EDGAR 10-K Filing

Company CIK: 933738
Filing Year: 2022
Filename: 933738_10-K_2022_0001654954-22-002983.json

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ITEM 1. BUSINESS
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 25, 2021 and December 26, 2020, both of 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.
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 25, 2021, our backlog was $12.8 million. Of this amount, $7.0 million was for our Commercial segment and $5.8 million was for our Government segment. This compares to a total backlog of $24.3 million as of December 26, 2020 with $15.0 million for our Commercial segment and $9.3 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. In addition, during the year ended December 25, 2021 we recorded a $1.4 million bad debt reserve due to one of our major customers filing for bankruptcy and suspending operating during the second quarter. 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; however, we have maintained our overhead structure in anticipation of higher revenue levels.
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., 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 chief executive officer (“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.
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.
Overall, our ten largest customers, who vary from one period to the next, accounted for 86.0% of our total revenues for 2021 and 86.8% of our total revenues for 2020. 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 2021 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 25, 2021 and December 26, 2020, we had approximately 69 and 55 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.
Employees
As of December 25, 2021, we employed approximately 198 individuals on a full-time equivalent basis compared to approximately 241 individuals on a full-time equivalent basis as of December 26, 2020. The 17.8% decrease in personnel in 2021 was attributable to the decrease in project volume during the year. 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. We continue to strategically hire experienced individuals with significant relationships with our current and new customers to expand our product offerings to our existing customers. 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.
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 does not currently match employees’ deferrals. The match was suspended beginning December 30, 2018 and no contributions have been made since that date.

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ITEM 1A. RISK FACTORS
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.
RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY
The COVID-19 pandemic has adversely affected and could continue to adversely affect our business, financial condition and results of operations. Our business is dependent upon the willingness and ability of our customers to conduct transactions with us. The COVID-19 pandemic has caused severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including many of our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. The prolonged nature of the COVID-19 pandemic may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 in our market areas. The COVID-19 pandemic may also negatively impact the availability of our key personnel necessary to conduct our business as well as the business and operations of third-party service providers who perform critical services for our business. For example, in June 2020 we temporarily closed one of our operational facilities for one week in response to a potential COVID-19 exposure. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID-19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.
Our backlog declined due to the COVID-19 pandemic and is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. While our backlog has not been materially impacted by the COVID-19 pandemic in terms of project cancellations, we have not been successful in replacing our backlog as quickly as it has been converted to revenues due to inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions that have led to delays in project awards. Further, the COVID-19 pandemic has affected our ability to make business development contacts with customers. As a result, our backlog has decreased by approximately $11.5 million from $24.3 million as of December 26, 2020 to $12.8 million as of December 25, 2021. We expect the majority of our backlog to be completed within 12 months. While we believe our backlog is sufficient to keep a significant portion of our workforce productive in the near term, it may not be at our current operating levels. We cannot assure investors that we will be successful in replacing our backlog as quickly as it has been converted to revenues, which will reduce future revenue and profits and impact our financial performance. In addition, we cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and profits that we actually earn. The potential for project cancellations, terminations, suspensions or reductions in scope and adjustments to our backlog are exacerbated by economic conditions, particularly in the energy industry which is experiencing volatility in oil prices since the beginning of 2020 due to concerns about the COVID-19 pandemic and its impact on the worldwide economy and global demand for oil. We are unable to predict when market conditions may improve and worsening overall market conditions could result in further declines in our backlog.
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:
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Prices and expectations about future prices of oil and natural gas;
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Domestic and foreign supply of and demand for oil and natural gas;
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The cost of exploring for, developing, producing and delivering oil and natural gas;
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Weather conditions, such as hurricanes, which may affect our clients’ ability to produce oil and natural gas;
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Available pipeline, storage and other transportation capacity;
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Federal, state and local regulation of oilfield activities;
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Environmental concerns regarding the methods our customers use to produce oil and natural gas;
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The availability of water resources and the cost of disposal and recycling services; and
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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. If the prices of oil and natural gas decline or remain depressed for a lengthy period, our business may be materially and adversely affected.
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.
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 2021, we generated approximately 22.7% 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:
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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;
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Budget constraints or policy changes resulting in delay or curtailment of expenditures related to the services we provide;
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The timing and amount of tax revenue received by federal, and state and local governments, and the overall level of government expenditures;
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Delays associated with insufficient numbers of government staff to oversee contracts;
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Competing political priorities and changes in the political climate with regard to the funding or operation of the services we provide;
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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;
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A dispute with or improper activity by any of our subcontractors; and
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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.
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:
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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;
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Difficulties in supporting and transitioning customers, if any, of the target company;
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Diversion of our financial and management resources from existing operations;
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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;
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Risks of entering new markets in which we have limited or no experience;
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Potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;
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Assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s services;
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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
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Inability to generate sufficient net income to justify the acquisition costs.
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.
Our debt obligations may limit our financial flexibility. As of December 25, 2021, we had a total of approximately $1.0 million in debt outstanding under the Revolving Credit Facility. 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.
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 2021, our top three clients accounted for 30.5%, 22.6% and 5.8% of our revenue, respectively, and our ten largest customers accounted for 86.0% 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.
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 25, 2021, we had projects that had $2.7 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. For example, on July 12, 2021, one of our major customers filed bankruptcy after suspending operations during the second quarter of 2021, which led to our recording of a $1.4 million bad debt reserve and a $0.5 million reduction in backlog as of September 25, 2021.
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.
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 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 $0.75 per share in January 2022, to a high of $7.16 per share in March 2021.
We do not believe that this volatility corresponds to any recent change in our financial condition.
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.
As a result of this volatility, our securities could experience rapid and substantial decreases in price, and you may be able to sell securities you purchase under this prospectus only at a substantial loss to the price at which you purchased the securities in this offering.
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.
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.
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 27% 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 39,769,325 shares of common stock and an additional 2,000,000 shares of undesignated preferred stock as of December 25, 2021. 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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
We lease space in five buildings in the U.S. totaling approximately 165,257 square feet. The leases have remaining terms ranging from eight months to eighty-four 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 in Tulsa, Oklahoma, Denver, Colorado, and Henderson, Texas. Approximately 58,162 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 fabrication services in its Henderson, Texas facility on 7 acres with approximately 22,450 square feet of shop space.
Location
Square Feet
Denver, CO (1)
Henderson, TX
22,450
Houston, TX
26,006
Houston, TX (Portwall)
81,089
Tulsa, OK
35,432
165,257
(1) Our Denver, Colorado location is a month-to-month office rental.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 25, 2021, approximately 11,870 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 2021:
Period
Total Number
of Shares
Purchased
Average
Price
Paid
per
Share
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs (1)
Maximum Number (or
Approximate Dollar
Value)
of Shares That May
Yet be
Purchased Under
Plans or
Programs (1)
September 26, 2021 to October 23, 2021
-
-
-
$ -
October 24, 2024 to November 27, 2021
-
-
-
$ -
November 28, 2021 to December 25, 2021
-
-
-
$ -
Total
-
-
1,290,460
$ 425,589
________________
(1)
On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0 million of the Company’s common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions. The Company is not obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase program, which may be suspended, discontinued or reinstated at any time. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. As of December 25, 2021, the Company had purchased and retired 1,290,460 shares at an aggregate cost of $1.6 million under this repurchase program. Management does not intend to repurchase any shares in the near future.
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.

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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. In addition, during the year ended December 25, 2021, we recorded a $1.4 million bad debt reserve due to one of our major customers filing for bankruptcy and suspending operating during the second quarter. 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; however, we have maintained our overhead structure in anticipation of higher revenue levels.
COVID-19 Update
On March 11, 2020, the World Health Organization declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. In response to the continued spread of COVID-19, governmental authorities in the United States and around the world have imposed various restrictions designed to slow the pace of the pandemic, including restrictions on travel and other restrictions that prohibit employees from going to work, in cities where we have offices, employees, and customers causing severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including many of our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. We have been fortunate that we entered 2020 with a robust backlog and that the larger projects in our backlog have not been cancelled or postponed. This has allowed us to keep a significant portion of our workforce productive. However, we have not been successful in replacing our backlog as quickly as it has been converted to revenues. As a result, our backlog has decreased by approximately $11.5 million from $24.3 million at December 26, 2020 to $12.8 million at December 25, 2021. While we have many potential opportunities in our sales pipeline that could replace a significant portion of this backlog reduction, inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions have largely contributed to delays in project awards and our inability to replace our backlog as quickly as it has been converted to revenue. While we believe our backlog is sufficient to keep a significant portion of our workforce productive in the near term, it may not be at our current operating levels. The extent to which the disruption of COVID-19 may impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to our business, financial condition and results of operations is uncertain and we will continue to monitor the situation and assess the operational and financial impact on our business.
As a result of these current and future uncertainties, we felt it necessary to utilize all avenues of available assistance as they may not be available in the future when needed. On April 13, 2020, we obtained a $4.9 million loan (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which was forgiven in full during 2021. We are also utilizing relief for employees impacted by COVID-19 under the Families First Coronavirus Response Act in order to minimize the impact to both our employees and our business. Further, we are utilizing some of the tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS and the CARES Act.
On May 21, 2020, in order to provide additional liquidity, the Company and its subsidiaries (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 in the aggregate amount of up to $6.0 million, subject to a credit limit. For additional information, see “Liquidity and Capital Resources.” As we continue to monitor the situation and assess the operational and financial impact on our business, we may determine to take further actions in response.
On June 27, 2020, we temporarily closed one of our operational facilities and sponsored COVID-19 testing for employees in response to a potential COVID-19 exposure. During the closure, we cleaned and sanitized the facility, and we reopened the facility after one week. Employees and visitors were allowed to return to the facility only after negative test results were received or after a fourteen day quarantine period. Although the closure was only for one week, the disruption to our operations was longer as testing results were received slower than expected and project progress was delayed.
Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID-19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations. For additional information, see Part II. Item 1A “Risk Factors.”
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 2021, we worked on 275 projects ranging in size from $1 thousand to $28.3 million. The average size of the projects during 2021 was $408 thousand and we recorded an average revenue of $132 thousand per project.
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, business development, 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 25, 2021 and December 26, 2020
The following table set forth below, for the years ended December 25, 2021 and December 26, 2020, provides financial data that is derived from our consolidated statements of operations (amounts in thousands, except per share data). The data for the year ended December 26, 2020 has been recast to align with our current reportable segments.
Government
Commercial
Services
Corporate
Consolidated
For the year ended December 25, 2021:
Revenue
$ 27,986
$ 8,424
$ -
$ 36,410
100.0 %
Gross profit (loss)
(1,567 )
-
(643 )
(1.8 )%
SG&A
7,032
4,909
12,833
35.2 %
Operating income (loss)
(8,599 )
(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
For the year ended December 26, 2020:
Revenue
54,368
10,081
-
64,449
100.0 %
Gross profit
6,898
1,553
-
8,451
13.1 %
SG&A
3,328
4,838
8,834
13.7 %
Operating income (loss)
3,570
(4,838 )
(383 )
(0.6 )%
Other income, net
Interest expense, net
(153 )
Tax expense
(103 )
Net loss
(625 )
(1.0 )%
Basic and diluted loss per share
(0.02 )
Commercial
Government
Services
Corporate
Consolidated
Year Over Year Increase (Decrease) in Operating Results:
Revenue
$ (26,382 )
$ (1,657 )
$ -
$ (28,039 )
(43.5 )%
Gross profit (loss)
(8,465 )
(629 )
-
(9,094 )
SG&A
3,704
3,999
45.3 %
Operating income (loss)
(12,169 )
(853 )
(71 )
(13,093 )
3,418.5 %
Other income, net
8,049
Interest expense, net
(59 )
Tax expense
Net loss
(5,060 )
809.6 %
Basic and diluted loss per share
$ (0.16 )
Revenue - Overall, our revenue for the year ended December 25, 2021, as compared to the year ended December 26, 2020, decreased $28.0 million, or 43.5%, to $36.4 million from $64.4 million. Revenue from the Commercial segment decreased $26.4 million, or 48.5%, to $28.0 million for the year ended December 25, 2021, as compared to $54.4 million for the comparable period in 2020. Revenue from the Government Services segment decreased $1.7 million, or 16.4%, to $8.4 million for the year ended December 25, 2021 as compared to $10.1 million for the comparable period in 2020. Our 2021 revenue for the Commercial segment decreased primarily due to the completion of several large projects and projects that were not renewed as our clients decreased their activities in all sectors of the energy industry due to COVID-19. Our 2021 revenue for the Government Services segment decreased primarily due to base closures and travel restrictions imposed by the U.S. Government as a result of COVID-19.
Gross Profit (Loss) - Gross loss for the year ended December 25, 2021 was $0.6 million, a decrease of $9.1 million, or 107.6%, from a gross profit of $8.5 million for the comparable period in 2020. Gross loss margin was 1.8% for the year ended December 25, 2021, a decrease from the 13.1% gross profit margin for the year ended December 26, 2020. The decrease in gross profit margin is primarily attributable to an increase in Commercial segment costs associated with maintaining essential staffing, for which we obtained employee retention credits in the first and third quarters of 2021, as projects were completed without subsequent renewals or replacements in addition to increased proposal activity from our efforts to replenish our backlog.
Gross profit (loss) in our Commercial segment decreased $8.5 million, or 122.7%, to $1.6 million of gross loss for a gross loss margin of 5.6% for the year ended December 25, 2021 as compared to $6.9 million of gross profit and gross profit margin of 12.7% for the year ended December 26, 2020. The decrease in gross profit (loss) margin is primarily attributable to costs associated with maintaining essential staffing, for which we obtained the employee retention credit recorded in other income, completed projects without subsequent renewals or replacements during 2021, and increased proposal activity from our efforts to replenish our backlog.
Gross profit in the Government Services segment decreased $0.6 million, or 40.5%, to $0.9 million for a gross profit margin of 11.0% for the year ended December 25, 2021 as compared to $1.6 million of gross profit with a gross profit margin of 15.4% for the year ended December 26, 2020. The decrease in gross profit is due to base closures and travel restrictions imposed by the U.S. government as a result of COVID-19.
Selling, General and Administrative - Overall, our SG&A expenses increased by $4.0 million for the year ended December 25, 2021 as compared to the year ended December 26, 2020. This increase in SG&A is driven by increases in salaries and burden costs of $1.9 million from our investment in key business development personnel, bad debt expense of $1.3 million, legal costs of $0.2 million, recruiting expense of $0.1 million, computer software expense of $0.1 million, insurance costs of $0.1 million, travel costs of $0.1 million, accounting services of $0.1 million, and marketing costs of $0.1 million. We continue to look for ways to streamline our processes and delay expenditures while we continue to invest in our business development activities.
Other income, net - Other income, net of expense, increased $8.1 million for the year ended December 25, 2021 as compared to the year ended December 26, 2020 primarily due to a $1.7 million employee retention credit recorded in the first quarter of 2021, $5.0 million of PPP loan forgiveness in the third quarter of 2021, and $1.4 million employee retention credit recorded in the third quarter of 2021, with no comparable occurrences in 2020.
Tax expense - Tax expense was $0.1 million for the year ended December 25, 2021 and December 26, 2020.
Net Income (Loss) - Net loss for the year ended December 25, 2021 was $5.7 million compared to a net loss of $0.6 million for the year ended December 26, 2020, primarily as a result of decreases in revenue and gross margin, in addition to increased business development costs and bad debt reserve within our Commercial segment, partially offset by the employee retention credit in the first and third quarters of 2021 in addition to the PPP Loan forgiveness in the third quarter of 2021.
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 increased to $19.2 million at December 25, 2021 from $13.7 million at December 26, 2020, as our 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, PPP Loan forgiveness, an increase in other current assets, an increase in trade payables, an increase in accrued compensations and benefits, and an increase in other current liabilities and other components of working capital, partially offset by a decrease in contract assets net of contract liabilities, share-based compensation and depreciation, and a decrease in trade receivables. Our working capital as of December 25, 2021 was $26.2 million as compared to $14.0 million as of December 26, 2020.
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 25, 2021, the credit limit under the Revolving Credit Facility was $2.4 million and outstanding borrowings were $1.0 million, which yields enough interest to cover our minimum monthly interest charge. As of December 25, 2021, we were in compliance with all of the covenants under the Revolving Credit Facility. On April 13, 2020, we obtained the PPP Loan, and on July 12, 2021, we received notification from our lender that the PPP Loan was forgiven in full by the U.S. Small Business Administration. For additional information on the Revolving Credit Facility and PPP Loan, see Part II, Item 8, Note 7 - Debt -.
In addition, on January 29, 2021, we filed a shelf registration statement on Form S-3 (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. 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.
On January 11, 2022, we entered into sales agreement (the "ATM Agreement") with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which we may offer and sell shares of our 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. Upon the filing of this Annual Report on Form 10-K, our registration statement on Form S-3 (File No. 333-252572), 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 March 7, 2022, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $56.1 million, based on the closing price per share of our common stock as reported on the Nasdaq Capital Market on March 7, 2022, as calculated in accordance with General Instruction I.B.6 of Form S-3. 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.
We believe our cash on hand, internally generated funds, availability under the Revolving Credit Facility and sales of common stock pursuant to the ATM Agreement, along with other working capital will be sufficient to fund our current operations and expected activity for the next twelve months.
Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses. If any such event occurs, we would be forced to consider alternative financing options.
Our Board of Directors continues to review strategic transactions, which could include strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board’s strategic review will result in any transaction, or any assurance as to its outcome or timing.
Cash Flows from Operating Activities
Operating activities 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. The primary drivers of the cash used by operations for the year ended December 26, 2020 was a decrease of $4.4 million in contract assets net of contract liabilities, a decrease of $1.1 million in trade payables, and our $0.6 million operating loss, partially offset by cash provided from decreases of $3.7 million in trade receivables, $0.5 million in deprecation, $0.2 million in share-based compensation, an increase of $1.3 million in accrued compensation and benefits, and a decrease of $0.1 million in other components of working capital.
Cash Flows from Investing Activities
Investing activities used cash of $0.2 million during the year ended December 25, 2021 primarily related to our office remodel and computer equipment and used cash of $0.4 million during the year ended December 26, 2020 primarily related to the purchase of equipment used to outfit our fabrication facility and to upgrade our accounting and purchasing system.
Cash Flows from Financing Activities
Financing activities provided cash of $19.4 million during the year ended December 25, 2021 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. Financing activities provided cash of $6.3 million during the year ended December 26, 2020 primarily due to the proceeds from the PPP Loan and Revolving Credit Facility partially offset by payments on our 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 25, 2021 (in thousands):
Payment Due by Fiscal Period
2026 and thereafter
Operating and finance leases
$ 1,408
$ 1,028
$ 916
$ 771
$ 1,326
Revolving Credit Facility
-
1,035
-
-
-
Other liabilities(1)
-
-
-
-
Total
$ 1,908
$ 2,063
$ 916
$ 771
$ 1,326
(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 25, 2021 and December 26, 2020, no shares were repurchased. Management does not intend to repurchase any shares in the near future.
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 0.1%, to $7.7 million as of December 25, 2021 compared to $7.8 million as of December 26, 2020. We had bad debt expense of $1.4 million for the year ended December 25, 2021 primarily due to a major customer filing bankruptcy during the third quarter of the year and $0.1 of bad debt expense for the year ended December 26, 2020. Our allowance for uncollectible accounts was $1.7 million as of December 25, 2021 and $0.4 million as of December 26, 2020 and increased as a percentage of trade accounts receivable to 22.1% for 2021 from 5.0% for 2020. 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 (Moss Adams LLP, Houston, TX PCAOB ID: 659)
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 25, 2021 and December 26, 2020, 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 25, 2021 and December 26, 2020, 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.
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.
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:
·
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:
·
Confirming relevant contract terms including contract price and related change orders, revenue earned to date, retainage, balance currently due, and estimated completion date.
·
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.
·
Testing the accuracy and completeness of the costs incurred to date for the performance obligation.
·
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.
·
Testing the mathematical accuracy of management’s calculation of revenue for the performance obligation.
·
Performing a gross margin fade analysis during the year and a look-back analysis on completed contracts to assess variances between actual and estimated costs to complete.
/s/ Moss Adams LLP
Houston, Texas
March 10, 2022
We have served as the Company’s auditor since 2017.
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
December 25,
December 26,
ASSETS
Current Assets:
Cash
$ 19,202
$ 13,706
Trade receivables, net of allowances of $1,673 and $386
7,692
7,789
Prepaid expenses and other current assets
Payroll tax receivable
3,065
-
Contract assets
4,177
4,090
Total Current Assets
35,094
26,476
Property and equipment, net
1,698
1,263
Goodwill
Other assets
Right of use asset
4,251
1,628
Deposits and other assets
Total Other Assets
4,557
1,979
Total Assets
$ 42,069
$ 30,438
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
$ 2,001
$ 2,138
Accrued compensation and benefits
2,183
3,048
Current portion of leases
1,389
1,541
Contract liabilities
2,054
1,258
Current portion of note
-
3,707
Current portion of deferred payroll tax
-
Other current liabilities
Total Current Liabilities
8,831
12,437
Deferred payroll tax
-
1,037
Long-term debt
1,035
2,733
Long-term leases
4,012
Total Liabilities
13,878
16,815
Commitments and Contingencies (Note 16)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 35,230,675 and 27,560,686 shares issued and outstanding at December 25, 2021 and December 26, 2020, respectively
Additional paid-in capital
57,403
37,157
Accumulated deficit
(29,247 )
(23,562 )
Total Stockholders’ Equity
28,191
13,623
Total Liabilities and Stockholders’ Equity
$ 42,069
$ 30,438
See accompanying notes to consolidated financial statements.
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Year Ended
Year Ended
December 25,
December 26,
Operating revenues
$ 36,410
$ 64,449
Operating costs
37,053
55,998
Gross profit (loss)
(643 )
8,451
Operating costs and expenses:
Selling, general, and administrative expenses
12,833
8,834
Operating loss
(13,476 )
(383 )
Other income (expense)
Interest expense, net
(212 )
(153 )
Other income, net
8,063
Loss before income taxes
(5,625 )
(522 )
Provision for federal and state income taxes
(60 )
(103 )
Net loss
$ (5,685 )
$ (625 )
Basic and diluted loss per common share
$ (0.18 )
$ (0.02 )
Basic and diluted weighted average shares used in computing loss per share:
31,888
27,474
See accompanying notes to consolidated financial statements.
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)
Year Ended
Year Ended
December 25,
December 26,
Common Stock
Balance at beginning of year
$ 27
$ 27
Common stock issued
Balance at end of year
Additional Paid-in Capital
Balance at beginning of year
37,157
36,934
Share-based compensation - employee
Common stock issued
19,976
-
Balance at end of year
57,403
37,157
Accumulated Deficit
Balance at beginning of year
(23,562 )
(22,937 )
Net loss
(5,685 )
(625 )
Balance at end of year
(29,247 )
(23,562 )
Total Stockholders’ Equity
$ 28,191
$ 13,623
See accompanying notes to consolidated financial statements.
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended
Year Ended
December 25,
December 26,
Cash Flows from Operating Activities:
Net loss
$ (5,685 )
$ (625 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Share-based compensation expense
Forgiveness of PPP Loan
(4,949 )
-
Changes in current assets and liabilities:
Trade accounts receivable
3,646
Contract assets
(87 )
(228 )
Other current assets
(3,087 )
(46 )
Accounts payable
(137 )
(1,123 )
Accrued compensation and benefits
(1,365 )
1,301
Contract liabilities
(4,180 )
Income taxes payable
(38)
(57 )
Other current liabilities, net
(40 )
Net cash used in operating activities
$ (13,664 )
$ (519 )
Cash Flows from Investing Activities:
Property and equipment acquired
(240 )
(428 )
Net cash used in investing activities
$ (240 )
$ (428 )
Cash Flows from Financing Activities:
Issuance of common stock, net
19,984
-
Payments on finance leases
(129 )
(93 )
Proceeds from PPP loan
-
4,949
Proceeds (payments) from revolving credit facility
(455 )
1,490
Net cash provided by financing activities
$ 19,400
$ 6,346
Net change in cash
5,496
5,399
Cash at beginning of year
13,706
8,307
Cash at end of year
$ 19,202
$ 13,706
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
$ 212
$ 153
Right of use assets obtained in exchange for new operating lease liability
$ 4,014
$ 963
Leased assets obtained in exchange for new finance lease liabilities
$ 665
$ 219
Cash paid during the year for income taxes (net of refunds)
$ 151
$ 86
Non-cash transaction: PPP loan forgiveness
$ 4,974
$ -
See accompanying notes to consolidated financial statements.
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 25, 2021 and December 26, 2020, and the results of our operations, cash flows and changes in stockholders’ equity for the 52 week period ended December 25, 2021 and for the 52 week period ended December 26, 2020. They are prepared in accordance with accounting principles generally accepted in the United States of America. Certain amounts for prior periods have been reclassified to conform to the current presentation. 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.
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.
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 10% each of our consolidated operating revenues for the year ended December 25, 2021 (30.5% and 22.6%). For the year ended December 26, 2020, four customers provided more than 10% each of our consolidated operating revenues (25.1%, 17.9%, 13.9%, and 13.8%). Amounts included in trade receivables related to these customers totaled $0.1 million and $1.2 million, respectively, at December 25, 2021 and $0.0 million, $0.6 million, $0.8 million and $1.5 million, respectively, at December 26, 2020.
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
5 - 10
Furniture and fixtures
5 - 7
Computer equipment; Autos and trucks
3 - 5
Software
3 - 5
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 a historical earnings multiple times the cash flow 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.
We performed a qualitative assessment of goodwill for each of the years ended December 25, 2021 and December 26, 2020. This assessment indicated that there was no impairment of goodwill for the years ended December 25, 2021 and December 26, 2020.
Impairment of Long-Lived Assets - We review 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 2021 and 2020 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.
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 2021 or 2020.
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 2021 and 2020.
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 2021 and 2020.
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 25, 2021 and December 26, 2020, are as follows (amounts in thousands):
Amounts billed
$ 5,810
$ 5,050
Amounts unbilled
1,455
Retainage
2,688
1,670
Less: Allowance for uncollectible accounts
(1,673 )
(386 )
Trade receivables, net
$ 7,692
$ 7,789
The components of prepaid expense and other current assets are as follows as of December 25, 2021 and December 26, 2020 (amounts in thousands):
Prepaid expenses
$ 917
$ 843
Other receivables - employee
Prepaid expenses and other current assets
$ 958
$ 891
The components of other current liabilities are as follows as of December 25, 2021 and December 26, 2020 (amounts in thousands):
Accrual for known contingencies
$ 104
$ 215
Customer prepayments
Gross receipts tax payable
State income taxes payable
Insurance payable
Other current liabilities
$ 667
$ 745
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 at December 25, 2021 and December 26, 2020 (amounts in thousands):
Computer equipment and software
$ 1,397
$ 1,170
Shop equipment
2,252
1,683
Furniture and fixtures
Leasehold improvements
Autos and trucks
$ 4,765
$ 3,978
Accumulated depreciation and amortization
(3,067 )
(2,715 )
Property and equipment, net
$ 1,698
$ 1,263
Depreciation expense was $0.5 million and $0.4 million for the years ended December 25, 2021 and December 26, 2020, respectively.
NOTE 5 - REVENUE RECOGNITION
Our revenue by contract type are as follows (amounts in thousands):
For the Years Ended
December 25,
December 26,
Fixed-price revenue
$ 21,205
$ 35,822
Time-and-material revenue
15,205
28,627
Total Revenue
36,410
64,449
NOTE 6 - CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts consist of the following at December 25, 2021 and December 26, 2020 (amounts in thousands):
Costs incurred on uncompleted contracts
$ 36,429
$ 39,154
Estimated earnings on uncompleted contracts
4,866
4,388
Earned revenues
41,295
43,542
Less: billings to date
39,172
40,710
Net costs in excess of billings on uncompleted contracts
$ 2,123
$ 2,832
Costs and estimated earnings in excess of billings on uncompleted contracts
$ 4,177
$ 4,090
Billings in excess of costs and estimated earnings on uncompleted contracts
(2,054 )
(1,258 )
Net costs in excess of billings on uncompleted contracts
$ 2,123
$ 2,832
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 $0.2 million in contingency amounts as of December 25, 2021 and had $0.2 million in contingency amounts as of December 26, 2020. Losses on contracts are recorded in full as they are identified.
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 $0.0 million in deferred revenue for the year ended December 25, 2021 and $0.3 million for the year ended December 26, 2020. This deferred revenue represents work on not to exceed contracts that has been performed but has not been billed or been recorded as revenue due to our revenue recognition policies as the work was performed outside the contracted amount without obtaining proper work order changes. It is uncertain as to whether these revenues will eventually be recognized by us or the proceeds collected. The costs associated with these billings have been expensed as incurred.
NOTE 7 - DEBT
The components of debt are as follows (amounts in thousands):
December 25, 2021
December 26, 2020
PPP Loan (1)
$ -
$ 4,949
Revolving Credit Facility (2)
1,035
1,491
Total debt
1,035
6,440
Amount due within one year
-
3,707
Total long-term debt
$ 1,035
$ 2,733
(1)
On April 13, 2020, the Company was granted an unsecured loan (the “PPP Loan”) from Origin Bank in the aggregate principal amount of $4,915,800 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan was evidenced by a promissory note, dated as of April 13, 2020 (the “Note”), by the Company in favor of Origin Bank, as lender.
On November 30, 2020, our lender, Origin Bank, transmitted our PPP Loan forgiveness application to the U.S. Small Business Administration. On July 12, 2021, we received notification from Origin Bank that the PPP Loan was forgiven in full by the U.S. Small Business Administration at which time the Company recognized the extinguishment of debt as other income.
(2)
On May 21, 2020 (the “Closing Date”), the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans (each a “Loan” and collectively, the “Loans”) in the aggregate amount of up to $6.0 million (the “Maximum Credit Limit”).
Set forth below are certain of the material terms of the Revolving Credit Facility:
Credit Limit: The credit limit is an amount equal to the lesser of (a) the Maximum Credit Limit and (b) the sum of (i) 85% of the Borrowers’ Eligible Accounts (as defined in the Revolving Credit Facility), plus (ii) the lesser of (A) 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility), or (B) $3,000,000 plus (iii) the lesser of (A) 20% of Borrowers’ Eligible Fixed Price Accounts, or (B) $250,000. As of December 25, 2021, the credit limit under the Revolving Credit Facility was $2.0 million.
Interest: Any Loans will bear interest at a rate per annum equal to the Prime rate (defined as the rate announced as the “prime rate” or “bank prime rate” in the Western Edition of the Wall Street Journal) plus 2.0%; provided that interest will not be less than $7,500 per month.
Collateral: Lender receives a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property.
Maturity: The maturity date is May 20, 2023 and shall be automatically extended for additional periods of one-year each, if written notice of termination is not given by one party to the other at least thirty days prior to the maturity date.
Loan Fee: The Borrowers will pay to Lender a loan fee of 1.00% of the Maximum Credit Limit at the time of funding and annually thereafter on the anniversary date of the initial funding.
Termination Fee: In the event the Borrowers terminate the Revolving Credit Facility prior to the maturity date, the Borrowers will pay to Lender a termination fee of (i) 2.00% of the Maximum Credit Limit, if the termination occurs on or prior to the first anniversary of the Closing Date, (ii) 1.00% of the Maximum Credit Limit, if the termination occurs after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date and (iii) 0.05% of the Maximum Credit Limit, if the termination occurs after the second anniversary of the Closing Date.
Covenants: The Revolving Credit Facility requires the Borrowers to comply with certain customary affirmative covenants, and negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Borrowers to engage in mergers, acquisitions or other transactions outside of the ordinary course of business, make loans or investments, incur indebtedness, pay dividends or repurchase stock, or engage in affiliate transactions. The Revolving Credit Facility does not require the Borrowers to comply with any financial covenants.
The future scheduled maturities of our debt are (amounts in thousands):
Revolving
Credit Facility
$ -
1,035
Thereafter
-
$ 1,035
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
Year ended
Year ended
Statement
December 25,
December 26,
Classification
Finance leases:
Amortization expense
SG&A Expense
$ 100
$ 92
Interest expense
Interest expense, net
$ 117
$ 112
Operating leases:
Operating costs
Operating costs
Selling, general and administrative expenses
SG&A Expense
1,728
1,830
$ 2,235
$ 2,463
Total lease expense
$ 2,352
$ 2,575
Supplemental balance sheet information related to leases are as follows (amounts in thousands):
Financial
Statement
December 25,
December 26,
Classification
ROU Assets:
Operating leases
Right of Use asset
$ 4,251
$ 1,628
Finance leases
Property and equipment, net
Total ROU Assets:
$ 5,230
$ 2,070
Lease liabilities:
Current liabilities
Operating leases
Current portion of leases
$ 1,153
$ 1,421
Finance leases
Current portion of leases
Noncurrent Liabilities:
Operating leases
Long Term Leases
3,269
Finance leases
Long Term Leases
Total lease liabilities
$ 5,401
$ 2,149
The weighted average remaining lease term and weighted average discount rate are as follows:
December 25,
December 26,
Weighted average remaining lease term (years)
Operating leases
4.8
1.2
Finance leases
4.4
4.2
Weighted average discount rate
Operating leases
0.8 %
1.7 %
Finance leases
2.1 %
5.8 %
Maturities of operating lease liabilities as of December 25, 2021 are as follows (dollars in thousands):
Year ending:
Operating leases
Finance leases
Total
1,162
1,410
1,031
2026 and thereafter
1,185
1,327
Total lease payments
4,460
5,458
Less: imputed interest
(37 )
(20 )
(57 )
Total lease liabilities
$ 4,423
$ 978
$ 5,401
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 does not currently match employees’ deferrals. The match was suspended beginning December 30, 2018 and no contributions were made during the years ended December 25, 2021 and December 26, 2020.
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 1,500,000 shares of common stock. The Long Term Incentive Plan provides for grants of non-statutory options, incentive stock options, restricted stock awards, performance shares, performance units, restricted stock units and other stock-based awards, in order to enhance the ability of ENGlobal to motivate current employees, to attract employees of outstanding ability and to provide for grants to be made to non-employee directors. At December 25, 2021, 1,399,365 shares of common stock are available to be issued pursuant to the Long Term Incentive Plan.
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 $0.3 million for the year ended December 25, 2021 and $0.2 million for the year ended December 26, 2020.
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.
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 25, 2021:
Number of unvested restricted
shares
Weighted-average grant-date fair
value
Outstanding at December 26, 2020
145,296
$ 1.05
Granted
140,750
3.09
Vested
130,381
1.24
Forfeited
39,034
1.44
Outstanding at December 25, 2021
116,631
$ 3.07
As of December 25, 2021, there was $0.3 million of total unrecognized compensation cost related to unvested restricted stock awards which is expected to be recognized over a weighted-average period of 2 years. 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
Director (1)
5,656
$ 4.42
$ 25,000
March 9, 2021
Employees (10)
56,557
$ 4.42
$ 250,000
June 1, 2021
Employee (1)
2,778
$ 3.60
$ 10,000
August 26, 2021
Directors (3)
75,759
$ 1.98
$ 150,000
During the year ended December 26, 2020, the Company granted the following restricted stock awards.
Date Issued
Issued to
Number of Shares
Market Price
Fair Value
June 11, 2020
Directors (3)
147,060
$ 1.02
$ 150,000
NOTE 11 - TREASURY STOCK
On April 21, 2015, we announced that the 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 are 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. As of December 25, 2021, the Company had purchased and retired 1,290,460 shares for $1.6 million under this program. The stock repurchase program was suspended from May 16, 2017 and was reinstated on December 19, 2018. No shares were repurchased during the year ended December 25, 2021. Management does not intend to repurchase any shares in the near future.
NOTE 12 - REDEEMABLE PREFERRED STOCK
We are authorized to issue 2,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”). The Board of Directors has the authority to approve the issuance of all or any of these shares of the Preferred Stock in one or more series, to determine the number of shares constituting any series and to determine any voting powers, conversion rights, dividend rights and other designations, preferences, limitations, restrictions and rights relating to such shares. While there are no current plans to issue the Preferred Stock, it was authorized in order to provide the Company with flexibility to take advantage of contingencies such as favorable acquisition opportunities.
NOTE 13 - FEDERAL AND STATE INCOME TAXES
The components of our income tax expense for the years ended December 25, 2021 and December 26, 2020 are as follows (amounts in thousands):
Current:
State
Total current
Deferred:
Federal
(35 )
(25 )
State
Total deferred
-
-
Total income tax expense
$ 60
$ 103
The following is a reconciliation of expected income tax benefit to actual income tax expense for the years ended December 25, 2021 and December 26, 2020 (amounts in thousands):
Federal income tax (benefit) at statutory rate of 21%
$ (1,181 )
$ (110 )
State income tax, net of federal income tax effect
(43 )
Nondeductible expenses
(31 )
Nontaxable PPP Loan Forgiveness
(1,044 )
-
State RTA
(13 )
-
Prior year adjustments and true-ups
(32 )
Change in valuation allowance
2,404
Total tax expense
$ 60
$ 103
The components of the deferred tax asset (liability) consisted of the following at December 25, 2021 and December 26, 2020 (amounts in thousands):
Noncurrent Deferred tax assets
Federal and state net operating loss carryforward
$ 9,503
$ 7,036
Tax credit carryforwards
1,977
1,971
Allowance for uncollectible accounts
Accruals not yet deductible for tax purposes
Goodwill
Depreciation
-
Lease payable
Total noncurrent deferred tax assets
13,576
10,470
Less: Valuation allowance
(12,419 )
(10,016 )
Total noncurrent deferred tax assets, net
$ 1,157
$ 454
Noncurrent deferred tax liabilities:
Depreciation
(49 )
-
Other
(126 )
(70 )
Right to use asset
(982 )
(384 )
Total noncurrent deferred tax liabilities
(1,157 )
(454 )
Net deferred tax assets/deferred tax Liabilities
$ -
$ -
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 25, 2021 and December 26, 2020, we do not have any significant uncertain tax positions.
We record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will expire before realization of the benefit or future deductibility is not probable. 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 2021, after evaluating all available evidence, we recorded a valuation allowance on all net deferred tax assets.
For the year ended December 25, 2021, we recognized a total income tax expense of $60 thousand on a pretax book loss of $5.6 million compared to an income tax expense of $103 thousand on a pretax book loss of $0.5 million for the year ended December 26, 2020. As a result of permanent difference add-backs to taxable income related to the PPP Loan forgiveness and stock compensation, the tax expense decreased by $1.0 million and $31 thousand, respectively, which decreased the effective tax rate by 18.6% and 0.6%, respectively. An increase of $2.4 million in the valuation allowance decreased the effective tax rate by 42.8%. State income tax (net of Federal) expense in the amount of $43 thousand decreased the effective tax rate by 0.8% mainly due to Texas margins tax. Federal and state tax true-ups decreased tax expense in the amount of $44 thousand and decreased the effective tax rate by 0.8%.
As of December 25, 2021 the Company has a gross federal net operating loss carry-forward of approximately $41.4 million, which will begin to expire in 2032. Under the Tax Cuts and Jobs Act of 2017 (“TCJA”), net operating losses (“NOL’s”) generated in tax year 2018 and forward have an indefinite carryforward but are limited to 80% of taxable income when utilized. For NOL’s incurred in tax year 2017 and prior, the limitation to 80% of taxable income does not apply, but the NOL’s are subject to expiration.
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 chief executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.
We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution. These four targeted markets include: (i) 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.
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. The segment information for the year ended December 26, 2020 has been recast to align with our current reportable segments.
Segment information for the years ended December 25, 2021 and December 26, 2020 are as follows (amounts in thousands):
For the year ended
December 25, 2021:
Commercial
Government
Corporate
Consolidated
Operating revenues
$ 27,986
$ 8,424
$ -
$ 36,410
Operating income (loss)
(8,599 )
(4,909 )
(13,476 )
Depreciation and amortization
Tangible assets
12,516
3,068
25,746
41,330
Goodwill
-
-
Other intangible assets
-
-
Total assets
12,535
3,788
25,746
42,069
Capital expenditures
-
For the year ended
December 26, 2020:
Commercial
Government
Corporate
Consolidated
Operating revenues
$ 54,368
$ 10,081
$ -
$ 64,449
Operating income (loss)
3,570
(4,838 )
(383 )
Depreciation and amortization
Tangible assets
11,111
2,431
16,157
29,699
Goodwill
-
-
Other intangible assets
-
-
Total assets
11,130
3,151
16,157
30,438
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.
We have accounted for the $1.7 million and $1.4 million employee retention credits in the first and third quarters of 2021, respectively, as other income on the Statement of Operations and as a receivable on the Balance Sheet.
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 $25 million to or through B. Riley, as sales agent, from time to time, in an “at the market offering”. Under the Prior ATM Agreement, the Company will pay B. Riley an aggregate commission of 3% of the gross sales price per share of common stock sold under the Prior ATM Agreement. The Company is not obligated to make any sales under the Prior ATM Agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs. In April 2021, 400,538 shares of common stock were issued pursuant to the Prior ATM Agreement for net proceeds of approximately $1.4 million.
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 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 of approximately $1.3 million.
NOTE 18 - LIQUIDITY
We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, sales of common stock pursuant to the ATM Agreement (defined below), 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 25, 2021, the credit limit under the Revolving Credit Facility was $2.4 million and outstanding borrowings were $1.0 million, which yields enough interest to cover our minimum monthly interest charge. As of December 25, 2021, we were in compliance with all of the covenants under the Revolving Credit Facility. On April 13, 2020, we obtained the PPP Loan, and on July 12, 2021, we received notification from our lender that the PPP Loan was forgiven in full by the U.S. Small Business Administration. For additional information on the Revolving Credit Facility and PPP Loan, see Note 7 - Debt.
In addition, on January 29, 2021, we filed a shelf registration statement on Form S-3 (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. 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 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.
We believe our cash on hand, internally generated funds, availability under the Revolving Credit Facility and sales of common stock pursuant to the ATM Agreement, along with other working capital will be sufficient to fund our current operations and expected activity for the next twelve months.
NOTE 19 - 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.
Sales Agreement
On January 7, 2022, the Company’s At Market Issuance Sales Agreement with B. Riley Securities, Inc. was terminated pursuant to its terms.
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 our 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 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. Upon the filing of this Annual Report on Form 10-K, our registration statement on Form S-3 (File No. 333-252572), 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 March 7, 2022, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $56.1 million, based on the closing price per share of our common stock as reported on the Nasdaq Capital Market on March 7, 2022, as calculated in accordance with General Instruction I.B.6 of Form S-3. 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.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
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 Chief Executive Officer 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 25, 2021, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 25, 2021, our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. 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.
In order to evaluate the effectiveness of our internal control over financial reporting as of December 25, 2021, 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 25, 2021. We have concluded that our internal control over financial reporting at December 25, 2021 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 25, 2021, that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III

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ITEM 9B. OTHER INFORMATION

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 2022 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be set forth in our definitive proxy statement for the 2022 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 2022 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 2022 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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 2022 annual meeting of stockholders or an amendment to this Report and is incorporated herein by this reference.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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
3.1
Restated Articles of Incorporation of Registrant dated January 29, 2021
8-K
3.1
1/29/2021
001-14217
3.2
Second Amended and Restated Bylaws of Registrant dated April 14, 2016
8-K
3.1
4/15/2016
001-14217
4.1
Registrant’s specimen common stock certificate
S-3
4.1
10/31/2005
333-29336
*4.2
Description of Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934.
+10.1
ENGlobal Corporation Incentive Bonus Plan Dated effective July 1, 2009
8-K
10.1
8/17/2009
001-14217
+10.2
Form of Restricted Stock Unit Award Agreement between Registrant and its Independent Non-employee Directors
10-Q
10.2
8/11/2008
001-14217
+10.3
Form of Restricted Stock Award Agreement of 2009 Equity Incentive Plan between Registrant and its independent directors
10-Q
10.1
8/10/2009
001-14217
*+10.4
Form of Indemnification Agreement between Registrant and its Directors and Executive Officers
+10.5
Employment Agreement between ENGlobal Corporation and Mark A. Hess effective December 18, 2012
8-K
10.7
12/20/2012
001-14217
10.6
Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated January 27, 2005
10-K
10.11
3/28/2008
001-14217
10.7
First Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated April 5, 2005
10-K/A
10.26
3/29/2007
001-14217
10.8
Second Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated June 15, 2005
10-K/A
10.27
3/29/2007
001-14217
10.9
Third Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Eng Inc. dated December 28, 2005
10-K/A
10.28
3/29/2007
001-14217
10.10
Fourth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Eng, Inc. dated February 27, 2006
10-K/A
10.29
3/29/2007
001-14217
10.11
Fifth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated July 28, 2006
10-K/A
10.30
3/29/2007
001-14217
10.12
Sixth Amendment to the Lease agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated June 20, 2007
10-K
10.17
3/28/2008
001-14217
10.13
Seventh Amendment to the Lease agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated November 12, 2010
10-K
10.11
3/15/2018
001-14217
10.14
Eighth Amendment to the Lease agreement between Oral Roberts University and ENGlobal U.S. Inc. dated May 15, 2012
10-K
10.12
3/15/2018
001-14217
10.15
Ninth Amendment to the Lease agreement between Oral Roberts University and ENGlobal U.S. Inc. dated August 22, 2017
10-K
10.13
3/15/2018
001-14217
10.16
Tenth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated August 23, 2018
10-Q
10.2
11/8/2018
001-14217
10.17
Lease Agreement between Koll Bren Fund V, LP and ENGlobal Corporate Services, Inc. dated March 4, 2005
10-K
10.14
3/15/2018
001-14217
10.18
First Amendment to the Lease Agreement between Koll Bren Fund V, LP and ENGlobal Corporate Services, Inc. dated November 3, 2005
10-K
10.15
3/15/2018
001-14217
10.19
Second Amendment to the Lease Agreement between Koll Bren Fund V, LP and ENGlobal Corporate Services, Inc. dated July 31, 2006
10-K
10.16
3/15/2018
001-14217
10.20
Third Amendment to the Lease Agreement between Koll Bren Fund V, LP and ENGlobal Corporate Services, Inc. dated April 18, 2007
10-K
10.17
3/15/2018
001-14217
10.21
Fourth Amendment to the Lease Agreement between YPI North Belt Portfolio, LLC and ENGlobal Corporate Services, Inc. dated March 1, 2010
10-Q
10.2
3/5/2010
001-14217
10.22
Fifth Amendment to the Lease Agreement between YPI North Belt Portfolio, LLC and ENGlobal U.S. Inc. dated April 18, 2016
10-K
10.19
3/15/2018
001-14217
10.23
Sixth Amendment to the Lease Agreement between YPI North Belt Portfolio, LLC and ENGlobal U.S. Inc. dated June 5, 2018
10-Q
10.1
11/8/2018
001-14217
10.24
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
10.25
Lease Agreement between Carson Portwall Management LLP and ENGlobal Systems. Inc. dated November 12, 2008
10-K
10.21
3/15/2018
001-14217
10.26
First Amendment to the Lease Agreement between Carson Portwall Management LLP .and ENGlobal Systems. Inc. dated December 10, 2008
10-K
10.22
3/15/2018
001-14217
10.27
Second Amendment to the Lease Agreement between Carson Portwall Management LLP .and ENGlobal US Inc. dated September 7, 2015
10-K
10.23
3/15/2018
001-14217
10.28
Lease Agreement between Bryan Bateman Properties LLC .and ENGlobal US. Inc. dated August 23, 2017
10-K
10.24
3/15/2018
001-14217
+10.29
ENGlobal U.S. Inc. Redacted Growth Initiative Plan
10-Q
10.1
11/12/2019
001-14217
10.30
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
10.31
U.S. Small Business Administration Note dated as of April 13, 2020, by ENGlobal Corporation in favor of Origin Bank, as lender
8-K
10.1
4/16/2020
001-14217
10.32
Loan and Security Agreement dated as of May 18, 2020, by and among ENGlobal Corporation, ENGlobal U.S., Inc., ENGlobal Government Services, Inc., and Pacific Western Bank, a California bank, as lender
8-K
10.1
5/26/2020
001-14217
10.33
At Market Issuance Sales Agreement, dated January 29, 2021, between ENGlobal Corporation and B. Riley Securities, Inc.
S-3
1.2
1/29/2021
333-252572
+10.34
ENGlobal Corporation 2021 Long Term Incentive Plan
DEF 14A
Appendix A
7/15/2021
001-14217
10.35
Sales Agreement, dated January 11, 2022, by and between ENGlobal Corporation and Lake Street Capital Markets, LLC.
8-K
1.1
1/11/2022
001-14217
10.36
Securities Purchase Agreement, dated June 1, 2021, by and among ENGlobal Corporation and the purchasers identified on the signature pages thereto
8-K
10.1
6/3/21
001-14217
*+10.37
Executive Employment Agreement between ENGlobal U.S. Inc. and Roger Westerlind effective December 16, 2020
*10.38
Third Amendment to the Lease Agreement between Carson Portwall Management, LLC .and ENGlobal US Inc. dated April 2019
*10.39
Fourth Amendment to the Lease Agreement between Carson Portwall Management, LLC .and ENGlobal US Inc. dated December 20, 2021
*10.40
Eleventh Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated September 25, 2019
*10.41
Twelfth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated November 11, 2020
*10.42
Sublease Agreement between FMC Technologies, Inc. and ENGlobal U.S., Inc. dated May 20, 2021
*+10.43
Form of Restricted Stock Unit Award Agreement of the 2021 Long Term Incentive Plan between Registrant and its Independent Non-employee Directors
14.1
Code of Business Conduct and Ethics of Registrant dated June 15, 2017
14.1
3/27/2020
001-14217
14.2
Code of Ethics for Chief Executive Officer and Senior Financial Officers of Registrant dated June 15, 2017
14.2
3/27/2020
001-14217
*21.1
Subsidiaries of the Registrant
*23.1
Consent of Moss Adams LLP
*31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14
*31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14
**32.1
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350
**32.2
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350
*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