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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 1, 2021

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 3, 2021, there were 12,791,789 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

36

Item 3. Quantitative and Qualitative Disclosures About Market Risk

50

Item 4. Controls and Procedures

52

PART II. OTHER INFORMATION

53

Item 1. Legal Proceedings

53

Item 1A. Risk Factors

54

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

54

Item 3. Defaults upon Senior Securities

54

Item 4. Mine Safety Disclosures

54

Item 5. Other Information

54

Item 6. Exhibits

55

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 83% of our consolidated revenue in fiscal year 2020;
our reliance on work from our top ten clients, which accounted for 48% of our consolidated contract revenue for fiscal year 2020;
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;
our ability to obtain financing and to refinance our outstanding debt as it matures; and
our ability to attract and retain managerial, technical, and administrative talent.

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

1

Table of Contents

this Quarterly Report on Form 10-Q, and 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 January 1, 2021, 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 1,

    

January 1,

2021

2021

Assets

Current assets:

Cash and cash equivalents

$

4,805

$

28,405

Accounts receivable, net of allowance for doubtful accounts of $1,723 and $2,127 at October 1, 2021 and January 1, 2021, respectively

 

62,208

 

60,403

Contract assets

 

65,744

 

62,426

Other receivables

 

6,029

 

6,405

Prepaid expenses and other current assets

 

3,736

 

5,564

Total current assets

 

142,522

 

163,203

Equipment and leasehold improvements, net

 

14,360

 

12,506

Goodwill

130,124

130,124

Right-of-use assets

16,096

20,130

Other intangible assets, net

55,599

64,256

Other assets

 

10,550

 

5,993

Deferred income taxes, net

17,655

14,111

Total assets

$

386,906

$

410,323

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

23,585

$

41,372

Accrued liabilities

 

47,185

 

41,754

Contingent consideration payable

8,846

12,321

Contract liabilities

 

8,450

 

7,434

Notes payable

 

13,336

 

14,996

Finance lease obligations

372

248

Lease liability

5,472

5,844

Total current liabilities

 

107,246

 

123,969

Contingent consideration payable

719

2,999

Notes payable

88,746

98,178

Finance lease obligations, less current portion

 

659

 

236

Lease liability, less current portion

11,842

15,649

Other noncurrent liabilities

80

128

Total liabilities

 

209,292

 

241,159

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; 12,789 and 12,160 shares issued and outstanding at October 1, 2021 and January 1, 2021, respectively

 

128

 

122

Additional paid-in capital

 

164,642

 

149,014

Accumulated other comprehensive loss

(145)

(488)

Retained earnings

 

12,989

 

20,516

Total stockholders’ equity

 

177,614

 

169,164

Total liabilities and stockholders’ equity

$

386,906

$

410,323

See accompanying notes to Condensed Consolidated Financial Statements.

3

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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 1,

October 2,

October 1,

October 2,

    

2021

    

2020

    

2021

    

2020

Contract revenue

$

98,297

$

104,508

$

261,537

$

294,083

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

Salaries and wages

 

16,346

 

16,332

 

48,532

 

48,897

Subcontractor services and other direct costs

 

43,824

 

53,520

 

111,860

 

150,295

Total direct costs of contract revenue

 

60,170

 

69,852

 

160,392

 

199,192

General and administrative expenses:

Salaries and wages, payroll taxes and employee benefits

 

19,374

 

17,530

 

57,530

 

53,273

Facilities and facility related

 

2,351

 

2,661

 

7,373

 

7,997

Stock-based compensation

 

4,210

 

3,978

 

14,349

 

12,803

Depreciation and amortization

 

4,267

 

4,339

 

12,678

 

14,324

Other

 

6,482

 

4,547

 

19,033

 

17,003

Total general and administrative expenses

 

36,684

 

33,055

 

110,963

 

105,400

Income (Loss) from operations

 

1,443

 

1,601

 

(9,818)

 

(10,509)

Other income (expense):

Interest expense, net

 

(937)

 

(1,213)

 

(3,100)

 

(3,983)

Other, net

 

98

 

666

 

34

 

712

Total other expense, net

 

(839)

 

(547)

 

(3,066)

 

(3,271)

Income (Loss) before income taxes

 

604

 

1,054

 

(12,884)

 

(13,780)

Income tax (benefit) expense

 

(236)

 

(1,586)

 

(5,357)

 

(3,281)

Net income (loss)

840

2,640

(7,527)

(10,499)

Other comprehensive income (loss):

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

111

160

343

(206)

Comprehensive income (loss)

$

951

$

2,800

$

(7,184)

$

(10,705)

Earnings (Loss) per share:

Basic

$

0.07

$

0.22

$

(0.61)

$

(0.90)

Diluted

$

0.06

$

0.21

$

(0.61)

$

(0.90)

Weighted-average shares outstanding:

Basic

 

12,606

 

11,992

 

12,391

 

11,723

Diluted

 

13,141

 

12,417

 

12,391

 

11,723

See accompanying notes to Condensed Consolidated Financial Statements.

4

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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 income (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

5

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WILLDAN GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – (Continued)

(in thousands)

(Unaudited)

Accumulated

Additional

Other

Common Stock

Paid-in

Comprehensive

Retained

    

Shares

    

Amount

    

Capital

    

Loss

    

Earnings

    

Total

Balance at January 1, 2021

 

12,160

$

122

$

149,014

$

(488)

$

20,516

$

169,164

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

 

66

1

1,384

 

1,385

Shares of common stock issued in connection with incentive stock plan

27

527

527

Shares used to pay taxes on stock grants

 

(12)

 

(12)

Issuance of restricted stock award and units

255

2

(3)

(1)

Unregistered sales of stock

 

Stock issued to acquire businesses

Stock-based compensation expense

 

4,206

 

4,206

Net income (loss)

 

(3,766)

 

(3,766)

Net unrealized gain on derivative contracts

128

 

128

Balance at April 2, 2021

 

12,508

$

125

$

155,116

$

(360)

$

16,750

$

171,631

Shares of common stock issued in connection with incentive stock plan

77

1

850

851

Shares used to pay taxes on stock grants

 

(79)

(1)

(3,104)

 

(3,105)

Issuance of restricted stock award and units

207

2

(2)

Stock-based compensation expense

 

5,933

 

5,933

Net income (loss)

 

(4,601)

 

(4,601)

Net unrealized gain on derivative contracts

104

 

104

Balance at July 2, 2021

 

12,713

$

127

$

158,793

$

(256)

$

12,149

$

170,813

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

 

40

1

1,270

 

1,271

Shares of common stock issued in connection with incentive stock plan

35

369

369

Issuance of restricted stock award and units

1

Stock-based compensation expense

 

4,210

 

4,210

Net income (loss)

 

840

 

840

Net unrealized gain on derivative contracts

111

 

111

Balance at October 1, 2021

 

12,789

$

128

$

164,642

$

(145)

$

12,989

$

177,614

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

    

2021

    

2020

Cash flows from operating activities:

Net income (loss)

$

(7,527)

$

(10,499)

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

Depreciation and amortization

 

12,678

 

14,324

Deferred income taxes, net

 

(3,544)

 

(4,389)

(Gain) loss on sale/disposal of equipment

 

(37)

 

(15)

Provision for doubtful accounts

 

87

 

1,066

Stock-based compensation

 

14,349

 

12,803

Accretion and fair value adjustments of contingent consideration

860

2,059

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

Accounts receivable

 

(1,892)

 

5,016

Contract assets

 

(3,318)

 

33,591

Other receivables

 

376

 

(581)

Prepaid expenses and other current assets

 

2,005

 

1,387

Other assets

 

(4,557)

 

366

Accounts payable

 

(17,787)

 

(70)

Accrued liabilities

 

5,726

 

(30,034)

Contract liabilities

 

1,016

 

1,594

Right-of-use assets

 

(145)

 

259

Net cash (used in) provided by operating activities

 

(1,710)

 

26,877

Cash flows from investing activities:

Purchase of equipment and leasehold improvements

 

(4,898)

 

(3,976)

Proceeds from sale of equipment

46

19

Net cash used in investing activities

 

(4,852)

 

(3,957)

Cash flows from financing activities:

Payments on contingent consideration

 

(6,615)

 

(1,433)

Payments on notes payable

(1,724)

(187)

Payments on debt issuance costs

(327)

Proceeds from notes payable

 

206

 

Borrowings under term loan facility and line of credit

24,000

Repayments under term loan facility and line of credit

(9,750)

(38,750)

Principal payments on finance leases

 

(440)

 

(435)

Proceeds from stock option exercise

 

1,747

 

652

Proceeds from sales of common stock under employee stock purchase plan

 

2,656

 

2,224

Cash used to pay taxes on stock grants

(3,117)

(2,879)

Restricted Stock Award and Units

(1)

1

Net cash used in financing activities

 

(17,038)

 

(17,134)

Net increase (decrease) in cash and cash equivalents

 

(23,600)

 

5,786

Cash and cash equivalents at beginning of period

 

28,405

 

5,452

Cash and cash equivalents at end of period

$

4,805

$

11,238

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$

2,701

$

4,256

Income taxes

 

(1,742)

 

284

Supplemental disclosures of noncash investing and financing activities:

(Gain) loss on cash flow hedge valuations, net of tax

343

(206)

Equipment acquired under finance leases

987

394

See accompanying notes to Condensed Consolidated Financial Statements.

7

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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 January 1, 2021. 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 January 1, 2021. 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 June 30, September 30, and December 31 and the 13 or 14-week period ending on the Friday closest to March 31, as applicable. Fiscal year 2021, which ends on December 31, 2021, will be comprised of 52 weeks, with all quarters consisting of 13 weeks each. Fiscal year 2020, which ended on January 1, 2021 was comprised of 53 weeks, with the first quarter consisting of 14 weeks and the remaining quarters consisting of 13 weeks each. 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 assets and 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.

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

Impact of Covid-19

The coronavirus (“Covid-19”) pandemic and efforts to limit its spread negatively impacted the Company’s operations during its fiscal year 2020 and continued to impact the Company, albeit to a lesser extent, through the nine months ended October 1, 2021. 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 all of the Company’s 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 the Company’s business occurred in California to its direct install business. During the last week of June 2021, the Company’s largest program for the Los Angeles Department of Water and Power (“LADWP”) resumed, which was the Company’s last program suspended due to Covid-19. In addition, as of November 3, 2021, none of the Company’s contracts have been cancelled due to Covid-19.

In the Energy segment, the Company has experienced a negative impact on its 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 the Company’s direct install work on these programs being suspended for varying periods of time during fiscal year 2020 and continuing in California through the Company’s first half of fiscal 2021. During non-Covid-19 impacted years, such as fiscal year 2019, the Company derived approximately 40% of its gross revenue from its direct install programs that serve small businesses and 60% from the Company’s other programs. The Company’s other programs 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, the Company’s 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.

The Company has continuously monitored its liquidity position during the Covid-19 pandemic in order to be flexible during these uncertain times and to position itself to resume its growth trajectory as work restrictions are lifted. As part of this effort, in April 2021, the Company amended its credit facility for increased covenant flexibility as a result of additional 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 October 1, 2021, the Company 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 the Company establish an additional valuation allowance against all or some portion of its net deferred tax assets.

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

Impact on Clients and Subcontractors and Other Risks

The Company primarily works for utilities, municipalities and other public agencies. 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 the Company’s contracts with governmental or public agencies were materially modified during its fiscal year 2020 or during its nine months ended October 1, 2021, 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” or “master service agreement” model. As a result, they may discontinue utilizing some or all of the Company’s services with little or no notice.

 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 I. Item 1A. “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended January 1, 2021. While Covid-19 has had an adverse effect on the Company’s business, financial condition and results of operations, the Company is unable to predict the extent or duration of future impacts at this time.

Health and Safety

In response to the Covid-19 pandemic, the Company has taken and will continue to take 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.

10

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Pronouncements Recently Adopted

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). ASU 2019-12 amends the accounting for income taxes by, among other things, removing: (i) The exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income); (ii) The exception to the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (iii) The exception to the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (iv) The exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The Company adopted this standard effective January 2, 2021. The adoption of this standard did not have a material impact to the Company’s Condensed Consolidated Financial Statements.

Accounting Pronouncements Recently Issued

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. ASU 2020-04 provides, among other things, guidance that modifications of contracts within the scope of Topic 470, Debt, should be accounted for by prospectively adjusting the effective interest rate; modifications of contracts within the scope of Topic 840, Leases, should be accounted for as a continuation of the existing contract; and, changes in the critical terms of hedging relationships, caused by reference rate reform, should not result in the de-designation of the instrument, provided certain criteria are met. In January 2021, the FASB issued ASU No. 2021-01, “Reference Rate Reform (Topic 848) - Scope” (“ASU 2021-01”). ASU 2021-01 clarifies the scope and application of ASU 2020-04 and permits entities, among other things, to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows. The Company’s exposure to LIBOR rates includes its credit facilities and swap agreement. The amendments are effective as of March 12, 2020 through December 31, 2022. Adoption is permitted at any time. The Company is currently evaluating the impact this update will have on its Condensed Consolidated Financial Statements.

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

3. REVENUES

The Company enters into contracts with its clients that contain various types of pricing provisions, including fixed price, time-and-materials, and unit-based provisions. The Company recognizes revenues in accordance with ASU 2014-09, Revenue from Contracts with Customer, codified as ASC Topic 606 and the related amendments (collectively “ASC 606”). As such, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenues when (or as) the Company satisfies a performance obligation.

The following table reflects the Company’s two reportable segments and the types of contracts that each most commonly enters into for revenue generating activities.

Segment

Contract Type

Revenue Recognition Method

Time-and-materials

Time-and-materials

Energy

Unit-based

Unit-based

Software license

Unit-based

Fixed price

Percentage-of-completion

Time-and-materials

Time-and-materials

Engineering and Consulting

Unit-based

Unit-based

Fixed price

Percentage-of-completion

Revenue on the vast majority of the Company’s contracts is recognized over time because of the continuous transfer of control to the customer. Revenue on fixed price contracts is recognized on the percentage-of-completion method based generally on the ratio of direct costs incurred-to-date to estimated total direct costs at completion. The Company uses the percentage-of-completion method to better match the level of work performed at a certain point in time in relation to the effort that will be required to complete a project. In addition, the percentage-of-completion method is a common method of revenue recognition in the Company’s industry.

Many of the Company’s fixed price contracts involve a high degree of subcontracted fixed price effort and are relatively short in duration, thereby lowering the risks of not properly estimating the percent complete. 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. The Company recognizes 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 the Company’s 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, the Company recognizes the contract price of units of a basic production product as revenue when the production product is delivered during a period. 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. The Company also derives revenue from software licenses and professional services and maintenance fees. In accordance with ASC 606, the Company performs 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. The Company utilizes 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.

12

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

To determine the proper revenue recognition method for contracts, the Company evaluates 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 the Company’s 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. 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 the Company provides a significant service of integrating a complex set of tasks and components into a single project or capability.

The Company may enter into contracts that include separate phases or elements. If each phase or element is negotiated separately based on the technical resources required and/or the supply and demand for the services being provided, the Company evaluates if the contracts should be segmented. If certain criteria are met, the contracts would be segmented which could result in revenues being assigned to the different elements or phases with different rates of profitability based on the relative value of each element or phase to the estimated total contract revenue. Segmented contracts may comprise up to approximately 2.0% to 3.0% of the Company’s consolidated contract revenue.

Contracts that cover multiple phases or elements of the project or service lifecycle (development, construction and maintenance and support) may be considered to have multiple performance obligations even when they are part of a single contract. For contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation using the best estimate of the standalone selling price of each distinct good or service in the contract. For the periods presented, the value of the separate performance obligations under contracts with multiple performance obligations (generally measurement and verification tasks under certain energy performance contracts) were not material. In cases where the Company does not provide the distinct good or service on a standalone basis, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which the Company forecasts the Company’s expected costs of satisfying a performance obligation and then adds an appropriate margin for the distinct good or service.

The Company provides quality of workmanship warranties to customers that are included in the sale and are not priced or sold separately or do not provide customers with a service in addition to assurance of compliance with agreed-upon specifications and industry standards. The Company does not consider these types of warranties to be separate performance obligations.

In some cases, the Company has a master service or blanket agreement with a customer under which each task order releases the Company to perform specific portions of the overall scope in the service contract. Each task order is typically accounted for as a separate contract because the task order establishes the enforceable rights and obligations, and payment terms.

Under ASC 606, variable consideration should be considered when determining the transaction price and estimates should be made for the variable consideration component of the transaction price, as well as assessing whether an estimate of variable consideration is constrained. For certain of the Company’s contracts, variable consideration can arise from modifications to the scope of services resulting from unapproved change orders or customer claims. Variable consideration is included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. The Company estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on assessments of legal enforceability, the Company’s performance, and all information (historical, current and forecasted) that is reasonably available to the Company.

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Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many variables and requires significant judgment. As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company reviews and updates the Company’s contract-related estimates regularly through a company-wide disciplined project review process in which management reviews the progress and execution of the Company’s performance obligations and the estimate at completion (EAC). As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule and the related changes in estimates of revenues and costs. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer, among other variables.

The Company recognizes adjustments in estimated profit on contracts under the cumulative catch-up method. Under this method, the impact of the adjustment on profit recorded to date is recognized in the period the adjustment is identified. Revenue and profit in future periods of contract performance is recognized using the adjusted estimate. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the full amount of estimated loss in the period it is identified.

Contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights or obligations. Most of the Company’s contract modifications are for goods or services that are not distinct from existing contracts due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract. The effect of a contract modification that is not distinct from the existing contract on the transaction price and the Company’s measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.

For contract modifications that result in the promise to deliver goods or services that are distinct from the existing contract and the increase in price of the contract is for the same amount as the standalone selling price of the additional goods or services included in the modification, the Company accounts for such contract modifications as a separate contract.

The Company includes claims to vendors, subcontractors and others as a receivable and a reduction in recognized costs when enforceability of the claim is established by the contract and the amounts are reasonably estimable and probable of being recovered. The amounts are recorded up to the extent of the lesser of the amounts management expects to recover or to costs incurred.

Billing practices are governed by the contract terms of each project based upon costs incurred, achievement of milestones or pre-agreed schedules. Billings do not necessarily correlate with revenue recognized using the percentage-of-completion method of revenue recognition.

Direct costs of contract revenue consist primarily of that portion of technical and nontechnical salaries and wages that has been incurred in connection with revenue producing projects. Direct costs of contract revenue also include production expenses, subcontractor services and other expenses that are incurred in connection with revenue producing projects.

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Direct costs of contract revenue exclude that portion of technical and nontechnical salaries and wages related to marketing efforts, vacations, holidays and other time not spent directly generating revenue under existing contracts. Such costs are included in general and administrative expenses. Additionally, payroll taxes, bonuses and employee benefit costs for all Company personnel are included in general and administrative expenses in the accompanying consolidated statements of comprehensive income since no allocation of these costs is made to direct costs of contract revenue. No allocation of facilities costs is made to direct costs of contract revenue. Other companies may classify as direct costs of contract revenue some of the costs that the Company classifies as general and administrative costs. The Company expenses direct costs of contract revenue when incurred.

Included in revenue and costs are all reimbursable costs for which the Company has the risk or on which the fee was based at the time of bid or negotiation. No revenue or cost is recorded for costs in which the Company acts solely in the capacity of an agent and has no risks associated with such costs.

Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts based upon a review of all outstanding amounts on a quarterly basis. 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. The Company’s 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.

Retainage, included in contract assets, represents amounts withheld from billings to the Company’s clients pursuant to provisions in the contracts and may not be paid to the Company until specific tasks are completed or the project is completed and, in some instances, for even longer periods. As of October 1, 2021 and January 1, 2021, contract assets included retainage of approximately $4.9 million and $