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 12 - 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 30, 2017 and December 31, 2016, and the results of our operations, cash flows and changes in
stockholders’ equity for the 52 week period ended December 30, 2017 and for the 53 week period ended December 31, 2016.
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 $0.2
million in cash in foreign banks as of December 30, 2017.
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 30, 2017, each of two
customers provided more than 10% of our consolidated operating revenues (22.5% and 10.9%). Two customers provided more than 10%
of our consolidated operating revenues for the year ended December 31, 2016 (15.4% and 14.0%). Amounts included in trade receivables
related to these customers totaled $0.7 million and zero at December 30, 2017 and $0.3 million and $1.1 million at December 31,
2016.
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 zero and $38,000 at December 30, 2017 and December 31, 2016, 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 2017 and 2016 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 30, 2017 and December 31, 2016, with $2.8 million now
attributable to our Automation segment due to the re-alignment of our segments (See Note 12
Segment Information
for additional
information).
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 30, 2017 and December 31, 2016 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 zero at December 30, 2017 and $0.1
million, net of accumulated amortization of $3.1 million, at December 31, 2016, all of which is attributable to our Automation
segment. Amortization expense was zero and $0.1 million for the years ended December 30, 2017 and December 31, 2016, 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 2017 and 2016 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.
We
adopted a new revenue recognition standard effective December 31, 2017 that superseded prior revenue recognition guidance. See
New Accounting Pronouncements Not Yet Adopted
below for additional information.
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 carry-forwards 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.
Our
effective tax rate for the year ended December 30, 2017 was significantly impacted by the Tax Cuts and Jobs Act (“the Act”),
which was enacted into law on December 22, 2017. For years beginning January 1, 2018, the Act includes significant changes to
the U.S. corporate income tax system including the reduction of the corporate tax rate from 35% to 21% and repealed the corporate
alternative minimum tax (“AMT”) providing full reimbursement of any AMT credit by 2021. Income tax effects resulting
from changes in tax laws are accounted for in accordance with FASB ASC Topic 740, which requires that these tax effects be recognized
in the period in which the law is enacted and the effects are recorded as a component of income taxes from continuing operations.
We are currently in the early stages of evaluating the impact of the Act on our financial statements, however, we have adjusted
our U.S. gross deferred tax assets and liabilities to the new 21% statutory rate and we have reclassified our AMT credit carry-forward
as a receivable and have recorded a corresponding adjustment to a valuation allowance.
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.
The
Company accounts for restricted stock awards granted to consultants using the accounting guidance included in ASC 505-50 “Equity-Based
Payments to Non-Employees” (“ASC 505-50”). All transactions in which services are received in exchange for share-based
awards are accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever
is more reliably measurable. Share-based compensation is measured at fair value at the earlier of the commitment date or the date
the services are completed.
Changes
in Accounting
-
In March 2016, the Financial Statements Accounting Board (“FASB”) issued Accounting
Standards Update (“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 have adopted this pronouncement effective 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. We recognized a benefit of $.01 million
in the twelve months ended December 30, 2017.
In
November 2016, the FASB Issued Update 2016-18,
Statement of Cash flows (Topic 230): Restricted Cash (a consensus of the FASB
Emerging Issues Task Force)
. This update addresses the presentation of restricted cash or restricted cash equivalents in the
statement of cash flows. This pronouncement is effective for interim and annual reporting periods beginning after December 15,
2017, with early application permitted. We adopted this pronouncement effective in the first quarter of 2017 and have reported
restricted cash as a component of ending cash, cash equivalents and restricted cash on the Statements of Cash Flows.
New
Accounting Pronouncements Not Yet Adopted
–
In May 2014, the FASB issued a comprehensive new revenue recognition
standard that will supersede most of the existing revenue recognition guidance under U.S. GAAP. The core principle of the new
guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The standard
creates a five step model that requires companies to exercise judgment when considering the terms of a contract and all relevant
facts and circumstances. The standard allows for several transition methods: (a) a full retrospective adoption in which the standard
is applied to all of the periods presented, or (b) a modified retrospective adoption in which the standard is applied only to
the most current period presented in the financial statements with a cumulative effect adjustment reflected in retained earnings.
The standard also requires 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. This new revenue recognition standard
will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting
period.
We
performed a detailed review of our contract portfolio representative of our different businesses and compared historical accounting
policies and practices to the new standard. Because the standard will impact our business processes, systems and controls, we
also developed a comprehensive change management project plan to guide the implementation. Our services are primarily short-term
in nature, and we do not expect the new revenue recognition standard to have a material impact on our financial statements. We
adopted the new standard effective December 31, 2017 utilizing the modified retrospective method. The cumulative-effect adjustment
to retained earnings upon adoption is not material.
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
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
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated financial
statements (amounts in thousands):
|
|
2017
|
|
|
2016
|
|
Cash
and cash equivalents
|
|
$
|
8,988
|
|
|
$
|
15,687
|
|
Restricted
cash
|
|
|
660
|
|
|
|
—
|
|
Total
cash, cash equivalents and restricted cash
|
|
$
|
9,648
|
|
|
$
|
15,687
|
|
Amounts
included in restricted cash represent those required to be set aside to collateralize a letter of credit required by a customer.
This letter of credit expired December 31, 2017.
The
components of trade receivables, net as of December 30, 2017 and December 31, 2016, are as follows (amounts in thousands):
|
|
2017
|
|
|
2016
|
|
Amounts
billed
|
|
$
|
7,753
|
|
|
$
|
6,699
|
|
Amounts
unbilled
|
|
|
1,985
|
|
|
|
2,729
|
|
Retainage
|
|
|
71
|
|
|
|
1,449
|
|
Less:
Allowance for uncollectible accounts
|
|
|
(695
|
)
|
|
|
(422
|
)
|
Trade
receivables, net
|
|
$
|
9,114
|
|
|
$
|
10,455
|
|
The
components of other current liabilities are as follows as of December 30, 2017 and December 31, 2016 (amounts in thousands):
|
|
2017
|
|
|
2016
|
|
Accrual
for known contingencies
|
|
$
|
472
|
|
|
$
|
747
|
|
Customer
prepayments
|
|
|
37
|
|
|
|
150
|
|
Deferred
rent
|
|
|
64
|
|
|
|
140
|
|
Current
portion of capital leases
|
|
|
62
|
|
|
|
229
|
|
Federal
and state income taxes payable
|
|
|
54
|
|
|
|
—
|
|
Insurance
note
|
|
|
378
|
|
|
|
—
|
|
Accrued
interest and other
|
|
|
—
|
|
|
|
4
|
|
Other
current liabilities
|
|
$
|
1,067
|
|
|
$
|
1,270
|
|
Our
reserve for known contingencies includes litigation accruals and related legal fees, if any. See “Note 13 – Commitments
and Contingencies” for further information.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 30, 2017 and December 31, 2016 (amounts in thousands):
|
|
2017
|
|
|
2016
|
|
Computer
equipment and software
|
|
$
|
3,984
|
|
|
$
|
3,768
|
|
Shop
equipment
|
|
|
1,214
|
|
|
|
879
|
|
Furniture
and fixtures
|
|
|
290
|
|
|
|
286
|
|
Building
and leasehold improvements
|
|
|
2,167
|
|
|
|
2,032
|
|
Autos
and trucks
|
|
|
107
|
|
|
|
85
|
|
|
|
$
|
7,762
|
|
|
$
|
7,050
|
|
Accumulated
depreciation and amortization
|
|
|
(6,735
|
)
|
|
|
(5,856
|
)
|
Property
and equipment, net
|
|
$
|
1,027
|
|
|
$
|
1,194
|
|
Depreciation
expense was $0.9 million and $1.0 million for the years ended December 30, 2017 and December 31, 2016, respectively.
NOTE
5 - CONTRACTS
Costs,
estimated earnings and billings on uncompleted contracts consist of the following at December 30, 2017 and December 31, 2016 (amounts
in thousands):
|
|
2017
|
|
|
2016
|
|
Costs
incurred on uncompleted contracts
|
|
$
|
57,916
|
|
|
$
|
58,933
|
|
Estimated
earnings on uncompleted contracts
|
|
|
15,423
|
|
|
|
24,694
|
|
Earned
revenues
|
|
|
73,339
|
|
|
|
83,627
|
|
Less:
billings to date
|
|
|
69,400
|
|
|
|
82,564
|
|
Net
costs in excess of billings on uncompleted contracts
|
|
$
|
3,939
|
|
|
$
|
1,063
|
|
Costs
and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
5,273
|
|
|
$
|
2,434
|
|
Billings
in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(1,334
|
)
|
|
|
(1,371
|
)
|
Net
costs in excess of billings on uncompleted contracts
|
|
$
|
3,939
|
|
|
$
|
1,063
|
|
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 $1.0 million in contingency amounts as of December 30, 2017 compared to $0.9 million as of December 31, 2016.
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 $0.4 million in deferred revenue recognition as of December 30, 2017 compared
to $0.1 million as of December 31, 2016. 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 - 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 30, 2017 are as follows (amounts in thousands):
Years
Ending
|
|
Amount
|
|
December
29, 2018
|
|
$
|
1,602
|
|
December
28, 2019
|
|
|
554
|
|
December
26, 2020
|
|
|
96
|
|
December
25, 2021
|
|
|
96
|
|
December
31, 2022 and after
|
|
|
64
|
|
Total
minimum lease payments
|
|
$
|
2,412
|
|
Rent
expense was $2.3 million for the year ended December 30, 2017 and $2.4 million for the year ended December 31, 2016. 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
7 - 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 to the plan for each of the years ended December 30, 2017 and December
31, 2016.
NOTE
8 - 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 30, 2017, 549,610 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 $0.4 million and $0.5 million for the fiscal
years ended December 30, 2017 and December 31, 2016, respectively.
Stock
Option Awards
–
We did not grant any stock options in 2017 or 2016. The following table summarizes our stock option
activity for the year ended December 30, 2017:
|
|
Vested
and Exercisable Balance
|
|
|
Number
of Shares Outstanding
|
|
|
Weighted
Average Exercise Price
|
|
Balance
at December 31, 2016
|
|
|
150,000
|
|
|
|
150,000
|
|
|
$
|
10.93
|
|
Cancelled
or expired
|
|
|
(150,000
|
)
|
|
|
(150,000
|
)
|
|
|
10.93
|
|
Balance
at December 30, 2017,
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
All
outstanding stock options during 2017 and 2016 were fully vested prior to 2016 and therefore we did not recognize any stock compensation
expense related to stock options in 2017 or 2016.
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; however, the December 2017 vesting has been delayed. 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 30, 2017:
|
|
Number
of unvested restricted shares
|
|
|
Weighted-
average grant-date fair value
|
|
Outstanding
at December 31, 2016
|
|
|
506,750
|
|
|
$
|
1.27
|
|
Granted
|
|
|
255,705
|
|
|
|
1.15
|
|
Vested
|
|
|
(284,699
|
)
|
|
|
1.44
|
|
Forfeited
|
|
|
(77,807
|
)
|
|
|
1.37
|
|
Outstanding
at December 31,2016
|
|
|
399,949
|
|
|
$
|
0.97
|
|
As
of December 30, 2017, there was $0.4 million of total unrecognized compensation cost related to unvested restricted stock awards
which is expected to be recognized over a weighted-average period of 1.95 years. During 2017 and 2016, the Company granted the
following restricted stock awards.
Date
Issued
|
|
Issued
to
|
|
Number
of Shares
|
|
|
Market
Price
|
|
|
Fair
Value
|
|
August
10, 2017
|
|
Employees
(6)
|
|
|
127,500
|
|
|
$
|
1.13
|
|
|
$
|
144,075
|
|
July
6, 2017
|
|
Consultant
|
|
|
176,000
|
|
|
$
|
1.28
|
|
|
$
|
225,280
|
|
June
16, 2017
|
|
Directors
(3)
|
|
|
128,205
|
|
|
$
|
1.17
|
|
|
$
|
150,000
|
|
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
|
|
NOTE
9 - 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. As of December 30, 2017, the Company had purchased and retired 1,191,050 shares for $1.5 million
under this program of which 63,156 shares were purchased in the three months ended July 1, 2017 for $91 thousand. The stock repurchase
program was suspended on May 16, 2017.
NOTE
10 - 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
11 - FEDERAL AND STATE INCOME TAXES
The
components of our income tax expense (benefit) for the years ended December 30, 2017 and December 31, 2016 were as follows (amounts
in thousands):
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(139
|
)
|
|
$
|
—
|
|
Foreign
Tax
|
|
|
(15
|
)
|
|
|
81
|
|
State
|
|
|
33
|
|
|
|
(37
|
)
|
Total
current
|
|
|
(121
|
)
|
|
|
44
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,070
|
|
|
|
(986
|
)
|
State
|
|
|
138
|
|
|
|
(85
|
)
|
Total
deferred
|
|
|
10,208
|
|
|
|
(1,071
|
)
|
Total
income tax expense (benefit)
|
|
$
|
10,087
|
|
|
$
|
(1,027
|
)
|
The
following is a reconciliation of expected income tax expense (benefit) to actual income tax expense (benefit) for the years ended
December 30, 2017 and December 31, 2016 (amounts in thousands):
|
|
2017
|
|
|
2016
|
|
Federal
income tax (benefit) at statutory rate of 35%
|
|
$
|
(2,160
|
)
|
|
$
|
(1,179
|
)
|
State
income tax, net of federal income tax effect
|
|
|
(90
|
)
|
|
|
(12
|
)
|
Change
of effective federal and state tax rate
|
|
|
3,927
|
|
|
|
4
|
|
Nondeductible
expenses
|
|
|
14
|
|
|
|
80
|
|
Research
and development credit
|
|
|
(68
|
)
|
|
|
(72
|
)
|
Stock
Compensation
|
|
|
344
|
|
|
|
436
|
|
Prior
year adjustments and true-ups
|
|
|
(141
|
)
|
|
|
(354
|
)
|
Change
in valuation allowance
|
|
|
8,261
|
|
|
|
70
|
|
Total
tax (benefit) expense
|
|
$
|
10,087
|
|
|
$
|
(1,027
|
)
|
The
components of the deferred tax asset (liability) consisted of the following at December 30, 2017 and December 31, 2016 (amounts
in thousands):
|
|
2017
|
|
|
2016
|
|
Noncurrent
Deferred tax assets
|
|
|
|
|
|
|
|
|
Federal
and state net operating loss carry-forward
|
|
$
|
5,643
|
|
|
$
|
6,417
|
|
Tax
credit carry-forwards
|
|
|
2,085
|
|
|
|
2,126
|
|
Allowance
for uncollectible accounts
|
|
|
159
|
|
|
|
156
|
|
Accruals
not yet deductible for tax purposes
|
|
|
368
|
|
|
|
755
|
|
Goodwill
|
|
|
475
|
|
|
|
948
|
|
Depreciation
|
|
|
297
|
|
|
|
339
|
|
Other
|
|
|
—
|
|
|
|
60
|
|
Total
noncurrent deferred tax assets
|
|
|
9,027
|
|
|
|
10,801
|
|
Less:
Valuation allowance
|
|
|
(8,854
|
)
|
|
|
(593
|
)
|
Total
noncurrent deferred tax assets, net
|
|
$
|
173
|
|
|
$
|
10,208
|
|
Noncurrent
deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(173
|
)
|
|
|
—
|
|
Total
noncurrent deferred tax liabilities
|
|
|
(173
|
)
|
|
|
—
|
|
Net
deferred tax assets/deferred tax Liabilities
|
|
|
—
|
|
|
|
10,208
|
|
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 carry-forwards 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. During 2017, after evaluating all available evidence, we recorded a valuation
allowance on all net deferred tax assets.
For
the year ended December 30, 2017, we recognized a total income tax benefit of $2.2 million on a pretax book loss of $6.2 million
compared to an income tax benefit of $1.2 million on $3.4 million of pretax book income for the year ended December 31, 2016.
As a result of permanent difference add-backs to taxable income related to meals & entertainment, fines and penalties, and
stock compensation, there is a decrease to the tax benefit in the amount of $14,176 which caused a decrease in the effective tax
rate of 0.23%. Return to accrual adjustments created additional tax benefit of ($81,202) increasing the effective tax rate by
1.32%, deferred tax true-ups partially related to returns filed during 2016 created additional tax expense of $926 and decreased
the effective tax rate by 0.02%, the reversal of a deferred tax asset related to expired stock options in 2017 offset by a reversal
of deferred tax liability related to forfeited restricted stock (from IRC §83(b) elections) created an additional tax expense
of $344,228 and decreased the effective tax rate by 5.58%, state tax payable true-ups created a tax benefit of ($12,164) and increased
the effective tax rate by 0.20%, foreign payable true-ups created an additional tax benefit of ($48,739) and increased the effective
tax rate by .79%. An estimated research and development credit in the amount of ($67,804) increased the effective tax rate by
1.10%. An increase of $8,261,315 in the valuation allowance decreased the effective tax rate by -133.88%, state income tax (net
of Federal) increased the tax benefit in the amount of ($90,365) increased the effective tax rate by 1.46% due to expected state
losses, offset by the Texas Margins tax, and tax expense of $3,926,666 was generated by the decrease in the federal tax rate from
35% to 21% and created a decrease in the effective tax rate by 63.63%.
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 30, 2017 and December 31, 2016, we do not have any significant uncertain tax positions.
We
had a federal net operating loss carry-forward at December 30, 2017 of approximately $23.1 million, which will begin to expire
starting 2021. At December 30, 2017, we had Alternative Minimum Tax (AMT) and federal research and development tax credit carry-forwards
of approximately $0.1 and $1.1 million respectively, available to reduce future tax liabilities. The AMT credit is available to
use against regular tax liability and, in accordance with recent tax law reform, a portion of this credit will become refundable
beginning in 2018. The research and development tax credit will begin to expire starting 2030. During 2017, the Company recorded
approximately $33 thousand of foreign tax credit that may be able to be utilized in the future. These foreign tax credits will
expire beginning in 2025. Under pre-Tax Cuts and Jobs Act law, net operating losses were generally carried back 2 years and then
carried forward 20 years. Taxpayers could elect to forego the carryback. Under the new law, for NOLs generated in tax year 2018
and forward, the 2 year carryback is repealed and the carry-forward is indefinite. However, the utilization of these post 2017
NOLs are limited to 80% of taxable income. For NOLs incurred in tax year 2017 and prior, the limitation to 80% of taxable income
does not apply, but the NOLs are subject to expiration. At this time, it is not determinable if there will be sufficient taxable
income available in future years to utilize the NOLs generated prior to 2018.
NOTE
12 - SEGMENT INFORMATION
Reporting
Segments
Our
segments are strategic business units that offer different services and products and therefore require different marketing and
management strategies. During 2017, ENGlobal changed the reporting structure within the company by placing an operational leader
in charge of its engineering offices and a separate operational leader in charge of its automation offices, including the office
that contracts with government agencies. The operating performance is regularly reviewed with these two operational leaders, the
chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents
the chief operating decision maker (“CODM”) for ENGlobal.
We
have revised our segment reporting to reflect our current management approach and recast prior periods to conform to the current
segment presentation. Our corporate and other expenses that do not individually meet the criteria for segment reporting continue
to be reported separately as Corporate expenses.
The
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, 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
a result of the change in reporting structure discussed above, effective January 1, 2017, the results of EGS, which were previously
included as part of our EPCM, are now reported within the Automation segment. The government services group provides engineering,
design, installation and operation and maintenance of various government, public sector and international facilities.
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 30, 2017 and December
31, 2016 is as follows (amounts in thousands):
For
the year ended
December
30, 2017:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
22,595
|
|
|
|
33,170
|
|
|
|
—
|
|
|
|
55,765
|
|
Operating
income (loss)
|
|
|
(1,786
|
)
|
|
|
2,162
|
|
|
|
(6,519
|
)
|
|
|
(6,143
|
)
|
Depreciation
and amortization
|
|
|
85
|
|
|
|
272
|
|
|
|
613
|
|
|
|
970
|
|
Tangible
assets
|
|
|
5,976
|
|
|
|
9,660
|
|
|
|
10,772
|
|
|
|
26,408
|
|
Goodwill
|
|
|
—
|
|
|
|
2,806
|
|
|
|
—
|
|
|
|
2,806
|
|
Other
intangible assets
|
|
|
—
|
|
|
|
19
|
|
|
|
19
|
|
|
|
38
|
|
Total
assets
|
|
|
5,976
|
|
|
|
12,485
|
|
|
|
10,791
|
|
|
|
29,252
|
|
Capital
expenditures
|
|
|
490
|
|
|
|
46
|
|
|
|
173
|
|
|
|
709
|
|
For
the year ended
December
31, 2016:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$
|
24,006
|
|
|
|
35,218
|
|
|
$
|
—
|
|
|
$
|
59,224
|
|
Operating
income (loss)
|
|
|
42
|
|
|
|
3,970
|
|
|
|
(7,250
|
)
|
|
|
(3,238
|
)
|
Depreciation
and amortization
|
|
|
23
|
|
|
|
386
|
|
|
|
734
|
|
|
|
1,143
|
|
Tangible
assets
|
|
|
4,913
|
|
|
|
8,997
|
|
|
|
27,610
|
|
|
|
41,520
|
|
Goodwill
|
|
|
—
|
|
|
|
2,806
|
|
|
|
—
|
|
|
|
2,806
|
|
Other
intangible assets
|
|
|
—
|
|
|
|
110
|
|
|
|
—
|
|
|
|
110
|
|
Total
assets
|
|
|
4,913
|
|
|
|
11,913
|
|
|
|
27,610
|
|
|
|
44,436
|
|
Capital
expenditures
|
|
|
44
|
|
|
|
14
|
|
|
|
6
|
|
|
|
64
|
|
Financial
Information by Geographic Area and Segments
Revenue
from our Caspian Pipeline Consortium Project in Russia and Kazakhstan contributed $4.6 million and $8.3 million in revenues in
our Automation segment for the years ended December 30, 2017 and December 31, 2016, respectively. Company assets, other than cash
and trade receivables, located in this region are insignificant.
NOTE
13 - 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.
Litigation
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.