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 engineered modular solutions and
professional 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 14 - 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
26, 2020 and December 28, 2019, and the results of our operations,
cash flows and changes in stockholders’ equity for the 52
week period ended December 26, 2020 and for the 52 week period
ended December 28, 2019. 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 wholly-owned subsidiaries.
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.
Our cash balance at financial institutions may exceed Federal
Deposit Insurance Corporation (“FDIC”) insured amounts
from time to time.
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, we may incur an increased credit
risk.
Our
businesses or product lines are largely dependent on a few
relatively 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 26, 2020, four
customers provided more than 10% each of our consolidated operating
revenues (25.1%, 17.9%, 13.9%, and 13.8%). Two customers provided
more than 10% each of our consolidated operating revenues for the
year ended December 28, 2019 (23.3% and 18.3%). Amounts included in
trade receivables related to these customers totaled $0.0 million,
$0.6 million, $0.8 million, and $1.5 million, respectively, at
December 26, 2020 and $0.2 million and $0.7 million, respectively,
at December 28, 2019.
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
|
|
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 remaining 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.
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.
In
January 2017, the Financial Accounting Standards Board
(“FASB”) issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic
350): Simplifying the Test for Goodwill Impairment. The
standard simplifies the subsequent measurement of goodwill by
removing the requirement to perform a hypothetical purchase price
allocation to compute the implied fair value of goodwill to measure
impairment. Instead, goodwill impairment is measured as the
difference between the fair value of the reporting unit and the
carrying value of the reporting unit. The standard also clarifies
the treatment of the income tax effect of tax-deductible goodwill
when measuring goodwill impairment loss. This standard is effective
for annual or any interim goodwill impairment test in fiscal years
beginning after December 15, 2019, with early adoption permitted
for impairment tests performed after January 1, 2017. The Company
early adopted ASU 2017-04 on December 29, 2018, the last day of its
fiscal 2018 year.
The
Company compares its fair value of a reporting unit and the
carrying value of the reporting unit to measure goodwill impairment
loss as required by ASU 2017-04. Fair value was determined by
applying a historical earnings multiple times the cash flow of the
operating unit after allocation of certain corporate
overhead.
We
performed a qualitative assessment of goodwill for each of the
years ended December 26, 2020 and December 28, 2019. This
assessment indicated that there was no impairment of goodwill for
the years ended December 26, 2020 and December 28, 2019.
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 2020 and 2019 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,
procurement and construction management services and sales of
fabricated systems and integrated control systems that we design
and assemble. The majority of our services are provided under
time-and-material contracts. Some time-and-material contracts may
have limits not to exceed. Revenue is not recognized over these
limits until authorization by the client has been
received.
A
majority of sales of fabrication and assembled systems are under
fixed-price contracts. We account for a contract when it has
approval and commitment from both parties, the rights of the
parties are identified, payment terms are identified, the contract
has commercial substance and collectability of consideration is
probable.
We
generally recognize revenue over time as we perform because of
continuous transfer of control to the customer. Our customer
typically controls the work in process as evidenced either by
contractual termination clauses or by our rights to payment for
work performed to date plus a reasonable profit to deliver products
or services that do not have an alternative use to the Company. The
selection of the method to measure progress towards completion
requires judgment and is based on the nature of the products or
service to be provided, which measures the ratio of costs incurred
to date to the total estimated costs at completion of the
performance obligation. We generally use the cost-to-cost method on
the labor portion of a project for revenue recognition to measure
progress of our contracts because it best depicts the transfer of
control to the customer which occurs as we consume the materials on
the contracts. Therefore, revenues and estimated profits are
recorded proportionally as labor costs are incurred.
Under
the typical payment terms of our fixed-price contracts, the
customer pays us progress payments. These progress payments are
based on quantifiable measures of performance or on the achievement
of specified events or milestones. The customer may retain a small
portion of the contract price until completion of the contract.
Revenue recognized in excess of billings is recorded as a contract
asset on the balance sheet. Amounts billed and due from our
customers are classified as receivables on the balance sheet. The
portion of the payments retained by the customer until final
contract settlement is not considered a significant financing
component because the intent is to protect the customer should we
fail to adequately complete some or all of our obligations under
the contract. For some contracts we may receive advance payments
from the customer. We record a liability for these advance payments
in contract liabilities on the balance sheet. The advance payment
typically is not considered a significant financing component
because it is used to meet working capital demand that can be
higher in the early stages of a contract and to protect us from the
other party failing to adequately complete some or all of its
obligations under the contract.
To
determine proper revenue recognition for contracts, we evaluate
whether two or more contracts should be combined and accounted for
as one single performance obligation or whether a single contract
should be accounted for as more than one performance obligation.
This evaluation requires significant judgment and the decision to
combine a group of contracts or separate a single contract into
multiple performance obligations could change the amount of revenue
and profit recorded in a given period. For most of our contracts,
we provide a significant service of integrating a complex set of
tasks and components into a single project. Hence, the entire
contract is accounted for as one performance obligation. Less
commonly, we may provide distinct goods or services within a
contract in which case we separate the contract into more than one
performance obligation. If a contract is separated into more than
one performance obligation, we allocate the total transaction price
to each performance obligation in an amount based on the estimated
relative standalone selling price of the promised goods or services
underlying each performance obligation and use the expected cost
plus margin approach to estimate the standalone selling price of
each performance obligation. Due to the nature of the work required
to be performed on many of our performance obligations, the
estimation of total revenue and cost at completion is complex,
subject to variables and requires significant judgment. We estimate
variable consideration at the most likely amount to which we expect
to be entitled. We include estimated amounts in the transaction
price to the extent it is probable that a significant reversal of
cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is resolved. Our
estimates of variable consideration and determination of whether to
include estimated amounts in the transaction price are based
largely on an assessment of our anticipated performance and all
information (historical, current and forecasted) that is reasonably
available to us.
Contracts are often
modified to account for changes in contract specifications and
requirements. We consider contract modifications to exist when the
modification either creates new or changes the existing enforceable
rights and obligations. Most of our contract modifications are for
goods or services that are not distinct from the existing contract
due to the significant integration service provided in the context
of the contract and are accounted for as if they were part of that
existing contract. The effect of a contract modification on the
transaction price and our measure of progress for the performance
obligation to which it relates, is recognized as an adjustment to
revenue (either as an increase or a reduction of revenue) on a
cumulative catch-up basis.
We have
a standard, monthly process in which management reviews the
progress and execution of our performance obligations. As part of
this process, management reviews information including, but not
limited to, any outstanding key contract matters, progress towards
completion and the related program schedule, identified risks and
opportunities and the related changes in estimates of revenues and
costs. The risks and opportunities include management’s
judgment about the ability and cost to achieve the schedule,
technical requirements, and other contractual requirements.
Management must make assumptions and estimates regarding labor
productivity and availability, the complexity of the work to be
performed, the availability of materials, the length of time to
complete the performance obligation, execution by our
subcontractors, the availability and timing of funding from our
customer and overhead cost rates, among other
variables.
Based
on this analysis, any adjustments to revenue, operating costs and
the related impact to operating income are recognized as necessary
in the period they become known. These adjustments may result from
positive performance and may result in an increase in operating
income during the performance of individual performance obligations
if we determine we will be successful in mitigating risks
surrounding the technical, schedule and cost aspects of those
performance obligations or realizing related opportunities. When
estimates of total costs to be incurred exceed total estimates to
be earned, a provision for the entire loss on the performance
obligation is recognized in the period the loss is estimated.
Likewise, these adjustments may result in a decrease in operating
income if we determine we will not be successful in mitigating
these risks or realizing related opportunities. Changes in
estimates of net revenue, operating costs and the related impact to
operating income are recognized monthly on a cumulative catch-up
basis, which recognizes in the current period the cumulative effect
of the changes on current and prior periods based on a performance
obligation’s percentage of completion. A significant change
in one or more of these estimates could affect the profitability of
one or more of our performance obligations.
Incremental
Costs – Our incremental costs of obtaining a contract,
which may consist of sales commission and proposal costs, are
reviewed and those costs that are immaterial to the financial
statements are expensed as they occur. Those costs that are deemed
to be material to the contract are deferred and amortized over the
period of contract performance. We classify incremental costs as
current or noncurrent based on the timing of when we expect to
recognize the expense. The current and noncurrent portions of
incremental costs are included in prepaid expenses and other
current assets and other assets, net, respectively in our
consolidated balance sheet. We had no incremental costs that met
our materiality threshold in 2020 or 2019.
Income
Taxes – We
account for deferred income taxes in accordance with 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 weighted 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. We
only had restricted stock awards outstanding during
2020.
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. All shares acquired during
2019 were retired.
Stock–Based
Compensation –
We have issued stock-based compensation in the form of 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.
NOTE 3 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The
components of trade receivables, net as of December 26, 2020 and
December 28, 2019, are as follows (amounts in
thousands):
|
|
|
Amounts
billed
|
$5,050
|
$5,523
|
Amounts
unbilled
|
1,455
|
5,576
|
Retainage
|
1,670
|
572
|
Less: Allowance for
uncollectible accounts
|
(386)
|
(236)
|
Trade receivables,
net
|
$7,789
|
$11,435
|
The
components of prepaid expense and other current assets are as
follows as of December 26, 2020 and December 28, 2019 (amounts in
thousands):
|
|
|
Prepaid
expenses
|
$843
|
$816
|
Other receivables -
employee
|
48
|
54
|
Note
receivable
|
—
|
19
|
Prepaid expenses
and other current assets
|
$891
|
$889
|
The
components of other current liabilities are as follows as of
December 26, 2020 and December 28, 2019 (amounts in
thousands):
|
|
|
Accrual for known
contingencies
|
$215
|
$145
|
Customer
prepayments
|
4
|
1
|
Gross receipts tax
payable
|
23
|
96
|
State income taxes
payable
|
83
|
67
|
Insurance
payable
|
420
|
372
|
Other current
liabilities
|
$745
|
$681
|
Our
accrual for known contingencies includes litigation accruals, if
any. See “Note 15 – Commitments and
Contingencies” for further information.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and
equipment consist of the following at December 26, 2020 and
December 28, 2019 (amounts in thousands):
|
|
|
Computer equipment
and software
|
$1,170
|
$989
|
Shop
equipment
|
1,683
|
1,301
|
Furniture and
fixtures
|
193
|
190
|
Leasehold
improvements
|
845
|
623
|
Autos and
trucks
|
87
|
87
|
Construction in
progress
|
—
|
141
|
|
$3,978
|
$3,331
|
Accumulated
depreciation and amortization
|
(2,715)
|
(2,298)
|
Property and
equipment, net
|
$1,263
|
$1,033
|
Depreciation
expense was $0.4 million and $0.3 million for the years ended
December 26, 2020 and December 28, 2019, respectively. During the
year ended December 28, 2019, we disposed of $4.9 million of assets
in connection with relocating several of our offices and upgrading
our IT equipment in several locations. There was no gain or loss
associated with these disposals due to the assets being fully
depreciated. The $4.9 million total consisted of $1.6 million of
leasehold improvements, $0.1 million of furniture and fixtures,
$0.2 million of machinery and equipment, and $3.0 million of
computer equipment and software.
NOTE 5 – REVENUE RECOGNITION
Our
revenue by contract type was as follows (amounts in
thousands):
|
For the Three
Months Ended
|
|
|
|
|
|
|
Fixed-price
revenue
|
$7,037
|
$4,670
|
$35,822
|
$19,088
|
Time-and-material
revenue
|
4,540
|
12,018
|
28,627
|
37,358
|
Total
Revenue
|
11,577
|
16,688
|
64,449
|
56,446
|
NOTE 6 - CONTRACTS
Costs,
estimated earnings, and billings on uncompleted contracts consist
of the following at December 26, 2020 and December 28, 2019
(amounts in thousands):
|
|
|
Costs incurred on
uncompleted contracts
|
$39,154
|
$23,846
|
Estimated earnings
on uncompleted contracts
|
4,388
|
5,188
|
Earned
revenues
|
43,542
|
29,034
|
Less: billings to
date
|
40,710
|
30,610
|
Net costs in excess
of billings on uncompleted contracts
|
$2,832
|
$(1,576)
|
|
|
|
Costs and estimated
earnings in excess of billings on uncompleted
contracts
|
$4,090
|
$3,862
|
Billings in excess
of costs and estimated earnings on uncompleted
contracts
|
(1,258)
|
(5,438)
|
Net costs in excess
of billings on uncompleted contracts
|
$2,832
|
$(1,576)
|
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 had $0.2 million in contingency amounts as of December 26, 2020
and had $0.9 million in contingency amounts as of December 28,
2019. 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 had $0.3 million in deferred revenue
for the year ended December 26, 2020 and $0.2 million for the year
ended December 28, 2019. This deferred revenue represents work on
not to exceed contracts that has been performed but has not been
billed or been recorded 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 7 – DEBT
The
components of debt were as follows (amounts in
thousands):
|
|
|
PPP
Loan (1)
|
$4,949
|
$—
|
Revolving
Credit Facility (2)
|
1,491
|
—
|
Total
debt
|
6,440
|
—
|
Amount
due within one year
|
3,707
|
—
|
Total long-term
debt
|
$2,733
|
$—
|
(1)
On April 13, 2020, the Company was granted an
unsecured loan (the “PPP Loan”) from Origin Bank in the
aggregate principal amount of $4,915,800 pursuant to the Paycheck
Protection Program (the “PPP”) under Division A,
Title I of the Coronavirus Aid, Relief and Economic
Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note,
dated as of April 13, 2020 (the “Note”), by the Company
in favor of Origin Bank, as lender.
Interest Rate:
The interest rate on the PPP Loan is
1% per year.
Potential PPP Loan
Forgiveness: Under the PPP, the Company may apply for
forgiveness of the amount due on the PPP Loan in an amount equal to
the sum of the following costs incurred during the covered period
beginning on the date of the first disbursement of the PPP Loan:
(a) payroll costs, (b) any payment of interest on a covered
obligation (which shall not include any prepayment of or payment of
principal on a covered mortgage obligation), (c) any payment on a
covered rent obligation, and (d) any covered utility payment,
calculated in accordance with the terms of the CARES
Act.
We have
elected to utilize a 24-week covered period as allowed by the
Paycheck Protection Program Flexibility Act (“PPPFA”)
enacted on June 5, 2020. When applying for PPP Loan forgiveness, we
have the option to increase the repayment period for any unforgiven
portion of the PPP Loan to five years as permitted under the
PPPFA.
We have
calculated qualified forgivable expenses in excess of our PPP Loan
amount. Although we expect the full PPP Loan amount to be forgiven,
we cannot guarantee our forgiveness application will be accepted
allowing for a fully forgiven loan.
(2)
On May 21, 2020 (the “Closing Date”), the Company and
its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal
Government Services, Inc. (collectively, the
“Borrowers”) entered into a Loan and Security Agreement
(the “Revolving Credit Facility”) with Pacific Western
Bank dba Pacific Western Business Finance, a California
state-chartered bank (the “Lender”), pursuant to which
the Lender agreed to extend credit to the Borrowers in the form of
revolving loans (each a “Loan” and collectively, the
“Loans”) in the aggregate amount of up to $6.0 million
(the “Maximum Credit Limit”).
Set
forth below are certain of the material terms of the Revolving
Credit Facility:
Credit
Limit: The credit limit
is an amount equal to the lesser of (a) the Maximum Credit Limit
and (b) the sum of (i) 85% of the Borrowers’ Eligible
Accounts (as defined in the Revolving Credit Facility), plus
(ii) the lesser of (A) 75% of the Borrowers’
Eligible Unbilled Accounts (as defined in the Revolving Credit
Facility), or (B) $3,000,000 plus (iii) the lesser of
(A) 20% of Borrowers’ Eligible Fixed Price Accounts, or
(B) $250,000. As of December 26, 2020, the credit limit under
the Revolving Credit Facility was $2.4 million.
Interest: Any
Loans will bear interest at a rate per annum equal to the Prime
rate (defined as the rate announced as the “prime rate”
or “bank prime rate” in the Western Edition of the Wall
Street Journal) plus 2.0%; provided that interest will not be less
than $7,500 per month.
Collateral:
Lender receives a first priority lien on all assets of the
Borrowers, including accounts receivable, inventory, equipment,
deposit accounts, general intangibles and investment
property.
Maturity: The
maturity date is May 20, 2023 and shall be automatically extended
for additional periods of one-year each, if written notice of
termination is not given by one party to the other at least thirty
days prior to the maturity date.
Loan Fee: The Borrowers will pay to Lender a loan fee of
1.00% of the Maximum Credit Limit at the time of funding and
annually thereafter on the anniversary date of the initial
funding.
Termination
Fee: In the event the Borrowers
terminate the Revolving Credit Facility prior to the maturity date,
the Borrowers will pay to Lender a termination fee of (i) 2.00% of
the Maximum Credit Limit, if the termination occurs on or prior to
the first anniversary of the Closing Date, (ii) 1.00% of the
Maximum Credit Limit, if the termination occurs after the first
anniversary of the Closing Date and on or prior to the second
anniversary of the Closing Date and (iii) 0.05% of the Maximum
Credit Limit, if the termination occurs after the second
anniversary of the Closing Date.
Covenants: The Revolving Credit Facility requires the
Borrowers to comply with certain customary affirmative covenants,
and negative covenants that, among other things, restrict, subject
to certain exceptions, the ability of the Borrowers to engage in
mergers, acquisitions or other transactions outside of the ordinary
course of business, make loans or investments, incur indebtedness,
pay dividends or repurchase stock, or engage in affiliate
transactions. The Revolving Credit Facility does not require the
Borrowers to comply with any financial
covenants.
The
future scheduled maturities of our debt are (amounts in
thousands):
|
PPP Loan and
Revolving
Credit Facility
(1)
|
Revolving
Credit
Facility
(1)
|
2021
|
$3,707
|
$—
|
2022
|
1,242
|
—
|
2023
|
1,491
|
1,491
|
2024
|
—
|
—
|
Thereafter
|
—
|
—
|
|
$6,440
|
$1,491
|
(1)
If the PPP Loan is
entirely forgiven, only the Revolving Credit Facility would remain
as debt.
NOTE 8 - LEASES
The
Company leases land, office space and equipment. Arrangements are
assessed at inception to determine if a lease exists and, with the
adoption of ASC 842, “Leases,” right-of-use
(“ROU”) assets and lease liabilities are recognized
based on the present value of lease payments over the lease term.
Because the Company’s leases do not provide an implicit rate
of return, the Company uses its incremental borrowing rate at the
inception of a lease to calculate the present value of lease
payments. The Company has elected to apply the short-term lease
exception for all asset classes, excluding lease liabilities from
the balance sheet and recognizing the lease payments in the period
they are incurred.
The
components of lease expense were as follows (amounts in
thousands):
|
Financial
Statement Classification
|
Year
ended
December 26,
2020
|
Year
ended
December 28,
2019
|
Finance
leases:
|
|
|
|
Amortization
expense
|
SG&A
Expense
|
$92
|
$33
|
Interest
expense
|
Interest expense,
net
|
20
|
7
|
|
$112
|
$40
|
Operating
leases:
|
|
|
|
Operating
costs
|
Operating
costs
|
633
|
1,214
|
Selling, general
and administrative expenses
|
SG&A
Expense
|
1,830
|
1,857
|
|
$2,463
|
$3,071
|
Total lease
expense
|
|
$2,575
|
$3,111
|
Supplemental
balance sheet information related to leases was as follows (amounts
in thousands):
|
Financial
Statement Classification
|
|
|
ROU
Assets:
|
|
|
|
Operating
leases
|
Right of Use
asset
|
$1,628
|
$2,133
|
Finance
leases
|
Property and
equipment, net
|
442
|
318
|
Total ROU
Assets:
|
|
$2,070
|
$2,451
|
|
|
|
Lease
liabilities:
|
|
|
|
Current
liabilities
|
|
|
|
Operating
leases
|
Current portion of
leases
|
$1,421
|
$961
|
Finance
leases
|
Current portion of
leases
|
120
|
80
|
Noncurrent
Liabilities:
|
|
|
|
Operating
leases
|
Long Term
Leases
|
286
|
1,220
|
Finance
leases
|
Long Term
Leases
|
322
|
238
|
Total lease
liabilities
|
|
$2,149
|
$2,499
|
The
weighted average remaining lease term and weighted average discount
rate were as follows:
|
|
|
Weighted average
remaining lease term (years)
|
|
|
Operating
leases
|
1.2
|
2.2
|
Finance
leases
|
4.2
|
3.3
|
Weighted average
discount rate
|
|
|
Operating
leases
|
1.7%
|
3.3%
|
Finance
leases
|
5.8%
|
11.0%
|
Maturities of
operating lease liabilities as of December 26, 2020 are as follows
(dollars in thousands):
Years
ending:
|
|
|
|
2021
|
1,448
|
133
|
1,581
|
2022
|
288
|
113
|
401
|
2023
|
—
|
93
|
93
|
2024
|
—
|
73
|
73
|
2025 and
thereafter
|
—
|
57
|
57
|
Total lease
payments
|
1,736
|
469
|
2,205
|
Less: imputed
interest
|
(29)
|
(27)
|
(56)
|
Total lease
liabilities
|
$1,707
|
$442
|
$2,149
|
NOTE 9 - 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. The Company does not currently
match employees’ deferrals. The match was suspended beginning
December 30, 2018 and no contributions were made during the years
ended December 26, 2020 and December 28, 2019.
NOTE 10 - STOCK COMPENSATION PLANS
The
Company’s Amended and Restated 2009 Equity Incentive Plan
(the “Equity Plan,” or the “Plan”),
currently provides for the aggregate issuance of up to 625,109
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. At December 26, 2020, 478,049 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 $0.2 million for the year ended December 26, 2020
and $0.1 million for the year ended December 28, 2019.
Restricted Stock
Awards –
Restricted stock awards granted to non-employee 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
30th of
the year of grant, so long as the grantee continues to serve as a
director of the Company as of each vesting date. The Company had
delayed the vesting of restricted stock awards made in 2017; these
awards were vested in full during the year ended December 26, 2020.
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 26, 2020:
|
Number
of
unvested
restricted
shares
|
Weighted-average
grant-date fair
value
|
Outstanding at
December 28, 2019
|
191,404
|
$1.12
|
Granted
|
147,060
|
1.02
|
Vested
|
(193,168)
|
1.10
|
Forfeited
|
—
|
—
|
Outstanding at
December 26, 2020
|
145,296
|
$1.05
|
As of
December 26, 2020, there was $0.2 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
year. During the year ended December 26, 2020, the Company granted
the following restricted stock awards.
Date
Issued
|
Issued
to
|
|
|
|
June 11, 2020
|
Directors (3)
|
147,060
|
$1.02
|
$150,000
|
During
the year ended December 28, 2019, the Company granted the following
restricted stock awards.
Date
Issued
|
Issued
to
|
|
|
|
August 6, 2019
|
Employees (1)
|
10,000
|
$1.22
|
$12,200
|
NOTE 11 - TREASURY STOCK
On
April 21, 2015, we announced that 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, discontinued or reinstated at any time. As of December
26, 2020, the Company had purchased and retired 1,290,460 shares
for $1.6 million under this program. The stock repurchase program
was suspended from May 16, 2017 and was reinstated on December 19,
2018. During the year ended December 28, 2019, we purchased and
retired 77,687 shares at a cost of $61 thousand. No shares were
repurchased during the year ended December 26, 2020. Management
does not intend to repurchase any shares in the near
future.
NOTE 12 - 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. 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 13 - FEDERAL AND STATE INCOME TAXES
The
components of our income tax expense for the years ended December
26, 2020 and December 28, 2019 were as follows (amounts in
thousands):
|
|
|
Current:
|
|
|
State
|
103
|
83
|
Total
current
|
103
|
83
|
Deferred:
|
|
|
Federal
|
(25)
|
(55)
|
State
|
25
|
55
|
Total
deferred
|
—
|
—
|
Total income tax
expense
|
$103
|
$83
|
The
following is a reconciliation of expected income tax benefit to
actual income tax expense for the years ended December 26, 2020 and
December 28, 2019 (amounts in thousands):
|
|
|
Federal income tax
(benefit) at statutory rate of 21%
|
$(110)
|
$(270)
|
State income tax,
net of federal income tax effect
|
64
|
93
|
Nondeductible
expenses
|
29
|
37
|
Stock
Compensation
|
—
|
(1)
|
Prior year
adjustments and true-ups
|
36
|
23
|
Change in valuation
allowance
|
84
|
201
|
Total tax
expense
|
$103
|
$83
|
The
components of the deferred tax asset (liability) consisted of the
following at December 26, 2020 and December 28, 2019 (amounts in
thousands):
|
|
|
Noncurrent Deferred
tax assets
|
|
|
Federal and state
net operating loss carryforward
|
$7,036
|
$7,145
|
Tax credit
carryforwards
|
1,971
|
1,971
|
Allowance for
uncollectible accounts
|
93
|
53
|
Accruals not yet
deductible for tax purposes
|
613
|
352
|
Goodwill
|
364
|
485
|
Depreciation
|
3
|
7
|
Lease
payable
|
390
|
488
|
Total noncurrent
deferred tax assets
|
10,470
|
10,501
|
Less: Valuation
allowance
|
(10,016)
|
(9,912)
|
Total noncurrent
deferred tax assets, net
|
$454
|
$589
|
Noncurrent deferred
tax liabilities:
|
|
|
Other
|
(70)
|
(107)
|
Right to use
asset
|
(384)
|
(482)
|
Total noncurrent
deferred tax liabilities
|
(454)
|
(589)
|
Net deferred tax
assets/deferred tax Liabilities
|
$—
|
$—
|
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. We recognize interest and
penalties related to unrecognized tax benefits in the provision for
income taxes. As of December 26, 2020 and December 28, 2019, we do
not have any significant uncertain tax positions.
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 26, 2020, we recognized a total income tax
expense of $103 thousand on a pretax book loss of $0.5 million
compared to an income tax expense of $83 thousand on a pretax book
loss of $1.3 million for the year ended December 28, 2019. As a
result of permanent difference add-backs to taxable income related
to meals and entertainment, the tax expense increased by $29
thousand which decreased the effective tax rate by 5.5%. An
increase of $84 thousand in the valuation allowance decreased the
effective tax rate by 16.1%. State income tax (net of Federal)
expense in the amount of $83 thousand decreased the effective tax
rate by 15.8% mainly due to Texas margins tax. Federal and state
tax true-ups increased tax expense in the amount of $36 thousand
and decreased the effective tax rate by 6.8%. An effect of rate
change due to state tax increased tax expense by $19 thousand and
decreased the effective rate by 3.6%.
As of
December 26, 2020, the Company has a gross federal net operating
loss carry-forward of approximately $31.4 million, which will begin
to expire in 2032. Under the Tax Cuts and Jobs Act of 2017
("TCJA"), net operating losses ("NOLs") generated in tax year 2018
and forward have an indefinite carryforward but are limited to 80%
of taxable income when utilized. 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. The provisions were
subsequently amended further under the CARES Act on March 27, 2020.
The CARES Act amended the net operating loss provisions in the 2017
Tax Cuts and Jobs Act (“TCJA”) and allows for the
carryback of NOLs arising in the taxable years ending December 31,
2017 and before January 1, 2021, to each of the five taxable years
preceding the taxable year of the loss. Additionally, the 80%
limitation related to application of NOLs towards current federal
taxable income has been removed for taxable years prior to January
1, 2021; thereby allowing 100% of the NOL to be applied to federal
taxable income.
As of
December 26, 2020, the Company has federal research and development
tax credit carryforwards of approximately $1.07 million available
to reduce future tax liabilities. The research and development tax
credit will begin to expire in 2030. The Company has foreign tax
credit carryforwards of approximately $900 thousand which will
begin to expire in 2025. Additionally under the TCJA, alternative
minimum tax ("AMT") was repealed for corporations and any
unutilized AMT credits have become refundable. The Company received
the remaining AMT refundable credit in 2020.
NOTE 14 - SEGMENT INFORMATION
Reporting Segments
Our
segments are strategic business units that offer different services
and products and therefore require different marketing and
management strategies. Separate operational leaders are in charge
of our engineering offices and our automation offices, including
the office that contracts with government agencies. The operating
performance of our segments is regularly reviewed with the
operational leaders of the two segments, the chief executive
officer (“CEO”), the chief financial officer
(“CFO”) and others. This group represents the chief
operating decision maker (“CODM”) for
ENGlobal.
Our
corporate and other expenses that do not individually meet the
criteria for segment reporting are reported separately as Corporate
expenses.
The
Engineering, Procurement and Construction Management
(“EPCM”) segment provides services relating to the
development, management and execution of projects requiring
professional engineering and related project services primarily to
the energy industry throughout the United States. The Automation
segment provides services related to the design, integration and
implementation of advanced automation, information technology,
process distributed control systems, analyzer systems, and
electrical projects primarily to the upstream and downstream
sectors of the energy industry throughout the United States. The
Automation segment includes the government services group, which
provides engineering, design, installation and operation and
maintenance of various government, public sector and international
facilities and the fabrication operation.
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 26, 2020 and December 28,
2019 is as follows (amounts in thousands):
For the year
ended
December 26,
2020:
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$25,929
|
$38,520
|
$—
|
$64,449
|
Operating income
(loss)
|
(69)
|
4,524
|
(4,838)
|
(383)
|
Depreciation and
amortization
|
275
|
57
|
117
|
449
|
Tangible
assets
|
7,389
|
7,806
|
14,504
|
29,699
|
Goodwill
|
—
|
720
|
—
|
720
|
Other intangible
assets
|
—
|
19
|
—
|
19
|
Total
assets
|
7,389
|
8,545
|
14,504
|
30,438
|
Capital
expenditures
|
145
|
15
|
268
|
428
|
For the year
ended
December 28,
2019:
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
$19,436
|
$37,010
|
$—
|
$56,446
|
Operating income
(loss)
|
(830)
|
4,595
|
(5,166)
|
(1,401)
|
Depreciation and
amortization
|
189
|
109
|
91
|
389
|
Tangible
assets
|
6,253
|
12,864
|
8,830
|
27,947
|
Goodwill
|
—
|
720
|
—
|
720
|
Other intangible
assets
|
—
|
19
|
—
|
19
|
Total
assets
|
6,253
|
13,603
|
8,830
|
28,686
|
Capital
expenditures
|
202
|
43
|
100
|
345
|
NOTE 15 - 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.
Litigation
From
time to time, ENGlobal or one or more of its subsidiaries may be
involved in various legal proceedings or may be 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. As of the date of this filing, management is not aware
of any such claims against the Company or any subsidiary business
entity.
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 provide health insurance to our
employees (including vision and dental), and are partially
self-funded for these claims. Provisions for expected future
payments are accrued based on our experience, and specific stop
loss levels provide protection for the Company. We believe we have
adequate reserves for the self-funded portion of our insurance
policies. We are not aware of any material litigation or claims
that are not covered by these policies or which are likely to
materially exceed the Company’s insurance
limits.
NOTE 16 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these
financial statements were issued. The Company determined there were
no events, other than as described below, that required disclosure
or recognition in these financial statements.
PPP Forgiveness
On
November 30, 2020, our lender, Origin Bank, transmitted our PPP
Loan forgiveness application to the U.S. Small Business
Administration. We have not received a forgiveness decision on our
PPP Loan.
At The Market Offering
On
January 29, 2021, the Company filed a shelf registration statement
on Form S-3 with the U.S. Securities and Exchange Commission (the
“SEC”) (the “Registration Statement”),
pursuant to which the Company may offer and sell, at its option,
securities having an aggregate offering price of up to $100
million. On the same date, the Company entered into an at market
issuance sales agreement with B. Riley Securities, Inc. (“B.
Riley”), pursuant to which the Company may offer and sell
shares of its common stock, par value $0.001 per share, having an
aggregate offering price of up to $25 million (the “Placement
Shares”), to or through B. Riley, as sales agent (the
“Sales Agreement”), from time to time, in an “at
the market offering” (as defined in Rule 415(a)(4) under the
Securities Act of 1933, as amended) of the Placement Shares (the
“ATM Offering”). The Registration Statement includes a
base prospectus (the “Base Prospectus”) and a sales
agreement prospectus relating to the ATM Offering, specifically
relating to the sale of the Placement Shares under the Sales
Agreement (the “ATM Prospectus,” and collectively with
the Base Prospectus, the “Prospectus”) both of which
form part of the Registration Statement. The Company is not
obligated to make any sales of Placement Shares under the Sales
Agreement and any determination by the Company to do so will be
dependent, among other things, on market conditions and the
Company’s capital raising needs. The Registration Statement
has not yet become effective and these securities may not be sold
nor may offers to buy be accepted prior to the time the
Registration Statement becomes effective.