10-Q 1 eng_10q.htm QUARTERLY REPORT eng_10q
 

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 March 27, 2021
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 001-14217
 
ENGlobal Corporation
(Exact name of registrant as specified in its charter)
 
Nevada
(State or other jurisdiction of
incorporation or organization)
 
88-0322261
(I.R.S. Employer Identification No.)
 
654 N. Sam Houston Parkway E.,
Suite 400, Houston, TX
 
77060-5914
(Address of principal executive offices)
 
(Zip code)
 
(281) 878-1000
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
ENG
 
NASDAQ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes [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]
 
 
As of May 6, 2021, the registrant had outstanding 27,988,927 shares of common stock, par value $0.001 per share.
 


 
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 27, 2021
 
TABLE OF CONTENTS
 
 
 
Page
Number
 
 
 
3
 
 
 
3
 
 
 
 
3
 
 
 
 
4
 
 

 
5
 
 
 
 
6
 
 
 
 
7
 
 
 
16
 
 
 
23
 
 
 
23
 
 
 
23
 
 
 
23
 
 
 
23
 
 
 
25
 
 
 
25
 
 
 
25
 
 
 
25
 
 
 
26
 
 
 
 
27
 
 
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
 
 
 
March 27,
2021
 
 
March 28,
2020
 
Operating revenues
 $12,449 
 $19,260 
Operating costs
  11,445 
  16,000 
Gross profit
  1,004 
  3,260 
 
    
    
Selling, general and administrative expenses
  2,561 
  2,133 
Operating income (loss)
  (1,557)
  1,127 
 
    
    
Other income (expense):
    
    
Other income, net
  1,684 
  1 
Interest expense, net
  (58)
  (5)
Income from operations before income taxes
  69 
  1,123 
 
    
    
Provision for federal and state income taxes
  23 
  22 
 
    
    
Net income
  46 
  1,101 
 
    
    
Basic and diluted income per common share:
 $0.00 
 $0.04 
 
    
    
Basic and diluted weighted average shares used in computing income per share:
  27,557 
  27,414 
 
See accompanying notes to unaudited interim condensed consolidated financial statements.
 
 
3
 
 
ENGlobal Corporation
Condensed Consolidated Balance Sheets
(Unaudited)
(amounts in thousands, except share and per share amounts)
 
 
 
March 27,
2021
 
 
December 26,
2020
 
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash
 $13,927 
 $13,706 
Trade receivables, net of allowances of $272 and $386
  9,111 
  7,789 
Prepaid expenses and other current assets
  531 
  891 
Employee retention credit
  1,676 
  — 
Contract assets
  1,322 
  4,090 
Total Current Assets
  26,567 
  26,476 
Property and equipment, net
  1,223 
  1,263 
Goodwill
  720 
  720 
Other assets
    
    
Right of use asset
  1,539 
  1,628 
Deposits and other assets
  342 
  351 
Total Other Assets
  1,881 
  1,979 
Total Assets
 $30,391 
 $30,438 
 
    
    
LIABILITIES AND STOCKHOLDERS’ EQUITY
    
    
 
    
    
Current Liabilities:
    
    
Accounts payable
 $2,151 
 $2,138 
Accrued compensation and benefits
  2,172 
  3,048 
Current portion of leases
  1,294 
  1,541 
Contract liabilities
  2,234 
  1,258 
Current portion of note
  4,579 
  3,707 
Current portion of deferred payroll tax
  519 
  — 
Other current liabilities
  597 
  745 
Total Current Liabilities
  13,546 
  12,437 
 
    
    
    Deferred payroll tax
  519 
  1,037 
    Long-term debt
  1,897 
  2,733 
    Long-term leases
  715 
  608 
Total Liabilities
  16,677 
  16,815 
Commitments and Contingencies (Note 8)
    
    
Stockholders’ Equity:
    
    
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,588,389 shares issued and outstanding at March 27, 2021 and 27,560,686 shares issued and outstanding at December 26, 2020
  28 
  28 
Additional paid-in capital
  37,202 
  37,157 
Accumulated deficit
  (23,516)
  (23,562)
Total Stockholders’ Equity
  13,714 
  13,623 
Total Liabilities and Stockholders’ Equity
 $30,391 
 $30,438 
 
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 Three Months Ended
 
 
 
March 27,
2021
 
 
March 28,
2020
 
Cash Flows from Operating Activities:
 
 
 
 
 
 
Net income
 $46 
 $1,101 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
    
    
Depreciation and amortization
  82 
  96 
Share-based compensation expense
  45 
  15 
Changes in current assets and liabilities:
    
    
Trade accounts receivable
  (1,322)
  655 
Contract assets
  2,768 
  (1,912)
Other current assets
  (1,307)
  165 
Accounts payable
  13 
  444 
Accrued compensation and benefits
  (876)
  (408)
Contract liabilities
  976 
  (1,801)
Income taxes payable
  19 
  258 
Other current liabilities, net
  (167)
  (97)
Net cash provided by (used in) operating activities
 $277 
 $(1,484)
 
    
    
Cash Flows from Investing Activities:
    
    
Property and equipment acquired
  (57)
  (34)
Net cash used in investing activities
 $(57)
 $(34)
 
    
    
Cash Flows from Financing Activities:
    
    
Payments on finance leases
  (36)
  (20)
Interest on PPP loan
  12 
  — 
Proceeds from revolving credit facility
  25 
  — 
Net cash provided by (used in) financing activities
 $1 
 $(20) 
Net change in cash
  221 
  (1,538)
Cash at beginning of period
  13,706 
  8,307 
Cash at end of period
 $13,927 
 $6,769 
 
    
    
Supplemental disclosure of cash flow information:
    
    
Cash paid during the period for interest
 $58 
 $5 
Right of use assets obtained in exchange for new operating lease liability
 $256 
 $963 
Cash paid during the period for income taxes (net of refunds)
 $1 
  — 
 
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
 
 
 
March 27,
2021
 
 
March 28,
2020
 
 
 
 
 
 
 
 
Common Stock
 $28 
 $27 
 
    
    
Additional Paid-in Capital
    
    
Balance at beginning of period
  37,157 
  36,934 
Share-based compensation - employee
  45 
  15 
Balance at end of period
  37,202 
  36,949 
 
    
    
Accumulated Deficit
    
    
Balance at beginning of period
  (23,562)
  (22,937)
Net income
  46 
  1,101 
Balance at end of period
  (23,516)
  (21,836)
 
    
    
Total Stockholders’ Equity
 $13,714 
 $15,140 
 
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 26, 2020, included in the Company’s 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
 
The condensed financial statements included herein are unaudited for the three month periods ended March 27, 2021 and March 28, 2020, and in the case of the condensed balance sheet as of December 26, 2020 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.
 
The Company has assessed subsequent events through the date of filing of these condensed financial statements with the Securities and Exchange Commission and believes that the disclosures made herein are adequate to make the information presented herein not misleading.
 
We had no items of other comprehensive income in any period presented; therefore, no other components of comprehensive income are presented.
 
Each of our quarters is comprised of 13 weeks.
 
NOTE 2 – ACCOUNTING STANDARDS
 
Revenue Recognition – Our revenue is comprised of engineering, procurement and construction management services and sales of fabricated systems and integrated control systems that we design and assemble. The majority of our services are provided under time-and-material contracts. Some time-and-material contracts may have limits. Revenue is not recognized over these limits until authorization by the client has been received.
 
A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
 
We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.
 
 
7
 
 
Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.
 
To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.
  
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or a reduction of revenue) on a cumulative catch-up basis.
 
We have a standard, monthly process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements, and other contractual requirements. Management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables.
 
Based on this analysis, any adjustments to revenue, operating costs and the related impact to operating income are recognized as necessary in the period they become known. These adjustments may result from positive performance and may result in an increase in operating income during the performance of individual performance obligations if we determine we will be successful in mitigating risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. When estimates of total costs to be incurred exceed total estimates to be earned, a provision for the entire loss on the performance obligation is recognized in the period the loss becomes known. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net revenue, operating costs and the related impact to operating income are recognized monthly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.
  
 
8
 
 
NOTE 3 – REVENUE RECOGNITION
 
Our revenue by contract type was as follows (dollars in thousands):
 
 
 
For the Three Months Ended
 
 
 
March 27,
2021
 
 
March 28,
2020
 
Fixed-price revenue
 $8,265 
 $7,900 
Time-and-material revenue
  4,184 
  11,360 
Total Revenue
 $12,449 
 $19,260 
 
NOTE 4 – CONTRACT ASSETS AND CONTRACT LIABILITIES
 
Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred.
 
Costs, estimated earnings and billings on uncompleted contracts consisted of the following (dollars in thousands):
 
 
 
March 27,
2021
 
 
December 26,
2020
 
Costs incurred on uncompleted contracts
 $44,912 
 $39,154 
Estimated earnings on uncompleted contracts
  5,253 
  4,388 
Earned revenues
  50,165 
  43,542 
Less: billings to date
  51,077 
  40,710 
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts
 $(912)
 $2,832 
 
    
    
Contract assets
 $1,322 
 $4,090 
Contract liabilities
  (2,234)
  (1,258)
Net contract assets
 $(912)
 $2,832 
 
NOTE 5 – DEBT
 
The components of debt were as follows (dollars in thousands):
 
 
 
March 27,
2021
 
 
December 26,
2020
 
   PPP Loan (1)
 $4,961 
 $4,949 
   Revolving Credit Facility (2)
  1,515 
  1,491 
Total debt
  6,476 
  6,440 
   Amount due within one year
  4,579 
  3,707 
Total long-term debt
 $1,897 
 $2,733 
 
(1)
On April 13, 2020, the Company was granted an unsecured loan (the “PPP Loan”) from Origin Bank in the aggregate principal amount of $4,915,800 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note, dated as of April 13, 2020 (the “Note”), by ENGlobal in favor of Origin Bank, as lender. The PPP Loan balance has increased due to accrued interest.
 
 
9
 
 
Interest Rate: The interest rate on the PPP Loan is 1% per year.
 
Potential PPP Loan Forgiveness: Under the PPP, ENGlobal may apply for forgiveness of the amount due on the PPP Loan in an amount equal to the sum of the following costs incurred during the covered period beginning on the date of the first disbursement of the PPP Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act.
 
We have elected to utilize a 24-week covered period as allowed by the Paycheck Protection Program Flexibility Act (“PPPFA”) enacted on June 5, 2020. When applying for PPP Loan forgiveness, we have the option to increase the repayment period for any unforgiven portion of the PPP Loan to five years as permitted under the PPPFA.
 
We have calculated qualified forgivable expenses in excess of our PPP Loan amount. Although we expect the full PPP Loan amount to be forgiven, we cannot guarantee our forgiveness application will be accepted allowing for a fully forgiven loan. On November 30, 2020, our lender, Origin Bank, transmitted our PPP Loan forgiveness application to the U.S. Small Business Administration. We have not received a forgiveness decision on our PPP Loan.
 
(2)
On May 21, 2020 (the “Closing Date”), the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans (each a “Loan” and collectively, the “Loans”) in the aggregate amount of up to $6.0 million (the “Maximum Credit Limit”).
 
Set forth below are certain of the material terms of the Revolving Credit Facility:
 
Credit Limit:  The credit limit is an amount equal to the lesser of (a) the Maximum Credit Limit and (b) the sum of (i) 85% of the Borrowers’ Eligible Accounts (as defined in the Revolving Credit Facility), plus (ii) the lesser of (A) 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility), or (B) $3,000,000 plus (iii) the lesser of (A) 20% of Borrowers’ Eligible Fixed Price Accounts, or (B) $250,000. As of March 27, 2021, the credit limit under the Revolving Credit Facility was $2.5 million.
 
Interest:  Any Loans will bear interest at a rate per annum equal to the Prime rate (defined as the rate announced as the “prime rate” or “bank prime rate” in the Western Edition of the Wall Street Journal) plus 2.0%; provided that interest will not be less than $7,500 per month.
 
Collateral: Lender receives a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property.
 
Maturity: The maturity date is May 20, 2023 and shall be automatically extended for additional periods of one-year each, if written notice of termination is not given by one party to the other at least thirty days prior to the maturity date.
 
Loan Fee: The Borrowers will pay to Lender a loan fee of 1.00% of the Maximum Credit Limit at the time of funding and annually thereafter on the anniversary date of the initial funding.
 
Termination Fee: In the event the Borrowers terminate the Revolving Credit Facility prior to the maturity date, the Borrowers will pay to Lender a termination fee of (i) 2.00% of the Maximum Credit Limit, if the termination occurs on or prior to the first anniversary of the Closing Date, (ii) 1.00% of the Maximum Credit Limit, if the termination occurs after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date and (iii) 0.05% of the Maximum Credit Limit, if the termination occurs after the second anniversary of the Closing Date.
 
 
10
 
 
Covenants: The Revolving Credit Facility requires the Borrowers to comply with certain customary affirmative covenants, and negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Borrowers to engage in mergers, acquisitions or other transactions outside of the ordinary course of business, make loans or investments, incur indebtedness, pay dividends or repurchase stock, or engage in affiliate transactions. The Revolving Credit Facility does not require the Borrowers to comply with any financial covenants.
 
The future scheduled maturities of our debt are (in thousands):
 
 
 
PPP Loan and Revolving Credit Facility (1)
 
 
Revolving Credit Facility (1)
 
2021
 $3,430 
 $— 
2022
  1,531 
  — 
2023
  1,515 
  1,515 
Thereafter
  — 
  — 
 
 $6,476 
 $1,515 
 
(1)
If the PPP Loan is entirely forgiven, only the Revolving Credit Facility would remain as debt.
  
NOTE 6 – SEGMENT INFORMATION
 
Our segments are strategic business units that offer our services and products to customers in their respective industry segments. The operating performance of our segments is regularly reviewed with operational leaders in charge of these segments, the chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.
 
We have identified five strategic markets where we have a long history of delivering project solutions and can provide complete project execution. These five targeted markets include: (i) Renewables; (ii) Automation; (iii) Refining and Transportation; (iv) Upstream; and (v) Government Services.
 
Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a construction partner.
 
Our Automation group designs, integrates and commissions modular systems that include electronic distributed control, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.
 
Our Refining and Transportation group focuses on providing engineering, procurement and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients.
 
 
11
 
 
The Upstream group 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 in addition to cybersecurity assessment and SCADA systems design and maintenance in the private sector.
 
We have two reportable segments: Commercial and Government Services. Our Renewables, Automation, Refining and Transportation, and Upstream groups are aggregated into one reportable segment, Commercial.
 
Revenues, operating income, and identifiable assets for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and includes costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments. The segment information for the three months ended March 28, 2020 and as of December 26, 2020 has been recast to align with our current reportable segments.
 
Segment information is as follows (dollars in thousands):
 
 
Commercial
 
 
Government Services
 
 
Corporate
 
 
Consolidated
 
For the three months ended March 27, 2021:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $10,048 
 $2,401 
 $— 
 $12,449 
Gross profit
  915 
  89 
  — 
  1,004 
Gross profit margin
  9.1%
  3.7%
    
  8.1%
SG&A
  1,294 
  209 
  1,058 
  2,561 
Operating income
  (379)
  (120)
  (1,058)
  (1,557)
Other income, net
    
    
    
  1,684 
Interest expense, net
    
    
    
  (58)
Tax expense
    
    
    
  (23)
Net income
    
    
    
  46 
 
 
 
Commercial
 
 
Government Services
 
 
Corporate
 
 
Consolidated
 
For the three months ended March 28, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $16,510 
 $2,750 
 $— 
 $19,260 
Gross profit
  2,846 
  414 
  — 
  3,260 
Gross profit margin
  17.2%
  15.1%
    
  16.9%
SG&A
  830 
  170 
  1,133 
  2,133 
Operating income
  2,016 
  244 
  (1,133)
  1,127 
Other income, net
    
    
    
  1 
Interest expense, net
    
    
    
  (5)
Tax expense
    
    
    
  (22)
Net income
    
    
    
  1,101 
  
 
12
 
 
Total assets by segment are as follows (dollars in thousands):
 
Total Assets by Segment
 
As of
March 27,
2021
 
 
As of
December 26,
2020
 
 
 
(dollars in thousands)
 
Commercial
 $10,107 
 $11,130 
Government Services
  2,580 
  3,151 
Corporate
  17,704 
  16,157 
Consolidated
 $30,391 
 $30,438 
 
NOTE 7 – FEDERAL AND STATE INCOME TAXES
 
The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740-270 we estimate an annual effective tax rate based on year-to-date operating results and our projection of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results. If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.
 
The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2016 and Texas margins tax returns prior to 2016 are closed. Generally, the applicable statues of limitations are three to four years from their filings.
 
The Company recorded income tax expense of $23 thousand for the three months ended March 27, 2021 as compared to income tax expense of $22 thousand for the three months ended March 28, 2020.
 
The effective income tax rate for the three months ended March 27, 2021 was 50.0% as compared to 2.15% for the three months ended March 28, 2020.
 
NOTE 8 – COMMITMENTS AND CONTINGENCIES
 
From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on our financial position, results of operations or liquidity.
 
We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental) which is partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.
  
NOTE 9 – LEASES
 
The Company leases land, office space and equipment. Arrangements are assessed at inception to determine if a lease exists and, with the adoption of ASC 842, “Leases,” right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term. Because the Company’s leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate at the inception of a lease to calculate the present value of lease payments. The Company has elected to apply the short-term lease exception for all asset classes, excluding lease liabilities from the balance sheet and recognizing the lease payments in the period they are incurred.
  
 
13
 
 
The components of lease expense were as follows (dollars in thousands):
 
 
Financial Statement Classification
 
Three months ended
March 27,
2021
 
 
Three months ended
March 28,
2020
 
Finance leases:
 
 
 
 
 
 
 
Amortization expense
SG&A Expense
 $19 
 $19 
Interest expense
Interest expense, net
  4 
  5 
Total finance lease expense
 
  23 
  24 
 
 
    
    
Operating leases:
 
    
    
Operating costs
Operating costs
  152 
  219 
Selling, general and administrative expenses
 
SG&A Expense
  449 
  438 
Total operating lease expense
 
  601 
  657 
Total lease expense
 
 $624 
 $681 
 
Supplemental balance sheet information related to leases was as follows (dollars in thousands):
 
 
Financial Statement Classification
 
March 27,
2021
 
 
December 26,
2020
 
ROU Assets:
 
 
 
 
 
 
 
   Operating leases
Right of Use asset
 $1,539 
 $1,628 
   Finance leases
Property and equipment, net
  413 
  442 
Total ROU Assets:
 
 $1,952 
 $2,070 
 
 
    
    
Lease liabilities:
 
    
    
Current liabilities
 
    
    
   Operating leases
Current portion of leases
 $1,173 
 $1,421 
   Finance leases
Current portion of leases
  121 
  120 
Noncurrent Liabilities:
 
    
    
   Operating leases
Long Term Leases
  430 
  286 
   Finance leases
Long Term Leases
  285 
  322 
Total lease liabilities
 
 $2,009 
 $2,149 
 
The weighted average remaining lease term and weighted average discount rate were as follows:
 
 
 
At March 27,
2021
 
Weighted average remaining lease term (years)
 
 
 
   Operating leases
  1.4 
   Finance leases
  4.0 
Weighted average discount rate
    
   Operating leases
  1.1%
   Finance leases
  5.4%
 
 
14
 
 
Maturities of operating lease liabilities as of March 27, 2021 are as follows (dollars in thousands):
 
Year ending:
 
Operating leases
 
 
Finance leases
 
 
Total
 
2021 (remaining months)
  962 
  99 
  1,061 
2022
  658 
  112 
  770 
2023
  — 
  92 
  92 
2024
  — 
  72 
  72 
2025 and thereafter
  — 
  56 
  56 
Total lease payments
  1,620 
  431 
  2,051 
Less: imputed interest
  (19)
  (23)
  (42)
Total lease liabilities
 $1,601 
 $408 
 $2,009 
 
NOTE 10 – EMPLOYEE RETENTION CREDIT
 
Pursuant to the CARES Act, the Company is eligible for an employee retention credit subject to certain criteria. Since there is no US GAAP guidance for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS).
 
Under an IAS 20 analogy, a business entity would recognize the employee retention credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received.
 
We have accounted for the $1.7 million employee retention credit as other income on the Statement of Operations and as a receivable on the Balance Sheet.
 
NOTE 11 – SUBSEQUENT EVENTS
 
The Company has evaluated subsequent events through the date these financial statements were issued. The Company determined there were no events, other than as described below, that required disclosure or recognition in these financial statements.
 
At-the-market Offering
 
On January 29, 2021, we entered into an at market issuance sales agreement (the “ATM Agreement”) with B. Riley Securities, Inc. pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $25 million to or through B. Riley, as sales agent, from time to time, in an “at the market offering”. In April 2021, 400,538 shares were issued pursuant to the ATM Agreement for net proceeds of approximately $1.5 million.
 
 
15
 
 
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
Certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission (the “SEC”), press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, the specific risk factors identified under Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 26, 2020, and those described from time to time in our future reports filed with the SEC.
 
The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 26, 2020.
 
Overview
 
ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”), incorporated in the State of Nevada in June 1994, is a leading provider of innovative, delivered project solutions primarily to the energy industry. We deliver these solutions to our clients by combining our vertically integrated engineering and professional project execution services with our automation and systems integration expertise and 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 have identified complete project execution and delivered solutions as the opportunity to which our capabilities are best applied, identified five strategic markets where we have a long history of delivering project solutions and can provide complete project execution and have focused our business development teams on communicating these offerings to their clients. These five targeted markets include: (i) Renewables; (ii) Automation; (iii) Refining and Transportation; (iv) Upstream and (v) Government Services. We have identified specific individuals within the Company to lead the efforts for each market initiative - “a champion” - while coordinating with the other sales leaders.
 
We continue to be mindful of our overhead structure. We have made investments in key business development personnel, product developments and new facilities and equipment, which have all negatively impacted our selling, general and administrative expense (“SG&A”). We recognize that the level of our SG&A is greater than it could be for a company our size; however, we have maintained our overhead structure in anticipation of higher revenue levels.
 
Our Board of Directors continues to review strategic transactions, which could include strategic mergers, reverse mergers, the issuance of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing stockholder value. The Company does not intend to disclose or comment on developments related to its review unless and until 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.
 
 
16
 
 
COVID-19 Update
 
On March 11, 2020, the World Health Organization declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. The continued worldwide spread of COVID-19, in conjunction with related government and other preventative measures taken to mitigate the spread of COVID-19, have caused severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. However, we have not been successful in replacing our backlog as quickly as it has been converted to revenues. As a result, our backlog has decreased by approximately $40.6 million from $59.2 million at December 28, 2019 to $18.6 million as of March 27, 2021. While we have many potential opportunities in our sales pipeline that could replace a significant portion of this backlog reduction, inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions have largely contributed to delays in project awards and our inability to replace our backlog as quickly as it has been converted to revenue. While we believe our backlog is sufficient to keep a significant portion of our workforce productive in the near term, it may not be at our current operating levels. The extent to which the disruption of COVID-19 may impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to our business, financial condition and results of operations is uncertain and we will continue to monitor the situation and assess the operational and financial impact on our business.
 
In response to the continued spread of COVID-19 in the United States, federal, state and local governments have imposed various restrictions designed to slow the pace of the pandemic, including stay at home mandates in cities where we have offices and employees. We are adhering to the stay at home mandates and while most of our employees can telecommute, some cannot. Our challenge is to keep our employees as productive as possible while not being located in their normal workplace. We are also utilizing relief for employees impacted by COVID-19 under the Families First Coronavirus Response Act in order to minimize the impact to both our employees and our business. Further, we are utilizing some of the tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). On April 13, 2020, we obtained a loan pursuant to the Paycheck Protection Program under Division A, Title I of the CARES Act (the “PPP Loan”). The PPP Loan was necessary to support our ongoing operations as we navigate the economic uncertainty caused by the COVID-19 pandemic. Under the provisions of the CARES Act, the Company is eligible for an employee retention credit subject to certain criteria. Accordingly, the Company recorded a $1.7 million employee retention credit during the three months ended March 27, 2021. As we continue to monitor the situation and assess the operational and financial impact on our business, we may determine to take further actions in response.
 
Because of the severity, magnitude and duration of the COVID-19 pandemic and its uncertain and rapidly changing economic consequences, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations. For additional information, see Part II. Item 1A “Risk Factors.”
 
Critical Accounting Policies Update
 
Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2020 Annual Report on Form 10-K.
 
Since there is no US GAAP guidance for for-profit business entities that receive government assistance that is not in the form of a loan, an income tax credit or revenue from a contract with a customer, we determined the appropriate accounting treatment by analogy to other guidance. We accounted for the employee retention credit by analogy to International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance, of International Financial Reporting Standards (IFRS).
 
 
17
 
 
Under an IAS 20 analogy, a business entity would recognize the credit on a systematic basis over the periods in which the entity recognizes the payroll expenses for which the grant (i.e., tax credit) is intended to compensate when there is reasonable assurance (i.e., it is probable) that the entity will comply with any conditions attached to the grant and the grant (i.e., tax credit) will be received.
 
 
Results of Operations
 
In the course of providing our time-and-material services, we routinely provide materials and equipment and may provide construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with small handling fees, which in general are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The material purchases and the use of subcontractor services can vary significantly from quarter to quarter; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percentage of revenue may not be indicative of the Company’s core business trends.
 
Segment operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment’s operations. 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
 
 
Comparison of the three months ended March 27, 2021 versus the three months ended March 28, 2020
 
The following table, for the three months ended March 27, 2021 versus the three months ended March 28, 2020, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).
 
 
 
Commercial
 
 
Government Services
 
 
Corporate
 
 
Consolidated
 
 
 
 
For the three months ended March 27, 2021:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $10,048 
 $2,401 
 $— 
 $12,449 
  100.0%
Gross profit
  915 
  89 
  — 
  1,004 
  8.1%
SG&A
  1,294 
  209 
  1,058 
  2,561 
  20.6%
Operating income (loss)
  (379)
  (120)
  (1,058)
  (1,557)
  (12.5)%
Other income, net
    
    
    
  1,684 
    
Interest expense, net
    
    
    
  (58)
    
Tax expense
    
    
    
  (23)
    
Net income
    
    
    
  46 
  0.4%
Earnings per share
    
    
    
 $0.00 
    
 
 
 
Commercial
 
 
Government Services
 
 
Corporate
 
 
Consolidated
 
 
 
 
For the three months ended March 28, 2020:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
  16,510 
  2,750 
  — 
  19,260 
  100.0%
Gross profit
  2,846 
  414 
  — 
  3,260 
  16.9%
SG&A
  830 
  170 
  1,133 
  2,133 
  11.1%
Operating income (loss)
  2,016 
  244 
  (1,133)
  1,127 
  5.9%
Other income, net
    
    
    
  1 
    
Interest expense, net
    
    
    
  (5)
    
Tax expense
    
    
    
  (22)
    
Net income
    
    
    
  1,101 
  5.7%
Earnings per share
    
    
    
  0.04 
    
 
 
 
Commercial
 
 
Government Services
 
 
Corporate
 
 
Consolidated
 
 
 
 
Year Over Year Increase (Decrease) in Operating Results:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 $(6,462)
 $(349)
 $— 
 $(6,811)
  (35.4)%
Gross profit
  (1,931)
  (325)
  — 
  (2,256)
    
SG&A
  464 
  39 
  (75)
  428 
  20.1%
Operating income (loss)
  (2,395)
  (364)
  75 
  (2,684)
  (238.2)%
Other income, net
    
    
    
  1,683 
    
Interest expense, net
    
    
    
  (53)
    
Tax expense
    
    
    
  (1)
    
Net income
    
    
    
  (1,055)
  (95.8)%
Earnings per share
    
    
    
 $(0.04)
    
 
 
19
 
 
Revenue – Revenue decreased $6.8 million to $12.4 million from $19.3 million, or a decrease of 35.4%, for the three months ended March 27, 2021 as compared to the three months ended March 28, 2020. The decrease is primarily due to the completion of several large projects in 2020 within our Commercial segment in addition to projects that were not renewed as our clients decreased their activities in all sectors of the energy industry due to COVID-19, partially offset by the progress of one of our large projects that has continued in the first quarter of 2021.
 
Gross Profit – Gross profit margin decreased 8.8% to 8.1% from 16.9% for the three months ended March 27, 2021 as compared to the three months ended March 28, 2020. The decrease in gross profit margin is primarily attributable to the Commercial segment for cost associated with underutilized staffing at our locations as projects were completed without subsequent renewals during the first quarter of 2021. The decrease in gross profit margin is primarily related to delays in Government Services projects due to base closures and travel restrictions imposed by the U.S. government as a result of COVID-19.
 
Selling, General and Administrative Expense – SG&A expenses increased by $0.4 million for the three months ended March 27, 2021 as compared to three months ended March 28, 2020 primarily due to the increase in salaries and burden expense by $0.4 million.
 
Other Income (Expense), Net – Other income, net of expense, increased $1.7 million for the three months ended March 27, 2021 as compared to the three months ended March 28, 2020 primarily due to the $1.7 million employee retention credit recorded in 2021 with no comparable credit in 2020.
 
Interest Expense, net – Interest expense is incurred primarily in connection with our insurance financing and our finance leases. Our interest expense increased to $58 thousand for the three months ended March 27, 2021 from $5 thousand for the three months ended March 28, 2020.
 
Tax Expense – We recorded income tax expense of $23 thousand for the three months ended March 27, 2021 as compared to income tax expense of $22 thousand for the three months ended March 28, 2020.
 
Net Income – Net income for the three months ended March 27, 2021 was $46 thousand, or a $1.1 million decrease from a net income of $1.1 million for the three months ended March 28, 2020, primarily as a result of our decrease in revenue and gross margin in our Commercial segment, partially offset by the employee retention credit.
 
 
20
 
 
Liquidity and Capital Resources
 
Overview
 
The Company defines liquidity as its ability to pay its liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, sales of common stock pursuant to the ATM Agreement, and the Revolving Credit Facility. We had cash of approximately $13.9 million at March 27, 2021 and $13.7 million at December 26, 2020. Our working capital as of March 27, 2021 was $13.0 million versus $14.0 million as of December 26, 2020.
 
On April 13, 2020, we obtained the $4.9 million PPP Loan, which was a significant cash injection for us. In addition, on May 21, 2020, we entered into the Revolving Credit Facility pursuant to which the Lender agreed to extend credit of up to $6.0 million, subject to a credit limit. As of March 27, 2021, the credit limit under the Revolving Credit Facility was $2.5 million and outstanding borrowings were $1.5 million, which yields enough interest to cover our minimum monthly interest charge. As of March 27, 2021, we were in compliance with all of the covenants under the PPP Loan and Revolving Credit Facility. For additional information on the PPP Loan and Revolving Credit Facility, see Part I, Item 1, Note 5 – Debt.
 
On January 29, 2021, we entered into an at market issuance sales agreement (the “ATM Agreement”) with B. Riley Securities, Inc. pursuant to which we may offer and sell shares of our common stock having an aggregate offering price of up to $25 million to or through B. Riley, as sales agent, from time to time, in an “at the market offering”. Under the ATM Agreement, the Company will pay B. Riley an aggregate commission of up to 3% of the gross sales price per share of common stock sold under the ATM Agreement. The Company is not obligated to make any sales under the ATM Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs. In April 2021, 400,538 shares were issued pursuant to the ATM Agreement for net proceeds of approximately $1.5 million.
 
We believe our cash on hand, internally generated funds, availability under the Revolving Credit Facility, and sales of common stock pursuant to the ATM Agreement, along with other working capital, will be sufficient to fund our current operations and expected activity 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.
 
Our Board of Directors continues to review strategic transactions, 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 stockholder 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 $0.3 million of cash for the three months ended March 27, 2021 and used $1.5 million of cash for the three months ended March 28, 2020. The primary drivers of our cash provided by operations for the three months ended March 27, 2021 were a decrease in contract assets net of contract liabilities of $3.7 million, partially offset by an increase in trade receivables of $1.3 million, an increase in accrued compensation and benefits of $0.9 million, an increase in other current assets of $1.3 million, and $0.1 million of cash used by an increase in other components of working capital.
 
 
21
 
 
Cash Flows from Investing Activities
 
Investing activities used cash of $57 thousand for the three months ended March 27, 2021 and $34 thousand for the three months ended March 28, 2020 primarily for the purchase of property and equipment.
 
Cash Flows from Financing Activities
 
Financing activities provided $1 thousand for the three months ended March 27, 2021 primarily due to interest on the PPP Loan and proceeds received from the Revolving Credit Facility partially offset by the interest incurred on our financial leases, and financing activities used cash of $20 thousand for the three months ended March 28, 2020 primarily for the interest incurred on our finance leases.
 
 
 
22
 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
 
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 27, 2021, 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 March 27, 2021, 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 March 27, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
From time to time, ENGlobal or one or more of its subsidiaries may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. As of the date of this filing, management is not aware of any such claims against the Company or any subsidiary business entity.
 
ITEM 1A. RISK FACTORS
 
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 26, 2020, 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.
 
The COVID–19 pandemic has adversely affected and could continue to adversely affect our business, financial condition and results of operations. Our business is dependent upon the willingness and ability of our customers to conduct transactions with us. The COVID–19 pandemic has caused severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including many of our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. The prolonged nature of the COVID–19 pandemic may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID–19 in our market areas. The COVID–19 pandemic may also negatively impact the availability of our key personnel necessary to conduct our business as well as the business and operations of third party service providers who perform critical services for our business. For example, in June 2020 we temporarily closed one of our operational facilities for one week in response to a potential COVID-19 exposure. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.
 
 
23
 
 
Our backlog is declining due to the COVID-19 pandemic and is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. While our backlog has not been materially impacted by the COVID-19 pandemic in terms of project cancellations, we have not been successful in replacing our backlog as quickly as it has been converted to revenues due to inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions that have led to delays in project awards. Further, the COVID-19 pandemic has affected our ability to make business development contacts with customers. As a result, our backlog has decreased by approximately $5.7 million from $24.3 million as of December 26, 2020 to $18.6 million as of March 27, 2021. We expect the majority of our backlog to be completed within 12 months. While we believe our backlog is sufficient to keep a significant portion of our workforce productive in the near term, it may not be at our current operating levels. We cannot assure investors that we will be successful in replacing our backlog as quickly as it has been converted to revenues, which will reduce future revenue and profits and impact our financial performance. In addition, 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 project cancellations, terminations, suspensions or reductions in scope and adjustments to our backlog are exacerbated by economic conditions, particularly in the energy industry which is experiencing volatility in oil prices since the beginning of 2020 due to concerns about the COVID–19 pandemic and its impact on the worldwide economy and global demand for oil. We are unable to predict when market conditions may improve and worsening overall market conditions could result in further declines in our backlog.
 
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 March 27, 2021 we had two projects that had $2.5 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.
 
 
24
 
 
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 2021:
 
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 27, 2020 to January 23, 2021
  — 
  — 
  — 
 $— 
January 24, 2021 to February 27, 2021
  — 
  — 
  — 
 $— 
February 28, 2021 to March 27, 2021
  — 
  — 
  — 
 $— 
Total
  — 
  — 
  1,290,460 
 $425,589 
 
(1)
On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0 million of the Company’s common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions. The Company is not obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase program, which may be suspended, discontinued or reinstated at any time. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. As of March 27, 2021, the Company had purchased and retired 1,290,460 shares at an aggregate cost of $1.6 million under this repurchase program. Management does not intend to repurchase any shares in the near future.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
ITEM 5. OTHER INFORMATION
 
None
 
 
25
 
 
ITEM 6. EXHIBITS
 
 
 
 
 
Incorporated by Reference to:
ExhibitNo.
 
Description
 
Form or Schedule
 
Exhibit No.
 
FilingDate with SEC
 
SEC FileNumber
 
 
 
 
 
 
 
 
 
 
 
 
 
8-K
 
3.1
 
1/29/2021
 
001-14217
 
 
 
 
 
 
 
 
 
 
 
 
 
8-K
 
3.1
 
4/15/2016
 
001-14217
 
 
 
 
 
 
 
 
 
 
 
 
 
Form S-3
 
1.2
 
1/29/2021
 
333-252572
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*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
** Furnished herewith
 
 
26
 
 
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 6, 2021
 
 
 
ENGlobal Corporation
 
 
 
 
By:
/s/ Darren W. Spriggs
 
 
Darren W. Spriggs
 
 
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 
 
 
 
 
 
 
 
27