10-Q 1 eng_10q.htm FORM 10-Q eng_10q.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended September 30, 2023

 

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

 

Commission File No. 001-14217

 

ENGlobal Corporation

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of

incorporation or organization)

 

88-0322261

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

 

11740 Katy Fwy – Energy Tower III, 11th floor

Houston, TX

 

77079

(Address of principal executive offices)

 

(Zip code)

 

(281) 878-1000

(Registrant’s telephone number, including area code)

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.001 par value

 

ENG

 

NASDAQ

 

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

 

Yes ☒      No ☐

 

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

 

Yes ☒      No ☐

 

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

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging growth company

 

 

 

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

 

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

 

Yes       No ☒

 

As of November 13, 2023, the registrant had outstanding 40,998,947 shares of common stock, par value $0.001 per share.

 

 

 

 

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2023

 

TABLE OF CONTENTS

 

 

 

 

Page

Number

 

 

 

 

 

 

Part I.

Financial Information

 

3

 

 

 

 

 

 

Item 1.

Financial Statements

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and September 24, 2022

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets at September 30, 2023 and December 31, 2022

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and September 24, 2022

 

5

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and September 24, 2022

 

6

 

 

 

 

 

 

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

 

 

Part II.

Other Information

 

28

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

30

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

30

 

 

 

 

 

 

Item 5.

Other Information

 

30

 

 

 

 

 

 

Item 6.

Exhibits

 

31

 

 

 

 

 

 

 

Signatures

 

32

 

 

 
2

Table of Contents

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ENGlobal Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share data)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30, 2023

 

 

September 24, 2022

 

 

September 30, 2023

 

 

September 24, 2022

 

Operating revenues

 

$9,450

 

 

$13,056

 

 

$32,381

 

 

$31,777

 

Operating costs

 

 

7,613

 

 

 

12,392

 

 

 

32,748

 

 

 

30,439

 

Gross profit (loss)

 

 

1,837

 

 

 

664

 

 

 

(367 )

 

 

1,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

2,512

 

 

 

2,920

 

 

 

10,850

 

 

 

8,653

 

Operating loss

 

 

(675 )

 

 

(2,256 )

 

 

(11,217 )

 

 

(7,315 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

3

 

 

 

5

 

 

 

52

 

 

 

36

 

Interest expense, net

 

 

(27 )

 

 

(63 )

 

 

(158 )

 

 

(166 )

Loss from continuing operations before income taxes

 

 

(699 )

 

 

(2,314 )

 

 

(11,323 )

 

 

(7,445 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for federal and state income taxes

 

 

22

 

 

 

21

 

 

 

66

 

 

 

43

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(721 )

 

 

(2,335 )

 

 

(11,389 )

 

 

(7,488 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per common share:

 

$(0.02 )

 

$(0.07 )

 

$(0.29 )

 

$(0.21 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted weighted average shares used in computing loss per share:

 

 

40,830

 

 

 

35,802

 

 

 

39,591

 

 

 

35,492

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 
3

Table of Contents

 

ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except share and per share amounts)

 

 

 

September 30, 2023

 

 

December 31, 2022

 

ASSETS

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

Cash

 

$1,488

 

 

$3,464

 

Trade receivables, net of allowances of $4,336 and $2,129

 

 

7,504

 

 

 

7,644

 

Prepaid expenses and other current assets

 

 

247

 

 

 

1,580

 

Payroll taxes receivable

 

 

102

 

 

 

1,547

 

Contract assets

 

 

4,716

 

 

 

4,934

 

Total Current Assets

 

 

14,057

 

 

 

19,169

 

Property and equipment, net

 

 

1,634

 

 

 

1,757

 

Goodwill

 

 

720

 

 

 

720

 

Other assets

 

 

 

 

 

 

 

 

Right-of-use asset

 

 

7,022

 

 

 

8,072

 

Deposits and other assets

 

 

280

 

 

 

305

 

Total Other Assets

 

 

7,302

 

 

 

8,377

 

Total Assets

 

$23,713

 

 

$30,023

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$7,086

 

 

$4,454

 

Accrued compensation and benefits

 

 

2,616

 

 

 

2,002

 

Current portion of leases

 

 

1,626

 

 

 

1,849

 

Contract liabilities

 

 

1,866

 

 

 

956

 

Other current liabilities

 

 

277

 

 

 

1,134

 

Credit Agreement

 

 

1,018

 

 

 

 

Revolving Credit Facility

 

 

 

 

 

1,661

 

Total Current Liabilities

 

 

14,489

 

 

 

12,056

 

 

 

 

 

 

 

 

 

 

Long-term unearned revenue

 

 

388

 

 

 

425

 

Long-term leases

 

 

6,731

 

 

 

7,217

 

Total Liabilities

 

 

21,608

 

 

 

19,698

 

Commitments and Contingencies (Note 8)

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Common stock - $0.001 par value; 75,000,000 shares authorized; 40,998,947 shares issued and outstanding at September 30, 2023 and 35,800,617 shares issued and outstanding at December 31, 2022

 

 

41

 

 

 

36

 

Additional paid-in capital

 

 

61,214

 

 

 

58,050

 

Accumulated deficit

 

 

(59,150 )

 

 

(47,761 )

Total Stockholders’ Equity

 

 

2,105

 

 

 

10,325

 

Total Liabilities and Stockholders’ Equity

 

$23,713

 

 

$30,023

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 
4

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ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2023

 

 

September 24, 2022

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

Net loss

 

$(11,389 )

 

$(7,488 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

450

 

 

 

691

 

Share-based compensation expense

 

 

202

 

 

 

165

 

Loss on disposal of fixed assets

 

 

287

 

 

 

 

Impairment of ROU asset

 

 

197

 

 

 

 

Changes in current assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivable

 

 

140

 

 

 

(2,375 )

Contract assets

 

 

218

 

 

 

(1,643 )

Other current assets

 

 

2,803

 

 

 

1,369

 

Accounts payable

 

 

2,632

 

 

 

1,564

 

Accrued compensation and benefits

 

 

614

 

 

 

13

 

Contract liabilities

 

 

910

 

 

 

(834 )

Income taxes payable

 

 

10

 

 

 

(8 )

Other current liabilities, net

 

 

(904 )

 

 

64

 

Net cash used in operating activities

 

$(3,830 )

 

$(8,482 )

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Asset acquisition, net of cash acquired

 

 

 

 

 

(971 )

Property and equipment acquired

 

 

(277 )

 

 

(291 )

Net cash used in investing activities

 

$(277 )

 

$(1,262 )

 

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Common stock and warrants issued, net

 

 

2,962

 

 

 

 

At-the-market offering costs

 

 

 

 

 

(97 )

Payments on finance leases

 

 

(188 )

 

 

(233 )

Proceeds from Credit Agreement

 

 

1,018

 

 

 

 

Payments on revolving credit facility, net

 

 

(1,661 )

 

 

536

 

Net cash provided by financing activities

 

$2,131

 

 

$206

 

Net change in cash

 

 

(1,976 )

 

 

(9,538 )

Cash at beginning of period

 

 

3,464

 

 

 

19,202

 

Cash at end of period

 

$1,488

 

 

$9,664

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

$158

 

 

$167

 

Fair value of warrants at issuance date

 

$2,782

 

 

$

 

Right of use assets obtained in exchange for new operating lease liability

 

$524

 

 

$4,864

 

Right of use assets obtained in exchange for new financing lease liability

 

$289

 

 

$

 

Cash paid during the period for income taxes (net of refunds)

 

$55

 

 

$51

 

Asset acquisition, common stock issued

 

$

 

 

$525

 

Asset acquisition, contingent consideration

 

$

 

 

$1,380

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements. 

 

 
5

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ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(amounts in thousands)

 

 

 

For the Three Months Ended

 

 

 

September 30, 2023

 

 

September 24, 2022

 

Common Stock

 

 

 

 

 

 

Balance at beginning of period

 

$40

 

 

$36

 

Common stock issued

 

 

1

 

 

 

 

Balance at the end of the period

 

 

41

 

 

 

36

 

Additional Paid-in Capital

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

61,101

 

 

 

57,972

 

At-the-market offering costs

 

 

 

 

 

(30 )

Share-based compensation - employees

 

 

113

 

 

 

54

 

Balance at end of period

 

 

61,214

 

 

 

57,996

 

 

 

 

 

 

 

 

 

 

Accumulated Deficit

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(58,429 )

 

 

(34,400 )

Net loss

 

 

(721 )

 

 

(2,335 )

Balance at end of period

 

 

(59,150 )

 

 

(36,735 )

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

$2,105

 

 

$21,297

 

 

 

 

For the Nine Months Ended

 

 

 

September 30, 2023

 

 

September 24, 2022

 

Common Stock

 

 

 

 

 

 

Balance at beginning of period

 

$36

 

 

$35

 

Common stock issued

 

 

5

 

 

 

1

 

Balance at the end of the period

 

 

41

 

 

 

36

 

Additional Paid-in Capital

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

58,050

 

 

 

57,403

 

Proceeds from common stock issued, net

 

 

180

 

 

 

525

 

Fair value of warrants at issuance date

 

 

2,782

 

 

 

 

At-the-market offering costs

 

 

 

 

 

(97 )

Share-based compensation - employees

 

 

202

 

 

 

165

 

Balance at end of period

 

 

61,214

 

 

 

57,996

 

 

 

 

 

 

 

 

 

 

Accumulated Deficit

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

(47,761 )

 

 

(29,247 )

Net loss

 

 

(11,389 )

 

 

(7,488 )

Balance at end of period

 

 

(59,150 )

 

 

(36,735 )

 

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

$2,105

 

 

$21,297

 

 

See accompanying notes to unaudited interim condensed consolidated financial statements.

 

 
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ENGLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). 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 31, 2022, included in the Company’s 2022 Annual Report on Form 10-K filed with the SEC.

 

The condensed financial statements included herein are unaudited for the three- and nine-month periods ended September 30, 2023 and September 24, 2022, and in the case of the condensed balance sheet as of December 31, 2022 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 SEC 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.

 

For our fiscal year 2023, all four quarters will be comprised of 13 weeks each.

 

NOTE 2 – ACCOUNTING STANDARDS

 

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) as of January 1, 2023. We adopted the standard using a modified retrospective approach which did not have a material impact on our financial position, results of operations, or cash flows.

 

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.

 

 
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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.

 

 
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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 30, 2023

 

 

September 24, 2022

 

 

September 30, 2023

 

 

September 24, 2022

 

Fixed-price revenue

 

$7,079

 

 

$10,037

 

 

$23,596

 

 

$24,136

 

Time-and-material revenue

 

 

2,371

 

 

 

3,019

 

 

 

8,785

 

 

 

7,641

 

Total Revenue

 

 

9,450

 

 

 

13,056

 

 

 

32,381

 

 

 

31,777

 

 

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 30, 2023

 

 

December 31, 2022

 

Costs incurred on uncompleted contracts

 

$26,942

 

 

$59,298

 

Estimated earnings on uncompleted contracts

 

 

4,211

 

 

 

4,464

 

Earned revenues

 

 

31,153

 

 

 

63,762

 

Less: billings to date

 

 

28,303

 

 

 

59,784

 

Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts

 

$2,850

 

 

$3,978

 

 

 

 

 

 

 

 

 

 

Contract assets

 

$4,716

 

 

$4,934

 

Contract liabilities

 

 

(1,866 )

 

 

(956 )

Net contract assets

 

$2,850

 

 

$3,978

 

 

 
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NOTE 5 – DEBT

 

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

 

 

 

September 30, 2023

 

 

December 31, 2022

 

Revolving Credit Facility (1)

 

$

 

 

$1,661

 

Credit Agreement (2)

 

 

1,018

 

 

 

 

Priority Agreement (3)

 

 

 

 

 

 

Amount due within one year

 

 

1,018

 

 

 

1,661

 

Total long-term debt

 

$

 

 

$

 

 

 

(1)

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, which amount was subsequently reduced to $1.0 million on March 27, 2023, to $750,000 on May 22, 2023, and then to $500,000 on June 16, 2023 (the “Maximum Credit Limit”).

 

 

 

 

On June 15, 2023, the Company repaid in full all indebtedness outstanding under the Revolving Credit Facility. The Revolving Credit Facility was closed on June 15, 2023.

 

 

 

 

(2)

On June 15, 2023, the Company entered into a Credit Agreement (the “Credit Agreement”) with Alliance 2000, Ltd., a Texas limited partnership (“Alliance”), pursuant to which Alliance has agreed, subject to certain terms and conditions, to extend up to two term loans in the aggregate principal amount of $1,250,000 to the Company (collectively, the “Term Loans”). In connection with entering into the Credit Agreement, (i) the Company and its subsidiaries, ENGlobal U.S., Inc., a Texas corporation, ENGlobal Government Services, Inc., a Texas corporation, and ENGlobal Technologies, LLC, a Texas limited liability company (collectively, the “Guarantors”), entered into a security agreement granting a security interest in favor of Alliance on substantially all of the Company’s and Guarantors’ assets to secure all of the indebtedness and other obligations owed to Alliance under the Credit Agreement and (ii) the Guarantors entered into a continuing guaranty pursuant to which the Guarantors guaranteed the payment of all indebtedness owed to Alliance.

 

 

 

 

The Credit Agreement provides for an initial term loan of $1,000,000 and, under certain conditions, an additional term loan of $250,000. During the one-year term of the loan, the Company will make interest-only payments on a quarterly basis. The loan carries an annual interest rate of 8.5% and has an origination fee of 0.5%, payable upon maturity.

 

 

 

 

The Credit Agreement matures on June 15, 2024.

 

 

 

 

(3)

On March 27, 2023, the Company entered into an invoice factoring agreement with FundThrough USA, Inc. (the “Priority Agreement”). The agreement provides the flexibility to receive funds early for a subset of customers at a discount rate of 2.75% to 8.25% depending on the length of payment terms with the customer. As of September 30, 2023, the Company had factored $0.0 million outstanding receivables through the Priority Agreement.

 

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

 

 

 

Credit Agreement

 

 

 

 

 

2023

 

$

 

2024

 

 

1,018

 

2025 and thereafter

 

 

 

 

 

$1,018

 

 
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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) Energy & Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.

 

Within the Energy & 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, construction management, 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 Energy & 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.

 

 
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Segment information is as follows (dollars in thousands):

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

For the three months ended September 30, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$5,862

 

 

 

3,588

 

 

 

 

 

 

9,450

 

Gross profit

 

 

323

 

 

 

1,514

 

 

 

 

 

 

1,837

 

Gross profit margin

 

 

5.5%

 

 

42.2%

 

 

 

 

 

 

19.4%

SG&A

 

 

1,203

 

 

 

161

 

 

 

1,148

 

 

 

2,512

 

Operating profit (loss)

 

 

(880 )

 

 

1,353

 

 

 

(1,148 )

 

 

(675 )

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27 )

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22 )

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(721 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

For the three months ended September 24, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$10,229

 

 

 

2,827

 

 

 

 

 

 

13,056

 

Gross profit (loss)

 

 

(368 )

 

 

1,032

 

 

 

 

 

 

664

 

Gross profit (loss) margin

 

 

(3.6 )%

 

 

36.5%

 

 

 

 

 

 

5.1%

SG&A

 

 

1,572

 

 

 

164

 

 

 

1,184

 

 

 

2,920

 

Operating profit (loss)

 

 

(1,940 )

 

 

868

 

 

 

(1,184 )

 

 

(2,256 )

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63 )

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21 )

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,335 )

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

For the nine months ended September 30, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$25,124

 

 

 

7,257

 

 

 

 

 

 

32,381

 

Gross profit (loss)

 

 

(2,479 )

 

 

2,112

 

 

 

 

 

 

(367 )

Gross profit (loss) margin

 

 

(9.9 )%

 

 

29.1%

 

 

 

 

 

 

(1.1 )%

SG&A

 

 

6,448

 

 

 

438

 

 

 

3,964

 

 

 

10,850

 

Operating profit (loss)

 

 

(8,927 )

 

 

1,674

 

 

 

(3,964 )

 

 

(11,217 )

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(158 )

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66 )

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,389 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

For the nine months ended September 24, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$24,835

 

 

 

6,942

 

 

 

 

 

 

31,777

 

Gross profit (loss)

 

 

(591 )

 

 

1,929

 

 

 

 

 

 

1,338

 

Gross profit (loss) margin

 

 

(2.4 )%

 

 

27.8%

 

 

 

 

 

 

4.2%

SG&A

 

 

4,668

 

 

 

554

 

 

 

3,431

 

 

 

8,653

 

Operating profit (loss)

 

 

(5,259 )

 

 

1,375

 

 

 

(3,431 )

 

 

(7,315 )

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(166 )

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43 )

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,488 )

 

 
12

Table of Contents

 

Total assets by segment are as follows (dollars in thousands):

 

Total Assets by Segment

 

As of

September 30, 2023

 

 

As of

December 31, 2022

 

 

 

(dollars in thousands)

 

Commercial

 

$14,940

 

 

$19,526

 

Government Services

 

 

4,940

 

 

 

2,032

 

Corporate

 

 

3,833

 

 

 

8,465

 

Consolidated

 

$23,713

 

 

$30,023

 

 

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 $22 thousand for the three months ended September 30, 2023 as compared to income tax expense of $21 thousand for the three months ended September 24, 2022. The effective income tax rate for the three months ended September 30, 2023 was (3.2)% as compared to (0.9)% for the three months ended September 24, 2022. The Company recorded income tax expense of $66 thousand for the nine months ended September 30, 2023 as compared to $43 thousand for the nine months ended September 24, 2022. The effective income tax rate for the nine months ended September 30, 2023 and September 24, 2022 was (0.6)%. The effective tax rate differed from the federal statutory rate of 21% primarily due to the effect of the valuation allowances related to the expected unrealized deferred tax asset generated by the current year benefit.

 

 
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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 and shop 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.

 

At the beginning of the third quarter, the Company decided to stop self-performing certain low margin services as part of the restructuring of its overall business model.  Accordingly, the Company evaluated the ongoing value of its shop leases that were used to support these services. Based on this evaluation, the Company determined that one of the right-of-use assets associated with these leases, with a carrying amount of $0.2 million, was no longer recoverable and was written down to $0.

 

 
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Table of Contents

 

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

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

Financial Statement Classification

 

September 30,  2023

 

 

September 24, 2022

 

 

September 30, 2023

 

 

September 24, 2022

 

Finance leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization expense

 

SG&A Expense

 

$61

 

 

$53

 

 

$176

 

 

$159

 

Interest expense

 

Interest expense, net

 

 

13

 

 

 

11

 

 

 

39

 

 

 

33

 

Total finance lease expense

 

 

 

 

74

 

 

 

64

 

 

 

215

 

 

 

192

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

Operating costs

 

 

23

 

 

 

86

 

 

 

710

 

 

 

189

 

Selling, general and administrative expenses

 

SG&A Expense

 

 

691

 

 

 

543

 

 

 

1,900

 

 

 

1,420

 

Total operating lease expense

 

 

 

 

714

 

 

 

629

 

 

 

2,610

 

 

 

1,609

 

Total lease expense

 

 

 

$788

 

 

$693

 

 

$2,825

 

 

$1,801

 

 

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

 

 

 

Financial Statement Classification

 

September 30, 2023

 

 

December 31, 2022

 

ROU Assets:

 

 

 

 

 

 

 

 

Operating leases

 

Right of use asset

 

$7,022

 

 

$8,072

 

Finance leases

 

Property and equipment, net

 

 

863

 

 

 

761

 

Total ROU Assets:

 

 

 

$7,885

 

 

$8,833

 

 

 

 

 

 

 

 

 

 

 

 

Lease liabilities:

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

Operating leases

 

Current portion of leases

 

$1,353

 

 

$1,638

 

Finance leases

 

Current portion of leases

 

 

273

 

 

 

211

 

Noncurrent Liabilities:

 

 

 

 

 

 

 

 

 

 

Operating leases

 

Long-term leases

 

 

6,141

 

 

 

6,669

 

Finance leases

 

Long-term leases

 

 

590

 

 

 

548

 

Total lease liabilities

 

 

 

$8,357

 

 

$9,066

 

 

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

 

 

 

At September 30, 2023

 

Weighted average remaining lease term (years)

 

 

 

Operating leases

 

 

6.8

 

Finance leases

 

 

3.4

 

Weighted average discount rate

 

 

 

 

Operating leases

 

 

10.8%

Finance leases

 

 

9.6%

 

 
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Table of Contents

 

Maturities of operating lease liabilities as of September 30, 2023 are as follows (dollars in thousands):

 

Years ending:

 

Operating leases

 

 

Finance leases

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

2023 (remaining months)

 

 

291

 

 

 

82

 

 

 

373

 

2024

 

 

1,691

 

 

 

301

 

 

 

1,992

 

2025

 

 

1,395

 

 

 

264

 

 

 

1,659

 

2026

 

 

918

 

 

 

234

 

 

 

1,152

 

2027 and thereafter

 

 

4,108

 

 

 

74

 

 

 

4,182

 

Total lease payments

 

 

8,403

 

 

 

955

 

 

 

9,358

 

Less: imputed interest

 

 

(909 )

 

 

(92 )

 

 

(1,001 )

Total lease liabilities

 

 

7,494

 

 

$863

 

 

$8,357

 

 

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. As of September 30, 2023, we have received refunds for all of the employee retention credits.

 

NOTE 11 – STOCKHOLDERS’ EQUITY

 

On January 11, 2022, the Company entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which the Company may offer and sell shares of its common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated to make any sales under the 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.

 

On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of 3,971,000 shares (the “Shares”) of the Company’s common stock at an offering price of $0.85 per Share in a registered direct offering pursuant to a registration statement on Form S-3 filed with the SEC on January 29, 2021 (the “Registration Statement”). Concurrently with the sale of the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000 shares of the Company’s common stock (the “Warrants”). The net proceeds to the Company from the offerings were approximately $3.0 million after deducting the placement agent’s fees and related offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes. The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to the ATM Agreement. We recorded the fair value of the warrants issued within additional paid-in capital. The warrants may be exercised by physical settlement or net share settlement, determined by the holder.

 

 
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NOTE 12 – LIQUIDITY

 

We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, sales of common stock pursuant to the ATM Agreement, and borrowings under the Credit Agreement which matures on June 15, 2024.

 

As of September 30, 2023, the outstanding borrowings under the Credit Agreement were $1.0 million. As of September 30, 2023, we were in compliance with all of the covenants under the Credit Agreement. For additional information on the Credit Agreement, see Part I, Item 1, Note 5 – Debt.

 

On March 27, 2023, the Company entered into an invoice factoring agreement with FundThrough USA, Inc. (the “Priority Agreement”). The agreement provides the flexibility to receive funds early for a subset of customers at a discount rate of 2.75% to 8.25% depending on the length of payment terms with the customer. As of September 30, 2023, no receivables were factored through the Priority Agreement.

 

On January 11, 2022, the Company entered into the ATM Agreement with Lake Street pursuant to which the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated to make any sales under the 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, including the accompanying prospectus and related prospectus supplements related to the “at the market offering,” is subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million. As of September 26, 2023, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $10.8 million, based on the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market on September 26, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition, during the 12 calendar month period that ends on the date of the filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the Registration Statement. If our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)(3) update as required under the Securities Act.

 

On February 1, 2023, we entered into the RDO Purchase Agreement providing for the sale and issuance by the Company to a single institutional investor of the Shares of the Company’s common stock, at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, the Warrants to purchase up to 3,971,000 shares of the Company’s common stock. The net proceeds to the Company from the offerings were approximately $3.0 million after deducting the placement agent’s fees and related offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes. The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to the ATM Agreement.

 

Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations.

 

Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses.

 

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

 

NOTE 13 – FAIR VALUE MEASUREMENTS

 

ASC 820, Fair Value Measurements and Disclosures, establishes a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value as follows:

 

 

·

Level 1 - Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

 

 

 

 

·

Level 2 - Observable inputs other than quoted prices in active markets that are either directly or indirectly observable.

 

 

 

 

·

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The Company measures the fair value of its warrants to purchase up to 3,971,000 shares of the Company’s common stock issued in connection with the RDO Purchase Agreement using a Black-Scholes model, which requires the use of several inputs, including the underlying stock price, exercise price, risk free rate, expected volatility, and time to expiration. The inputs used in the Black-Scholes model are classified as Level 2 inputs in the fair value hierarchy.

 

The following table provides a summary of the assumptions used in the Black-Scholes model to estimate the fair value of the warrants at issuance date of February 6, 2023:

 

Assumptions used:

 

Total

 

 

 

 

 

Stock price

 

$0.87

 

Exercise price

 

$0.95

 

Risk free rate

 

 

3.65%

Annualized volatility

 

 

107.89%

Time to expiration

 

 

5.50

 

 

The Company considers these assumptions to be reasonable, based on the historical performance of the underlying stock and other market factors. However, actual results may differ from these estimates. We recorded the $2.8 million fair value of the warrants in additional paid-in capital on the issuance date. As the warrants are classified in equity, remeasurement is not required unless reclassification from equity is required. The warrant contract is reassessed at each balance sheet date for the appropriate classification.

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

On June 15, 2023, the Company entered into the Credit Agreement with Alliance, the family limited partnership of the Company’s Chairman and Chief Executive Officer, William A. Coskey, P.E.  The Credit Agreement provides for an initial term loan of $1,000,000 and, under certain conditions, an additional term loan of $250,000. During the one-year term of the loan, the Company will make interest-only payments on a quarterly basis. The loan carries an annual interest rate of 8.5% and has an origination fee of 0.5%, payable upon maturity

 

In connection with entering into the Credit Agreement, the Company and its subsidiaries, entered into a Security Agreement  granting a security interest in favor of Alliance on substantially all of the Company’s and Guarantors’ assets to secure all of the indebtedness and other obligations owed to Alliance under the Credit Agreement and the Guarantors entered into a Continuing Guaranty pursuant to which the Guarantors guaranteed the payment of all indebtedness owed to Alliance.

 

Alliance is the beneficial owner of more than 22% of the Company’s issued and outstanding common stock and is controlled by William A. Coskey, P.E., the Company’s Chairman and Chief Executive Officer. In accordance with the charter of the Company’s Audit Committee and the Company’s policy on related party transactions, the loan documents and the resulting transactions were reviewed and approved by the Company’s Audit Committee and determined in good faith to be on terms no less favorable to the Company than could be obtained from unrelated third parties and fair to the Company from a financial point of view, and were approved by all of the disinterested members of the Company’s Board of Directors.

 

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

 

Forward-Looking Statements

 

Certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission (the “SEC”), press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, the specific risk factors identified under Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and those described from time to time in our future reports filed with the SEC.

 

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

 

Overview

 

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

 

We focus on four strategic markets where we have a long history of delivering project solutions and can provide complete project execution and have focused our business development teams on communicating these offerings to their clients. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.

 

We have made significant reductions in our overhead structure as part of the internal business reorganization that we started in the first quarter of 2023. These cost reductions were primarily in headcount across all segments to better align the number of administrative staff needed to support our current volume of work and re-organize our corporate structure.  We continue to evaluate our SG&A headcount and will reduce it as necessary to better align our costs with the volume of the business.  We have also started and are continuing efforts to reduce our rent and insurance costs to bring our total SG&A costs in line with that of a company our size.

 

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

 

 
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Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.

 

Critical Accounting Policies Update

 

Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2022 Annual Report on Form 10-K.

 

Results of Operations

 

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

 

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

 

 
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Comparison of the three months ended September 30, 2023 versus the three months ended September 24, 2022

 

The following table, for the three months ended September 30, 2023 versus the three months ended September 24, 2022, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

 

 

 

For the three months ended September 30, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$5,862

 

 

$3,588

 

 

$

 

 

$9,450

 

 

 

100.0%

Gross profit

 

 

323

 

 

 

1,514

 

 

 

 

 

 

1,837

 

 

 

19.4%

SG&A

 

 

1,203

 

 

 

161

 

 

 

1,148

 

 

 

2,512

 

 

 

26.6%

Operating income (loss)

 

 

(880)

 

 

1,353

 

 

 

(1,148)

 

 

(675)

 

 

(7.1)%

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27)

 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(22)

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$(721)

 

 

(7.6)%

Basic and diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

$(0.02)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

 

 

 

 

For the three months ended September 24, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$10,229

 

 

$2,827

 

 

$

 

 

$13,056

 

 

 

100.0%

Gross profit (loss)

 

 

(368)

 

 

1,032

 

 

 

 

 

 

664

 

 

 

5.1%

SG&A

 

 

1,572

 

 

 

164

 

 

 

1,184

 

 

 

2,920

 

 

 

22.4%

Operating income (loss)

 

 

(1,940)

 

 

868

 

 

 

(1,184)

 

 

(2,256)

 

 

(17.3)%

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(63)

 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(21)

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$(2,335)

 

 

(17.9)%

Basic and diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

$(0.07)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

 

 

 

 

Year Over Year Increase (Decrease) in Operating Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$(4,367)

 

$761

 

 

$

 

 

$(3,606)

 

 

(27.6)%

Gross profit (loss)

 

 

691

 

 

 

482

 

 

 

 

 

 

1,173

 

 

 

176.7%

SG&A

 

 

(369)

 

 

(3)

 

 

(36)

 

 

(408)

 

 

(14.0)%

Operating income (loss)

 

 

1,060

 

 

 

485

 

 

 

36

 

 

 

1,581

 

 

 

(70.1)%

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2)

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$1,614

 

 

 

(69.1)%

Basic and diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.05

 

 

 

 

 

 

 
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Comparison of the nine months ended September 30, 2023 versus the nine months ended September 24, 2022

 

The following table, for the nine months ended September 30, 2023 versus the nine months ended September 24, 2022, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

 

 

For the nine months ended September 30, 2023:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$25,124

 

 

$7,257

 

 

$

 

 

$32,381

 

 

 

100.0%

Gross profit (loss)

 

 

(2,479 )

 

 

2,112

 

 

 

 

 

 

(367 )

 

 

(1.1 )%

SG&A

 

 

6,448

 

 

 

438

 

 

 

3,964

 

 

 

10,850

 

 

 

33.5%

Operating income (loss)

 

 

(8,927 )

 

 

1,674

 

 

 

(3,964 )

 

 

(11,217 )

 

 

(34.6 )%

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(158 )

 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66 )

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$(11,389 )

 

 

(35.2 )%

Basic and diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

$(0.29 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

 

 

 

 

For the nine months ended September 24, 2022:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$24,835

 

 

$6,942

 

 

$

 

 

$31,777

 

 

 

100.0%

Gross profit (loss)

 

 

(591 )

 

 

1,929

 

 

 

 

 

 

1,338

 

 

 

4.2%

SG&A

 

 

4,668

 

 

 

554

 

 

 

3,431

 

 

 

8,653

 

 

 

27.2%

Operating income (loss)

 

 

(5,259 )

 

 

1,375

 

 

 

(3,431 )

 

 

(7,315 )

 

 

(23.0 )%

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(166 )

 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(43 )

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$(7,488 )

 

 

(23.6 )%

Basic and diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

$(0.21 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

Government Services

 

 

Corporate

 

 

Consolidated

 

 

 

 

 

Year Over Year Increase (Decrease) in Operating Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$289

 

 

$315

 

 

$

 

 

$604

 

 

 

1.9%

Gross loss

 

 

(1,888 )

 

 

183

 

 

 

 

 

 

(1,705 )

 

 

(127.4 )%

SG&A

 

 

1,780

 

 

 

(116 )

 

 

533

 

 

 

2,197

 

 

 

25.4%

Operating loss

 

 

(3,668 )

 

 

299

 

 

 

(533 )

 

 

(3,902 )

 

 

53.3%

Other income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

 

 

 

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

Tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23 )

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

$(3,901 )

 

 

52.1%

Basic and diluted loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

$(0.08 )

 

 

 

 

 

 
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Revenue – Revenue decreased $3.6 million to $9.5 million from $13.1 million, or a decrease of 27.6%, for the three months ended September 30, 2023 as compared to the three months ended September 24, 2022. Our 2023 revenue for the Commercial segment decreased primarily due to a large project that ended in 2022 without subsequent renewal, partially offset by project awards with new customers for projects that were completed during the third quarter of 2023. Our 2023 revenue for the Government Services segment increased primarily due to new projects awards.

 

Revenue increased $0.6 million to $32.4 million from $31.8 million, or an increase of 1.9%, for the nine months ended September 30, 2023 as compared to the nine months ended September 24, 2022. The increase is primarily due to the completion of several projects from new customers within our Commercial segment in the 2023 period.

 

Gross Profit (Loss) – Gross profit (loss) margin increased 14.3% to 19.4% from 5.1% for the three months ended September 30, 2023 as compared to the three months ended September 24, 2022. The increase in gross profit (loss) margin is primarily attributable to a change order awarded to our Government Services group to cover excess material purchases on a large project.

 

Gross profit (loss) margin decreased 5.3% to (1.1)% from 4.2% for the nine months ended September 30, 2023 as compared to the nine months ended September 24, 2022. The decrease in gross profit (loss) margin is primarily attributable to the inefficient use of personnel and equipment to complete projects where we were unable to secure additional change orders to cover costs, partially offset by a change order awarded to our Government Services group to cover excess material purchases on a large project.

 

Selling, General and Administrative Expense – SG&A expenses decreased $0.4 million for the three months ended September 30, 2023 as compared to the three months ended September 24, 2022 due to a $0.7 million decrease in salaries and burden expense and a $0.1 million decrease in travel expense, partially offset by a $0.2 million increase in legal fees and a $0.2 million impairment of an ROU asset related to one of our shop leases.

 

SG&A expenses increased by $2.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 24, 2022 due to a $2.2 million bad debt reserve recorded during the 2023 period with no comparable occurrence in 2022, a $0.3 million increase in facility expense as we moved our fabrication shop to a new location, a $0.2 million impairment of an ROU asset related to one of our shop leases, a $0.2 million increase in legal expense, a $0.1 million increase in computer software and hardware expense, a $0.1 million increase in accounting fees, and a $0.1 million increase in early payment fees, partially offset by a decrease in salary expense of $1.0 million and a decrease in travel expense of $0.1 million.

 

Other Income (Expense), Net – Other income, net of expense, decreased $2 thousand for the three months ended September 30, 2023 as compared to the three months ended September 24, 2022.

 

Other income, net of expense, increased $16 thousand for the nine months ended September 30, 2023 as compared to the nine months ended September 24, 2022.

 

Interest Expense, net – Interest expense is incurred primarily in connection with our Credit Agreement and our finance leases. Our interest expense decreased $36 thousand for the three months ended September 30, 2023 from $63 thousand for the three months ended September 24, 2022.

 

Our interest expense decreased to $158 thousand for the nine months ended September 30, 2023 from $166 thousand for the nine months ended September 24, 2022.

 

Tax Expense – Tax expense is incurred primarily for our state franchise taxes. We recorded income tax expense of $22 thousand for the three months ended September 30, 2023 compared to income tax expense of $21 thousand for the three months ended September 24, 2022.

 

We recorded income tax expense of $66 thousand for the nine months ended September 30, 2023 compared to $43 thousand for the nine months ended September 24, 2022.

 

 
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Net Income (Loss) – Net loss for the three months ended September 30, 2023 was $0.7 million, or a $1.6 million decrease from a net loss of $2.3 million for the three months ended September 24, 2022, primarily as a result of the change order awarded to our Government Services group to cover excess material purchases on a large project and the decreased selling, general, and administrative expense, partially offset by inefficient execution of projects which resulted in a decreased gross profit (loss) margin.

 

Net loss for the nine months ended September 30, 2023 was $11.4 million, or a $3.9 million increase from net loss of $7.5 million for the nine months ended September 24, 2022, primarily as a result of a $1.6 million loss in the construction and field services business, $0.7 million of underutilized personnel expense, a $2.2 million increase in bad debt reserve, and increased facility costs of $0.3 million primarily related to our Brookshire fabrication shop, partially offset by the change order awarded to our Government Services group to cover excess material purchases on a large project.

 

Liquidity and Capital Resources Overview

 

The Company defines liquidity as its ability to pay its liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, sales of common stock pursuant to the ATM Agreement (defined below), and borrowings under the Credit Agreement which matures on June 15, 2024. We had cash of approximately $1.5 million at September 30, 2023 and $3.5 million at December 31, 2022. Our working capital as of September 30, 2023 was $(0.4) million versus $7.1 million as of December 31, 2022.

 

As of September 30, 2023, the outstanding borrowings under the Credit Agreement were $1.0 million. As of September 30, 2023, we were in compliance with all of the covenants under the Credit Agreement. For additional information on the Credit Agreement, see Part I, Item 1, Note 5 – Debt.

 

On January 11, 2022, we entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which we may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated to make any sales under the 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 Company’s registration statement on Form S-3 (the “Registration Statement”) filed with the SEC on January 29, 2021, including the accompanying prospectus and related prospectus supplements related to the “at the market offering”, is subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million. As of September 26, 2023, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $10.8 million, based on the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market on September 26, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition, during the 12 calendar month period that ends on the date of the filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the Registration Statement. If our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)(3) update as required under the Securities Act.

 

On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”)  providing for the sale and issuance by the Company to a single institutional investor of 3,971,000 shares (the “Shares”) of the Company’s common stock, at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000 shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes. The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement. Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern, as discussed in Part II, Item 8, Note 1. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.

 

 
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Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses. If any such event occurs, we would be forced to consider alternative financing options.

 

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

 

Cash Flows from Operating Activities

 

Operating activities used $3.8 million of cash for the nine months ended September 30, 2023. The primary drivers of our cash used in operations for the nine months ended September 30, 2023 were our operating loss of $11.4 million and a decrease of other current liabilities of $0.9 million, partially offset by cash provided by a decrease in other current assets of $2.8 million, an increase in trade payables of $2.6 million, a decrease in contract assets net of contract liabilities of $1.1 million, $1.2 million from other components of working capital, an increase in accrued compensation and benefits of $0.6 million, and a decrease in trade receivables of $0.1 million.

 

Operating activities used $8.5 million of cash for the nine months ended September 24, 2022. The primary drivers of our cash used in operations for the nine months ended September 24, 2022 were our net loss of $7.5 million, an increase in contract assets net of contract liabilities of $2.5 million, and an increase in trade receivables of $2.4 million, partially offset by cash provided from a decrease in trade payables of $1.6 million, a decrease in other current assets of $1.4 million, and $0.9 million from other components of working capital.

 

Cash Flows from Investing Activities

 

Investing activities used cash of $0.3 million for the nine months ended September 30, 2023 primarily for the purchase of personal property and equipment.

 

Investing activities used cash of $1.3 million for the nine months ended September 24, 2022 primarily related to the Calvert acquisition in addition to the purchase of personal property and equipment.

 

Cash Flows from Financing Activities

 

Financing activities provided $2.1 million of cash for the nine months ended September 30, 2023 primarily due to proceeds received from the issuance of common stock under the RDO Purchase Agreement, net of issuance costs, and the Credit Agreement entered into during the second quarter of 2023, partially offset by cash used for payments for our finance leases and payments under the Revolving Credit Facility. The Revolving Credit Facility was repaid during the second quarter of 2023.

 

Financing activities provided cash of $0.2 million of cash for the nine months ended September 24, 2022 primarily from the Revolving Credit Facility, partially offset by costs associated with the ATM Agreement and payments for our finance leases.

 

 
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Contractual Obligations

 

The Company is obligated to make future cash payments under the Credit Agreement, operating leases, finance leases, and other liabilities. Amounts below are undiscounted and may differ from balances reflected on the financial statements. The table below sets forth certain information about our contractual obligations as of September 30, 2023 (in thousands):

 

 

 

Payment Due by Fiscal Period

 

 

 

2023

 

 

2024

 

 

2025

 

 

2026

 

 

2027 and thereafter

 

Operating and finance leases

 

$373

 

 

$1,992

 

 

$1,659

 

 

$1,152

 

 

$4,182

 

Credit Agreement

 

 

 

 

 

1,018

 

 

 

 

 

 

 

 

 

 

Total

 

$373

 

 

$3,010

 

 

$1,659

 

 

$1,152

 

 

$4,182

 

 

(1)    Other liabilities includes short-term notes payable.

 

 
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2023, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

No changes in our internal control over financial reporting occurred during the three months ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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. 

 

ITEM 1A. RISK FACTORS

 

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which outline factors that could materially affect our business, financial condition or future results, and the additional risk factors below. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.

 

Substantial doubt about our ability to continue as a going concern exists. Our audited financial statements for the period ended December 31, 2022 were prepared on the assumption that we would continue as a going concern. Those financial statements and the accompanying opinion of our auditor expressed a substantial doubt about our ability to continue as a going concern. Those audited financial statements did not include any adjustments that might result from the outcome of this uncertainty. Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.

 

 
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Our ability to continue as a going concern is also subject to, among other factors, our ability to collect receivables from our clients when due and invoice our customers in a timely manner. If we are not able collect our receivables when due from our clients, our cash flow will be negatively impacted which could lead to us not being able to meet our current obligations.

 

We do not have material borrowing capacity under our Credit Agreement, which matures on June 15, 2024, which may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition. As of September 30, 2023, we have outstanding borrowings of $1.0 million under the Credit Agreement, which matures on June 15, 2024. The terms of the Credit Agreement allow for an additional term loan of $0.3 million at the lender’s discretion. The limited availability under the Credit Agreement may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition.

 

The COVID–19 pandemic has adversely affected and could continue to adversely affect our business, financial condition and results of operations. Our business is dependent upon the willingness and ability of our customers to conduct transactions with us. The COVID–19 pandemic has caused severe disruptions in the worldwide economy, including the global demand for oil and natural gas. The prolonged nature of the COVID–19 pandemic has resulted, and may continue to result, in a significant decrease in business and/or has caused, and may in the future cause, our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a resurgence of COVID–19 in our market areas. The COVID–19 pandemic may also negatively impact the availability of our key personnel necessary to conduct our business as well as the business and operations of third-party service providers who perform critical services for our business. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 resurgences or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.

 

If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected. Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed and materials supplied. In the ordinary course of business, we extend unsecured credit to our customers. We may also agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. As of September 30, 2023, we had projects that totaled less than $0.1 million in retainage. We bear the risk that our clients will pay us late or not at all. Though we evaluate and attempt to monitor our clients’ financial condition, there is no guarantee that we will accurately assess their creditworthiness. To the extent the credit quality of our clients deteriorates or our clients seek bankruptcy protection, our ability to collect receivables and our results of operations could be adversely affected. Even if our clients are credit-worthy, they may delay payments in an effort to manage their cash flow. Financial difficulties or business failure experienced by one or more of our major customers has had and could, in the future, continue to have a material adverse effect on both our ability to collect receivables and our results of operations.

 

Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. As of September 30, 2023, our backlog was approximately $15.5 million which was a decrease of $4.9 million from $20.4 million as of December 31, 2022. We expect a majority of this backlog to be completed within the next 12 months. We cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and profits that we actually earn. The potential for cancellations and adjustments to our backlog are exacerbated by economic conditions, particularly in our chosen area of concentration, the energy industry. The energy industry has experienced a sustained period of low crude oil and natural gas prices which has reduced our clients’ activities in the energy industry.

 

 
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Our cash balance at financial institutions may exceed Federal Deposit Insurance Corporation (“FDIC”) insured amounts. Our cash balances, including funds on deposit with financial institutions, are subject to certain limitations imposed by the FDIC. The FDIC provides deposit insurance coverage up to the maximum limit for each depositor, per insured bank. The standard deposit insurance amount is $250,000 per depositor, per FDIC-insured bank, for each ownership category. Due to the FDIC deposit insurance limits, we may be exposed to the risk of loss on any excess cash balances that exceed the deposit insurance amount. This risk arises from the possibility of financial institutions with whom we have deposits becoming insolvent or unable to honor withdrawal requests, resulting in potential losses on uninsured portions of our cash holdings.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The following table sets forth certain information with respect to repurchases of our common stock for the third quarter of 2023:

 

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs (1)

 

 

Maximum Number (or

Approximate Dollar Value)

of Shares That May Yet be

Purchased Under Plans or

Programs (1)

 

July 2, 2023 to July 29, 2023

 

 

 

 

 

 

 

 

 

 

$

 

July 30, 2023 to September 2, 2023

 

 

 

 

 

 

 

 

 

 

$

 

September 3, 2023 to September 30, 2023

 

 

 

 

 

 

 

 

 

 

$

 

Total

 

 

 

 

 

 

 

 

1,290,460

 

 

$425,589

 

 

 

(1)

On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0 million of the Company’s common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions. The Company is 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. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. As of September 30, 2023, the Company had purchased and retired 1,290,460 shares at an aggregate cost of $1.6 million under this repurchase program. Management does not intend to repurchase any shares in the near future.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None

 

 
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ITEM 6. EXHIBITS

 

 

 

 

 

Incorporated by Reference to:

Exhibit

No.

 

Description

 

Form or

Schedule

 

Exhibit

No.

 

Filing

Date with

SEC

 

SEC

File

Number

 

 

 

 

 

 

 

 

 

 

 

3.1

 

Restated Articles of Incorporation of Registrant dated January 29, 2021

 

8-K

 

3.1

 

1/29/2021

 

001-14217

 

 

 

 

 

 

 

 

 

 

 

3.2

 

Second Amended and Restated Bylaws of Registrant dated April 14, 2016

 

8-K

 

3.1

 

4/15/2016

 

001-14217

 

 

 

 

 

 

 

 

 

 

 

3.3

 

Amendment to Article Fourth of ENGlobal’s Restated Articles of Incorporation, filed on June 29, 2023

 

8-K

 

3.1

 

7/3/2023

 

001-14217

 

 

 

 

 

 

 

 

 

 

 

4.1

 

Form of Common Stock Purchase Warrant

 

8-K

 

4.1

 

2/3/2023

 

001-14217

 

 

 

 

 

 

 

 

 

 

 

*10.1

 

First Amendment to Sublease Agreement between FMC Technologies, Inc. and ENGlobal U.S., Inc. dated August 22, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*10.2

 

Fourteenth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated September 1, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*31.1

 

Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the Third Quarter 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*31.2

 

Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the Third Quarter 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

**32.1

 

Certification Pursuant to Rule 13a – 14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Third Quarter 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*101.ins

 

Inline XBRL instance document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*101.sch

 

Inline XBRL taxonomy extension schema document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*101.cal

 

Inline XBRL taxonomy extension calculation linkbase document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*101.def

 

Inline XBRL taxonomy extension definition linkbase document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*101.lab

 

Inline XBRL taxonomy extension label linkbase document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*101.pre

 

Inline XBRL taxonomy extension presentation linkbase document

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

 

 

 

 

 

 

* Filed herewith

** Furnished herewith

 

 
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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 13, 2023

 

 

 

ENGlobal Corporation

 

 

 

 

By:

/s/ Darren W. Spriggs

 

 

Darren W. Spriggs

 

 

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

 

 
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