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 July 1, 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 August 10, 2023, the registrant had outstanding 40,899,947 shares of common stock, par value $0.001 per share.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JULY 1, 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 Six Months Ended July 1, 2023 and June 25, 2022	3

	Unaudited Condensed Consolidated Balance Sheets at July 1, 2023 and December 31, 2022	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 1, 2023 and June 25, 2022	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended July 1, 2023 and June 25, 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	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

Part II.	Other Information	30

Item 1.	Legal Proceedings	30

Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	33

	Signatures	35

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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
	July 1, 2023			June 25, 2022			July 1, 2023			June 25, 2022
Operating revenues	$	9,738		$	11,355		$	22,931		$	18,721
Operating costs		10,120			10,023			25,135			18,047
Gross profit (loss)		(382	)		1,332			(2,204	)		674

Selling, general and administrative expenses		3,922			2,890			8,338			5,733
Operating loss		(4,304	)		(1,558	)		(10,542	)		(5,059	)

Other income (expense):
Other income, net		46			21			49			31
Interest expense, net		(59	)		(52	)		(131	)		(103	)
Loss from continuing operations before income taxes		(4,317	)		(1,589	)		(10,624	)		(5,131	)

Provision (benefit) for federal and state income taxes		22			(56	)		44			22

Net loss		(4,339	)		(1,533	)		(10,668	)		(5,153	)

Basic and diluted loss per common share:	$	(0.11	)	$	(0.04	)	$	(0.27	)	$	(0.15	)

Basic and diluted weighted average shares used in computing loss per share:		39,759			35,444			38,975			35,337

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

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

	July 1, 2023			December 31, 2022
ASSETS
Current Assets:
Cash	$	764		$	3,464
Trade receivables, net of allowances of $4,336 and $2,129		8,787			7,644
Prepaid expenses and other current assets		576			1,580
Payroll taxes receivable		484			1,547
Contract assets		3,748			4,934
Total Current Assets		14,359			19,169
Property and equipment, net		1,652			1,757
Goodwill		720			720
Other assets
Right-of-use asset		7,205			8,072
Deposits and other assets		280			305
Total Other Assets		7,485			8,377
Total Assets	$	24,216		$	30,023

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$	6,727		$	4,454
Accrued compensation and benefits		2,343			2,002
Current portion of leases		1,596			1,849
Contract liabilities		1,052			956
Other current liabilities		698			1,134
Credit Agreement		1,004			—
Priority Agreement		864			—
Revolving Credit Facility		—			1,661
Total Current Liabilities		14,284			12,056

Long-term unearned revenue		400			425
Long-term leases		6,820			7,217
Total Liabilities		21,504			19,698
Commitments and Contingencies (Note 8)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 39,757,092 shares issued and outstanding at July 1, 2023 and 35,800,617 shares issued and outstanding at December 31, 2022		40			36
Additional paid-in capital		61,101			58,050
Accumulated deficit		(58,429	)		(47,761	)
Total Stockholders’ Equity		2,712			10,325
Total Liabilities and Stockholders’ Equity	$	24,216		$	30,023

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

	For the Six Months Ended
	July 1, 2023			June 25, 2022
Cash Flows from Operating Activities:
Net loss	$	(10,668	)	$	(5,153	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		330			368
Share-based compensation expense		89			111
Loss on disposal of fixed assets		287			—
Changes in current assets and liabilities:
Trade accounts receivable		(1,143	)		382
Contract assets		1,186			(1,468	)
Other current assets		2,092			1,608
Accounts payable		2,273			297
Accrued compensation and benefits		341			69
Contract liabilities		96			278
Income taxes payable		34			(27	)
Other current liabilities, net		(495	)		(433	)
Net cash used in operating activities	$	(5,578	)	$	(3,968	)

Cash Flows from Investing Activities:
Asset acquisition, net of cash acquired		—			(937	)
Property and equipment acquired		(154	)		(92	)
Net cash used in investing activities	$	(154	)	$	(1,029	)

Cash Flows from Financing Activities:
Common stock and warrants issued, net		2,962			—
At-the-market offering costs		—			(67	)
Payments on finance leases		(136	)		(182	)
Proceeds from Priority Agreement		864			—
Proceeds from Credit Agreement		1,004			—
Payments on revolving credit facility, net		(1,662	)		183
Net cash provided by (used in) financing activities	$	3,032		$	(66	)
Net change in cash		(2,700	)		(5,063	)
Cash at beginning of period		3,464			19,202
Cash at end of period	$	764		$	14,139

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	131		$	98
Fair value of warrants at issuance date	$	2,782		$	—
Right of use assets obtained in exchange for new operating lease liability	$	—		$	354
Right of use assets obtained in exchange for new financing lease liability	$	289		$	—
Cash paid during the period for income taxes (net of refunds)	$	—		$	48
Asset acquisition, common stock issued	$	—		$	525
Asset acquisition, contingent consideration	$	—		$	1,355

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(amounts in thousands)

	For the Three Months Ended
	July 1, 2023			June 25, 2022
Common Stock
Balance at beginning of period	$	40		$	35
Common stock issued		—			1
Balance at the end of the period		40			36
Additional Paid-in Capital
Balance at beginning of period		61,070			57,407
Proceeds from common stock issued, net		(8	)		525
At-the-market offering costs		—			(15	)
Share-based compensation - employees		39			55
Balance at end of period		61,101			57,972

Accumulated Deficit
Balance at beginning of period		(54,090	)		(32,867	)
Net loss		(4,339	)		(1,533	)
Balance at end of period		(58,429	)		(34,400	)

Total Stockholders’ Equity	$	2,712		$	23,608

	For the Six Months Ended
	July 1, 2023			June 25, 2022
Common Stock
Balance at beginning of period	$	36		$	35
Common stock issued		4			1
Balance at the end of the period		40			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		—			(67	)
Share-based compensation - employees		89			111
Balance at end of period		61,101			57,972

Accumulated Deficit
Balance at beginning of period		(47,761	)		(29,247	)
Net loss		(10,668	)		(5,153	)
Balance at end of period		(58,429	)		(34,400	)

Total Stockholders’ Equity	$	2,712		$	23,608

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 six-month periods ended July 1, 2023 and June 25, 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 Six Months Ended
	July 1, 2023		June 25, 2022		July 1, 2023		June 25, 2022
Fixed-price revenue	$	6,080	$	8,891	$	16,517	$	14,099
Time-and-material revenue		3,658		2,464		6,414		4,622
Total Revenue		9,738		11,355		22,931		18,721

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):

	July 1, 2023			December 31, 2022
Costs incurred on uncompleted contracts	$	53,994		$	59,298
Estimated earnings on uncompleted contracts		2,519			4,464
Earned revenues		56,513			63,762
Less: billings to date		53,817			59,784
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts	$	2,696		$	3,978

Contract assets	$	3,748		$	4,934
Contract liabilities		(1,052	)		(956	)
Net contract assets	$	2,696		$	3,978

NOTE 5 – DEBT

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

	July 1, 2023		December 31, 2022
Revolving Credit Facility (1)	$	—	$	1,661
Credit Agreement (2)		1,004		—
Priority Agreement (3)		864		—
Amount due within one year		1,868		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”).

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		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 July 1, 2023, the company had factored $0.9 million of receivables through the Priority Agreement.

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

	Priority Agreement		Credit Agreement
	$		$
2023		864		—
2024		—		1,004
2025 and thereafter		—		—
	$	864	$	1,004

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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 July 1, 2023:
Revenue	$	7,427			2,311			—			9,738
Gross profit (loss)		(1,200	)		818			—			(382	)
Gross profit (loss) margin		(16.2	)%		35.4	%					(3.9	)%
SG&A		2,499			141			1,282			3,922
Operating profit (loss)		(3,699	)		677			(1,282	)		(4,304	)
Other income, net											46
Interest expense, net											(59	)
Tax expense											(22	)
Net loss											(4,339	)

	Commercial			Government Services			Corporate			Consolidated
For the three months ended June 25, 2022:
Revenue	$	9,203			2,152			—			11,355
Gross profit		701			631			—			1,332
Gross profit margin		7.6	%		29.3	%					11.7	%
SG&A		1,605			172			1,113			2,890
Operating profit (loss)		(904	)		459			(1,113	)		(1,558	)
Other income, net											21
Interest expense, net											(52	)
Tax benefit											56
Net loss											(1,533	)

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	Commercial			Government Services			Corporate			Consolidated
For the six months ended July 1, 2023:
Revenue	$	19,262			3,669			—			22,931
Gross profit (loss)		(2,802	)		598			—			(2,204	)
Gross profit (loss) margin		(14.5	)%		16.3	%					(9.6	)%
SG&A		5,245			277			2,816			8,338
Operating profit (loss)		(8,047	)		321			(2,816	)		(10,542	)
Other income, net											49
Interest expense, net											(131	)
Tax expense											(44	)
Net loss											(10,668	)

	Commercial			Government Services			Corporate			Consolidated
For the six months ended June 25, 2022:
Revenue	$	14,606			4,115			—			18,721
Gross profit (loss)		(223	)		897			—			674
Gross profit (loss) margin		(1.5	)%		21.8	%					3.6	%
SG&A		3,096			390			2,247			5,733
Operating profit (loss)		(3,319	)		507			(2,247	)		(5,059	)
Other income, net											31
Interest expense, net											(103	)
Tax expense											(22	)
Net loss											(5,153	)

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

Total Assets by Segment	As of July 1, 2023		As of December 31, 2022
	(dollars in thousands)
Commercial	$	15,280	$	19,526
Government Services		5,016		2,032
Corporate		3,920		8,465
Consolidated	$	24,216	$	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 July 1, 2023 as compared to income tax benefit of $56 thousand for the three months ended June 25, 2022. The effective income tax rate for the three months ended July 1, 2023 was (0.5)% as compared to 3.5% for the three months ended June 25, 2022. The Company recorded income tax expense of $44 thousand for the six months ended July 1, 2023 as compared to $22 thousand for the six months ended June 25, 2022. The effective income tax rate for the six months ended July 1, 2023 and June 25, 2022 was (0.4)%. 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.

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

Three Months Ended

Six Months Ended

Financial Statement Classification

July 1, 2023

June 25, 2022

July 1, 2023

June 25, 2022

Finance leases:

Amortization expense

SG&A Expense

SEC Form 10-Q filed by ENGlobal Corporation