ENGLOBAL CORP - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended September 26, 2020

 

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

 

Commission File No. 001-14217

 

ENGlobal Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of

incorporation or organization)

 

88-0322261

(I.R.S. Employer Identification No.)

 

654 N. Sam Houston Parkway E., Suite 400, Houston, TX		77060-5914
(Address of principal executive offices)		(Zip code)

 

(281) 878-1000

(Registrant’s telephone number, including area code)

 

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

 

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		ENG		NASDAQ

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X]      No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes [X]      No [  ]

 

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

 

Large Accelerated Filer	[  ]		Accelerated Filer	[  ]
Non-Accelerated Filer	[X]		Smaller Reporting Company	[X]
Emerging growth company	[  ]

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes [  ]      No [X]

 

 

As of November 5, 2020, the registrant had outstanding 27,560,686 shares of common stock, par value $0.001 per share.

 

 

 

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 26, 2020

 

TABLE OF CONTENTS

 

		Page Number
Part I.	Financial Information	3
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 26, 2020 and September 28, 2019	3
	Unaudited Condensed Consolidated Balance Sheets at September 26, 2020 and December 28, 2019	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2020 and September 28, 2019	5
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 26, 2020 and September 28, 2019	6
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
Part II.	Other Information	23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
	Signatures	27

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ENGlobal Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share data)

 

	For the Three Months Ended		For the Nine Months Ended
	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Operating revenues	$15,729	$13,974	$52,871	$39,758
Operating costs	14,585	12,299	46,014	34,803
Gross profit	1,144	1,675	6,857	4,955
Selling, general and administrative expenses	2,174	2,371	6,621	7,125
Operating profit (loss)	(1,030)	(696)	236	(2,170)
Other income (expense):
Other income, net	4	7	6	48
Interest expense, net	(62)	(5)	(103)	(12)
Income (loss) from operations before income taxes	(1,088)	(694)	139	(2,134)
Provision for federal and state income taxes	22	22	80	73
Net income (loss)	(1,110)	(716)	59	(2,207)
Basic and diluted income (loss) per common share:	$(0.04)	$(0.03)	$0.00	$(0.08)
Basic and diluted weighted average shares used in computing income (loss) per share:	27,507	27,410	27,529	27,417

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 

ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except share amounts)

 

	September 26, 2020	December 28, 2019
ASSETS
Current Assets:
Cash	$12,699	$8,307
Trade receivables, net of allowances of $270 and $236	12,703	11,435
Prepaid expenses and other current assets	185	889
Contract assets	3,055	3,862
Total Current Assets	28,642	24,493
Property and equipment, net	1,193	1,033
Goodwill	720	720
Other assets
Right of use asset	1,999	2,133
Deposits and other assets	391	307
Total Other Assets	2,390	2,440
Total Assets	$32,945	$28,686
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$3,084	$3,261
Accrued compensation and benefits	2,875	2,783
Current portion of leases	1,613	1,041
Contract liabilities	2,732	5,438
Current portion of note	3,042	—
Other current liabilities	244	681
Total Current Liabilities	13,590	13,204
Deferred payroll tax	791	—
Long-term debt	3,371	—
Long-term leases	932	1,458
Total Liabilities	18,684	14,662
Commitments and Contingencies (Note 8)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,560,686 shares issued and outstanding at September 26, 2020 and 27,413,626 shares issued and outstanding at December 28, 2019	28	27
Additional paid-in capital	37,111	36,934
Accumulated deficit	(22,878)	(22,937)
Total Stockholders’ Equity	14,261	14,024
Total Liabilities and Stockholders’ Equity	$32,945	$28,686

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 

 

ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

 

	For the Nine Months Ended
	September 26, 2020	September 28, 2019
Cash Flows from Operating Activities:
Net income (loss)	$59	$(2,207)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	313	258
Share-based compensation expense	177	45
Changes in current assets and liabilities:
Trade accounts receivable	(1,268)	2,748
Contract assets	807	(953)
Prepaids and other current assets	620	956
Accounts payable	(177)	(229)
Accrued compensation and benefits	883	(126)
Contract liabilities	(2,706)	209
Income taxes payable	(76)	16
Other current liabilities, net	(361)	(460)
Net cash provided by (used in) operating activities	$(1,729)	$257
Cash Flows from Investing Activities:
Proceeds from notes receivable	—	24
Property and equipment acquired	(228)	(191)
Net cash used in investing activities	$(228)	$(167)
Cash Flows from Financing Activities:
Purchase of common stock	—	(61)
Proceeds from PPP loan	4,937	—
Proceeds from revolving credit facility	1,476	—
Payments on finance leases	(64)	(1)
Net cash provided by (used in) financing activities	$6,349	$(62)
Net change in cash	4,392	28
Cash at beginning of period	8,307	6,060
Cash at end of period	$12,699	$6,088
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$103	$12
Right of use assets obtained in exchange for new operating lease liability	$963	$2,377
Cash paid during the period for income taxes (net of refunds)	$16	$—
Debt issuance costs	$140	$—
Leased assets obtained in exchange for new finance lease liabilities	$219	$236

 

See accompanying notes to unaudited interim condensed consolidated financial statements. 

 

 

ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(amounts in thousands)

	For the Three Months Ended
	September 26, 2020	September 28, 2019
Common Stock
Balance at beginning of period	$27	$27
Common stock issued	1	—
Balance at end of period	28	27
Additional Paid-in Capital
Balance at beginning of period	37,066	36,906
Share-based compensation - employee	45	12
Balance at end of period	37,111	36,918
Accumulated Earnings (Deficit)
Balance at beginning of period	(21,768)	(22,962)
Net loss	(1,110)	(716)
Balance at end of period	(22,878)	(23,678)
Total Stockholders’ Equity	$14,261	$13,267

 

 

	For the Nine Months Ended
	September 26, 2020	September 28, 2019
Common Stock
Balance at beginning of period	$27	$27
Common stock issued	1	—
Balance at end of period	28	27
Additional Paid-in Capital
Balance at beginning of period	36,934	36,934
Share-based compensation - employee	177	45
Treasury stock retired	—	(61)
Balance at end of period	37,111	36,918
Accumulated Earnings (Deficit)
Balance at beginning of period	(22,937)	(21,471)
Net income (loss)	59	(2,207)
Balance at end of period	(22,878)	(23,678)
Total Stockholders’ Equity	$14,261	$13,267

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

ENGLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed financial statements do not include all of the information or note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 28, 2019, included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

The condensed financial statements included herein are unaudited for the three month and nine month periods ended September 26, 2020 and September 28, 2019, and in the case of the condensed balance sheet as of December 28, 2019 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.

 

The Company has assessed subsequent events through the date of filing of these condensed financial statements with the Securities and Exchange Commission and believes that the disclosures made herein are adequate to make the information presented herein not misleading.

 

We had no items of other comprehensive income in any period presented; therefore, no other components of comprehensive income are presented.

 

Each of our quarters is comprised of 13 weeks.

 

NOTE 2 – ACCOUNTING STANDARDS

 

Revenue Recognition – Our revenue is comprised of engineering, procurement and construction management services and sales of fabricated systems and integrated control systems that we design and assemble. The majority of our services are provided under time-and-material contracts. Some time-and-material contracts may have limits. Revenue is not recognized over these limits until authorization by the client has been received.

 

A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

 

We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.

 

Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

  

 

To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single contract should be accounted for as more than one 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. For most of our contracts, we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts 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. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us. 

 

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

 

We have a standard, monthly process in which management reviews the progress and execution of our performance obligations. 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, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements, and other contractual requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables.

 

Based on this analysis, any adjustments to revenue, operating costs and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive performance and may result in an increase in operating income during the performance of individual performance obligations if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. When estimates of total costs to be incurred exceed total estimates to be earned resulting in a loss on the performance obligation, a provision for the entire loss is recognized in the period the loss becomes known. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net revenue, operating costs and the related impact to operating income are recognized monthly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.

 

NOTE 3 – REVENUE RECOGNITION

 

Our revenue by contract type was as follows (dollars in thousands):

 

	For the Three Months Ended		For the Nine Months Ended
	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Fixed-price revenue	$10,863	$5,334	$28,785	$14,418
Time-and-material revenue	4,866	8,640	24,086	25,340
Total Revenue	15,729	13,974	52,871	39,758

 

NOTE 4 – CONTRACT ASSETS AND CONTRACT LIABILITIES

 

Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred.

 

 

Costs, estimated earnings and billings on uncompleted contracts consisted of the following at September 26, 2020 and December 28, 2019:

 

	September 26, 2020	December 28, 2019
	(dollars in thousands)
Costs incurred on uncompleted contracts	$33,565	$23,846
Estimated earnings on uncompleted contracts	3,467	5,188
Earned revenues	37,032	29,034
Less: billings to date	36,709	30,610
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts	$323	$(1,576)
Contract assets	$3,055	$3,862
Contract liabilities	(2,732)	(5,438)
Net contract assets	$323	$(1,576)

 

NOTE 5 – DEBT

 

The components of debt were as follows (dollars in thousands):

 

	September 26, 2020	December 28, 2019
PPP Loan (1)	$4,937	$—
Revolving Credit Facility (2)	1,476	—
Total debt	6,413	—
Amount due within one year	3,042	—
Total long-term debt	$3,371	$—

 

 

Interest Rate: The interest rate on the PPP Loan is 1% per year.

 

Potential PPP Loan Forgiveness: Under the PPP, ENGlobal may apply for forgiveness of the amount due on the PPP Loan in an amount equal to the sum of the following costs incurred during the covered period beginning on the date of the first disbursement of the PPP Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act.

 

We have elected to utilize a 24-week covered period as allowed by the Paycheck Protection Program Flexibility Act (“PPPFA”) enacted on June 5, 2020. When applying for PPP Loan forgiveness, we have the option to increase the repayment period for any unforgiven portion of the PPP Loan to five years as permitted under the PPPFA.

 

We have calculated qualified forgivable expenses in excess of our PPP Loan amount. Although we expect the full PPP Loan amount to be forgiven, we cannot guarantee our forgiveness application will be accepted allowing for a fully forgiven loan.

 

 

 

Set forth below are certain of the material terms of the Revolving Credit Facility:

 

Credit Limit:  The credit limit is an amount equal to the lesser of (a) the Maximum Credit Limit and (b) the sum of (i) 85% of the Borrowers’ Eligible Accounts (as defined in the Revolving Credit Facility), plus (ii) the lesser of (A) 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility), or (B) $3,000,000 plus (iii) the lesser of (A) 20% of Borrowers’ Eligible Fixed Price Accounts, or (B) $250,000. As of June 27, 2020, the credit limit under the Revolving Credit Facility was $3.5 million.

 

Interest:  Any Loans will bear interest at a rate per annum equal to the Prime rate (defined as the rate announced as the “prime rate” or “bank prime rate” in the Western Edition of the Wall Street Journal) plus 2.0%; provided that interest will not be less than $7,500 per month.

 

Collateral: Lender receives a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property.

 

Maturity: The maturity date is May 20, 2023 and shall be automatically extended for additional periods of one-year each, if written notice of termination is not given by one party to the other at least thirty days prior to the maturity date.

 

Loan Fee: The Borrowers will pay to Lender a loan fee of 1.00% of the Maximum Credit Limit at the time of funding and annually thereafter on the anniversary date of the initial funding.

 

Termination Fee: In the event the Borrowers terminate the Revolving Credit Facility prior to the maturity date, the Borrowers will pay to Lender a termination fee of (i) 2.00% of the Maximum Credit Limit, if the termination occurs on or prior to the first anniversary of the Closing Date, (ii) 1.00% of the Maximum Credit Limit, if the termination occurs after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date and (iii) 0.05% of the Maximum Credit Limit, if the termination occurs after the second anniversary of the Closing Date.

 

Covenants: The Revolving Credit Facility requires the Borrowers to comply with certain customary affirmative covenants, and negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Borrowers to engage in mergers, acquisitions or other transactions outside of the ordinary course of business, make loans or investments, incur indebtedness, pay dividends or repurchase stock, or engage in affiliate transactions. The Revolving Credit Facility does not require the Borrowers to comply with any financial covenants.

 

The future scheduled maturities of our debt are (in thousands):

 

	PPP Loan and Revolving Credit Facility (1)	Revolving Credit Facility (1)
2020	$553	$—
2021	3,318	—
2022	1,066	—
2023	1,476	1,476
Thereafter	—	—
	$6,413	$1,476

 

 

 

NOTE 6 – SEGMENT INFORMATION

 

Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. The operating performance of our segments is regularly reviewed with operational leaders in charge of our engineering offices and automation offices of these segments, the chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.

 

The Engineering, Procurement and Construction Management (“EPCM”) segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the energy industry throughout the United States. The Automation segment provides services related to the design, integration and implementation of advanced automation, information technology, process distributed control systems, analyzer systems, and electrical projects primarily to the upstream and downstream sectors of the energy industry throughout the United States. The Automation segment includes the government services group, which provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities and the fabrication operation.

 

Revenues, operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and includes costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments.

 

Segment information for the three months ended September 26, 2020 and September 28, 2019 is as follows (dollars in thousands):

 

For the three months ended September 26, 2020:	EPCM	Automation	Corporate	Consolidated
Revenue	$8,016	$7,713	$—	$15,729
Gross profit	754	390	—	1,144
Gross Profit Margin	9.4%	5.1%		7.3%
SG&A	574	417	1,183	2,174
Operating income (loss)	180	(27)	(1,183)	(1,030)
Other income, net				4
Interest expense, net				(62)
Tax expense				(22)
Net loss				$(1,110)

 

For the three months ended September 28, 2019:	EPCM	Automation	Corporate	Consolidated
Revenue	$4,256	$9,718	$—	$13,974
Gross profit	75	1,600	—	1,675
Gross Profit Margin	1.8%	16.5%		12.0%
SG&A	651	427	1,293	2,371
Operating income (loss)	(576)	1,173	(1,293)	(696)
Other income, net				7
Interest expense, net				(5)
Tax expense				(22)
Net loss				$(716)

 

 

Segment information for the nine months ended September 26, 2020 and September 28, 2019 is as follows (dollars in thousands):

 

For the nine months ended September 26, 2020:	EPCM	Automation	Corporate	Consolidated
Revenue	$19,771	$33,100	$—	$52,871
Gross profit	1,677	5,180	—	6,857
Gross Profit Margin	8.5%	15.6%		13.0%
SG&A	1,852	1,121	3,648	6,621
Operating income (loss)	(175)	4,059	(3,648)	236
Other income, net				6
Interest expense, net				(103)
Tax expense				(80)
Net income				$59

 

For the nine months ended September 28, 2019:	EPCM	Automation	Corporate	Consolidated
Revenue	$15,548	$24,210	$—	$39,758
Gross profit	1,574	3,381	—	4,955
Gross Profit Margin	10.1%	14.0%		12.5%
SG&A	1,826	1,246	4,053	7,125
Operating income (loss)	(252)	2,135	(4,053)	(2,170)
Other income, net				48
Interest expense, net				(12)
Tax expense				(73)
Net loss				$(2,207)

 

Total assets by segment for the three months ended September 26, 2020 and December 28, 2019 are as follows (dollars in thousands):

 

Total Assets by Segment	As of September 26, 2020	As of December 28, 2019
	(dollars in thousands)
EPCM	$9,888	$6,253
Automation	10,350	13,603
Corporate	12,707	8,830
Consolidated	$32,945	$28,686

 

 

NOTE 7 – FEDERAL AND STATE INCOME TAXES

 

The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740-270 we estimate an annual effective tax rate based on year-to-date operating results and our projection of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results. If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.

 

The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2016 and Texas margins tax returns prior to 2016 are closed. Generally, the applicable statues of limitations are three to four years from their filings.

 

On March 27, 2020, the CARES Act was enacted and signed into law and U.S. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date.  The CARES Act includes changes to the tax provisions that benefit business entities and makes certain technical corrections to the Tax Cuts and Jobs Act enacted in 2017. The tax relief measures for businesses include a five-year net operating loss carryback, suspension of annual deduction limitation of 80% of taxable income from net operating losses generated in a tax year beginning after December 31, 2017, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic. The Company evaluated the impact of the CARES Act and determined that there was no significant impact to the income tax provision for the quarter.

 

The Company recorded income tax expense of $22 thousand and $80 thousand for the three and nine months ended September 26, 2020, respectively, as compared to income tax expense of $22 thousand and $73 thousand for the three and nine months ended September 28, 2019, respectively.

 

The effective income tax rate for the three and nine months ended September 26, 2020 was (2.0)% and 57.6%, respectively, as compared to (3.2)% and (3.4)% for the three and nine months ended September 28, 2019, respectively. The effective tax rate differed from the federal statutory rate of 21% primarily due to the effect of the valuation allowances related to the unrealized deferred tax asset generated by the current year benefit.

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on our financial position, results of operations or liquidity.

 

We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental) which is partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.

 

 

NOTE 9 – LEASES

 

The Company leases land, office space and equipment. Arrangements are assessed at inception to determine if a lease exists and, with the adoption of ASC 842, “Leases,” right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. Because the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate at the inception of a lease to calculate the present value of lease payments. The Company has elected to apply the short-term lease exception for all asset classes, excluding lease liabilities from the balance sheet and recognizing the lease payments in the period they are incurred.

 

The components of lease expense were as follows (dollars in thousands):

 

		Three Months Ended		Nine Months Ended
	Financial Statement Classification	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Finance leases:
Amortization expense	SG&A Expense	$26	$4	$64	$4
Interest expense	Interest expense, net	5	2	15	2
Total finance lease expense		31	6	79	6
Operating leases:
Operating costs	Operating costs	135	427	506	845
Selling, general and administrative expenses	SG&A Expense	459	476	1,364	1,398
Total operating lease expense		594	903	1,870	2,243
Total lease expense		$625	$909	$1,949	$2,249

 

Supplemental balance sheet information related to leases was as follows (dollars in thousands):

 

	Financial Statement Classification	September 26, 2020	December 28, 2019
ROU Assets:
Operating leases	Right of Use asset	$1,999	$2,133
Finance leases	Property and equipment, net	471	318
Total ROU Assets:		$2,470	$2,451
Lease liabilities:
Current liabilities
Operating leases	Current portion of leases	$1,494	$961
Finance leases	Current portion of leases	119	80
Noncurrent Liabilities:
Operating leases	Long-term leases	579	1,220
Finance leases	Long-term leases	353	238
Total lease liabilities		$2,545	$2,499

 

 

The weighted average remaining lease term and weighted average discount rate were as follows:

 

	At September 26, 2020
Weighted average remaining lease term (years)
Operating leases	1.4
Finance leases	4.4
Weighted average discount rate
Operating leases	2.0%
Finance leases	6.2%

 

Maturities of lease liabilities as of September 26, 2020 are as follows (dollars in thousands):

 

Years ending:	Operating leases	Finance leases	Total
2020 (remaining months)	379	33	412
2021	1,448	133	1,581
2022	289	112	401
2023	—	92	92
2024	—	72	72
2025	—	37	37
2026	—	18	18
Total lease payments	2,116	497	2,613
Less: imputed interest	(43)	(25)	(68)
Total lease liabilities	$2,073	$472	$2,545

 

NOTE 10 – SUBSEQUENT EVENTS

 

On September 28, 2020, we received written notice from The NASDAQ Stock Market (“NASDAQ”) indicating that the Company is not in compliance with the $1.00 minimum bid price requirement for continued listing on NASDAQ, as set forth in Listing Rule 5550(a)(2). The notice has no immediate effect on the listing of the Company’s common stock, and its common stock will continue to trade on NASDAQ under the symbol “ENG” at this time.

 

The Company may regain compliance with the minimum bid price requirement in accordance with Listing Rule 5810(c)(3)(A) during the 180 calendar day period from September 28, 2020 to March 29, 2021. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for at least ten consecutive business days before March 29, 2021.

 

If the Company is not in compliance by March 29, 2021, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for NASDAQ, except for the minimum bid price requirement. In addition, the Company would be required to notify NASDAQ of its intent to cure the minimum bid price deficiency, which may include implementing a reverse stock split.

 

If the Company does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by NASDAQ, NASDAQ will provide notice that the Company’s common stock will be subject to delisting. The Company would then be entitled to appeal the NASDAQ Staff’s determination to a NASDAQ Listing Qualifications Panel and request a hearing.

 

The Company intends to monitor the closing bid price of the Company’s common stock and consider its available options to resolve the noncompliance with the minimum bid price requirement. No determination regarding the Company’s response has been made at this time. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other NASDAQ listing criteria.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

Certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission (the “SEC”), press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, the specific risk factors identified under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019, and those described from time to time in our future reports filed with the SEC.

 

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 28, 2019.

 

Overview

 

ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”), incorporated in the State of Nevada in June 1994, is a leading provider of engineered modular solutions to the energy industry. We deliver these solutions to our clients by combining our vertically integrated engineering and professional project execution services with our automation and systems integration expertise and mechanical fabrication capabilities. We believe our vertically integrated strategy allows us to differentiate our company from most of our competitors as a full service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their project schedules. Our strategy and positioning has also allowed the Company to pursue larger scopes of work centered around many different types of modularized engineered systems.

 

We have identified modular project execution offerings as the opportunity to which our capabilities are best applied, focused our business development team on communicating these offerings to specific clients and realigned our internal reporting structure to better facilitate complete modular project execution. We have identified six strategic market initiatives where we have a history of delivering project solutions and can provide complete project execution that includes engineering, design, fabrication and integration of automated control systems as a complete packaged solution for our clients, preferably in a modular form. This “design it once – build it many times” concept has many merits including a single vendor interface, better control of costs, better control of schedule and lower safety risk. These six targeted market initiatives include: (1) natural gas and crude oil and renewable energy production systems; (2) control systems implementation; (3) continuous emission monitoring systems; (4) pipeline pump, compression, metering, loading and blending systems; (5) adding customer relationships in specific markets for automation; and (6) expanding government services beyond our heritage contracts. We have identified specific individuals within the Company to lead the efforts for each market initiative - “a champion” - while coordinating with the other sales leaders.

 

We continue to be mindful of our overhead structure. While we continue to make investments in key individuals, product developments and new facilities and equipment, which may negatively impact our selling, general and administrative expense (“SG&A”), we have been able to offset those increases with decreases in other areas and, overall, our SG&A costs have continued to decrease year over year. We recognize that the level of our SG&A is greater than it could be for a company our size; however, we have maintained our overhead structure in anticipation of higher operating levels.

 

On April 18, 2018, we announced that our Board of Directors had initiated a review of strategic alternatives, which could include strategic mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board’s strategic review will result in any transaction, or any assurance as to its outcome or timing.

 

 

COVID-19 Update

 

On March 11, 2020, the World Health Organization declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. In response to the continued spread of COVID-19, governmental authorities in the United States and around the world have imposed various restrictions designed to slow the pace of the pandemic, including restrictions on travel and other restrictions that prohibit employees from going to work, in cities where we have offices, employees, and customers causing severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including many of our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. We have been fortunate that we entered the year with a robust backlog and that the larger projects in our backlog have not been cancelled or postponed. This has allowed us to keep a significant portion of our workforce productive. However, we have not been successful in replacing our backlog as quickly as it has been converted to revenues. As a result, our backlog has decreased by approximately $27.4 million from $59.2 million at December 28, 2019 to $31.8 million at September 26, 2020. While we have many potential opportunities in our sales pipeline that could replace a significant portion of this backlog reduction, inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions have largely contributed to delays in project awards and our inability to replace our backlog as quickly as it has been converted to revenue. While we believe our backlog is sufficient to keep a significant portion of our workforce productive for the balance of this year, it may not be at our current operating levels. The extent to which the disruption of COVID-19 may impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to our business, financial condition and results of operations is uncertain and we will continue to monitor the situation and assess the operational and financial impact on our business.

 

As a result of these current and future uncertainties, we felt it necessary to utilize all avenues of available assistance as they may not be available in the future when needed. On April 13, 2020, we obtained a $4.9 million loan (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which we expect to be forgiven. We are also utilizing relief for employees impacted by COVID-19 under the Families First Coronavirus Response Act in order to minimize the impact to both our employees and our business. Further, we are utilizing some of the tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS and the CARES Act.

 

On May 21, 2020, in order to provide additional liquidity, the Company and its subsidiaries (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans in the aggregate amount of up to $6.0 million, subject to a credit limit. For additional information, see “Liquidity and Capital Resources.” As we continue to monitor the situation and assess the operational and financial impact on our business, we may determine to take further actions in response.

 

On June 27, 2020, we temporarily closed one of our operational facilities and sponsored COVID-19 testing for employees in response to a potential COVID-19 exposure. During the closure, we cleaned and sanitized the facility, and we reopened the facility after one week. Employees and visitors were allowed to return to the facility only after negative test results were received or after a fourteen day quarantine period. Although the closure was only for one week, the disruption to our operations was longer as testing results were received slower than expected and project progress was delayed.

 

Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations. For additional information, see Part II. Item 1A “Risk Factors.”

 

Critical Accounting Policies Update

 

A summary of our critical accounting policies is described under the caption “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Form 10-K. Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2019 Annual Report on Form 10-K.

 

Results of Operations

 

In the course of providing our time-and-material services, we routinely provide materials and equipment and may provide construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in general are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The material purchases and the use of subcontractor services can vary significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percentage of revenue may not be indicative of the Company’s core business trends.

 

Segment operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment’s operations. Corporate SG&A expenses include finance, accounting, human resources, business development, legal and information technology which are unrelated to specific projects or segments but which are incurred to support the Company’s activities.

 

 

Comparison of the three months ended September 26, 2020 versus the three months ended September 28, 2019

 

The following table, for the three months ended September 26, 2020 versus the three months ended September 28, 2019, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

 

Operations Data	EPCM	Automation	Corporate	Consolidated
Three months ended September 26, 2020:
Revenue	$8,016	$7,713	$—	$15,729	100%
Gross profit	754	390	—	1,144
Gross Profit Margin	9.4%	5.1%		7.3%
SG&A	574	417	1,183	2,174	13.8%
Operating income (loss)	180	(27)	(1,183)	(1,030)	(6.5)%
Other income, net				4
Interest expense, net				(62)
Tax expense				(22)
Net loss				$(1,110)	(7.1)%
Basic and diluted loss per share				$(0.04)
Three months ended September 28, 2019:
Revenue	$4,256	$9,718	$—	$13,974	100%
Gross profit	75	1,600	—	1,675
Gross Profit Margin	1.8%	16.5%		12.0%
SG&A	651	427	1,293	2,371	17.0%
Operating income (loss)	(576)	1,173	(1,293)	(696)	(5.0)%
Other income, net				7
Interest expense, net				(5)
Tax expense				(22)
Net loss				$(716)	(5.1)%
Basic and diluted loss per share				$(0.03)
Increase (Decrease) in Operating Results:
Revenue	$3,760	$(2,005)	$—	$1,755	12.6%
Gross profit	679	(1,210)	—	(531)
SG&A	(77)	(10)	(110)	(197)	(8.3)%
Operating income (loss)	756	(1,200)	110	(334)	48.0%
Other income, net				(3)
Interest expense, net				(57)
Tax expense				—
Net loss				$(394)	55.0%
Basic and diluted loss per share				$(0.01)

 

Comparison of the nine months ended September 26, 2020 versus the nine months ended September 28, 2019

 

The following table, for the nine months ended September 26, 2020 versus the nine months ended September 28, 2019, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

 

Operations Data	EPCM	Automation	Corporate	Consolidated
Nine months ended September 26, 2020:
Revenue	$19,771	$33,100	$—	$52,871	100%
Gross profit	1,677	5,180	—	6,857
Gross Profit Margin	8.5%	15.6%		13.0%
SG&A	1,852	1,121	3,648	6,621	12.5%
Operating income (loss)	(175)	4,059	(3,648)	236	0.4%
Other income, net				6
Interest expense, net				(103)
Tax expense				(80)
Net income				$59	0.1%
Basic and diluted income per share				$0.00
Nine months ended September 28, 2019:
Revenue	$15,548	$24,210	$—	$39,758	100%
Gross profit	1,574	3,381	—	4,955
Gross Profit Margin	10.1%	14.0%		12.5%
SG&A	1,826	1,246	4,053	7,125	17.9%
Operating income (loss)	(252)	2,135	(4,053)	(2,170)	(5.5)%
Other income, net				48
Interest expense, net				(12)
Tax expense				(73)
Net loss				$(2,207)	(5.6)%
Basic and diluted loss per share				$(0.08)
Increase (Decrease) in Operating Results:
Revenue	$4,223	$8,890	$—	$13,113	33.0%
Gross profit	103	1,799	—	1,902
SG&A	26	(125)	(405)	(504)	(7.1)%
Operating income (loss)	77	1,924	405	2,406	(110.9)%
Other income, net				(42)
Interest expense, net				(91)
Tax expense				(7)
Net income				$2,266	(102.7)%
Basic and diluted income per share				$0.08