Willdan Group, Inc. 10-Q

Item 1. Financial Statements WILLDAN GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET S (in thousands, except par value) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ ​ 2022 ​ 2021 ​ Assets ​ Current assets: ​ ​ ​ ​ ​ ​ ​ Cash and cash equivalents ​ $ 8,818 ​ $ 11,221 ​ Accounts receivable, net of allowance for doubtful accounts of $ 756 and $ 1,115 at September 30, 2022 and December 31, 2021, respectively ​ 60,376 ​ 67,211 ​ Contract assets ​ 74,924 ​ 59,288 ​ Other receivables ​ 5,112 ​ 6,267 ​ Prepaid expenses and other current assets ​ 4,891 ​ 4,972 ​ Total current assets ​ 154,121 ​ 148,959 ​ Equipment and leasehold improvements, net ​ 21,147 ​ 16,757 ​ Goodwill ​ ​ 130,124 ​ ​ 130,124 ​ Right-of-use assets ​ ​ 12,715 ​ ​ 15,177 ​ Other intangible assets, net ​ ​ 44,182 ​ ​ 52,713 ​ Other assets ​ 11,862 ​ 13,843 ​ Deferred income taxes, net ​ ​ 20,960 ​ ​ 16,849 ​ Total assets ​ $ 395,111 ​ $ 394,422 ​ Liabilities and Stockholders’ Equity ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 23,487 ​ $ 36,672 ​ Accrued liabilities ​ 50,996 ​ 35,680 ​ Contingent consideration payable ​ ​ 2,491 ​ ​ 10,206 ​ Contract liabilities ​ 12,163 ​ 13,499 ​ Notes payable ​ 15,510 ​ 15,036 ​ Finance lease obligations ​ ​ 970 ​ ​ 539 ​ Lease liability ​ ​ 4,889 ​ ​ 5,575 ​ Total current liabilities ​ 110,506 ​ 117,207 ​ Contingent consideration payable ​ ​ — ​ ​ 832 ​ Notes payable ​ ​ 93,912 ​ ​ 85,538 ​ Finance lease obligations, less current portion ​ 1,657 ​ 778 ​ Lease liability, less current portion ​ ​ 8,747 ​ ​ 10,768 ​ Other noncurrent liabilities ​ ​ 78 ​ ​ 78 ​ Total liabilities ​ 214,900 ​ 215,201 ​ ​ ​ ​ ​ ​ ​ ​ ​ 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; 13,297 and 12,804 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively ​ 133 ​ 128 ​ Additional paid-in capital ​ 176,002 ​ 167,032 ​ Accumulated other comprehensive loss ​ ​ — ​ ​ ( 38 ) ​ Retained earnings ​ 4,076 ​ 12,099 ​ Total stockholders’ equity ​ 180,211 ​ 179,221 ​ Total liabilities and stockholders’ equity ​ $ 395,111 ​ $ 394,422 ​ ​ See accompanying notes to Condensed Consolidated Financial Statements. 3 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands, except per share amounts) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ October 1, ​ September 30, ​ October 1, ​ 2022 2021 2022 2021 Contract revenue ​ $ 121,399 ​ $ 98,297 ​ $ 315,882 ​ $ 261,537 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Direct costs of contract revenue (inclusive of directly related depreciation and amortization): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Salaries and wages ​ 21,420 ​ 16,346 ​ 61,514 ​ 48,532 Subcontractor services and other direct costs ​ 62,457 ​ 43,824 ​ 153,896 ​ 111,860 Total direct costs of contract revenue ​ 83,877 ​ 60,170 ​ 215,410 ​ 160,392 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ General and administrative expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Salaries and wages, payroll taxes and employee benefits ​ 20,373 ​ 19,374 ​ 60,169 ​ 57,530 Facilities and facility related ​ 2,228 ​ 2,351 ​ 6,999 ​ 7,373 Stock-based compensation ​ 1,607 ​ 4,210 ​ 6,626 ​ 14,349 Depreciation and amortization ​ 4,405 ​ 4,267 ​ 13,240 ​ 12,678 Other ​ 9,664 ​ 6,482 ​ 25,099 ​ 19,033 Total general and administrative expenses ​ 38,277 ​ 36,684 ​ 112,133 ​ 110,963 Income (Loss) from operations ​ ( 755 ) ​ 1,443 ​ ( 11,661 ) ​ ( 9,818 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest expense, net ​ ( 1,435 ) ​ ( 937 ) ​ ( 3,216 ) ​ ( 3,100 ) Other, net ​ 740 ​ 98 ​ 1,266 ​ 34 Total other expense, net ​ ( 695 ) ​ ( 839 ) ​ ( 1,950 ) ​ ( 3,066 ) Income (Loss) before income taxes ​ ( 1,450 ) ​ 604 ​ ( 13,611 ) ​ ( 12,884 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Income tax (benefit) expense ​ ( 1,526 ) ​ ( 236 ) ​ ( 5,588 ) ​ ( 5,357 ) Net income (loss) ​ ​ 76 ​ ​ 840 ​ ​ ( 8,023 ) ​ ​ ( 7,527 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive income (loss): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gain (loss) on derivative contracts, net of tax ​ ​ — ​ ​ 111 ​ ​ 38 ​ ​ 343 Comprehensive income (loss) ​ $ 76 ​ $ 951 ​ $ ( 7,985 ) ​ $ ( 7,184 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings (Loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.01 ​ $ 0.07 ​ $ ( 0.62 ) ​ $ ( 0.61 ) Diluted ​ $ 0.01 ​ $ 0.06 ​ $ ( 0.62 ) ​ $ ( 0.61 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 13,110 ​ 12,606 ​ 12,971 ​ 12,391 Diluted ​ 13,360 ​ 13,141 ​ 12,971 ​ 12,391 See accompanying notes to Condensed Consolidated Financial Statements. ​ 4 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT Y (in thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Additional ​ Other ​ ​ ​ ​ ​ ​ ​ Common Stock ​ Paid-in ​ Comprehensive ​ Retained ​ ​ ​ ​ Shares Amount Capital Income (Loss) Earnings Total Balance at December 31, 2021 12,804 ​ $ 128 ​ $ 167,032 ​ $ ( 38 ) ​ $ 12,099 ​ $ 179,221 Shares of common stock issued in connection with employee stock purchase plan 52 ​ ​ 1 ​ ​ 1,560 ​ ​ — ​ ​ — ​ 1,561 Shares of common stock issued in connection with incentive stock plan ​ 4 ​ ​ — ​ ​ 23 ​ ​ — ​ ​ — ​ ​ 23 Shares used to pay taxes on stock grants ( 27 ) ​ ​ — ​ ​ ( 837 ) ​ ​ — ​ ​ — ​ ( 837 ) Issuance of restricted stock award and units ​ 373 ​ ​ 3 ​ ​ ( 3 ) ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense — ​ ​ — ​ ​ 3,305 ​ ​ — ​ ​ — ​ 3,305 Net income (loss) — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 3,773 ) ​ ( 3,773 ) Net unrealized gain on derivative contracts ​ — ​ ​ — ​ ​ — ​ ​ 38 ​ ​ — ​ 38 Balance at April 1, 2022 13,206 ​ $ 132 ​ $ 171,080 ​ $ — ​ $ 8,326 ​ $ 179,538 Shares of common stock issued in connection with employee stock purchase plan — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — Shares of common stock issued in connection with incentive stock plan ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Shares used to pay taxes on stock grants ( 5 ) ​ ​ — ​ ​ ( 116 ) ​ ​ — ​ ​ — ​ ( 116 ) Issuance of restricted stock award and units ​ 14 ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense — ​ ​ — ​ ​ 1,714 ​ ​ — ​ ​ — ​ 1,714 Net income (loss) — ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 4,326 ) ​ ( 4,326 ) Net unrealized gain on derivative contracts ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — Balance at July 1, 2022 13,215 ​ $ 132 ​ $ 172,678 ​ $ — ​ $ 4,000 ​ $ 176,810 Shares of common stock issued in connection with employee stock purchase plan 63 ​ ​ 1 ​ ​ 1,475 ​ ​ — ​ ​ — ​ 1,476 Shares of common stock issued in connection with incentive stock plan ​ 29 ​ ​ — ​ ​ 247 ​ ​ — ​ ​ — ​ ​ 247 Shares used to pay taxes on stock grants — ​ ​ — ​ ​ ( 5 ) ​ ​ — ​ ​ — ​ ( 5 ) Issuance of restricted stock award and units ​ ( 10 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — Stock-based compensation expense — ​ ​ — ​ ​ 1,607 ​ ​ — ​ ​ — ​ 1,607 Net income (loss) — ​ ​ — ​ ​ — ​ ​ — ​ ​ 76 ​ 76 Net unrealized gain on derivative contracts ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ — Balance at September 30, 2022 13,297 ​ $ 133 ​ $ 176,002 ​ $ — ​ $ 4,076 ​ $ 180,211 ​ ​ ​ 5 Table of Contents 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 Income (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 ) 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. ​ 6 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ September 30, ​ October 1, ​ 2022 2021 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income (loss) ​ $ ( 8,023 ) ​ $ ( 7,527 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: ​ ​ ​ ​ ​ ​ Depreciation and amortization ​ 13,240 ​ 12,678 Deferred income taxes, net ​ ( 4,111 ) ​ ( 3,544 ) (Gain) loss on sale/disposal of equipment ​ ( 67 ) ​ ( 37 ) Provision for doubtful accounts ​ 230 ​ 87 Stock-based compensation ​ 6,626 ​ 14,349 Accretion and fair value adjustments of contingent consideration ​ ​ 1,659 ​ ​ 860 Changes in operating assets and liabilities, net of effects from business acquisitions: ​ ​ ​ ​ ​ ​ Accounts receivable ​ 6,605 ​ ( 1,892 ) Contract assets ​ ( 15,636 ) ​ ( 3,318 ) Other receivables ​ 1,155 ​ 376 Prepaid expenses and other current assets ​ 256 ​ 2,005 Other assets ​ 1,981 ​ ( 4,557 ) Accounts payable ​ ( 13,185 ) ​ ( 17,787 ) Accrued liabilities ​ 15,354 ​ 5,726 Contract liabilities ​ ( 1,336 ) ​ 1,016 Right-of-use assets ​ ( 245 ) ​ ( 145 ) Net cash (used in) provided by operating activities ​ 4,503 ​ ( 1,710 ) Cash flows from investing activities: ​ ​ ​ ​ ​ ​ Purchase of equipment and leasehold improvements ​ ( 6,969 ) ​ ( 4,898 ) Proceeds from sale of equipment ​ ​ 75 ​ ​ 46 Net cash (used in) provided by investing activities ​ ( 6,894 ) ​ ( 4,852 ) Cash flows from financing activities: ​ ​ ​ ​ ​ ​ Payments on contingent consideration ​ ( 10,206 ) ​ ( 6,615 ) Payments on notes payable ​ ​ ( 1,577 ) ​ ​ ( 1,724 ) Proceeds from notes payable ​ — ​ 206 Borrowings under term loan facility and line of credit ​ ​ 20,000 ​ ​ — Repayments under term loan facility and line of credit ​ ​ ( 9,750 ) ​ ​ ( 9,750 ) Principal payments on finance leases ​ ( 827 ) ​ ( 440 ) Proceeds from stock option exercise ​ 270 ​ 1,747 Proceeds from sales of common stock under employee stock purchase plan ​ 3,036 ​ 2,656 Cash used to pay taxes on stock grants ​ ​ ( 958 ) ​ ​ ( 3,117 ) Restricted Stock Award and Units ​ ​ — ​ ​ ( 1 ) Net cash (used in) provided by financing activities ​ ( 12 ) ​ ( 17,038 ) Net increase (decrease) in cash and cash equivalents ​ ( 2,403 ) ​ ( 23,600 ) Cash and cash equivalents at beginning of period ​ 11,221 ​ 28,405 Cash and cash equivalents at end of period ​ $ 8,818 ​ $ 4,805 Supplemental disclosures of cash flow information: ​ ​ ​ ​ ​ ​ Cash paid (received) during the period for: ​ ​ ​ ​ ​ ​ Interest ​ $ 2,790 ​ $ 2,701 Income taxes ​ ( 1,027 ) ​ ( 1,742 ) Supplemental disclosures of noncash investing and financing activities: ​ ​ ​ ​ ​ ​ Equipment acquired under finance leases ​ ​ 2,137 ​ ​ 987 See accompanying notes to Condensed Consolidated Financial Statements. ​ ​ 7 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. ORGANIZATION AND OPERATIONS OF THE COMPAN Y 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 31, 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 December 31, 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 2022, which ends on December 30, 2022, will be comprised of 52 weeks, with all quarters consisting of 13 weeks each. Fiscal year 2021, which ended on December 31, 2021, was comprised of 52 weeks, with all 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. 8 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Historical and Current 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, during fiscal year 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 followed by phased re-openings that began in May 2020, followed by periods of curtailments as a result of resurgences of Covid-19 cases, and subsequent re-openings through 2020 and 2021. The Company’s largest program for the Los Angeles Department of Water and Power (“LADWP”) resumed in the third quarter of fiscal 2021 and was the Company’s last program suspended due to Covid-19. In addition, through fiscal year 2020 and 2021, none of the Company’s contracts were cancelled due to Covid-19. ​ Through the current fiscal year 2022, though none of the Company’s current programs are under suspension due to Covid-19 restrictions, certain market segments such as small business customers of major utilities continue to experience lingering impacts of the reduced economic activity due to the Covid-19 related mandates in 2020 and 2021. As of November 2, 2022, none of the Company’s contracts were cancelled as a result of Covid-19. ​ Asset and liability valuation and other estimates used in preparation of financial statements As of September 30, 2022, the Company did not have any impairment with respect to goodwill or long-lived assets , including intangible assets. Because the full extent of any impact of a resurgence 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. Should there be a resurgence related to Covid-19, some of these customers could experience significant budget shortfalls for the current year and beyond as a result of the measures taken to mitigate the resurgence effects of the Covid-19 pandemic and/or revenue shortfalls as a result of reduced economic activity. Although none of the Company’s contracts with governmental or public agencies were materially modified during its fiscal year 2020 or fiscal year 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 December 31, 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. 9 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 2. RECENT ACCOUNTING PRONOUNCEMENTS Accounting Pronouncements Recently Adopted 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 adopted this standard effective March 8, 2022 . The Company’s previous exposure to LIBOR rates included its credit facilities and swap agreement. The adoption of this standard did not have a material impact to the Company’s Condensed Consolidated Financial Statements. ​ 10 Table of Contents 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. 11 Table of Contents 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. 12 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 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. 13 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 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 September 30, 2022 and December 31, 2021, contract assets included retainage of approximately $ 7.7 million and $ 4.5 million, respectively. ​ ​ 14 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 4. SUPPLEMENTAL FINANCIAL STATEMENT DATA Accounts Receivable From time to time, in connection with factoring agreements, the Company sells trade accounts receivable without recourse to third party purchasers in exchange for cash. During the nine months ended September 30, 2022, the Company did not sell any trade accounts receivable. During the nine months ended October 1, 2021, the Company sold trade accounts receivable and received cash proceeds of $ 8.0 million. The discounts on the trade accounts receivable sold were $ 0.8 million and were recorded within “Other, net” in other income (expense) in the condensed consolidated financial statements. Equipment and Leasehold Improvements ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2022 2021 ​ ​ (in thousands) Furniture and fixtures ​ $ 4,065 ​ $ 4,070 Computer hardware and software ​ 33,085 ​ 26,425 Leasehold improvements ​ 3,083 ​ 3,011 Equipment under finance leases ​ 5,204 ​ 3,286 Automobiles, trucks, and field equipment ​ 3,102 ​ 3,099 Subtotal ​ 48,539 ​ 39,891 Accumulated depreciation and amortization ​ ( 27,392 ) ​ ( 23,134 ) Equipment and leasehold improvements, net ​ $ 21,147 ​ $ 16,757 ​ Included in accumulated depreciation and amortization is $ 0.8 million and $ 0.6 million of amortization expense related to equipment held under finance leases for the nine months ended September 30, 2022 and for fiscal year 2021, respectively. Accrued Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ 2022 2021 ​ ​ (in thousands) Accrued subcontractor costs ​ $ 34,624 ​ $ 19,727 Other ​ 5,013 ​ 2,750 Compensation and payroll taxes ​ 3,676 ​ 2,244 Accrued bonuses ​ ​ 3,606 ​ ​ 7,767 Employee withholdings ​ 3,396 ​ 2,665 Accrued workers’ compensation insurance ​ 681 ​ 527 Total accrued liabilities ​ $ 50,996 ​ $ 35,680 ​ 15 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Goodwill ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, ​ Additional ​ Additions / ​ September 30, ​ 2021 Purchase Cost Adjustments 2022 ​ ​ (in thousands) Reporting Unit: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Energy ​ $ 129,375 ​ $ — ​ $ — ​ $ 129,375 Engineering and Consulting ​ ​ 749 ​ ​ — ​ ​ — ​ ​ 749 ​ ​ $ 130,124 ​ $ — ​ $ — ​ $ 130,124 ​ The Company tests for impairment, at a minimum, on an annual basis or earlier when certain events or changes in circumstances indicate that goodwill may more likely than not be impaired. During the quarter ended September 30, 2022, although the Company experienced declines in the market price of its stock, such decreases did not result in the Company’s market capitalization decreasing below book value. Subsequent to the end of the quarter, the Company’s market capitalization based upon its stock price has fluctuated below book value. The fair value of the Company using a market capitalization approach based on the Company’s share price would also include a control premium not reflected in the current share price based on recent transactions that have occurred in the Company’s industry. This indicative fair value exceeded the Company’s book value; therefore, the Company does not believe it is more likely than not that goodwill was impaired as of September 30, 2022. If there are further decreases in the Company’s stock price for a sustained period or other unfavorable factors, the Company may be required to perform a goodwill impairment assessment, which may result in a recognition of goodwill impairment that could be material to the consolidated financial statements. Intangible Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2022 ​ December 31, 2021 ​ ​ ​ ​ ​ ​ ​ ​ Gross ​ Accumulated ​ Gross ​ Accumulated ​ Amortization ​ Amount Amortization Amount Amortization Period ​ ​ (in thousands) ​ (in years) Finite: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Backlog ​ $ 7,944 ​ $ 7,872 ​ $ 7,944 ​ $ 7,222 ​ 1.0 Tradename ​ 15,911 ​ 10,492 ​ 15,911 ​ 8,997 2.5 ​ - ​ 6.0 Non-compete agreements ​ ​ 1,420 ​ ​ 1,420 ​ ​ 1,420 ​ ​ 1,413 ​ 4.0 ​ - ​ 5.0 Developed technology ​ ​ 15,810 ​ ​ 11,141 ​ ​ 15,500 ​ ​ 8,950 ​ 8.0 Customer relationships ​ ​ 58,149 ​ ​ 24,127 ​ ​ 58,149 ​ ​ 19,939 ​ 5.0 ​ - ​ 8.0 Total finite intangible assets ​ ​ 99,234 ​ ​ 55,052 ​ ​ 98,924 ​ ​ 46,521 ​ ​ ​ ​ ​ ​ In-process research and technology (1) ​ ​ — ​ ​ — ​ ​ 310 ​ ​ — ​ ​ ​ ​ ​ ​ Total intangible assets ​ $ 99,234 ​ $ 55,052 ​ $ 99,234 ​ $ 46,521 ​ ​ ​ ​ ​ ​ (1) In-process research and technology will not be amortized until put into use. ​ During the nine months ended September 30, 2022, the Company reclassified $ 0.3 million of in-process research and technology to developed technology and commenced amortization over its estimated useful life. ​ ​ 16 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 5. DERIVATIVE FINANCIAL INSTRUMENTS From time to time, the Company uses certain interest rate derivative contracts to hedge interest rate exposures on its variable rate debt. The Company’s hedging program is not designated for trading or speculative purposes. The Company recognizes derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. The Company records changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in its consolidated balance sheets as accumulated other comprehensive income (loss) and in its condensed consolidated statements of comprehensive (loss) income as a loss or gain on cash flow hedge valuation. On January 31, 2019, the Company entered into an interest rate swap agreement that the Company designated as cash flow hedge to fix the variable interest rate on a portion of the Company’s Term A Loan (as defined below in Note 6. “ Debt Obligations ”). The interest rate swap agreement had total notional amount of $ 35.0 million and had a fixed annual interest rate of 2.47 %. The interest rate swap expired on January 31, 2022. At its expiration, changes in the fair value of the Company’s interest rate swap agreement were immaterial to the Company’s condensed consolidated financial statements and were included in accrued liabilities in the condensed consolidated balance sheet. At its expiration, the effective portion of the Company’s interest rate swap agreement designated as a cash flow hedge was immaterial to the Company’s condensed consolidated financial statements, and all amounts were reclassified from accumulated other comprehensive income to interest expense. As of September 30, 2022, the Company had no derivative financial instruments in place. ​ ​ ​ 17 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) ​ 6. DEBT OBLIGATIONS Debt obligations, excluding obligations under finance leases (see Note 7, Leases, below), consisted of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ 2022 ​ 2021 ​ ​ (in thousands) Outstanding borrowings on Term A Loan ​ $ 67,500 ​ $ 75,000 Outstanding borrowings on Revolving Credit Facility ​ ​ — ​ ​ — Outstanding borrowings on Delayed Draw Term Loan ​ ​ 41,750 ​ ​ 24,000 Other debt agreements ​ ​ 583 ​ ​ 2,161 Total debt ​ ​ 109,833 ​ ​ 101,161 Issuance costs and debt discounts ​ ​ ( 411 ) ​ ​ ( 587 ) Subtotal ​ ​ 109,422 ​ ​ 100,574 Less current portion of long-term debt ​ 15,510 ​ 15,036 Long-term debt portion ​ $ 93,912 ​ $ 85,538 ​ Credit Facilities On June 26, 2019, the Company and certain of its subsidiaries entered into an Amended and Restated Credit Agreement (as amended by the First Amendment, dated as of August 15, 2019, the Second Amendment, dated as of November 6, 2019, the Third Amendment, dated as of May 6, 2020, the Fourth Amendment, dated April 30, 2021, and the Fifth Amendment, dated March 8, 2022, the “Credit Agreement”) with a syndicate of financial institutions as lenders and BMO Harris Bank, N.A. (“BMO”), as administrative agent. The Credit Agreement provides for (i) a $ 100.0 million secured term loan (the “Term A Loan”), (ii) up to $ 50.0 million in delayed draw secured term loans (the “Delayed Draw Term Loan”), and (iii) a $ 50.0 million secured revolving credit facility (the “Revolving Credit Facility” and, collectively with the Term A Loan and the Delayed Draw Term Loan, the “Credit Facilities”), each maturing on June 26, 2024. The Company’s obligations under the Credit Agreement are guaranteed by its present and future domestic subsidiaries, with limited exceptions. Prior to the Fourth Amendment to the Credit Agreement, dated as of April 30, 2021 (the “Fourth Amendment”), the Credit Agreement required the Company to comply with certain financial covenants, including requiring that the Company maintain a (i) total leverage ratio (the “Leverage Ratio”), defined as the ratio of total funded debt to Adjusted EBITDA (as defined in the Credit Agreement), of 6.00 to 1.00 through June 26, 2020, 7.75 to 1.00 through September 25, 2020, 7.50 to 1.00 through January 1, 2021, 6.25 to 1.00 through April 2, 2021, 4.00 to 1.00 through July 2, 2021, and 3.25 to 1.00 through October 1, 2021 and thereafter and (ii) fixed charge coverage ratio (“FCCR Ratio”), defined as the ratio of Adjusted EBITDA less Unfinanced Capital Expenditures (as defined in the Credit Agreement) to Fixed Charges (as defined in the Credit Agreement), of not less than 1.20 to 1.00, in each case tested quarterly, except during the period from May 6, 2020 until July 2, 2021 (the “Initial Covenant Relief Period”), when the maximum Leverage Ratio was increased and the covenant to maintain a minimum FCCR Ratio was replaced with a covenant to maintain a minimum Adjusted EBITDA (as defined in the Third Amendment). In addition, during the Initial Covenant Relief Period, no delayed draw term loans could be borrowed under the Credit Facilities and the Company was prohibited from engaging in share repurchases or making any Permitted Acquisitions (as defined in the Credit Agreement). Additionally, during the Initial Covenant Relief Period, the aggregate amount of all capital expenditures made by the Company could not exceed $ 7.0 million, and the Company was prohibited from making any earn-out payments if, after giving effect to such earn-out payment, the Company’s liquidity would be less than $ 5.0 million or the aggregate amount of all earn-out payments made by the Company during the Initial Covenant Relief Period would exceed $ 7.0 million. 18 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Pursuant to the Fourth Amendment, the Initial Covenant Relief Period was extended from July 2, 2021 to and including the earlier of (i) April 1, 2022 and (ii) the last day of the fiscal quarter in which the Company delivers an irrevocable election to terminate the covenant relief granted by the Fourth Amendment (the “Second Covenant Relief Period,” and together with the Initial Covenant Relief Period, the “Amended Covenant Relief Period”). The Fourth Amendment also (A) increased the maximum Leverage Ratio the Company was permitted to maintain to 4.50 to 1.00 through June 30, 2021, 5.25 to 1.00 through September 30, 2021, 4.50 to 1.00 through December 31, 2021, 4.25 to 1.00 through March 31, 2022, and 3.25 to 1.00 through June 30, 2022 and thereafter, (B) established the minimum Adjusted EBITDA thresholds (as defined in the Third Amendment) for the remainder of the Amended Covenant Relief Period, (C) removed the previous prohibition during the Initial Covenant Relief Period on the Company’s ability to make delayed draw term loan borrowings, (D) removed the previous prohibition during the Initial Covenant Relief Period on the Company’s ability to make Permitted Acquisitions (as defined in the Credit Agreement) and to purchase, redeem or otherwise acquire the Company’s common stock, in each case, subject to certain conditions, and (E) increased the maximum amount of earn-out payments the Company was permitted to make during the Amended Covenant Relief Period from $ 7.0 million to $ 17.0 million, provided that the Company’s liquidity would not be less than $ 10.0 million after giving effect to such earn-out payment. Additionally, during the remainder of the Amended Covenant Relief Period, the aggregate amount of all capital expenditures made by the Company may not exceed $ 15.0 million. ​ In accordance with the Fourth Amendment, borrowings under the Credit Agreement bore interest at all times other than during the Initial Covenant Relief Period, at either a Base Rate or London Inter-Bank Offered Rate (“LIBOR”), each as defined in the Credit Agreement, at the Company’s option, and in each case plus an applicable margin, which applicable margin ranged from 0.125 % to 1.25 % with respect to Base Rate borrowings and 1.125 % to 2.25 % with respect to LIBOR borrowings, depending on the Leverage Ratio; provided, that LIBOR could not be less than 0.00 %. The Company also agreed to pay a commitment fee for the unused portion of the Revolving Credit Facility and the delayed draft term loan facility, which ranged from 0.15 % to 0.40 % per annum depending on the Leverage Ratio, and fees on the face amount of any letters of credit outstanding under the Revolving Credit Facility, which ranged from 0.84 % to 1.688 % per annum, in each case, depending on whether such letter of credit is a performance or financial letter of credit and the Leverage Ratio. ​ The Credit Agreement includes customary events of default and also contains other customary restrictive covenants including (i) restrictions on the incurrence of additional indebtedness and additional liens on property, (ii) restrictions on permitted acquisitions and other investments and (iii) limitations on asset sales, mergers and acquisitions. Further, the Credit Agreement limits the Company’s payment of future dividends and distributions and share repurchases by the Company. Subject to certain exceptions, borrowings under the Credit Agreement are also subject to mandatory prepayment from (a) any issuances of debt or equity securities, (b) any sale or disposition of assets, (c) insurance and condemnation proceeds (d) representation and warranty insurance proceeds related to insurance policies issued in connection with acquisitions and (e) excess cash flow. ​ Fifth Amendment to the Credit Agreement ​ On March 8, 2022, the Company entered into the Fifth Amendment to the Credit Agreement (the “Fifth Amendment”). The Fifth Amendment extended the Amended Covenant Relief Period from March 31, 2022 to and including the earlier of (i) December 30, 2022 and (ii) the last day of the fiscal quarter in which the Company delivers an irrevocable election to terminate the covenant relief granted by the Fifth Amendment (the “Third Covenant Relief Period,” and together with the Amended Covenant Relief Period, the “Extended Covenant Relief Period”). ​ The Fifth Amendment also (A) amended the minimum Adjusted EBITDA (as defined in the Fifth Amendment) thresholds for the remainder of the Extended Covenant Relief Period, (B) increased the maximum Total Leverage Ratio (as defined in the Credit Agreement) the Company is permitted to maintain through the fiscal quarter ending on December 31, 2022, (C) funded to the Company, on the date of closing, the remaining $ 20.0 million in available funds from the Delayed Draw Term Loan, and (D) amended the pricing structure of borrowings under the Credit Agreement 19 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) from utilizing as a reference rate the LIBOR to utilizing the Secured Overnight Financing Rate (“SOFR”). Additionally, during the remainder of the Covenant Relief Period, the aggregate amount of all capital expenditures made by the Company may not exceed $ 20.0 million. Pursuant to the Fifth Amendment, during the Extended Covenant Relief Period, borrowings under the Credit Agreement will bear interest at either a Base Rate or SOFR (plus 0.10 % or 0.15 % depending on the interest period), each as defined in the Credit Agreement, at the Company’s option, and in each case, plus an applicable margin, which applicable margin will range from 0.125 % to 1.50 % with respect to Base Rate borrowings and 1.125 % to 2.50 % with respect to SOFR borrowings, depending on the Total Leverage Ratio; provided, that SOFR cannot be less than 0.00 %. The Company will also pay a commitment fee for the unused portion of the revolving credit facility and the delayed draft term loan facility under the Credit Agreement, which will range from 0.15 % to 0.45 % per annum depending on the Total Leverage Ratio, and fees on the face amount of any letters of credit outstanding under the revolving credit facility, which will range from 0.84 % to 1.875 % per annum, in each case, depending on whether such letter of credit is a performance or financial letter of credit and the Total Leverage Ratio. ​ After the Extended Covenant Relief Period, borrowings under the Credit Agreement will bear interest at either a Base Rate or SOFR (plus 0.10 % or 0.15 % depending on the interest period), each as defined in the Credit Agreement, at the Company’s option, and in each case, plus an applicable margin, which applicable margin will range from 0.125 % to 1.25 % with respect to Base Rate borrowings and 1.125 % to 2.25 % with respect to SOFR borrowings, depending on the Total Leverage Ratio; provided, that SOFR cannot be less than 0.00 %. The Company will also pay a commitment fee for the unused portion of the revolving credit facility and the delayed draft term loan facility under the Credit Agreement, which will range from 0.15 % to 0.40 % per annum depending on the Total Leverage Ratio, and fees on the face amount of any letters of credit outstanding under the revolving credit facility, which will range from 0.84 % to 1.688 % per annum, in each case, depending on whether such letter of credit is a performance or financial letter of credit and the Total Leverage Ratio. ​ Sixth Amendment to the Credit Agreement ​ On August 2, 2022, the Company entered into the Sixth Amendment to the Credit Agreement (the “Sixth Amendment”). The Sixth Amendment increased the purchase money indebtedness and Capitalized Lease Obligations (as defined in the Credit Agreement) permissible limit from $ 1.5 million to $ 4.0 million, with no other changes to the Credit Agreement. ​ As of September 30, 2022, the Company was in compliance with all covenants contained in the Credit Agreement, as amended, other than the minimum Adjusted EBITDA thresholds for the test period ended September 30, 2022. Such non-compliance with the minimum Adjusted EBITDA thresholds for the test period ended September 30, 2022 was subsequently waived by the lenders under the Credit Agreement pursuant to the Seventh Amendment (defined and described in Note 13. “ Subsequent Events ” below). ​ Other Debt Agreements The Company’s other debt agreements are related to financed insurance premiums, a financed software agreement, and a utility customer agreement and are immaterial to the Company’s Condensed Consolidated Financial Statements. ​ ​ 20 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 7. LEASES The Company leases certain office facilities under long-term, non-cancellable operating leases that expire at various dates through the year 2027. In addition, the Company is obligated under finance leases for certain furniture and office equipment that expire at various dates through the year 2027. From time to time, the Company enters into non-cancelable leases for some of its facility and equipment needs. These leases allow the Company to conserve cash by paying a monthly lease rental fee for the use of facilities and equipment rather than purchasing them. The Company’s leases have terms ranging from one to eight years , some of which may include options to extend the leases for up to five years , and some of which may include options to terminate the leases within one year . Currently, all of the Company’s leases contain fixed payment terms. The Company may decide to cancel or terminate a lease before the end of its term, in which case the Company is typically liable to the lessor for the remaining lease payments under the term of the lease. Additionally, all of the Company’s month-to-month leases are cancelable by the Company or the lessor, at any time, and are not included in the Company’s right-of-use asset or lease liability. As of September 30, 2022, the Company had no leases with residual value guarantees. Typically, the Company has purchase options on the equipment underlying its long-term leases. The Company may exercise some of these purchase options when the need for equipment is on-going and the purchase option price is attractive. Nonperformance-related default covenants, cross-default provisions, subjective default provisions and material adverse change clauses contained in material lease agreements, if any, are also evaluated to determine whether those clauses affect lease classification in accordance with “ASC” Topic 842-10-25. Leases are accounted for as operating or financing leases, depending on the terms of the lease. ​ Financing Leases ​ The Company leases certain equipment under financing leases. The economic substance of the leases is a financing transaction for acquisition of equipment and leasehold improvements. Accordingly, the right-of-use assets for these leases are included in the balance sheets in equipment and leasehold improvements, net of accumulated depreciation, with a corresponding amount recorded in current portion of financing lease obligations or noncurrent portion of financing lease obligations, as appropriate. The financing lease assets are amortized over the life of the lease or, if shorter, the life of the leased asset, on a straight-line basis and included in depreciation expense. The interest associated with financing lease obligations is included in interest expense. Right-of-use assets Operating leases are included in right-of-use assets, and current portion of lease liability and noncurrent portion of lease liability, as appropriate. Right-of-use assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate to calculate present value, the Company determines this rate by estimating the Company’s incremental borrowing rate at the lease commencement date. The right-of-use asset also includes any lease payments made and initial direct costs incurred at lease commencement and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. ​ ​ 21 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The following is a summary of the Company’s lease expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ September 30, ​ October 1, ​ September 30, ​ October 1, ​ 2022 2021 2022 2021 ​ (in thousands) ​ (in thousands) Operating lease cost $ 1,523 ​ $ 1,596 ​ $ 4,635 ​ $ 4,941 Finance lease cost: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortization of assets ​ 311 ​ ​ 139 ​ ​ 799 ​ ​ 397 Interest on lease liabilities ​ 22 ​ ​ 9 ​ ​ 51 ​ ​ 22 Total net lease cost $ 1,856 ​ $ 1,744 ​ $ 5,485 ​ $ 5,360 ​ The following is a summary of lease information presented on the Company’s consolidated balance sheet: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ ​ ​ 2022 ​ 2021 ​ ​ ​ (in thousands) ​ Operating leases: ​ ​ ​ ​ ​ ​ ​ Right-of-use assets ​ $ 12,715 ​ $ 15,177 ​ ​ ​ ​ ​ ​ ​ Lease liability ​ $ 4,889 ​ $ 5,575 ​ Lease liability, less current portion ​ 8,747 ​ 10,768 ​ Total lease liabilities ​ $ 13,636 ​ $ 16,343 ​ ​ ​ ​ ​ ​ ​ Finance leases (included in equipment and leasehold improvements, net): ​ ​ ​ ​ ​ ​ ​ Equipment and leasehold improvements, net ​ $ 5,204 ​ $ 3,286 ​ Accumulated depreciation ​ ( 2,524 ) ​ ( 1,947 ) ​ Total equipment and leasehold improvements, net ​ $ 2,680 ​ $ 1,339 ​ ​ ​ ​ ​ ​ ​ ​ Finance lease obligations ​ $ 970 ​ $ 539 ​ Finance lease obligations, less current portion ​ ​ 1,657 ​ ​ 778 ​ Total finance lease obligations ​ $ 2,627 ​ $ 1,317 ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average remaining lease term (in years): ​ ​ ​ ​ ​ ​ ​ Operating Leases ​ ​ 3.48 ​ ​ 3.79 ​ Finance Leases ​ ​ 2.70 ​ ​ 2.62 ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average discount rate: ​ ​ ​ ​ ​ ​ ​ Operating Leases ​ ​ 4.16 % ​ 4.28 % Finance Leases ​ ​ 3.08 % ​ 2.78 % ​ Rent expense was $ 1.6 million and $ 4.9 million for the three and nine months ended September 30, 2022, respectively, as compared to $ 1.6 million and $ 5.2 million for the three and nine months ended October 1, 2021, respectively. ​ ​ ​ 22 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The following is a summary of other information and supplemental cash flow information related to finance and operating leases: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended ​ ​ September 30, ​ October 1, ​ ​ 2022 2021 ​ ​ (in thousands) Cash paid for amounts included in the measurement of lease liabilities: ​ ​ ​ ​ ​ ​ Operating cash flow from operating leases ​ $ 4,879 ​ $ 5,115 Operating cash flow from finance leases ​ ​ 51 ​ ​ 22 Financing cash flow from finance leases ​ ​ 827 ​ ​ 440 ​ ​ ​ ​ ​ ​ ​ Right-of-use assets obtained in exchange for lease liabilities: ​ ​ ​ ​ ​ ​ Operating leases ​ $ 1,706 ​ $ 326 ​ The following is a summary of the maturities of lease liabilities as of September 30, 2022: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating Finance ​ ​ (in thousands) ​ Fiscal year: ​ ​ ​ ​ ​ ​ ​ Remainder of 2022 ​ $ 1,542 ​ $ 228 ​ 2023 ​ 4,765 ​ 1,161 ​ 2024 ​ 3,313 ​ ​ 887 ​ 2025 ​ ​ 2,493 ​ ​ 303 ​ 2026 ​ ​ 2,140 ​ 134 ​ 2027 and thereafter ​ 453 ​ 30 ​ Total lease payments ​ ​ 14,706 ​ ​ 2,743 ​ Less: Imputed interest ​ ( 1,070 ) ​ ​ ( 116 ) ​ Total lease obligations ​ 13,636 ​ ​ 2,627 ​ Less: Current obligations ​ 4,889 ​ ​ 970 ​ Noncurrent lease obligations ​ $ 8,747 ​ $ 1,657 ​ ​ The imputed interest for finance lease obligations represents the interest component of finance leases that will be recognized as interest expense in future periods. The financing component for operating lease obligations represents the effect of discounting the operating lease payments to their present value. ​ 23 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 8. COMMITMENTS AND VARIABLE INTEREST ENTITIES Employee Benefit Plans The Company has a qualified profit sharing plan pursuant to Code Section 401(a) and qualified cash or deferred arrangement pursuant to Code Section 401(k) covering all employees. Company contributions are made solely at the discretion of the Company’s board of directors. The Company’s defined contribution plan (the “Plan”) covers employees who have completed three months of service and who have attained 21 years of age. Employees may elect to contribute up to 50 % of their compensation limited to the amount allowed by tax laws. The Company elects to make matching contributions equal to 50 % of the participants’ contributions to the Plan, up to 6 % of the individual participant’s compensation, and subject to a maximum of $3,000 per employee. Under the Plan, the Company’s matching contributions to employee accounts are discretionary. During the nine months ended September 30, 2022 and October 1, 2021, the Company made matching contributions of $ 2.0 million and $ 1.6 million, respectively. Variable Interest Entities On March 4, 2016, the Company and the Company’s wholly-owned subsidiary, WES, acquired substantially all of the assets of Genesys and assumed certain specified liabilities of Genesys (collectively, the “Purchase”) pursuant to an Asset Purchase and Merger Agreement, dated as of February 26, 2016 (the “Agreement”), by and among Willdan Group, Inc., WES, WESGEN (as defined below), Genesys and Ronald W. Mineo (“Mineo”) and Robert J. Braun (“Braun” and, together with Mineo, the “Genesys Shareholders”). On March 5, 2016, pursuant to the terms of the Agreement, WESGEN, Inc., a non-affiliated corporation (“WESGEN”), merged (the “Merger” and, together with the Purchase, the “Acquisition”) with Genesys, with Genesys remaining as the surviving corporation. Genesys was acquired to strengthen the Company’s power engineering capability in the northeastern U.S., and also to increase client exposure and experience with universities. Genesys continues to be a professional corporation organized under the laws of the State of New York, wholly-owned by one or more licensed engineers. Pursuant to New York law, the Company does not own capital stock of Genesys. The Company has entered into an agreement with the Shareholder of Genesys pursuant to which the Shareholder will be prohibited from selling, transferring or encumbering the Shareholder’s ownership interest in Genesys without the Company’s consent. Notwithstanding the Company’s rights regarding the transfer of Genesys’s stock, the Company does not have control over the professional decision making of Genesys’s engineering services. The Company has entered into an administrative services agreement with Genesys pursuant to which WES will provide Genesys with ongoing administrative, operational and other non-professional support services. Genesys pays WES a service fee, which consists of all of the costs incurred by WES to provide the administrative services to Genesys plus ten percent of such costs, as well as any other costs that relate to professional service supplies and personnel costs. As a result of the administrative services agreement, the Company absorbs the expected losses of Genesys through its deferral of Genesys’s service fees owed to WES. ​ 24 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The Company manages Genesys and has the power to direct the activities that most significantly impact Genesys’s performance, in addition to being obligated to absorb expected losses from Genesys. Accordingly, the Company is the primary beneficiary of Genesys and consolidates Genesys as a VIE. In addition, the Company concluded there is no noncontrolling interest related to the consolidation of Genesys because the Company determined that (i) the shareholder of Genesys does not have more than a nominal amount of equity investment at risk, (ii) WES absorbs the expected losses of Genesys through its deferral of Genesys’s service fees owed to WES and the Company has, since entering into the administrative services agreement, had to continuously defer service fees for Genesys, and (iii) the Company believes Genesys will continue to have a shortfall on payment of its service fees for the foreseeable future, leaving no expected residual returns for the shareholder. As of September 30, 2022, the Company had one VIE — Genesys. 25 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 9. SEGMENT AND GEOGRAPHICAL INFORMATION Segment Information The Company’s two segments are Energy and Engineering and Consulting, and the Company’s chief operating decision maker, which continues to be its chief executive officer, receives and reviews financial information in this format. There were no intersegment sales during the three and nine months ended September 30, 2022 and October 1, 2021. The Company’s chief operating decision maker evaluates the performance of each segment based upon income or loss from operations before income taxes. Certain segment asset information including expenditures for long-lived assets has not been presented as it is not reported to or reviewed by the chief operating decision maker. In addition, enterprise-wide service line contract revenue is not included as it is impracticable to report this information for each group of similar services. Financial information with respect to the reportable segments is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Engineering ​ Unallocated ​ ​ ​ ​ Consolidated ​ Energy & Consulting Corporate Intersegment Total ​ ​ (in thousands) Fiscal Three Months Ended September 30, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract revenue ​ $ 102,625 ​ $ 18,774 ​ $ - ​ $ - ​ $ 121,399 Depreciation and amortization ​ ​ 4,166 ​ ​ 239 ​ ​ - ​ ​ - ​ ​ 4,405 Interest expense, net ​ ​ 3 ​ ​ - ​ ​ 1,432 ​ ​ - ​ ​ 1,435 Segment profit (loss) before income tax expense ​ ​ ( 1,815 ) ​ ​ 3,473 ​ ​ ( 3,108 ) ​ ​ - ​ ​ ( 1,450 ) Income tax expense (benefit) ​ ​ ( 1,565 ) ​ ​ 1,781 ​ ​ ( 1,742 ) ​ ​ - ​ ​ ( 1,526 ) Net income (loss) ​ ​ ( 250 ) ​ ​ 1,692 ​ ​ ( 1,366 ) ​ ​ - ​ ​ 76 Segment assets (1) ​ ​ 336,036 ​ ​ 22,630 ​ ​ 59,575 ​ ​ ( 23,130 ) ​ ​ 395,111 Fiscal Three Months Ended October 1, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract revenue ​ $ 81,523 ​ $ 16,774 ​ $ - ​ $ - ​ $ 98,297 Depreciation and amortization ​ ​ 4,023 ​ ​ 244 ​ ​ - ​ ​ - ​ ​ 4,267 Interest expense, net ​ ​ - ​ ​ - ​ ​ 937 ​ ​ - ​ ​ 937 Segment profit (loss) before income tax expense ​ ​ 2,138 ​ ​ 2,673 ​ ​ ( 4,207 ) ​ ​ - ​ ​ 604 Income tax expense (benefit) ​ ​ 610 ​ ​ 1,286 ​ ​ ( 2,132 ) ​ ​ - ​ ​ ( 236 ) Net income (loss) ​ ​ 1,529 ​ ​ 1,387 ​ ​ ( 2,076 ) ​ ​ - ​ ​ 840 Segment assets (1) ​ ​ 331,573 ​ ​ 23,134 ​ ​ 55,329 ​ ​ ( 23,130 ) ​ ​ 386,906 Fiscal Nine Months Ended September 30, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract revenue ​ $ 262,186 ​ $ 53,696 ​ $ - ​ $ - ​ $ 315,882 Depreciation and amortization ​ ​ 12,506 ​ ​ 734 ​ ​ - ​ ​ - ​ ​ 13,240 Interest expense, net ​ ​ 8 ​ ​ - ​ ​ 3,208 ​ ​ - ​ ​ 3,216 Segment profit (loss) before income tax expense ​ ​ ( 12,525 ) ​ ​ 8,111 ​ ​ ( 9,197 ) ​ ​ - ​ ​ ( 13,611 ) Income tax expense (benefit) ​ ​ ( 5,143 ) ​ ​ 3,330 ​ ​ ( 3,775 ) ​ ​ - ​ ​ ( 5,588 ) Net income (loss) ​ ​ ( 7,382 ) ​ ​ 4,780 ​ ​ ( 5,421 ) ​ ​ - ​ ​ ( 8,023 ) Segment assets (1) ​ ​ 336,036 ​ ​ 22,630 ​ ​ 59,575 ​ ​ ( 23,130 ) ​ ​ 395,111 Fiscal Nine Months Ended October 1, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Contract revenue ​ $ 209,977 ​ $ 51,560 ​ $ - ​ $ - ​ $ 261,537 Depreciation and amortization ​ ​ 11,934 ​ ​ 744 ​ ​ - ​ ​ - ​ ​ 12,678 Interest expense, net ​ ​ 5 ​ ​ - ​ ​ 3,095 ​ ​ - ​ ​ 3,100 Segment profit (loss) before income tax expense ​ ​ ( 5,607 ) ​ ​ 7,507 ​ ​ ( 14,784 ) ​ ​ - ​ ​ ( 12,884 ) Income tax expense (benefit) ​ ​ ( 2,331 ) ​ ​ 3,122 ​ ​ ( 6,148 ) ​ ​ - ​ ​ ( 5,357 ) Net income (loss) ​ ​ ( 3,275 ) ​ ​ 4,386 ​ ​ ( 8,638 ) ​ ​ - ​ ​ ( 7,527 ) Segment assets (1) ​ ​ 331,573 ​ ​ 23,134 ​ ​ 55,329 ​ ​ ( 23,130 ) ​ ​ 386,906 (1) Segment assets are presented net of intercompany receivables. ​ 26 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) The following tables provide information about disaggregated revenue by contract type, client type and geographical region: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended September 30, 2022 ​ Energy Engineering and Consulting Total ​ (in thousands) Contract Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Time-and-materials ​ $ 7,468 ​ $ 13,880 ​ $ 21,348 Unit-based ​ ​ 43,039 ​ ​ 3,791 ​ ​ 46,830 Fixed price ​ ​ 52,118 ​ ​ 1,103 ​ ​ 53,221 Total (1) ​ $ 102,625 ​ $ 18,774 ​ $ 121,399 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Client Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 6,848 ​ $ 1,376 ​ $ 8,224 Government ​ ​ 48,073 ​ ​ 17,348 ​ ​ 65,421 Utilities (2) ​ ​ 47,704 ​ ​ 50 ​ ​ 47,754 Total (1) ​ $ 102,625 ​ $ 18,774 ​ $ 121,399 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Geography (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ Domestic ​ $ 102,625 ​ $ 18,774 ​ $ 121,399 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended September 30, 2022 ​ Energy Engineering and Consulting Total ​ (in thousands) Contract Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Time-and-materials ​ $ 23,873 ​ $ 40,221 ​ $ 64,094 Unit-based ​ ​ 128,540 ​ ​ 10,530 ​ ​ 139,070 Fixed price ​ ​ 109,773 ​ ​ 2,945 ​ ​ 112,718 Total (1) ​ $ 262,186 ​ $ 53,696 ​ $ 315,882 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Client Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 21,638 ​ $ 4,330 ​ $ 25,968 Government ​ ​ 96,293 ​ ​ 49,139 ​ ​ 145,432 Utilities (2) ​ ​ 144,255 ​ ​ 227 ​ ​ 144,482 Total (1) ​ $ 262,186 ​ $ 53,696 ​ $ 315,882 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Geography (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ Domestic ​ $ 262,186 ​ $ 53,696 ​ $ 315,882 ​ 27 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended October 1, 2021 ​ Energy Engineering and Consulting Total ​ (in thousands) Contract Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Time-and-materials ​ $ 9,104 ​ $ 13,160 ​ $ 22,264 Unit-based ​ ​ 51,470 ​ ​ 2,650 ​ ​ 54,120 Fixed price ​ ​ 20,950 ​ ​ 963 ​ ​ 21,913 Total (1) ​ $ 81,524 ​ $ 16,773 ​ $ 98,297 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Client Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 7,741 ​ $ 1,568 ​ $ 9,309 Government ​ ​ 18,537 ​ ​ 15,181 ​ ​ 33,718 Utilities (2) ​ ​ 55,245 ​ ​ 24 ​ ​ 55,269 Total (1) ​ $ 81,524 ​ $ 16,773 ​ $ 98,297 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Geography (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ Domestic ​ $ 81,524 ​ $ 16,773 ​ $ 98,297 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine months ended October 1, 2021 ​ Energy Engineering and Consulting Total ​ (in thousands) Contract Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Time-and-materials ​ $ 25,060 ​ $ 40,444 ​ $ 65,504 Unit-based ​ ​ 132,688 ​ ​ 7,817 ​ ​ 140,505 Fixed price ​ ​ 52,229 ​ ​ 3,299 ​ ​ 55,528 Total (1) ​ $ 209,977 ​ $ 51,560 ​ $ 261,537 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Client Type ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 20,685 ​ $ 4,037 ​ $ 24,723 Government ​ ​ 45,766 ​ ​ 47,391 ​ ​ 93,157 Utilities (2) ​ ​ 143,525 ​ ​ 132 ​ ​ 143,657 Total (1) ​ $ 209,977 ​ $ 51,560 ​ $ 261,537 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Geography (3) ​ ​ ​ ​ ​ ​ ​ ​ ​ Domestic ​ $ 209,977 ​ $ 51,560 ​ $ 261,537 ​ (1) Amounts may not add to the totals due to rounding. (2) Includes the portion of revenue related to small business programs paid by the end user/customer. (3) Revenue from the Company’s foreign operations were not material for the three and nine months ended September 30, 2022 and October 1, 2021. ​ Geographical Information ​ Substantially all of the Company’s consolidated revenue was derived from its operations in the U.S. The Company operates through a network of offices spread across 23 U.S. states, the District of Columbia, and Canada. Revenues from the Company’s Canadian operations were not material for the three and nine months ended September 30, 2022 nor for the three and nine months ended October 1, 2021. Customer Concentration For the three and nine months ended September 30, 2022, the Company’s top 10 customers accounted for 57.2 %, and 54.5 %, respectively, of the Company’s consolidated contract revenue. For the three and nine months ended October 1, 2021, the Company’s top 10 customers accounted for 52.4 %, and 46.8 %, respectively, of the Company’s consolidated contract revenue. 28 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) For the three months ended September 30, 2022, the Company had one customer, Pueblo County School District, that accounted for 13.3 % of its consolidated contract revenues . For the nine months ended September 30, 2022, the Company had one customer, LADWP, that accounted for 13.2 % of its consolidated contract revenues . For the three months ended October 1, 2021, the Company had one customer, LADWP, that accounted for 17.0 % of its consolidated contract revenue. For the nine months ended October 1, 2021, the Company had no individual customer that accounted for more than 10% of its consolidated contract revenue. On a segment basis, the Company had individual customers that accounted for more than 10% of its segment contract revenues. For the three months ended September 30, 2022, the Company derived 38.3 % of its Energy segment revenues from three customers, Pueblo County School District, The Dormitory Authority State of New York (“DASNY”) and LADWP. For the nine months ended September 30, 2022, the Company derived 26.5 % of its Energy segment revenues from two customers, LADWP and Pueblo County School District. For the three months ended October 1, 2021, the Company derived 20.4 % of its Energy segment revenues from one customer, LADWP. For the nine months ended October 1, 2021, the Company derived 21.5 % of its Energy segment revenues from two customers, LADWP and Consolidated Edison of New York. For the three months and nine months ended September 30, 2022, and for the three months ended October 1, 2021, no single customer accounted for 10% or more of the Company’s Engineering and Consulting segment revenues. For the nine months ended October 1, 2021, the Company derived 12.2 % of its Engineering and Consulting segment revenues from one customer, the City of Elk Grove. On a geographical basis, the Company’s largest clients are based in California and New York. For the three and nine months ended September 30, 2022, services provided to clients in California accounted for 37.2 % and 40.3 %, respectively, of the Company’s contract revenue and services provided to clients in New York accounted for 23.4 % and 21.4 %, respectively, of the Company’s contract revenue. For the three and nine months ended October 1, 2021, services provided to clients in California accounted for 38.9 % and 36.2 %, respectively, of the Company’s consolidated contract revenue and services provided to clients in New York accounted for 19.0 % and 20.7 %, respectively, of the Company’s consolidated contract revenue. ​ 29 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 10. INCOME TAXES Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the financial reporting basis and tax basis of the Company’s assets and liabilities, subject to a judgmental assessment of the recoverability of deferred tax assets. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets may not be realized. Significant judgment is applied when assessing the need for valuation allowances and includes the evaluation of historical income (loss) adjusted for the effects of non-recurring items and the impact of recent business combinations. Areas of estimation include the Company’s consideration of future taxable income which is driven by verifiable signed contracts and ongoing prudent and feasible tax planning strategies. Should a change in circumstances lead to a change in judgment about the utilization of deferred tax assets in future years, the Company would adjust the related valuation allowances in the period that the change in circumstances occurs, along with a corresponding increase or charge to income. During each fiscal year, the Company assesses the available positive and negative evidence to evaluate if it is more likely than not that the deferred tax assets will be realized. At the end of fiscal year 2018, the Company determined that it was more-likely-than-not that the entire California net operating loss will not be utilized prior to expiration. Significant pieces of objective evidence evaluated included the Company’s history of utilization of California net operating losses in prior years for each of its subsidiaries, as well as its forecasted amount of net operating loss utilization for certain members of the combined group. As a result, at that time, the Company recorded a valuation allowance in the amount of $ 86,000 related to California net operating losses. During fiscal year 2021, the Company determined that it was more-likely-than-not that the New Jersey net operating losses will not be utilized prior to expiration and, accordingly, recorded a valuation allowance of $ 1.1 million. Significant pieces of objective evidence evaluated included the Company’s proportional increase of revenue to other states resulting in a dilution of New Jersey sourced income as well as the Company’s forecasted amount of net operating loss utilization in New Jersey for certain members of the combined group. At the end of fiscal year 2021, the total valuation allowance was $ 1.2 million, compared to a balance of $ 86,000 for fiscal year 2020. As of September 30, 2022, the Company assessed all available positive and negative evidence available to determine whether, based on the weight of that evidence, there was a change in judgment related to the utilization of deferred tax assets in future years. The Company concluded that as of September 30, 2022, the valuation allowance for the Company’s deferred tax assets was appropriate in accordance with ASC 740. Consequently, there was no change to the valuation allowance during the three and nine months ended September 30, 2022. For acquired business entities, if the Company identifies 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 the Company records the offset to goodwill. The Company records all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current period income tax expense. The Company recognizes the tax benefit from uncertain tax positions if it is more likely than not that the tax positions will be sustained on examination by the tax authorities, based on the technical merits of the position. The tax benefit is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense. During the three and nine months ended September 30, 2022, the Company did no t record a liability for uncertain tax positions. 30 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) Based on the Company’s estimates and determination of an effective tax rate for the year, the Company recorded an income tax benefit of $ 1.5 million and $ 5.6 million for the three and nine months ended September 30, 2022, respectively, as compared to an income tax benefit of $ 0.2 million and $ 5.4 million for the three and nine months ended October 1, 2021, respectively. During the three and nine months ended September 30, 2022, the difference between the effective tax rate and the federal statutory rate was primarily attributable to state taxes, non-deductible stock compensation, nondeductible executive compensation, research and development tax credits, and the commercial building energy efficiency deduction. During the three and nine months ended October 1, 2021, the difference between the effective tax rate and the federal statutory rate was primarily attributable to state taxes, excess tax benefit on stock compensation, nondeductible executive compensation, research and development tax credits, the commercial building energy efficiency deduction, and additional benefits provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748). On June 10, 2021, the Company received notice from the State of New York indicating that the Company’s 2017 , 2018 , and 2019 state tax returns were under examination. The examination was finalized during the Company’s first quarter of fiscal 2022 and there were no changes made by the State of New York to the state tax returns filed. ​ 31 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 11. EARNINGS PER SHARE (“EPS”) Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Diluted EPS is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive potential common shares for the period. Potential common shares include the weighted-average dilutive effects of outstanding stock options and restricted stock awards using the treasury stock method. The following table sets forth the number of weighted-average common shares outstanding used to compute basic and diluted EPS: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three months ended ​ Nine months ended ​ ​ September 30, ​ October 1, ​ September 30, ​ October 1, ​ 2022 2021 2022 2021 ​ ​ (in thousands, except per share amounts) Net income (loss) ​ $ 76 ​ $ 840 ​ $ ( 8,023 ) ​ $ ( 7,527 ) Weighted-average common shares outstanding ​ 13,110 ​ 12,606 ​ 12,971 ​ 12,391 Effect of dilutive stock options and restricted stock awards ​ 250 ​ 535 ​ — ​ — Weighted-average common shares outstanding-diluted ​ 13,360 ​ 13,141 ​ 12,971 ​ 12,391 Earnings (Loss) per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ $ 0.01 ​ $ 0.07 ​ $ ( 0.62 ) ​ $ ( 0.61 ) Diluted ​ $ 0.01 ​ $ 0.06 ​ $ ( 0.62 ) ​ $ ( 0.61 ) ​ For the three months ended September 30, 2022 and October 1, 2021, the Company excluded 401,000 and 26,000 common shares subject to outstanding equity awards, respectively, from the calculation of diluted shares because their impact would have been anti-dilutive. For the nine months ended September 30, 2022 and October 1, 2021, the Company reported a net loss, and accordingly, all outstanding equity awards have been excluded from such periods because including them would have been anti-dilutive. ​ 32 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) ​ 12. CONTINGENCIES Claims and Lawsuits The Company is subject to claims and lawsuits from time to time, including those alleging professional errors or omissions that arise in the ordinary course of business against firms that operate in the engineering and consulting professions. The Company carries professional liability insurance, subject to certain deductibles and policy limits, for such claims as they arise and may from time to time establish reserves for litigation that is considered probable of a loss. In accordance with accounting standards regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a loss is probable and the amount can be reasonably estimated, and discloses the amount accrued and an estimate of any reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for the Company’s financial statements not to be misleading. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. Because litigation outcomes are inherently unpredictable, the Company’s evaluation of legal proceedings often involves a series of complex assessments by management about future events and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material to any one of the Company’s financial statements are not probable, but are reasonably possible, or are probable, but cannot be estimated, then the Company will disclose the nature of the loss contingencies, together with an estimate of the possible loss or a statement that such loss is not reasonably estimable. While the consequences of certain unresolved proceedings are not presently determinable, and a reasonable estimate of the probable and reasonably possible loss or range of loss in excess of amounts accrued for such proceedings cannot be made, an adverse outcome from such proceedings could have a material adverse effect on the Company’s earnings in any given reporting period. However, in the opinion of the Company’s management, after consulting with legal counsel, and taking into account insurance coverage, the ultimate liability related to current outstanding claims and lawsuits is not expected to have a material adverse effect on the Company’s financial statements. ​ 33 Table of Contents WILLDAN GROUP, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued) (Unaudited) 13. SUBSEQUENT EVENTS ​ Seventh Amendment to the Credit Agreement ​ On November 1, 2022 , the Company entered into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). The Seventh Amendment, (A) waives the minimum Adjusted EBITDA (as defined in the Fifth Amendment) threshold and any related Default or Event of Default (each as defined in the Fifth Amendment) for the fiscal quarter ending September 30, 2022, (B) amends the maximum Total Leverage Ratio (as defined in the Fifth Amendment) threshold and the minimum Adjusted EBITDA threshold for the remainder of the Extended Covenant Relief Period, (C) amends the pricing structure of borrowings under the Credit Agreement during the remainder of the Extended Covenant Relief Period, (D) restricts aggregate borrowings under the Revolving Credit Facility to no more than $ 10.0 million at any time during the period from November 1, 2022 through the date on which financial statements and compliance documents have been received by the Administrative Agent (as defined in the Credit Agreement) for the fiscal quarter ending March 31, 2023, (E) conditions access to the accordion feature of the Credit Agreement to periods when the Company’s Total Leverage ratio is less than 3.0 , (F) amends the Total Leverage Ratio requirement contained in the conditions precedent required upon any Credit Event (as defined in the Credit Agreement) occurring prior to the delivery to the Administrative Agent of the financial statements and compliance documents required for the fiscal quarter ending March 31, 2023, (G) includes a general release of all Claims (as defined in the Seventh Amendment) against the Administrative Agent, the L/C Issuer and the Lenders (each as defined in the Credit Agreement) and (H) amends the timing requirement of certain financial reports. Additionally, during the remainder of the Extended Covenant Relief Period, the Company may not make Share Repurchases (as defined in the Seventh Amendment). ​ Pursuant to the Seventh Amendment, during the Extended Covenant Relief Period, (A) borrowings under the Credit Agreement will bear interest at SOFR plus 4.00 %; provided, that SOFR cannot be less than 0.00 %, and (B) the Company will pay a commitment fee of 0.50 % per annum for the unused portion of the revolving credit facility under the Credit Agreement. ​ After the Extended Covenant Relief Period, borrowings under the Credit Agreement will bear interest at either a Base Rate or SOFR (plus 0.10 % or 0.15 % depending on the interest period), each as defined in the Credit Agreement, at the Company’s option, and in each case, plus an applicable margin, which applicable margin will range from 0.125 % to 1.25 % with respect to Base Rate borrowings and 1.125 % to 2.25 % with respect to SOFR borrowings, depending on the Total Leverage Ratio; provided, that SOFR cannot be less than 0.00 %. The Company will also pay a commitment fee for the unused portion of the revolving credit facility and the delayed draft term loan facility under the Credit Agreement, which will range from 0.15 % to 0.40 % per annum depending on the Total Leverage Ratio, and fees on the face amount of any letters of credit outstanding under the revolving credit facility, which will range from 0.84 % to 1.688 % per annum, in each case, depending on whether such letter of credit is a performance or financial letter of credit and the Total Leverage Ratio. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 34 Table of Contents