UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☐ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☑ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 001-14217
ENGlobal Corporation
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction
of incorporation or organization)
11740 Katy Fwy – Energy Tower III, 11th floor
Houston, TX
(Address of principal executive offices)
88-0322261
(I.R.S Employer
Identification No.)
77079
(Zip code)
Registrant’s telephone number, including area code: (281) 878-1000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Common Stock, $0.001 par value
Trading Symbol
ENG
Name of each exchange on which registered
NASDAQ
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act: Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer
Non-accelerated Filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of
the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously
issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant on June 25, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter)
was $27,931,814 (based upon the closing price for shares of common stock as reported by the NASDAQ on June 24, 2022).
The number of shares outstanding of the registrant’s $0.001 par value common stock on March 28, 2023 is as follows: 39,771,617 shares.
Documents incorporated by reference: Responses to Items 10, 11, 12, 13 and 14 of Part III of this Report are incorporated herein by reference to information contained in the Company’s definitive proxy
statement for its 2023 Annual Meeting of Stockholders or an amendment to this Report to be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year
covered by this Report.
ITEM 1.
ITEM 1A.
BUSINESS
RISK FACTORS
ENGLOBAL CORPORATION
2022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
4
10
ITEM 2.
ITEM 3.
ITEM 4.
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
PART II
ITEM 5.
ITEM 7.
ITEM 8.
ITEM 9.
ITEM 9A.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART III
ITEM 15.
ITEM 16.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
SIGNATURES
Table of Contents
PART IV
SIGNATURES
2
PART I
19
19
19
20
21
F-1
28
28
30
30
30
30
30
31
33
34
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this “Report”), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as oral statements made by the Company
and its officers, directors or employees, contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such forward-
looking statements are based on management’s beliefs, current expectations, estimates and projections about the industries that the Company and its subsidiaries’ serve, the economy and the Company in
general. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements; however, this Report also
contains other forward-looking statements in addition to historical information. Although we believe that the expectations reflected in the forward-looking statements are reasonable, such forward-looking
statements are not guarantees of future performance and are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to differ
materially from historical results or from any results expressed or implied by such forward-looking statements. The Company cautions readers that the following important factors and the risks described
in Part I, Item 1A. Risk Factors of this Report, among others, could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Report: (1) the substantial
doubt about our ability to continue as a going concern as of December 31, 2022; (2) our limited borrowing capacity under our credit facility may limit our ability to finance operations or engage in other
business activities, which could have a material impact on our financial condition; (3) our ability to realize revenue projected in our backlog and our ability to collect accounts receivable and process
accounts payable in a timely manner; (4) our ability to obtain additional financing when needed; (5) the impact of the COVID-19 pandemic and of the actions taken by governmental authorities,
individuals and companies in response to the pandemic on our business, financial condition, and results of operations, including on our revenues and profitability; (6) our ability to increase our backlog,
revenue and profitability; (7) the effect of economic downturns and the volatility and level of oil and natural gas prices; (8) the uncertainties related to the U.S. Government’s budgetary process and their
effects on our long-term U.S. Government contracts; (9) our ability to identify, evaluate, and complete any transactions in connection with our review of strategic transactions; (10) the impact of the
announcement of our review of strategic transactions on our business, including our financial and operating results, or our employees, suppliers and customers; (11) our ability to accurately estimate the
overall risks, revenue or costs on a contract; (12) the risk of providing services in excess of original project scope without having an approved change order; (13) our ability to execute our expansion into
the modular solutions market and to execute our updated business growth strategy to position the Company as a leading provider of engineered modular solutions to its customer base; (14) our ability to
attract and retain key professional personnel; (15) our debt obligations may limit our financial flexibility; (16) our dependence on one or a few customers; (17) the risks of internal system failures of our
information technology systems, whether caused by us, third-party service providers, intruders or hackers, computer viruses, malicious code, cyber-attacks, phishing and other cyber security problems,
natural disasters, power shortages or terrorist attacks; (18) the risk of unexpected liability claims or poor safety performance; (19) our ability to realize project awards or contracts on our pending
proposals, and the timing, scope and amount of any related awards or contracts; (20) our ability to retain existing customers and attract new customers; (21) our ability to identify, consummate and
integrate potential acquisitions; (22) our reliance on third-party subcontractors and equipment manufacturers; (23) our ability to satisfy the continued listing standards of NASDAQ with respect to our
common stock or to cure any continued listing standard deficiency with respect thereto; and (24) the effect of changes in laws and regulations, including U.S. tax laws, with which the Company must
comply and the associated cost of compliance with such laws and regulations. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-
looking statements due to a number of factors detailed from time to time in ENGlobal’s filings with the Securities and Exchange Commission. In addition, reference is hereby made to cautionary statements
set forth in the Company’s other SEC filings.
The Company cautions that the foregoing list of important factors is not exclusive. We are under no duty and have no plans to update any of the forward-looking statements after the date of this Report to
conform such statements to actual results.
Table of Contents
ITEM 1. BUSINESS
3
ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”), incorporated in the State of Nevada in June 1994, is a leading provider of innovative,
delivered project solutions primarily to the energy industry. We deliver these solutions to our clients by combining our vertically-integrated engineering and professional project execution services with our
automation and systems integration expertise and our fabrication and construction capabilities. We believe our vertically-integrated strategy allows us to differentiate our company from most of our
competitors as a full-service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their project cost and schedules. Our strategy and
positioning has also allowed the Company to pursue larger scopes of work centered around many different types of modularized engineered systems. All of the information contained in this Report relates
to the annual periods ended December 31, 2022, which contained 53 weeks, and December 25, 2021, which contained 52 weeks.
We derive revenues primarily from three sources: (i) business development efforts, (ii) preferred provider or alliance agreements with strategic end-user clients, original equipment manufacturers,
and technology partners, and (iii) referrals from existing customers and industry members. Our business development professionals are focused on specific market segments within the energy industry. The
market segments that we are targeting include Renewables, Automation, Oil, Gas, and Petrochemicals, and Government Services. This market focus allows us to develop centers of expertise for each of
our targeted markets.
We generally enter into two principal types of contracts with our clients: time-and-material contracts and fixed-price contracts. Our clients typically determine the type of contract to be utilized for
a particular engagement, with the specific terms and conditions of a contract being negotiated and typically contained in a multiyear services agreement.
Our business development professionals focus on building long-term relationships with clients in order to provide solutions throughout the life cycle of their projects and facilities. Additionally,
we seek to capitalize on cross-selling opportunities between our market segments and many of our projects will contain elements from more than one market segment. Sales leads are often jointly
developed and pursued by our business development personnel from multiple markets.
Products and services are also promoted through trade advertising, participation in industry conferences and on-line internet communication via our corporate home page at www.englobal.com.
The ENGlobal website illustrates our company’s full range of services and capabilities and is updated on a continuous basis. Through the ENGlobal website, we seek to provide visitors and investors with
a single point of contact for obtaining information about our company. Information on our website or any other website is not a part of this Report.
Client relationships are nurtured by our geographic advantage of having office locations near our larger customers. By having clients in close proximity, we are able to provide single, dedicated
points of contact. Our growth depends in large measure on our ability to attract and retain qualified business development personnel with a respected reputation in the energy industry. Management
believes that in-house marketing allows for more accountability and control, thus increasing profitability. We develop preferred provider and alliance agreements with clients in order to facilitate repeat
business. These preferred provider agreements, also known as master services or umbrella agreements (“MSAs”) typically have a duration of three to five years. This allows our clients to release work to
us without having to negotiate contract terms for each individual project. With the primary terms of the contract agreed to, add-on projects with these customers are easier to negotiate and can be accepted
quickly, without the necessity of a bidding process. Management believes that these agreements can serve to stabilize project-centered operations.
We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution and have focused our business development
teams on communicating these offerings to their clients. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
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4
Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce
products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on
these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a
construction partner.
Our Automation group designs, integrates and commissions modular systems that include electronic distributed control, on-line process analytical data, continuous emission monitoring, and
electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We
provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.
Our Oil, Gas, and Petrochemical group focuses on providing engineering, procurement, construction, and automation services as well as fabricated products to downstream refineries and
petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within
refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending
systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients. This group also provides engineering,
fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification,
storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.
Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military
across the globe.
We have positioned ourselves as a full-service, vertically-integrated supplier in order to better accommodate the requests of our clients and capture opportunities of larger scope. A majority of
these opportunities are expected to be in all sectors of the energy industry; however, some may be outside the energy sector. One result of our sales efforts is that our proposal pipeline continues to increase
as we are now focused on selling complete packaged solutions as opposed to our past focus of primarily selling consultant man hours. Many of these proposals have very long lead times and have
exceeded our expected award timing, which would imply that many of our customers will release awards when they are more confident that commodity prices have stabilized at a sufficient level or
foreseeable time period. Backlog represents an estimate of gross revenues of all awarded contracts that have not been completed and will be recognized as revenue over the life of the project. Although
backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur. Further, most contracts with clients may be terminated by either party at will, in which case the client
would only be obligated to pay us for services provided through the termination date. A significant portion of our revenue is generated through MSAs with our clients. Projects awarded under these MSAs
tend to be smaller in nature, but continuously awarded as each one is completed. In these instances, only the current unfinished projects are included in our backlog. Additionally, we have historically
performed work under longer term contracts with the U.S. Navy that were generally renewed, released or awarded on an annual basis. Recently, the federal government has begun changing the contracting
agency for this work. This has created some delays to the contracting sequence. At December 31, 2022, our backlog was $20.4 million. Of this amount, $14.9 million was for our Commercial segment and
$5.5 million was for our Government segment. This compares to a total backlog of $12.8 million as of December 25, 2021 with $7.0 million for our Commercial segment and $5.8 million for our
Government segment.
We continue to be mindful of our overhead structure. We have made significant investments in key business development and other essential personnel, product developments and new facilities
and equipment, which all have negatively impacted our selling, general and administrative (“SG&A”) expense. While we believe the addition of these key personnel will allow the Company to expand its
client base and acquire new projects, we recognize that the level of our SG&A is greater than it could be for a company our size and have started efforts to reduce headcount, reduce office and shop space,
and implement other cost saving measures to address our lack of profitability. If anticipated revenue levels are not achieved to support the reduced level of our SG&A, we will continue these efforts to
reduce SG&A expense. In addition, during the year ended December 31, 2022 we recorded a $1.9 million bad debt reserve due to a contract dispute with one of our major customers.
Table of Contents
5
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt
about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties,
including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt
financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive
cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Available Information
You can find financial and other information about ENGlobal at our website at www.englobal.com. Copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are provided free of charge
through our website and are available as soon as reasonably practicable after filing electronically or otherwise furnishing reports to the Securities and Exchange Commission (the “SEC”). Information
relating to corporate governance at ENGlobal, including: (i) our Code of Business Conduct and Ethics for all of our employees, including our Chief Executive Officer and our Chief Financial Officer; (ii)
our Code of Ethics for our Chief Executive Officer and our Senior Financial Officers; (iii) information concerning our directors and our Board of Directors Committees, including Committee charters; and
(iv) information concerning transactions in ENGlobal securities by directors and executive officers, is available on our website under the Investors link. Information on our website or any other website is
not a part of this Report. We will provide any of the foregoing information, for a reasonable fee, upon written request to Investor Relations, ENGlobal Corporation, 11740 Katy Fwy., Energy Tower III,
Suite 1100, Houston, Texas 77079.
Reporting Segments
Our Commercial and Government segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. Separate
operational leaders are in charge of our engineering offices and our automation offices, including the office that contracts with government agencies. The operating performance of our segments is
regularly reviewed with the operational leaders of the two segments, the Executive Chairman (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision
maker (“CODM”) for ENGlobal.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Products and Services
The Commercial segment provides multi-disciplined engineering services and fabrication relating to the development, management and execution of projects requiring professional engineering
and related project management services primarily to the energy industry throughout the United States. The Commercial segment currently operates through ENGlobal’s wholly-owned subsidiary,
ENGlobal U.S., Inc. (“ENGlobal U.S.”). ENGlobal’s engineering staff has the capability of developing a project from the initial planning stages through detailed design and construction management. Our
services include conceptual studies, project definition, cost estimating, engineering design, environmental compliance, material procurement, project management, construction management and
fabrication.
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6
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.
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7
Overall, our ten largest customers, who vary from one period to the next, accounted for 66.0% of our total revenues for 2022 and 86.0% of our total revenues for 2021. Most of our projects are
specific in nature and we generally have multiple projects with the same clients. If we were to lose one or more of our significant clients and were unable to replace them with other customers or other
projects, our business could be materially adversely affected. Our top two clients in 2022 were a contractor completing a renewable diesel facility and the U.S. Government. Even though we frequently
receive work from repeat clients, our client list may vary significantly from year to year. Our potential revenue in all segments is dependent on continuing relationships with our customers. For the years
ended December 31, 2022 and December 25, 2021, we had approximately 59 and 69 active customers, respectively.
Suppliers
Our ability to provide clients with services and systems in a timely and competitive manner depends on the availability of products and parts from our suppliers at competitive prices and on
reasonable terms. Our suppliers are not obligated to have products on hand for timely delivery nor can they guarantee product availability in sufficient quantities to meet our demands. There can be no
assurance that we will be able to obtain necessary supplies at prices or on terms we find acceptable. However, in an effort to maximize availability and maintain quality control, we generally procure
components from multiple distributors on our clients’ behalf and in some cases we can take advantage of national agreements our clients may have entered into.
For example, all of the product components used by our Government segment are assembled using components and materials that are available from numerous domestic manufacturers and
suppliers. There are approximately five principal suppliers of distributed control systems, each of which can be replaced by an equally viable competitor, and our clients typically direct the selection of
their preferred supplier. Thus, in the vast majority of cases, we anticipate little or no difficulty in obtaining components in sufficient quantities and in a timely manner to support our installation and
assembly operations in the Government segment. Units produced through the Government segment are not produced for inventory and component parts; rather, they are typically purchased on an as-
needed basis. By being vendor neutral, ENGlobal is able to provide quality technology and platforms for the design of plant systems such as 3D modeling, process simulation and other technical
applications.
Despite the foregoing, our Government segment relies on certain suppliers for necessary components and there can be no assurance that these components will continue to be available on
acceptable terms. If a vendor does not continue to contract with us, it may be difficult to obtain alternative sources of supply without a material disruption in our ability to provide products and services to
our customers. While we do not believe that such a disruption is likely, if it did occur, it could have a material adverse effect on our financial condition and results of operations.
Patents, Trademarks, Licenses
Our success depends in part upon our ability to protect our proprietary technology, which we do primarily through protection of our trade secrets and confidentiality agreements. In addition, the
U.S. Patent and Trademark Office issued our “Integrated Rack” patent No. 7,419,061 B1 in 2008, our “Universal Master Control Station System” patent No. 8,601,491 B1 in 2013, our “Modular HVAC
System for Providing Positive Pressure to an Interior of a Positive Pressure Facility” patent No. 8,670,870 in 2014, our “Method of Controlling a Plurality of Master Control Stations” patent No. 8,959,447
B1 and our “Client Configuration Tool” patent No. 8,983,636 B1 in 2015.
Our trade names are protected by registration as well as by common law trademark rights. Our trademark for the use of “ENGlobal” ® - “Engineered for Growth” ®, and “viMAC” ® in
connection with our products are registered with the U.S. Patent and Trademark Office and we claim common law trademark rights for “ENGlobal” TM in connection with our services. We also claim
common law trademark rights for “Global Thinking…Global Solutions” TM, “CARES - Communicating Appropriate Responses in Emergency Situations” TM, “riFAT” TM, “ACE” TM, and “ENGlobal
Power Islands” TM.
There can be no assurance that the protective measures we currently employ will be adequate to prevent the unauthorized use or disclosure of our technology, or the independent, third-party
development of the same or similar technology. Although our competitive position to some extent depends on our ability to protect our proprietary and trade secret information, we believe that other
factors, such as the technical expertise and knowledge base of our management and technical personnel, as well as the timeliness and quality of the support services we provide, will also help us to
maintain our competitive position.
Table of Contents
Environmental, Social and Governance (ESG), Human Capital, and Diversity, Equity and Inclusion (DEI)
Workforce Composition
8
As of December 31, 2022, we employed approximately 302 individuals on a full-time equivalent basis compared to approximately 198 individuals on a full-time equivalent basis as of December
25, 2021. The 52.5% increase in personnel in 2022 was attributable to the start-up of our field services and construction divisions, and increased staffing levels to address the increase in project volume
during the year and the anticipated growth in 2023. We believe that our ability to recruit and retain highly skilled and experienced professional and technical personnel has been and will continue to be
critical to our ability to execute our business plan. None of our employees are represented by a labor union or is subject to a collective bargaining agreement. We believe that relations with our employees
are good.
Diversity and Inclusion
As a company focused on internal collaboration to achieve common goals and partnerships with a diverse group of stakeholders to optimize value, we believe a diverse workforce is critical to our
success. As such, we endeavor to create an environment rich in diversity that welcomes those of all backgrounds, ethnicities, and experiences. We employ people from a diverse number of nationalities and
ethnicities. Nearly 49% of our workforce is comprised of racial minority groups; approximately 15% of our workforce is female.
ENGlobal is committed to balance in our hiring practices and workplaces. Our recruiting efforts, development opportunities and retention initiatives include a focus on promoting gender and
ethnicity balance in the workplace. As a contractor for various governmental entities we provide certain assurances of our initiatives related to workplace diversity.
We also are dedicated to the development and training of our workforce. Training begins with onboarding with job-specific instruction, integrating safety expectations, corporate ethics and
behaviors that focus on workplace inclusion.
Benefits
We provide employees health and welfare benefits standard for the industry and their location of employment. All employees and their families (upon meeting eligibility requirements) are eligible
to participate in the Company’s health insurance plan as well as the Company’s defined contribution (401(k)) plan with a discretionary Company match.
Health and Safety
Safety is one of our core values. We endeavor to make certain our employees have access to preventive policies, procedures, programs, and training as we work toward an accident-free workplace.
Our human capital initiatives are implemented by senior leadership with oversight from our Board of Directors. The Board’s Compensation and Nominating and Corporate Governance
Committees oversee our human capital-related policies, programs, and initiatives that focus on diversity and benefits including employee safety, health and wellness matters.
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Government Regulations
9
ENGlobal and certain of its subsidiaries are subject to various foreign, federal, state, and local laws and regulations relating to our business and operations, and various health and safety
regulations established by the Occupational Safety and Health Administration (OSHA). We are subject to a variety of state, local and foreign licensing, registration and other regulatory requirements
governing the practice of engineering and other professional disciplines. For example, OSHA requires Process Safety Management to prevent the release of hazardous chemicals, the Department of
Transportation (DOT) requires that pipeline operators are in full compliance with pipeline safety regulations, and the Environmental and Protection Agency (EPA) provides incentives to reduce chemical
emissions. Currently, we are not aware of any situation or condition relating to the regulation of the Company, its subsidiaries, or personnel that we believe is likely to have a material adverse effect on our
results of operations or financial condition.
Benefit Plans
ENGlobal sponsors a 401(k) retirement plan for its employees. The Company, at the direction of the Board of Directors, may make discretionary contributions. The Company reinstated the match
of employees’ deferrals effective May 29, 2022. The Company matches 33% of employee deferrals up to 6% of eligible pre-tax compensation, for a maximum Company matching contribution of 2%.
ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Report and in other documents that we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results
contemplated by the forward-looking statements contained in this Report. You should be aware that the occurrence of any of the events described in these risk factors and elsewhere in this Report could
have a material adverse effect on our business, financial condition and results of operations and that upon the occurrence of any of these events, the trading price of our common stock could decline. These
factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of this Report.
RISKS RELATED TO OUR BUSINESS, INDUSTRY AND STRATEGY
Substantial doubt about our ability to continue as a going concern exists. Our audited financial statements for the period ended December 31, 2022 were prepared on the assumption that we
would continue as a going concern. Those financial statements and the accompanying opinion of our auditor expressed a substantial doubt about our ability to continue as a going concern. Those audited
financial statements did not include any adjustments that might result from the outcome of this uncertainty. Our recurring losses, negative cash flows from operating activities, need for additional financing
and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt about our ability to continue as a going concern. We have limited cash on hand and will need additional
working capital to fund our planned operations. We are subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably
operate the business. We intend to raise funds through various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable
terms, or at all. If adequate financing is not available or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations,
and our business would be jeopardized.
Our ability to continue as a going concern is also subject to, among other factors, our ability to collect receivables from our clients when due and invoice our customers in a timely manner. If we
are not able collect our receivables when due from our clients, our cash flow will be negatively impacted which could lead to us not being able to meet our current obligations.
We do not have material borrowing capacity under our revolving credit facility, which may limit our ability to finance operations or engage in other business activities, which could have a
material impact on our financial condition. As of December 31, 2022, the credit limit under the Revolving Credit Facility was $1.8 million and outstanding borrowings were $1.7 million. On March 27,
2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. The limited availability under the Revolving Credit Facility may
limit our ability to finance operations or engage in other business activities, which could have a material impact on our financial condition.
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If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected. Our business depends on our ability to successfully obtain payment from our
clients of the amounts they owe us for work performed and materials supplied. In the ordinary course of business, we extend unsecured credit to our customers. We may also agree to allow our customers
to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. As of
December 31, 2022, we had projects that had $0.1 million in retainage. We bear the risk that our clients will pay us late or not at all. Though we evaluate and attempt to monitor our clients’ financial
condition, there is no guarantee that we will accurately assess their creditworthiness. To the extent the credit quality of our clients deteriorates or our clients seek bankruptcy protection, our ability to collect
receivables and our results of operations could be adversely affected. Even if our clients are credit-worthy, they may delay payments in an effort to manage their cash flow. Financial difficulties or business
failure experienced by one or more of our major customers has had and could, in the future, continue to have a material adverse effect on both our ability to collect receivables and our results of operations.
Our debt obligations may limit our financial flexibility. As of December 31, 2022, we had a total of approximately $1.7 million in debt outstanding under the Revolving Credit Facility, which
matures on May 20, 2023. On March 27, 2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. We may incur
additional debt in order to fund our operational activities. A higher level of indebtedness increases the risk that our financial flexibility may deteriorate. Our ability to meet our debt obligations and service
our debt depends on future performance. General economic conditions, commodity prices, and financial, business and other factors may affect our operations and our future performance. Many of these
factors are beyond our control and we may not be able to generate sufficient cash flow to pay the debt, and future working capital, borrowings and equity financing may not be available to pay or refinance
such debt.
The COVID–19 pandemic has adversely affected and could continue to adversely affect our business, financial condition and results of operations. Our business is dependent upon the
willingness and ability of our customers to conduct transactions with us. The COVID–19 pandemic has caused severe disruptions in the worldwide economy, including the global demand for oil and
natural gas. The prolonged nature of the COVID–19 pandemic has resulted, and may continue to result, in a significant decrease in business and/or has caused, and may in the future cause, our customers
to be unable to meet existing payment or other obligations to us, particularly in the event of a resurgence of COVID–19 in our market areas. The COVID–19 pandemic may also negatively impact the
availability of our key personnel necessary to conduct our business as well as the business and operations of third-party service providers who perform critical services for our business. Because the
severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and
results of operations remains uncertain and difficult to predict. If COVID–19 resurges or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect
on our business, financial condition, and results of operations.
Our future revenue depends on our ability to consistently bid and win new contracts, provide high-quality, cost-effective services, and to maintain and renew existing contracts. Our failure to
effectively obtain future contracts could adversely affect our profitability. Our future revenue and overall results of operations require us to successfully bid on new contracts, provide high-quality, cost-
effective services, and renew existing contracts. Contract proposals and negotiations are complex and frequently involve a lengthy bidding and selection process, which is affected by a number of factors,
such as market conditions, financing arrangements and required governmental approvals. For example, a client may require us to provide a bond or letter of credit to protect the client should we fail to
perform under the terms of the contract. When negative market conditions arise, or if we fail to secure adequate financial arrangements or required governmental approvals, we may not be able to pursue
particular projects, which could adversely affect our profitability. These factors have impacted our operations in the past several years and may continue to do so.
Economic downturns and the volatility and level of oil and natural gas prices could have a negative impact on our businesses. Demand for the services offered by us has been and is expected
to continue to be, subject to significant fluctuations due to a variety of factors beyond our control, including demand for engineering services in the petroleum refining, petroleum chemical and pipeline
industries and in other industries that we provide services to. During economic downturns in these industries, our customers’ need to engage us may decline significantly and projects may be delayed or
cancelled. However, these factors can cause our profitability to decline significantly. Our clients’ willingness to undertake these activities depends largely on the following factors:
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Prices and expectations about future prices of oil and natural gas;
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;
Weather conditions, such as hurricanes, which may affect our clients’ ability to produce oil and natural gas;
Available pipeline, storage and other transportation capacity;
Federal, state and local regulation of oilfield activities;
Environmental concerns regarding the methods our customers use to produce oil and natural gas;
The availability of water resources and the cost of disposal and recycling services; and
Seasonal limitations on access to work locations.
Anticipated future prices for oil and natural gas are a primary factor affecting spending by our clients. Historically, the markets for oil and natural gas have been volatile and lower prices or
volatility in prices for oil and natural gas typically decreases spending by our clients, which can cause rapid and material declines in demand for our services and in the prices we are able to charge for our
services. Further, a sustained period of lower prices and volatility in prices for oil and natural gas can exacerbate the potential for cancellations and adjustments to our backlog from our clients in the oil
and natural gas industry. The February 2022 invasion of Ukraine by Russia is an ongoing conflict. As a result of the invasion, certain events are effecting the global and United States economy, including
increased inflation, substantial increases in the prices of oil and natural gas, large Western companies ceasing to do business in Russia and uncertain capital markets with declines in the leading market
indexes. The duration of this conflict and its impact on our business are uncertain, but it is likely to continue causing disruption and instability which may lead to additional volatility in prices for oil and
natural gas.
We derive a portion of our revenue from U.S. federal, state and local government agencies, and as a result, any disruption in government funding, any change in our ability to comply with
various procurement laws and regulations as a U.S. Government contractor, or any exercise by the U.S. Government of certain rights to modify, delay, curtail, renegotiate, or terminate existing
contracts for convenience could adversely affect our business. In 2022, we generated approximately 18.6% of our revenue from contracts with U.S. federal, state and local government agencies. A
significant amount of this revenue is derived under multi-year contracts, many of which are appropriated on an annual basis. As a result, at the beginning of a project, the related contract may be only
partially funded, and additional funding is normally committed only as appropriations are made in each subsequent year. Our backlog includes only the portion of the contract award for which funding has
been appropriated. Whether appropriations are made, and the timing of payment of appropriated amounts, may be influenced by numerous factors that could affect our U.S. Government contracting
business, including the following:
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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;
Budget constraints or policy changes resulting in delay or curtailment of expenditures related to the services we provide;
The timing and amount of tax revenue received by federal, and state and local governments, and the overall level of government expenditures;
Delays associated with insufficient numbers of government staff to oversee contracts;
Competing political priorities and changes in the political climate with regard to the funding or operation of the services we provide;
Unsatisfactory performance on government contracts by us or one of our subcontractors, negative government audits or other events that may impair our relationship with federal, state or
local governments;
A dispute with or improper activity by any of our subcontractors; and
General economic or political conditions.
In addition, we must comply with and are affected by U.S. federal, state, local, and foreign laws and regulations relating to the formation, administration and performance of government contracts.
These laws and regulations affect how we do business with our clients and, in some instances, impose additional costs on our business operations. Although we take precautions to prevent and deter fraud,
misconduct, and non-compliance, we face the risk that our employees or outside partners may engage in misconduct, fraud, or other improper activities. U.S. government agencies, such as the Defense
Contract Audit Agency (“DCAA”), routinely audit and investigate government contractors and evaluate compliance with applicable laws, regulations, and standards. In addition, during the course of its
audits, the DCAA may question our incurred project costs. If the DCAA believes we have accounted for such costs in a manner inconsistent with the requirements of applicable laws, regulations and
standards, the DCAA auditor may recommend that such costs be disallowed. Historically, we have not experienced significant disallowed costs as a result of government audits. However, we can provide
no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.
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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;
Difficulties in supporting and transitioning customers, if any, of the target company;
Diversion of our financial and management resources from existing operations;
The price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another
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Risks of entering new markets in which we have limited or no experience;
Potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;
Assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s services;
Risks associated with possible violations of the Foreign Corrupt Practices Act and other anti-corruption laws as a result of any acquisition or otherwise applicable to our business; and
Inability to generate sufficient net income to justify the acquisition costs.
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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.
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Our dependence on one or a few customers could adversely affect us. One or a few clients have in the past and may in the future contribute a significant portion of our consolidated revenue in
any one year or over a period of several consecutive years. In 2022, our top three clients accounted for 17.3%, 12.8% and 7.9% of our revenue, respectively, and our ten largest customers accounted for
66.0% of our revenue. As our backlog frequently reflects multiple projects for individual clients, one major customer may comprise a significant percentage of our backlog at any point in time. Because
these significant customers generally contract with us for specific projects, we may lose them in other years as their projects with us are completed. If we do not continually replace them with other
customers or other projects, our business could be materially adversely affected. Also, the majority of our contracts can be terminated at will. Although we have long-standing relationships with many of
our significant customers, our contracts with these customers are on a project-by-project basis and the customers may unilaterally reduce or discontinue their purchases at any time. In addition,
dissatisfaction with the results of a single project could have a much more widespread impact on our ability to get additional projects from a single major client. The loss of business from any one of such
customers could have a material adverse effect on our business or results of operations.
Internal system or service failures could disrupt our business and impair our ability to effectively provide our services and products to our clients, which could damage our reputation and
adversely affect our revenue, profitability and operating results. Our information technology systems are subject to systems failures, including network, software or hardware failures, whether caused by
us, third-party service providers, intruders or hackers, computer viruses, malicious code, cyber-attacks, phishing and other cyber security problems, natural disasters, power shortages or terrorist attacks.
Any such failures could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs, subject us to claims and damage our reputation. Failure or disruption of our
communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Any system or service disruptions if not anticipated and appropriately mitigated
could have a material adverse effect on our business including, among other things, an adverse effect on our ability to bill our clients for work performed on our contracts, collect the amounts that have
been billed and produce accurate financial statements in a timely manner. Our property and business interruption insurance may be inadequate to compensate us for all losses that may occur as a result of
any system or operational failure or disruption and, as a result, our results of operations could be materially and adversely affected. We have invested and will continue to pursue further investments in
systems that will allow us to achieve and remain in compliance with the regulations governing our business; however, there can be no assurance that such systems will be effective at achieving and
maintaining compliance or that we will not incur additional costs in order to make such systems effective.
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. As of December 31, 2022, our backlog was
$20.4 million. We expect a majority of this backlog to be completed in 2023. We cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits.
Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the
current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and
profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and
profits that we actually earn. The potential for cancellations and adjustments to our backlog are exacerbated by economic conditions, particularly in our chosen area of concentration, the energy industry.
The markets for oil and natural gas have been volatile which can exacerbate the potential for cancellations and adjustments to our backlog from our clients in the oil and natural gas industry.
Liability claims could result in losses. Providing engineering and design services involves the risk of contract, professional errors and omissions and other liability claims, as well as adverse
publicity. Further, many of our contracts require us to indemnify our clients not only for our negligence, if any, but also for the concurrent negligence of our clients. We currently maintain liability
insurance coverage, including coverage for professional errors and omissions. However, claims outside of or exceeding our insurance coverage may be made. A significant claim could result in unexpected
liabilities, take management time away from operations, and have a material adverse impact on our cash flow.
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Unsatisfactory safety performance can affect customer relationships, result in higher operating costs and result in high employee turnover. Our workers are subject to the normal hazards
associated with providing services on construction sites and industrial facilities. Even with proper safety precautions, these hazards can lead to personal injury, loss of life, damage to, or destruction of
property, plant and equipment, and environmental damages. We are intensely focused on maintaining a safe environment and reducing the risk of accidents across all of our job sites. However, poor safety
performance may limit or eliminate potential revenue streams from many of our largest customers and may materially increase our future insurance and other operating costs. In hiring new employees, we
normally target experienced personnel; however, we also hire inexperienced employees. Even with thorough safety training, inexperienced employees have a higher likelihood of injury which could lead to
higher operating costs and insurance rates.
Our dependence on third-party subcontractors and equipment manufacturers could adversely affect us. We rely on third-party subcontractors as well as third-party suppliers and manufacturers
to complete our projects. To the extent that we cannot engage subcontractors or acquire supplies or materials, our ability to complete a project in a timely fashion may be impaired. If the amount we are
required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price or time-and-material contracts, we could experience losses on these contracts. In addition, if a
subcontractor or supplier is unable to deliver its services or materials according to the negotiated contract terms for any reason, including the deterioration of its financial condition or over-commitment of
its resources, we may be required to purchase the services or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services
or materials were needed.
Force majeure events such as natural disasters or global or national health epidemics or concerns, such as the recent COVID-19 coronavirus outbreak, could negatively impact the economy
and the industries we service, which may negatively affect our financial condition, results of operations and cash flows. Force majeure events, such as hurricanes or global or national health epidemics
or concerns, such as the recent COVID-19 coronavirus outbreak, could negatively impact the economies of the areas in which we operate. For example, in 2017 Hurricane Harvey caused considerable
damage along the Gulf Coast not only to the refining and petrochemical industry, but also the commercial segment which competes for labor, materials and equipment resources needed throughout the
entire United States. In some cases, we remain obligated to perform our services after a natural disaster even though our contracts may contain force majeure clauses. In those cases, if we are not able to
react quickly and/or negotiate contractual relief on favorable terms to us, our operations may be significantly and adversely affected, which would have a negative impact on our financial condition, results
of operations and cash flows.
RISKS RELATED TO OUR COMMON STOCK OUTSTANDING
The trading price of our stock may continue to be volatile, which could cause you to lose part or all of your investment. The stock market in general has experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. In particular, the trading price of our common stock has been highly volatile and could
continue to be subject to wide fluctuations in response to various factors, some of which are beyond our control. During the past twelve months, the sales price of our stock ranged from a low of $0.47 per
share in March 2023 to a high of $2.24 per share in August 2022. As a result of this volatility, our stock could experience rapid and substantial decreases in price, and you may be able to sell our stock only
at a substantial loss to the price at which you purchased our stock.
Some, but not all, of the factors that may cause the market price of our common stock to fluctuate include:
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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.
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In addition, if the market for energy related stocks, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons
unrelated to our business, financial condition, or results of operations. Further, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities,
securities class action litigation has often been instituted against these companies. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if
unsuccessful, could be costly to defend and a distraction to management.
We are not currently in compliance with Nasdaq’s continued listing requirements. If we are unable to comply with Nasdaq’s continued listing requirements, our common stock could be
delisted, which could affect the price of our common stock and liquidity and reduce our ability to raise capital. Our common stock is currently listed on Nasdaq. Nasdaq has established certain
quantitative criteria and qualitative standards that companies must meet to remain listed for trading on this market. On December 21, 2022, we received written notice from Nasdaq indicating that we are
not in compliance with the $1.00 minimum bid price requirement for continued listing on Nasdaq, as set forth in Listing Rule 5550(a)(2).
The notice has no immediate effect on the listing of our common stock, and our common stock will continue to trade on Nasdaq under the symbol “ENG” at this time. We may regain compliance
with the minimum bid price requirement in accordance with Listing Rule 5810(c)(3)(A) during the 180 calendar day period from December 21, 2022 to June 19, 2023. To regain compliance, the closing
bid price of our common stock must meet or exceed $1.00 per share for at least ten consecutive business days before June 19, 2023.
If we are not in compliance by June 19, 2023, we may be afforded a second 180 calendar day period to regain compliance. To qualify, we would be required to meet the continued listing
requirement for market value of publicly held shares and all other initial listing standards for Nasdaq, except for the minimum bid price requirement. In addition, we would be required to notify Nasdaq of
our intent to cure the minimum bid price deficiency, which may include implementing a reverse stock split.
If we do not regain compliance within the allotted compliance period(s), including any extensions that may be granted by Nasdaq, Nasdaq will provide notice that our common stock will be
subject to delisting. We would then be entitled to appeal the Nasdaq Staff’s determination to a Nasdaq Listing Qualifications Panel and request a hearing.
We intend to monitor the closing bid price of our common stock and consider our available options to resolve the noncompliance with the minimum bid price requirement. No determination
regarding our response has been made at this time. There can be no assurance that we will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with
other Nasdaq listing criteria.
SEC regulations limit the amount of funds we may raise during any 12-month period pursuant to our shelf registration statement on Form S-3. Our registration statement on Form S-3 (File
No. 333-252572), including the accompanying base prospectus and related prospectus supplements, is subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not
sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve calendar-month period unless our public float is at least $75 million. As of January 31, 2023,
our public float (i.e., the aggregate market value of our outstanding equity securities held by non-affiliates) was approximately $26.1 million, based on the closing price per share of our Common Stock as
reported on Nasdaq on January 31, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition, during the 12 calendar month period that ends on the date of this filing of this
Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the registration statement. If our public float meets or exceeds $75 million at any time, we will no longer be
subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)(3) update as required under the Securities Act.
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17
A possible “short squeeze” due to a sudden increase in demand of our common stock that largely exceeds supply may lead to additional price volatility. Historically there has not been a large
short position in our common stock. However, in the future investors may purchase shares of our common stock to hedge existing exposure or to speculate on the price of our common stock. Speculation
on the price of our common stock may involve long and short exposures. To the extent an aggregate short exposure in our common stock becomes significant, investors with short exposure may have to
pay a premium to purchase shares for delivery to share lenders at times if and when the price of our common stock increases significantly, particularly over a short period of time. Those purchases may in
turn, dramatically increase the price of our common stock. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our common stock that are not directly
correlated to our business prospects, financial performance or other traditional measures of value for the Company or our common stock.
A small number of stockholders own a significant portion of our outstanding common stock, thus limiting the extent to which other stockholders can effect decisions subject to stockholder
vote. Directors, executive officers and principal stockholders of ENGlobal and their affiliates, beneficially own approximately 31% of our outstanding common stock on a fully diluted basis as of the date
of this Report. Accordingly, these stockholders, as a group, are able to affect the outcome of stockholder votes, including votes concerning the adoption or amendment of provisions in our Articles of
Incorporation or bylaws and the approval of mergers and other significant corporate transactions.
The existence of these levels of ownership concentrated in a few persons makes it unlikely that any other holder of common stock will be able to affect the management or direction of the
Company. These factors may also have the effect of delaying or preventing a change in management or voting control of the Company.
Our Board of Directors may authorize future sales of ENGlobal common stock, which could result in a decrease in the market value to existing stockholders of the shares they hold. Our
Articles of Incorporation authorize our Board of Directors to issue up to an additional 39,199,383 shares of common stock and an additional 2,000,000 shares of undesignated preferred stock as of
December 31, 2022. Subject to the terms of our Articles of Incorporation, these shares may be issued without stockholder approval unless the issuance is 20% or more of our outstanding common stock, in
which case the NASDAQ requires stockholder approval. We may issue shares of stock in the future in connection with acquisitions or financings. In addition, we may issue restricted stock or options under
our 2021 Long Term Incentive Plan. Future issuances of substantial amounts of common stock, or the perception that these sales could occur, may affect the market price of our common stock. In addition,
the ability of the Board of Directors to issue additional stock may discourage transactions involving actual or potential changes of control of the Company, including transactions that otherwise could
involve payment of a premium over prevailing market prices to holders of our common stock.
Future issuances of our securities in connection with financing transactions or under equity incentive plans could dilute current stockholders’ ownership. We may decide to raise additional
funds to fund our operations through the issuance of public or private debt or equity securities. We cannot predict the effect, if any, that future issuances of debt, our common stock, other equity securities
or securities convertible into or exchangeable for our common stock or other equity securities or the availability of any of the foregoing for future sale, will have on the market price of our common stock.
The issuance of substantial amounts of our common stock or securities convertible into or exchangeable for our common stock (including shares issued upon the exercise of stock options or the conversion
or exchange of any convertible or exchangeable securities outstanding now or in the future), or the perception that such issuances could occur, may adversely affect prevailing market prices for our
common stock. In addition, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.
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ITEM 2. PROPERTIES
18
We lease space in five locations in the U.S. totaling approximately 191,127 square feet. The leases have remaining terms ranging from eight months to one hundred sixteen months and are on
terms that we consider commercially reasonable. We have no major encumbrances related to these properties.
Our principal office is located in Houston, Texas. We have other offices located in Tulsa, Oklahoma, Brookshire, Texas, and Monahans, Texas. Approximately 61,438 square feet of our total office
space is designated for our professional, technical and administrative personnel. We believe that our office and other facilities are well maintained and adequate for existing and planned operations at each
operating location. Our Commercial segment performs assembly services in its Houston, Texas integration facility with approximately 81,089 square feet of space and performs fabrication services in its
Brookshire, Texas facility with approximately 45,000 square feet of shop space. The previous fabrication facility located in Henderson, TX was moved to the Brookshire, TX location.
Location
Brookshire, TX
Houston, TX
Houston, TX (Portwall)
Tulsa, OK
Monahans, TX
ITEM 3. LEGAL PROCEEDINGS
Square Feet
45,000
26,006
81,089
35,432
3,600
191,127
From time to time, ENGlobal or one or more of its subsidiaries may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business alleging,
among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted
with certainty. As of the date of this filing, management is not aware of any such claims against the Company or any subsidiary business entity.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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19
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock has been quoted on the NASDAQ Capital Market (NASDAQ - CM) under the symbol “ENG” since April 16, 2013 and the NASDAQ Global Market prior to that date.
Newspaper and on-line stock listings identify us as “ENGlobal.”
As of December 31, 2022, approximately 87 stockholders of record held our common stock. We do not have information regarding the number of holders of beneficial interests in our common
stock.
Issuer Purchases of Equity Securities
The following table sets forth certain information with respect to repurchases of our common stock for the fourth quarter of 2022:
Period
September 25, 2022 to October 29, 2022
October 30, 2022 to November 26, 2022
November 27, 2022 to December 31, 2022
Total
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)
—
—
—
—
—
—
—
—
—
—
—
1,290,460
$
$
$
$
—
—
—
425,589
(1) On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0 million of the Company’s common stock from time to time through open market
or privately negotiated transactions, based on prevailing market conditions. The Company is not obligated to repurchase any dollar amount or specific number of shares of common stock under the
repurchase program, which may be suspended, discontinued or reinstated at any time. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. As
of December 31, 2022, the Company had purchased and retired 1,290,460 shares at an aggregate cost of $1.6 million under this repurchase program. Management does not intend to repurchase any
shares in the near future.
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Dividend Policy
20
We have never declared or paid a cash dividend on our common stock. We intend to retain any future earnings for reinvestment in our business and we do not intend to pay cash dividends in the
foreseeable future. The payment of dividends in the future, if any, will depend on numerous factors, including our earnings, capital requirements and operating and financial position as well as general
business conditions.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by, and should be read in conjunction with, our Consolidated Financial Statements and Notes thereto, included elsewhere in this Report.
Overview
ENGlobal Corporation is a leading provider of innovative, delivered project solutions primarily to the energy industry. We deliver these solutions to our clients by combining our vertically-
integrated engineering and professional project execution services with our automation and systems integration expertise and fabrication capabilities. We believe our vertically-integrated strategy allows us
to differentiate our company from most of our competitors as a full service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their
project cost and schedules. Our strategy and positioning has also allowed the Company to pursue larger scopes of work centered around many different types of modularized engineered systems.
We focus on four strategic markets where we have a long history of delivering project solutions and can provide complete project execution and have focused our business development teams on
communicating these offerings to their clients. These four targeted markets include: (i) Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
We continue to be mindful of our overhead structure. We have made significant investments in key business development and other essential personnel, product developments and new facilities
and equipment, which have all negatively impacted our selling, general and administrative (“SG&A”) expense. While believe these investments will allow the Company to expand its client base and
acquire new projects, we recognize that the level of our SG&A is greater than it could be for a company our size and have started efforts to reduce headcount, reduce office and shop space, and implement
other cost saving measures to address our lack of profitability. If anticipated revenue levels are not achieved to support the reduced level of our SG&A, we will continue these efforts to reduce SG&A
expense. In addition, during the year ended December 31, 2022, we recorded a $1.9 million bad debt reserve due to a contract dispute with one of our major customers.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt
about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties,
including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt
financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive
cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Results of Operations
Our revenue is comprised of services revenue and the sale of engineered modular solutions. We generally recognize service revenue as soon as the services are performed. During 2022, we
worked on 242 projects ranging in size from $1 thousand to $28.7 million. The average size of the projects during 2022 was $677 thousand and we recorded an average revenue of $168 thousand per
project.
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21
In the course of providing our services, we routinely provide materials and equipment and may provide construction management or construction services. Generally, these materials, equipment
and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in total are at margins much lower than those of our services business. In accordance with
industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The use of subcontractor services can change significantly from project to project; therefore,
changes in revenue and gross profit, SG&A expense and operating income as a percent of revenue may not be indicative of our core business trends.
Segment operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, bad debt and other expenses generally
unrelated to specific client contracts, but directly related to the support of a segment’s operations. Corporate SG&A expenses includes investor relations, governance, finance, accounting, health, safety,
environmental, human resources, legal and information technology which are unrelated to specific projects but which are incurred to support corporate activities.
Reporting Segments
Our segments are strategic business units that offer different services and products and therefore require different marketing and management strategies. Separate operational leaders are in charge
of our engineering offices and our automation offices, including the office that contracts with government agencies. The operating performance of our segments is regularly reviewed with the operational
leaders of the two segments, the CEO, CFO and others. This group represents the CODM for ENGlobal.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Comparison of the years ended December 31, 2022 and December 25, 2021
The following table set forth below, for the years ended December 31, 2022 and December 25, 2021, provides financial data that is derived from our consolidated statements of operations
(amounts in thousands, except per share data).
For the year ended December 31, 2022:
Revenue
Gross profit (loss)
SG&A
Operating income (loss)
Other income, net
Interest expense, net
Tax expense
Net loss
Basic and diluted loss per share
For the year ended December 25, 2021:
Revenue
Gross profit (loss)
SG&A
Operating income (loss)
Other income, net
Interest expense, net
Tax expense
Net loss
Basic and diluted loss per share
Commercial
Government
Services
Corporate
Consolidated
$
$
32,096
(5,887)
8,608
(14,495)
$
8,093
1,675
740
935
$
—
—
4,767
(4,767)
$
40,189
(4,212)
14,115
(18,327)
75
(223)
(39)
(18,514)
(0.52)
Commercial
Government
Services
Corporate
Consolidated
27,986
(1,567)
7,032
(8,599)
8,424
924
892
32
—
—
4,909
(4,909)
36,410
(643)
12,833
(13,476)
8,063
(212)
(60)
(5,685)
(0.18)
Year Over Year Increase (Decrease) in Operating Results:
Revenue
Gross profit (loss)
SG&A
Operating income (loss)
Other income, net
Interest expense, net
Tax expense
Net loss
Basic and diluted loss per share
Commercial
Government
Services
Corporate
Consolidated
$
$
4,110
(4,320)
1,576
(5,896)
(331) $
751
(152)
903
$
—
—
(142)
142
$
3,779
(3,569)
1,282
(4,851)
(7,988)
(11)
21
(12,829)
(0.34)
100.0%
(10.5)%
35.1%
(45.6)%
(46.1)%
100.0%
(1.8)%
35.2%
(37.0)%
(15.6)%
10.4%
10.0%
36.0%
225.7%
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22
Revenue – Overall, our revenue for the year ended December 31, 2022, as compared to the year ended December 25, 2021, increased $3.8 million, or 10.4%, to $40.2 million from $36.4 million.
Revenue from the Commercial segment increased $4.1 million, or 14.6%, to $32.1 million for the year ended December 31, 2022, as compared to $28.0 million for the comparable period in 2021. Revenue
from the Government Services segment decreased $0.3 million, or 3.9%, to $8.1 million for the year ended December 31, 2022 as compared to $8.4 million for the comparable period in 2021. Our 2022
revenue for the Commercial segment increased primarily due to project awards with new customers as we continue our business development efforts to increase our backlog, partially offset by the
completion of one large project and projects that ended without subsequent renewals. Our 2022 revenue for the Government Services segment decreased primarily due the ending of a contract and
transition to new projects awarded in 2022.
Gross Profit (Loss) – Gross loss for the year ended December 31, 2022 was $4.2 million, an increase of $3.6 million, or 555.1%, from a gross loss of $0.6 million for the comparable period in
2021. Gross loss margin was 10.5% for the year ended December 31, 2022, an increase from the 1.8% gross loss margin for the year ended December 25, 2021.
Gross loss in our Commercial segment increased $4.3 million, or 275.7%, to a gross loss of $5.9 million for a gross loss margin of 18.3% for the year ended December 31, 2022 as compared to a
gross loss of $1.6 million and gross loss margin of 5.6% for the year ended December 25, 2021. The increase in gross loss margin is primarily attributable to the inefficient use of personnel to complete
projects in addition to the impairment of the license agreement acquired during 2022.
Gross profit in the Government Services segment increased $0.8 million, or 81.3%, to $1.7 million for a gross profit margin of 20.7% for the year ended December 31, 2022 as compared to gross
profit of $0.9 million with a gross profit margin of 11.0% for the year ended December 25, 2021. The increase in gross profit is due to an efficient transition out of one of our Government Services
contracts.
Selling, General and Administrative – Overall, our SG&A expenses increased by $1.3 million for the year ended December 31, 2022 as compared to the year ended December 25, 2021. This
increase in SG&A was driven by increases in rent expense of $0.5 million, computer software expense of $0.5 million, bad debt expense of $0.5 million, and travel expense of $0.1 million, partially offset
by decreases in legal expense of $0.2 million, and recruiting expense of $0.1 million. We continue to focus on reducing expenses to keep our costs in line with our revenue levels. These cost reduction
measures include reducing headcount and reducing office and shop space.
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23
Other income, net – Other income, net of expense, decreased $8.0 million for the year ended December 31, 2022 as compared to the year ended December 25, 2021 primarily due to a $1.7
million employee retention credit recorded in the first quarter of 2021, $5.0 million of PPP loan forgiveness recorded in the third quarter of 2021, and a $1.4 million employee retention credit recorded in
the third quarter of 2021, with no comparable occurrences in 2022.
Tax expense – Tax expense was $0.1 million for the year ended December 31, 2022 and December 25, 2021.
Net Income (Loss) – Net loss for the year ended December 31, 2022 was $18.5 million compared to a net loss of $5.7 million for the year ended December 25, 2021, primarily as a result of the
increase in gross loss in 2022, in addition to the employee retention credit in the first and third quarters of 2021 and the PPP Loan forgiveness in the third quarter of 2021, with no comparable occurrences
in 2022.
Liquidity and Capital Resources
Overview
We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand,
internally generated funds, sales of common stock pursuant to the ATM Agreement (defined below), and borrowings under the Revolving Credit Facility. Our cash decreased to $3.5 million at December
31, 2022 from $19.2 million at December 25, 2021, as our operating activities used approximately $14.5 million in net cash during the year ended December 31, 2022 primarily due to cash used to fund
our operating loss. Our working capital as of December 31, 2022 was $7.1 million as compared to $26.2 million as of December 25, 2021.
On May 21, 2020, we entered into the Revolving Credit Facility (the “Revolving Credit Facility”) pursuant to which the Lender agreed to extend credit of up to $6.0 million, subject to a credit
limit. As of December 31, 2022, the credit limit under the Revolving Credit Facility was $1.8 million and outstanding borrowings were $1.7 million, which yields enough interest to cover our minimum
monthly interest charge. On March 27, 2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. As of December 31,
2022, we were in compliance with all of the covenants under the Revolving Credit Facility. Our Revolving Credit Facility matures on May 20, 2023.
In addition, on January 29, 2021, we filed a shelf registration statement on Form S-3 (File No. 333-252572) (the “Registration Statement”) with the SEC, pursuant to which we may offer and sell,
at our option, securities having an aggregate offering price of up to $100 million, subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a
public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million, as described further below. On January 29, 2021, we
entered into an at market issuance sales agreement with B. Riley Securities, Inc., which was subsequently terminated pursuant to its terms on January 7, 2022.
On June 1, 2021, we entered into a securities purchase agreement (the “Purchase Agreement”) pursuant to which we sold and issued an aggregate of 7,142,859 shares of the Company’s common
stock to certain institutional investors at an offering price of $2.80 per share in a registered direct offering priced at-the-market under NASDAQ rules for net proceeds of approximately $18.7 million after
deducting the fees of A.G.P./Alliance Global Partners, the placement agent, and related offering expenses.
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24
On January 11, 2022, we entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which we may offer and sell shares of the
Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The Company is not obligated
to make any sales under the agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital raising needs. The
Registration Statement, including the accompanying prospectus and related prospectus supplements related to the “at the market offering”, is subject to the provisions of General Instruction I.B.6 of Form
S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75
million. As of January 31, 2023, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $26.1 million, based on the
closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market on January 31, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In addition,
during the 12 calendar month period that ends on the date of this filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the Registration Statement. If
our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next Section 10(a)
(3) update as required under the Securities Act.
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of
3,971,000 shares (the “Shares”) of the Company’s common stock, at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of
the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000
shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related
offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes.
The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to
the ATM Agreement.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt
about our ability to continue as a going concern, as discussed in Part II, Item 8, Note 1. We have limited cash on hand and will need additional working capital to fund our planned operations. We are
subject to significant risks and uncertainties, including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through
various potential sources, such as equity or debt financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available
or we do not achieve profitability and positive cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
Cash and the availability of cash could be materially restricted if (1) outstanding invoices billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely
internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects
that we can perform on a profitable basis or (5) we are unable to reverse our use of cash to fund losses.
Our Board of Directors continues to review strategic transactions, which could include strategic acquisitions, mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or
sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and
until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board’s strategic review will result in any transaction,
or any assurance as to its outcome or timing.
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Cash Flows from Operating Activities
25
Operating activities used approximately $14.5 million in net cash during the year ended December 31, 2022 primarily due to cash used to fund our operating loss of $18.5 million, a $1.9 million
increase in contract assets net of contract liabilities, a $1.4 million decrease in contingent consideration, and a $0.2 million decrease in accrued compensations and benefits, partially offset by a $2.5 million
increase in trade payables, a $2.5 million impairment of intangible assets, a $0.9 million decrease in other receivables due to a partial refund of the employee retention credit, $0.2 million of share-based
compensation, a $0.4 million increase in other current liabilities, $0.9 million of depreciation and amortization, and $0.1 million from other components of working capital. Operating activities used
approximately $13.7 million in net cash during the year ended December 25, 2021 primarily due to cash used to fund our operating loss of $5.7 million, $4.9 million of PPP Loan forgiveness, a $3.1
million increase in other current assets, a $0.1 million decrease in trade payables, a $1.4 million decrease in accrued compensations and benefits, and a $0.1 million decrease in other current liabilities and
other components of working capital, partially offset by a $0.7 million decrease in contract assets net of contract liabilities, $0.8 million of share-based compensation and depreciation, and a $0.1 million
decrease in trade receivables.
Cash Flows from Investing Activities
Investing activities used cash of $1.5 million during the year ended December 31, 2022 primarily related to the Calvert acquisition as discussed in Part II, Item 8, Note 18, and the purchase of
computer hardware and software, and machinery and equipment to outfit our fabrication and field services businesses. Investing activities used cash of $0.2 million during the year ended December 25,
2021 primarily related to the purchase of computer hardware and machinery and equipment.
Cash Flows from Financing Activities
Financing activities provided cash of $0.3 million during the year ended December 31, 2022 due to proceeds from borrowings on the Revolving Credit Facility partially offset by payments on
finance leases. Financing activities provided cash of $19.4 million during the year ended December 25, 2021 primarily due to net proceeds from sales of common stock under the ATM Agreement and
Purchase Agreement, partially offset by payments on the Revolving Credit Facility and finance leases.
Contractual Obligations
The Company is obligated to make future cash payments under the Revolving Credit Facility, operating leases, finance leases, and other liabilities. Amounts below are undiscounted and may
differ from balances reflected on the financial statements. The table below sets forth certain information about our contractual obligations as of December 31, 2022 (in thousands):
Operating and finance leases
Revolving Credit Facility
Other liabilities(1)
Total
(1)
Other liabilities includes short-term notes payable.
Stock Repurchase Program
Payment Due by Fiscal Period
2023
2024
2025
2026
$
$
2,076
1,661
509
4,246
$
$
1,546
—
—
1,546
$
$
1,328
—
—
1,328
$
$
2027 and
thereafter
4,128
—
—
4,128
1,077
—
—
1,077
$
$
On April 21, 2015, the Company announced that our Board of Directors had authorized the repurchase of up to $2.0 million of our common stock from time to time through open market or
privately negotiated transactions, based on prevailing market conditions. We were not obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase
program, which may be suspended, discontinued or reinstated at any time. From April 2015 through December 2017, the Company purchased and retired 1,191,050 shares at a cost of $1.5 million. The
stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. During the years ended December 31, 2022 and December 25, 2021, no shares were repurchased.
Management does not intend to repurchase any shares in the near future.
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Accounts Receivable
26
We typically sell our products and services on short-term credit and seek to minimize our credit risk by performing credit checks and conducting our own collection efforts. Our trade accounts
receivable decreased $0.1 million, or 1.3%, to $7.6 million as of December 31, 2022 compared to $7.7 million as of December 25, 2021. We had bad debt expense of $1.9 million for the year ended
December 31, 2022 primarily due to a contract dispute with a major customer during the fourth quarter of the year and $1.4 of bad debt expense for the year ended December 25, 2021. Our allowance for
uncollectible accounts was $2.1 million as of December 31, 2022 and $1.7 million as of December 25, 2021 and increased as a percentage of trade accounts receivable to 23.5% for 2022 from 22.1% for
2021. We continue to manage this portion of our business very carefully.
Risk Management
In performing services for our clients, we could potentially face liability for breach of contract, personal injury, property damage or negligence, including professional errors and omissions. We
often agree to indemnify our clients for losses and expenses incurred as a result of our negligence and, in certain cases, the sole or concurrent negligence of our clients. Our quality control and assurance
program includes a control function to establish standards and procedures for performance and for documentation of project tasks, and an assurance function to audit and to monitor compliance with
procedures and quality standards. We maintain liability insurance for bodily injury and third-party property damage, professional errors and omissions, and workers’ compensation coverage, which we
consider sufficient to insure against these risks, subject to self-insured amounts.
Seasonality
Our revenues are generated by services, and therefore holidays and employee vacations during our fourth quarter negatively impact revenues for that quarter, which is only partially offset by the
year-end efforts on the part of many clients to spend any remaining funds budgeted for services and capital expenditures during the year. Our clients’ annual budget process is normally completed in the
first quarter, which can slow the award of new work at the beginning of the year. Principally due to these factors, our first and fourth quarters are typically less robust than our second and third quarters.
Critical Accounting Policies
Please see Part II, Item 8, Note 2 – Accounting Policies and New Accounting Pronouncements for additional information regarding our critical accounting policies.
Table of Contents
27
The audited financial information below is attached hereto and made part hereof:
INDEX
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
PAGE
F-2
F-4
F-5
F-6
F-7
F-8
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
ENGlobal Corporation
Opinion on the Financial Statements
F-1
We have audited the accompanying consolidated balance sheets of ENGlobal Corporation (the “Company”) as of December 31, 2022 and December 25, 2021, the related consolidated statements of
operations, stockholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial
statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and December 25, 2021, and the consolidated results of its operations and its
cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has utilized significant cash in operations that raise substantial doubt about its ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit
committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Table of Contents
Revenue Recognition – Estimates of Costs to Complete
F-2
As described in Note 2, the Company recognizes revenue on fixed-price contracts over time when there is a continuous transfer of control to the customer over the duration of the contract as the services
are rendered. The accounting conclusions for contracts involve significant judgment, particularly as it relates to determining the amount, timing and presentation of revenue that will be recognized for each
performance obligation within the contract, and the distinct number of performance obligations represented by the contract.
We identified management’s estimate of costs to complete on contracts where revenue is recognized over time as a critical audit matter. On certain contracts, revenue is recognized over time using a cost-
based input method that measures the extent of progress towards completion of a performance obligation. The majority of contract costs are labor costs, but costs also include material and allocable
indirect expenses. Generally, revenue is recognized proportionally as labor costs are incurred. Management must make assumptions and estimates regarding labor productivity and availability, the
complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by subcontractors, the availability and timing of funding, and
overhead cost rates, among other variables. A significant change in one or more of these estimates could affect the profitability of the Company’s contracts. Given the significant judgments necessary to
determine the amount, timing and presentation of revenue and to estimate total costs for the performance obligations that recognize revenue using a cost-based input method, auditing such estimates
required extensive audit effort due to the complexity of these fixed-price contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures.
The primary procedures we performed to address this critical audit matter included:
·
·
·
·
Obtained an understanding and evaluated the design of internal controls over the contract management cycle, including those related to the accumulation of the estimated costs to complete
a contract and the estimation of variable consideration.
Performing journal entry testing procedures to address the presumed fraud risk over revenue.
For a selection of uncompleted contracts projected to be an overall loss, inquiring of project managers and management to ensure that all losses have been accrued.
For a selection of contracts, performing elements of the following for each contract:
o
o
o
o
o
o
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.
Performed a gross margin fade analysis subsequent to year-end and a look-back analysis on completed contracts during the year for selected projects to assess variances between
ultimate realization on projects versus estimated profitability in order to evaluate accuracy of the estimation process.
/s/ Moss Adams LLP
Houston, Texas
March 31, 2023
We have served as the Company’s auditor since 2017.
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F-3
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share amounts)
December 31,
2022
December 25,
2021
Current Assets:
Cash
Trade receivables, net of allowances of $2,129 and $1,673
Prepaid expenses and other current assets
Payroll taxes receivable
Contract assets
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total Current Assets
Property and equipment, net
Goodwill
Other assets
Right of use asset
Deposits and other assets
Total Other Assets
Total Assets
Current Liabilities:
Accounts payable
Accrued compensation and benefits
Current portion of leases
Contract liabilities
Current portion of deferred payroll tax
Other current liabilities
Short-term debt
Total Current Liabilities
Long-term unearned revenue
Long-term debt
Long-term leases
Total Liabilities
Commitments and Contingencies (Note 16)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 35,800,617 shares issued and outstanding at December 31, 2022 and 35,230,675
shares issued and outstanding at December 25, 2021
Additional paid-in capital
Accumulated deficit
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
See accompanying notes to consolidated financial statements.
F-4
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Table of Contents
Operating revenues
Operating costs
Gross loss
Operating costs and expenses:
Selling, general, and administrative expenses
Operating loss
Other income (expense)
Interest expense, net
Other income, net
Loss before income taxes
Provision for federal and state income taxes
Net loss
Basic and diluted loss per common share
$
$
$
3,464
7,644
1,580
1,547
4,934
19,169
1,757
720
8,072
305
8,377
30,023
4,454
2,002
1,849
956
-
1,134
1,661
12,056
425
-
7,217
19,698
19,202
7,692
958
3,065
4,177
35,094
1,698
720
4,251
306
4,557
42,069
2,001
2,183
1,389
2,054
537
667
-
8,831
-
1,035
4,012
13,878
36
58,050
(47,761)
10,325
30,023
$
35
57,403
(29,247)
28,191
42,069
Year Ended
December 31,
2022
Year Ended
December 25,
2021
$
$
$
$
$
$
40,189
44,401
(4,212)
14,115
(18,327)
(223)
75
(18,475)
(39)
$
$
(18,514) $
(0.52) $
36,410
37,053
(643)
12,833
(13,476)
(212)
8,063
(5,625)
(60)
(5,685)
(0.18)
Basic and diluted weighted average shares used in computing loss per share:
35,574
31,888
See accompanying notes to consolidated financial statements.
F-5
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)
Table of Contents
Common Stock
Balance at beginning of year
Common stock issued
Balance at end of year
Year Ended
December 31,
2022
Year Ended
December 25,
2021
$
$
35
1
36
27
8
35
Additional Paid-in Capital
Balance at beginning of year
Common stock issued
At-the-market offering costs
Share-based compensation – employees
Balance at end of year
Accumulated Deficit
Balance at beginning of year
Net loss
Balance at end of year
Total Stockholders’ Equity
Table of Contents
See accompanying notes to consolidated financial statements.
F-6
ENGLOBAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
57,403
525
(97)
219
58,050
(29,247)
(18,514)
(47,761)
37,157
19,976
-
270
57,403
(23,562)
(5,685)
(29,247)
$
10,325
$
28,191
Year Ended
December 31,
2022
Year Ended
December 25,
2021
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
$
(18,514) $
Depreciation and amortization
Share-based compensation expense
Loss on disposal of fixed assets
Contingent consideration revaluation
Impairment of intangible asset
Forgiveness of PPP Loan
Changes in current assets and liabilities:
Trade accounts receivable
Contract assets
Other current assets
Accounts payable
Accrued compensation and benefits
Contract liabilities
Income taxes payable
Other current liabilities, net
Net cash used in operating activities
Cash Flows from Investing Activities:
Property and equipment acquired
Asset acquisition, net of cash acquired
Net cash used in investing activities
Cash Flows from Financing Activities:
Issuance of common stock, net
Payments on finance leases
At-the-market offering costs
Proceeds (payments) from revolving credit facility
Net cash provided by financing activities
Net change in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosure of cash flow information:
Cash paid during the year for interest
Right of use assets obtained in exchange for new operating lease liability
Leased assets obtained in exchange for new finance lease liabilities
Asset acquisition, common stock issued
Cash paid during the year for income taxes (net of refunds)
Non-cash transaction: PPP loan forgiveness
$
$
$
$
$
$
$
$
$
$
933
219
13
(1,409)
2,503
—
48
(757)
898
2,453
(181)
(1,098)
(38)
394
(14,536) $
(602)
(904)
(1,506) $
—
(224)
(97)
625
304
(15,738)
19,202
3,464
$
$
223
4,864
67
525
52
—
$
$
$
$
$
$
(5,685)
561
270
—
—
—
(4,949)
97
(87)
(3,087)
(137)
(1,365)
796
(38)
(40)
(13,664)
(240)
—
(240)
19,984
(129)
—
(455)
19,400
5,496
13,706
19,202
212
4,014
665
—
151
4,974
Table of Contents
NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION
See accompanying notes to consolidated financial statements.
F-7
ENGLOBAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Organization and Operations – ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context requires otherwise, references to “we”, “us”, “our”, “the Company” or
“ENGlobal” are intended to mean the consolidated business and operations of ENGlobal Corporation. Our business operations consist of providing innovative, delivered project solutions to our clients by
combining our vertically-integrated engineering and professional project execution services with our automation and systems integration expertise and our fabrication and construction capabilities
primarily to the energy industry. Please see “Note 14 – Segment Information” for a description of our segments and segment operations.
Basis of Presentation – The accompanying consolidated financial statements and related notes present our consolidated financial position as of December 31, 2022 and December 25, 2021, and
the results of our operations, cash flows and changes in stockholders’ equity for the 53 week period ended December 31, 2022 and for the 52 week period ended December 25, 2021. They are prepared in
accordance with accounting principles generally accepted in the United States of America. In preparing financial statements, management makes informed judgments and estimates that affect the reported
amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management reviews
its estimates, including those related to percentage-of-completion contracts in progress, litigation, income taxes, impairment of long-lived assets and fair values. Changes in facts and circumstances or
discovery of new information may result in revised estimates. Actual results could differ from these estimates.
Going Concern – The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal
course of business. As shown in the accompanying financial statements, the Company has suffered recurring losses, used significant cash in support of its operating activities, has limited cash on hand, and
will need additional working capital to fund our planned operations.
We define liquidity as our ability to pay liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand,
internally generated funds, sales of common stock pursuant to the ATM Agreement, and borrowings under the Revolving Credit Facility.
On May 21, 2020, we entered into the Revolving Credit Facility pursuant to which the Lender agreed to extend credit of up to $6.0 million, subject to a credit limit. As of December 31, 2022, the
credit limit under the Revolving Credit Facility was $1.8 million and outstanding borrowings were $1.7 million, which yields enough interest to cover our minimum monthly interest charge. On March 27,
2023, we modified the Revolving Credit Facility which reduced the credit limit to $0.9 million and outstanding borrowings to $0.9 million. As of December 31, 2022, we were in compliance with all of the
covenants under the Revolving Credit Facility. Our Revolving Credit Facility matures on May 20, 2023.
In addition, on January 29, 2021, we filed a shelf registration statement on Form S-3 (File No. 333-252572) (the “Registration Statement”) with the SEC, pursuant to which we may offer and sell,
at our option, securities having an aggregate offering price of up to $100 million, subject to the provisions of General Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a
public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public float is at least $75 million, as described further below. On January 29, 2021, we
entered into an at market issuance sales agreement with B. Riley Securities, Inc., which was subsequently terminated pursuant to its terms on January 7, 2022.
On June 1, 2021, sales and issuance of shares of the Company’s common stock pursuant to Purchase Agreement provided net proceeds of approximately $18.7 million after deducting the fees of
A.G.P./Alliance Global Partners, the placement agent, and related offering expenses.
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F-8
On January 11, 2022, the Company entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which the Company may offer and
sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The
Company is not obligated to make any sales under the agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital
raising needs. The Registration Statement, including the accompanying prospectus and related prospectus supplements related to the “at the market offering,” is subject to the provisions of General
Instruction I.B.6 of Form S-3, which provides that we may not sell securities in a public primary offering with a value exceeding one-third of our public float in any twelve-month period unless our public
float is at least $75 million. As of January 31, 2023, the Company’s public float (i.e., the aggregate market value of its outstanding equity securities held by non-affiliates) was approximately $26.1 million,
based on the closing price per share of the Company’s common stock as reported on the Nasdaq Capital Market January 31, 2023, as calculated in accordance with General Instruction I.B.6 of Form S-3. In
addition, during the 12 calendar month period that ends on the date of this filing of this Report, we had offered and sold approximately $3.4 million of our common stock pursuant to the Registration
Statement. If our public float meets or exceeds $75 million at any time, we will no longer be subject to the restrictions set forth in General Instruction I.B.6 of Form S-3, at least until the filing of our next
Section 10(a)(3) update as required under the Securities Act.
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of
3,971,000 shares (the “Shares”) of the Company’s common stock, at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of
the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000
shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related
offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes.
The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to
the ATM Agreement.
Our recurring losses, negative cash flows from operating activities, need for additional financing and the uncertainties surrounding our ability to obtain such financing, raise substantial doubt
about our ability to continue as a going concern. We have limited cash on hand and will need additional working capital to fund our planned operations. We are subject to significant risks and uncertainties,
including failing to secure additional capital to fund our planned operations or failing to profitably operate the business. We intend to raise funds through various potential sources, such as equity or debt
financings; however, we can provide no assurance that such financing will be available on acceptable terms, or at all. If adequate financing is not available or we do not achieve profitability and positive
cash flows from operating activities, we may be required to significantly curtail or cease our operations, and our business would be jeopardized.
NOTE 2 – ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
Consolidation Policy – Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries.
Fair Value Measurements – Fair value is defined as the amount that would be received for the sale of an asset or paid for the transfer of a liability in an orderly transaction between unrelated third-
party market participants at the measurement date. In determination of fair value measurements for assets and liabilities we consider the principal, or most advantageous market, and assumptions that
market participants would use when pricing the asset or liability.
Cash and cash equivalents – Cash and cash equivalents include all cash on hand, demand deposits and investments with original maturities of three months or less. We consider cash equivalents
to include short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Our cash balance at financial
institutions may exceed Federal Deposit Insurance Corporation (“FDIC”) insured amounts from time to time.
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F-9
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 31, 2022 (17.3% and 12.8%). For the year ended December 25, 2021, two customers provided more than 10% each of our consolidated
operating revenues (30.5% and 22.6%). Amounts included in trade receivables related to these customers totaled $0.2 million and $3.7 million, respectively, at December 31, 2022 and $0.1 million and
$1.2 million, respectively, at December 25, 2021. One customer not within the top 10% percent of revenue had an outstanding accounts receivable balance of $1.6 million as of December 31, 2022.
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
Shop equipment
Furniture and fixtures
Computer equipment; Autos and trucks
Software
Years
5 – 10
5 – 7
3 – 5
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 undiscounted cash
flows of the operating unit after allocation of certain corporate overhead. Estimating the cash flow of the operating unit requires the use of significant estimates and assumptions, including revenue growth
rates, operating margins, discount rates and future market conditions, among others. It is possible that changes in market conditions, economy, facts, circumstances, judgments and assumptions used in
estimating the fair value could change, resulting in possible impairment of goodwill in the future.
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F-10
We performed a qualitative assessment of goodwill, which relates to Government Services, for each of the years ended December 31, 2022 and December 25, 2021. This assessment indicated that
there was no impairment of goodwill for the years ended December 31, 2022 and December 25, 2021.
Impairment of Long-Lived Assets – We review our intangible license and property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. The recoverability of long-lived assets is measured by comparison the future undiscounted cash flows expected to result from the use and eventual disposition of the
asset to the carrying value of the asset. Estimates of expected future cash flows represent management’s best estimate based on reasonable and supportable assumptions. If the carrying amount is not
recoverable, an impairment loss is measured as the excess of the asset’s carrying value over its fair value. We assess the fair value of long-lived assets using commonly accepted techniques, and may use
more than one method, including, but not limited to, recent third-party comparable sales, internally developed discounted cash flow analysis and analysis from outside advisors. During the fourth quarter of
2022, we determined the carrying amount of the license agreement acquired was no longer recoverable and wrote the balance down to its estimated fair value. Fair value was based on expected future cash
flows using Level 3 inputs. The resulting impairment of $2.5 million was recorded within Operating Costs on the Consolidated Statement of Operations. The impairment is attributable to our Commercial
segment. During 2021 there were no events or changes in circumstances that indicated that the carrying amount of our assets may not be recoverable.
Revenue Recognition – Our revenue is comprised of engineering, procurement and construction management services and sales of fabricated systems and integrated control systems that we design
and assemble. The majority of our services are provided under time-and-material contracts. Some time-and-material contracts may have limits not to exceed. Revenue is not recognized over these limits
until authorization by the client has been received.
A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the
parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by
contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The
selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to
the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts
because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor
costs are incurred.
Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the
achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a
contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract
settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For
some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not
considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to
adequately complete some or all of its obligations under the contract.
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F-11
To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single
contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into
multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, we provide a significant service of integrating a complex set of tasks
and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case
we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance
obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach
to estimate the standalone selling price of each performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and
cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated
amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is
resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and
all information (historical, current and forecasted) that is reasonably available to us.
Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes
the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided
in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract modification on the transaction price and our measure of progress for the
performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase or a reduction of revenue) on a cumulative catch-up basis.
We have a standard, monthly process in which management reviews the progress and execution of our performance obligations. As part of this process, management reviews information
including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of
revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements, and other contractual requirements. Management
must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance
obligation, execution by our subcontractors, the availability and timing of funding from our customer and overhead cost rates, among other variables.
Based on this analysis, any adjustments to revenue, operating costs and the related impact to operating income are recognized as necessary in the period they become known. These adjustments
may result from positive performance and may result in an increase in operating income during the performance of individual performance obligations if we determine we will be successful in mitigating
risks surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. When estimates of total costs to be incurred exceed total estimates to be
earned, a provision for the entire loss on the performance obligation is recognized in the period the loss is estimated. Likewise, these adjustments may result in a decrease in operating income if we
determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net revenue, operating costs and the related impact to operating income are
recognized monthly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage
of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.
Incremental Costs – Our incremental costs of obtaining a contract, which may consist of sales commission and proposal costs, are reviewed and those costs that are immaterial to the financial
statements are expensed as they occur. Those costs that are deemed to be material to the contract are deferred and amortized over the period of contract performance. We classify incremental costs as
current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of incremental costs are included in prepaid expenses and other current assets
and other assets, net, respectively in our consolidated balance sheet. We had no incremental costs that met our materiality threshold in 2022 or 2021.
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F-12
Income Taxes – We account for deferred income taxes in accordance with FASB ASC Topic 740 “Income Taxes” (“ASC 740”), which provides for recording deferred taxes using an asset and
liability method. We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities including net operating loss
and tax credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes represents the current taxes payable or refundable
for the period plus or minus the tax effect of the net change in the deferred tax assets and liabilities during the period. Tax law and rate changes are reflected in income in the period such changes are
enacted.
A valuation allowance is recorded to reduce previously recorded tax assets when it becomes more-likely-than-not such asset will not be realized. We evaluate the realizability of deferred tax assets
based on all available evidence, both positive and negative, regarding historical operating results, including the estimated timing of future reversals of existing taxable temporary differences, estimated
future taxable income exclusive of reversing temporary differences and carryforwards and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward
from expiring unused.
We account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit of the tax positions to the extent that the benefit will more-
likely-than-not be realized. The determination as to whether the tax benefit will more-likely-than-not be realized is based upon technical merits of the tax positions as well as consideration of the available
facts and circumstances. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.
Earnings per Share – Our basic earnings per share (“EPS”) amounts have been computed based on the weighted average number of shares of common stock outstanding for the period. Diluted
EPS amounts include the effect of common stock equivalents associated with outstanding stock options, restricted stock awards and restricted stock units, if including such potential shares of common
stock is dilutive. We only had restricted stock awards outstanding during 2022 and 2021.
Treasury Stock – We use the cost method to record treasury stock purchases whereby the entire cost of the acquired shares of our common stock is recorded as treasury stock (at cost). When we
subsequently retire these shares, the cost of the shares acquired are recorded in common stock and additional paid-in capital. There were no treasury stock purchases in 2022 and 2021.
Stock–Based Compensation – We have issued stock-based compensation in the form of non-vested restricted stock awards to directors, employees and officers. We apply the provisions of ASC
Topic 718 “Compensation – Stock Compensation” (“ASC 718”) and recognize compensation expense over the applicable service for all stock-based compensation based on the grant date fair value of the
award.
The Company accounts for restricted stock awards granted to consultants using the accounting guidance included in ASC 505-50 “Equity-Based Payments to Non-Employees” (“ASC 505-50”).
All transactions in which services are received in exchange for share-based awards are accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever
is more reliably measurable. Share-based compensation is measured at fair value at the earlier of the commitment date or the date the services are completed.
NOTE 3 – DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The components of trade receivables, net as of December 31, 2022 and December 25, 2021, are as follows (amounts in thousands):
2022
2021
Amounts billed
Amounts unbilled
Retainage
Less: Allowance for uncollectible accounts
Trade receivables, net
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$
$
F-13
The components of prepaid expense and other current assets are as follows as of December 31, 2022 and December 25, 2021 (amounts in thousands):
Prepaid expenses
Other receivables – employee
Other receivable
Inventory
Prepaid expenses and other current assets
The components of other current liabilities are as follows as of December 31, 2022 and December 25, 2021 (amounts in thousands):
Accrual for known contingencies
Customer prepayments
Warranty reserve
Gross receipts tax payable
State income taxes payable
Unearned revenue
Insurance payable
Other current liabilities
Our accrual for known contingencies includes litigation accruals, if any. See “Note 16 – Commitments and Contingencies” for further information.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of December 31, 2022 and December 25, 2021 (amounts in thousands):
Computer equipment and software
Shop equipment
Furniture and fixtures
Leasehold improvements
Autos and trucks
Accumulated depreciation and amortization
Property and equipment, net
Depreciation expense was $0.5 million and $0.5 million for the years ended December 31, 2022 and December 25, 2021, respectively.
NOTE 5 – REVENUE RECOGNITION
Our revenue by contract type are as follows (amounts in thousands):
Fixed-price revenue
Time-and-material revenue
Total Revenue
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NOTE 6 – CONTRACTS
F-14
$
$
$
$
$
$
$
$
$
9,061
619
93
(2,129)
7,644
$
2022
2021
1,397
19
35
129
1,580
$
$
2022
2021
17
17
511
—
30
50
509
1,134
$
$
2022
2021
$
1,500
2,609
196
828
100
5,233
(3,476)
1,757
$
$
5,810
867
2,688
(1,673)
7,692
917
41
—
—
958
104
4
—
35
33
—
491
667
1,397
2,252
197
836
83
4,765
(3,067)
1,698
For the Years Ended
December 31,
2022
December 25,
2021
$
30,050
10,139
40,189
21,205
15,205
36,410
Costs, estimated earnings, and billings on uncompleted contracts consist of the following as of December 31, 2022 and December 25, 2021 (amounts in thousands):
Costs incurred on uncompleted contracts
Estimated earnings on uncompleted contracts
2022
2021
$
$
59,298
4,464
36,429
4,866
Earned revenues
Less: billings to date
Net costs in excess of billings on uncompleted contracts
Costs and estimated earnings in excess of billings on uncompleted contracts
Billings in excess of costs and estimated earnings on uncompleted contracts
Net costs in excess of billings on uncompleted contracts
$
$
$
63,762
59,784
3,978
$
4,934
(956)
3,978
$
$
41,295
39,172
2,123
4,177
(2,054)
2,123
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 $1.0 million in contingency amounts as of December
31, 2022 and had $0.2 million in contingency amounts as of December 25, 2021. 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 $0.2 million in deferred revenue for the year ended December 31, 2022 and $0.0 million for the
year ended December 25, 2021. 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):
Revolving Credit Facility (1)
Total debt
Amount due within one year
Total long-term debt
December 31,
2022
December 25,
2021
$
$
1,661
1,661
1,661
—
$
$
1,035
1,035
—
1,035
(1)
On May 21, 2020 (the “Closing Date”), the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”)
entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the
“Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans (each a “Loan” and collectively, the “Loans”) in the aggregate amount of
up to $6.0 million (the “Maximum Credit Limit”).
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Set forth below are certain of the material terms of the Revolving Credit Facility:
F-15
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 31, 2022, the credit limit under the Revolving Credit Facility was $1.8 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.
On March 27, 2023, the Company and the Borrowers modified the Revolving Credit Facility with the Lender.
Set forth below are the material terms of the modification to the Revolving Credit Facility:
Credit Limit: The credit limit will not exceed the lesser of $1,000,000 at any time outstanding (the “Maximum Credit Limit”) minus any reserves, or the sum of (a) 85% of the Borrowers’
Eligible Accounts (as defined in the Revolving Credit Facility) and (b) the lesser of $500,000 or 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit
Facility).
As a result of the modification, our current credit limit and outstanding borrowings are $0.9 million under the Revolving Credit Facility.
Collateral: The Lender maintains a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and
investment property, except for the Borrowers’ present and after-acquired Accounts Receivable defined in the Priority Agreement between the Borrowers, FundThrough USA Inc. and
Pacific Western Bank.
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The future scheduled maturities of our debt are (amounts in thousands):
F-16
2023
Thereafter
NOTE 8 – LEASES
Revolving Credit
Facility
$
$
1,661
—
1,661
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):
Finance leases:
Amortization expense
Interest expense
Operating leases:
Operating costs
Selling, general and administrative expenses
Total lease expense
Supplemental balance sheet information related to leases are as follows (amounts in thousands):
ROU Assets:
Operating leases
Finance leases
Total ROU Assets:
Lease liabilities:
Current liabilities
Operating leases
Finance leases
Noncurrent Liabilities:
Operating leases
Finance leases
Total lease liabilities
The weighted average remaining lease term and weighted average discount rate are as follows:
Weighted average remaining lease term (years)
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
Maturities of operating lease liabilities as of December 31, 2022 are as follows (dollars in thousands):
2023
2024
2025
2026
2027 and thereafter
Total lease payments
Less: imputed interest
Total lease liabilities
NOTE 9 – EMPLOYEE BENEFIT PLANS
Financial
Statement Classification
Year ended
December 31, 2022
Year ended
December 25, 2021
SG&A Expense
Interest expense, net
Operating costs
SG&A Expense
Financial
Statement Classification
Right of Use asset
Property and equipment, net
Current portion of leases
Current portion of leases
Long Term Leases
Long Term Leases
$
$
$
$
$
$
$
$
204
44
248
$
$
491
2,218
2,709
2,957
$
$
100
17
117
507
1,728
2,235
2,352
December 31,
2022
December 25,
2021
8,072
761
8,833
$
$
$
1,638
211
6,669
548
9,066
$
4,251
979
5,230
1,153
236
3,269
743
5,401
December 31,
2022
December 25,
2021
7.3
3.7
11.0%
8.2%
Operating
leases
Finance
leases
Total
1,836
1,323
1,140
919
4,113
9,331
(1,024)
8,307
$
240
223
188
158
15
824
(65)
759
$
$
4.8
4.4
0.8%
2.1%
2,076
1,546
1,328
1,077
4,128
10,155
(1,089)
9,066
ENGlobal sponsors a 401(k) plan for its employees. The Company, at the direction of the Board of Directors, may make discretionary contributions. Our employees may elect to make
contributions pursuant to a salary reduction agreement upon meeting age and length-of-service requirements. The Company matching contribution for the year ended December 31, 2022 was $0.2 million.
The Company did not match employees’ deferrals in the year ended December 25, 2021.
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 31, 2022,
1,289,949 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 $0.2 million for the
year ended December 31, 2022 and $0.3 million for the year ended December 25, 2021.
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.
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F-17
The following is a summary of the status of our restricted stock awards and of changes in restricted stock outstanding for the year ended December 31, 2022:
Outstanding at December 25, 2021
Granted
Vested
Forfeited
Outstanding at December 31, 2022
Number of
unvested
restricted
shares
Weighted-average
grant-date
fair value
116,631
114,504
133,106
5,088
92,941
$
$
3.07
1.31
1.98
4.42
2.40
As of December 31, 2022, there was $0.2 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 31, 2022, the Company granted the following restricted stock awards:
Date Issued
June 9, 2022
Issued to
Directors (3)
Number of Shares
114,504
Market Price
$
1.31
$
Fair Value
150,000
During the year ended December 25, 2021, the Company granted the following restricted stock awards:
Date Issued
March 9, 2021
March 9, 2021
June 1, 2021
August 26, 2021
NOTE 11 – TREASURY STOCK
Issued to
Director (1)
Employees (10)
Employee (1)
Directors (3)
Number of Shares
5,656
56,557
2,778
75,759
Market Price
$
$
$
$
4.42
4.42
3.60
1.98
$
$
$
$
Fair Value
25,000
250,000
10,000
150,000
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 years ended December 25, 2021 and December 31, 2022. 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”). Subject to the terms of our articles of incorporation, 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.
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NOTE 13 – FEDERAL AND STATE INCOME TAXES
F-18
The components of our income tax expense for the years ended December 31, 2022 and December 25, 2021 are as follows (amounts in thousands):
Current:
State
Total current
Deferred:
Federal
State
Total deferred
Total income tax expense
2022
2021
39
39
(37)
37
—
39
$
$
The following is a reconciliation of expected income tax benefit to actual income tax expense for the years ended December 31, 2022 and December 25, 2021 (amounts in thousands):
Federal income tax (benefit) at statutory rates
Foreign tax rate adjustment
State income tax, net of federal income tax effect
Nondeductible expenses
Nontaxable PPP Loan Forgiveness
State RTA
Prior year adjustments and true-ups
Change in valuation allowance
Total tax expense
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F-19
2022
2021
$
$
(3,888) $
122
(256)
188
—
30
61
3,782
39
$
The components of the deferred tax asset (liability) consisted of the following as of December 31, 2022 and December 25, 2021 (amounts in thousands):
2022
2021
60
60
(35)
35
—
60
(1,181)
—
(43)
(31)
(1,044)
(13)
(32)
2,404
60
Noncurrent Deferred tax assets
Federal and state net operating loss carryforward
Tax credit carryforwards
Allowance for uncollectible accounts
Accruals not yet deductible for tax purposes
Goodwill
Lease payable
Capitalized R&D expenses
Total noncurrent deferred tax assets
Less: Valuation allowance
Total noncurrent deferred tax assets, net
Noncurrent deferred tax liabilities:
Depreciation
Other
Right to use asset
Total noncurrent deferred tax liabilities
Net deferred tax assets/deferred tax Liabilities
$
$
$
$
12,006
1,977
491
548
177
1,897
1,086
18,182
(16,166)
2,016
$
(10)
(116)
(1,890)
(2,016)
—
$
9,503
1,977
380
488
236
992
—
13,576
(12,419)
1,157
(49)
(126)
(982)
(1,157)
—
We account for deferred income taxes in accordance with FASB ASC Topic 740 (“ASC 740”), which provides for deferred taxes using an asset and liability method. We recognize deferred tax
assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities including net operating loss and tax credit carryforwards using enacted
tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes represents the current taxes payable or refundable for the period plus or minus the tax effect
of the net change in the deferred tax assets and liabilities during the period. Tax law and rate changes are reflected in income in the period such changes are enacted.
We account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit of the tax positions to the extent that the benefit will more
likely than not be realized. The determination as to whether the tax benefit will more likely than not be realized is based upon technical merits of the tax positions as well as consideration of the available
facts and circumstances. We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes. As of December 31, 2022 and December 25, 2021, we do not have any
significant uncertain tax positions.
We record a valuation allowance to reduce previously recorded tax assets when it becomes more-likely-than-not such asset will not be realized. We evaluate based on all available evidence, both
positive and negative, regarding historical operating results, including the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of
reversing temporary differences and carryforwards and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The ultimate realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character and in the related jurisdiction in the future. In evaluating
our ability to recover our deferred tax assets, we consider the available positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years and
our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of pretax operating income, the reversal of temporary differences and the
implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment. During 2022, after evaluating all available evidence, we recorded a valuation allowance on
all net deferred tax assets.
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F-20
For the year ended December 31, 2022, we recognized a total income tax expense of $39 thousand on a pretax book loss of $18.5 million compared to an income tax expense of $60 thousand on a
pretax book loss of $5.6 million for the year ended December 25, 2021. As a result of permanent difference add-backs to taxable income related to meals and entertainment the tax expense increased by
$188 thousand, which decreased the effective tax rate by 1.02%. An increase of $3.8 million in the valuation allowance decreased the effective tax rate by 20.5%. State income tax (net of Federal) expense
in the amount of $256 thousand increased the effective tax rate by 1.39% mainly due to Texas margins tax. Federal and state tax true-ups decreased tax expense in the amount of $91 thousand and
decreased the effective tax rate by 0.29%.
As of December 31, 2022, the Company has a gross federal net operating loss carry-forward of approximately $52.9 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 Executive Chairman (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”)
for ENGlobal.
We have identified four strategic markets where we have a long history of delivering project solutions and can provide complete project execution. These four targeted markets include: (i)
Renewables, (ii) Automation, (iii) Oil, Gas, and Petrochemicals, and (iv) Government Services.
Within the Renewables group, our focus is to design and build production facilities for hydrogen and associated products, together with converting existing production facilities to produce
products from renewable feedstock sources. These projects often utilize technologies that are more fuel efficient, and therefore reduce the associated carbon footprint of the facility. Our scope of work on
these projects will typically include front-end development, engineering, procurement, mechanical fabrication, automation and commissioning services, and may be performed in conjunction with a
construction partner.
Our Automation group provides the design and programming of automated control systems as well as designs, fabricates, integrates and commissions modular systems that include remote
instrumentation control stations, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure,
modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-
site commissioning services to our clients for both new and existing facilities.
Our Oil, Gas, and Petrochemicals group focuses on providing engineering, procurement, construction, and automation services as well as fabricated products to downstream refineries and
petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within
refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending
systems. In addition, this group designs, programs and maintains supervisory control and data acquisition (“SCADA”) systems for our transportation clients. This group also provides engineering,
fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification,
storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.
Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military
across the globe.
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F-21
We have two reportable segments: Commercial and Government Services. Our Renewables, Automation, and Oil, Gas, and Petrochemical groups are aggregated into one reportable segment,
Commercial.
Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.
Revenue, operating income, identifiable assets, capital expenditures and depreciation for each segment are set forth in the following table. The amount identified as Corporate includes those
activities that are not allocated to the operating segments and include costs related to business development, executive functions, finance, accounting, safety, human resources and information technology
that are not specifically identifiable with the segments.
Segment information for the years ended December 31, 2022 and December 25, 2021 are as follows (amounts in thousands):
For the year ended December 31, 2022:
Commercial
Government
Corporate
Consolidated
Operating revenues
Operating income (loss)
Depreciation and amortization
Tangible assets
Goodwill
Other intangible assets
Total assets
Capital expenditures
For the year ended December 25, 2021:
Operating revenues
Operating income (loss)
Depreciation and amortization
Tangible assets
Goodwill
Other intangible assets
Total assets
Capital expenditures
$
$
$
32,096
(14,495)
731
19,526
—
—
19,526
348
$
8,093
935
14
1,312
720
—
2,032
23
$
—
(4,767)
188
8,465
—
—
8,465
209
40,189
(18,327)
933
29,303
720
—
30,023
580
Commercial
Government
Corporate
Consolidated
$
27,986
(8,599)
394
12,516
—
19
12,535
58
$
8,424
32
14
3,068
720
—
3,788
—
$
—
(4,909)
153
25,746
—
—
25,746
182
36,410
(13,476)
561
41,330
720
19
42,069
240
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.
Table of Contents
F-22
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 for year ended December 25, 2021. We have received funds for a portion of each quarter we requested the employee retention credits for. For the year ended December 31,
2022, the remaining unpaid employee retention credits of $1.5 million is accounted for 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 paid B. Riley an aggregate commission of 3% of the gross sales price per share of common stock sold under the Prior ATM Agreement. 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. The Prior ATM Agreement was subsequently terminated pursuant to its terms on January
7, 2022.
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.
Table of Contents
F-23
On January 11, 2022, the Company entered into a sales agreement (the “ATM Agreement”) with Lake Street Capital Markets, LLC (“Lake Street”) pursuant to which the Company may offer and
sell shares of the Company’s common stock having an aggregate offering price of up to $30 million to or through Lake Street, as sales agent, from time to time, in an “at the market offering”. The
Company is not obligated to make any sales under the agreement and any determination by the Company to do so will be dependent, among other things, on market conditions and the Company’s capital
raising needs.
NOTE 18 – ACQUISITIONS
On May 18, 2022, ENG Calvert Holdings Ltd., a wholly owned subsidiary of the Company, completed the acquisition of the stock of Calvert Group Belgium NV (“Calvert”), a business that
licenses small-scale gas to liquids (“GTL”) technology for flare gas and stranded gas applications for specific territories including the Middle East and North Africa. The Company expects to utilize
Calvert’s basic designs incorporating the GTL technology into small scale GTL plants to be manufactured by the Company in the United States and subsequently shipped internationally.
Pursuant to the accounting guidance in ASC 805, we determined that the acquisition of Calvert did not meet the criteria necessary to constitute a business combination and was accounted for as an
asset acquisition which occurs when substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identified assets. The determination was
based on the gross fair value of the acquisition being concentrated in the license agreement acquired.
The consideration transferred on the acquisition date included $0.8 million cash, net of cash acquired, and $0.5 million in common stock issued. In addition, we may pay up to approximately $1.4
million in cash and issue approximately $0.6 million in common stock if certain benchmarks are achieved. The Company capitalized $0.2 million in costs associated with the transaction.
During the fourth quarter of 2022, we determined the carrying amount of the license agreement acquired was no longer recoverable and wrote the balance down to its estimated fair value. Fair
value was based on expected future cash flows using Level 3 inputs. The $2.5 million impairment of the intangible asset and $1.4 million write down of the related contingent consideration balances are
reflected within Operating Costs on the Consolidated Statement of Operations.
NOTE 19 – INTANGIBLE ASSETS
The Company had recognized a $2.8 million intangible asset for the license acquired in the Calvert acquisition and $1.4 million of contingent consideration. During the fourth quarter of 2022, we
determined the carrying amount of the license agreement acquired was no longer recoverable and wrote the balance down to its estimated fair value. Fair value was based on expected future cash flows
using Level 3 inputs. The impairment of the intangible asset and balance are reflected within Operating Costs on the Consolidated Statement of Operations.
NOTE 20 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date these financial statements were issued. The Company determined there were no events, other than as described below, that required
disclosure or recognition in these financial statements.
Registered Direct Offering
On February 1, 2023, we entered into a securities purchase agreement (the “RDO Purchase Agreement”) providing for the sale and issuance by the Company to a single institutional investor of
3,971,000 shares (the “Shares”) of the Company’s common stock at an offering price of $0.85 per Share in a registered direct offering pursuant to the Registration Statement. Concurrently with the sale of
the Shares and pursuant to the RDO Purchase Agreement, the Company also sold and issued in a private placement, for no additional consideration to the investor, warrants to purchase up to 3,971,000
shares of the Company’s common stock (the “Warrants”). The gross proceeds to the Company from the offerings were approximately $3.4 million before deducting the placement agent’s fees and related
offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants. The Company intends to use the net proceeds of the offering for working capital and general corporate purposes.
The sale of the Shares pursuant to the RDO Purchase Agreement has reduced the amount of securities that we may sell in a primary offering pursuant to the Registration Statement, including pursuant to
the ATM Agreement.
Table of Contents
Company’s Officer Changes
F-24
Mark A. Hess, the former Chief Executive Officer of the Company, resigned from his officer positions with the Company and its subsidiaries effective February 10, 2023.
The Board of Directors appointed William A. Coskey, P.E., the Company’s Chairman of the Board of Directors, as the Company’s Executive Chairman effective February 7, 2023.
Roger Westerlind, the former President of the Company, was terminated effective March 17, 2023.
Revolving Credit Facility
On March 27, 2023, the Company modified the Revolving Credit Facility agreement which reduced our credit limit and outstanding borrowings to $0.9 million.
Priority Agreement
On March 27, 2023, the Company entered into an invoice factoring agreement. The agreement provides the flexibility to receive funds early for a subset of customers at a discount rate of 2.75%
to 8.25% depending on the length of payment terms with the customer.
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
F-25
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a registrant designed to ensure that information required to be disclosed by the registrant in the reports that it files or
submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms.
Disclosure controls and procedures include processes to accumulate and evaluate relevant information and communicate such information to a registrant’s management, including its Executive Chairman
and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosures.
We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022, as required by Rule 13a-15 of the Exchange Act. Based on the
evaluation described above, our Executive Chairman and Chief Financial Officer have concluded that, as of December 31, 2022, our disclosure controls and procedures were effective insofar as they are
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods
specified in the SEC’s rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as that term is defined in Exchange Act Rule 13a-15(f). Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in
accordance with generally accepted accounting principles (“GAAP”). Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our
financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is
a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control
over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards into the process to reduce, although not
eliminate, this risk. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the
degree of compliance with the policies or procedures may deteriorate.
Table of Contents
28
In order to evaluate the effectiveness of our internal control over financial reporting as of December 31, 2022, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our management
conducted an assessment, including testing, based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO Framework”). A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of our annual or
interim financial statements will not be prevented or detected. In assessing the effectiveness of our internal control over financial reporting, management did not identify a material weakness in internal
control over financial reporting as of December 31, 2022. We have concluded that our internal control over financial reporting at December 31, 2022 was effective.
(c) No Attestation Report of the Registered Public Accounting Firm
This Report does not include an attestation report of the Company’s independent registered public accounting firm regarding the Company’s internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the
Dodd-Frank Act. We qualify for the Dodd-Frank Act exemption from the independent auditor attestation requirement under Section 404(b) of the Sarbanes-Oxley Act for smaller reporting companies.
(d) Changes in Internal Control over Financial Reporting
No changes in our internal controls over financial reporting occurred during the quarter ended December 31 2022, that materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 27, 2023, the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into an invoice
factoring agreement (the “Priority Agreement”) with FundThrough USA, Inc. (the “Priority Lender”) to purchase certain accounts receivable of the Borrowers with the consent of the lender under the Loan
and Security Agreement (the “Revolving Credit Facility”).
Set forth below are the material terms of the Priority Agreement between the Borrowers and the Priority Lender:
Eligible Accounts are limited to the specific customers defined in the Priority Agreement.
The cost to fund an invoice is a percentage of the invoice amount that ranges from 2.75% to 8.25% depending on the length of the payment terms with the customer.
The Borrower has granted the Priority Lender a security interest in all of the Borrower’s present and after-acquired accounts receivable of the customers defined in the Priority Agreement.
On March 27, 2023, the Borrowers modified the Revolving Credit Facility with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), in
connection with the Priority Agreement between the Borrowers and FundThrough USA Inc.
Set forth below are the material terms of the modification of the Revolving Credit Facility:
Credit Limit: The credit limit will not exceed the lesser of $1,000,000 at any time outstanding (the “Maximum Credit Limit”) minus any reserves, or the sum of (a) 85% of the Borrowers’ Eligible
Accounts (as defined in the Revolving Credit Facility) and (b) the lesser of $500,000 or 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility).
As a result of the modification, our current credit limit and outstanding borrowings are $0.9 million under the Revolving Credit Facility.
Collateral: The Lender maintains a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment
property, except for the Borrowers’ present and after-acquired Accounts Receivable defined in the Priority Agreement.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
Table of Contents
29
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated
herein by this reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated
herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated
herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated
herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required in response to this item will be set forth in our definitive proxy statement for the 2023 annual meeting of stockholders or an amendment to this Report and is incorporated
herein by this reference.
Table of Contents
30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The consolidated financial statements filed as part of this Form 10-K are listed and indexed in Part II, Item 8.
(a)(2) Schedules
All schedules have been omitted since the information required by the schedule is not applicable, or is not present in amounts sufficient to require submission of the schedule, or because
the information required is included in the consolidated financial statements and notes thereto.
3.1
3.2
4.1
*4.2
+10.1
+10.2
+10.3
(a)(3) Exhibits
Exhibit No.
Description
EXHIBIT INDEX
Restated Articles of Incorporation of Registrant dated January 29, 2021
Second Amended and Restated Bylaws of Registrant dated April 14, 2016
Registrant’s specimen common stock certificate
Description of Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934.
Incorporated by Reference to:
Form or
Schedule
Exhibit
No.
Filing Date
with SEC
SEC File
Number
8-K
8-K
S-3
3.1
3.1
4.1
1/29/2021
001-14217
4/15/2016
001-14217
10/31/2005
333-29336
ENGlobal Corporation Incentive Bonus Plan Dated effective July 1, 2009
8-K
10.1
8/17/2009
001-14217
Form of Restricted Stock Unit Award Agreement between Registrant and its Independent Non-employee Directors
10-Q
10.2
8/11/2008
001-14217
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
Table of Contents
31
+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
10.7
Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated January 27, 2005
10-K
10.11
3/28/2008
001-14217
First Amendment to the Lease Agreement between Oral Roberts University and ENGlobal Engineering, Inc. dated April 5,
10-K/A
10.26
3/29/2007
001-14217
2005
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
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
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
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
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
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
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
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
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
Lease Agreement between Koll Bren Fund V, LP and ENGlobal Corporate Services, Inc. dated March 4, 2005
First Amendment to the Lease Agreement between Koll Bren Fund V, LP and ENGlobal Corporate Services, Inc. dated
November 3, 2005
10-K
10-K
10.14
10.15
3/15/2018
3/15/2018
001-14217
001-14217
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
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
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
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
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
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
Lease Agreement between Carson Portwall Management LLP and ENGlobal Systems. Inc. dated November 12, 2008
10-K
10.21
3/15/2018
001-14217
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
32
Table of Contents
10.26
10.27
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
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
10.30
10.31
10.32
Office Lease between 700 17th Street, LLC and ENGlobal U.S. Inc., dated January 23, 2019
U.S. Small Business Administration Note dated as of April 13, 2020, by ENGlobal Corporation in favor of Origin Bank, as
lender
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
+10.33
ENGlobal Corporation 2021 Long Term Incentive Plan
10.34
10.35
Sales Agreement, dated January 11, 2022, by and between ENGlobal Corporation and Lake Street Capital Markets, LLC.
Securities Purchase Agreement, dated June 1, 2021, by and among ENGlobal Corporation and the purchasers identified on
the signature pages thereto
10-Q
10.1
11/12/2019
001-14217
10-Q
8-K
8-K
10.1
10.1
10.1
5/13/2019
4/16/2020
001-14217
001-14217
5/26/2020
001-14217
DEF 14A
8-K
8-K
Appendix
A
1.1
7/15/2021
001-14217
1/11/2022
001-14217
10.1
6/3/21
001-14217
+10.36
Executive Employment Agreement between ENGlobal U.S. Inc. and Roger Westerlind effective December 16, 2020
10-K
10.37
3/11/22
001-14217
10.37
10.38
10.39
10.40
Third Amendment to the Lease Agreement between Carson Portwall Management, LLC .and ENGlobal US Inc. dated April
2019
10-K
10.38
3/11/22
001-14217
Fourth Amendment to the Lease Agreement between Carson Portwall Management, LLC .and ENGlobal US Inc. dated
December 20, 2021
10-K
10.39
3/11/22
001-14217
Eleventh Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated September 25,
2019
10-K
10.40
3/11/22
001-14217
Twelfth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated November 11,
2020
10-K
10.41
3/11/22
001-14217
10.41
Sublease Agreement between FMC Technologies, Inc. and ENGlobal U.S., Inc. dated May 20, 2021
10-K
10.42
3/11/22
001-14217
+10.42
*10.43
*10.44
*10.45
Form of Restricted Stock Unit Award Agreement of the 2021 Long Term Incentive Plan between Registrant and its
Independent Non-employee Directors
Invoice Factoring Agreement between ENGlobal Corporation, ENGlobal U.S., Inc., and ENGlobal Government Services,
Inc. and FundThrough USA, Inc.
Modified Loan and Security Agreement by and among ENGlobal Corporation, ENGlobal U.S., Inc., ENGlobal Government
Services, Inc., and Pacific Western Bank, a California bank, as lender
Thirteenth Amendment to the Lease Agreement between Oral Roberts University and ENGlobal U.S., Inc. dated August 24,
2022
10-K
10.43
3/11/22
001-14217
*10.46
Lease Agreement between V Energy Industrial Park I, LLC and ENGlobal U.S., Inc. dated September 1, 2022
14.1
14.2
*21.1
*23.1
*31.1
*31.2
**32.1
Code of Business Conduct and Ethics of Registrant dated June 15, 2017
Code of Ethics for Chief Executive Officer and Senior Financial Officers of Registrant dated June 15, 2017
Subsidiaries of the Registrant
14.1
14.2
3/27/2020
3/27/2020
001-14217
001-14217
Consent of Moss Adams LLP
Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14
Certification of Principal Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14
Certification of Principal 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 Principal Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350
*101.ins
*101.sch
*101.cal
*101.def
*101.lab
*101.pre
*104
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.
Inline XBRL taxonomy extension schema document
Inline XBRL taxonomy extension calculation linkbase document
Inline XBRL taxonomy extension definition linkbase document
Inline XBRL taxonomy extension label linkbase document
Inline XBRL taxonomy extension presentation linkbase document
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith
** Furnished herewith
+ Management contract or compensatory plan or arrangement
ITEM 16. FORM 10-K SUMMARY
None.
Table of Contents
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 2023
ENGlobal Corporation
By:
/s/ William A. Coskey
William A. Coskey
Executive Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated:
By:
By:
By:
By:
By:
/s/ Darren W. Spriggs
Darren W. Spriggs
Chief Financial Officer, Treasurer
(Principal Financial and Accounting Officer)
/s/ William Coskey
William A. Coskey, P.E.
Executive Chairman and Director
(Principal Executive Officer)
/s/ Mark A. Hess
Mark A. Hess, Director
/s/ Christopher Sorrells
Christopher Sorrells, Director
/s/ Lloyd Kirchner
Lloyd Kirchner, Director
By:
/s/ Kevin M. Palma
Kevin M. Palma, Director
34
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
March 31, 2023
Table of Contents
EXHIBIT 4.2
Description of Registrant’s Securities Registered under Section 12 of the Securities Exchange Act of 1934
The following description sets forth certain material terms and provisions of the common stock of ENGlobal Corporation, which is registered under Section 12 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This description also summarizes relevant provisions of the Nevada Revised Statutes (“NRS”).
The following description is a summary and does not purport to be complete. It is subject to, and qualified in its entirety by reference to, the relevant provisions of the
NRS, and to our Restated Articles of Incorporation dated January 29, 2021 (collectively, the “Articles of Incorporation”) and our Second Amended and Restated Bylaws
dated April 14, 2016 (the “Bylaws”), which are filed as Exhibit 3.1 and Exhibit 3.2, respectively, to the Annual Report on Form 10-K of which this Exhibit 4.2 is a part,
and are incorporated by reference herein. We encourage you to read the Articles of Incorporation and the Bylaws, and the relevant provisions of the NRS for additional
information. Unless the context requires otherwise, all references to “we,” “us,” “our” and the “Company” in this Exhibit 4.2 refer solely to ENGlobal Corporation and
not to its subsidiaries.
Authorized and Outstanding Capital Stock
The Company is authorized to issue 75,000,000 shares of common stock, par value $0.001 per share (“Common Stock”), and 2,000,000 shares of undesignated
preferred stock, par value $0.001 per share (“Preferred Stock”). As of March 23, 2023, there were 39,771,617 shares of Common Stock and no shares of Preferred Stock
issued and outstanding.
Common Stock
Voting. Holders of shares of the Common Stock are entitled to one vote for each share held of record on matters properly submitted to a vote of our stockholders.
Stockholders are not entitled to vote cumulatively for the election of directors.
Dividends. Subject to the dividend rights of the holders of any outstanding series of Preferred Stock, holders of shares of Common Stock will be entitled to receive
ratably such dividends, if any, when, as, and if declared by our Board of Directors out of the Company’s assets or funds legally available for such dividends or
distributions.
Liquidation and Distribution. In the event of any liquidation, dissolution, or winding up of the Company’s affairs, holders of the Common Stock would be entitled
to share ratably in the Company’s assets that are legally available for distribution to its stockholders. If the Company has any Preferred Stock outstanding at such time,
holders of the Preferred Stock may be entitled to distribution preferences, liquidation preferences, or both. In such case, the Company must pay the applicable
distributions to the holders of its Preferred Stock before it may pay distributions to the holders of Common Stock.
Conversion, Redemption, and Preemptive Rights. Holders of the Common Stock have no preemptive, subscription, redemption or conversion rights.
Sinking Fund Provisions. There are no sinking fund provisions applicable to the Common Stock.
1
Anti-Takeover Effects of Nevada Law and the Articles of Incorporation and Bylaws
General. Certain provisions of the Articles of Incorporation and Bylaws, and certain provisions of the NRS could make our acquisition by a third party, a change in
our incumbent management, or a similar change of control more difficult. These provisions, which are summarized below, are likely to reduce our vulnerability to an
unsolicited proposal for the restructuring or sale of all or substantially all of our assets or an unsolicited takeover attempt. The summary of the provisions set forth below
does not purport to be complete and is qualified in its entirety by reference to the Articles of Incorporation and the Bylaws and the relevant provisions of the NRS.
Authorized but Unissued Shares. Our authorized but unissued shares of common stock and preferred stock are available for future issuance, subject to any
limitations imposed by the listing standards of The Nasdaq Capital Market. These additional shares may be used for a variety of corporate finance transactions,
acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make it more difficult or
discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise..
No Action by Written Consent. Our Bylaws provide that no action required or permitted to be taken at a meeting of the stockholders may be taken by written
consent.
Advance Notice Requirements. Stockholders wishing to nominate persons for election to our Board of Directors at a meeting or to propose any business to be
considered by our stockholders at a meeting must comply with certain advance notice and other requirements set forth in our Bylaws.
Special Meetings. Our Bylaws provide that special meetings of stockholders may only be called by the President or Secretary, by a majority of the Board of
Directors, or by the President at the written request of at least fifty percent (50%) of the number of shares of the Company then outstanding and entitled to vote.
Board Vacancies. Our Bylaws provide that any vacancy on our Board of Directors, howsoever resulting, may be filled by a majority vote of the remaining
directors.
Removal of Directors. Our Bylaws provide that any directors may be removed either with or without cause at any time by the vote of stockholders representing
two-thirds of the voting power of the issued and outstanding capital stock entitled to vote.
Nevada Anti-Takeover Statutes. The NRS contains provisions restricting the ability of a Nevada corporation to engage in business combinations with an interested
stockholder. Under the NRS, except under certain circumstances, business combinations with interested stockholders are not permitted for a period of two years following
the date such stockholder becomes an interested stockholder. The NRS defines an interested stockholder, generally, as a person who is the beneficial owner, directly or
indirectly, of 10% of the outstanding shares of a Nevada corporation. In addition, the NRS generally disallows the exercise of voting rights with respect to “control
shares” of an “issuing corporation” held by an “acquiring person,” unless such voting rights are conferred by a majority vote of the disinterested stockholders. “Control
shares” are those outstanding voting shares of an issuing corporation which an acquiring person and those persons acting in association with an acquiring person (i)
acquire or offer to acquire in an acquisition of a controlling interest and (ii) acquire within ninety days immediately preceding the date when the acquiring person became
an acquiring person. An “issuing corporation” is a corporation organized in Nevada which has two hundred or more stockholders, at least one hundred of whom are
stockholders of record and residents of Nevada, and which does business in Nevada directly or through an affiliated corporation. The NRS also permits directors to resist
a change or potential change in control of the corporation if the directors determine that the change or potential change is opposed to or not in the best interest of the
corporation.
Stock Exchange Listing
The Common Stock is traded on the NASDAQ Capital Market under the symbol “ENG.”
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Computershare Investor Services, LLC located at P.O. Box 30170, College Station, TX 77842-3170 and
its telephone number is 1-800-662-7232.
2
EXHBIT 10.43
EXHIBIT 10.44
EXHIBIT 10.45
EXHIBIT 10.46
SUBSIDIARIES OF REGISTRANT
ENGlobal U.S., Inc.
Incorporated in the State of Texas
ENGlobal Government Services, Inc.
Incorporated in the State of Texas
ENGlobal Technologies, LLC
ENGlobal Calvert Holdings Ltd.
Calvert Group Belgium NV
Incorporated in the State of Texas
Ireland
Belgium
EXHIBIT 21.1
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333- 129336, No. 333-136830, No. 333-252572, and No. 333-269721) and
Form S-8 (No. 333-127803, No. 333-161246, No. 333-193214, No. 333-205378, No. 333-239095, and No. 333-259084) of ENGlobal Corporation (the “Company”), of
our report dated March 31, 2023, relating to the consolidated financial statements the Company (which report expresses an unqualified opinion and includes an
explanatory paragraph relating to a going concern uncertainty), appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2022.
/s/ Moss Adams LLP
Houston, Texas
March 31, 2023
EXHIBIT 31.1
I, William A. Coskey, P.E., certify that:
Certification by the Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
1.
2.
3.
4.
I have reviewed this Report on Form 10-K of ENGlobal Corporation;
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this Report;
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this Report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this Report based on such evaluation; and
Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s Board of Directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2023
/s/ William A. Coskey
William A. Coskey, P.E.
Executive Chairman
EXHIBIT 31.2
I, Darren W. Spriggs, certify that:
Certification by the Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
1.
2.
3.
4.
I have reviewed this Report on Form 10-K of ENGlobal Corporation;
Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this Report;
Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this Report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this Report based on such evaluation; and
Disclosed in this Report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of
the registrant’s Board of Directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: March 31, 2023
/s/ Darren W. Spriggs
Darren W. Spriggs
Chief Financial Officer
Certification by the Principal Executive Officer Pursuant to 18 U. S. C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
Pursuant to 18 U. S. C. Section 1350, I, William A. Coskey, P.E., hereby certify that, to my knowledge, the Annual Report on Form 10-K of ENGlobal Corporation
for the fiscal year ended December 31, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of ENGlobal Corporation.
Date: March 31, 2023
/s/ William A. Coskey
William A. Coskey, P.E.
Executive Chairman
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will
not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
Certification by the Principal Financial Officer Pursuant to 18 U. S. C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
Pursuant to 18 U. S. C. Section 1350, I, Darren W. Spriggs, hereby certify that, to my knowledge, the Annual Report on Form 10-K of ENGlobal Corporation for the fiscal year ended December
31, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in
all material respects, the financial condition and results of operations of ENGlobal Corporation.
Date: March 31, 2023
/s/ Darren W. Spriggs
Darren W. Spriggs
Chief Financial Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by
the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.