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 June 26, 2021

☐	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.)

654 N. Sam Houston Parkway E.,

Suite 400, Houston, TX

77060-5914

(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 August 5, 2021, the registrant had outstanding 35,134,564 shares of common stock, par value $0.001 per share.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 26, 2021

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 Six Months Ended June 26, 2021 and June 27, 2020	3

	Unaudited Condensed Consolidated Balance Sheets at June 26, 2021 and December 26, 2020	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 26, 2021 and June 27, 2020	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 26, 2021 and June 27, 2020	6

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

Part II.	Other Information	26

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 3.	Defaults Upon Senior Securities	28

Item 4.	Mine Safety Disclosures	28

Item 5.	Other Information	28

Item 6.	Exhibits	29

	Signatures	30

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 Six Months Ended
	June 26, 2021			June 27, 2020			June 26, 2021			June 27, 2020
Operating revenues	$	11,079		$	17,882		$	23,528		$	37,142
Operating costs		10,997			15,429			22,442			31,429
Gross profit		82			2,453			1,086			5,713

Selling, general and administrative expenses		4,264			2,314			6,825			4,447
Operating profit (loss)		(4,182	)		139			(5,739	)		1,266

Other income (expense):
Other income, net		6			1			1,690			2
Interest expense, net		(57	)		(36	)		(115	)		(41	)
Income (loss) from operations before income taxes		(4,233	)		104			(4,164	)		1,227

Provision for federal and state income taxes		23			36			46			58

Net income (loss)		(4,256	)		68			(4,210	)		1,169

Basic and diluted income (loss) per common share:	$	(0.14	)	$	0.00		$	(0.15	)	$	0.04

Basic and diluted weighted average shares used in computing income (loss) per share:		29,599			27,413			28,573			27,413

See accompanying notes to unaudited interim condensed consolidated financial statements.

Table of Contents

ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

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

	June 26, 2021			December 26, 2020
ASSETS
Current Assets:
Cash	$	29,175		$	13,706
Trade receivables, net of allowances of $1,636 and $386		6,572			7,789
Prepaid expenses and other current assets		398			891
Payroll taxes receivable		1,676			-
Contract assets		2,900			4,090
Total Current Assets		40,721			26,476
Property and equipment, net		1,135			1,263
Goodwill		720			720
Other assets
Right of use asset		1,210			1,628
Deposits and other assets		402			351
Total Other Assets		1,612			1,979
Total Assets	$	44,188		$	30,438

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	1,974		$	2,138
Accrued compensation and benefits		2,479			3,048
Current portion of leases		1,180			1,541
Contract liabilities		560			1,258
Current portion of note		4,974			3,707
Current portion of deferred payroll tax		519			-
Other current liabilities		344			745
Total Current Liabilities		12,030			12,437

Deferred payroll tax		519			1,037
Long-term debt		1,600			2,733
Long-term leases		467			608
Total Liabilities		14,616			16,815
Commitments and Contingencies (Note 8)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 35,134,564 shares issued and outstanding at June 26, 2021 and 27,560,686 shares issued and outstanding at December 26, 2020		35			28
Additional paid-in capital		57,309			37,157
Accumulated deficit		(27,772	)		(23,562	)
Total Stockholders’ Equity		29,572			13,623
Total Liabilities and Stockholders’ Equity	$	44,188		$	30,438

See accompanying notes to unaudited interim condensed consolidated financial statements.

Table of Contents

ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

	For the Six Months Ended
	June 26, 2021			June 27, 2020
Cash Flows from Operating Activities:
Net income (loss)	$	(4,210	)	$	1,169
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		187			205
Share-based compensation expense		107			132
Changes in current assets and liabilities:
Trade accounts receivable		1,217			1,569
Contract assets		1,190			(1,256	)
Other current assets		(1,234	)		344
Accounts payable		(164	)		(166	)
Accrued compensation and benefits		(569	)		977
Contract liabilities		(698	)		(3,109	)
Income taxes payable		(54	)		219
Other current liabilities, net		(347	)		(192	)
Net cash used in operating activities	$	(4,575	)	$	(108	)

Cash Flows from Investing Activities:
Property and equipment acquired		(88	)		(126	)
Net cash used in investing activities	$	(88	)	$	(126	)

Cash Flows from Financing Activities:
Issuance of common stock, net		20,052			-
Payments on finance leases		(55	)		(42	)
Proceeds from PPP loan		-			4,925
Interest on PPP loan		25			-
Proceeds from revolving credit facility		110			1,445
Net cash provided by (used in) financing activities	$	20,132		$	6,328
Net change in cash		15,469			6,094
Cash at beginning of period		13,706			8,307
Cash at end of period	$	29,175		$	14,401

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	115		$	12
Right of use assets obtained in exchange for new operating lease liability	$	256		$	1,182
Cash paid during the period for income taxes (net of refunds)	$	151		$	86
Debt issuance costs	$	-		$	131

See accompanying notes to unaudited interim condensed consolidated financial statements.

Table of Contents

ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(amounts in thousands)

	For the Three Months Ended
	June 26, 2021			June 27, 2020

Common Stock
Balance at beginning of period	$	28		$	27
Common stock issued		7			-
Balance at end of the period		35			27
Additional Paid-in Capital
Balance at beginning of period		37,202			36,949
Common stock issued		20,045			-
Share-based compensation - employee		62			117
Balance at end of period		57,309			37,066

Accumulated Deficit
Balance at beginning of period		(23,516	)		(21,836	)
Net income (loss)		(4,256	)		68
Balance at end of period		(27,772	)		(21,768	)

Total Stockholders’ Equity	$	29,572		$	15,325

	For the Six Months Ended
	June 26, 2021			June 27, 2020

Common Stock
Balance at beginning of period	$	28		$	27
Common stock issued		7			-
Balance at end of the period		35			27

Additional Paid-in Capital
Balance at beginning of period		37,157			36,934
Common stock issued		20,045			-
Share-based compensation - employee		107			132
Balance at end of period		57,309			37,066

Accumulated Deficit
Balance at beginning of period		(23,562	)		(22,937	)
Net income (loss)		(4,210	)		1,169
Balance at end of period		(27,772	)		(21,768	)

Total Stockholders’ Equity	$	29,572		$	15,325

See accompanying notes to unaudited interim condensed consolidated financial statements.

Table of Contents

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. Accordingly, these condensed financial statements do not include all of the information or note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 26, 2020, included in the Company’s 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The condensed financial statements included herein are unaudited for the three month and six month periods ended June 26, 2021 and June 27, 2020, and in the case of the condensed balance sheet as of December 26, 2020 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.

The Company has assessed subsequent events through the date of filing of these condensed financial statements with the Securities and Exchange Commission and believes that the disclosures made herein are adequate to make the information presented herein not misleading.

We had no items of other comprehensive income in any period presented; therefore, no other components of comprehensive income are presented.

Each of our quarters is comprised of 13 weeks.

NOTE 2 – ACCOUNTING STANDARDS

Revenue Recognition – Our revenue is comprised of engineering, procurement and construction management services and sales of fabricated systems and integrated control systems that we design and assemble. The majority of our services are provided under time-and-material contracts. Some time-and-material contracts may have limits. Revenue is not recognized over these limits until authorization by the client has been received.

A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.

Table of Contents

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.

Table of Contents

NOTE 3 – REVENUE RECOGNITION

Our revenue by contract type was as follows (dollars in thousands):

	For the Three Months Ended				For the Six Months Ended
	June 26, 2021		June 27, 2020		June 26, 2021		June 27, 2020
Fixed-price revenue	$	6,528	$	10,022	$	14,793	$	17,922
Time-and-material revenue		4,551		7,860		8,735		19,220
Total Revenue		11,079		17,882		23,528		37,142

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):

	June 26, 2021			December 26, 2020
Costs incurred on uncompleted contracts	$	34,987		$	39,154
Estimated earnings on uncompleted contracts		5,766			4,388
Earned revenues		40,753			43,542
Less: billings to date		38,413			40,710
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts	$	2,340		$	2,832

Contract assets	$	2,900		$	4,090
Contract liabilities		(560	)		(1,258	)
Net contract assets	$	2,340		$	2,832

NOTE 5 – DEBT

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

	June 26, 2021		December 26, 2020
PPP Loan (1)	$	4,974	$	4,949
Revolving Credit Facility (2)		1,600		1,491
Total debt		6,574		6,440
Amount due within one year		4,974		3,707
Total long-term debt	$	1,600	$	2,733

(1)

On April 13, 2020, the Company was granted an unsecured loan (the “PPP Loan”) from Origin Bank in the aggregate principal amount of $4,915,800 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note, dated as of April 13, 2020 (the “Note”), by ENGlobal in favor of Origin Bank, as lender. The PPP Loan balance has increased due to accrued interest.

Table of Contents

		Interest Rate: The interest rate on the PPP Loan is 1% per year. Potential PPP Loan Forgiveness: Under the PPP, ENGlobal may apply for forgiveness of the amount due on the PPP Loan in an amount equal to the sum of the following costs incurred during the covered period beginning on the date of the first disbursement of the PPP Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. We have elected to utilize a 24-week covered period as allowed by the Paycheck Protection Program Flexibility Act (“PPPFA”) enacted on June 5, 2020. On November 30, 2020, our lender, Origin Bank, transmitted our PPP Loan forgiveness application to the U.S. Small Business Administration. On July 12, 2021, we received notification from Origin Bank that the PPP Loan was forgiven in full by the U.S. Small Business Administration. See Note 12 for more information on the PPP Loan forgiveness.

	(2)	On May 21, 2020 (the “Closing Date”), the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans (each a “Loan” and collectively, the “Loans”) in the aggregate amount of up to $6.0 million (the “Maximum Credit Limit”).

		Set forth below are certain of the material terms of the Revolving Credit Facility: Credit Limit: The credit limit is an amount equal to the lesser of (a) the Maximum Credit Limit and (b) the sum of (i) 85% of the Borrowers’ Eligible Accounts (as defined in the Revolving Credit Facility), plus (ii) the lesser of (A) 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility), or (B) $3,000,000 plus (iii) the lesser of (A) 20% of Borrowers’ Eligible Fixed Price Accounts, or (B) $250,000. As of June 26, 2021, the credit limit under the Revolving Credit Facility was $3.1 million. Interest: Any Loans will bear interest at a rate per annum equal to the Prime rate (defined as the rate announced as the “prime rate” or “bank prime rate” in the Western Edition of the Wall Street Journal) plus 2.0%; provided that interest will not be less than $7,500 per month. Collateral: Lender receives a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property. Maturity: The maturity date is May 20, 2023 and shall be automatically extended for additional periods of one-year each, if written notice of termination is not given by one party to the other at least thirty days prior to the maturity date. Loan Fee: The Borrowers will pay to Lender a loan fee of 1.00% of the Maximum Credit Limit at the time of funding and annually thereafter on the anniversary date of the initial funding. Termination Fee: In the event the Borrowers terminate the Revolving Credit Facility prior to the maturity date, the Borrowers will pay to Lender a termination fee of (i) 2.00% of the Maximum Credit Limit, if the termination occurs on or prior to the first anniversary of the Closing Date, (ii) 1.00% of the Maximum Credit Limit, if the termination occurs after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date and (iii) 0.05% of the Maximum Credit Limit, if the termination occurs after the second anniversary of the Closing Date.

Table of Contents

Covenants: The Revolving Credit Facility requires the Borrowers to comply with certain customary affirmative covenants, and negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Borrowers to engage in mergers, acquisitions or other transactions outside of the ordinary course of business, make loans or investments, incur indebtedness, pay dividends or repurchase stock, or engage in affiliate transactions. The Revolving Credit Facility does not require the Borrowers to comply with any financial covenants.

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

	PPP Loan and Revolving Credit Facility (1)		Revolving Credit Facility (1)
2021	$	2,980	$	-
2022		1,994		-
2023		1,600		1,600
Thereafter		-		-
	$	6,574	$	1,600

(1)

On July 12, 2021, we received notification that the PPP Loan was entirely forgiven and only the Revolving Credit Facility will remain as debt.

NOTE 6 – SEGMENT INFORMATION

Our segments are strategic business units that offer our services and products to customers in their respective industry segments. The operating performance of our segments is regularly reviewed with operational leaders in charge of these segments, the chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.

We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.

Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a construction partner.

Our Automation group designs, integrates and commissions modular systems that include electronic distributed control, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.

Our Oil, Gas, and Petrochemicals group focuses on providing engineering, procurement and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients. This group also provides engineering, fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification, storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.

Table of Contents

Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military across the globe.

We have two reportable segments: Commercial and Government Services. Our Renewables, Automation, and Oil, Gas, and Petrochemical groups are aggregated into one reportable segment, Commercial.

Revenues, operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and includes costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments. The segment information for the three months and six months ended June 27, 2020 and as of December 26, 2020 has been recast to align with our current reportable segments.

Segment information is as follows (dollars in thousands):

	Commercial			Government Services			Corporate			Consolidated
For the three months ended June 26, 2021:
Revenue	$	9,157		$	1,922		$	-		$	11,079
Gross profit (loss)		(201	)		283			-			82
Gross profit margin		(2.2	)%		14.7	%					0.7	%
SG&A		2,816			188			1,260			4,264
Operating income (loss)		(3,017	)		95			(1,260	)		(4,182	)
Other income, net											6
Interest expense, net											(57	)
Tax expense											(23	)
Net loss											(4,256	)

	Commercial			Government Services			Corporate			Consolidated
For the three months ended June 27, 2020:
Revenue	$	14,803		$	3,079		$	-		$	17,882
Gross profit		1,910			543			-			2,453
Gross profit margin		12.9	%		17.6	%					13.7	%
SG&A		831			150			1,333			2,314
Operating income (loss)		1,079			393			(1,333	)		139
Other income, net											1
Interest expense, net											(36	)
Tax expense											(36	)
Net income											68

Table of Contents

	Commercial			Government Services			Corporate			Consolidated
For the six months ended June 26, 2021:
Revenue	$	19,206		$	4,322		$	-		$	23,528
Gross profit		714			372			-			1,086
Gross profit margin		3.7	%		8.6	%					4.6	%
SG&A		4,109			397			2,319			6,825
Operating loss		(3,395	)		(25	)		(2,319	)		(5,739	)
Other income, net											1,690
Interest expense, net											(115	)
Tax expense											(46	)
Net loss											(4,210	)

	Commercial			Government Services			Corporate			Consolidated
For the six months ended June 27, 2020:
Revenue	$	31,313		$	5,829		$	-		$	37,142
Gross profit		4,755			958			-			5,713
Gross profit margin		15.2	%		16.4	%					15.4	%
SG&A		1,661			320			2,466			4,447
Operating income (loss)		3,094			638			(2,466	)		1,266
Other income, net											2
Interest expense, net											(41	)
Tax expense											(58	)
Net income											1,169

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

Total Assets by Segment	As of June 26, 2021		As of December 26, 2020
	(dollars in thousands)
Commercial	$	7,633	$	11,130
Government Services		2,606		3,151
Corporate		33,949		16,157
Consolidated	$	44,188	$	30,438

NOTE 7 – FEDERAL AND STATE INCOME TAXES

The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740-270 we estimate an annual effective tax rate based on year-to-date operating results and our projection of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results. If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.

The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2016 and Texas margins tax returns prior to 2016 are closed. Generally, the applicable statues of limitations are three to four years from their filings.

The Company recorded income tax expense of $23 thousand for the three months ended June 26, 2021 as compared to income tax expense of $36thousand for the three months ended June 27, 2020. The effective income tax rate for the three months ended June 26, 2021 was (0.5)% as compared to 34.6% for the three months ended June 27, 2020.

Table of Contents

The Company recorded income tax expense of $46 thousand for the six months ended June 26, 2021 as compared to income tax expense of $58 thousand for the six months ended June 27, 2020. The effective income tax rate for the six months ended June 26, 2021 was (1.1)% as compared to 4.7% for the six months ended June 27, 2020.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on our financial position, results of operations or liquidity.

We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental) which is partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.

NOTE 9 – LEASES

The Company leases land, office space and equipment. Arrangements are assessed at inception to determine if a lease exists and, with the adoption of ASC 842, “Leases,” right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. Because the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate at the inception of a lease to calculate the present value of lease payments. The Company has elected to apply the short-term lease exception for all asset classes, excluding lease liabilities from the balance sheet and recognizing the lease payments in the period they are incurred.

Table of Contents

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

		Three Months Ended				Six Months Ended
	Financial Statement Classification	June 26, 2021		June 27, 2020		June 26, 2021		June 27, 2020
Finance leases:
Amortization expense	SG&A Expense	$	22	$	19	$	41	$	38
Interest expense	Interest expense, net		5		5		9		10
Total finance lease expense			27		24		50		48

Operating leases:
Operating costs	Operating costs		107		152		259		371
Selling, general and administrative expenses	SG&A Expense		416		467		865		905
Total operating lease expense			523		619		1,124		1,276
Total lease expense		$	550	$	643	$	1,174	$	1,324

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

	Financial Statement Classification	June 26, 2021		December 26, 2020
ROU Assets:
Operating leases	Right of Use asset	$	1,210	$	1,628
Finance leases	Property and equipment, net		382		442
Total ROU Assets:		$	1,592	$	2,070

Lease liabilities:
Current liabilities
Operating leases	Current portion of leases	$	1,058	$	1,421
Finance leases	Current portion of leases		122		120
Noncurrent Liabilities:
Operating leases	Long Term Leases		202		286
Finance leases	Long Term Leases		265		322
Total lease liabilities		$	1,647	$	2,149

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

	At June 26, 2021
Weighted average remaining lease term (years)
Operating leases		1.2
Finance leases		3.8
Weighted average discount rate
Operating leases		0.9	%
Finance leases		5.1	%

Table of Contents

Maturities of operating lease liabilities as of June 26, 2021 are as follows (dollars in thousands):

Years ending:	Operating leases			Finance leases			Total
2021 (remaining months)		612			67			679
2022		658			114			772
2023		-			93			93
2024		-			73			73
2025 and thereafter					62			62
Total lease payments		1,270			409			1,679
Less: imputed interest		(12	)		(20	)		(32	)
Total lease liabilities	$	1,258		$	389		$	1,647

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 employee retention credit as other income on the Statement of Operations and as a receivable on the Balance Sheet.

NOTE 11 – STOCKHOLDER’S EQUITY

On January 29, 2021, the Company entered into an at market issuance sales agreement (the “ATM Agreement”) with B. Riley Securities, Inc. pursuant to which the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $25 million to or through B. Riley, as sales agent, from time to time, in an “at the market offering”. Under the ATM Agreement, the Company will pay B. Riley an aggregate commission of 3% of the gross sales price per share of common stock sold under the ATM Agreement. The Company is not obligated to make any sales under the ATM Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs. In April 2021, 400,538 shares of common stock were issued pursuant to the ATM Agreement for net proceeds of approximately $1.4 million.

On June 1, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold and issued an aggregate of 7,142,859 shares of the Company’s common stock to certain institutional investors at an offering price of $2.80 per share in a registered direct offering priced at-the-market under NASDAQ rules for net proceeds of approximately $18.7 million after deducting the fees of A.G.P./Alliance Global Partners, the placement agent, and related offering expenses of approximately $1.3 million.

NOTE 12 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date these financial statements were issued. The Company determined there were no events, other than as described below, that required disclosure or recognition in these financial statements.

PPP Loan Forgiveness

On July 12, 2021, the Company received notification from its lender that the PPP Loan was forgiven in full by the U.S. Small Business Administration at which time the Company recognized the extinguishment of debt as Other Income.

Major Customer Bankruptcy

On July 12, 2021, one of the Company’s major customers filed bankruptcy. The customer had suspended operations during the second quarter of 2021, which led to the Company’s recording of a $1.4 million bad debt reserve and a $0.5 million reduction in backlog as of June 26, 2021. The reserve is recorded within the Commercial segment sales, general, and administrative expense in the second quarter of 2021.

Table of Contents

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 26, 2020, 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 26, 2020.

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 leading 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 cost 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 have identified 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 identified specific individuals within the Company to lead the efforts for each market initiative - “a champion” - while coordinating with the other sales leaders.

We continue to be mindful of our overhead structure. We have made significant investments in key business development and other essential personnel, product developments and new facilities and equipment, which have all negatively impacted our selling, general and administrative expense (“SG&A”). We recognize that the level of our SG&A is greater than it could be for a company our size; however, we have maintained our overhead structure in anticipation of higher revenue levels.

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

Table of Contents

COVID-19 Update

On March 11, 2020, the World Health Organization declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. The continued worldwide spread of COVID-19, in conjunction with related government and other preventative measures taken to mitigate the spread of COVID-19, have caused severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. However, we have not been successful in replacing our backlog as quickly as it has been converted to revenues. As a result, our backlog has decreased by approximately $47.6 million from $59.2 million at December 28, 2019 to $11.6 million as of June 26, 2021, and by approximately $12.7 million from $24.3 million as of December 26, 2020 to $11.6 million as of June 26, 2021. While we have many potential opportunities in our sales pipeline that could replace a significant portion of this backlog reduction, inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions have largely contributed to delays in project awards and our inability to replace our backlog as quickly as it has been converted to revenue. While we believe our backlog is sufficient to keep a significant portion of our workforce productive in the near term, it may not be at our current operating levels. The extent to which the disruption of COVID-19 may impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to our business, financial condition and results of operations is uncertain and we will continue to monitor the situation and assess the operational and financial impact on our business.

We are utilizing relief for employees impacted by COVID-19 under the Families First Coronavirus Response Act in order to minimize the impact to both our employees and our business. Further, we are utilizing some of the tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). On April 13, 2020, we obtained a loan pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act (the “PPP Loan”) and in July 2021, we were notified by our lender that the PPP Loan was forgiven in full by the U.S. Small Business Administration. The PPP Loan was necessary to support our ongoing operations as we navigate the economic uncertainty caused by the COVID-19 pandemic. Under the provisions of the CARES Act, the Company is eligible for an employee retention credit subject to certain criteria. Accordingly, the Company recorded a $1.7 million employee retention credit during the six months ended June 26, 2021. As we continue to monitor the situation and assess the operational and financial impact on our business, we may determine to take further actions in response.

Because of the severity, magnitude and duration of the COVID-19 pandemic and its uncertain and rapidly changing economic consequences, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 continues to spread 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. For additional information, see Part II. Item 1A “Risk Factors.”

Critical Accounting Policies Update

Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2020 Annual Report on Form 10-K.

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).

Table of Contents

Under an IAS 20 analogy, a business entity would recognize the 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.

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. Other Services includes revenue and expenses for activities that were not directly identifiable under one of our reporting segments. 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.

During the second quarter of 2021, we recorded a $1.4 million bad debt reserve as a result of a customer suspending operations and, subsequent to quarter end, filing bankruptcy. Further, our backlog was reduced by $0.5 million as of June 26, 2021.

Table of Contents

Comparison of the three months ended June 26, 2021 versus the three months ended June 27, 2020

The following table, for the three months ended June 26, 2021 versus the three months ended June 27, 2020, 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 June 26, 2021:
Revenue	$	9,157		$	1,922		$	—		$	11,079		100.0	%
Gross profit (loss)		(201	)		283			—			82		0.7	%
SG&A		2,816			188			1,260			4,264		38.5	%
Operating income (loss)		(3,017	)		95			(1,260	)		(4,182	)	(37.7	)%
Other income, net											6
Interest expense, net											(57	)
Tax expense											(23	)
Net loss											(4,256	)	(38.4	)%
Basic and diluted loss per share										$	(0.14	)

	Commercial			Government Services			Corporate			Consolidated
For the three months ended June 27, 2020:
Revenue		14,803			3,079			—			17,882		100.0	%
Gross profit		1,910			543			—			2,453		13.7	%
SG&A		831			150			1,333			2,314		12.9	%
Operating income (loss)		1,079			393			(1,333	)		139		0.8	%
Other income, net											1
Interest expense, net											(36	)
Tax expense											(36	)
Net income											68		0.4	%
Basic and diluted income per share											0.00

	Commercial			Government Services			Corporate			Consolidated
Year Over Year Increase (Decrease) in Operating Results:
Revenue	$	(5,646	)	$	(1,157	)	$	—		$	(6,803	)	(38.0	)%
Gross profit (loss)		(2,111	)		(260	)		—			(2,371	)
SG&A		1,985			38			(73	)		1,950		84.3	%
Operating income (loss)		(4,096	)		(298	)		73			(4,321	)	(3,108.6	)%
Other income, net											5
Interest expense, net											(21	)
Tax expense											13
Net loss											(4,324	)	(6,358.8	)%
Basic and diluted loss per share										$	(0.15	)

Table of Contents

Comparison of the six months ended June 26, 2021 versus the six months ended June 27, 2020

The following table, for the six months ended June 26, 2021 versus the six months ended June 27, 2020, 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 six months ended June 26, 2021:
Revenue	$	19,206		$	4,322		$	—		$	23,528		100.0	%
Gross profit		714			372			—			1,086		4.6	%
SG&A		4,109			397			2,319			6,825		29.0	%
Operating loss		(3,395	)		(25	)		(2,319	)		(5,739	)	(24.4	)%
Other income, net											1,690
Interest expense, net											(115	)
Tax expense											(46	)
Net loss											(4,210	)	(17.9	)%
Basic and diluted loss per share										$	(0.15	)

	Commercial			Government Services			Corporate			Consolidated
For the six months ended June 27, 2020:
Revenue		31,313			5,829			—			37,142		100.0	%
Gross profit		4,755			958			—			5,713		15.4	%
SG&A		1,661			320			2,466			4,447		12.0	%
Operating income (loss)		3,094			638			(2,466	)		1,266		3.4	%
Other income, net											2
Interest expense, net											(41	)
Tax expense											(58	)
Net income											1,169		3.1	%
Basic and diluted income per share											0.04

	Commercial			Government Services			Corporate			Consolidated
Year Over Year Increase (Decrease) in Operating Results:
Revenue	$	(12,107	)	$	(1,507	)	$	—		$	(13,614	)	(36.7	)%
Gross profit (loss)		(4,041	)		(586	)		—			(4,627	)
SG&A		2,448			77			(147	)		2,378		53.5	%
Operating income (loss)		(6,489	)		(663	)		147			(7,005	)

SEC Form 10-Q filed by ENGlobal Corporation