stock

Paid-in

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Loss

    

Earnings

    

Total

Balance at December 27, 2019

 

11,497

$

115

$

132,547

$

(396)

$

35,012

$

167,278

Shares of common stock issued in connection with employee stock purchase plan

 

40

1,073

 

1,073

Shares of common stock issued in connection with incentive stock plan

19

260

260

Shares used to pay taxes on stock grants

 

(92)

(1)

(2,866)

 

(2,867)

Issuance of restricted stock award and units

176

2

(1)

1

Stock-based compensation expense

 

4,595

 

4,595

Net loss

 

(8,154)

 

(8,154)

Net unrealized loss on derivative contracts

(449)

 

(449)

Balance at April 3, 2020

 

11,640

$

116

$

135,608

$

(845)

$

26,858

$

161,737

Shares of common stock issued in connection with incentive stock plan

63

1

330

331

Issuance of restricted stock award and units

309

3

(3)

Stock-based compensation expense

 

4,230

 

4,230

Net loss

 

(4,985)

 

(4,985)

Net unrealized gain on derivative contracts

83

 

83

Balance at July 3, 2020

 

12,012

$

120

$

140,165

$

(762)

$

21,873

$

161,396

Shares of common stock issued in connection with employee stock purchase plan

 

54

1

1,151

 

1,151

Shares of common stock issued in connection with incentive stock plan

9

0

61

62

Shares used to pay taxes on stock grants

 

(0)

(0)

(11)

 

(11)

Stock-based compensation expense

 

3,978

 

3,978

Net income

 

2,640

 

2,640

Net unrealized gain on derivative contracts

160

 

160

Balance at October 2, 2020

 

12,074

$

121

$

145,344

$

(602)

$

24,513

$

169,376

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

Accumulated

Additional

other

Common Stock

Paid-in

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Loss

    

Earnings

    

Total

Balance at December 28, 2018

 

10,968

$

110

$

114,008

$

$

30,171

$

144,289

Shares of common stock issued in connection with employee stock purchase plan

 

28

 

 

749

 

 

 

749

Shares of common stock issued in connection with incentive stock plan

21

291

291

Shares used to pay taxes on stock grants

 

(66)

 

(1)

 

(2,515)

 

 

 

(2,516)

Issuance of restricted stock award and units

175

2

(2)

Stock-based compensation expense

 

 

 

1,817

 

 

 

1,817

Net loss

 

 

 

 

 

(417)

 

(417)

Net unrealized loss on derivative contracts

(219)

(219)

Balance at March 29, 2019

 

11,126

$

111

$

114,348

$

(219)

$

29,754

$

143,994

Shares of common stock issued in connection with incentive stock plan

77

1

231

232

Unregistered sales of equity securities and use of proceeds

 

(9)

 

 

(346)

 

 

 

(346)

Stock-based compensation expense

 

 

 

2,224

 

 

 

2,224

Net income

 

 

 

 

 

1,640

 

1,640

Net unrealized loss on derivative contracts

(219)

(219)

Balance at June 28, 2019

 

11,194

$

112

$

116,457

$

(438)

$

31,394

$

147,525

Shares of common stock issued in connection with employee stock purchase plan

 

34

991

 

991

Shares of common stock issued in connection with incentive stock plan

14

 

 

334

 

 

334

Issuance of restricted stock award and units

22

 

 

 

 

Unregistered sales of stock

53

 

1

 

1,699

 

 

 

1,700

Stock-based compensation expense

 

 

 

4,107

 

 

 

4,107

Net income

 

 

 

 

 

416

 

416

Net unrealized loss on derivative contracts

(42)

(42)

Balance at September 27, 2019

 

11,317

$

113

$

123,588

$

(480)

$

31,810

$

155,031

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Nine Months Ended

October 2,

September 27,

    

2020

    

2019

Cash flows from operating activities:

Net income (loss)

$

(10,499)

$

1,639

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization

 

14,324

 

11,624

Deferred income taxes, net

 

(4,389)

 

(285)

(Gain) loss on sale/disposal of equipment

 

(15)

 

(5)

Provision for doubtful accounts

 

1,066

 

256

Stock-based compensation

 

12,803

 

8,148

Accretion and fair value adjustments of contingent consideration

2,059

(540)

Changes in operating assets and liabilities, net of effects from business acquisitions:

Accounts receivable

 

5,016

 

13,491

Contract assets

 

33,591

 

(20,221)

Other receivables

 

(581)

 

(3,004)

Prepaid expenses and other current assets

 

1,387

 

1,060

Other assets

 

366

 

(336)

Accounts payable

 

(70)

 

(5,836)

Accrued liabilities

 

(30,034)

 

1,164

Contract liabilities

 

1,594

 

705

Right-of-use assets

 

259

 

429

Net cash provided by operating activities

 

26,877

 

8,289

Cash flows from investing activities:

Purchase of equipment and leasehold improvements

 

(3,976)

 

(5,636)

Proceeds from sale of equipment

19

45

Cash paid for acquisitions, net of cash acquired

(46,539)

Net cash used in investing activities

 

(3,957)

 

(52,130)

Cash flows from financing activities:

Change in excess of outstanding checks over bank balance

 

 

(1,514)

Payments on contingent consideration

 

(1,433)

 

(1,381)

Payments on notes payable

(187)

(1,371)

Payments on debt issuance costs

(327)

(749)

Borrowings under term loan facility and line of credit

24,000

105,000

Repayments under term loan facility and line of credit

(38,750)

(72,500)

Principal payments on finance leases

 

(435)

 

(338)

Proceeds from stock option exercise

 

652

 

858

Proceeds from sales of common stock under employee stock purchase plan

 

2,224

 

1,740

Shares used to pay taxes on stock grants

(2,879)

(2,862)

Restricted Stock Award and Units

1

Proceeds from unregistered sales of equity

1,699

Net cash (used in) provided by financing activities

 

(17,134)

 

28,582

Net increase (decrease) in cash and cash equivalents

 

5,786

 

(15,259)

Cash and cash equivalents at beginning of period

 

5,452

 

15,259

Cash and cash equivalents at end of period

$

11,238

$

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$

4,256

$

3,314

Income taxes

 

284

 

2,247

Supplemental disclosures of noncash investing and financing activities:

Loss on cash flow hedge valuations, net of tax

(206)

(480)

Equipment acquired under finance leases

394

See accompanying notes to Condensed Consolidated Financial Statements.

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WILLDAN GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND OPERATIONS OF THE COMPANY

Willdan Group, Inc. (“Willdan” or the “Company”) is 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, the Company helps 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, the Company designs and delivers trusted, comprehensive, innovative, and proven solutions to improve efficiency, resiliency, and sustainability in energy and infrastructure.

The Company’s broad portfolio of services operates within two financial reporting segments: (1) Energy and (2) Engineering and Consulting. The interfaces and synergies between these segments are important elements of the Company’s strategy to design and deliver trusted, comprehensive, innovative, and proven solutions for its customers.

The accounting policies followed by the Company are set forth in Part II, Item 8, Note 1, Organization and Operations of the Company, of the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2019. In the opinion of management, all adjustments necessary to fairly state the Condensed Consolidated Financial Statements have been made. All such adjustments are of a normal, recurring nature. Certain information and footnote disclosures normally included in the Consolidated Financial Statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These Condensed Consolidated Financial Statements and related notes thereto should be read in conjunction with the Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2019. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

Fiscal Years

The Company operates and reports its annual financial results based on 52 or 53-week periods ending on the Friday closest to December 31. The Company operates and reports its quarterly financial results based on the 13-week period ending on the Friday closest to March 31, June 30 and September 30 and the 13 or 14-week period ending on the Friday closest to March 31, as applicable. Fiscal year 2020, which ends on January 1, 2021, will be comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each. Fiscal year 2019, which ended on December 27, 2019 was comprised of 52 weeks, with all quarters presented consisting of 13 weeks. All references to years in the notes to consolidated financial statements represent fiscal years.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Management’s Plans in Response to Covid-19

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,

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

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, the Company cannot reasonably estimate the ultimate impacts of Covid-19 and efforts to limit its spread on its business, financial condition, results of operations or cash flows for the foreseeable future or whether the Company’s assumptions used to estimate its future liquidity requirements will be correct.

Health and Safety

In response to the Covid-19 pandemic, the Company has taken and will continue to take temporary precautionary measures intended to help minimize the risk of Covid-19 to its employees, including requiring the majority of its employees to work remotely, suspending non-essential travel and restricting in-person work-related meetings. The Company expects to continue to implement these measures until it has determined that the Covid-19 pandemic is adequately contained for purposes of its business, and may take further actions as government authorities require or recommend or as it determines to be in the best interests of its 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 the Company’s business during the three and nine months ended October 2, 2020. In California and New York, the states in which the Company has historically derived a majority of its revenue, mandatory shutdown orders were issued in March 2020. In New York, phased re-openings began in June 2020 and the Company’s business in New York has been improving over the last fiscal quarter. All of the Company’s New York utility programs have restarted. In California, phased re-openings began in May 2020, were curtailed in July 2020 as a result of resurgences of Covid-19 cases, and phased re-openings subsequently resumed in September 2020. As a result, the most significant pandemic related impacts to the Company’s business are now occurring in California to its direct install business.

In the Energy segment, the Company has experienced and expects to continue to experience a negative impact on its 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 2019, the Company derived approximately 40% of its gross revenue from its direct install programs that serve small businesses, and a significant portion of its direct install work on these programs continues to recover as phased re-openings progress. The Company’s other programs, which generated approximately 60% of its 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 addition, some of the Company’s programs in the Energy segment, particularly those related to improvements in public schools, were accelerated during the second quarter to take advantage of empty facilities.

In the Engineering and Consulting segment, the Company’s revenues have been minimally affected by Covid-19. 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 November 5, 2020, though some of the Company’s work has been suspended, none of its contracts have been cancelled and proposal activities for new programs have continued to advance.

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

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

Executing a reduction in workforce, primarily through an unpaid furlough, impacting approximately 300 members of staff. The largest reductions were a result of government-mandated work restrictions impacting the Company’s direct install programs in California and New York. During the Company’s 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 the Company’s 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 the Company’s Board of Directors, which was lifted during the Company’s third fiscal quarter;

Implementing a temporary hiring freeze; and

Amending the Company’s credit facility for increased flexibility.

The Company believes that its financial position is sufficiently flexible to enable it to maneuver in the current economic environment. Throughout the fiscal year 2020, the Company enhanced liquidity by minimizing working capital and significantly improving cash collections. In addition, in May 2020, the Company amended its credit facility to modify, among other things, certain covenants to increase its financial flexibility. Combined with availability under its credit facility, the Company believes its enhanced liquidity position provides a cushion against liquidity disruptions. The Company may borrow additional amounts under its existing credit facility during its fourth fiscal quarter of 2020 to support an expectation of recovery from Covid-19 operating levels and the accompanying need for working capital as a result of the easing of Covid-19 restrictions.

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

As of October 2, 2020, the Company did not have any impairment with respect to its 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 the Company establish an additional valuation allowance against all or some portion of its net deferred tax assets.

Impact on Clients and Subcontractors and Other Risks

The Company primarily works for utilities, municipalities and other public agencies. The Company expects many governmental and other public agencies will 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 the Company’s contracts with governmental or other public agencies were materially modified in the third fiscal quarter, these potential budget deficits could result in delayed funding for existing contracts with the Company, postponements of new contracts or price concessions. Further, most of the Company’s clients are not committed to purchase any minimum amount of services, as the Company agreements with them are based on a “purchase order” model. As a result, they may discontinue utilizing some or all of the Company’s services with little or no notice.

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)

 In addition, the Company relies on subcontractors and material suppliers to complete a substantial portion of its work, especially in its Energy segment. If the Company’s 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, the Company’s subcontractors and material suppliers may not be able to fulfill their contractual obligations satisfactorily and the Company may not have the ability to select its subcontractors and material suppliers of choice for new contracts. If the Company’s subcontractors and material suppliers are not able to fulfill their contractual obligations, it could result in a significant increase in costs for the Company to complete the projects or cause significant delays to the realization of revenues under those projects. The ultimate impact of Covid-19 on the Company’s financial condition and results of operations will depend on all of the factors noted above, including other factors that the Company 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 II, Item 1A. “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2020. While Covid-19 has had, and the Company expects it to continue to have, an adverse effect on its business, financial condition and results of operations, it is unable to predict the extent of these impacts at this time.

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WILLDAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)