UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 29, 2019

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

Commission File No. 001-14217

ENGlobal Corporation

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of

incorporation or organization)

88-0322261

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

654 N. Sam Houston Parkway E., Suite 400, Houston, TX	77060-5914
(Address of principal executive offices)	(Zip code)

(281) 878-1000

(Registrant’s telephone number, including area code)

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 [X] 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 [X] 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	[X]	Smaller Reporting Company	[X]
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 [X]

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 the number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on August 8, 2019.

$0.001 Par Value Common Stock 27,404,469 shares

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 29, 2019

TABLE OF CONTENTS

		Page Number
Part I.	Financial Information	3
Item 1.	Financial Statements	3
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 29, 2019 and June 30, 2018	3
	Unaudited Condensed Consolidated Balance Sheets at June 29 2019 and December 29, 2018	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 29, 2019 and June 30, 2018	5
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 29, 2019 and June 30, 2018	6
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
Part II.	Other Information	21
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
	Signatures	24

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENGlobal Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share data)

	For the Three Months Ended						For the Six Months Ended
	June 29, 2019			June 30, 2018			June 29, 2019			June 30, 2018
Operating revenues	$	13,621		$	13,872		$	25,784		$	27,059
Operating costs		11,679			11,619			22,504			23,394
Gross profit		1,942			2,253			3,280			3,665
Selling, general and administrative expenses		2,450			2,869			4,755			5,451
Operating loss		(508	)		(616	)		(1,475	)		(1,786	)
Other income (expense):
Other income (expense), net		26			(373	)		41			(378	)
Interest expense, net		(4	)		(5	)		(6	)		(14	)
Loss from operations before income taxes		(486	)		(994	)		(1,440	)		(2,178	)
Provision (benefit) for federal and state income taxes		31			(2	)		51			14
Net loss		(517	)		(992	)		(1,491	)		(2,192	)
Basic and diluted loss per common share:	$	(0.02	)	$	(0.04	)	$	(0.05	)	$	(0.08	)
Basic and diluted weighted average shares used in computing loss per share:		27,408			27,510			27,420			27,512

See accompanying notes to unaudited interim condensed consolidated financial statements.

3

ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except share amounts)

	June 29, 2019			December 29, 2018
ASSETS
Current Assets:
Cash and cash equivalents	$	9,896		$	6,060
Trade receivables, net of allowances of $202 and $202		8,189			10,211
Prepaid expenses and other current assets		670			1,096
Contract assets		2,190			3,175
Total Current Assets		20,945			20,542
Property and equipment, net		604			677
Goodwill		720			720
Other assets
Right of use asset		2,619			—
Deposits and other assets		296			367
Total Other Assets		2,915			367
Total Assets	$	25,184		$	22,306
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	3,156		$	3,172
Accrued compensation and benefits		2,493			2,301
Contract liabilities		2,650			604
Other current liabilities		1,196			740
Total Current Liabilities		9,495			6,817
Long Term Leases		1,718			—
Total Liabilities		11,213			6,817
Commitments and Contingencies (Note 7)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,404,469 and 27,487,594 shares issued and outstanding at June 29, 2019 and December 29, 2018, respectively		27			27
Additional paid-in capital		36,906			36,934
Accumulated deficit		(22,962	)		(21,472	)
Total Stockholders’ Equity		13,971			15,489
Total Liabilities and Stockholders’ Equity	$	25,184		$	22,306

See accompanying notes to unaudited interim condensed consolidated financial statements.

4

ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

	For the Six Months Ended
	June 29, 2019			June 30, 2018
Cash Flows from Operating Activities:
Net loss	$	(1,491	)	$	(2,192	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		177			289
Share-based compensation expense		32			122
Changes in current assets and liabilities:
Trade accounts receivable		2,022			(845	)
Contract assets		985			(1,720	)
Prepaid expenses and Other current assets		492			396
Accounts payable		(16	)		869
Accrued compensation and benefits		192			68
Contract liabilities		2,046			(417	)
Income taxes payable		(430	)		(60	)
Other current liabilities, net		(44	)		(589	)
Net cash provided by (used in) operating activities	$	3,965		$	(4,079	)
Cash Flows from Investing Activities:
Proceeds from notes receivable		5			14
Property and equipment acquired		(72	)		(65	)
Net cash used in investing activities	$	(67	)	$	(51	)
Cash Flows from Financing Activities:
Purchase of treasury stock		(61	)		—
Payments on capitalized leases		(1	)		(74	)
Net cash used in financing activities	$	(62	)	$	(74	)
Net change in cash, cash equivalents and restricted cash		3,836			(4,204	)
Cash, cash equivalents and restricted cash, at beginning of period		6,060			9,648
Cash, cash equivalents and restricted cash, at end of period	$	9,896		$	5,444
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	9		$	14
Right of use assets	$	2,619		$	0

See accompanying notes to unaudited interim condensed consolidated financial statements.

5

ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(amounts in thousands)

	For the Three Months Ended
	June 29, 2019			June 30, 2018
Common Stock
Balance at beginning of period	$	27		$	27
Treasury stock retired		—			—
Balance at end of period		27			27
Additional Paid-in Capital
Balance at beginning of period		36,890			36,919
Share-based compensation - employee		16			46
Stock repurchased
Treasury stock retired
Balance at end of period		36,906			36,965
Accumulated Earnings (Deficit)
Balance at beginning of period		(22,445	)		(17,001	)
Net loss		(517	)		(992	)
Balance at end of period		(22,962	)		(17,993	)
Total Stockholders’ Equity	$	13,971		$	18,999

	For the Six Months Ended
	June 29, 2019			June 30, 2018
Common Stock
Balance at beginning of period	$	27		$	27
Treasury stock retired		—			—
Balance at end of period		27			27
Additional Paid-in Capital
Balance at beginning of period		36,934			36,843
Share-based compensation - employee		32			122
Stock repurchased
Treasury stock retired		(60	)
Balance at end of period		36,906			36,965
Accumulated Earnings (Deficit)
Balance at beginning of period		(21,471	)		(15,801	)
Net loss		(1,491	)		(2,192	)
Balance at end of period		(22,962	)		(17,993	)
Total Stockholders’ Equity	$	13,971		$	18,999

See accompanying notes to unaudited interim condensed consolidated financial statements.

6

ENGLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed financial statements do not include all of the information or note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 29, 2018, included in the Company’s 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The condensed financial statements included herein are unaudited for the three and six month periods ended June 29, 2019 and June 30, 2018, and in the case of the condensed balance sheet as of December 29, 2018 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.

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

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

Each of our quarters is comprised of 13 weeks.

NOTE 2 – ACCOUNTING STANDARDS

In February 2016, the Financial Statements Accounting Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), that amends the accounting standards for leases. This new standard retains a distinction between finance leases and operating leases but the primary change is the recognition of lease assets and lease liabilities by lessees for leases classified as operating leases on the lessee’s balance sheet and certain aspects of lease accounting have been simplified. This new standard requires additional qualitative and quantitative disclosures along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This pronouncement is effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an additional transition method under the modified retrospective approach for the adoption of Topic 842. The two permitted transition methods are now: (1) to apply the new lease requirements at the beginning of the earliest period presented, and (2) to apply the new lease requirements at the effective date. Under both transition methods there is a cumulative effect adjustment. We adopted the standard effective December 30, 2018 using the modified retrospective transition approach and elected not to adjust prior comparative periods. The Company elected the practical expedient to not reassess prior conclusions related to contracts containing leases, lease classification, lease term and initial direct costs. Upon adoption, the Company recognized right-of-use assets and lease liabilities of $1.3 million at December 30, 2018.

7

NOTE 3 – CRITICAL ACCOUNTING POLICIES UPDATE

Our critical accounting policies are detailed in “Note 2 – Accounting Policies and New Accounting Pronouncements” within Item 8 of our Annual Report on Form 10-K for the year ended December 29, 2018 . Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below:

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 of revenue recognition to measure progress for our contracts because it best depicts the transfer of control to the customer which occurs as we consume the costs on the contracts. Therefore, revenues and estimated profits are recorded proportionally as 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 require 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.

8

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 is recorded. 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. See Note 5 – Segment Information for disaggregated revenue information.

Adoption of ASC Topic 606 did not have a material impact on our revenue or associated costs.

Incremental Costs – Our incremental costs of obtaining a contract, which consists of sales commission and proposal costs, are reviewed and those costs that are immaterial to the financial statements are expensed as they occur. Those costs that are deemed to be material to the contract are deferred and amortized over the period of contract performance. We classify incremental costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of incremental costs are included in prepaid expenses and other current assets and other assets, net, respectively in our consolidated balance sheet. We had no amortization expense related to incremental costs in the second quarter of 2019 or 2018.

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 and deferred revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in our consolidated balance sheets.

9

Costs, estimated earnings and billings on uncompleted contracts consisted of the following at June 29, 2019 and December 29, 2018:

	June 29, 2019			December 29, 2018
	(dollars in thousands)
Costs incurred on uncompleted contracts	$	18,912		$	34,800
Estimated earnings on uncompleted contracts		4,544			6,921
Earned revenues		23,456			41,721
Less: billings to date		23,916			39,150
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts	$	(460	)	$	2,571
Contract assets	$	2,190		$	3,175
Contract liabilities		(2,650	)		(604	)
Net contract assets (liabilities)	$	(460	)	$	2,571

NOTE 5– SEGMENT INFORMATION

Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. The operating performance is regularly reviewed with these two operational leaders in charge of its engineering offices and its automation offices, the chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.

The Engineering, Procurement and Construction Management (“EPCM”) segment provides services relating to the development, management and execution of projects requiring professional engineering and related project services primarily to the energy industry throughout the United States. The Automation segment provides services related to the design, integration and implementation of advanced automation, information technology, process distributed control systems, analyzer systems, and electrical projects primarily to the upstream and downstream sectors throughout the United States. The Automation segment includes the government services group, which provides engineering, design, installation and operation and maintenance of various government, public sector and international facilities and the fabrication operation.

Revenues, operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and includes costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments.

Segment information for the three months ended June 29, 2019 and June 30, 2018 is as follows (dollars in thousands):

For the three months ended June 29, 2019:	EPCM			Automation			Corporate			Consolidated
Revenue	$	5,659		$	7,962		$	—		$	13,621
Gross profit		828			1,114			—			1,942
Gross Profit Margin		14.6	%		14.0	%					14.3	%
SG&A		589			390			1,471			2,450
Operating income (loss)		239			724			(1,471	)		(508	)
Other income, net											26
Interest expense, net											(4	)
Tax expense											(31	)
Net loss										$	(517	)

10

For the three months ended June 30, 2018:	EPCM			Automation			Corporate			Consolidated
Revenue	$	6,652		$	7,220		$	—		$	13,872
Gross profit		1,330			923			—			2,253
Gross Profit Margin		20.0	%		12.8	%					16.2	%
SG&A		531			663			1,675			2,869
Operating income (loss)		799			260			(1,675	)		(616	)
Other expense, net											(373	)
Interest expense, net											(5	)
Tax benefit											2
Net loss										$	(992	)

Segment information for the six months ended June 29, 2019 and June 30, 2018 is as follows (dollars in thousands):

For the six months ended June 29, 2019:	EPCM			Automation			Corporate			Consolidated
Revenue	$	11,292		$	14,492		$	—		$	25,784
Gross profit		1,499			1,781			—			3,280
Gross Profit Margin		13.3	%		12.3	%					12.7	%
SG&A		1,176			819			2,760			4,755
Operating income (loss)		323			962			(2,760	)		(1,475	)
Other expense											41
Interest expense, net											(6	)
Tax expense											(51	)
Net loss										$	(1,491	)

For the six months ended June 30, 2018:	EPCM			Automation			Corporate			Consolidated
Revenue	$	11,747		$	15,312		$	—		$	27,059
Gross profit		1,746			1,919			—			3,665
Gross Profit Margin		14.9	%		12.5	%					13.5	%
SG&A		957			1,367			3,127			5,451
Operating income (loss)		789			552			(3,127	)		(1,786	)
Other expense											(378	)
Interest expense, net											(14	)
Tax expense											(14	)
Net loss										$	(2,192	)

Total Assets by Segment	As of June 29, 2019		As of December 29, 2018
	(dollars in thousands)
EPCM	$	6,597	$	4,792
Automation		8,673		10,550
Corporate		9,914		6,964
Consolidated	$	25,184	$	22,306

11

NOTE 6 – 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 2014 and Texas margins tax returns prior to 2014 are closed. Generally, the applicable statues of limitations are three to four years from their filings.

The Company recorded income tax expense of $31 thousand and $51 thousand for the three and six months ended June 29, 2019, respectively, as compared to income tax benefit of $2 thousand and income tax expense of $14 thousand for the three and six months ended June 30, 2018, respectively.

The effective income tax rate for the three and six months ended June 29, 2019 was (2.06)% and (0.20)%, respectively, as compared to 0.0% and (0.05)% for the three and six months ended June 30, 2018. The effective tax rate differed from the federal statutory rate of 21% primarily due to the effect of the valuation allowances related to the unrealized deferred tax asset generated by the current year benefit.

NOTE 7 – 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), 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 8 – LEASES

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

12

The Company’s finance leases are immaterial to its consolidated financial statements.

The components of lease expense were as follows:

	Six months ended June 29, 2019
Operating leases:
Operating costs	$	418
Selling, general and administrative expenses		922
		1,340
Short-term leases:
Operating costs		—
Selling, general and administrative expenses		255
		255
Total lease expense	$	1,595

Supplemental balance sheet information related to leases was as follows:

	Financial Statement Classification	June 29, 2019
Operating ROU assets	Right of Use asset	$	2,619
Operating lease liabilities:
Current operating lease liabilities	Other current liabilities	$	933
Noncurrent operating lease liabilities	Long Term Leases		1,718
Total operating lease liabilities		$	2,651

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

	At June 29, 2019
Weighted average remaining lease term of operating leases		2.7 years
Weighted average discount rate of operating leases		4.0	%

Maturities of operating lease liabilities as of June 29, 2019 are as follows:

Year ending:	Amount
2019 (remaining months)	$	504
2020		1,012
2021		958
2022		288
Total lease payments	$	2,762
Less: imputed interest		(111	)
Total lease liabilities	$	2,651

The aggregate amount of future minimum annual rental payments applicable to non-cancelable leases as of December 29, 2018 were as follows:

Year ending:	Minimal Rental Payments
2019	$	445
2020		445
2021		387
2022		64
Total	$	1,341

13

ENGLOBAL CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS

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, 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. 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 in this Quarterly Report on Form 10-Q, the specific risk factors identified in the Company’s Annual Report on Form 10-K for the year ended December 29, 2018, and those described from time to time in our future reports filed with the Securities and Exchange Commission.

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 29, 2018.

Overview

ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”), incorporated in the State of Nevada in June 1994, is a leading provider of engineered modular solutions to the energy industry. We deliver these solutions to our clients by combining our vertically integrated engineering and professional project execution services with our automation and systems integration expertise and mechanical fabrication capabilities. We believe our vertically integrated strategy allows us to differentiate our company from most of our competitors as a full service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their project 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 are making strides implementing the multi-year strategic initiative we began in the fall of 2017. We have identified modular project execution offerings as the opportunity to which our capabilities are best applied, focused our business development team on communicating these offerings to specific clients and realigned our internal reporting structure to better facilitate complete modular project execution. We have identified seven strategic market initiatives where we have a history of delivering project solutions and can provide complete project execution that includes engineering, design, fabrication and integration of automated control systems as a complete packaged solution for our clients, preferably in a modular form. This “design it once – build it many times” concept has many merits including a single vendor interface, better control of costs, better control of schedule and lower safety risk. These seven targeted market initiatives include: (1) natural gas and crude oil production systems; (2) synthesis gas processing; (3) control systems implementation; (4) continuous emission monitoring systems; (5) pipeline pump, compression, metering, loading and blending systems; (6) adding customer relationships in specific markets for automation; and (7) expanding government services beyond our heritage contracts. We have identified specific individuals within the Company to lead the efforts for each market initiative - “a champion” - while coordinating with the other sales leaders.

14

We continue to be mindful of our overhead structure. While we have made investments in key individuals, product developments and new facilities and equipment, which have all negatively impacted our SG&A, we have been able to offset those increases with decreases in other areas and, overall, our SG&A costs have continued to decrease. We recognize that the level of our SG&A is greater than it could be for a company our size; however, we have maintained our overhead structure in anticipation of higher revenue levels.

On April 18, 2018, we announced that our Board of Directors had initiated a review of strategic alternatives, which could include strategic 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.

Critical Accounting Policies Update

A summary of our critical accounting policies is described under the caption “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2018 Annual Report on Form 10-K. Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2018 Annual Report on Form 10-K.

Results of Operations

In the course of providing our time-and-material services, we routinely provide materials and equipment and may provide construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with 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 project to project; 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.

15

Comparison of the three months ended June 29, 2019 versus the three months ended June 30, 2018

The following table, for the three months ended June 29, 2019 versus the three months ended June 30, 2018, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

Operations Data	EPCM			Automation			Corporate			Consolidated
Three months ended June 29, 2019:
Revenue	$	5,659		$	7,962		$	—		$	13,621		100	%
Gross profit		828			1,114			—			1,942
Gross Profit Margin		14.6	%		14.0	%					14.3	%
SG&A		589			390			1,471			2,450		18.0	%
Operating income (loss)		239			724			(1,471	)		(508	)	(3.7	)%
Other income, net											26
Interest expense, net											(4	)
Tax expense											(31	)
Net loss										$	(517	)	(3.8	)%
Basic and Diluted loss per share										$	(0.02	)

Three months ended June 30, 2018:
Revenue	$	6,652		$	7,220		$	—		$	13,872		$	100	%
Gross profit		1,330			923			—			2,253
Gross Profit Margin		20.0	%		12.8	%					16.2	%
SG&A		531			663			1,675			2,869			20.7	%
Operating income (loss)		799			260			(1,675	)		(616	)		(4.4	)%
Other expense, net											(373	)
Interest expense, net											(5	)
Tax benefit											2
Net loss										$	(992	)		(7.2	)%
Basic and Diluted loss per share											(0.04	)

Increase (Decrease) in Operating Results:
Revenue	$	(993	)	$	742		$	—		$	(251	)	(1.8	)%
Gross profit (loss)		(502	)		191			—			(311	)
SG&A		58			(272	)		(204	)		(418	)	(14.6	)%
Operating income		(560	)		463			204			107		(17.4	)%
Other income, net											399
Interest expense, net											1
Tax expense											(33	)
Net loss											474		(47.8	)%
Basic and Diluted loss per share											0.02

16

The following table, for the six months ended June 29, 2019 versus the six months ended June 30, 2018, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

Operations Data	EPCM			Automation			Corporate			Consolidated
Six months ended June 29, 2019:
Revenue	$	11,292			14,492			—			25,784		100	%
Gross profit		1,499			1,781			—			3,280
Gross Profit Margin		13.3	%		12.3	%					12.7	%
SG&A		1,176			819			2,760			4,755		18.4	%
Operating income (loss)		323			962			(2,760	)		(1,475	)	(5.7	)%
Other income, net											41
Interest expense, net											(6	)
Tax expense											(51	)
Net loss											(1,491	)	(5.8	)%
Basic and Diluted loss per share											(0.05	)

Six months ended June 30, 2018:
Revenue	$	11,747		15,312		—		27,059		100	%
Gross profit		1,746		1,919		—		3,665
Gross Profit Margin		14.9	%	12.5	%			13.5	%
SG&A		957		1,367		3,127		5,451		20.1	%
Operating income (loss)		789		552		(3,127	)	(1,786	)	(6.6	)%
Other expense, net								(378)
Interest expense, net								(14	)
Tax expense								(14	)
Net loss								(2,192	)	(8.1	)%
Basic and Diluted loss per share								(0.08	)

Increase (Decrease) in Operating Results:
Revenue	$	(455)	(820	)	—		(1,275	)	(4.7	)%
Gross profit (loss)		(247)	(138	)	—		(385	)
SG&A		219	(548	)	(367	)	(696	)	(12.8	)%
Operating income (loss)		(466)	410		367		311		(17.4)	%
Other income, net							419
Interest expense, net							8
Tax benefit							(37	)
Net loss							701		(54.9	)%
Basic and Diluted loss per share							0.03

17

Revenue – Revenue decreased $0.3 million to $13.6 million from $13.9 million, or a decrease of 1.8%, for the three months ended June 29, 2019, as compared to the three months ended June 30, 2018. Revenue from the EPCM segment decreased $1.0 million to $5.6 million from $6.6 million, or a decrease of 14.9%, for the three months ended June 29, 2019, as compared to the three months ended June 30, 2018, primarily due to the completion of several large projects in 2018. Revenue from the Automation segment increased $0.7 million to $7.9 million from $7.2 million, or an increase of 10.3%, for the three months ended June 29, 2019, as compared to the three months ended June 30, 2018. This increase is primarily due to a large project that was awarded during in the second half of 2018.

Revenue decreased $1.3 million to $25.8 million from $27.1 million, or a decrease of 4.7%, for the six months ended June 29, 2019, as compared to the six months ended June 30, 2018. Revenue from the EPCM segment decreased $0.5 million to $11.3 million from $11.8 million, or a decrease of 3.9%, for the six months ended June 29, 2019, as compared to the six months ended June 30, 2018. The decrease was primarily due to the completion of several large projects in 2018. Revenue from the Automation segment decreased $0.8 million to $14.5 million from $15.3 million, or a decrease of 5.4%, for the six months ended June 29, 2019, as compared to the six months ended June 30, 2018. The decrease was primarily due to the completion of several large projects in 2018, partially offset by increased petrochemical, refining, and government work, which included a large project awarded in the second half of 2018.

Gross Profit – Gross profit margin decreased 1.9% to 14.3% from 16.2% for the three months ended June 29, 2019, as compared to the three months ended June 30, 2018. Gross profit for the EPCM segment decreased $0.5 million to $0.8 million from $1.3 million and its gross profit margin decreased 5.4% to 14.6% from 20.0% for the three months ended June 29, 2019, as compared to the three months ended June 30, 2018. The decrease in gross profit margin is primarily attributable to the cost associated with staffing for recent awards that are expected to begin in the third quarter. Gross profit margin for the Automation segment increased 1.2% to 14.0% from 12.8% for the three months ended June 29, 2019, as compared to the three months ended June 30, 2018, primarily due to increased utilization of personnel.

Gross profit margin decreased to 12.7% from 13.5% for the six months ended June 29, 2019, as compared to the six months ended June 30, 2018. Gross profit for the EPCM segment decreased $0.2 million to $1.5 million from $1.7 million and its gross profit margin decreased to 13.3% from 14.9% for the six months ended June 29, 2019, as compared to the six months ended June 30, 2018. The decrease in gross profit was primarily due to the completion of several large projects in 2018. The decrease in gross profit margin was primarily attributable to the cost associated with staffing for recent awards that are expected to begin in the third quarter. Gross profit for the Automation segment decreased $0.1 million to $1.8 million from $1.9 million and its gross profit margin declined to 12.3% from 12.5% for the six months ended June 29, 2019, as compared to the six months ended June 30, 2018. The decrease in gross profit was primarily due to the completion of several large projects in 2018. Gross profit margin declined due to a decrease in personnel utilization.

Selling, General and Administrative Expense – SG&A expenses declined by $0.4 million for the three months ended June 29, 2019 as compared to three months ended June 30, 2018. Professional services declined by $0.1 million, bad debt declined by $0.1 million, and depreciation and amortization decreased by $0.1 million for the three months ended June 29, 2019 as compared to the three months ended June 30, 2018.

SG&A expenses declined by $0.7 million for the six months ended June 29, 2019 as compared to the six months ended June 30, 2018. Office salaries declined by $0.1 million, depreciation and amortization declined by $0.1 million, and our stock compensation costs decreased by $0.1 million for the six months ended June 29, 2019 as compared to the six months ended June 30, 2018, which included approximately $0.3 million in one-time costs.

Other Expense – Other expense decreased $0.4 million for the three months and six months ended June 29, 2019 primarily due to a $0.3 million legal settlement paid in 2018.

Interest Expense, net – Interest expense is incurred primarily in connection with our insurance financing and our capital leases. Our interest expense decreased from $5 thousand for the three months ended June 30, 2018  to approximately $4 thousand for the three months ended June 29, 2019. 

Interest expense is incurred primarily in connection with our insurance financing and our capital leases. Our interest expense decreased from $14 thousand for the six months ended June 30 , 2018 to approximately $6 thousand for the six months ended June 29  2019.

Tax Expense – We recorded income tax expense of $31 thousand for the three months ended June 29, 2019 as compared to income tax benefit of $2 thousand for the three months ended June 30, 2018.

We recorded income tax expense of $51 thousand for the six months ended June 29, 2019 as compared to income tax expense of $14 thousand for the six months ended June 30, 2018.

Net Loss – Net loss for the three months ended June 29, 2019 was $0.5 million, or a $0.5 million decrease from a net loss of $1 million for the three months ended June 30, 2018, primarily as a result of lower selling, general and administrative expense.

Net loss for the six months ended June 29, 2019 was $1.5 million, or a $0.7 million decrease from a net loss of $2.2 million for the six months ended June 30, 2018, primarily as a result of lower selling, general and administrative expense.

18

Liquidity and Capital Resources

Overview

The Company defines liquidity as its ability to pay its liabilities as they become due, fund business operations and meet monetary contractual obligations. As we are currently operating without a credit facility, our primary sources of liquidity are cash on hand and internally generated funds. We had cash of approximately $9.9 million at June 29, 2019 compared to $6.1 million as of December 29, 2018. Our working capital as of June 29, 2019 was $11.5 million versus $13.7 million as of December 29, 2018. This decrease is primarily attributable to the adoption of ASC 842, “Leases,” right-of-use (“ROU”) assets and lease liabilities, which decreased our working capital by $0.9 million. Additionally, challenging industry conditions and a competitive environment continue to impact our financial results. We believe our cash on hand, internally generated funds and other working capital will be sufficient to fund our current operations and expected growth for the next twelve months.

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

On April 18, 2018, we announced that our Board of Directors had initiated a review of strategic alternatives, which could include strategic 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 generated $4.0 million of cash for the six months ended June 29, 2019 and used $4.1 million of cash for the six months ended June 30, 2018. The primary drivers of our cash provided by operations for the six months ended June 29, 2019 were decreases of contract assets net of contract liabilities of $2.0 million, and a decrease in trade receivables of $2.0 million, offset by our operating loss before non-cash expenses of $1.5 million, and cash provided by an increase in other components of working capital of $1.5 million.

The primary drivers of our cash used in operations for the six months ended June 30, 2018 were our operating loss before non-cash expenses of $1.8 million, an increase in trade receivables of $0.8 million and increases of contract assets net of contract liabilities of $2.1 million partially offset by other components of working capital of $0.6 million.

Cash Flows from Investing Activities

Investing activities used cash of $67 thousand for the six months ended June 29, 2019 as expenditures for property and equipment of $72 thousand were partially offset by proceeds from notes receivable of $5 thousand.

Investing activities used cash of $51 thousand for the six months ended June 30, 2018 primarily due to expenditures for property and equipment of $65 thousand partially offset by proceeds from notes receivable of $14 thousand.

Cash Flows from Financing Activities

The use of cash for financing activities during the six months ended June 29, 2019 of $61 thousand was primarily for the purchase of treasury stock which used $60 thousand. Financing activities for the six months ended June 30, 2018 used $0.1 million for the payment of our capital leases obligations.

19

Changes in Accounting

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), that amends the accounting standards for leases. This new standard retains a distinction between finance leases and operating leases but the primary change is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the lessee’s balance sheet and certain aspects of lease accounting have been simplified. This new standard requires additional qualitative and quantitative disclosures along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This pronouncement is effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which allows for an additional transition method under the modified retrospective approach for the adoption of Topic 842. The two permitted transition methods are now: (1) to apply the new lease requirements at the beginning of the earliest period presented, and (2) to apply the new lease requirements at the effective date. Under both transition methods there is a cumulative effect adjustment. We adopted the standard effective December 30, 2018 using the modified retrospective transition approach and elected not to adjust prior comparative periods. Upon adoption, the Company recognized right-of-use assets and lease liabilities of $1.3 million at December 30, 2018. See Note 8.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, capital leases payable and debt obligations. The book value of cash and cash equivalents, accounts and notes receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments.

We do not utilize financial instruments for trading purposes and we do not hold any derivative financial instruments that could expose us to significant market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and, to a minor extent, currency exchange rates.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 29, 2019, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 29, 2019, our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the three months ended June 29, 2019, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, ENGlobal or one or more of its subsidiaries 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. We believe, as of the date of this filing, all such active proceedings and claims of substance that have been asserted against ENGlobal or one or more of its subsidiaries have been adequately allowed for, or are covered by insurance, such that, if determined adversely to the Company, individually or in the aggregate, they would not have a material adverse effect on our results of operations or financial position.

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 29, 2018, which outline factors that could materially affect our business, financial condition or future results, and the additional risk factors below. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.

We are reviewing strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic alternative, that any such strategic alternative will result in additional value for our shareholders or that the process will not have an adverse impact on our business. On April 18, 2018, we announced that our Board of Directors had initiated a review of strategic alternatives. These alternatives could include, but are not limited to, strategic 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. There can be no assurance that the review of strategic alternatives will result in the identification or consummation of any transaction. Our Board of Directors may also determine that our most effective strategy is to continue to effectuate our current business plan. The process of reviewing strategic alternatives may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We could incur substantial expenses associated with identifying and evaluating potential strategic alternatives. No decision has been made with respect to any transaction and we cannot assure you that we will be able to identify and undertake any transaction that allows our shareholders to realize an increase in the value of their common stock or provide any guidance on the timing of such action, if any.

We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current price of our common stock. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, but not limited to, market conditions, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms. We do not intend to comment regarding the evaluation of strategic alternatives until such time as our Board of Directors has determined the outcome of the process or otherwise has deemed that disclosure is appropriate or required by applicable law. As a consequence, perceived uncertainties related to our future may result in the loss of potential business opportunities and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and business partners.

Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. As of June 29, 2019, our backlog was approximately $26.4 million. We expect a majority of this backlog to be completed in 2019 and 2020. We cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and profits that we actually earn. The potential for cancellations and adjustments to our backlog are exacerbated by economic conditions, particularly in our chosen area of concentration, the energy industry. The energy industry has experienced a sustained period of low crude oil and natural gas prices which has reduced our clients’ activities in the energy industry.

21

If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected. Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed and materials supplied. In the ordinary course of business, we extend unsecured credit to our customers. We may also agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. As of June 29, 2019 we had two projects that had $0.1 million in retainage. We bear the risk that our clients will pay us late or not at all. Though we evaluate and attempt to monitor our clients’ financial condition, there is no guarantee that we will accurately assess their creditworthiness. To the extent the credit quality of our clients deteriorates or our clients seek bankruptcy protection, our ability to collect receivables and our results of operations could be adversely affected. Even if our clients are credit-worthy, they may delay payments in an effort to manage their cash flow. Financial difficulties or business failure experienced by one or more of our major customers has had and could, in the future, continue to have a material adverse effect on both our ability to collect receivables and our results of operations.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None.

22

ITEM 6. EXHIBITS

		Incorporated by Reference to:
Exhibit No.	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number
3.1	Restated Articles of Incorporation of Registrant dated August 8, 2002	10-Q	3.1	11/14/2002	001-14217
3.2	Amendment to the Restated Articles of Incorporation of the Registrant, filed with the Nevada Secretary of State on June 2, 2006	8-A12B	3.1	12/17/2007	001-14217
3.3	Second Amended and Restated Bylaws of Registrant dated April 14, 2016	8-K	3.1	4/15/2016	001-14217
*10.1	Office Lease between 700 17th Street, LLC and ENGlobal U.S. Inc. dated January 23, 2019.
*31.1	Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the First Quarter 2019
*31.2	Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the First Quarter 2019
*32.0	Certification Pursuant to Rule 13a – 14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the First Quarter 2019
*101.ins	XBRL instance document
*101.sch	XBRL taxonomy extension schema document
*101.cal	XBRL taxonomy extension calculation linkbase document
*101.def	XBRL taxonomy extension definition linkbase document
*101.lab	XBRL taxonomy extension label linkbase document
*101.pre	XBRL taxonomy extension presentation linkbase document

* Filed herewith

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SIGNATURE

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

Dated: August 8, 2019
	ENGlobal Corporation
	By:	/s/ Mark A. Hess
		Mark A. Hess
		Chief Financial Officer

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