NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
and Operations
–
ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context requires otherwise,
references to “we”, “us”, “our”, “the Company” or “ENGlobal” are intended
to mean the consolidated business and operations of ENGlobal Corporation. Our business operations consist of providing engineering
and other professional project services related to design, assembly, procurement, maintenance, environmental and other governmental
compliance and construction management, primarily with respect to energy sector infrastructure facilities throughout the United
States of America (“U.S.”). Please see “Note 13 - Segment Information” for a description of our segments
and segment operations.
Basis
of Presentation
–
The accompanying consolidated financial statements and related notes present our consolidated
financial position as of December 31, 2016 and December 26, 2015, and the results of our operations, cash flows and changes in
stockholders’ equity for the 53 week period ended December 31, 2016 and for the 52 week period ended December 26, 2015.
They are prepared in accordance with accounting principles generally accepted in the U.S. Certain amounts for prior periods have
been reclassified to conform to the current presentation. In preparing financial statements, management makes informed judgments
and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect
the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management reviews its estimates,
including those related to percentage-of-completion contracts in progress, litigation, income taxes, impairment of long-lived
assets and fair values. Changes in facts and circumstances or discovery of new information may result in revised estimates. Actual
results could differ from these estimates.
NOTE
2 - ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
Consolidation
Policy
–
Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries
in which we have a controlling interest after the elimination of all material inter-company accounts and transactions. Currently,
all of our subsidiaries are wholly-owned.
Fair
Value Measurements
–
Fair value is defined as the amount that would be received for the sale of an asset or paid
for the transfer of a liability in an orderly transaction between unrelated third party market participants at the measurement
date. In determination of fair value measurements for assets and liabilities we consider the principal, or most advantageous market,
and assumptions that market participants would use when pricing the asset or liability.
Cash
and cash equivalents
–
Cash and cash equivalents include all cash on hand, demand deposits and investments with
original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. We have $0.8
million in cash in foreign banks as of December 31, 2016.
We
utilize a cash management system whereby U.S. bank accounts are swept daily. Major operating bank accounts are automatically replenished
daily to meet check-clearing requirements. Outstanding checks are recorded as a reduction of cash when they are issued. Our checks
that have not yet been paid by banks at the reporting date are reclassified to accounts payable in the financial statements. The
reclassification to accounts payable for outstanding checks was $0 and $0.3 million as of December 31, 2016 and December 26, 2015,
respectively.
Receivables
–
Our components of trade receivables include amounts billed, amounts unbilled, retainage and allowance for uncollectible
accounts. Subject to our allowance for uncollectible accounts, all amounts are believed to be collectible within a year. There
are no amounts unbilled representing claims or other similar items subject to uncertainty concerning their determination or ultimate
realization. In estimating the allowance for uncollectible accounts, we consider the length of time receivable balances have been
outstanding, historical collection experience, current economic conditions and customer specific information. When we ultimately
conclude that a receivable is uncollectible, the balance is charged against the allowance for uncollectible accounts.
Concentration
of Credit Risk
–
Financial instruments which potentially subject ENGlobal to concentrations of credit risk consist
primarily of trade accounts and notes receivable. Although our services are provided largely to the energy sector, management
believes the risk due to this concentration is limited because a significant portion of our services are provided under contracts
with major integrated oil and gas companies and other industry leaders. When we enter into contracts with smaller customers, it
incurs an increased credit risk.
Our
businesses or product lines are largely dependent on a relatively few large customers. Although we believe we have an extensive
customer base, the loss of one of these large customers or if such customers were to incur a prolonged period of decline in business,
our financial condition and results of operations could be adversely affected. For the year ended December 31, 2016, each of two
customers provided more than 10% of our consolidated operating revenues (15.4% and 14.0%). Two customers provided more than 10%
of our consolidated operating revenues for the year ended December 26, 2015 (15.0% and 14.8%). Amounts included in trade receivables
related to these customers totaled $0.3 million and $1.1 million at December 31, 2016 and $1.8 million and $5.4 million at December
26, 2015.
We
extend credit to customers in the normal course of business. We have established various procedures to manage our credit exposure,
including initial credit approvals, credit limits and terms, letters of credit, and occasionally through rights of offset. We
also use prepayments and guarantees to limit credit risk to ensure that our established credit criteria are met. Our most significant
exposure to credit risks relates to situations under which we provide services early in the life of a project that is dependent
on financing. Risks increase in times of general economic downturns and under conditions that threaten project feasibility.
Property
and Equipment
–
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The estimated service lives of our asset
groups are as follows:
Asset Group
|
|
|
Years
|
|
Shop equipment
|
|
|
5 - 10
|
|
Furniture and fixtures
|
|
|
5 - 7
|
|
Computer equipment; Autos and trucks
|
|
|
3 - 5
|
|
Software
|
|
|
3 - 5
|
|
Leasehold
improvements are amortized over the term of the related lease. See Note 4 for details related to property and equipment and related
depreciation. Expenditures for maintenance and repairs are expensed as incurred. Upon disposition or retirement of property and
equipment, any gain or loss is charged to operations.
Debt
Issue Costs
–
Costs incurred in connection with the issuance of long-term debt are capitalized and charged to interest
expense over the term of the related debt on a straight-line basis, which approximates the interest method. The total amount of
debt issue costs capitalized was $38,000 and $90,000 at December 31, 2016 and December 26, 2015, respectively.
Goodwill
–
Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired
and liabilities assumed. Goodwill is not amortized but rather is tested and assessed for impairment annually, or more frequently
if certain events or changes in circumstance indicate the carrying amount may exceed fair value. The annual test for goodwill
impairment is performed in the fourth quarter of each year and begins with a qualitative assessment of whether it is “more
likely than not” that the fair value of a reporting unit is less than its carrying amount and bypass the two-step goodwill
impairment test. If the qualitative analysis indicates that it is “more likely than not” that our business’
fair value is less than its carrying value, the resulting goodwill impairment test would consist of a two-step accounting test.
The first step of the goodwill impairment test identifies the potential impairment, resulting if the fair value of a reporting
unit (including goodwill) is less than its carrying amount. If during testing, it is determined that the fair value of net assets
(including goodwill) exceeds its carrying amount, the goodwill of such net assets are not considered impaired and the second step
of the goodwill impairment test is not applicable. However, if the fair value of net assets (including goodwill) is less than
its carrying amount, we would then proceed to the second step in the goodwill impairment test. The second step includes hypothetically
valuing the net assets as if they had been acquired in a business combination. Then, the implied fair value of the net assets’
goodwill is compared to the carrying value of that goodwill. If the carrying value of net assets’ goodwill exceeds the implied
fair value of the goodwill, an impairment loss is recognized in an amount equal to the excess, not to exceed the carrying value.
Our 2016 and 2015 qualitative assessments of goodwill determined it was not “more likely than not” that the fair value
of our reporting units were less than the carrying value of the remaining goodwill and, therefore, no goodwill impairment adjustment
was required in either year. Goodwill was $2.8 million at both December 31, 2016 and December 26, 2015, with $2.1 million attributable
to our Automation segment and $0.7 million attributable to our EPCM segment.
Other
intangible assets
–
Intangible assets are comprised primarily of non-competition covenants, customer relationships
and developed technology acquired through acquisitions and are amortized using the straight-line method based on the estimated
useful life of the intangible assets. We review intangible assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. This review consists of comparing the carrying value of the asset
with the asset’s expected future undiscounted cash flows. Estimates of expected future cash flows represent management’s
best estimate based on reasonable and supportable assumptions. If such a review should indicate that the carrying amount of intangible
assets is not recoverable, we reduce the carrying amount of such assets to fair value. We performed a qualitative assessment of
intangible assets at December 31, 2016 and December 26, 2015 and determined the asset’s expected future undiscounted cash
flows exceeded the carrying value of the related asset and as a result no impairment adjustments were necessary. Other intangible
assets are included in Other Assets on the respective balance sheets. Intangible assets were $0.1 million, net of accumulated
amortization of $3.1 million, at December 31, 2016 and $0.2 million, net of accumulated amortization of $3.0 million, at December
26, 2015, all of which is attributable to our Automation segment. Amortization expense was $0.1 million and $0.2 million for the
years ended December 31, 2016 and December 26, 2015, respectively.
Impairment
of Long-Lived Assets
–
We review
property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets
may not be recoverable. The recoverability of long-lived assets is measured by comparison the future undiscounted cash flows expected
to result from the use and eventual disposition of the asset to the carrying value of the asset. Estimates of expected future
cash flows represent management’s best estimate based on reasonable and supportable assumptions. If the carrying amount
is not recoverable, an impairment loss is measured as the excess of the asset’s carrying value over its fair value. We assess
the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited
to, recent third party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors.
During 2016 and 2015 there were no events or changes in circumstances that indicated that the carrying amount of our assets may
not be recoverable.
Revenue
Recognition
–
Our revenue is comprised of engineering, construction management and procurement service fees and
sales of integrated control systems that we design and assemble. In general, we recognize revenues when all of the following criteria
are met: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the price
is fixed or determinable, and (4) collection is reasonably assured. We recognize service revenue as the services are performed.
The majority of our engineering services are provided under time-and-material contracts. Some time-and-material contracts may
have upper limits referred to as “not-to-exceed” amounts. Revenue is not recognized over these amounts until a change
order or authorization by the client has been received. A majority of sales of assembled systems are under fixed-price contracts
that may also include a service element covered under that contract price.
Profits
and losses on our fixed-price contracts are recognized on the percentage-of-completion method of accounting, measured by the percentage-of-contract
cost incurred to date relative to estimated total contract cost. Contract costs used for estimating percentage-of-completion factors
include professional compensation and related benefits, materials, subcontractor services and other direct cost of projects. Costs
recognized for labor include all actual employee compensation plus a burden factor to cover estimated variable labor expenses.
These variable labor expenses consist of payroll taxes, self-insured medical plan expenses, workers’ compensation insurance,
general liability insurance and paid time off.
Under
the percentage-of-completion method, revenue recognition is dependent upon the accuracy of a variety of estimates, including the
progress of engineering and design efforts, material installation, labor productivity, cost estimates and others. These estimates
are based on various professional judgments and are difficult to accurately determine until projects are significantly underway.
Due to uncertainties inherent to the estimation process, it is possible that actual percentage-of-completion may vary materially
from our estimates. Estimating errors may cause errors in revenue recognition on uncompleted contracts and may even result in
losses on the contracts. Anticipated losses on uncompleted contracts are charged to operations as soon as such losses can be estimated.
Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to
costs and revenues and are recognized in the period in which the revisions are determined. Costs related to change orders are
recognized when they are incurred. Change orders are included in the total estimated contract revenue when it is more likely than
not that the change orders will result in a bona fide addition to value that can be reliably estimated.
Income
Taxes
–
We account for deferred income taxes in accordance with Financial Accounting Standards Board (“FASB”)
ASC Topic 740 “Income Taxes” (“ASC 740”), which provides for recording deferred taxes using an asset and
liability method. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying
amounts and the tax bases of assets and liabilities including net operating loss and tax credit carryforwards using enacted tax
rates in effect for the year in which the differences are expected to reverse. The provision for income taxes represents the current
taxes payable or refundable for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities
during the period. Tax law and rate changes are reflected in income in the period such changes are enacted.
A
valuation allowance is recorded to reduce previously recorded tax assets when it becomes more-likely-than-not such asset will
not be realized. We evaluate the realizability of deferred tax assets based on all available evidence, both positive and negative,
regarding historical operating results, including the estimated timing of future reversals of existing taxable temporary differences,
estimated future taxable income exclusive of reversing temporary differences and carryforwards and potential tax planning strategies
which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
We
account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit
of the tax positions to the extent that the benefit will more-likely-than-not be realized. The determination as to whether the
tax benefit will more-likely-than-not be realized is based upon technical merits of the tax positions as well as consideration
of the available facts and circumstances. The Company recognizes interest and penalties related to unrecognized tax benefits in
the provision for income taxes.
Earnings
per Share
–
Our basic earnings per share (“EPS”) amounts have been computed based on the average number
of shares of common stock outstanding for the period. Diluted EPS amounts include the effect of common stock equivalents associated
with outstanding stock options, restricted stock awards and restricted stock units, if including such potential shares of common
stock is dilutive. Because the exercise price on options granted to employees and directors have been above our stock price, these
common stock equivalents were antidilutive, thus not included in the calculation of earnings (loss) per share.
Treasury
Stock
–
We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares
of our common stock is recorded as treasury stock (at cost). When we subsequently retire these shares, the cost of the shares
acquired are recorded in common stock and additional paid in capital.
Stock–Based
Compensation
–
We have issued stock-based compensation in the form of stock options and non-vested restricted stock
awards to directors, employees and officers. We apply the provisions of ASC Topic 718 “Compensation - Stock Compensation”
(“ASC 718”) and recognize compensation expense over the applicable service for all stock-based compensation based
on the grant date fair value of the award.
Changes
in Accounting Policies
–
In November 2015, Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2015-17,
Balance Sheet Classification of Deferred Taxes (Topic 740)
: which requires
deferred tax liabilities and assets to be classified as noncurrent in the Balance Sheet. The standard will be effective for financial
statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted for financial statements that have not been previously issued. The ASU may be applied either prospectively
to all deferred tax liabilities and assets or retrospectively to all periods presented. We adopted this ASU on a prospective basis
in the fourth quarter of fiscal 2015. The change in accounting principle does not have an impact on the Company’s results
of operations, cash flows or stockholders’ equity.
In
August 2015, the FASB issued ASU No. 2015-15,
Interest-Imputation of Interest (Topic 835-30): Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
This amendment allows for the deferral and presentation
of debt issuance costs as an asset to be ratably amortized over the term of the line-of-credit arrangement, regardless of whether
there are any outstanding borrowings on the line-of-credit arrangement. We have historically accounted for our debt issuance costs
related to revolving credit agreements in accordance with this amendment and therefore this pronouncement did not have an impact
on the Company’s financial statements or related disclosures.
In
April 2015, the FASB issued ASU No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs.
This amendment requires debt issuance costs related to a recognized debt liability be presented in
the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with the treatment of debt
discounts. This pronouncement is effective for interim and annual financial statements issued for fiscal years beginning after
December 15, 2015. We adopted this pronouncement in the first quarter of fiscal 2016 and because the Company did not have any
debt outstanding at fiscal year-end 2015 or any period during 2016, this pronouncement did not have an impact on the Company’s
financial statements or related disclosures.
New
Accounting Pronouncements Not Yet Adopted
–
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts
with Customers (Topic 606):
The ASU will supersede most of the existing revenue recognition requirements in U.S. GAAP and
will require entities to recognize revenue at an amount that reflects the consideration to which we expect to be entitled in exchange
for transferring goods or services to a customer. The new standard also requires significantly expanded disclosures regarding
the qualitative and quantitative information of an entity’s nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. In May 2016, the FASB issued ASU No. 2016-12 to clarify certain narrow aspects of
Topic 606 such as assessing the collectability criterion, presentation of sales taxes and other similar taxes collected from customers,
non-cash consideration, contract modifications at transition, completed contracts at transition, and other technical corrections.
This new accounting standard, as updated, is effective for interim and annual reporting periods beginning after December 15, 2017.
We are currently evaluating the provisions of this pronouncement and are assessing its potential impact on our financial position,
results of operations, cash flows and related disclosures. However we are currently unable to reasonably estimate the impact this
pronouncement will have on our financial statements and related disclosures.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, that will amend the accounting standards for leases.
This new standard retains a distinction between finance leases and operating leases but the primary change is the recognition
of lease assets and lease liabilities by lessees for those leases classified as operating leases on the lessee’s balance
sheet and certain aspects of lease accounting have been simplified. This new standard requires additional qualitative and quantitative
disclosures along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users
of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This pronouncement is
effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. We are
currently evaluating the provisions of this pronouncement and are assessing its potential impact on our financial position, results
of operations, cash flows and related disclosures. However we are currently unable to reasonably estimate the impact this pronouncement
will have on our financial statements and related disclosures.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting
, to change several aspects of accounting for share-based payment transactions, including a
requirement to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. This pronouncement
is effective for interim and annual reporting periods beginning after December 31, 2016, with early adoption permitted. Varying
transition methods (modified retrospective, retrospective or prospective) are applied to different provisions of the standard.
We will adopt this pronouncement in the first quarter of 2017 by electing to account for forfeitures in compensation costs as
they occur and reflecting this change in accounting policy on a modified retrospective basis through a non-material, cumulative-effect
adjustment reducing accumulated earnings as of the beginning of 2017.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments.
This amendment addresses how certain specified cash receipts and cash payments are presented in the statement
of cash flows. This guidance becomes effective for interim and annual reporting periods beginning after December 15, 2017. We
are currently evaluating the provisions of this pronouncement and are assessing its potential impact on our financial position,
results of operations, cash flows and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.
This amendment removes the second step of the two-step goodwill impairment test. When adopted, an entity will
apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying
amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. This pronouncement is
effective for the Company’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019, with early adoption permitted. We are currently evaluating the provisions of this pronouncement and are assessing its potential
impact on our financial position, results of operations, cash flows and related disclosures.
NOTE
3 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The
components of trade receivables, net as of December 31, 2016 and December 26, 2015, are as follows (amounts in thousands):
|
|
2016
|
|
|
2015
|
|
Amounts billed
|
|
$
|
6,699
|
|
|
$
|
12,214
|
|
Amounts unbilled
|
|
|
2,729
|
|
|
|
6,175
|
|
Retainage
|
|
|
1,449
|
|
|
|
6,858
|
|
Less: Allowance for uncollectible accounts
|
|
|
(422
|
)
|
|
|
(1,150
|
)
|
Trade receivables, net
|
|
$
|
10,455
|
|
|
$
|
24,097
|
|
The
components of short-term and long-term notes receivable as of December 31, 2016 and December 26, 2015, are as follows (amounts
in thousands):
|
|
2016
|
|
|
2015
|
|
Aspen
|
|
$
|
—
|
|
|
$
|
514
|
|
Increased Performance
|
|
|
116
|
|
|
|
151
|
|
Reserve for uncollectible accounts
|
|
|
—
|
|
|
|
(514
|
)
|
Total notes receivable
|
|
|
116
|
|
|
|
151
|
|
Less current portion
|
|
|
(116
|
)
|
|
|
(151
|
)
|
Notes Receivable, net of current portion
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Increased Performance note receivable was a trade receivable converted to a note during 2015, bearing interest at 0% per annum
and payable in installments through its maturity on October 1, 2016. During 2016, Increased Performance made minimal payments
on this note and the Company continues to pursue its collection.
The
Aspen note bears interest at 6% per annum, was due and payable in September 2011, and was fully reserved in 2015. During 2016,
the Company settled the Aspen note for $0.1 million and wrote-off the remaining balance against the reserve resulting in no impact
on 2016 earnings.
The
components of other current liabilities are as follows as of December 31, 2016 and December 26, 2015 (amounts in thousands):
|
|
2016
|
|
|
2015
|
|
Accrual for known contingencies
|
|
$
|
747
|
|
|
$
|
781
|
|
Customer prepayments
|
|
|
150
|
|
|
|
91
|
|
Deferred rent
|
|
|
140
|
|
|
|
263
|
|
Current portion of capital leases
|
|
|
229
|
|
|
|
287
|
|
Federal and state income taxes payable
|
|
|
—
|
|
|
|
264
|
|
Accrued interest and other
|
|
|
4
|
|
|
|
4
|
|
Other current liabilities
|
|
$
|
1,270
|
|
|
$
|
1,690
|
|
Our
reserve for known contingencies includes litigation accruals and related legal fees, if any. See “Note 14 – Commitments
and Contingencies” for further information.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 31, 2016 and December 26, 2015 (amounts in thousands):
|
|
2016
|
|
|
2015
|
|
Computer equipment and software
|
|
$
|
3,768
|
|
|
$
|
6,961
|
|
Shop equipment
|
|
|
879
|
|
|
|
1,044
|
|
Furniture and fixtures
|
|
|
286
|
|
|
|
542
|
|
Building and leasehold improvements
|
|
|
2,032
|
|
|
|
2,383
|
|
Autos and trucks
|
|
|
85
|
|
|
|
159
|
|
|
|
$
|
7,050
|
|
|
$
|
11,089
|
|
Accumulated depreciation and amortization
|
|
|
(5,856
|
)
|
|
|
(8,971
|
)
|
|
|
$
|
1,194
|
|
|
$
|
2,118
|
|
Property and equipment implementations in process
|
|
|
—
|
|
|
|
27
|
|
Property and equipment, net
|
|
$
|
1,194
|
|
|
$
|
2,145
|
|
Depreciation
expense was $1.0 million and $1.2 million for the years ended December 31, 2016 and December 26, 2015, respectively.
NOTE
5 - CONTRACTS
Costs,
estimated earnings and billings on uncompleted contracts consist of the following at December 31, 2016 and December 26, 2015 (amounts
in thousands):
|
|
2016
|
|
|
2015
|
|
Costs incurred on uncompleted contracts
|
|
$
|
58,933
|
|
|
$
|
67,488
|
|
Estimated earnings on uncompleted contracts
|
|
|
24,694
|
|
|
|
27,492
|
|
Earned revenues
|
|
|
83,627
|
|
|
|
94,980
|
|
Less: billings to date
|
|
|
82,564
|
|
|
|
94,830
|
|
Net costs in excess of billings on uncompleted contracts
|
|
$
|
1,063
|
|
|
$
|
150
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
2,434
|
|
|
$
|
4,062
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(1,371
|
)
|
|
|
(3,912
|
)
|
Net costs in excess of billings on uncompleted contracts
|
|
$
|
1,063
|
|
|
$
|
150
|
|
Revenue
on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Revenue and gross margin
on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in
the period in which the revisions become known. To manage unknown risks, management may use contingency amounts to increase the
estimated costs, therefore, lowering the earned revenues until the risks are better identified and quantified or have been mitigated.
We currently have $0.9 million in contingency amounts as of December 31, 2016 compared to $2.4 million as of December 26, 2015.
Losses on contracts are recorded in full as they are identified.
We
recognize service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment
history or history of not providing written work authorizations, we have deferred revenue recognition until we receive either
a written authorization or a payment. We currently have $0.1 million in deferred revenue recognition as of December 31, 2016 and
December 26, 2015. This deferred revenue represents work on not to exceed contracts that has been performed but has not been billed
nor been booked as revenue due to our revenue recognition policies as the work was performed outside the contracted amount without
obtaining proper work order changes. It is uncertain as to whether these revenues will eventually be recognized by us or the proceeds
collected. The costs associated with these billings have been expensed as incurred.
NOTE
6 - CREDIT FACILITIES
Line
of Credit Facility
On
September 16, 2014, we entered into a three year Loan and Security Agreement (“Loan Agreement”) with Regions Bank
(“Lender”) pursuant to which the Lender agreed to extend credit to the Company in the form of revolving loans of up
to the lesser of $10.0 million (the “Commitment”) or the Borrowing Base. The Loan Agreement includes a sub-facility
for standby and / or trade letters of credit up to an amount not to exceed $2.5 million. There were no loans outstanding under
this Loan Agreement as of December 31, 2016 or as of December 26, 2015.
On
June 16, 2016, but effective May 29, 2016, we entered into the Second Amendment to the Loan Agreement (“Second Amendment”)
with the Lender pursuant to which the Company was not required to comply with the fixed charge coverage ratio financial covenant
from the fiscal month ending April 30, 2016 through the fiscal month ending December 31, 2016, provided that the Company was not
permitted to have any obligations or borrowings related to working capital outstanding and the Company was required to retain
a cash balance of at least $5.0 million in collection accounts with the Lender.
We
currently cannot borrow under the Loan Agreement due to an existing event of default resulting from our failure to comply with
the fixed charge coverage ratio financial covenant after December 31, 2016. While there are no revolving loans currently outstanding
under the Loan Agreement, during February 2017, a letter of credit in the amount of $628,000 and with a termination date of December
31, 2017 was issued under the Loan Agreement that we collateralized with cash. While we are currently negotiating with the Lender
to address the outstanding event of default and our ability to borrow under the Loan Agreement in the future, we cannot assure
you that we will reach an agreement with the Lender. If we are unable to address the outstanding event of default, we or the Lender
may terminate the Loan Agreement and the Lender may accelerate any outstanding loan amounts.
Borrowing
Base
–
The Borrowing Base is an amount equal to the sum of (a) 85% of the total amount of Eligible Approved
Cost Plus Contract Amounts, plus (b) the lesser of (i) 85% of the total amount of Eligible Approved Fixed Price Contract Accounts
or (ii) $2,500,000, plus (c) the lesser of (i) 85% of the total amount of Eligible Approved Government Contract Accounts or (ii)
$1,000,000, plus (d) the lesser of (i) 75% of the total amount of Eligible Unbilled Accounts or (ii) total revenues from all Accounts
over the preceding 30-day period, provided that to the extent that any Eligible Unbilled Accounts consist of Accounts that would
be Eligible Approved Government Contracts and be included in provision (c) above if billed there shall be a limitation in eligibility
thereof under this provision (d) of $800,000, plus (e) 75% of the total amount of Eligible Costs in Excess of Billings, and minus
(f) such amounts as may be required by Lender to be reserved at any time and from time to time.
Interest
–
Any loans will bear interest at a rate per annum equal to the LIBOR Index Rate plus 2.25%. If the loan
is converted to a Base Rate Loan, then such loan will bear interest at a rate per annum equal to the Base Rate (defined as a rate
per annum equal to the greatest of (a) the Federal Funds Rate in effect on such day plus 0.50%, (b) the Prime Rate in effect on
such day, or (c) a per annum rate equal to LIBOR determined with respect to an interest period of one month plus 1.00%) plus 1.25%.
Collateral
–
All obligations of the Company under the Loan Agreement are secured by a first priority perfected lien
against any and all personal property assets of the Company (other than certain excluded property).
Term
–
All loans and all other obligations outstanding under the Loan Agreement shall be payable in full on September
14, 2017, unless otherwise terminated pursuant to the terms of the Loan Agreement.
Material
Covenants
–
The Loan Agreement requires the Company to comply with various financial, affirmative and negative
covenants affecting its businesses and operations, including:
|
●
|
The
Company will not be a party to mergers, acquisitions, consolidations, reorganizations or similar transactions.
|
|
●
|
The
Company will not sell, lease, transfer or otherwise dispose of any of its properties or assets (subject to certain exceptions
set forth in the Loan Agreement).
|
|
●
|
The
Company will not declare, pay or make any dividend or distribution on any shares of common or preferred stock or make any
cash payment to repurchase or otherwise retire any common or preferred stock, provided that the Company may repurchase up
to $2.0 million of its common stock pursuant to its announced stock repurchase plan, subject to certain conditions.
|
|
●
|
The
fixed charge coverage ratio must not be less than 1.10 to 1.00.
|
|
●
|
The
Company will not permit capital expenditures during any fiscal year to exceed $3.5 million.
|
While
the Company was in compliance with all of the material covenants of the Loan Agreement as of December 31, 2016, the Company is
not presently in compliance with the fixed charge coverage ratio financial covenant, which is an event of default under the Loan
Agreement as described above.
NOTE
7 - OPERATING LEASES
We
lease equipment and office space under long-term operating lease agreements. The future minimum lease payments on leases (with
initial or remaining non-cancelable terms in excess of one year) as of December 31, 2016 are as follows (amounts in thousands):
Years Ending
|
|
Amount
|
|
December 30, 2017
|
|
$
|
1,944
|
|
December 29, 2018
|
|
|
993
|
|
December 28, 2019
|
|
|
458
|
|
December 26, 2020
|
|
|
—
|
|
December 25, 2021 and after
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
3,395
|
|
Rent
expense was $2.4 million for the year ended December 31, 2016 and $2.5 million for the year ended December 26, 2015. Certain of
our lease agreements may include items such as abated lease payments, capital improvement funding, step rent provisions and escalation
clauses that affect the lease payment schedule and do not qualify as contingent rentals. These items have been included in the
minimum lease payment amount on a straight-line basis over the minimum lease term. Any lease payments that are dependent on a
factor related to the future use of the property have been excluded from the minimum lease payment amount and are recognized as
incurred.
NOTE
8 - EMPLOYEE BENEFIT PLANS
ENGlobal
sponsors a 401(k) profit sharing plan for its employees. The Company, at the direction of the Board of Directors, may make discretionary
contributions. Our employees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and length-of-service
requirements. For active participants, we match 33.3% of elective deferrals up to 6%, for a maximum of 2% of employee’s
compensation. We have made contributions totaling $0.3 million and $0.4 million to the plan for the year ended December 31, 2016
and December 26, 2015, respectively.
NOTE
9 - STOCK COMPENSATION PLANS
The
Company’s 2009 Equity Incentive Plan, as amended (the “Equity Plan,” or the “Plan”) provides for
the aggregate issuance of up to 2,580,000 shares of common stock. The Equity Plan provides for grants of non-statutory options,
incentive stock options, restricted stock awards, performance shares, performance units, restricted stock units and other stock-based
awards, in order to enhance the ability of ENGlobal to motivate current employees, to attract employees of outstanding ability
and to provide for grants to be made to non-employee directors. Grants to employees will generally vest in four equal annual installments
on the anniversary date of grant. Grants to non-employee directors will generally vest quarterly over a one-year period coinciding
with their service term. At December 31, 2016, 727,507 shares of common stock are available to be issued pursuant to the Equity
Plan.
We
recognized non-cash stock-based compensation expense related to our Equity Plan of $0.5 million and $0.5 million, with a tax impact
of $0.2 million and $70,000, for the fiscal years ended December 31, 2016 and December 26, 2015, respectively.
Stock
Option Awards
–
We did not grant any stock options in 2016 or 2015. The following table summarizes our stock option
activity for the year ended December 31, 2016:
|
|
Vested and Exercisable Balance
|
|
|
Number of Shares Outstanding
|
|
|
Weighted Average Exercise Price
|
|
Balance at December 26, 2015
|
|
|
300,000
|
|
|
|
300,000
|
|
|
$
|
10.04
|
|
Cancelled or expired
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
|
|
9.15
|
|
Balance at December 31, 2016,
|
|
|
150,000
|
|
|
|
150,000
|
|
|
$
|
10.93
|
|
The
number of options exercisable at December 31, 2016 was 150,000 with a weighted average remaining contractual life of 0.45 years
and a weighted-average exercise price of $10.93 per share.
All
outstanding stock options during 2016 and 2015 were fully vested prior to 2015 and therefore we did not recognize any stock compensation
expense related to stock options in 2016 or 2015.
Restricted
Stock Awards
–
Restricted stock awards granted to directors are intended to compensate and retain the directors
over the one-year service period commencing July 1 of the year of service. These awards generally vest in quarterly installments
beginning September 30
th
of the year of grant, so long as the grantee continues to serve as a director of the Company
as of each vesting date. Restricted stock awards granted to employees generally vest in four equal annual installments on the
anniversary date of grant, so long as the grantee remains employed full-time with us as of each vesting date. Shares are generally
issued from new shares at the time of grant. The grant-date fair value of restricted stock grants is determined using the closing
quoted market price on the grant date.
The
following is a summary of the status of our restricted stock awards and of changes in restricted stock outstanding for the year
ended December 31, 2016:
|
|
Number of unvested
restricted shares
|
|
|
Weighted- average
grant-date fair value
|
|
Outstanding at December 26, 2015
|
|
|
542,462
|
|
|
$
|
1.38
|
|
Granted
|
|
|
297,949
|
|
|
|
1.03
|
|
Vested
|
|
|
(288,311
|
)
|
|
|
1.57
|
|
Forfeited
|
|
|
(45,350
|
)
|
|
|
1.85
|
|
Outstanding at December 31,2016
|
|
|
506,750
|
|
|
$
|
1.27
|
|
As
of December 31, 2016, there was $0.6 million of total unrecognized compensation cost related to unvested restricted stock awards
which is expected to be recognized over a weighted-average period of 2.1 years. During 2016 and 2015, the Company granted the
following restricted stock awards.
Date Issued
|
|
Issued to
|
|
|
Number of Shares
|
|
|
Market Price
|
|
|
Fair Value
|
|
June 16, 2016
|
|
|
Directors (3)
|
|
|
|
122,949
|
|
|
$
|
1.22
|
|
|
$
|
150,000
|
|
June 2, 2016
|
|
|
Employees (1)
|
|
|
|
40,000
|
|
|
$
|
1.05
|
|
|
$
|
42,000
|
|
March 1, 2016
|
|
|
Employees (9)
|
|
|
|
135,000
|
|
|
$
|
0.86
|
|
|
$
|
116,100
|
|
June 18, 2015
|
|
|
Directors (3)
|
|
|
|
107,913
|
|
|
$
|
1.39
|
|
|
$
|
150,000
|
|
February 9, 2015
|
|
|
Employees (17)
|
|
|
|
305,100
|
|
|
$
|
1.98
|
|
|
$
|
604,100
|
|
January 8, 2015
|
|
|
Employees (1)
|
|
|
|
4,000
|
|
|
$
|
1.89
|
|
|
$
|
7,560
|
|
NOTE
10 - TREASURY STOCK
On
July 22, 2015, the Board approved the retirement of 981,099 shares of existing treasury shares.
On
April 21, 2015, we announced the Board of Directors had authorized the repurchase of up to $2.0 million of our common stock from
time to time through open market or privately negotiated transactions, based on prevailing market conditions. We are not obligated
to repurchase any dollar amount or specific number of shares of common stock under the repurchase program, which may be suspended
or discontinued at any time. Under this program, we purchased and retired 1,074,150 shares at a cost of $1.3 million during the
year ended December 31, 2016 and we purchased and retired 53,744 shares at a cost of $0.1 million during the year ended December
26, 2015.
NOTE
11 - REDEEMABLE PREFERRED STOCK
We
are authorized to issue 2,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”). The
Board of Directors has the authority to approve the issuance of all or any of these shares of the Preferred Stock in one or more
series, to determine the number of shares constituting any series and to determine any voting powers, conversion rights, dividend
rights and other designations, preferences, limitations, restrictions and rights relating to such shares without any further action
by the stockholders. While there are no current plans to issue the Preferred Stock, it was authorized in order to provide the
Company with flexibility to take advantage of contingencies such as favorable acquisition opportunities.
NOTE
12 - FEDERAL AND STATE INCOME TAXES
The
components of our income tax benefit for the years ended December 31, 2016 and December 26, 2015 were as follows (amounts in thousands):
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(21
|
)
|
Foreign Tax
|
|
|
81
|
|
|
|
805
|
|
State
|
|
|
(37
|
)
|
|
|
139
|
|
Total current
|
|
|
44
|
|
|
|
923
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(986
|
)
|
|
|
(8,631
|
)
|
State
|
|
|
(85
|
)
|
|
|
(506
|
)
|
Total deferred
|
|
|
(1,071
|
)
|
|
|
(9,137
|
)
|
Total income tax benefit
|
|
$
|
(1,027
|
)
|
|
$
|
(8,214
|
)
|
The
following is a reconciliation of expected income tax expense (benefit) to actual income tax benefit for the years ended December
31, 2016 and December 26, 2015 (amounts in thousands):
|
|
2016
|
|
|
2015
|
|
Federal income tax expense (benefit) at 35%
|
|
$
|
(1,179
|
)
|
|
$
|
813
|
|
State income tax, net of federal income tax effect
|
|
|
(12
|
)
|
|
|
(416
|
)
|
Change of effective state tax rate
|
|
|
4
|
|
|
|
—
|
|
Nondeductible expenses
|
|
|
80
|
|
|
|
222
|
|
Research and development credit
|
|
|
(72
|
)
|
|
|
(297
|
)
|
Current year expiration of stock options
|
|
|
436
|
|
|
|
163
|
|
Prior year adjustments and true-ups
|
|
|
(354
|
)
|
|
|
2,261
|
|
Change in valuation allowance
|
|
|
70
|
|
|
|
(10,960
|
)
|
Total tax benefit
|
|
$
|
(1,027
|
)
|
|
$
|
(8,214
|
)
|
The
components of the deferred tax asset (liability) consisted of the following at December 31, 2016 and December 26, 2015 (amounts
in thousands):
|
|
2016
|
|
|
2015
|
|
Deferred tax asset (liabilities)
|
|
|
|
|
|
|
|
|
Federal net operating loss carry-forward
|
|
$
|
6,417
|
|
|
$
|
4,339
|
|
Tax credit carryforwards
|
|
|
2,126
|
|
|
|
1,873
|
|
Allowance for uncollectible accounts
|
|
|
156
|
|
|
|
616
|
|
Accruals not yet deductible for tax purposes
|
|
|
755
|
|
|
|
1,182
|
|
Goodwill
|
|
|
948
|
|
|
|
1,122
|
|
Depreciation
|
|
|
339
|
|
|
|
64
|
|
Other
|
|
|
60
|
|
|
|
464
|
|
Deferred tax assets
|
|
|
10,801
|
|
|
|
9,660
|
|
Less: Valuation allowance
|
|
|
(593
|
)
|
|
|
(523
|
)
|
Deferred tax assets, net
|
|
$
|
10,208
|
|
|
$
|
9,137
|
|
We
account for deferred income taxes in accordance with ASC 740, which provides for recording deferred taxes using an asset and liability
method. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts
and the tax bases of assets and liabilities including net operating loss and tax credit carryforwards using enacted tax rates
in effect for the year in which the differences are expected to reverse. The provision for income taxes represents the current
taxes payable or refundable for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities
during the period. Tax law and rate changes are reflected in income in the period such changes are enacted.
We
record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that a portion
or all of the deferred tax assets will expire before realization of the benefit or future deductibility is not probable. The ultimate
realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character
and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available
positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years
and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of
pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment.
For
the year ended December 31, 2016, we recognized an income tax benefit of $1.0 million on a pre-tax loss of $3.4 million as compared
to an income tax benefit of $8.2 million on $2.3 million of pre-tax income for year ended December 26, 2015. During 2016, our
tax benefit was (A) increased primarily by (i) $354,000 resulting from return to accrual adjustments and true-ups of deferred
tax assets and liabilities and foreign taxes payable and (ii) $72,000 for an estimated research and development credit and
(B) decreased by (i) $436,000 due to the current year expiration of stock options, (ii) a $70,000 increase in the valuation
allowance and (iii) $80,000 associated with permanent differences. During 2015, a significant tax benefit was recognized
primarily related to the reversal of $11.0 million of valuation allowance on certain of our deferred tax assets.
We
account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit
of the tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the
tax benefit will more likely than not be realized is based upon technical merits of the tax positions as well as consideration
of the available facts and circumstances. The Company recognizes interest and penalties related to unrecognized tax benefits in
the provision for income taxes. As of December 31, 2016 and December 26, 2015, we do not have any significant uncertain tax positions.
We
had a federal net operating loss carry-forward at December 31, 2016 of approximately $17.0 million, which will begin to expire
starting in 2032. At December 31, 2016, we had Alternative Minimum Tax (AMT) and federal research and development tax credit carryforwards
of approximately $0.1 and $1.0 million, respectively, available to reduce future tax liabilities. The AMT credit is available
for an indefinite carryforward period and the research and development tax credit will begin to expire starting in 2030. At December
31, 2016, we had foreign tax credits of approximately $0.9 million which will begin to expire starting in 2025. However, to the
uncertainty of realization, the Company has recorded a valuation allowance of $0.6 million against this asset as of December 31,
2016.
NOTE
13 - SEGMENT INFORMATION
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 EPCM segment includes the government services group, which provides engineering, design, installation
and operation and maintenance of various government, public sector and international facilities. The Automation segment provides
services related to the design, fabrication and implementation of process distributed control and analyzer systems, advanced automation,
information technology and electrical projects primarily to the upstream and downstream sectors throughout the United States as
well as a specific project in Central Asia.
Sales,
operating income, identifiable assets, capital expenditures and depreciation 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 include 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 years ended December 31, 2016 and December
26, 2015 is as follows (amounts in thousands):
For the year ended
December 31, 2016:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
33,266
|
|
|
$
|
25,958
|
|
|
$
|
—
|
|
|
$
|
59,224
|
|
Operating income (loss)
|
|
|
731
|
|
|
|
3,281
|
|
|
|
(7,250
|
)
|
|
|
(3,238
|
)
|
Depreciation and amortization
|
|
|
28
|
|
|
|
381
|
|
|
|
734
|
|
|
|
1,143
|
|
Tangible assets
|
|
|
5,810
|
|
|
|
8,100
|
|
|
|
27,610
|
|
|
|
41,520
|
|
Goodwill
|
|
|
720
|
|
|
|
2,086
|
|
|
|
—
|
|
|
|
2,806
|
|
Other intangible assets
|
|
|
—
|
|
|
|
110
|
|
|
|
—
|
|
|
|
110
|
|
Total assets
|
|
|
6,530
|
|
|
|
10,296
|
|
|
|
27,610
|
|
|
|
44,436
|
|
Capital expenditures
|
|
|
44
|
|
|
|
14
|
|
|
|
6
|
|
|
|
64
|
|
For the year ended
December 26, 2015:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
49,277
|
|
|
$
|
30,328
|
|
|
$
|
—
|
|
|
$
|
79,605
|
|
Operating income (loss)
|
|
|
4,219
|
|
|
|
6,832
|
|
|
|
(8,951
|
)
|
|
|
2,100
|
|
Depreciation and amortization
|
|
|
177
|
|
|
|
614
|
|
|
|
665
|
|
|
|
1,456
|
|
Tangible assets
|
|
|
12,289
|
|
|
|
17,253
|
|
|
|
19,621
|
|
|
|
49,163
|
|
Goodwill
|
|
|
720
|
|
|
|
2,086
|
|
|
|
—
|
|
|
|
2,806
|
|
Other intangible assets
|
|
|
—
|
|
|
|
231
|
|
|
|
—
|
|
|
|
231
|
|
Total assets
|
|
|
13,009
|
|
|
|
19,570
|
|
|
|
19,621
|
|
|
|
52,200
|
|
Capital expenditures
|
|
|
16
|
|
|
|
189
|
|
|
|
800
|
|
|
|
1,005
|
|
Financial
Information by Geographic Area and Segments
Revenue
from our Caspian Pipeline Consortium Project in Russia and Kazakhstan contributed $8.3 million and $11.8 million in revenues in
our Automation segment for the years ended December 31, 2016 and December 26, 2015, respectively. Company assets, other than cash
and trade receivables, located in this region are insignificant.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Employment
Agreements
We
have employment agreements with certain of our executive and other officers with severance terms ranging from six to twelve months.
Such agreements provide for minimum salary levels. If employment is terminated for any reason other than 1) termination for cause,
2) voluntary resignation or 3) the employee’s death, we are obligated to provide a severance benefit equal to six months
of the employee’s salary, and, at our option, an additional six months at 50% of the employee’s salary in exchange
for an extension of a non-competition agreement. The terms of these agreements include evergreen provisions allowing for automatic
renewal. No liability is recorded for our obligations under employment agreements as the amounts that will ultimately be paid
cannot be reasonably estimated, if any.
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, either individually
or in the aggregate, to have a material adverse effect on our financial position, results of operations or liquidity.
Insurance
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 provides health insurance to its employees (including
vision and dental), and 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 its 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.