UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
For the fiscal year ended
or
For the transition period from __________ to __________
Commission File No.
(Exact name of registrant as specified in its charter) |
| ||
(State or other jurisdiction of incorporation or organization) |
| (I.R.S Employer Identification No.) |
|
| |
(Address of principal executive offices) |
| (Zip code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
|
|
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act: Yes ☐
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
|
| Emerging growth company |
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. Yes ☐ No ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 25, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter) was $
The number of shares outstanding of the registrant’s $0.001 par value common stock on March 28, 2023 is as follows:
Documents incorporated by reference: Responses to Items 10, 11, 12, 13 and 14 of Part III of this Report are incorporated herein by reference to information contained in the Company’s definitive proxy statement for its 2023 Annual Meeting of Stockholders or an amendment to this Report to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year covered by this Report.
ENGLOBAL CORPORATION
2022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
| 2 |
| Table of Contents |
PART I
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as oral statements made by the Company and its officers, directors or employees, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-looking statements are based on management’s beliefs, current expectations, estimates and projections about the industries that the Company and its subsidiaries’ serve, the economy and the Company in general. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements; however, this Report also contains other forward-looking statements in addition to historical information. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ materially from historical results or from any results expressed or implied by such forward-looking statements. The Company cautions readers that the following important factors and the risks described in Part I, Item 1A. Risk Factors of this Report, among others, could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Report: (1) the substantial doubt about our ability to continue as a going concern as of December 31, 2022; (2) our limited borrowing capacity under our credit facility may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition; (3) our ability to realize revenue projected in our backlog and our ability to collect accounts receivable and process accounts payable in a timely manner; (4) our ability to obtain additional financing when needed; (5) the impact of the COVID-19 pandemic and of the actions taken by governmental authorities, individuals and companies in response to the pandemic on our business, financial condition, and results of operations, including on our revenues and profitability; (6) our ability to increase our backlog, revenue and profitability; (7) the effect of economic downturns and the volatility and level of oil and natural gas prices; (8) the uncertainties related to the U.S. Government’s budgetary process and their effects on our long-term U.S. Government contracts; (9) our ability to identify, evaluate, and complete any transactions in connection with our review of strategic transactions; (10) the impact of the announcement of our review of strategic transactions on our business, including our financial and operating results, or our employees, suppliers and customers; (11) our ability to accurately estimate the overall risks, revenue or costs on a contract; (12) the risk of providing services in excess of original project scope without having an approved change order; (13) our ability to execute our expansion into the modular solutions market and to execute our updated business growth strategy to position the Company as a leading provider of engineered modular solutions to its customer base; (14) our ability to attract and retain key professional personnel; (15) our debt obligations may limit our financial flexibility; (16) our dependence on one or a few customers; (17) the risks of internal system failures of our information technology systems, whether caused by us, third-party service providers, intruders or hackers, computer viruses, malicious code, cyber-attacks, phishing and other cyber security problems, natural disasters, power shortages or terrorist attacks; (18) the risk of unexpected liability claims or poor safety performance; (19) our ability to realize project awards or contracts on our pending proposals, and the timing, scope and amount of any related awards or contracts; (20) our ability to retain existing customers and attract new customers; (21) our ability to identify, consummate and integrate potential acquisitions; (22) our reliance on third-party subcontractors and equipment manufacturers; (23) our ability to satisfy the continued listing standards of NASDAQ with respect to our common stock or to cure any continued listing standard deficiency with respect thereto; and (24) the effect of changes in laws and regulations, including U.S. tax laws, with which the Company must comply and the associated cost of compliance with such laws and regulations. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements due to a number of factors detailed from time to time in ENGlobal’s filings with the Securities and Exchange Commission. In addition, reference is hereby made to cautionary statements set forth in the Company’s other SEC filings.
The Company cautions that the foregoing list of important factors is not exclusive. We are under no duty and have no plans to update any of the forward-looking statements after the date of this Report to conform such statements to actual results.
| 3 |
| Table of Contents |
ITEM 1. BUSINESS
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 our fabrication and construction capabilities. We believe our vertically-integrated strategy allows us to differentiate our company from most of our competitors as a full-service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their project cost and schedules. Our strategy and positioning has also allowed the Company to pursue larger scopes of work centered around many different types of modularized engineered systems. All of the information contained in this Report relates to the annual periods ended December 31, 2022, which contained 53 weeks, and December 25, 2021, which contained 52 weeks.
We derive revenues primarily from three sources: (i) business development efforts, (ii) preferred provider or alliance agreements with strategic end-user clients, original equipment manufacturers, and technology partners, and (iii) referrals from existing customers and industry members. Our business development professionals are focused on specific market segments within the energy industry. The market segments that we are targeting include Renewables, Automation, Oil, Gas, and Petrochemicals, and Government Services. This market focus allows us to develop centers of expertise for each of our targeted markets.
We generally enter into two principal types of contracts with our clients: time-and-material contracts and fixed-price contracts. Our clients typically determine the type of contract to be utilized for a particular engagement, with the specific terms and conditions of a contract being negotiated and typically contained in a multiyear services agreement.
Our business development professionals focus on building long-term relationships with clients in order to provide solutions throughout the life cycle of their projects and facilities. Additionally, we seek to capitalize on cross-selling opportunities between our market segments and many of our projects will contain elements from more than one market segment. Sales leads are often jointly developed and pursued by our business development personnel from multiple markets.
Products and services are also promoted through trade advertising, participation in industry conferences and on-line internet communication via our corporate home page at www.englobal.com. The ENGlobal website illustrates our company’s full range of services and capabilities and is updated on a continuous basis. Through the ENGlobal website, we seek to provide visitors and investors with a single point of contact for obtaining information about our company. Information on our website or any other website is not a part of this Report.
Client relationships are nurtured by our geographic advantage of having office locations near our larger customers. By having clients in close proximity, we are able to provide single, dedicated points of contact. Our growth depends in large measure on our ability to attract and retain qualified business development personnel with a respected reputation in the energy industry. Management believes that in-house marketing allows for more accountability and control, thus increasing profitability. We develop preferred provider and alliance agreements with clients in order to facilitate repeat business. These preferred provider agreements, also known as master services or umbrella agreements (“MSAs”) typically have a duration of three to five years. This allows our clients to release work to us without having to negotiate contract terms for each individual project. With the primary terms of the contract agreed to, add-on projects with these customers are easier to negotiate and can be accepted quickly, without the necessity of a bidding process. Management believes that these agreements can serve to stabilize project-centered operations.
We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution and have focused our business development teams on communicating these offerings to their clients. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
| 4 |
| Table of Contents |
Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a construction partner.
Our Automation group designs, integrates and commissions modular systems that include electronic distributed control, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.
Our Oil, Gas, and Petrochemical group focuses on providing engineering, procurement, construction, and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients. This group also provides engineering, fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification, storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.
Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military across the globe.
We have positioned ourselves as a full-service, vertically-integrated supplier in order to better accommodate the requests of our clients and capture opportunities of larger scope. A majority of these opportunities are expected to be in all sectors of the energy industry; however, some may be outside the energy sector. One result of our sales efforts is that our proposal pipeline continues to increase as we are now focused on selling complete packaged solutions as opposed to our past focus of primarily selling consultant man hours. Many of these proposals have very long lead times and have exceeded our expected award timing, which would imply that many of our customers will release awards when they are more confident that commodity prices have stabilized at a sufficient level or foreseeable time period. Backlog represents an estimate of gross revenues of all awarded contracts that have not been completed and will be recognized as revenue over the life of the project. Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur. Further, most contracts with clients may be terminated by either party at will, in which case the client would only be obligated to pay us for services provided through the termination date. A significant portion of our revenue is generated through MSAs with our clients. Projects awarded under these MSAs tend to be smaller in nature, but continuously awarded as each one is completed. In these instances, only the current unfinished projects are included in our backlog. Additionally, we have historically performed work under longer term contracts with the U.S. Navy that were generally renewed, released or awarded on an annual basis. Recently, the federal government has begun changing the contracting agency for this work. This has created some delays to the contracting sequence. At December 31, 2022, our backlog was $20.4 million. Of this amount, $14.9 million was for our Commercial segment and $5.5 million was for our Government segment. This compares to a total backlog of $12.8 million as of December 25, 2021 with $7.0 million for our Commercial segment and $5.8 million for our Government segment.
We continue to be mindful of our overhead structure. We have made significant investments in key business development and other essential personnel, product developments and new facilities and equipment, which all have negatively impacted our selling, general and administrative (“SG&A”) expense. While we believe the addition of these key personnel will allow the Company to expand its client base and acquire new projects, we recognize that the level of our SG&A is greater than it could be for a company our size and have started efforts to reduce headcount, reduce office and shop space, and implement other cost saving measures to address our lack of profitability. If anticipated revenue levels are not achieved to support the reduced level of our SG&A, we will continue these efforts to reduce SG&A expense. In addition, during the year ended December 31, 2022 we recorded a $1.9 million bad debt reserve due to a contract dispute with one of our major customers.
| 5 |
| Table of Contents |
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Available Information
You can find financial and other information about ENGlobal at our website at www.englobal.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are provided free of charge through our website and are available as soon as reasonably practicable after filing electronically or otherwise furnishing reports to the Securities and Exchange Commission (the “SEC”). Information relating to corporate governance at ENGlobal, including: (i) our Code of Business Conduct and Ethics for all of our employees, including our Chief Executive Officer and our Chief Financial Officer; (ii) our Code of Ethics for our Chief Executive Officer and our Senior Financial Officers; (iii) information concerning our directors and our Board of Directors Committees, including Committee charters; and (iv) information concerning transactions in ENGlobal securities by directors and executive officers, is available on our website under the Investors link. Information on our website or any other website is not a part of this Report. We will provide any of the foregoing information, for a reasonable fee, upon written request to Investor Relations, ENGlobal Corporation, 11740 Katy Fwy., Energy Tower III, Suite 1100, Houston, Texas 77079.
Reporting Segments
Our Commercial and Government segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. Separate operational leaders are in charge of our engineering offices and our automation offices, including the office that contracts with government agencies. The operating performance of our segments is regularly reviewed with the operational leaders of the two segments, the Executive Chairman (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Products and Services
The Commercial segment provides multi-disciplined engineering services and fabrication relating to the development, management and execution of projects requiring professional engineering and related project management services primarily to the energy industry throughout the United States. The Commercial segment currently operates through ENGlobal’s wholly-owned subsidiary, ENGlobal U.S., Inc. (“ENGlobal U.S.”). ENGlobal’s engineering staff has the capability of developing a project from the initial planning stages through detailed design and construction management. Our services include conceptual studies, project definition, cost estimating, engineering design, environmental compliance, material procurement, project management, construction management and fabrication.
| 6 |
| Table of Contents |
The Commercial segment derives revenue on contracts from time-and-material fees charged for professional and technical services. Its operating income is derived primarily from services it provides to the oil and gas industry. We also enter into contracts providing for the execution of projects on a fixed-price basis, whereby some, or all, of the project activities related to engineering, material procurement, construction management, automation, integration, and fabrication are performed for a fixed amount.
The Government segment provides services related to the design, integration and implementation of process distributed control and analyzer systems, advanced automated data gathering systems, information technology and the maintenance of these systems primarily to the U.S. Government globally. The Government segment operates through ENGlobal’s wholly-owned subsidiary, ENGlobal Government Services, Inc. (“EGS”).
EGS primarily provides automated fuel handling systems and maintenance services to branches of the U.S. military and public sector entities. Other clients of this division are government agencies, refineries, petrochemical and process industry customers worldwide. EGS provides electrical and instrument installation, technical services, and ongoing maintenance, calibration and repair services.
Competition
Our Commercial segment competes with a large number of public and private firms of various sizes, ranging from the industry’s largest firms, which operate on a worldwide basis to much smaller regional and local firms. Many of our competitors are larger than we are and have significantly greater financial and other resources available to them than we do. However, the largest firms in our industry are sometimes our clients, performing as program managers for very large-scale projects who subcontract a portion of their work to us. We also have many competitors who are smaller than us and who, as a result, may be able to offer services at more competitive prices.
Competition is centered on performance and the ability to provide the engineering, planning and project delivery skills required for completing projects in a timely, cost-efficient manner. The expertise of our management and technical personnel and the timeliness and quality of our support services are key competitive factors.
Our Government segment competes with a large number of public and private firms of various sizes, ranging from the industry’s largest firms, which operate on a worldwide basis to much smaller regional and local firms. Many of our competitors are larger than we are and have significantly greater financial and other resources available to them than we do. We also have many competitors who are smaller than us and who, as a result, may be able to offer services at more competitive prices.
Competition is centered on performance and the ability to provide the engineering, assembly and integration required to complete projects in a timely and cost-efficient manner. The technical expertise of our management team and technical personnel and the timeliness and quality of our support services are key competitive factors.
Customers
Our customer base consists primarily of Fortune 500 companies in the energy industry and the U.S. government. While we do not have continuing dependence on any single client or a limited group of clients, one or a few clients may contribute a substantial portion of our revenue in any given year or over a period of several consecutive years due to the longevity of major projects, such as facility upgrades or expansions. ENGlobal may work for many different subsidiaries or divisions of a client. The loss of a single large customer, including all of its subsidiaries or divisions, or the reduction in demand for our services by several customers in the same year could have a material impact on our financial results. We continue to focus substantial attention on improving customer services in order to enhance satisfaction and increase customer retention. Revenue generated through sources such as preferred provider relationships are longer term in nature and are not typically limited to one project.
A significant long-term trend among our clients and their industry counterparts has been outsourcing engineering services. This trend has fostered the development of ongoing, longer-term client arrangements. These arrangements vary in scope, duration and degree of commitment. While there is typically no guarantee that work will result from these agreements, often the arrangements form the basis for a longer-term client relationship. Despite their variety, we believe that these partnering relationships have a stabilizing influence on our revenue.
| 7 |
| Table of Contents |
Overall, our ten largest customers, who vary from one period to the next, accounted for 66.0% of our total revenues for 2022 and 86.0% of our total revenues for 2021. Most of our projects are specific in nature and we generally have multiple projects with the same clients. If we were to lose one or more of our significant clients and were unable to replace them with other customers or other projects, our business could be materially adversely affected. Our top two clients in 2022 were a contractor completing a renewable diesel facility and the U.S. Government. Even though we frequently receive work from repeat clients, our client list may vary significantly from year to year. Our potential revenue in all segments is dependent on continuing relationships with our customers. For the years ended December 31, 2022 and December 25, 2021, we had approximately 59 and 69 active customers, respectively.
Suppliers
Our ability to provide clients with services and systems in a timely and competitive manner depends on the availability of products and parts from our suppliers at competitive prices and on reasonable terms. Our suppliers are not obligated to have products on hand for timely delivery nor can they guarantee product availability in sufficient quantities to meet our demands. There can be no assurance that we will be able to obtain necessary supplies at prices or on terms we find acceptable. However, in an effort to maximize availability and maintain quality control, we generally procure components from multiple distributors on our clients’ behalf and in some cases we can take advantage of national agreements our clients may have entered into.
For example, all of the product components used by our Government segment are assembled using components and materials that are available from numerous domestic manufacturers and suppliers. There are approximately five principal suppliers of distributed control systems, each of which can be replaced by an equally viable competitor, and our clients typically direct the selection of their preferred supplier. Thus, in the vast majority of cases, we anticipate little or no difficulty in obtaining components in sufficient quantities and in a timely manner to support our installation and assembly operations in the Government segment. Units produced through the Government segment are not produced for inventory and component parts; rather, they are typically purchased on an as-needed basis. By being vendor neutral, ENGlobal is able to provide quality technology and platforms for the design of plant systems such as 3D modeling, process simulation and other technical applications.
Despite the foregoing, our Government segment relies on certain suppliers for necessary components and there can be no assurance that these components will continue to be available on acceptable terms. If a vendor does not continue to contract with us, it may be difficult to obtain alternative sources of supply without a material disruption in our ability to provide products and services to our customers. While we do not believe that such a disruption is likely, if it did occur, it could have a material adverse effect on our financial condition and results of operations.
Patents, Trademarks, Licenses
Our success depends in part upon our ability to protect our proprietary technology, which we do primarily through protection of our trade secrets and confidentiality agreements. In addition, the U.S. Patent and Trademark Office issued our “Integrated Rack” patent No. 7,419,061 B1 in 2008, our “Universal Master Control Station System” patent No. 8,601,491 B1 in 2013, our “Modular HVAC System for Providing Positive Pressure to an Interior of a Positive Pressure Facility” patent No. 8,670,870 in 2014, our “Method of Controlling a Plurality of Master Control Stations” patent No. 8,959,447 B1 and our “Client Configuration Tool” patent No. 8,983,636 B1 in 2015.
Our trade names are protected by registration as well as by common law trademark rights. Our trademark for the use of “ENGlobal” ® - “Engineered for Growth” ®, and “viMAC” ® in connection with our products are registered with the U.S. Patent and Trademark Office and we claim common law trademark rights for “ENGlobal” TM in connection with our services. We also claim common law trademark rights for “Global Thinking…Global Solutions” TM, “CARES - Communicating Appropriate Responses in Emergency Situations” TM, “riFAT” TM, “ACE” TM, and “ENGlobal Power Islands” TM.
There can be no assurance that the protective measures we currently employ will be adequate to prevent the unauthorized use or disclosure of our technology, or the independent, third-party development of the same or similar technology. Although our competitive position to some extent depends on our ability to protect our proprietary and trade secret information, we believe that other factors, such as the technical expertise and knowledge base of our management and technical personnel, as well as the timeliness and quality of the support services we provide, will also help us to maintain our competitive position.
| 8 |
| Table of Contents |
Environmental, Social and Governance (ESG), Human Capital, and Diversity, Equity and Inclusion (DEI)
Workforce Composition
As of December 31, 2022, we employed approximately 302 individuals on a full-time equivalent basis compared to approximately 198 individuals on a full-time equivalent basis as of December 25, 2021. The 52.5% increase in personnel in 2022 was attributable to the start-up of our field services and construction divisions, and increased staffing levels to address the increase in project volume during the year and the anticipated growth in 2023. We believe that our ability to recruit and retain highly skilled and experienced professional and technical personnel has been and will continue to be critical to our ability to execute our business plan. None of our employees are represented by a labor union or is subject to a collective bargaining agreement. We believe that relations with our employees are good.
Diversity and Inclusion
As a company focused on internal collaboration to achieve common goals and partnerships with a diverse group of stakeholders to optimize value, we believe a diverse workforce is critical to our success. As such, we endeavor to create an environment rich in diversity that welcomes those of all backgrounds, ethnicities, and experiences. We employ people from a diverse number of nationalities and ethnicities. Nearly 49% of our workforce is comprised of racial minority groups; approximately 15% of our workforce is female.
ENGlobal is committed to balance in our hiring practices and workplaces. Our recruiting efforts, development opportunities and retention initiatives include a focus on promoting gender and ethnicity balance in the workplace. As a contractor for various governmental entities we provide certain assurances of our initiatives related to workplace diversity.
We also are dedicated to the development and training of our workforce. Training begins with onboarding with job-specific instruction, integrating safety expectations, corporate ethics and behaviors that focus on workplace inclusion.
Benefits
We provide employees health and welfare benefits standard for the industry and their location of employment. All employees and their families (upon meeting eligibility requirements) are eligible to participate in the Company’s health insurance plan as well as the Company’s defined contribution (401(k)) plan with a discretionary Company match.
Health and Safety
Safety is one of our core values. We endeavor to make certain our employees have access to preventive policies, procedures, programs, and training as we work toward an accident-free workplace.
Our human capital initiatives are implemented by senior leadership with oversight from our Board of Directors. The Board’s Compensation and Nominating and Corporate Governance Committees oversee our human capital-related policies, programs, and initiatives that focus on diversity and benefits including employee safety, health and wellness matters.
| 9 |
| Table of Contents |
Government Regulations
ENGlobal and certain of its subsidiaries are subject to various foreign, federal, state, and local laws and regulations relating to our business and operations, and various health and safety regulations established by the Occupational Safety and Health Administration (OSHA). We are subject to a variety of state, local and foreign licensing, registration and other regulatory requirements governing the practice of engineering and other professional disciplines. For example, OSHA requires Process Safety Management to prevent the release of hazardous chemicals, the Department of Transportation (DOT) requires that pipeline operators are in full compliance with pipeline safety regulations, and the Environmental and Protection Agency (EPA) provides incentives to reduce chemical emissions. Currently, we are not aware of any situation or condition relating to the regulation of the Company, its subsidiaries, or personnel that we believe is likely to have a material adverse effect on our results of operations or financial condition.
Benefit Plans
ENGlobal sponsors a 401(k) retirement plan for its employees. The Company, at the direction of the Board of Directors, may make discretionary contributions. The Company reinstated the match of employees’ deferrals effective May 29, 2022. The Company matches 33% of employee deferrals up to 6% of eligible pre-tax compensation, for a maximum Company matching contribution of 2%.
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Report and in other documents that we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Report. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Report could have a material adverse effect on our business, financial condition and results of operations and that upon the occurrence of any of these events, the trading price of our common stock could decline. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of this Report.
RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY
Substantial doubt about our ability to continue as a going concern exists. Our audited financial statements for the period ended December 31, 2022 were prepared on the assumption that we would continue as a going concern. Those financial statements and the accompanying opinion of our auditor expressed a substantial doubt about our ability to continue as a going concern. Those audited financial statements did not include any adjustments that might result from the outcome of this uncertainty. Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Our ability to continue as a going concern is also subject to, among other factors, our ability to collect receivables from our clients when due and invoice our customers in a timely manner. If we are not able collect our receivables when due from our clients, our cash flow will be negatively impacted which could lead to us not being able to meet our current obligations.
We do not have material borrowing capacity under our revolving credit facility, which may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition. As of December 31, 2022, the credit limit under the Revolving Credit Facility was $1.8 million and outstanding borrowings were $1.7 million. On March 27, 2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. The limited availability under the Revolving Credit Facility may limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition.
| 10 |
| Table of Contents |
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 December 31, 2022, we had 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.
Our debt obligations may limit our financial flexibility. As of December 31, 2022, we had a total of approximately $1.7 million in debt outstanding under the Revolving Credit Facility, which matures on May 20, 2023. On March 27, 2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. We may incur additional debt in order to fund our operational activities. A higher level of indebtedness increases the risk that our financial flexibility may deteriorate. Our ability to meet our debt obligations and service our debt depends on future performance. General economic conditions, commodity prices, and financial, business and other factors may affect our operations and our future performance. Many of these factors are beyond our control and we may not be able to generate sufficient cash flow to pay the debt, and future working capital, borrowings and equity financing may not be available to pay or refinance such debt.
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. The prolonged nature of the COVID–19 pandemic has resulted, and may continue to result, in a significant decrease in business and/or has caused, and may in the future cause, our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a resurgence 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. 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 resurges 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.
Our future revenue depends on our ability to consistently bid and win new contracts, provide high-quality, cost-effective services, and to maintain and renew existing contracts. Our failure to effectively obtain future contracts could adversely affect our profitability. Our future revenue and overall results of operations require us to successfully bid on new contracts, provide high-quality, cost-effective services, and renew existing contracts. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors, such as market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to perform under the terms of the contract. When negative market conditions arise, or if we fail to secure adequate financial arrangements or required governmental approvals, we may not be able to pursue particular projects, which could adversely affect our profitability. These factors have impacted our operations in the past several years and may continue to do so.
Economic downturns and the volatility and level of oil and natural gas prices could have a negative impact on our businesses. Demand for the services offered by us has been and is expected to continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including demand for engineering services in the petroleum refining, petroleum chemical and pipeline industries and in other industries that we provide services to. During economic downturns in these industries, our customers’ need to engage us may decline significantly and projects may be delayed or cancelled. However, these factors can cause our profitability to decline significantly. Our clients’ willingness to undertake these activities depends largely on the following factors:
| ● | Prices and expectations about future prices of oil and natural gas; |
| ● | Domestic and foreign supply of and demand for oil and natural gas; |
| 11 |
| Table of Contents |
| ● | The cost of exploring for, developing, producing and delivering oil and natural gas; |
| ● | Weather conditions, such as hurricanes, which may affect our clients’ ability to produce oil and natural gas; |
| ● | Available pipeline, storage and other transportation capacity; |
| ● | Federal, state and local regulation of oilfield activities; |
| ● | Environmental concerns regarding the methods our customers use to produce oil and natural gas; |
| ● | The availability of water resources and the cost of disposal and recycling services; and |
| ● | Seasonal limitations on access to work locations. |
Anticipated future prices for oil and natural gas are a primary factor affecting spending by our clients. Historically, the markets for oil and natural gas have been volatile and lower prices or volatility in prices for oil and natural gas typically decreases spending by our clients, which can cause rapid and material declines in demand for our services and in the prices we are able to charge for our services. Further, a sustained period of lower prices and volatility in prices for oil and natural gas can exacerbate the potential for cancellations and adjustments to our backlog from our clients in the oil and natural gas industry. The February 2022 invasion of Ukraine by Russia is an ongoing conflict. As a result of the invasion, certain events are effecting the global and United States economy, including increased inflation, substantial increases in the prices of oil and natural gas, large Western companies ceasing to do business in Russia and uncertain capital markets with declines in the leading market indexes. The duration of this conflict and its impact on our business are uncertain, but it is likely to continue causing disruption and instability which may lead to additional volatility in prices for oil and natural gas.
We derive a portion of our revenue from U.S. federal, state and local government agencies, and as a result, any disruption in government funding, any change in our ability to comply with various procurement laws and regulations as a U.S. Government contractor, or any exercise by the U.S. Government of certain rights to modify, delay, curtail, renegotiate, or terminate existing contracts for convenience could adversely affect our business. In 2022, we generated approximately 18.6% of our revenue from contracts with U.S. federal, state and local government agencies. A significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. Our backlog includes only the portion of the contract award for which funding has been appropriated. Whether appropriations are made, and the timing of payment of appropriated amounts, may be influenced by numerous factors that could affect our U.S. Government contracting business, including the following:
| ● | The failure of the U.S. Government to complete its budget and appropriations process before its fiscal year-end, which may result in U.S. Government agencies delaying the procurement of services; |
| ● | Budget constraints or policy changes resulting in delay or curtailment of expenditures related to the services we provide; |
| ● | The timing and amount of tax revenue received by federal, and state and local governments, and the overall level of government expenditures; |
| ● | Delays associated with insufficient numbers of government staff to oversee contracts; |
| ● | Competing political priorities and changes in the political climate with regard to the funding or operation of the services we provide; |
| ● | Unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits or other events that may impair our relationship with federal, state or local governments; |
| ● | A dispute with or improper activity by any of our subcontractors; and |
| ● | General economic or political conditions. |
In addition, we must comply with and are affected by U.S. federal, state, local, and foreign laws and regulations relating to the formation, administration and performance of government contracts. These laws and regulations affect how we do business with our clients and, in some instances, impose additional costs on our business operations. Although we take precautions to prevent and deter fraud, misconduct, and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud, or other improper activities. U.S. government agencies, such as the Defense Contract Audit Agency (“DCAA”), routinely audit and investigate government contractors and evaluate compliance with applicable laws, regulations, and standards. In addition, during the course of its audits, the DCAA may question our incurred project costs. If the DCAA believes we have accounted for such costs in a manner inconsistent with the requirements of applicable laws, regulations and standards, the DCAA auditor may recommend that such costs be disallowed. Historically, we have not experienced significant disallowed costs as a result of government audits. However, we can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.
| 12 |
| Table of Contents |
Also, U.S. Government projects in which we participate as a contractor or subcontractor may extend for several years. Generally, government contracts include the right to modify, delay, curtail, renegotiate, or terminate contracts and subcontracts at the government’s convenience any time prior to their completion. Any decision by a U.S. Government client to modify, delay, curtail, renegotiate, or terminate our contracts at their convenience may result in a decline in our profits and revenue.
We are reviewing strategic transactions and there can be no assurance that we will be successful in identifying or completing any strategic alternative, that any such strategic transactions will result in additional value for our shareholders or that the process will not have an adverse impact on our business. Our Board of Directors continues to review strategic transactions. These transactions could include, but are not limited to, strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. There can be no assurance that the review of strategic transactions 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 transactions 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 transactions. 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 transactions 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.
We may consider growing through acquisitions and may not be successful in doing so or in integrating effectively any business or operations we may acquire. As part of our historic business strategy, we have expanded our business through strategic acquisitions. Appropriate acquisitions could allow us to expand into new geographical locations, offer new services, add complementary businesses to expand our portfolio of services, enhance our capital strength or acquire additional talent. Accordingly, our future performance will be impacted by our ability to identify appropriate businesses to acquire, negotiate favorable terms for such acquisitions and effectively and efficiently integrate such acquisitions into our existing businesses. There is no certainty that we will succeed in completing any future acquisitions or whether we will be able to successfully integrate any acquired businesses or to operate them profitably.
Acquisitions involve numerous risks, any of which could harm our business, including:
| ● | Difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of the target company and realizing the anticipated synergies of the combined businesses; |
| ● | Difficulties in supporting and transitioning customers, if any, of the target company; |
| ● | Diversion of our financial and management resources from existing operations; |
| ● | The price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity; |
| ● | Risks of entering new markets in which we have limited or no experience; |
| ● | Potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business; |
| ● | Assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s services; |
| ● | Risks associated with possible violations of the Foreign Corrupt Practices Act and other anti-corruption laws as a result of any acquisition or otherwise applicable to our business; and |
| ● | Inability to generate sufficient net income to justify the acquisition costs. |
| 13 |
| Table of Contents |
Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairment in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could lower the market price of our common stock. As a result, if we fail to properly evaluate acquisitions or investments, we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of amounts that we anticipate.
Our business and operating results could be adversely affected by our inability to accurately estimate the overall risks, revenue or costs on a contract. Revenue recognition for a contract requires judgment relative to assessing the contracts estimated risks, revenue and costs and technical issues. Due to the size, complexity and nature of many of our contracts, the estimation of overall risk, revenue and cost at completion is complicated and subject to many variables. Changes in underlying assumptions, circumstances or estimates have in the past and may continue to adversely affect future period financial performance.
We may incur significant costs in providing services in excess of original project scope without having an approved change order. After commencement of a contract, we may perform, without the benefit of an approved change order from the customer, additional services requested by the customer that were not contemplated in our contract price due to customer changes or to incomplete or inaccurate engineering, project specifications, and other similar information provided to us by the customer. Our construction contracts generally require the customer to compensate us for additional work or expenses incurred under these circumstances as long as we obtain prior written approval. A failure to obtain adequate written approvals prior to performing the work could require us to record an adjustment to revenue and profit recognized in prior periods under the percentage-of-completion accounting method. Any such adjustments, if substantial, could have a material adverse effect on our results of operations and financial condition, particularly for the period in which such adjustments are made. There can be no assurance that we will be successful in obtaining, through negotiation, arbitration, litigation or otherwise, approved change orders in an amount sufficient to compensate us for our additional, unapproved work or expenses.
Our focus on four strategic market initiatives could subject us to increased costs and related risks and may not achieve the intended results. Focusing our business activities on four strategic market initiatives could subject us to increased costs and related risks and we may not achieve the intended results. These initiatives may require additional investments by the Company and additional attention from management, and if not successful, we may not realize the return on our investments as anticipated or our operating results could be adversely affected by slower than expected sales growth or additional costs.
The failure to attract and retain key professional personnel could materially adversely affect our business. Our success depends on attracting and retaining qualified personnel even in an environment where the contracting process is more difficult. We are dependent upon our ability to attract and retain highly qualified managerial, technical and business development personnel. In particular, competition for key management personnel continues to be intense. We cannot be certain that we will retain our key managerial, technical, and business development personnel or be able to attract or assimilate key personnel in the future. Failure to attract and retain such personnel would materially adversely affect our businesses, financial position, results of operations and cash flows.
| 14 |
| Table of Contents |
Our dependence on one or a few customers could adversely affect us. One or a few clients have in the past and may in the future contribute a significant portion of our consolidated revenue in any one year or over a period of several consecutive years. In 2022, our top three clients accounted for 17.3%, 12.8% and 7.9% of our revenue, respectively, and our ten largest customers accounted for 66.0% of our revenue. As our backlog frequently reflects multiple projects for individual clients, one major customer may comprise a significant percentage of our backlog at any point in time. Because these significant customers generally contract with us for specific projects, we may lose them in other years as their projects with us are completed. If we do not continually replace them with other customers or other projects, our business could be materially adversely affected. Also, the majority of our contracts can be terminated at will. Although we have long-standing relationships with many of our significant customers, our contracts with these customers are on a project-by-project basis and the customers may unilaterally reduce or discontinue their purchases at any time. In addition, dissatisfaction with the results of a single project could have a much more widespread impact on our ability to get additional projects from a single major client. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations.
Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our clients, which could damage our reputation and adversely affect our revenue, profitability and operating results. Our information technology systems are subject to systems failures, including network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, malicious code, cyber-attacks, phishing and other cyber security problems, natural disasters, power shortages or terrorist attacks. Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. Failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Any system or service disruptions if not anticipated and appropriately mitigated could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our clients for work performed on our contracts, collect the amounts that have been billed and produce accurate financial statements in a timely manner. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our results of operations could be materially and adversely affected. We have invested and will continue to pursue further investments in systems that will allow us to achieve and remain in compliance with the regulations governing our business; however, there can be no assurance that such systems will be effective at achieving and maintaining compliance or that we will not incur additional costs in order to make such systems effective.
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. As of December 31, 2022, our backlog was $20.4 million. We expect a majority of this backlog to be completed in 2023. We cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and profits that we actually earn. The potential for cancellations and adjustments to our backlog are exacerbated by economic conditions, particularly in our chosen area of concentration, the energy industry. The markets for oil and natural gas have been volatile which can exacerbate the potential for cancellations and adjustments to our backlog from our clients in the oil and natural gas industry.
Liability claims could result in losses. Providing engineering and design services involves the risk of contract, professional errors and omissions and other liability claims, as well as adverse publicity. Further, many of our contracts require us to indemnify our clients not only for our negligence, if any, but also for the concurrent negligence of our clients. We currently maintain liability insurance coverage, including coverage for professional errors and omissions. However, claims outside of or exceeding our insurance coverage may be made. A significant claim could result in unexpected liabilities, take management time away from operations, and have a material adverse impact on our cash flow.
| 15 |
| Table of Contents |
Unsatisfactory safety performance can affect customer relationships, result in higher operating costs and result in high employee turnover. Our workers are subject to the normal hazards associated with providing services on construction sites and industrial facilities. Even with proper safety precautions, these hazards can lead to personal injury, loss of life, damage to, or destruction of property, plant and equipment, and environmental damages. We are intensely focused on maintaining a safe environment and reducing the risk of accidents across all of our job sites. However, poor safety performance may limit or eliminate potential revenue streams from many of our largest customers and may materially increase our future insurance and other operating costs. In hiring new employees, we normally target experienced personnel; however, we also hire inexperienced employees. Even with thorough safety training, inexperienced employees have a higher likelihood of injury which could lead to higher operating costs and insurance rates.
Our dependence on third-party subcontractors and equipment manufacturers could adversely affect us. We rely on third-party subcontractors as well as third-party suppliers and manufacturers to complete our projects. To the extent that we cannot engage subcontractors or acquire supplies or materials, our ability to complete a project in a timely fashion may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price or time-and-material contracts, we could experience losses on these contracts. In addition, if a subcontractor or supplier is unable to deliver its services or materials according to the negotiated contract terms for any reason, including the deterioration of its financial condition or over-commitment of its resources, we may be required to purchase the services or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services or materials were needed.
Force majeure events such as natural disasters or global or national health epidemics or concerns, such as the recent COVID-19 coronavirus outbreak, could negatively impact the economy and the industries we service, which may negatively affect our financial condition, results of operations and cash flows. Force majeure events, such as hurricanes or global or national health epidemics or concerns, such as the recent COVID-19 coronavirus outbreak, could negatively impact the economies of the areas in which we operate. For example, in 2017 Hurricane Harvey caused considerable damage along the Gulf Coast not only to the refining and petrochemical industry, but also the commercial segment which competes for labor, materials and equipment resources needed throughout the entire United States. In some cases, we remain obligated to perform our services after a natural disaster even though our contracts may contain force majeure clauses. In those cases, if we are not able to react quickly and/or negotiate contractual relief on favorable terms to us, our operations may be significantly and adversely affected, which would have a negative impact on our financial condition, results of operations and cash flows.
RISKS RELATED TO OUR COMMON STOCK OUTSTANDING
The trading price of our stock may continue to be volatile, which could cause you to lose part or all of your investment. The stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. In particular, the trading price of our common stock has been highly volatile and could continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. During the past twelve months, the sales price of our stock ranged from a low of $0.47 per share in March 2023 to a high of $2.24 per share in August 2022. As a result of this volatility, our stock could experience rapid and substantial decreases in price, and you may be able to sell our stock only at a substantial loss to the price at which you purchased our stock.
Some, but not all, of the factors that may cause the market price of our common stock to fluctuate include:
| · | fluctuations in our quarterly or annual financial results or the quarterly or annual financial results of companies perceived to be similar to us or relevant for our business; |
| · | changes in estimates of our financial results or recommendations by securities analysts; |
| · | failure of our services or products to achieve or maintain market acceptance; |
| · | changes in market valuations of similar or relevant companies; |
| · | success of competitive service offerings or technologies; |
| · | changes in our capital structure, such as the issuance of securities or the incurrence of debt; |
| · | announcements by us or by our competitors of significant services, contracts, acquisitions or strategic alliances; |
| · | regulatory developments in the United States, foreign countries, or both; |
| · | litigation; |
| · | additions or departures of key personnel; |
| · | investors’ general perceptions; and |
| · | changes in general economic, industry or market conditions. |
| 16 |
| Table of Contents |
In addition, if the market for energy related stocks, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition, or results of operations. Further, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
We are not currently in compliance with Nasdaq’s continued listing requirements. If we are unable to comply with Nasdaq’s continued listing requirements, our common stock could be delisted, which could affect the price of our common stock and liquidity and reduce our ability to raise capital. Our common stock is currently listed on Nasdaq. Nasdaq has established certain quantitative criteria and qualitative standards that companies must meet to remain listed for trading on this market. On December 21, 2022, we received written notice from Nasdaq indicating that we are not in compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq, as set forth in Listing Rule 5550(a)(2).
The notice has no immediate effect on the listing of our common stock, and our common stock will continue to trade on Nasdaq under the symbol “ENG” at this time. We may regain compliance with the minimum bid price requirement in accordance with Listing Rule 5810(c)(3)(A) during the 180 calendar day period from December 21, 2022 to June 19, 2023. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days before June 19, 2023.
If we are not in compliance by June 19, 2023, we may be afforded a second 180 calendar day period to regain compliance. To qualify, we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, except for the minimum bid price requirement. In addition, we would be required to notify Nasdaq of our intent to cure the minimum bid price deficiency, which may include implementing a reverse stock split.
If we do not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal the Nasdaq Staff’s determination to a Nasdaq Listing Qualifications Panel and request a hearing.
We intend to monitor the closing bid price of our common stock and consider our available options to resolve the noncompliance with the minimum bid price requirement. No determination regarding our response has been made at this time. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other Nasdaq listing criteria.
SEC regulations limit the amount of funds we may raise during any 12-month period pursuant to our shelf registration statement on Form S-3. Our registration statement on Form S-3 (File No. 333-252572), including the accompanying base prospectus and related prospectus supplements, is subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve calendar-month period unless our public float is at least $75 million. As of January 31, 2023, our public float (i.e., the aggregate market value of our outstanding equity securities held by non-affiliates) was approximately $26.1 million, based on the closing price per share of our Common Stock as reported on Nasdaq on January 31, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition, during the 12 calendar month period that ends on the date of this filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the registration statement. If our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)(3) update as required under the Securities Act.
| 17 |
| Table of Contents |
A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to additional price volatility. Historically there has not been a large short position in our common stock. However, in the future investors may purchase shares of our common stock to hedge existing exposure or to speculate on the price of our common stock. Speculation on the price of our common stock may involve long and short exposures. To the extent an aggregate short exposure in our common stock becomes significant, investors with short exposure may have to pay a premium to purchase shares for delivery to share lenders at times if and when the price of our common stock increases significantly, particularly over a short period of time. Those purchases may in turn, dramatically increase the price of our common stock. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly correlated to our business prospects, financial performance or other traditional measures of value for the Company or our common stock.
A small number of stockholders own a significant portion of our outstanding common stock, thus limiting the extent to which other stockholders can effect decisions subject to stockholder vote. Directors, executive officers and principal stockholders of ENGlobal and their affiliates, beneficially own approximately 31% of our outstanding common stock on a fully diluted basis as of the date of this Report. Accordingly, these stockholders, as a group, are able to affect the outcome of stockholder votes, including votes concerning the adoption or amendment of provisions in our Articles of Incorporation or bylaws and the approval of mergers and other significant corporate transactions.
The existence of these levels of ownership concentrated in a few persons makes it unlikely that any other holder of common stock will be able to affect the management or direction of the Company. These factors may also have the effect of delaying or preventing a change in management or voting control of the Company.
Our Board of Directors may authorize future sales of ENGlobal common stock, which could result in a decrease in the market value to existing stockholders of the shares they hold. Our Articles of Incorporation authorize our Board of Directors to issue up to an additional 39,199,383 shares of common stock and an additional 2,000,000 shares of undesignated preferred stock as of December 31, 2022. Subject to the terms of our Articles of Incorporation, these shares may be issued without stockholder approval unless the issuance is 20% or more of our outstanding common stock, in which case the NASDAQ requires stockholder approval. We may issue shares of stock in the future in connection with acquisitions or financings. In addition, we may issue restricted stock or options under our 2021 Long Term Incentive Plan. Future issuances of substantial amounts of common stock, or the perception that these sales could occur, may affect the market price of our common stock. In addition, the ability of the Board of Directors to issue additional stock may discourage transactions involving actual or potential changes of control of the Company, including transactions that otherwise could involve payment of a premium over prevailing market prices to holders of our common stock.
Future issuances of our securities in connection with financing transactions or under equity incentive plans could dilute current stockholders’ ownership. We may decide to raise additional funds to fund our operations through the issuance of public or private debt or equity securities. We cannot predict the effect, if any, that future issuances of debt, our common stock, other equity securities or securities convertible into or exchangeable for our common stock or other equity securities or the availability of any of the foregoing for future sale, will have on the market price of our common stock. The issuance of substantial amounts of our common stock or securities convertible into or exchangeable for our common stock (including shares issued upon the exercise of stock options or the conversion or exchange of any convertible or exchangeable securities outstanding now or in the future), or the perception that such issuances could occur, may adversely affect prevailing market prices for our common stock. In addition, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.
| 18 |
| Table of Contents |
ITEM 2. PROPERTIES
We lease space in five locations in the U.S. totaling approximately 191,127 square feet. The leases have remaining terms ranging from eight months to one hundred sixteen months and are on terms that we consider commercially reasonable. We have no major encumbrances related to these properties.
Our principal office is located in Houston, Texas. We have other offices located in Tulsa, Oklahoma, Brookshire, Texas, and Monahans, Texas. Approximately 61,438 square feet of our total office space is designated for our professional, technical and administrative personnel. We believe that our office and other facilities are well maintained and adequate for existing and planned operations at each operating location. Our Commercial segment performs assembly services in its Houston, Texas integration facility with approximately 81,089 square feet of space and performs fabrication services in its Brookshire, Texas facility with approximately 45,000 square feet of shop space. The previous fabrication facility located in Henderson, TX was moved to the Brookshire, TX location.
Location |
| Square Feet |
| |
Brookshire, TX |
|
| 45,000 |
|
Houston, TX |
|
| 26,006 |
|
Houston, TX (Portwall) |
|
| 81,089 |
|
Tulsa, OK |
|
| 35,432 |
|
Monahans, TX |
|
| 3,600 |
|
|
|
| 191,127 |
|
ITEM 3. 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 4. MINE SAFETY DISCLOSURES
Not applicable.
| 19 |
| Table of Contents |
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock has been quoted on the NASDAQ Capital Market (NASDAQ - CM) under the symbol “ENG” since April 16, 2013 and the NASDAQ Global Market prior to that date. Newspaper and on-line stock listings identify us as “ENGlobal.”
As of December 31, 2022, approximately 87 stockholders of record held our common stock. We do not have information regarding the number of holders of beneficial interests in our common stock.
Issuer Purchases of Equity Securities
The following table sets forth certain information with respect to repurchases of our common stock for the fourth quarter of 2022:
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) |
| ||||
September 25, 2022 to October 29, 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
October 30, 2022 to November 26, 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
November 27, 2022 to December 31, 2022 |
|
| — |
|
|
| — |
|
|
| — |
|
| $ | — |
|
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 December 31, 2022, 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. |
| 20 |
| Table of Contents |
Dividend Policy
We have never declared or paid a cash dividend on our common stock. We intend to retain any future earnings for reinvestment in our business and we do not intend to pay cash dividends in the foreseeable future. The payment of dividends in the future, if any, will depend on numerous factors, including our earnings, capital requirements and operating and financial position as well as general business conditions.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements and Notes thereto, included elsewhere in this Report.
Overview
ENGlobal Corporation is a leading provider of innovative, delivered project solutions primarily to the energy industry. We deliver these solutions to our clients by combining our vertically-integrated engineering and professional project execution services with our automation and systems integration expertise and fabrication capabilities. We believe our vertically-integrated strategy allows us to differentiate our company from most of our competitors as a full service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their project cost and schedules. Our strategy and positioning has also allowed the Company to pursue larger scopes of work centered around many different types of modularized engineered systems.
We focus on four strategic markets where we have a long history of delivering project solutions and can provide complete project execution and have focused our business development teams on communicating these offerings to their clients. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
We continue to be mindful of our overhead structure. We have made significant investments in key business development and other essential personnel, product developments and new facilities and equipment, which have all negatively impacted our selling, general and administrative (“SG&A”) expense. While believe these investments will allow the Company to expand its client base and acquire new projects, we recognize that the level of our SG&A is greater than it could be for a company our size and have started efforts to reduce headcount, reduce office and shop space, and implement other cost saving measures to address our lack of profitability. If anticipated revenue levels are not achieved to support the reduced level of our SG&A, we will continue these efforts to reduce SG&A expense. In addition, during the year ended December 31, 2022, we recorded a $1.9 million bad debt reserve due to a contract dispute with one of our major customers.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Results of Operations
Our revenue is comprised of services revenue and the sale of engineered modular solutions. We generally recognize service revenue as soon as the services are performed. During 2022, we worked on 242 projects ranging in size from $1 thousand to $28.7 million. The average size of the projects during 2022 was $677 thousand and we recorded an average revenue of $168 thousand per project.
| 21 |
| Table of Contents |
In the course of providing our services, we routinely provide materials and equipment and may provide construction management or construction services. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in total are at margins much lower than those of our services business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The use of subcontractor services can change significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of our core business trends.
Segment operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, bad debt and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment’s operations. Corporate SG&A expenses includes investor relations, governance, finance, accounting, health, safety, environmental, human resources, legal and information technology which are unrelated to specific projects but which are incurred to support corporate activities.
Reporting Segments
Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. Separate operational leaders are in charge of our engineering offices and our automation offices, including the office that contracts with government agencies. The operating performance of our segments is regularly reviewed with the operational leaders of the two segments, the CEO, CFO and others. This group represents the CODM for ENGlobal.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Comparison of the years ended December 31, 2022 and December 25, 2021
The following table set forth below, for the years ended December 31, 2022 and December 25, 2021, provides 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 year ended December 31, 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenue |
| $ | 32,096 |
|
| $ | 8,093 |
|
| $ | — |
|
| $ | 40,189 |
|
|
| 100.0 | % |
Gross profit (loss) |
|
| (5,887 | ) |
|
| 1,675 |
|
|
| — |
|
|
| (4,212 | ) |
|
| (10.5 | )% |
SG&A |
|
| 8,608 |
|
|
| 740 |
|
|
| 4,767 |
|
|
| 14,115 |
|
|
| 35.1 | % |
Operating income (loss) |
|
| (14,495 | ) |
|
| 935 |
|
|
| (4,767 | ) |
|
| (18,327 | ) |
|
| (45.6 | )% |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 75 |
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (223 | ) |
|
|
|
|
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (39 | ) |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (18,514 | ) |
|
| (46.1 | )% |
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (0.52 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
| Government Services |
|
| Corporate |
|
| Consolidated |
|
|
|
|
| ||||
For the year ended December 25, 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
| 27,986 |
|
|
| 8,424 |
|
|
| — |
|
|
| 36,410 |
|
|
| 100.0 | % |
Gross profit (loss) |
|
| (1,567 | ) |
|
| 924 |
|
|
| — |
|
|
| (643 | ) |
|
| (1.8 | )% |
SG&A |
|
| 7,032 |
|
|
| 892 |
|
|
| 4,909 |
|
|
| 12,833 |
|
|
| 35.2 | % |
Operating income (loss) |
|
| (8,599 | ) |
|
| 32 |
|
|
| (4,909 | ) |
|
| (13,476 | ) |
|
| (37.0 | )% |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,063 |
|
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (212 | ) |
|
|
|
|
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (60 | ) |
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (5,685 | ) |
|
| (15.6 | )% |
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (0.18 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
|
| Government Services |
|
| Corporate |
|
| Consolidated |
|
|
|
|
| ||||
Year Over Year Increase (Decrease) in Operating Results: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 4,110 |
|
| $ | (331 | ) |
| $ | — |
|
| $ | 3,779 |
|
|
| 10.4 | % |
Gross profit (loss) |
|
| (4,320 | ) |
|
| 751 |
|
|
| — |
|
|
| (3,569 | ) |
|
|
|
|
SG&A |
|
| 1,576 |
|
|
| (152 | ) |
|
| (142 | ) |
|
| 1,282 |
|
|
| 10.0 | % |
Operating income (loss) |
|
| (5,896 | ) |
|
| 903 |
|
|
| 142 |
|
|
| (4,851 | ) |
|
| 36.0 | % |
Other income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (7,988 | ) |
|
|
|
|
Interest expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (11 | ) |
|
|
|
|
Tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 21 |
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (12,829 | ) |
|
| 225.7 | % |
Basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | (0.34 | ) |
|
|
|
|
| 22 |
| Table of Contents |
Revenue – Overall, our revenue for the year ended December 31, 2022, as compared to the year ended December 25, 2021, increased $3.8 million, or 10.4%, to $40.2 million from $36.4 million. Revenue from the Commercial segment increased $4.1 million, or 14.6%, to $32.1 million for the year ended December 31, 2022, as compared to $28.0 million for the comparable period in 2021. Revenue from the Government Services segment decreased $0.3 million, or 3.9%, to $8.1 million for the year ended December 31, 2022 as compared to $8.4 million for the comparable period in 2021. Our 2022 revenue for the Commercial segment increased primarily due to project awards with new customers as we continue our business development efforts to increase our backlog, partially offset by the completion of one large project and projects that ended without subsequent renewals. Our 2022 revenue for the Government Services segment decreased primarily due the ending of a contract and transition to new projects awarded in 2022.
Gross Profit (Loss) – Gross loss for the year ended December 31, 2022 was $4.2 million, an increase of $3.6 million, or 555.1%, from a gross loss of $0.6 million for the comparable period in 2021. Gross loss margin was 10.5% for the year ended December 31, 2022, an increase from the 1.8% gross loss margin for the year ended December 25, 2021.
Gross loss in our Commercial segment increased $4.3 million, or 275.7%, to a gross loss of $5.9 million for a gross loss margin of 18.3% for the year ended December 31, 2022 as compared to a gross loss of $1.6 million and gross loss margin of 5.6% for the year ended December 25, 2021. The increase in gross loss margin is primarily attributable to the inefficient use of personnel to complete projects in addition to the impairment of the license agreement acquired during 2022.
Gross profit in the Government Services segment increased $0.8 million, or 81.3%, to $1.7 million for a gross profit margin of 20.7% for the year ended December 31, 2022 as compared to gross profit of $0.9 million with a gross profit margin of 11.0% for the year ended December 25, 2021. The increase in gross profit is due to an efficient transition out of one of our Government Services contracts.
Selling, General and Administrative – Overall, our SG&A expenses increased by $1.3 million for the year ended December 31, 2022 as compared to the year ended December 25, 2021. This increase in SG&A was driven by increases in rent expense of $0.5 million, computer software expense of $0.5 million, bad debt expense of $0.5 million, and travel expense of $0.1 million, partially offset by decreases in legal expense of $0.2 million, and recruiting expense of $0.1 million. We continue to focus on reducing expenses to keep our costs in line with our revenue levels. These cost reduction measures include reducing headcount and reducing office and shop space.
| 23 |
| Table of Contents |
Other income, net – Other income, net of expense, decreased $8.0 million for the year ended December 31, 2022 as compared to the year ended December 25, 2021 primarily due to a $1.7 million employee retention credit recorded in the first quarter of 2021, $5.0 million of PPP loan forgiveness recorded in the third quarter of 2021, and a $1.4 million employee retention credit recorded in the third quarter of 2021, with no comparable occurrences in 2022.
Tax expense – Tax expense was $0.1 million for the year ended December 31, 2022 and December 25, 2021.
Net Income (Loss) – Net loss for the year ended December 31, 2022 was $18.5 million compared to a net loss of $5.7 million for the year ended December 25, 2021, primarily as a result of the increase in gross loss in 2022, in addition to the employee retention credit in the first and third quarters of 2021 and the PPP Loan forgiveness in the third quarter of 2021, with no comparable occurrences in 2022.
Liquidity and Capital Resources
Overview
We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, sales of common stock pursuant to the ATM Agreement (defined below), and borrowings under the Revolving Credit Facility. Our cash decreased to $3.5 million at December 31, 2022 from $19.2 million at December 25, 2021, as our operating activities used approximately $14.5 million in net cash during the year ended December 31, 2022 primarily due to cash used to fund our operating loss. Our working capital as of December 31, 2022 was $7.1 million as compared to $26.2 million as of December 25, 2021.
On May 21, 2020, we entered into the Revolving Credit Facility (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 December 31, 2022, the credit limit under the Revolving Credit Facility was $1.8 million and outstanding borrowings were $1.7 million, which yields enough interest to cover our minimum monthly interest charge. On March 27, 2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. As of December 31, 2022, we were in compliance with all of the covenants under the Revolving Credit Facility. Our Revolving Credit Facility matures on May 20, 2023.
In addition, on January 29, 2021, we filed a shelf registration statement on Form S-3 (File No. 333-252572) (the “Registration Statement”) with the SEC, pursuant to which we may offer and sell, at our option, securities having an aggregate offering price of up to $100 million, subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million, as described further below. On January 29, 2021, we entered into an at market issuance sales agreement with B. Riley Securities, Inc., which was subsequently terminated pursuant to its terms on January 7, 2022.
On June 1, 2021, we entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which we sold and issued an aggregate of 7,142,859 shares of the Company’s common stock to certain institutional investors at an offering price of $2.80 per share in a registered direct offering priced at-the-market under NASDAQ rules for net proceeds of approximately $18.7 million after deducting the fees of A.G.P./Alliance Global Partners, the placement agent, and related offering expenses.
| 24 |
| Table of Contents |
On January 11, 2022, we entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which we may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated to make any sales under the 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. The Registration Statement, including the accompanying prospectus and related prospectus supplements related to the “at the market offering”, is subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million. As of January 31, 2023, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $26.1 million, based on the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market on January 31, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition, during the 12 calendar month period that ends on the date of this filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the Registration Statement. If our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)(3) update as required under the Securities Act.
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of 3,971,000 shares (the “Shares”) of the Company’s common stock, at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000 shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes. The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to the ATM Agreement.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern, as discussed in Part II, Item 8, Note 1. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses.
Our Board of Directors continues to review strategic transactions, which could include strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board’s strategic review will result in any transaction, or any assurance as to its outcome or timing.
| 25 |
| Table of Contents |
Cash Flows from Operating Activities
Operating activities used approximately $14.5 million in net cash during the year ended December 31, 2022 primarily due to cash used to fund our operating loss of $18.5 million, a $1.9 million increase in contract assets net of contract liabilities, a $1.4 million decrease in contingent consideration, and a $0.2 million decrease in accrued compensations and benefits, partially offset by a $2.5 million increase in trade payables, a $2.5 million impairment of intangible assets, a $0.9 million decrease in other receivables due to a partial refund of the employee retention credit, $0.2 million of share-based compensation, a $0.4 million increase in other current liabilities, $0.9 million of depreciation and amortization, and $0.1 million from other components of working capital. Operating activities used approximately $13.7 million in net cash during the year ended December 25, 2021 primarily due to cash used to fund our operating loss of $5.7 million, $4.9 million of PPP Loan forgiveness, a $3.1 million increase in other current assets, a $0.1 million decrease in trade payables, a $1.4 million decrease in accrued compensations and benefits, and a $0.1 million decrease in other current liabilities and other components of working capital, partially offset by a $0.7 million decrease in contract assets net of contract liabilities, $0.8 million of share-based compensation and depreciation, and a $0.1 million decrease in trade receivables.
Cash Flows from Investing Activities
Investing activities used cash of $1.5 million during the year ended December 31, 2022 primarily related to the Calvert acquisition as discussed in Part II, Item 8, Note 18, and the purchase of computer hardware and software, and machinery and equipment to outfit our fabrication and field services businesses. Investing activities used cash of $0.2 million during the year ended December 25, 2021 primarily related to the purchase of computer hardware and machinery and equipment.
Cash Flows from Financing Activities
Financing activities provided cash of $0.3 million during the year ended December 31, 2022 due to proceeds from borrowings on the Revolving Credit Facility partially offset by payments on finance leases. Financing activities provided cash of $19.4 million during the year ended December 25, 2021 primarily due to net proceeds from sales of common stock under the ATM Agreement and Purchase Agreement, partially offset by payments on the Revolving Credit Facility and finance leases.
Contractual Obligations
The Company is obligated to make future cash payments under the Revolving Credit Facility, operating leases, finance leases, and other liabilities. Amounts below are undiscounted and may differ from balances reflected on the financial statements. The table below sets forth certain information about our contractual obligations as of December 31, 2022 (in thousands):
|
| Payment Due by Fiscal Period |
| |||||||||||||||||
|
| 2023 |
|
| 2024 |
|
| 2025 |
|
| 2026 |
|
| 2027 and thereafter |
| |||||
Operating and finance leases |
| $ | 2,076 |
|
| $ | 1,546 |
|
| $ | 1,328 |
|
| $ | 1,077 |
|
| $ | 4,128 |
|
Revolving Credit Facility |
|
| 1,661 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Other liabilities(1) |
|
| 509 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total |
| $ | 4,246 |
|
| $ | 1,546 |
|
| $ | 1,328 |
|
| $ | 1,077 |
|
| $ | 4,128 |
|
(1) | Other liabilities includes short-term notes payable. |
Stock Repurchase Program
On April 21, 2015, the Company announced that our Board of Directors had authorized the repurchase of up to $2.0 million of our common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions. We were 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. From April 2015 through December 2017, the Company purchased and retired 1,191,050 shares at a cost of $1.5 million. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. During the years ended December 31, 2022 and December 25, 2021, no shares were repurchased. Management does not intend to repurchase any shares in the near future.
| 26 |
| Table of Contents |
Accounts Receivable
We typically sell our products and services on short-term credit and seek to minimize our credit risk by performing credit checks and conducting our own collection efforts. Our trade accounts receivable decreased $0.1 million, or 1.3%, to $7.6 million as of December 31, 2022 compared to $7.7 million as of December 25, 2021. We had bad debt expense of $1.9 million for the year ended December 31, 2022 primarily due to a contract dispute with a major customer during the fourth quarter of the year and $1.4 of bad debt expense for the year ended December 25, 2021. Our allowance for uncollectible accounts was $2.1 million as of December 31, 2022 and $1.7 million as of December 25, 2021 and increased as a percentage of trade accounts receivable to 23.5% for 2022 from 22.1% for 2021. We continue to manage this portion of our business very carefully.
Risk Management
In performing services for our clients, we could potentially face liability for breach of contract, personal injury, property damage or negligence, including professional errors and omissions. We often agree to indemnify our clients for losses and expenses incurred as a result of our negligence and, in certain cases, the sole or concurrent negligence of our clients. Our quality control and assurance program includes a control function to establish standards and procedures for performance and for documentation of project tasks, and an assurance function to audit and to monitor compliance with procedures and quality standards. We maintain liability insurance for bodily injury and third-party property damage, professional errors and omissions, and workers’ compensation coverage, which we consider sufficient to insure against these risks, subject to self-insured amounts.
Seasonality
Our revenues are generated by services, and therefore holidays and employee vacations during our fourth quarter negatively impact revenues for that quarter, which is only partially offset by the year-end efforts on the part of many clients to spend any remaining funds budgeted for services and capital expenditures during the year. Our clients’ annual budget process is normally completed in the first quarter, which can slow the award of new work at the beginning of the year. Principally due to these factors, our first and fourth quarters are typically less robust than our second and third quarters.
Critical Accounting Policies
Please see Part II, Item 8, Note 2 – Accounting Policies and New Accounting Pronouncements for additional information regarding our critical accounting policies.
| 27 |
| Table of Contents |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited financial information below is attached hereto and made part hereof:
INDEX
|
| PAGE |
| |
|
|
|
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ( |
|
| F-2 |
|
|
|
|
|
|
|
| F-4 |
| |
|
|
|
|
|
|
| F-5 |
| |
|
|
|
|
|
|
| F-6 |
| |
|
|
|
|
|
|
| F-7 |
| |
|
|
|
|
|
|
| F-8 |
| |
| F-1 |
| Table of Contents |
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
ENGlobal Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ENGlobal Corporation (the “Company”) as of December 31, 2022 and December 25, 2021, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and December 25, 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has utilized significant cash in operations that raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
| F-2 |
| Table of Contents |
Revenue Recognition – Estimates of Costs to Complete
As described in Note 2, the Company recognizes revenue on fixed-price contracts over time when there is a continuous transfer of control to the customer over the duration of the contract as the services are rendered. The accounting conclusions for contracts involve significant judgment, particularly as it relates to determining the amount, timing and presentation of revenue that will be recognized for each performance obligation within the contract, and the distinct number of performance obligations represented by the contract.
We identified management’s estimate of costs to complete on contracts where revenue is recognized over time as a critical audit matter. On certain contracts, revenue is recognized over time using a cost-based input method that measures the extent of progress towards completion of a performance obligation. The majority of contract costs are labor costs, but costs also include material and allocable indirect expenses. Generally, revenue is recognized proportionally as labor costs are incurred. 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 subcontractors, the availability and timing of funding, and overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the profitability of the Company’s contracts. Given the significant judgments necessary to determine the amount, timing and presentation of revenue and to estimate total costs for the performance obligations that recognize revenue using a cost-based input method, auditing such estimates required extensive audit effort due to the complexity of these fixed-price contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
The primary procedures we performed to address this critical audit matter included:
| · | Obtained an understanding and evaluated the design of internal controls over the contract management cycle, including those related to the accumulation of the estimated costs to complete a contract and the estimation of variable consideration. |
| · | Performing journal entry testing procedures to address the presumed fraud risk over revenue. |
| · | For a selection of uncompleted contracts projected to be an overall loss, inquiring of project managers and management to ensure that all losses have been accrued. |
| · | For a selection of contracts, performing elements of the following for each contract: |
| o | Confirming relevant contract terms including contract price and related change orders, revenue earned to date, retainage, balance currently due, and estimated completion date. |
| o | Reviewing the terms and conditions of each contract and any related modifications to evaluate the appropriateness of the accounting treatment in accordance with generally accepted accounting principles. |
| o | Testing the accuracy and completeness of the costs incurred to date for the performance obligation. |
| o | Evaluating the estimates of total cost and fees for the performance obligation by: |
| · | Comparing costs incurred to date to the costs management estimated to be incurred by that date. |
| · | Evaluating management’s ability to achieve the estimates of total cost by performing corroborating inquiries with the Company’s project managers, and comparing the estimates to management’s work plans. |
| o | Testing the mathematical accuracy of management’s calculation of revenue for the performance obligation. |
| o | Performed a gross margin fade analysis subsequent to year-end and a look-back analysis on completed contracts during the year for selected projects to assess variances between ultimate realization on projects versus estimated profitability in order to evaluate accuracy of the estimation process. |
/s/
March 31, 2023
We have served as the Company’s auditor since 2017.
| F-3 |
| Table of Contents |
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
|
| December 31, 2022 |
|
| December 25, 2021 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current Assets: |
|
|
|
|
|
| ||
Cash |
| $ |
|
| $ |
| ||
Trade receivables, net of allowances of $ |
|
|
|
|
|
| ||
Prepaid expenses and other current assets |
|
|
|
|
|
| ||
Payroll taxes receivable |
|
|
|
|
|
| ||
Contract assets |
|
|
|
|
|
| ||
Total Current Assets |
|
|
|
|
|
| ||
Property and equipment, net |
|
|
|
|
|
| ||
Goodwill |
|
|
|
|
|
| ||
Other assets |
|
|
|
|
|
|
|
|
Right of use asset |
|
|
|
|
|
| ||
Deposits and other assets |
|
|
|
|
|
| ||
Total Other Assets |
|
|
|
|
|
| ||
Total Assets |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
| $ |
|
| $ |
| ||
Accrued compensation and benefits |
|
|
|
|
|
| ||
Current portion of leases |
|
|
|
|
|
| ||
Contract liabilities |
|
|
|
|
|
| ||
Current portion of deferred payroll tax |
|
|
|
|
|
| ||
Other current liabilities |
|
|
|
|
|
| ||
Short-term debt |
|
|
|
|
|
| ||
Total Current Liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Long-term unearned revenue |
|
|
|
|
|
| ||
Long-term debt |
|
|
|
|
|
| ||
Long-term leases |
|
|
|
|
|
| ||
Total Liabilities |
|
|
|
|
|
| ||
Commitments and Contingencies (Note 16) |
|
|
|
|
|
|
|
|
Stockholders’ Equity: |
|
|
|
|
|
|
|
|
Common stock - $ |
|
|
|
|
|
| ||
Additional paid-in capital |
|
|
|
|
|
| ||
Accumulated deficit |
|
| ( | ) |
|
| ( | ) |
Total Stockholders’ Equity |
|
|
|
|
|
| ||
Total Liabilities and Stockholders’ Equity |
| $ |
|
| $ |
| ||
See accompanying notes to consolidated financial statements.
| F-4 |
| Table of Contents |
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
|
| Year Ended December 31, |
|
| Year Ended December 25, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Operating revenues |
| $ |
|
| $ |
| ||
Operating costs |
|
|
|
|
|
| ||
Gross loss |
|
| ( | ) |
|
| ( | ) |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses |
|
|
|
|
|
| ||
Operating loss |
|
| ( | ) |
|
| ( | ) |
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense, net |
|
| ( | ) |
|
| ( | ) |
Other income, net |
|
|
|
|
|
| ||
Loss before income taxes |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Provision for federal and state income taxes |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares used in computing loss per share: |
|
|
|
|
|
| ||
See accompanying notes to consolidated financial statements.
| F-5 |
| Table of Contents |
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)
|
| Year Ended December 31, |
|
| Year Ended December 25, |
| ||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
|
|
| ||
Common Stock |
|
|
|
|
|
| ||
Balance at beginning of year |
| $ |
|
| $ |
| ||
Common stock issued |
|
|
|
|
|
| ||
Balance at end of year |
|
|
|
|
| 35 |
| |
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
|
|
|
|
| ||
Common stock issued |
|
|
|
|
|
| ||
At-the-market offering costs |
|
| ( | ) |
|
|
| |
Share-based compensation – employees |
|
|
|
|
|
| ||
Balance at end of year |
|
|
|
|
| 57,403 |
| |
|
|
|
|
|
|
|
|
|
Accumulated Deficit |
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
| ( | ) |
|
| (23,562 | ) |
Net loss |
|
| ( | ) |
|
| ( | ) |
Balance at end of year |
|
| ( | ) |
|
| (29,247 | ) |
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity |
| $ | 10,325 |
|
| $ | 28,191 |
|
See accompanying notes to consolidated financial statements.
| F-6 |
| Table of Contents |
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
|
| Year Ended December 31, 2022 |
|
| Year Ended December 25, 2021 |
| ||
Cash Flows from Operating Activities: |
|
|
|
|
|
| ||
Net loss |
| $ | ( | ) |
| $ | ( | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
| ||
Share-based compensation expense |
|
|
|
|
|
| ||
Loss on disposal of fixed assets |
|
|
|
|
|
| ||
Contingent consideration revaluation |
|
| ( | ) |
|
|
| |
Impairment of intangible asset |
|
|
|
|
|
| ||
Forgiveness of PPP Loan |
|
|
|
|
| ( | ) | |
Changes in current assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
|
|
|
| ||
Contract assets |
|
| ( | ) |
|
| ( | ) |
Other current assets |
|
|
|
|
| ( | ) | |
Accounts payable |
|
|
|
|
| ( | ) | |
Accrued compensation and benefits |
|
| ( | ) |
|
| ( | ) |
Contract liabilities |
|
| ( | ) |
|
|
| |
Income taxes payable |
|
| ( | ) |
|
| ( | ) |
Other current liabilities, net |
|
|
|
|
| ( | ) | |
Net cash used in operating activities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Property and equipment acquired |
|
| ( | ) |
|
| ( | ) |
Asset acquisition, net of cash acquired |
|
| ( | ) |
|
|
| |
Net cash used in investing activities |
| $ | ( | ) |
| $ | ( | ) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Issuance of common stock, net |
|
|
|
|
|
| ||
Payments on finance leases |
|
| ( | ) |
|
| ( | ) |
At-the-market offering costs |
|
| ( | ) |
|
|
| |
Proceeds (payments) from revolving credit facility |
|
|
|
|
| ( | ) | |
Net cash provided by financing activities |
| $ |
|
| $ |
| ||
Net change in cash |
|
| ( | ) |
|
|
| |
Cash at beginning of year |
|
|
|
|
|
| ||
Cash at end of year |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
| $ |
|
| $ |
| ||
Right of use assets obtained in exchange for new operating lease liability |
| $ |
|
| $ |
| ||
Leased assets obtained in exchange for new finance lease liabilities |
| $ |
|
| $ |
| ||
Asset acquisition, common stock issued |
| $ |
|
| $ |
| ||
Cash paid during the year for income taxes (net of refunds) |
| $ |
|
| $ |
| ||
Non-cash transaction: PPP loan forgiveness |
| $ |
|
| $ |
| ||
See accompanying notes to consolidated financial statements.
| F-7 |
| Table of Contents |
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
Organization and Operations – ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context requires otherwise, references to “we”, “us”, “our”, “the Company” or “ENGlobal” are intended to mean the consolidated business and operations of ENGlobal Corporation. Our business operations consist of providing innovative, delivered project solutions to our clients by combining our vertically-integrated engineering and professional project execution services with our automation and systems integration expertise and our fabrication and construction capabilities primarily to the energy industry. Please see “Note 14 – Segment Information” for a description of our segments and segment operations.
Basis of Presentation – The accompanying consolidated financial statements and related notes present our consolidated financial position as of December 31, 2022 and December 25, 2021, and the results of our operations, cash flows and changes in stockholders’ equity for the 53 week period ended December 31, 2022 and for the 52 week period ended December 25, 2021. They are prepared in accordance with accounting principles generally accepted in the United States of America. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management reviews its estimates, including those related to percentage-of-completion contracts in progress, litigation, income taxes, impairment of long-lived assets and fair values. Changes in facts and circumstances or discovery of new information may result in revised estimates. Actual results could differ from these estimates.
Going Concern – The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As shown in the accompanying financial statements, the Company has suffered recurring losses, used significant cash in support of its operating activities, has limited cash on hand, and will need additional working capital to fund our planned operations.
We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, sales of common stock pursuant to the ATM Agreement, and borrowings under the Revolving Credit Facility.
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 December 31, 2022, the credit limit under the Revolving Credit Facility was $1.8 million and outstanding borrowings were $1.7 million, which yields enough interest to cover our minimum monthly interest charge. On March 27, 2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. As of December 31, 2022, we were in compliance with all of the covenants under the Revolving Credit Facility. Our Revolving Credit Facility matures on May 20, 2023.
In addition, on January 29, 2021, we filed a shelf registration statement on Form S-3 (File No. 333-252572) (the “Registration Statement”) with the SEC, pursuant to which we may offer and sell, at our option, securities having an aggregate offering price of up to $100 million, subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million, as described further below. On January 29, 2021, we entered into an at market issuance sales agreement with B. Riley Securities, Inc., which was subsequently terminated pursuant to its terms on January 7, 2022.
On June 1, 2021, sales and issuance of shares of the Company’s common stock pursuant to Purchase Agreement provided net proceeds of approximately $18.7 million after deducting the fees of A.G.P./Alliance Global Partners, the placement agent, and related offering expenses.
| F-8 |
| Table of Contents |
On January 11, 2022, the Company entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated to make any sales under the 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. The Registration Statement, including the accompanying prospectus and related prospectus supplements related to the “at the market offering,” is subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million. As of January 31, 2023, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $26.1 million, based on the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market January 31, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition, during the 12 calendar month period that ends on the date of this filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the Registration Statement. If our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)(3) update as required under the Securities Act.
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of 3,971,000 shares (the “Shares”) of the Company’s common stock, at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000 shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes. The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to the ATM Agreement.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
NOTE 2 – ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
Consolidation Policy – Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries.
Fair Value Measurements – Fair value is defined as the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between unrelated third-party market participants at the measurement date. In determination of fair value measurements for assets and liabilities we consider the principal, or most advantageous market, and assumptions that market participants would use when pricing the asset or liability.
Cash and cash equivalents – Cash and cash equivalents include all cash on hand, demand deposits and investments with original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Our cash balance at financial institutions may exceed Federal Deposit Insurance Corporation (“FDIC”) insured amounts from time to time.
| F-9 |
| Table of Contents |
Receivables – Our components of trade receivables include amounts billed, amounts unbilled, retainage and allowance for uncollectible accounts. Subject to our allowance for uncollectible accounts, all amounts are believed to be collectible within a year. There are no amounts unbilled representing claims or other similar items subject to uncertainty concerning their determination or ultimate realization. In estimating the allowance for uncollectible accounts, we consider the length of time receivable balances have been outstanding, historical collection experience, current economic conditions and customer specific information. When we ultimately conclude that a receivable is uncollectible, the balance is charged against the allowance for uncollectible accounts.
Concentration of Credit Risk – Financial instruments which potentially subject ENGlobal to concentrations of credit risk consist primarily of trade accounts and notes receivable. Although our services are provided largely to the energy sector, management believes the risk due to this concentration is limited because a significant portion of our services are provided under contracts with major integrated oil and gas companies and other industry leaders. When we enter into contracts with smaller customers, we may incur an increased credit risk.
Our businesses or product lines are largely dependent on a few relatively large customers. Although we believe we have an extensive customer base, the loss of one of these large customers or if such customers were to incur a prolonged period of decline in business, our financial condition and results of operations could be adversely affected. Two customers provided more than
We extend credit to customers in the normal course of business. We have established various procedures to manage our credit exposure, including initial credit approvals, credit limits and terms, letters of credit, and occasionally through rights of offset. We also use prepayments and guarantees to limit credit risk to ensure that our established credit criteria are met. Our most significant exposure to credit risks relates to situations under which we provide services early in the life of a project that is dependent on financing. Risks increase in times of general economic downturns and under conditions that threaten project feasibility.
Property and Equipment – Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated service lives of our asset groups are as follows:
Asset Group |
|
| Years |
|
Shop equipment |
|
|
| |
Furniture and fixtures |
|
|
| |
Computer equipment; Autos and trucks |
|
|
| |
Software |
|
|
|
Leasehold improvements are amortized over the remaining term of the related lease. See Note 4 for details related to property and equipment and related depreciation. Expenditures for maintenance and repairs are expensed as incurred. Upon disposition or retirement of property and equipment, any gain or loss is charged to operations.
Goodwill – Goodwill represents the excess of the purchase price of acquisitions over the fair value of the net assets acquired and liabilities assumed. Goodwill is not amortized but rather is tested and assessed for impairment annually, or more frequently if certain events or changes in circumstance indicate the carrying amount may exceed fair value. The annual test for goodwill impairment is performed in the fourth quarter of each year.
The Company compares its fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment. Fair value was determined by applying undiscounted cash flows of the operating unit after allocation of certain corporate overhead. Estimating the cash flow of the operating unit requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates and future market conditions, among others. It is possible that changes in market conditions, economy, facts, circumstances, judgments and assumptions used in estimating the fair value could change, resulting in possible impairment of goodwill in the future.
| F-10 |
| Table of Contents |
We performed a qualitative assessment of goodwill, which relates to Government Services, for each of the years ended December 31, 2022 and December 25, 2021. This assessment indicated that there was no impairment of goodwill for the years ended December 31, 2022 and December 25, 2021.
Impairment of Long-Lived Assets – We review our intangible license and property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. The recoverability of long-lived assets is measured by comparison the future undiscounted cash flows expected to result from the use and eventual disposition of the asset to the carrying value of the asset. Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions. If the carrying amount is not recoverable, an impairment loss is measured as the excess of the asset’s carrying value over its fair value. We assess the fair value of long-lived assets using commonly accepted techniques, and may use more than one method, including, but not limited to, recent third-party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors. During the fourth quarter of 2022, we determined the carrying amount of the license agreement acquired was no longer recoverable and wrote the balance down to its estimated fair value. Fair value was based on expected future cash flows using Level 3 inputs. The resulting impairment of $2.5 million was recorded within Operating Costs on the Consolidated Statement of Operations. The impairment is attributable to our Commercial segment. During 2021 there were no events or changes in circumstances that indicated that the carrying amount of our assets may not be recoverable.
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 not to exceed. 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.
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.
| F-11 |
| Table of Contents |
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 is estimated. 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.
Incremental Costs – Our incremental costs of obtaining a contract, which may consist 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 incremental costs that met our materiality threshold in 2022 or 2021.
| F-12 |
| Table of Contents |
Income Taxes – We account for deferred income taxes in accordance with FASB ASC Topic 740 “Income Taxes” (“ASC 740”), which provides for recording deferred taxes using an asset and liability method. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities including net operating loss and tax credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes represents the current taxes payable or refundable for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities during the period. Tax law and rate changes are reflected in income in the period such changes are enacted.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more-likely-than-not such asset will not be realized. We evaluate the realizability of deferred tax assets based on all available evidence, both positive and negative, regarding historical operating results, including the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
We account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit of the tax positions to the extent that the benefit will more-likely-than-not be realized. The determination as to whether the tax benefit will more-likely-than-not be realized is based upon technical merits of the tax positions as well as consideration of the available facts and circumstances. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.
Earnings per Share – Our basic earnings per share (“EPS”) amounts have been computed based on the weighted average number of shares of common stock outstanding for the period. Diluted EPS amounts include the effect of common stock equivalents associated with outstanding stock options, restricted stock awards and restricted stock units, if including such potential shares of common stock is dilutive. We only had restricted stock awards outstanding during 2022 and 2021.
Treasury Stock – We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares of our common stock is recorded as treasury stock (at cost). When we subsequently retire these shares, the cost of the shares acquired are recorded in common stock and additional paid-in capital. There were no treasury stock purchases in 2022 and 2021.
Stock–Based Compensation – We have issued stock-based compensation in the form of non-vested restricted stock awards to directors, employees and officers. We apply the provisions of ASC Topic 718 “Compensation – Stock Compensation” (“ASC 718”) and recognize compensation expense over the applicable service for all stock-based compensation based on the grant date fair value of the award.
The Company accounts for restricted stock awards granted to consultants using the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”). All transactions in which services are received in exchange for share-based awards are accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably measurable. Share-based compensation is measured at fair value at the earlier of the commitment date or the date the services are completed.
NOTE 3 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables, net as of December 31, 2022 and December 25, 2021, are as follows (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Amounts billed |
| $ |
|
| $ |
| ||
Amounts unbilled |
|
|
|
|
|
| ||
Retainage |
|
|
|
|
|
| ||
Less: Allowance for uncollectible accounts |
|
| ( | ) |
|
| ( | ) |
Trade receivables, net |
| $ |
|
| $ |
| ||
| F-13 |
| Table of Contents |
The components of prepaid expense and other current assets are as follows as of December 31, 2022 and December 25, 2021 (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Prepaid expenses |
| $ |
|
| $ |
| ||
Other receivables – employee |
|
|
|
|
|
| ||
Other receivable |
|
|
|
|
| — |
| |
Inventory |
|
|
|
|
| — |
| |
Prepaid expenses and other current assets |
| $ |
|
| $ |
| ||
The components of other current liabilities are as follows as of December 31, 2022 and December 25, 2021 (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Accrual for known contingencies |
| $ |
|
| $ |
| ||
Customer prepayments |
|
|
|
|
|
| ||
Warranty reserve |
|
|
|
|
| — |
| |
Gross receipts tax payable |
|
| — |
|
|
|
| |
State income taxes payable |
|
|
|
|
|
| ||
Unearned revenue |
|
|
|
|
| — |
| |
Insurance payable |
|
|
|
|
|
| ||
Other current liabilities |
| $ |
|
| $ |
| ||
Our accrual for known contingencies includes litigation accruals, if any. See “Note 16 – Commitments and Contingencies” for further information.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 2022 and December 25, 2021 (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Computer equipment and software |
| $ |
|
| $ |
| ||
Shop equipment |
|
|
|
|
|
| ||
Furniture and fixtures |
|
|
|
|
|
| ||
Leasehold improvements |
|
|
|
|
|
| ||
Autos and trucks |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
Accumulated depreciation and amortization |
|
| ( | ) |
|
| ( | ) |
Property and equipment, net |
| $ |
|
| $ |
| ||
Depreciation expense was $
NOTE 5 – REVENUE RECOGNITION
Our revenue by contract type are as follows (amounts in thousands):
|
| For the Years Ended |
| |||||
|
| December 31, 2022 |
|
| December 25, 2021 |
| ||
Fixed-price revenue |
| $ |
|
| $ |
| ||
Time-and-material revenue |
|
|
|
|
|
| ||
Total Revenue |
|
|
|
|
|
| ||
| F-14 |
| Table of Contents |
NOTE 6 – CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts consist of the following as of December 31, 2022 and December 25, 2021 (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Costs incurred on uncompleted contracts |
| $ |
|
| $ |
| ||
Estimated earnings on uncompleted contracts |
|
|
|
|
|
| ||
Earned revenues |
|
|
|
|
|
| ||
Less: billings to date |
|
|
|
|
|
| ||
Net costs in excess of billings on uncompleted contracts |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
| $ |
|
| $ |
| ||
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
| ( | ) |
|
| ( | ) |
Net costs in excess of billings on uncompleted contracts |
| $ |
|
| $ |
| ||
Revenue on fixed-price contracts is recorded primarily using the percentage-of-completion (cost-to-cost) method. Revenue and gross margin on fixed-price contracts are subject to revision throughout the lives of the contracts and any required adjustments are made in the period in which the revisions become known. To manage unknown risks, management may use contingency amounts to increase the estimated costs, therefore, lowering the earned revenues until the risks are better identified and quantified or have been mitigated. We had $
We recognize service revenue as soon as the services are performed. For clients that we consider higher risk, due to past payment history or history of not providing written work authorizations, we have deferred revenue recognition until we receive either a written authorization or a payment. We had $
NOTE 7 – DEBT
The components of debt are as follows (amounts in thousands):
|
| December 31, 2022 |
|
| December 25, 2021 |
| ||
Revolving Credit Facility (1) |
| $ |
|
| $ |
| ||
Total debt |
|
|
|
|
|
| ||
Amount due within one year |
|
|
|
|
| — |
| |
Total long-term debt |
| $ | — |
|
| $ |
| |
| (1) | On May 21, 2020 (the “Closing Date”), the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans (each a “Loan” and collectively, the “Loans”) in the aggregate amount of up to $ |
| F-15 |
| Table of Contents |
Set forth below are certain of the material terms of the Revolving Credit Facility:
Credit Limit:
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
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
Loan Fee: The Borrowers will pay to Lender a loan fee of
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)
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.
On March 27, 2023, the Company and the Borrowers modified the Revolving Credit Facility with the Lender.
Set forth below are the material terms of the modification to the Revolving Credit Facility:
Credit Limit: The credit limit will not exceed the lesser of $
As a result of the modification, our current credit limit and outstanding borrowings are $0.9 million under the Revolving Credit Facility.
Collateral: The Lender maintains a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property, except for the Borrowers’ present and after-acquired Accounts Receivable defined in the Priority Agreement between the Borrowers, FundThrough USA Inc. and Pacific Western Bank.
| F-16 |
| Table of Contents |
The future scheduled maturities of our debt are (amounts in thousands):
|
| Revolving Credit Facility |
| |
2023 |
| $ |
| |
Thereafter |
|
| — |
|
|
| $ |
| |
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.
The components of lease expense are as follows (amounts in thousands):
|
| Financial Statement Classification |
| Year ended December 31, 2022 |
|
| Year ended December 25, 2021 |
| ||
Finance leases: |
|
|
|
|
|
|
|
| ||
Amortization expense |
| SG&A Expense |
| $ |
|
| $ |
| ||
Interest expense |
| Interest expense, net |
|
|
|
|
|
| ||
|
|
|
| $ |
|
| $ |
| ||
Operating leases: |
|
|
|
|
|
|
|
|
|
|
Operating costs |
| Operating costs |
|
|
|
|
|
| ||
Selling, general and administrative expenses |
| SG&A Expense |
|
|
|
|
|
| ||
|
|
|
| $ |
|
| $ |
| ||
Total lease expense |
|
|
| $ |
|
| $ |
| ||
Supplemental balance sheet information related to leases are as follows (amounts in thousands):
|
| Financial Statement Classification |
| December 31, 2022 |
|
| December 25, 2021 |
| ||
ROU Assets: |
|
|
|
|
|
|
|
| ||
Operating leases |
| Right of Use asset |
| $ |
|
| $ |
| ||
Finance leases |
| Property and equipment, net |
|
|
|
|
|
| ||
Total ROU Assets: |
|
|
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
|
|
Lease liabilities: |
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
|
Operating leases |
| Current portion of leases |
| $ |
|
| $ |
| ||
Finance leases |
| Current portion of leases |
|
|
|
|
|
| ||
Noncurrent Liabilities: |
|
|
|
|
|
|
|
|
|
|
Operating leases |
| Long Term Leases |
|
|
|
|
|
| ||
Finance leases |
| Long Term Leases |
|
|
|
|
|
| ||
Total lease liabilities |
|
|
| $ |
|
| $ |
| ||
The weighted average remaining lease term and weighted average discount rate are as follows:
|
| December 31, 2022 |
|
| December 25, 2021 |
| ||
Weighted average remaining lease term (years) |
|
|
|
|
|
| ||
Operating leases |
|
|
|
|
|
| ||
Finance leases |
|
|
|
|
|
| ||
Weighted average discount rate |
|
|
|
|
|
|
|
|
Operating leases |
|
| % |
|
| % | ||
Finance leases |
|
| % |
|
| % | ||
Maturities of operating lease liabilities as of December 31, 2022 are as follows (dollars in thousands):
|
| Operating leases |
|
| Finance leases |
|
| Total |
| |||
|
|
|
|
|
|
|
|
|
| |||
2023 |
|
|
|
|
|
|
|
|
| |||
2024 |
|
|
|
|
|
|
|
|
| |||
2025 |
|
|
|
|
|
|
|
|
| |||
2026 |
|
|
|
|
|
|
|
|
| |||
2027 and thereafter |
|
|
|
|
|
|
|
|
| |||
Total lease payments |
|
|
|
|
|
|
|
|
| |||
Less: imputed interest |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Total lease liabilities |
| $ |
|
| $ |
|
| $ |
| |||
NOTE 9 – EMPLOYEE BENEFIT PLANS
ENGlobal sponsors a 401(k) plan for its employees. The Company, at the direction of the Board of Directors, may make discretionary contributions. Our employees may elect to make contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements. The Company matching contribution for the year ended December 31, 2022 was $
NOTE 10 – STOCK COMPENSATION PLANS
The Company’s 2021 Long Term Incentive Plan (the “Long Term Incentive Plan”), currently provides for the aggregate issuance of up to
We recognized non-cash stock-based compensation expense related to our Long Term Incentive Plan and the expired Amended and Restated 2009 Equity Incentive Plan of $
Restricted Stock Awards – Restricted stock awards granted to non-employee directors are intended to compensate and retain the directors over the one-year service period commencing July 1 of the year of service. These awards generally vest in quarterly installments beginning September 30th of the year of grant, so long as the grantee continues to serve as a director of the Company as of each vesting date. Restricted stock awards granted to employees generally vest in four equal annual installments on the anniversary date of grant, so long as the grantee remains employed full-time with us as of each vesting date. Restricted stock awards are generally issued as new shares at the time of grant. The grant-date fair value of restricted stock grants is determined using the closing quoted market price on the grant date.
| F-17 |
| Table of Contents |
The following is a summary of the status of our restricted stock awards and of changes in restricted stock outstanding for the year ended December 31, 2022:
|
| Number of unvested restricted shares |
|
| Weighted-average grant-date fair value |
| ||
Outstanding at December 25, 2021 |
|
|
|
| $ |
| ||
Granted |
|
|
|
|
|
| ||
Vested |
|
|
|
|
|
| ||
Forfeited |
|
|
|
|
|
| ||
Outstanding at December 31, 2022 |
|
|
|
| $ | 2.40 |
| |
As of December 31, 2022, there was $
Date Issued |
| Issued to |
| Number of Shares |
|
| Market Price |
|
| Fair Value |
| |||
June 9, 2022 |
| Directors (3) |
|
|
|
| $ |
|
| $ |
| |||
During the year ended December 25, 2021, the Company granted the following restricted stock awards:
Date Issued |
| Issued to |
| Number of Shares |
|
| Market Price |
|
| Fair Value |
| |||
March 9, 2021 |
|
|
|
|
| $ |
|
| $ |
| ||||
March 9, 2021 |
|
|
|
|
| $ |
|
| $ |
| ||||
June 1, 2021 |
|
|
|
|
| $ |
|
| $ |
| ||||
August 26, 2021 |
|
|
|
|
| $ |
|
| $ |
| ||||
NOTE 11 – TREASURY STOCK
On April 21, 2015, we announced that the Board of Directors had authorized the repurchase of up to $
NOTE 12 – REDEEMABLE PREFERRED STOCK
We are authorized to issue
| F-18 |
| Table of Contents |
NOTE 13 – FEDERAL AND STATE INCOME TAXES
The components of our income tax expense for the years ended December 31, 2022 and December 25, 2021 are as follows (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Current: |
|
|
|
|
|
| ||
State |
|
|
|
|
|
| ||
Total current |
|
|
|
|
|
| ||
Deferred: |
|
|
|
|
|
|
|
|
Federal |
|
| ( | ) |
|
| ( | ) |
State |
|
|
|
|
|
| ||
Total deferred |
|
|
|
|
|
| ||
Total income tax expense |
| $ |
|
| $ |
| ||
The following is a reconciliation of expected income tax benefit to actual income tax expense for the years ended December 31, 2022 and December 25, 2021 (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Federal income tax (benefit) at statutory rates |
| $ | ( | ) |
| $ | ( | ) |
Foreign tax rate adjustment |
|
|
|
|
|
| ||
State income tax, net of federal income tax effect |
|
| ( | ) |
|
| ( | ) |
Nondeductible expenses |
|
|
|
|
| ( | ) | |
Nontaxable PPP Loan Forgiveness |
|
|
|
|
| ( | ) | |
State RTA |
|
|
|
|
| ( | ) | |
Prior year adjustments and true-ups |
|
|
|
|
| ( | ) | |
Change in valuation allowance |
|
|
|
|
|
| ||
Total tax expense |
| $ |
|
| $ |
| ||
| F-19 |
| Table of Contents |
The components of the deferred tax asset (liability) consisted of the following as of December 31, 2022 and December 25, 2021 (amounts in thousands):
|
| 2022 |
|
| 2021 |
| ||
Noncurrent Deferred tax assets |
|
|
|
|
|
| ||
Federal and state net operating loss carryforward |
| $ |
|
| $ |
| ||
Tax credit carryforwards |
|
|
|
|
|
| ||
Allowance for uncollectible accounts |
|
|
|
|
|
| ||
Accruals not yet deductible for tax purposes |
|
|
|
|
|
| ||
Goodwill |
|
|
|
|
|
| ||
Lease payable |
|
|
|
|
|
| ||
Capitalized R&D expenses |
|
|
|
|
|
| ||
Total noncurrent deferred tax assets |
|
|
|
|
|
| ||
Less: Valuation allowance |
|
| ( | ) |
|
| ( | ) |
Total noncurrent deferred tax assets, net |
| $ |
|
| $ |
| ||
Noncurrent deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
| ( | ) |
|
| ( | ) |
Other |
|
| ( | ) |
|
| ( | ) |
Right to use asset |
|
| ( | ) |
|
| ( | ) |
Total noncurrent deferred tax liabilities |
|
| ( | ) |
|
| ( | ) |
Net deferred tax assets/deferred tax Liabilities |
| $ |
|
| $ |
| ||
We account for deferred income taxes in accordance with FASB ASC Topic 740 (“ASC 740”), which provides for deferred taxes using an asset and liability method. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities including net operating loss and tax credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes represents the current taxes payable or refundable for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities during the period. Tax law and rate changes are reflected in income in the period such changes are enacted.
We account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit of the tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon technical merits of the tax positions as well as consideration of the available facts and circumstances. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2022 and December 25, 2021, we do not have any significant uncertain tax positions.
We record a valuation allowance to reduce previously recorded tax assets when it becomes more-likely-than-not such asset will not be realized. We evaluate based on all available evidence, both positive and negative, regarding historical operating results, including the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. During 2022, after evaluating all available evidence, we recorded a valuation allowance on all net deferred tax assets.
| F-20 |
| Table of Contents |
For the year ended December 31, 2022, we recognized a total income tax expense of $
As of December 31, 2022, the Company has a gross federal net operating loss carry-forward of approximately $
NOTE 14 – SEGMENT INFORMATION
Reporting Segments
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 Executive Chairman (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.
We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a construction partner.
Our Automation group provides the design and programming of automated control systems as well as designs, fabricates, integrates and commissions modular systems that include remote instrumentation control stations, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.
Our Oil, Gas, and Petrochemicals group focuses on providing engineering, procurement, construction, and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients. This group also provides engineering, fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification, storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.
Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military across the globe.
| F-21 |
| Table of Contents |
We have two reportable segments: Commercial and Government Services. Our Renewables, Automation, and Oil, Gas, and Petrochemical groups are aggregated into one reportable segment, Commercial.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Revenue, operating income, identifiable assets, capital expenditures and depreciation for each segment are set forth in the following table. The amount identified as Corporate includes those activities that are not allocated to the operating segments and include costs related to business development, executive functions, finance, accounting, safety, human resources and information technology that are not specifically identifiable with the segments.
Segment information for the years ended December 31, 2022 and December 25, 2021 are as follows (amounts in thousands):
For the year ended December 31, 2022: |
| Commercial |
|
| Government |
|
| Corporate |
|
| Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating revenues |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Operating income (loss) |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tangible assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other intangible assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 25, 2021: |
| Commercial |
|
| Government |
|
| Corporate |
|
| Consolidated |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Operating income (loss) |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Tangible assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other intangible assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
| ||||
NOTE 15 – EMPLOYEE RETENTION CREDIT
Pursuant to the CARES Act, the Company is eligible for an employee retention credit subject to certain criteria. Since there are no generally accepted accounting principles 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.
| F-22 |
| Table of Contents |
We have accounted for the $
NOTE 16 – COMMITMENTS AND CONTINGENCIES
Employment Agreements
We have employment agreements with certain of our executive and other officers with severance terms ranging from six to twelve months. Such agreements provide for minimum salary levels. If employment is terminated for any reason other than 1) termination for cause, 2) voluntary resignation or 3) the employee’s death, we are obligated to provide a severance benefit equal to six months of the employee’s salary, and, at our option, an additional six months at 50% of the employee’s salary in exchange for an extension of a non-competition agreement. The terms of these agreements include evergreen provisions allowing for automatic renewal. No liability is recorded for our obligations under employment agreements as the amounts that will ultimately be paid cannot be reasonably estimated.
Litigation
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.
Insurance
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 17 – STOCKHOLDERS’ EQUITY
On January 29, 2021, the Company entered into an at market issuance sales agreement (the “Prior ATM Agreement”) with B. Riley Securities, Inc. pursuant to which the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $
On June 1, 2021, the Company entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which the Company sold and issued an aggregate of
| F-23 |
| Table of Contents |
On January 11, 2022, the Company entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which the Company may offer and sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated to make any sales under the 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.
NOTE 18 – ACQUISITIONS
On May 18, 2022, ENG Calvert Holdings Ltd., a wholly owned subsidiary of the Company, completed the acquisition of the stock of Calvert Group Belgium NV (“Calvert”), a business that licenses small-scale gas to liquids (“GTL”) technology for flare gas and stranded gas applications for specific territories including the Middle East and North Africa. The Company expects to utilize Calvert’s basic designs incorporating the GTL technology into small scale GTL plants to be manufactured by the Company in the United States and subsequently shipped internationally.
Pursuant to the accounting guidance in ASC 805, we determined that the acquisition of Calvert did not meet the criteria necessary to constitute a business combination and was accounted for as an asset acquisition which occurs when substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identified assets. The determination was based on the gross fair value of the acquisition being concentrated in the license agreement acquired.
The consideration transferred on the acquisition date included $
During the fourth quarter of 2022, we determined the carrying amount of the license agreement acquired was no longer recoverable and wrote the balance down to its estimated fair value. Fair value was based on expected future cash flows using Level 3 inputs. The $
NOTE 19 – INTANGIBLE ASSETS
The Company had recognized a $
NOTE 20 – 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.
Registered Direct Offering
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of 3,971,000 shares (the “Shares”) of the Company’s common stock at an offering price of $
| F-24 |
| Table of Contents |
Company’s Officer Changes
Mark A. Hess, the former Chief Executive Officer of the Company, resigned from his officer positions with the Company and its subsidiaries effective February 10, 2023.
The Board of Directors appointed William A. Coskey, P.E., the Company’s Chairman of the Board of Directors, as the Company’s Executive Chairman effective February 7, 2023.
Roger Westerlind, the former President of the Company, was terminated effective March 17, 2023.
Revolving Credit Facility
On March 27, 2023, the Company modified the Revolving Credit Facility agreement which reduced our credit limit and outstanding borrowings to $
Priority Agreement
On March 27, 2023, the Company entered into an invoice factoring agreement. The agreement provides the flexibility to receive funds early for a subset of customers at a discount rate of
| F-25 |
| Table of Contents |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) 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 Executive Chairman and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Executive Chairman and Chief Financial Officer have concluded that, as of December 31, 2022, 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. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with generally accepted accounting principles (“GAAP”). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards into the process to reduce, although not eliminate, this risk. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies or procedures may deteriorate.
| 28 |
| Table of Contents |
In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2022, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our management conducted an assessment, including testing, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or interim financial statements will not be prevented or detected. In assessing the effectiveness of our internal control over financial reporting, management did not identify a material weakness in internal control over financial reporting as of December 31, 2022. We have concluded that our internal control over financial reporting at December 31, 2022 was effective.
(c) No Attestation Report of the Registered Public Accounting Firm
This Report does not include an attestation report of the Company’s independent registered public accounting firm regarding the Company’s internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Act. We qualify for the Dodd-Frank Act exemption from the independent auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act for smaller reporting companies.
(d) Changes in Internal Control over Financial Reporting
No changes in our internal controls over financial reporting occurred during the quarter ended December 31 2022, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 27, 2023, the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into an invoice factoring agreement (the “Priority Agreement”) with FundThrough USA, Inc. (the “Priority Lender”) to purchase certain accounts receivable of the Borrowers with the consent of the lender under the Loan and Security Agreement (the “Revolving Credit Facility”).
Set forth below are the material terms of the Priority Agreement between the Borrowers and the Priority Lender:
Eligible Accounts are limited to the specific customers defined in the Priority Agreement.
The cost to fund an invoice is a percentage of the invoice amount that ranges from 2.75% to 8.25% depending on the length of the payment terms with the customer.
The Borrower has granted the Priority Lender a security interest in all of the Borrower’s present and after-acquired accounts receivable of the customers defined in the Priority Agreement.
On March 27, 2023, the Borrowers modified the Revolving Credit Facility with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), in connection with the Priority Agreement between the Borrowers and FundThrough USA Inc.
Set forth below are the material terms of the modification of the Revolving Credit Facility:
Credit Limit: The credit limit will not exceed the lesser of $1,000,000 at any time outstanding (the “Maximum Credit Limit”) minus any reserves, or the sum of (a) 85% of the Borrowers’ Eligible Accounts (as defined in the Revolving Credit Facility) and (b) the lesser of $500,000 or 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility).
As a result of the modification, our current credit limit and outstanding borrowings are $0.9 million under the Revolving Credit Facility.
Collateral: The Lender maintains a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property, except for the Borrowers’ present and after-acquired Accounts Receivable defined in the Priority Agreement.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
| 29 |
| Table of Contents |
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.
| 30 |
| Table of Contents |
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The consolidated financial statements filed as part of this Form 10-K are listed and indexed in Part II, Item 8.
(a)(2) Schedules
All schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.
(a)(3) Exhibits
EXHIBIT INDEX
|
|
|
| Incorporated by Reference to: | ||||||
Exhibit No. |
|
Description |
| Form or Schedule |
| Exhibit No. |
| Filing Date with SEC |
| SEC File Number |
|
|
|
|
|
|
|
|
|
|
|
Restated Articles of Incorporation of Registrant dated January 29, 2021 |
| 8-K |
| 3.1 |
| 1/29/2021 |
| 001-14217 | ||
|
|
|
|
|
|
|
|
|
|
|
Second Amended and Restated Bylaws of Registrant dated April 14, 2016 |
| 8-K |
| 3.1 |
| 4/15/2016 |
| 001-14217 | ||
|
|
|
|
|
|
|
|
|
|
|
| S-3 |
| 4.1 |
| 10/31/2005 |
| 333-29336 | |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
ENGlobal Corporation Incentive Bonus Plan Dated effective July 1, 2009 |
| 8-K |
| 10.1 |
| 8/17/2009 |
| 001-14217 | ||
|
|
|
|
|
|
|
|
|
|
|
| 10-Q |
| 10.2 |
| 8/11/2008 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-Q |
| 10.1 |
| 8/10/2009 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
*+10.4 |
| Form of Indemnification Agreement between Registrant and its Directors and Executive Officers |
|
|
|
|
|
|
|
|
| 31 |
| Table of Contents |
Employment Agreement between ENGlobal Corporation and Mark A. Hess effective December 18, 2012 |
| 8-K |
| 10.7 |
| 12/20/2012 |
| 001-14217 | ||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.11 |
| 3/28/2008 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K/A |
| 10.26 |
| 3/29/2007 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K/A |
| 10.27 |
| 3/29/2007 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K/A |
| 10.28 |
| 3/29/2007 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K/A |
| 10.29 |
| 3/29/2007 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K/A |
| 10.30 |
| 3/29/2007 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.17 |
| 3/28/2008 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.11 |
| 3/15/2018 |
| 001-14217 | |||
| 10-K |
| 10.12 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.13 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-Q |
| 10.2 |
| 11/8/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.14 |
| 3/15/2018 |
| 001-14217 | |||
| 10-K |
| 10.15 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.16 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.17 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-Q |
| 10.2 |
| 3/5/2010 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.19 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-Q |
| 10.1 |
| 11/8/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
Lease Agreement between El Dorado Office 3, L.P. and ENGlobal U.S. Inc. dated September 9, 2013 |
| 10-K |
| 10.20 |
| 3/15/2018 |
| 001-14217 | ||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.21 |
| 3/15/2018 |
| 001-14217 |
| 32 |
| Table of Contents |
| 10-K |
| 10.22 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.23 |
| 3/15/2018 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
Lease Agreement between Bryan Bateman Properties LLC .and ENGlobal US. Inc. dated August 23, 2017 |
| 10-K |
| 10.24 |
| 3/15/2018 |
| 001-14217 | ||
| 10-Q |
| 10.1 |
| 11/12/2019 |
| 001-14217 | |||
Office Lease between 700 17th Street, LLC and ENGlobal U.S. Inc., dated January 23, 2019 | 10-Q | 10.1 | 5/13/2019 | 001-14217 | ||||||
8-K | 10.1 | 4/16/2020 | 001-14217 | |||||||
| 8-K | 10.1 | 5/26/2020 | 001-14217 | ||||||
|
|
|
|
|
|
|
| |||
| DEF 14A |
| Appendix A |
| 7/15/2021 |
| 001-14217 | |||
| 8-K |
| 1.1 |
| 1/11/2022 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
8-K |
| 10.1 |
| 6/3/21 |
| 001-14217 | ||||
|
|
| ||||||||
| 10-K |
| 10.37 |
| 3/11/22 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.38 |
| 3/11/22 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.39 |
| 3/11/22 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.40 |
| 3/11/22 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.41 |
| 3/11/22 |
| 001-14217 | |||
|
|
|
|
|
|
|
|
|
|
|
Sublease Agreement between FMC Technologies, Inc. and ENGlobal U.S., Inc. dated May 20, 2021 |
| 10-K |
| 10.42 |
| 3/11/22 |
| 001-14217 | ||
|
|
|
|
|
|
|
|
|
|
|
| 10-K |
| 10.43 |
| 3/11/22 |
| 001-14217 | |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
Code of Business Conduct and Ethics of Registrant dated June 15, 2017 |
|
| 14.1 |
| 3/27/2020 |
| 001-14217 | |||
|
|
| 14.2 |
| 3/27/2020 |
| 001-14217 | |||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14 |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14 |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
*101.ins | Inline XBRL instance document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document Interactive Data Files. | |||||||||
*101.sch | Inline XBRL taxonomy extension schema document | |||||||||
*101.cal | Inline XBRL taxonomy extension calculation linkbase document | |||||||||
*101.def | Inline XBRL taxonomy extension definition linkbase document | |||||||||
*101.lab | Inline XBRL taxonomy extension label linkbase document | |||||||||
*101.pre | Inline XBRL taxonomy extension presentation linkbase document | |||||||||
*104 |
| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
|
|
|
|
* Filed herewith
** Furnished herewith
+ Management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
| 33 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENGlobal Corporation |
| |
|
|
|
|
Dated: March 31, 2023 | By: | /s/ William A. Coskey |
|
|
| William A. Coskey |
|
|
| Executive Chairman |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| By: | /s/ Darren W. Spriggs | March 31, 2023 |
|
| Darren W. Spriggs |
|
|
| Chief Financial Officer, Treasurer (Principal Financial and Accounting Officer) |
|
|
|
|
|
| By: | /s/ William Coskey | March 31, 2023 |
|
| William A. Coskey, P.E. |
|
|
| Executive Chairman and Director (Principal Executive Officer) |
|
|
|
|
|
| By: | /s/ Mark A. Hess | March 31, 2023 |
|
| Mark A. Hess, Director |
|
|
|
|
|
| By: | /s/ Christopher Sorrells | March 31, 2023 |
|
| Christopher Sorrells, Director |
|
|
|
|
|
| By: | /s/ Lloyd Kirchner | March 31, 2023 |
|
| Lloyd Kirchner, Director |
|
|
|
|
|
| By: | /s/ Kevin M. Palma | March 31, 2023 |
|
| Kevin M. Palma, Director |
|
| 34 |
| Table of Contents |