UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No.
(Exact name of registrant as specified in its charter) |
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
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(Address of principal executive offices) |
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(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 |
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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.
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).
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 | ☐ |
☒ | Smaller Reporting Company | ||
Emerging growth company |
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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
As of May 9, 2024, the registrant had outstanding
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 30, 2024
TABLE OF CONTENTS
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| Unaudited Condensed Consolidated Balance Sheets at March 30, 2024 and December 30, 2023 |
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| Notes to Unaudited Interim Condensed Consolidated Financial Statements |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| 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)
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| For the Three Months Ended |
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| March 30, 2024 |
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| April 1, 2023 |
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Operating revenues |
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Operating costs |
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Gross profit (loss) |
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Selling, general and administrative expenses |
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Operating loss |
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Other income (expense): |
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Other income, net |
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Interest expense, net |
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Loss from operations before income taxes |
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Provision for federal and state income taxes |
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Net loss |
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Basic and diluted loss per common share: |
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Basic and diluted weighted average shares used in computing loss per share: |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
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| Table of Contents |
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(amounts in thousands, except share and per share amounts)
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| March 30, 2024 |
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| December 30, 2023 |
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ASSETS |
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Current Assets: |
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Cash |
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Trade receivables, net of allowances of $ |
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Prepaid expenses and other current assets |
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Payroll taxes receivable |
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Contract assets |
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Total Current Assets |
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Property and equipment, net |
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Goodwill |
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Other assets |
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Right-of-use asset |
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Deposits and other assets |
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Total Other Assets |
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Total Assets |
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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Current Liabilities: |
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Accounts payable |
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Accrued compensation and benefits |
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Current portion of operating leases |
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Current portion of finance leases |
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Contract liabilities |
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Other current liabilities |
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Short-term debt |
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Total Current Liabilities |
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Long-term debt |
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Long-term unearned revenue |
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Long-term operating leases |
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Long-term finance leases |
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Total Liabilities |
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Commitments and Contingencies (Note 8) |
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Stockholders’ Equity: |
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Common stock - $ |
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Additional paid-in capital |
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Accumulated deficit |
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Total Stockholders’ Deficit |
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Total Liabilities and Stockholders’ Deficit |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
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| Table of Contents |
ENGlobal Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(amounts in thousands)
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| For the Three Months Ended |
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| March 30, 2024 |
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| April 1, 2023 |
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Cash Flows from Operating Activities: |
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Net loss |
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Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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Share-based compensation expense |
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Gain on disposal of fixed assets |
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Changes in current assets and liabilities: |
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Trade accounts receivable |
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Contract assets |
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Other current assets |
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Accounts payable |
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Accrued compensation and benefits |
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Contract liabilities |
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Income taxes payable |
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Other current liabilities, net |
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Net cash provided by (used in) operating activities |
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Cash Flows from Investing Activities: |
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Property and equipment acquired |
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Proceeds from sale of property and equipment |
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Net cash provided by (used in) investing activities |
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Cash Flows from Financing Activities: |
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Issuance of common stock and warrants, net |
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Payments on finance leases |
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Payoff of finance leases |
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Proceeds from Credit Agreement |
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Payments on revolving credit facility |
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Net cash provided by (used in) financing activities |
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Net change in cash |
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Cash at beginning of period |
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Cash at end of period |
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
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| $ |
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Fair value of warrants at issuance date |
| $ |
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| $ |
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Right of use assets obtained in exchange for new financing lease liability |
| $ |
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| $ |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
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| Table of Contents |
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
(amounts in thousands)
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| For the Three Months Ended |
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| March 30, 2024 |
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| April 1, 2023 |
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Common Stock |
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Balance at beginning of period |
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Common stock issued |
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Balance at end of period |
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Additional Paid-in Capital |
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Balance at beginning of period |
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Proceeds from common stock issued, net |
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Fair value of warrants at issuance date |
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Share-based compensation |
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Balance at end of period |
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Accumulated Deficit |
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Balance at beginning of period |
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| $ | ( | ) |
Net loss |
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Balance at end of period |
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| $ | ( | ) |
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Total Stockholders’ Equity (Deficit) |
| $ | ( | ) |
| $ |
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See accompanying notes to unaudited interim condensed consolidated financial statements.
| 6 |
| 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 (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 30, 2023, included in the Company’s 2023 Annual Report on Form 10-K filed with the SEC.
The condensed financial statements included herein are unaudited for the three-month periods ended March 30, 2024 and April 1, 2023, and in the case of the condensed balance sheet as of December 30, 2023 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 2024, all four quarters will be comprised of 13 weeks each.
Reverse Stock Split – We effected a one-for-eight reverse split of our common stock on November 30, 2023. There was no net effect on total stockholders’ equity, and the par value per share of our common stock remained at $0.001 per share after the reverse stock split. All references made to share or per share amounts in the accompanying condensed consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the reverse stock split.
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. Our services are provided under time-and-material and fixed-price 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.
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We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.
Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.
To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or a reduction of revenue) on a cumulative catch-up basis.
We have a standard, monthly process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements, and other contractual requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables.
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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.
Related Parties – The Company entered into the Credit Agreement (as defined below) and the Amended Credit Agreement (as defined below) with Alliance 2000, Ltd., a Texas limited partnership (“Alliance”), the family limited partnership of the Company’s Chairman and Chief Executive Officer, William A. Coskey, P.E. We apply provisions of subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions. The disclosures include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
Property and Equipment –Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the three months ended March 30, 2024 was $
NOTE 3 – REVENUE RECOGNITION
Our revenue by contract type was as follows (dollars in thousands):
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| For the Three Months Ended |
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| March 30, 2024 |
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| April 1, 2023 |
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Fixed-price revenue |
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Time-and-material revenue |
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Total Revenue |
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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.
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Costs, estimated earnings and billings on uncompleted contracts consisted of the following (dollars in thousands):
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| March 30, 2024 |
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| December 30, 2023 |
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Costs incurred on uncompleted contracts |
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Estimated earnings on uncompleted contracts |
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Earned revenues |
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Less: billings to date |
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Net costs in excess of billings on uncompleted contracts |
| $ |
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Costs and estimated earnings in excess of billings on uncompleted contracts |
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Billings in excess of costs and estimated earnings on uncompleted contracts |
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Net costs in excess of billings on uncompleted contracts |
| $ |
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| $ |
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NOTE 5 – DEBT
The components of debt were as follows (dollars in thousands):
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| March 30, 2024 |
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| December 30, 2023 |
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Credit Agreement (1) |
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Total debt |
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Amount due within one year |
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Total long-term debt |
| $ |
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| $ |
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| (1) | On June 15, 2023, the Company entered into the Credit Agreement (the “Credit Agreement”) with Alliance, pursuant to which Alliance agreed, subject to certain terms and conditions, to extend up to two term loans in the aggregate principal amount of $ |
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| On April 24, 2024, the Company entered into an |
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| The Amended Credit Agreement matures on |
The future scheduled maturities of our debt are (in thousands):
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| Credit Agreement |
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2024 |
| $ |
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2025 |
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Thereafter |
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| $ |
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| 10 |
| Table of Contents |
NOTE 6 – SEGMENT INFORMATION
Our operating segments are strategic business units that offer our services and products to customers in their respective industries. The operating performance 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.
Our three operating segments are: (i) Automation, (ii) Engineering, and (iii) Government Services.
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 Engineering group focuses on providing engineering, procurement, construction, 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. 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 Engineering and Automation groups are aggregated into one reportable segment, Commercial.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Revenue, operating income, identifiable assets, capital expenditures and depreciation for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and include costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments.
Segment information is as follows (dollars in thousands):
|
| Commercial |
|
| Government Services |
|
| Corporate |
|
| Consolidated |
| ||||
For the three months ended March 30, 2024: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ |
|
|
|
|
|
|
|
|
|
| ||||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Gross profit margin |
|
| % |
|
| % |
|
|
|
|
|
| % | |||
SG&A |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating profit (loss) |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
| 11 |
| Table of Contents |
|
| Commercial |
|
| Government Services |
|
| Corporate |
|
| Consolidated |
| ||||
For the three months ended April 1, 2023: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
| $ |
|
|
|
|
|
|
|
|
|
| ||||
Gross loss |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | |
Gross loss margin |
|
| ( | )% |
|
| ( | )% |
|
|
|
|
|
| ( | )% |
SG&A |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating loss |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
Total assets by segment are as follows (dollars in thousands):
Total Assets by Segment |
| As of March 30, 2024 |
|
| As of December 30, 2023 |
| ||
|
| (dollars in thousands) |
| |||||
Commercial |
| $ |
|
| $ |
| ||
Government Services |
|
|
|
|
|
| ||
Corporate |
|
|
|
|
|
| ||
Consolidated |
| $ |
|
| $ |
| ||
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 $
| 12 |
| Table of Contents |
NOTE 8 – COMMITMENTS AND CONTINGENCIES
From time to time, ENGlobal or one or more of its subsidiaries may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty.
On March 12, 2024, ENGlobal U.S. Inc. was served with a lawsuit by VEnergy Industrial Park I, LLC (the “Plaintiff”). The lawsuit is pending in the County Court of Waller County, Texas (the “Court”). The Plaintiff is seeking monetary damages of $
We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental), and are partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.
NOTE 9 – LEASES
The Company leases land, office space and equipment. Arrangements are assessed at inception to determine if a lease exists and right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. Because the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate at the inception of a lease to calculate the present value of lease payments. The Company has elected to apply the short-term lease exception for all asset classes, excluding lease liabilities from the balance sheet and recognizing the lease payments in the period they are incurred.
The components of lease expense are as follows (amounts in thousands):
|
|
| Three Months Ended |
| ||||||
|
| Financial Statement Classification |
| March 30, 2024 |
|
| April 1, 2023 |
| ||
Finance leases: |
|
|
|
|
|
|
|
| ||
Amortization expense |
| SG&A Expense |
| $ |
|
| $ |
| ||
Interest expense |
| Interest expense, net |
|
|
|
|
|
| ||
Total finance lease expense |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Operating leases: |
|
|
|
|
|
|
|
|
|
|
Operating costs |
| Operating costs |
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| SG&A Expense |
|
|
|
|
|
| ||
Total operating lease expense |
|
|
|
|
|
|
|
| ||
Total lease expense |
|
|
| $ |
|
| $ |
| ||
| 13 |
| Table of Contents |
Supplemental balance sheet information related to leases was as follows (dollars in thousands):
|
| Financial Statement Classification |
| March 30, 2024 |
|
| December 30, 2023 |
| ||
ROU Assets: |
|
|
|
|
|
|
|
| ||
Operating leases |
| Right of use asset |
| $ |
|
| $ |
| ||
Finance leases |
| Property and equipment, net |
|
|
|
|
|
| ||
Total ROU Assets: |
|
|
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities: |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
Operating leases |
| Current portion of operating leases |
| $ |
|
| $ |
| ||
Finance leases |
| Current portion of finance leases |
|
|
|
|
|
| ||
Noncurrent Liabilities: |
|
|
|
|
|
|
|
|
|
|
Operating leases |
| Long-term operating leases |
|
|
|
|
|
| ||
Finance leases |
| Long-term finance leases |
|
|
|
|
|
| ||
Total lease liabilities |
|
|
| $ |
|
| $ |
| ||
The weighted average remaining lease term and weighted average discount rate were as follows:
|
| At March 30, 2024 |
| |
Weighted average remaining lease term (years) |
|
|
| |
Operating leases |
|
|
| |
Finance leases |
|
|
| |
Weighted average discount rate |
|
|
|
|
Operating leases |
|
| % | |
Finance leases |
|
| % | |
| 14 |
| Table of Contents |
Maturities of operating lease liabilities as of March 30, 2024 are as follows (dollars in thousands):
Years ending: |
| Operating leases |
|
| Finance leases |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
| |||
2024 (remaining months) |
|
|
|
|
|
|
|
|
| |||
2025 |
|
|
|
|
|
|
|
|
| |||
2026 |
|
|
|
|
|
|
|
|
| |||
2027 |
|
|
|
|
|
|
|
|
| |||
2028 and thereafter |
|
|
|
|
|
|
|
|
| |||
Total lease payments |
|
|
|
|
|
|
|
|
| |||
Less: imputed interest |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total lease liabilities |
|
|
|
| $ |
|
| $ |
| |||
NOTE 11 – STOCKHOLDERS’ EQUITY
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of
In 2023, we issued stock-based compensation in the form of non-vested restricted stock awards to certain employees, directors, and officers. We apply the provisions of ASC Topic 718 “Compensation – Stock Compensation” (“ASC 718”) and recognize compensation expense over the applicable service period for all stock-based compensation based on the grant date fair value of the award. For the three months ended March 30, 2024, we recognized share-based compensation expense of $
NOTE 12 – LIQUIDITY
We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds and borrowings under the Amended Credit Agreement.
On June 15, 2023, the Company entered into the Credit Agreement with Alliance, pursuant to which Alliance agreed, subject to certain terms and conditions, to extend up to two term loans in the aggregate principal amount of $
On April 24, 2024, the Company entered into the Amended Credit Agreement with Alliance that modified the Credit Agreement.
On February 1, 2023, we entered into the RDO Purchase Agreement providing for the sale and issuance by the Company to a single institutional investor of the Shares, at an offering price of $
| 15 |
| Table of Contents |
We have had to extend the payment terms for our suppliers beyond our standard terms. In some cases, we have signed an agreement stipulating scheduled payment dates and amounts to provide assurance to the supplier that the balance will be paid in full. The payment terms for these arrangements are between a few weeks and 12 months depending on various factors such as amount, age, and how critical they are to our on-going operations. As of March 30, 2024, approximately $
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses.
Our Board of Directors continues to review strategic transactions, which could include strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board's strategic review will result in any transaction, or any assurance as to its outcome or timing.
NOTE 13 – SUBSEQUENT EVENTS
In accordance with ASC Topic 855, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued, the Company evaluated subsequent events and transactions that occurred after March 30, 2024, the balance sheet date, up to the date that the financial statements were available to be issued. As a result, the following transactions were identified as subsequent events as of March 30, 2024.
On April 24, 2024, the Company entered into the Amended Credit Agreement with Alliance pursuant to which the parties amended and restated the Credit Agreement to, among other things, (i) modify the existing term loans in the aggregate original principal amount of $
| 16 |
| 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 30, 2023, 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 30, 2023.
Overview
ENGlobal Corporation 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. 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 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 our clients which include (i) Engineering, (ii) Automation, and (iii) Government Services.
We have made significant reductions in our overhead structure as part of the internal business reorganization that we started in the first quarter of 2023. These cost reductions were primarily in headcount across all segments to better align the number of administrative staff needed to support our current volume of work and re-organize our corporate structure. We continue to evaluate our headcount and will reduce it as necessary to better align our costs with the volume of the business.
Our Board of Directors continues to review strategic transactions, which could include strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board’s strategic review will result in any transaction, or any assurance as to its outcome or timing.
| 17 |
| Table of Contents |
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Critical Accounting Policies Update
Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2023 Annual Report on Form 10-K.
Goodwill - Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired and liabilities assumed. Goodwill is not amortized but rather is tested and assessed for impairment annually, or more frequently if certain events or changes in circumstance indicate the carrying amount may exceed fair value. The annual test for goodwill impairment is performed in the fourth quarter of each year.
The Company compares its fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment. Fair value was determined by applying discounted cash flows of the operating unit after allocation of certain corporate overhead. Estimating the cash flow of the operating unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. It is possible that changes in market conditions, economy, facts, circumstances, judgments and assumptions used in estimating the fair value could change, resulting in possible impairment of goodwill in the future.
Results of Operations
In the course of providing our time-and-material services, we routinely provide materials and equipment and may provide construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with small handling fees, which in general are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The material purchases and the use of subcontractor services can vary significantly from quarter to quarter; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percentage of revenue may not be indicative of the Company’s core business trends.
Segment operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment’s operations. Corporate SG&A expenses include finance, accounting, human resources, business development, legal and information technology which are unrelated to specific projects but which are incurred to support the Company’s activities.
| 18 |
| Table of Contents |
Comparison of the three months ended March 30, 2024 versus the three months ended April 1, 2023
The following table, for the three months ended March 30, 2024 versus the three months ended April 1, 2023, 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 March 30, 2024: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue |
| $ | 4,389 |
|
| $ | 2,139 |
|
| $ | — |
|
| $ | 6,528 |
|
|
| 100.0 | % |
Gross profit |
|
| 350 |
|
|
| 114 |
|
|
| — |
|
|
| 464 |
|
|
| 7.1 | % |
SG&A |
|
| 720 |
|
|
| 106 |
|
|
| 1,191 |
|
|
| 2,017 |
|
|
| 30.9 | % |
Operating income (loss) |
|
| (370 | ) |
|
| 8 |
|
|
| (1,191 | ) |
|
| (1,553 | ) |
|
| (23.8 | )% |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 222 |
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (43 | ) |
|
|
|
|
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (22 | ) |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (1,396 | ) |
|
| (21.4 | )% |
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (0.27 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
| Government Services |
|
| Corporate |
|
| Consolidated |
|
|
|
|
| ||||
For the three months ended April 1, 2023: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 11,835 |
|
| $ | 1,358 |
|
| $ | — |
|
| $ | 13,193 |
|
|
| 100.0 | % |
Gross loss |
|
| (1,602 | ) |
|
| (220 | ) |
|
| — |
|
|
| (1,822 | ) |
|
| (13.8 | )% |
SG&A |
|
| 2,746 |
|
|
| 136 |
|
|
| 1,534 |
|
|
| 4,416 |
|
|
| 33.5 | % |
Operating loss |
|
| (4,348 | ) |
|
| (356 | ) |
|
| (1,534 | ) |
|
| (6,238 | ) |
|
| (47.3 | )% |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 3 |
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (72 | ) |
|
|
|
|
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (22 | ) |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (6,329 | ) |
|
| (48.0 | )% |
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (0.17 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
| Government Services |
|
| Corporate |
|
| Consolidated |
|
|
|
|
| ||||
Year Over Year Increase (Decrease) in Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | (7,446 | ) |
| $ | 781 |
|
| $ | — |
|
| $ | (6,665 | ) |
|
| (50.5 | )% |
Gross profit (loss) |
|
| 1,952 |
|
|
| 334 |
|
|
| — |
|
|
| 2,286 |
|
|
| (125.5 | )% |
SG&A |
|
| (2,026 | ) |
|
| (30 | ) |
|
| (343 | ) |
|
| (2,399 | ) |
|
| (54.3 | )% |
Operating income (loss) |
|
| 3,978 |
|
|
| 364 |
|
|
| 343 |
|
|
| 4,685 |
|
|
| (75.1 | )% |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 219 |
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 29 |
|
|
|
|
|
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| — |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 4,933 |
|
|
| (77.9 | )% |
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (0.07 | ) |
|
|
|
|
| 19 |
| Table of Contents |
Revenue – Revenue decreased $6.7 million to $6.5 million from $13.2 million, or a decrease of 50.5%, for the three months ended March 30, 2024 as compared to the three months ended April 1, 2023. Our 2024 revenue for the Commercial segment decreased primarily due to our decision to stop self-performing fabrication, construction and field services. Our 2024 revenue for the Government Services segment increased primarily due to one new project that started in the second quarter of 2023.
Gross Profit (Loss) – Gross profit (loss) margin increased 20.9% to 7.1% from (13.8)% for the three months ended March 30, 2024 as compared to the three months ended April 1, 2023. The increase in gross profit margin is primarily attributable to the reduction of indirect costs of $1.4 million and the decision to stop self-performing fabrication, construction and field services.
Selling, General and Administrative Expense – SG&A expenses decreased $2.4 million for the three months ended March 30, 2024 as compared to the three months ended April 1, 2023 due primarily to $0.8 million of labor savings, $0.1 million of rent savings, and $1.1 million of bad debt expense recorded in 2023.
Interest Expense, net – Interest expense is incurred primarily in connection with the previous revolving credit facility, the current Credit Agreement (defined below) and our finance leases. Our interest expense decreased $29 thousand to $43 thousand for the three months ended March 30, 2024 from $72 thousand for the three months ended April 1, 2023.
Tax Expense – Tax expense is incurred primarily for our state franchise taxes. We recorded income tax expense of $22 thousand for each of the three months ended March 30, 2024 and April 1, 2023.
Net Income (Loss) – Net loss for the three months ended March 30, 2024 was $1.4 million, or a $4.9 million decrease from a net loss of $6.3 million for the three months ended April 1, 2023, primarily as a result of the decision to stop self- performing fabrication, construction and field services, and a decrease in selling, general, and administrative expenses of $2.4 million.
Liquidity and Capital Resources Overview
The Company defines liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, and borrowings under the Amended Credit Agreement. We had cash of approximately $1.1 million at March 30, 2024 and $0.6 million at December 30, 2023. Our working capital as of March 30, 2024 was ($2.1) million versus ($2.2) million as of December 30, 2023.
On June 15, 2023, we entered into a Credit Agreement (the “Credit Agreement”) with Alliance 2000, Ltd., a Texas limited partnership (“Alliance”), pursuant to which Alliance agreed, subject to certain terms and conditions, to extend up to two term loans in the aggregate principal amount of $1,250,000 to us. During the one-year term of the term loans, the Company made interest-only payments on a quarterly basis. The term loans carried an annual interest rate of 8.5% and had an origination fee of 0.5%, payable upon maturity. As of March 30, 2024, we were in compliance with all of the covenants under the Credit Agreement. As of March 30, 2024, we had outstanding borrowings of $1.2 million under the Credit Agreement, with additional borrowing capacity of $50,000 at the lender’s discretion. On April 24, 2024, the Company entered into the Amended Credit Agreement with Alliance pursuant to which the parties amended and restated the Credit Agreement to, among other things, (i) modify the existing term loans in the aggregate original principal amount of $1,200,000 to (a) extend the maturity date to July 2, 2025, and (b) reduce the applicable interest rate from 8.5% to 8.0% per annum, and (ii) provide a revolving credit facility of up to the lesser of (a) the Borrowing Base (as defined below) and (b) $1,000,000. The borrowing base (the “Borrowing Base”) will be an amount equal to up to 95% of Eligible Receivables (as defined in the Amended Credit Agreement) as determined by Alliance from time to time, less any reserves established by Alliance in its sole discretion from time to time.
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of 496,375 shares (the “Shares”) of the Company’s common stock, at an offering price of $6.80 per Share in a registered direct offering. Concurrently with the sale of the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 496,375 shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company used the net proceeds of the offering for working capital and general corporate purposes.
| 20 |
| Table of Contents |
We have had to extend the payment terms for our suppliers beyond our standard terms. In some cases, we have signed an agreement stipulating scheduled payment dates and amounts to provide assurance to the supplier that the balance will be paid in full. The payment terms for these arrangements are between a few weeks and 12 months depending on various factors such as amount, age, and how critical they are to our on-going operations. As of March 30, 2024, approximately $1.1 million of our trade payables have a payment schedule agreement.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses.
Our Board of Directors continues to review strategic transactions, which could include strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board's strategic review will result in any transaction, or any assurance as to its outcome or timing.
Cash Flows from Operating Activities
Operating activities provided $0.2 million of cash for the three months ended March 30, 2024 and used $3.1 million of cash for the three months ended April 1, 2023. The primary drivers of our cash provided by operations for the three months ended March 30, 2023 were a decrease in trade receivable of $2.4 million, an increase in accrued compensation and benefits of $0.3 million, a decrease in other current assets of $0.3 million, depreciation and amortization of $0.2 million, and share-based compensation of $0.1 million, partially offset by cash used in operations to fund our operating loss of $1.4 million, a decrease in trade payables of $0.9 million, an increase in contract assets net of contract liabilities of $0.5 million, and an increase in other current liabilities of $0.4 million.
The primary drivers of our cash used in operations for the three months ended April 1, 2023 were our operating loss of $6.3 million primarily as a result of an increase in gross loss, an increase in contract assets net of contract liabilities of $0.9 million, and a decrease of other current liabilities of $0.1 million, partially offset by cash provided from an increase in trade payables of $1.9 million, an increase in accrued compensation and benefits of $1.1 million, a decrease in other current assets of $0.9 million, a decrease of trade receivables of $0.2 million, and $0.1 million from other components of working capital.
Cash Flows from Investing Activities
Investing activities provided cash of $0.4 million for the three months ended March 30, 2024 from the sale of personal property and equipment. Investing activities used $0.1 million for the three months ended April 1, 2023 for the purchase of personal property and equipment.
| 21 |
| Table of Contents |
Cash Flows from Financing Activities
Financing activities used $0.1 million of cash for the three months ended March 30, 2024 primarily due to payment made on finance leases partially offset by the net proceeds received from the Credit Agreement. Financing activities provided $2.4 million of cash for the three months ended April 1, 2023 primarily due to proceeds provided by the issuance of common stock under the RDO Purchase Agreement, net of issuance costs, partially offset by cash used for payments for our finance leases and payments under the revolving credit facility due to the reduced credit limit effective in the first quarter of 2023.
Contractual Obligations
The Company is obligated to make future cash payments under the Amended Credit Agreement, operating leases, finance leases, and other liabilities. Amounts below are undiscounted and may differ from balances reflected on the financial statements. The table below sets forth certain information about our contractual obligations as of March 30, 2024 (in thousands):
|
| Payment Due by Fiscal Period |
| |||||||||||||||||
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 |
|
| 2028 and thereafter |
| |||||
Operating and finance leases |
| $ | 1,793 |
|
| $ | 1,550 |
|
| $ | 1,071 |
|
| $ | 1,015 |
|
| $ | 3,170 |
|
Amended Credit Agreement |
|
| — |
|
|
| 1,272 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other liabilities(1) |
|
| 296 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 2,089 |
|
| $ | 2,822 |
|
| $ | 1,071 |
|
| $ | 1,015 |
|
| $ | 3,170 |
|
(1) Other liabilities includes short-term notes payable.
| 22 |
| Table of Contents |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. The Company’s disclosure controls and procedures are also designed to ensure such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance that control objectives are attained.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 30, 2024, as required by Rule 13a-15 of the Exchange Act. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 30, 2024, the disclosure controls and procedures were not effective because of the material weaknesses in the Company’s internal control over financial reporting described below.
Material Weaknesses in Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation of the Company’s 2023 Annual Report, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 30, 2023, and identified the material weaknesses described below that continue to exist as of March 30, 2024.
Specifically, (i) the Company did not have sufficient resources in place with the appropriate training and knowledge of internal control over financial reporting in order to ensure the operating effectiveness; (ii) the Company did not perform an adequate continuous risk assessment over financial reporting to identify and analyze risks of financial misstatement due to errors, and implement necessary changes to internal controls impacted by changes in the business, organizational structure and reduction in personnel over the last twelve months; and (iii) the Company did not have an effective information and communication process that ensured variances and anomalies were communicated to the appropriate personnel on a timely basis in order to investigate and take corrective action to prevent the error.
Accordingly, the Company did not follow established appropriate control activities through policies and procedures to mitigate risk to the achievement of the Company’s financial reporting objectives, as follows:
| · | The Company’s management review controls did not operate effectively, including the completeness and accuracy of the data used in the operation of the control, to ensure change orders and contract values were properly entered into the accounting system; and |
| · | The Company’s reconciliation controls did not operate effectively to timely record on-line payments, other electronic bank transactions, and unprocessed credit card payments to suppliers. |
| 23 |
| Table of Contents |
These material weaknesses resulted in several material and immaterial misstatements that were corrected prior to the issuance of the consolidated financial statements.
The Company believes that, notwithstanding the material weaknesses mentioned above, the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q present fairly, in all material respects, the consolidated balance sheets, statements of operations, stockholders’ equity (deficit), and cash flows of the Company and its subsidiaries in conformity with generally accepted accounting principles in the United States as of the dates and for the periods stated in this Quarterly Report on Form 10-Q.
Remediation Plan and Status
The Company has implemented the following plan of action and will continue to evaluate and adjust remediation actions as needed to ensure the elements of the remediation plan remain appropriate and are sustainable. The elements of the remediation plan include:
| · | The Company did not have effective controls over the accuracy of change orders to ensure they were properly entered into the accounting system and the associated contract values were accurately reported in the accounting system as of December 30, 2023. As of March 30, 2024, we have taken the following actions to remediate the material weakness. |
| o | Communicated and trained those in charge of updating contract values in the proper procedure for entering change orders in the accounting system for lump sum contracts. |
| o | Communicated to those involved in the monthly forecasting process the importance of communicating to the accounting department any deviation from the expected contract value. |
| o | Educated the personnel responsible for setting up projects and entering changes to contract values in the accounting system on how the data they input is used to calculate and recognize revenue on lump sum projects. |
| o | Changed the system procedure for calculating revenue from task level to project level on lump sum contracts. |
| o | Developed a monthly report to identify contract value changes and assign the responsibility of confirming changes to contract values are valid change orders to another person that is not responsible for entering change orders. |
| · | The Company did not follow established control procedures to (i) timely record on-line payments and other electronic bank transactions, and (ii) reconcile unprocessed credit card payments to suppliers as of December 30, 2023. As of March 30, 2024, we have taken the following actions to remediate the material weakness. |
| o | Discontinued the supplier credit card program. |
| o | Changed when the Company records on-line payments from a month-end process to an interim process, i.e., as they are made. |
| o | Re-assigned the responsibility of confirming that all on-line payments have been recorded in the accounts payable subledger at month-end to the accounts payable clerk. |
| o | Re-assigned the preparer and approver roles for the bank reconciliations to provide more oversight by the Chief Financial Officer. |
| o | Established a more structured review process to ensure the timely recording of all reconciling items. |
The Company believes that the actions listed above have provided the appropriate remediation of the material weaknesses identified as of December 30, 2023. Due to the nature of the remediation process and the need for sufficient time after implementation to evaluate and test the design and effectiveness of the controls, no assurance can be made as to when the remediation actions have been operating effectively for a sufficient period of time. The material weakness will be considered fully remediated when the Company concludes that the controls have been operating for a sufficient amount of time and the design and effectiveness of the controls are validated by management.
Changes in Internal Control over Financial Reporting
Except as described above in “Remediation Plan and Status”, there have been no changes in the Company’s internal control over financial reporting during the quarter ended March 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 24 |
| Table of Contents |
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, ENGlobal or one or more of its subsidiaries may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Except as described in Note 8—Commitments and Contingencies to our unaudited consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, as of the date of this Quarterly Report on Form 10-Q, no legal proceedings are pending against us that we believe individually or collectively could have a materially adverse effect upon our financial condition, results of operations, or cash flows.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 30, 2023, which outline factors that could materially affect our business, financial condition or future results, and the additional risk factors below. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Quarterly Report on Form 10-Q could have a material adverse effect on our business, financial condition and results of operations and that upon the occurrence of any of these events, the trading price of our common stock could decline. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of this Quarterly Report on Form 10-Q.
Substantial doubt about our ability to continue as a going concern exists. Our unaudited financial statements for the period ended March 30, 2024 were prepared on the assumption that we would continue as a going concern. Those financial statements expressed a substantial doubt about our ability to continue as a going concern. Those financial statements did not include any adjustments that might result from the outcome of this uncertainty. Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Our ability to continue as a going concern is also subject to, among other factors, our ability to collect receivables from our clients when due and to invoice our customers in a timely manner. 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. If these events or milestones are delayed, it will negatively impact the timing of our cash receipts, which affects our ability to pay our employees and suppliers. If we are not able collect our receivables when due from our clients, our cash flow will be negatively impacted which could lead to us not being able to meet our current obligations.
Our limited borrowing capacity under our Amended Credit Agreement, which matures on July 2, 2025, may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition. As of April 24, 2024, we have outstanding borrowings of $1.2 million under the Amended Credit Agreement, which matures on July 2, 2025. The terms of the Amended Credit Agreement provide for a revolving credit facility of up to the lesser of (a) the borrowing base and (b) $1,000,000, with the borrowing base being in an amount equal to up to 95% of Eligible Receivables (as defined in the Amended Credit Agreement) as determined by the lender from time to time, less any reserves established by the lender in its sole discretion from time to time. The limited borrowing capacity under the Amended Credit Agreement may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition.
| 25 |
| Table of Contents |
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. As of March 30, 2024, our backlog was $10.8 million. We expect a majority of this backlog to be completed in 2024. We cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and profits that we actually earn. The potential for cancellations and adjustments to our backlog are exacerbated by economic conditions, particularly in our chosen area of concentration, the energy industry. The markets for oil and natural gas have been volatile which can exacerbate the potential for cancellations and adjustments to our backlog from our clients in the oil and natural gas industry.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth certain information with respect to repurchases of our common stock for the first quarter of 2024:
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |
|
| Maximum Number (or Approximate Dollar Value) of Shares That May Yet be Purchased Under Plans or Programs (1) |
| ||||
December 31, 2023 to January 27, 2024 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
January 28, 2024 to March 2, 2024 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
March 3, 2024 to March 30, 2024 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
Total |
|
| — |
|
|
| — |
|
|
| 161,308 |
|
| $ | 425,589 |
|
(1) | On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0 million of the Company’s common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions. The Company is not obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase program, which may be suspended, discontinued or reinstated at any time. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. As of March 30, 2024, the Company had purchased and retired 161,308 shares at an aggregate cost of $1.6 million under this repurchase program. Management does not intend to repurchase any shares in the near future. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
During the fiscal quarter ended March 30, 2024, no director or officer (as defined in Rule 16a-1(f) of the Securities Exchange Act) of the Company adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 105-1 trading arrangements as each term is defined in Item 408(a) of Regulation S-K.
| 26 |
| Table of Contents |
ITEM 6. EXHIBITS
|
|
|
| Incorporated by Reference to: | ||||||
Exhibit No. |
| Description |
| Form or Schedule |
| Exhibit No. |
| Filing Date with SEC |
| SEC File Number |
|
|
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|
|
|
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|
|
| Restated Articles of Incorporation of Registrant dated January 29, 2021 |
| 8-K |
| 3.1 |
| 1/29/2021 |
| 001-14217 | |
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| Second Amended and Restated Bylaws of Registrant dated April 14, 2016 |
| 8-K |
| 3.1 |
| 4/15/2016 |
| 001-14217 | |
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|
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|
| Amendment to Article Fourth of ENGlobal’s Restated Articles of Incorporation, filed June 29, 2023 |
| 8-K |
| 3.1 |
| 7/2/23 |
| 001-14217 | |
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| Certificate of Amendment to the Restated Articles of Incorporation of ENGlobal Corporation |
| 8-K |
| 3.1 |
| 12/1/2023 |
| 001-14217 | |
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| S-3 |
| 4.1 |
| 10/31/2005 |
| 333-29336 | ||
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| 8-K |
| 4.1 |
| 2/3/2023 |
| 001-14217 | ||
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| 8-K |
| 10.1 |
| 4/25/24 |
| 001-14217 | ||
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*101.lab |
| Inline XBRL taxonomy extension label linkbase document |
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*101.pre |
| Inline XBRL taxonomy extension presentation linkbase document |
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*104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* Filed herewith
** Furnished herewith
| 27 |
| Table of Contents |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 9, 2024 |
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| ENGlobal Corporation |
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| By: | /s/ Darren W. Spriggs |
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| Darren W. Spriggs |
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| Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) |
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| 28 |