See accompanying notes to unaudited interim condensed consolidated financial statements.
See accompanying notes to unaudited interim condensed consolidated financial statements.
See accompanying notes to unaudited interim condensed consolidated financial statements.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed financial statements do not include all of the information or note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 26, 2020, included in the Company’s 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
The condensed financial statements included herein are unaudited for the three month and nine month periods ended September 25, 2021 and September 26, 2020, and in the case of the condensed balance sheet as of December 26, 2020 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.
The Company has assessed subsequent events through the date of filing of these condensed financial statements with the Securities and Exchange Commission and believes that the disclosures made herein are adequate to make the information presented herein not misleading.
We had no items of other comprehensive income in any period presented; therefore, no other components of comprehensive income are presented.
Each of our quarters is comprised of 13 weeks.
NOTE 2 – ACCOUNTING STANDARDS
Revenue Recognition – Our revenue is comprised of engineering, procurement and construction management services and sales of fabricated systems and integrated control systems that we design and assemble. The majority of our services are provided under time-and-material contracts. Some time-and-material contracts may have limits. Revenue is not recognized over these limits until authorization by the client has been received.
A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.
Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.
To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are 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 becomes known. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net revenue, operating costs and the related impact to operating income are recognized monthly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.
NOTE 3 – REVENUE RECOGNITION
Our revenue by contract type was as follows (dollars in thousands):
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 25,
2021
|
|
|
September 26,
2020
|
|
|
September 25,
2021
|
|
|
September 26,
2020
|
|
Fixed-price revenue
|
|
$
|
2,743
|
|
|
$
|
10,863
|
|
|
$
|
17,536
|
|
|
$
|
28,785
|
|
Time-and-material revenue
|
|
|
3,178
|
|
|
|
4,866
|
|
|
|
11,913
|
|
|
|
24,086
|
|
Total Revenue
|
|
|
5,921
|
|
|
|
15,729
|
|
|
|
29,449
|
|
|
|
52,871
|
|
NOTE 4 – CONTRACT ASSETS AND CONTRACT LIABILITIES
Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred.
Costs, estimated earnings and billings on uncompleted contracts consisted of the following (dollars in thousands):
|
|
September 25,
2021
|
|
|
December 26,
2020
|
|
Costs incurred on uncompleted contracts
|
|
$
|
34,712
|
|
|
$
|
39,154
|
|
Estimated earnings on uncompleted contracts
|
|
|
4,958
|
|
|
|
4,388
|
|
Earned revenues
|
|
|
39,670
|
|
|
|
43,542
|
|
Less: billings to date
|
|
|
36,679
|
|
|
|
40,710
|
|
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts
|
|
$
|
2,991
|
|
|
$
|
2,832
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
3,655
|
|
|
$
|
4,090
|
|
Contract liabilities
|
|
|
(664
|
)
|
|
|
(1,258
|
)
|
Net contract assets
|
|
$
|
2,991
|
|
|
$
|
2,832
|
|
NOTE 5 – DEBT
The components of debt were as follows (dollars in thousands):
|
|
September 25,
2021
|
|
|
December 26,
2020
|
|
PPP Loan (1)
|
|
$
|
—
|
|
|
$
|
4,949
|
|
Revolving Credit Facility (2)
|
|
|
1,377
|
|
|
|
1,491
|
|
Total debt
|
|
|
1,377
|
|
|
|
6,440
|
|
Amount due within one year
|
|
|
—
|
|
|
|
3,707
|
|
Total long-term debt
|
|
$
|
1,377
|
|
|
$
|
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 $4,915,800pursuant 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 ENGlobal in favor of Origin Bank, as lender. The PPP Loan balance has increased due to accrued interest.
|
|
|
On November 30, 2020, our lender, Origin Bank, transmitted our PPP Loan forgiveness application to the U.S. Small Business Administration. On July 12, 2021, we received notification from Origin Bank that the PPP Loan was forgiven in full by the U.S. Small Business Administration at which time the Company recognized the extinguishment of debt as Other Income.
|
|
|
|
|
(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 September 25, 2021, the credit limit under the Revolving Credit Facility was $1.7 million.
|
|
|
|
|
|
Interest: Any Loans will bear interest at a rate per annum equal to the Prime rate (defined as the rate announced as the “prime rate” or “bank prime rate” in the Western Edition of the Wall Street Journal) plus 2.0%; provided that interest will not be less than $7,500 per month.
|
|
|
|
|
|
Collateral: Lender receives a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property.
|
|
|
|
|
|
Maturity: The maturity date is May 20, 2023 and shall be automatically extended for additional periods of one-year each, if written notice of termination is not given by one party to the other at least thirty days prior to the maturity date.
|
|
|
|
|
|
Loan Fee: The Borrowers will pay to Lender a loan fee of 1.00% of the Maximum Credit Limit at the time of funding and annually thereafter on the anniversary date of the initial funding.
|
|
|
|
|
|
Termination Fee: In the event the Borrowers terminate the Revolving Credit Facility prior to the maturity date, the Borrowers will pay to Lender a termination fee of (i) 2.00% of the Maximum Credit Limit, if the termination occurs on or prior to the first anniversary of the Closing Date, (ii) 1.00% of the Maximum Credit Limit, if the termination occurs after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date and (iii) 0.05% of the Maximum Credit Limit, if the termination occurs after the second anniversary of the Closing Date.
|
|
|
|
|
|
Covenants: The Revolving Credit Facility requires the Borrowers to comply with certain customary affirmative covenants, and negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Borrowers to engage in mergers, acquisitions or other transactions outside of the ordinary course of business, make loans or investments, incur indebtedness, pay dividends or repurchase stock, or engage in affiliate transactions. The Revolving Credit Facility does not require the Borrowers to comply with any financial covenants.
|
The future scheduled maturities of our debt are (in thousands):
|
|
Revolving Credit Facility
|
|
2021
|
|
$
|
—
|
|
2022
|
|
|
—
|
|
2023
|
|
|
1,377
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
1,377
|
|
NOTE 6 – SEGMENT INFORMATION
Our segments are strategic business units that offer our services and products to customers in their respective industry segments. The operating performance of our segments is regularly reviewed with operational leaders in charge of these segments, the chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.
We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a construction partner.
Our Automation group provides the design and programming of automated control systems as well as designs, fabricates, integrates and commissions modular systems that include remote instrumentation control stations, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.
Our Oil, Gas, and Petrochemicals group focuses on providing engineering, procurement and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients. This group also provides engineering, fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification, storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.
Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military across the globe.
We have two reportable segments: Commercial and Government Services. Our Renewables, Automation, and Oil, Gas, and Petrochemical groups are aggregated into one reportable segment, Commercial.
Revenues, operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and includes costs related to business development, executive functions, finance, accounting, safety, human resources and information technology. The segment information for the three months and nine months ended September 26, 2020 and as of December 26, 2020 has been recast to align with our current reportable segments.
Segment information is as follows (dollars in thousands):
|
|
Commercial
|
|
|
Government Services
|
|
|
Corporate
|
|
|
Consolidated
|
|
For the three months ended September 25, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,935
|
|
|
$
|
1,986
|
|
|
$
|
—
|
|
|
$
|
5,921
|
|
Gross profit (loss)
|
|
|
(1,089
|
)
|
|
|
275
|
|
|
|
—
|
|
|
|
(814
|
)
|
Gross profit (loss) margin
|
|
|
(27.7
|
)%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
(13.7
|
)%
|
SG&A
|
|
|
1,534
|
|
|
|
280
|
|
|
|
1,275
|
|
|
|
3,089
|
|
Operating loss
|
|
|
(2,623
|
)
|
|
|
(5
|
)
|
|
|
(1,275
|
)
|
|
|
(3,903
|
)
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,371
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Government Services
|
|
|
Corporate
|
|
|
Consolidated
|
|
For the three months ended September 26, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
13,867
|
|
|
$
|
1,862
|
|
|
$
|
—
|
|
|
$
|
15,729
|
|
Gross profit
|
|
|
985
|
|
|
|
159
|
|
|
|
—
|
|
|
|
1,144
|
|
Gross profit margin
|
|
|
7.1
|
%
|
|
|
8.5
|
%
|
|
|
|
|
|
|
7.3
|
%
|
SG&A
|
|
|
826
|
|
|
|
165
|
|
|
|
1,183
|
|
|
|
2,174
|
|
Operating income (loss)
|
|
|
159
|
|
|
|
(6
|
)
|
|
|
(1,183
|
)
|
|
|
(1,030
|
)
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,110
|
)
|
|
|
Commercial
|
|
|
Government Services
|
|
|
Corporate
|
|
|
Consolidated
|
|
For the nine months ended September 25, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
23,141
|
|
|
$
|
6,308
|
|
|
$
|
—
|
|
|
$
|
29,449
|
|
Gross profit (loss)
|
|
|
(375
|
)
|
|
|
647
|
|
|
|
—
|
|
|
|
272
|
|
Gross profit margin
|
|
|
(1.6
|
)%
|
|
|
10.3
|
%
|
|
|
|
|
|
|
0.9
|
%
|
SG&A
|
|
|
5,643
|
|
|
|
677
|
|
|
|
3,594
|
|
|
|
9,914
|
|
Operating loss
|
|
|
(6,018
|
)
|
|
|
(30
|
)
|
|
|
(3,594
|
)
|
|
|
(9,642
|
)
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,061
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Government Services
|
|
|
Corporate
|
|
|
Consolidated
|
|
For the nine months ended September 26, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
45,180
|
|
|
$
|
7,691
|
|
|
$
|
—
|
|
|
$
|
52,871
|
|
Gross profit
|
|
|
5,740
|
|
|
|
1,117
|
|
|
|
—
|
|
|
|
6,857
|
|
Gross profit margin
|
|
|
12.7
|
%
|
|
|
14.5
|
%
|
|
|
|
|
|
|
13.0
|
%
|
SG&A
|
|
|
2,488
|
|
|
|
485
|
|
|
|
3,648
|
|
|
|
6,621
|
|
Operating income (loss)
|
|
|
3,252
|
|
|
|
632
|
|
|
|
(3,648
|
)
|
|
|
236
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
Tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59
|
|
Total assets by segment are as follows (dollars in thousands):
Total Assets by Segment
|
|
As of
September 25,
2021
|
|
|
As of
December 26,
2020
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
$
|
8,725
|
|
|
$
|
11,130
|
|
Government Services
|
|
|
3,398
|
|
|
|
3,151
|
|
Corporate
|
|
|
30,214
|
|
|
|
16,157
|
|
Consolidated
|
|
$
|
42,337
|
|
|
$
|
30,438
|
|
NOTE 7 – FEDERAL AND STATE INCOME TAXES
The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740-270 we estimate an annual effective tax rate based on year-to-date operating results and our projection of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results. If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.
The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2018 and Texas margins tax returns prior to 2017 are closed. Generally, the applicable statues of limitations are three to four years from their filings.
The Company recorded income tax expense of $21 thousand for the three months ended September 25, 2021 as compared to income tax expense of $22 thousand for the three months ended September 26, 2020. The effective income tax rate for the three months ended September 25, 2021 was 0.9% as compared to (2.0)% for the three months ended September 26, 2020.
The Company recorded income tax expense of $67 thousand for the nine months ended September 25, 2021 as compared to income tax expense of $80 thousand for the nine months ended September 26, 2020. The effective income tax rate for the nine months ended September 25, 2021 was (3.8)% as compared to 57.6% for the nine months ended September 26, 2020.
As of September 25, 2021, the Company has a gross federal net operating loss carry-forward of approximately $39.4 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.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on our financial position, results of operations or liquidity.
We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental) which is partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.
NOTE 9 – LEASES
The Company leases land, office space and equipment. Arrangements are assessed at inception to determine if a lease exists and, with the adoption of ASC 842, “Leases,” right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. Because the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate at the inception of a lease to calculate the present value of lease payments. The Company has elected to apply the short-term lease exception for all asset classes, excluding lease liabilities from the balance sheet and recognizing the lease payments in the period they are incurred.
The components of lease expense were as follows (dollars in thousands):
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
Financial Statement Classification
|
|
September 25,
2021
|
|
|
September 26,
2020
|
|
|
September 25,
2021
|
|
|
September 26,
2020
|
|
Finance leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense
|
|
SG&A Expense
|
|
$
|
19
|
|
|
$
|
26
|
|
|
$
|
61
|
|
|
$
|
64
|
|
Interest expense
|
|
Interest expense, net
|
|
|
4
|
|
|
|
5
|
|
|
|
13
|
|
|
|
15
|
|
Total finance lease expense
|
|
|
|
|
23
|
|
|
|
31
|
|
|
|
74
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs
|
|
Operating costs
|
|
|
131
|
|
|
|
135
|
|
|
|
391
|
|
|
|
506
|
|
Selling, general and administrative expenses
|
|
SG&A Expense
|
|
|
462
|
|
|
|
459
|
|
|
|
1,327
|
|
|
|
1,364
|
|
Total operating lease expense
|
|
|
|
|
593
|
|
|
|
594
|
|
|
|
1,718
|
|
|
|
1,870
|
|
Total lease expense
|
|
|
|
$
|
616
|
|
|
$
|
625
|
|
|
$
|
1,792
|
|
|
$
|
1,949
|
|
Supplemental balance sheet information related to leases was as follows (dollars in thousands):
|
|
Financial Statement Classification
|
|
September 25,
2021
|
|
|
December 26,
2020
|
|
ROU Assets:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Right of use asset
|
|
$
|
3,179
|
|
|
$
|
1,628
|
|
Finance leases
|
|
Property and equipment, net
|
|
|
352
|
|
|
|
442
|
|
Total ROU Assets:
|
|
|
|
$
|
3,531
|
|
|
$
|
2,070
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Current portion of leases
|
|
$
|
1,013
|
|
|
$
|
1,421
|
|
Finance leases
|
|
Current portion of leases
|
|
|
113
|
|
|
|
120
|
|
Noncurrent Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Long-term leases
|
|
|
2,267
|
|
|
|
286
|
|
Finance leases
|
|
Long-term leases
|
|
|
235
|
|
|
|
322
|
|
Total lease liabilities
|
|
|
|
$
|
3,628
|
|
|
$
|
2,149
|
|
The weighted average remaining lease term and weighted average discount rate were as follows:
|
|
At September 25, 2021
|
|
Weighted average remaining lease term (years)
|
|
|
|
Operating leases
|
|
|
5.3
|
|
Finance leases
|
|
|
3.8
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
1.0
|
%
|
Finance leases
|
|
|
5.1
|
%
|
Maturities of operating lease liabilities as of September 25, 2021 are as follows (dollars in thousands):
Years ending:
|
|
Operating leases
|
|
|
Finance leases
|
|
|
Total
|
|
2021 (remaining months)
|
|
|
267
|
|
|
|
33
|
|
|
|
300
|
|
2022
|
|
|
931
|
|
|
|
114
|
|
|
|
1,045
|
|
2023
|
|
|
336
|
|
|
|
93
|
|
|
|
429
|
|
2024
|
|
|
232
|
|
|
|
73
|
|
|
|
305
|
|
2025 and thereafter
|
|
|
1,541
|
|
|
|
56
|
|
|
|
1,597
|
|
Total lease payments
|
|
|
3,307
|
|
|
|
369
|
|
|
|
3,676
|
|
Less: imputed interest
|
|
|
(27
|
)
|
|
|
(21
|
)
|
|
|
(48
|
)
|
Total lease liabilities
|
|
$
|
3,280
|
|
|
$
|
348
|
|
|
$
|
3,628
|
|
NOTE 10 – EMPLOYEE RETENTION CREDIT
Pursuant to the CARES Act, the Company is eligible for an employee retention credit subject to certain criteria. Since there is no US GAAP guidance for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS).
Under an IAS 20 analogy, a business entity would recognize the employee retention credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received.
We have accounted for the $1.7 million and $1.4 million employee retention credits in the first and third quarters of 2021, respectively, as other income on the Statement of Operations and as a receivable on the Balance Sheet.
NOTE 11 – STOCKHOLDERS’ EQUITY
On January 29, 2021, the Company entered into an at market issuance sales agreement (the “ATM Agreement”) with B. Riley Securities, Inc. pursuant to which the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $25 million to or through B. Riley, as sales agent, from time to time, in an “at the market offering”. Under the ATM Agreement, the Company will pay B. Riley an aggregate commission of 3% of the gross sales price per share of common stock sold under the ATM Agreement. The Company is not obligated to make any sales under the ATM 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. In April 2021, 400,538 shares of common stock were issued pursuant to the ATM Agreement for net proceeds of approximately $1.4 million.
On June 1, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold and issued an aggregate of 7,142,859 shares of the Company’s common stock to certain institutional investors at an offering price of $2.80 per share in a registered direct offering priced at-the-market under NASDAQ rules for net proceeds of approximately $18.7 million after deducting the fees of A.G.P./Alliance Global Partners, the placement agent, and related offering expenses of approximately $1.3 million.