ENGLOBAL CORP - FORM 10-Q - November 5, 2020

Attached files

file	filename
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - ENGLOBAL CORP	eng_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - ENGLOBAL CORP	eng_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - ENGLOBAL CORP	eng_ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 26, 2020

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

Commission File No. 001-14217

ENGlobal Corporation

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of

incorporation or organization)

88-0322261

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

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

(281) 878-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common Stock, $0.001 par value		ENG		NASDAQ

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shortened period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	[ ]	Accelerated Filer	[ ]
Non-Accelerated Filer	[X]	Smaller Reporting Company	[X]
Emerging growth company	[ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

As of November 5, 2020, the registrant had outstanding 27,560,686 shares of common stock, par value $0.001 per share.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 26, 2020

TABLE OF CONTENTS

		Page Number

Part I.	Financial Information	3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 26, 2020 and September 28, 2019	3

	Unaudited Condensed Consolidated Balance Sheets at September 26, 2020 and December 28, 2019	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2020 and September 28, 2019	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 26, 2020 and September 28, 2019	6

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

Part II.	Other Information	23

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	25

Item 4.	Mine Safety Disclosures	25

Item 5.	Other Information	25

Item 6.	Exhibits	26

	Signatures	27

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENGlobal Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share data)

	For the Three Months Ended		For the Nine Months Ended
	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Operating revenues	$15,729	$13,974	$52,871	$39,758
Operating costs	14,585	12,299	46,014	34,803
Gross profit	1,144	1,675	6,857	4,955

Selling, general and administrative expenses	2,174	2,371	6,621	7,125
Operating profit (loss)	(1,030)	(696)	236	(2,170)

Other income (expense):
Other income, net	4	7	6	48
Interest expense, net	(62)	(5)	(103)	(12)
Income (loss) from operations before income taxes	(1,088)	(694)	139	(2,134)

Provision for federal and state income taxes	22	22	80	73

Net income (loss)	(1,110)	(716)	59	(2,207)

Basic and diluted income (loss) per common share:	$(0.04)	$(0.03)	$0.00	$(0.08)

Basic and diluted weighted average shares used in computing income (loss) per share:	27,507	27,410	27,529	27,417

See accompanying notes to unaudited interim condensed consolidated financial statements.

ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except share amounts)

	September 26, 2020	December 28, 2019
ASSETS
Current Assets:
Cash	$12,699	$8,307
Trade receivables, net of allowances of $270 and $236	12,703	11,435
Prepaid expenses and other current assets	185	889
Contract assets	3,055	3,862
Total Current Assets	28,642	24,493
Property and equipment, net	1,193	1,033
Goodwill	720	720
Other assets
Right of use asset	1,999	2,133
Deposits and other assets	391	307
Total Other Assets	2,390	2,440
Total Assets	$32,945	$28,686

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities:
Accounts payable	$3,084	$3,261
Accrued compensation and benefits	2,875	2,783
Current portion of leases	1,613	1,041
Contract liabilities	2,732	5,438
Current portion of note	3,042	—
Other current liabilities	244	681
Total Current Liabilities	13,590	13,204
Deferred payroll tax	791	—
Long-term debt	3,371	—
Long-term leases	932	1,458
Total Liabilities	18,684	14,662
Commitments and Contingencies (Note 8)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,560,686 shares issued and outstanding at September 26, 2020 and 27,413,626 shares issued and outstanding at December 28, 2019	28	27
Additional paid-in capital	37,111	36,934
Accumulated deficit	(22,878)	(22,937)
Total Stockholders’ Equity	14,261	14,024
Total Liabilities and Stockholders’ Equity	$32,945	$28,686

See accompanying notes to unaudited interim condensed consolidated financial statements.

ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

	For the Nine Months Ended
	September 26, 2020	September 28, 2019
Cash Flows from Operating Activities:
Net income (loss)	$59	$(2,207)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	313	258
Share-based compensation expense	177	45
Changes in current assets and liabilities:
Trade accounts receivable	(1,268)	2,748
Contract assets	807	(953)
Prepaids and other current assets	620	956
Accounts payable	(177)	(229)
Accrued compensation and benefits	883	(126)
Contract liabilities	(2,706)	209
Income taxes payable	(76)	16
Other current liabilities, net	(361)	(460)
Net cash provided by (used in) operating activities	$(1,729)	$257

Cash Flows from Investing Activities:
Proceeds from notes receivable	—	24
Property and equipment acquired	(228)	(191)
Net cash used in investing activities	$(228)	$(167)

Cash Flows from Financing Activities:
Purchase of common stock	—	(61)
Proceeds from PPP loan	4,937	—
Proceeds from revolving credit facility	1,476	—
Payments on finance leases	(64)	(1)
Net cash provided by (used in) financing activities	$6,349	$(62)
Net change in cash	4,392	28
Cash at beginning of period	8,307	6,060
Cash at end of period	$12,699	$6,088

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$103	$12
Right of use assets obtained in exchange for new operating lease liability	$963	$2,377
Cash paid during the period for income taxes (net of refunds)	$16	$—
Debt issuance costs	$140	$—
Leased assets obtained in exchange for new finance lease liabilities	$219	$236

See accompanying notes to unaudited interim condensed consolidated financial statements.

ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(amounts in thousands)

	For the Three Months Ended
	September 26, 2020	September 28, 2019
Common Stock
Balance at beginning of period	$27	$27
Common stock issued	1	—
Balance at end of period	28	27

Additional Paid-in Capital
Balance at beginning of period	37,066	36,906
Share-based compensation - employee	45	12
Balance at end of period	37,111	36,918

Accumulated Earnings (Deficit)
Balance at beginning of period	(21,768)	(22,962)
Net loss	(1,110)	(716)
Balance at end of period	(22,878)	(23,678)
Total Stockholders’ Equity	$14,261	$13,267

	For the Nine Months Ended
	September 26, 2020	September 28, 2019
Common Stock
Balance at beginning of period	$27	$27
Common stock issued	1	—
Balance at end of period	28	27

Additional Paid-in Capital
Balance at beginning of period	36,934	36,934
Share-based compensation - employee	177	45
Treasury stock retired	—	(61)
Balance at end of period	37,111	36,918

Accumulated Earnings (Deficit)
Balance at beginning of period	(22,937)	(21,471)
Net income (loss)	59	(2,207)
Balance at end of period	(22,878)	(23,678)
Total Stockholders’ Equity	$14,261	$13,267

See accompanying notes to unaudited interim condensed consolidated financial statements.

ENGLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, these condensed financial statements do not include all of the information or note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 28, 2019, included in the Company’s 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

The condensed financial statements included herein are unaudited for the three month and nine month periods ended September 26, 2020 and September 28, 2019, and in the case of the condensed balance sheet as of December 28, 2019 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.

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

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

Each of our quarters is comprised of 13 weeks.

NOTE 2 – ACCOUNTING STANDARDS

Revenue Recognition – Our revenue is comprised of engineering, procurement and construction management services and sales of fabricated systems and integrated control systems that we design and assemble. The majority of our services are provided under time-and-material contracts. Some time-and-material contracts may have limits. Revenue is not recognized over these limits until authorization by the client has been received.

A majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

We generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.

Under the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The portion of the payments retained by the customer until final contract settlement is not considered a significant financing component because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract. For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

To determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted for as one single performance obligation or whether a single contract should be accounted for as more than one performance obligation. This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts, we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex, subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is reasonably available to us.

Contracts are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications are for goods or services that are not distinct from the existing contract due to the significant integration service provided in the context of the contract and are, therefore, 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 and cost (either as an increase or a reduction) 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 resulting in a loss on the performance obligation, a provision for the entire loss is recognized in the period the loss becomes known. Likewise, these adjustments may result in a decrease in operating income if we determine we will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net revenue, operating costs and the related impact to operating income are recognized monthly on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on a performance obligation’s percentage of completion. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations.

NOTE 3 – REVENUE RECOGNITION

Our revenue by contract type was as follows (dollars in thousands):

	For the Three Months Ended		For the Nine Months Ended
	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Fixed-price revenue	$10,863	$5,334	$28,785	$14,418
Time-and-material revenue	4,866	8,640	24,086	25,340
Total Revenue	15,729	13,974	52,871	39,758

NOTE 4 – CONTRACT ASSETS AND CONTRACT LIABILITIES

Our contract assets consist of unbilled amounts typically resulting from sales under long-term contracts when the cost-to-cost method of revenue recognition is utilized and revenue recognized exceeds the amount billed to the customer. Our contract liabilities consist of advance payments and billings in excess of costs incurred.

Costs, estimated earnings and billings on uncompleted contracts consisted of the following at September 26, 2020 and December 28, 2019:

	September 26, 2020	December 28, 2019
	(dollars in thousands)
Costs incurred on uncompleted contracts	$33,565	$23,846
Estimated earnings on uncompleted contracts	3,467	5,188
Earned revenues	37,032	29,034
Less: billings to date	36,709	30,610
Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts	$323	$(1,576)

Contract assets	$3,055	$3,862
Contract liabilities	(2,732)	(5,438)
Net contract assets	$323	$(1,576)

NOTE 5 – DEBT

The components of debt were as follows (dollars in thousands):

	September 26, 2020	December 28, 2019
PPP Loan (1)	$4,937	$—
Revolving Credit Facility (2)	1,476	—
Total debt	6,413	—
Amount due within one year	3,042	—
Total long-term debt	$3,371	$—

(1)

On April 13, 2020, the Company was granted an unsecured loan (the “PPP Loan”) from Origin Bank in the aggregate principal amount of $4,915,800 pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan is evidenced by a promissory note, dated as of April 13, 2020 (the “Note”), by ENGlobal in favor of Origin Bank, as lender.

Interest Rate: The interest rate on the PPP Loan is 1% per year.

Potential PPP Loan Forgiveness: Under the PPP, ENGlobal may apply for forgiveness of the amount due on the PPP Loan in an amount equal to the sum of the following costs incurred during the covered period beginning on the date of the first disbursement of the PPP Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act.

We have elected to utilize a 24-week covered period as allowed by the Paycheck Protection Program Flexibility Act (“PPPFA”) enacted on June 5, 2020. When applying for PPP Loan forgiveness, we have the option to increase the repayment period for any unforgiven portion of the PPP Loan to five years as permitted under the PPPFA.

We have calculated qualified forgivable expenses in excess of our PPP Loan amount. Although we expect the full PPP Loan amount to be forgiven, we cannot guarantee our forgiveness application will be accepted allowing for a fully forgiven loan.

(2)

On May 21, 2020 (the “Closing Date”), the Company and its wholly owned subsidiaries, ENGlobal U.S., Inc. and ENGlobal Government Services, Inc. (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans (each a “Loan” and collectively, the “Loans”) in the aggregate amount of up to $6.0 million (the “Maximum Credit Limit”).

Set forth below are certain of the material terms of the Revolving Credit Facility:

Credit Limit: The credit limit is an amount equal to the lesser of (a) the Maximum Credit Limit and (b) the sum of (i) 85% of the Borrowers’ Eligible Accounts (as defined in the Revolving Credit Facility), plus (ii) the lesser of (A) 75% of the Borrowers’ Eligible Unbilled Accounts (as defined in the Revolving Credit Facility), or (B) $3,000,000 plus (iii) the lesser of (A) 20% of Borrowers’ Eligible Fixed Price Accounts, or (B) $250,000. As of June 27, 2020, the credit limit under the Revolving Credit Facility was $3.5 million.

Interest: Any Loans will bear interest at a rate per annum equal to the Prime rate (defined as the rate announced as the “prime rate” or “bank prime rate” in the Western Edition of the Wall Street Journal) plus 2.0%; provided that interest will not be less than $7,500 per month.

Collateral: Lender receives a first priority lien on all assets of the Borrowers, including accounts receivable, inventory, equipment, deposit accounts, general intangibles and investment property.

Maturity: The maturity date is May 20, 2023 and shall be automatically extended for additional periods of one-year each, if written notice of termination is not given by one party to the other at least thirty days prior to the maturity date.

Loan Fee: The Borrowers will pay to Lender a loan fee of 1.00% of the Maximum Credit Limit at the time of funding and annually thereafter on the anniversary date of the initial funding.

Termination Fee: In the event the Borrowers terminate the Revolving Credit Facility prior to the maturity date, the Borrowers will pay to Lender a termination fee of (i) 2.00% of the Maximum Credit Limit, if the termination occurs on or prior to the first anniversary of the Closing Date, (ii) 1.00% of the Maximum Credit Limit, if the termination occurs after the first anniversary of the Closing Date and on or prior to the second anniversary of the Closing Date and (iii) 0.05% of the Maximum Credit Limit, if the termination occurs after the second anniversary of the Closing Date.

Covenants: The Revolving Credit Facility requires the Borrowers to comply with certain customary affirmative covenants, and negative covenants that, among other things, restrict, subject to certain exceptions, the ability of the Borrowers to engage in mergers, acquisitions or other transactions outside of the ordinary course of business, make loans or investments, incur indebtedness, pay dividends or repurchase stock, or engage in affiliate transactions. The Revolving Credit Facility does not require the Borrowers to comply with any financial covenants.

The future scheduled maturities of our debt are (in thousands):

	PPP Loan and Revolving Credit Facility (1)	Revolving Credit Facility (1)
2020	$553	$—
2021	3,318	—
2022	1,066	—
2023	1,476	1,476
Thereafter	—	—
	$6,413	$1,476

(1)

If the PPP Loan is entirely forgiven, only the Revolving Credit Facility would remain as debt.

NOTE 6 – SEGMENT INFORMATION

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

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

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

Segment information for the three months ended September 26, 2020 and September 28, 2019 is as follows (dollars in thousands):

For the three months ended September 26, 2020:	EPCM	Automation	Corporate	Consolidated

Revenue	$8,016	$7,713	$—	$15,729
Gross profit	754	390	—	1,144
Gross Profit Margin	9.4%	5.1%		7.3%
SG&A	574	417	1,183	2,174
Operating income (loss)	180	(27)	(1,183)	(1,030)
Other income, net				4
Interest expense, net				(62)
Tax expense				(22)
Net loss				$(1,110)

For the three months ended September 28, 2019:	EPCM	Automation	Corporate	Consolidated

Revenue	$4,256	$9,718	$—	$13,974
Gross profit	75	1,600	—	1,675
Gross Profit Margin	1.8%	16.5%		12.0%
SG&A	651	427	1,293	2,371
Operating income (loss)	(576)	1,173	(1,293)	(696)
Other income, net				7
Interest expense, net				(5)
Tax expense				(22)
Net loss				$(716)

Segment information for the nine months ended September 26, 2020 and September 28, 2019 is as follows (dollars in thousands):

For the nine months ended September 26, 2020:	EPCM	Automation	Corporate	Consolidated

Revenue	$19,771	$33,100	$—	$52,871
Gross profit	1,677	5,180	—	6,857
Gross Profit Margin	8.5%	15.6%		13.0%
SG&A	1,852	1,121	3,648	6,621
Operating income (loss)	(175)	4,059	(3,648)	236
Other income, net				6
Interest expense, net				(103)
Tax expense				(80)
Net income				$59

For the nine months ended September 28, 2019:	EPCM	Automation	Corporate	Consolidated

Revenue	$15,548	$24,210	$—	$39,758
Gross profit	1,574	3,381	—	4,955
Gross Profit Margin	10.1%	14.0%		12.5%
SG&A	1,826	1,246	4,053	7,125
Operating income (loss)	(252)	2,135	(4,053)	(2,170)
Other income, net				48
Interest expense, net				(12)
Tax expense				(73)
Net loss				$(2,207)

Total assets by segment for the three months ended September 26, 2020 and December 28, 2019 are as follows (dollars in thousands):

Total Assets by Segment	As of September 26, 2020	As of December 28, 2019
	(dollars in thousands)
EPCM	$9,888	$6,253
Automation	10,350	13,603
Corporate	12,707	8,830
Consolidated	$32,945	$28,686

NOTE 7 – FEDERAL AND STATE INCOME TAXES

The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740, “Income Taxes” (“ASC 740”). Under ASC 740-270 we estimate an annual effective tax rate based on year-to-date operating results and our projection of operating results for the remainder of the year. We apply this annual effective tax rate to the year-to-date operating results. If our actual results differ from the estimated annual projection, our estimated annual effective tax rate can change affecting the tax expense for successive interim results as well as the estimated annual tax expense results. Certain states are not included in the calculation of the estimated annual effective tax rate because the underlying basis for the tax is related to revenues and not taxable income. Amounts for Texas margin taxes are reported as income tax expense.

The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2016 and Texas margins tax returns prior to 2016 are closed. Generally, the applicable statues of limitations are three to four years from their filings.

On March 27, 2020, the CARES Act was enacted and signed into law and U.S. GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date. The CARES Act includes changes to the tax provisions that benefit business entities and makes certain technical corrections to the Tax Cuts and Jobs Act enacted in 2017. The tax relief measures for businesses include a five-year net operating loss carryback, suspension of annual deduction limitation of 80% of taxable income from net operating losses generated in a tax year beginning after December 31, 2017, changes in the deductibility of interest, acceleration of alternative minimum tax credit refunds, payroll tax relief, and a technical correction to allow accelerated deductions for qualified improvement property. The CARES Act also provides other non-tax benefits to assist those impacted by the pandemic. The Company evaluated the impact of the CARES Act and determined that there was no significant impact to the income tax provision for the quarter.

The Company recorded income tax expense of $22 thousand and $80 thousand for the three and nine months ended September 26, 2020, respectively, as compared to income tax expense of $22 thousand and $73 thousand for the three and nine months ended September 28, 2019, respectively.

The effective income tax rate for the three and nine months ended September 26, 2020 was (2.0)% and 57.6%, respectively, as compared to (3.2)% and (3.4)% for the three and nine months ended September 28, 2019, respectively. The effective tax rate differed from the federal statutory rate of 21% primarily due to the effect of the valuation allowances related to the unrealized deferred tax asset generated by the current year benefit.

NOTE 8 – COMMITMENTS AND CONTINGENCIES

From time to time, ENGlobal or one or more of its subsidiaries is involved in various legal proceedings or is subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. Management is not aware of any pending or threatened lawsuits or proceedings that are expected to have a material effect on our financial position, results of operations or liquidity.

We carry a broad range of insurance coverage, including general and business automobile liability, commercial property, professional errors and omissions, workers’ compensation insurance, directors’ and officers’ liability insurance and a general umbrella policy, all with standard self-insured retentions/deductibles. We also provide health insurance to our employees (including vision and dental) which is partially self-funded for these claims. Provisions for expected future payments are accrued based on our experience, and specific stop loss levels provide protection for the Company. We believe we have adequate reserves for the self-funded portion of our insurance policies. We are not aware of any material litigation or claims that are not covered by these policies or which are likely to materially exceed the Company’s insurance limits.

NOTE 9 – LEASES

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

The components of lease expense were as follows (dollars in thousands):

		Three Months Ended		Nine Months Ended
	Financial Statement Classification	September 26, 2020	September 28, 2019	September 26, 2020	September 28, 2019
Finance leases:
Amortization expense	SG&A Expense	$26	$4	$64	$4
Interest expense	Interest expense, net	5	2	15	2
Total finance lease expense		31	6	79	6

Operating leases:
Operating costs	Operating costs	135	427	506	845
Selling, general and administrative expenses	SG&A Expense	459	476	1,364	1,398
Total operating lease expense		594	903	1,870	2,243
Total lease expense		$625	$909	$1,949	$2,249

Supplemental balance sheet information related to leases was as follows (dollars in thousands):

	Financial Statement Classification	September 26, 2020	December 28, 2019
ROU Assets:
Operating leases	Right of Use asset	$1,999	$2,133
Finance leases	Property and equipment, net	471	318
Total ROU Assets:		$2,470	$2,451

Lease liabilities:
Current liabilities
Operating leases	Current portion of leases	$1,494	$961
Finance leases	Current portion of leases	119	80
Noncurrent Liabilities:
Operating leases	Long-term leases	579	1,220
Finance leases	Long-term leases	353	238
Total lease liabilities		$2,545	$2,499

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

	At September 26, 2020
Weighted average remaining lease term (years)
Operating leases	1.4
Finance leases	4.4
Weighted average discount rate
Operating leases	2.0%
Finance leases	6.2%

Maturities of lease liabilities as of September 26, 2020 are as follows (dollars in thousands):

Years ending:	Operating leases	Finance leases	Total
2020 (remaining months)	379	33	412
2021	1,448	133	1,581
2022	289	112	401
2023	—	92	92
2024	—	72	72
2025	—	37	37
2026	—	18	18
Total lease payments	2,116	497	2,613
Less: imputed interest	(43)	(25)	(68)
Total lease liabilities	$2,073	$472	$2,545

NOTE 10 – SUBSEQUENT EVENTS

On September 28, 2020, we received written notice from The NASDAQ Stock Market (“NASDAQ”) indicating that the Company is 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 the Company’s common stock, and its common stock will continue to trade on NASDAQ under the symbol “ENG” at this time.

The Company 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 September 28, 2020 to March 29, 2021. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for at least ten consecutive business days before March 29, 2021.

If the Company is not in compliance by March 29, 2021, the Company may be afforded a second 180 calendar day period to regain compliance. To qualify, the Company 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, the Company would be required to notify NASDAQ of its intent to cure the minimum bid price deficiency, which may include implementing a reverse stock split.

If the Company does not regain compliance within the allotted compliance period(s), including any extensions that may be granted by NASDAQ, NASDAQ will provide notice that the Company’s common stock will be subject to delisting. The Company would then be entitled to appeal the NASDAQ Staff’s determination to a NASDAQ Listing Qualifications Panel and request a hearing.

The Company intends to monitor the closing bid price of the Company’s common stock and consider its available options to resolve the noncompliance with the minimum bid price requirement. No determination regarding the Company’s response has been made at this time. There can be no assurance that the Company will be able to regain compliance with the minimum bid price requirement or will otherwise be in compliance with other NASDAQ listing criteria.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain information contained in this Quarterly Report on Form 10-Q, as well as other written and oral statements made or incorporated by reference from time to time by the Company and its representatives in other reports, filings with the Securities and Exchange Commission (the “SEC”), press releases, conferences or otherwise, may be deemed to be forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). This information includes, without limitation, statements concerning the Company’s future financial position and results of operations, planned capital expenditures, business strategy and other plans for future operations, the future mix of revenues and business, customer retention, project reversals, commitments and contingent liabilities, future demand and industry conditions. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Generally, the words “anticipate,” “believe,” “estimate,” “expect,” “may” and similar expressions, identify forward-looking statements, which generally are not historical in nature. Actual results could differ materially from the results described in the forward-looking statements due to the risks and uncertainties set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, the specific risk factors identified under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019, and those described from time to time in our future reports filed with the SEC.

The following discussion is qualified in its entirety by, and should be read in conjunction with, the Company’s financial statements, including the notes thereto, included in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 28, 2019.

Overview

ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us” or “our”), incorporated in the State of Nevada in June 1994, is a leading provider of engineered modular solutions to the energy industry. We deliver these solutions to our clients by combining our vertically integrated engineering and professional project execution services with our automation and systems integration expertise and mechanical fabrication capabilities. We believe our vertically integrated strategy allows us to differentiate our company from most of our competitors as a full service provider, thereby reducing our clients’ dependency on and coordination of multiple vendors and improving control over their project schedules. Our strategy and positioning has also allowed the Company to pursue larger scopes of work centered around many different types of modularized engineered systems.

We have identified modular project execution offerings as the opportunity to which our capabilities are best applied, focused our business development team on communicating these offerings to specific clients and realigned our internal reporting structure to better facilitate complete modular project execution. We have identified six strategic market initiatives where we have a history of delivering project solutions and can provide complete project execution that includes engineering, design, fabrication and integration of automated control systems as a complete packaged solution for our clients, preferably in a modular form. This “design it once – build it many times” concept has many merits including a single vendor interface, better control of costs, better control of schedule and lower safety risk. These six targeted market initiatives include: (1) natural gas and crude oil and renewable energy production systems; (2) control systems implementation; (3) continuous emission monitoring systems; (4) pipeline pump, compression, metering, loading and blending systems; (5) adding customer relationships in specific markets for automation; and (6) expanding government services beyond our heritage contracts. We have identified specific individuals within the Company to lead the efforts for each market initiative - “a champion” - while coordinating with the other sales leaders.

We continue to be mindful of our overhead structure. While we continue to make investments in key individuals, product developments and new facilities and equipment, which may negatively impact our selling, general and administrative expense (“SG&A”), we have been able to offset those increases with decreases in other areas and, overall, our SG&A costs have continued to decrease year over year. We recognize that the level of our SG&A is greater than it could be for a company our size; however, we have maintained our overhead structure in anticipation of higher operating levels.

On April 18, 2018, we announced that our Board of Directors had initiated a review of strategic alternatives, which could include strategic mergers, reverse mergers, the issuance or buyback of public shares, or the purchase or sale of specific assets, in addition to other potential actions aimed at increasing shareholder value. The Company does not intend to disclose or comment on developments related to its review unless and until the Board has approved a specific transaction or otherwise determined that further disclosure is appropriate. There can be no assurance that the Board’s strategic review will result in any transaction, or any assurance as to its outcome or timing.

COVID-19 Update

On March 11, 2020, the World Health Organization declared that the worldwide spread and severity of a new coronavirus, referred to as COVID-19, was severe enough to be characterized as a pandemic. In response to the continued spread of COVID-19, governmental authorities in the United States and around the world have imposed various restrictions designed to slow the pace of the pandemic, including restrictions on travel and other restrictions that prohibit employees from going to work, in cities where we have offices, employees, and customers causing severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including many of our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. We have been fortunate that we entered the year with a robust backlog and that the larger projects in our backlog have not been cancelled or postponed. This has allowed us to keep a significant portion of our workforce productive. However, we have not been successful in replacing our backlog as quickly as it has been converted to revenues. As a result, our backlog has decreased by approximately $27.4 million from $59.2 million at December 28, 2019 to $31.8 million at September 26, 2020. While we have many potential opportunities in our sales pipeline that could replace a significant portion of this backlog reduction, inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions have largely contributed to delays in project awards and our inability to replace our backlog as quickly as it has been converted to revenue. While we believe our backlog is sufficient to keep a significant portion of our workforce productive for the balance of this year, it may not be at our current operating levels. The extent to which the disruption of COVID-19 may impact our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The duration and intensity of these impacts and resulting disruption to our business, financial condition and results of operations is uncertain and we will continue to monitor the situation and assess the operational and financial impact on our business.

As a result of these current and future uncertainties, we felt it necessary to utilize all avenues of available assistance as they may not be available in the future when needed. On April 13, 2020, we obtained a $4.9 million loan (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) under Division A, Title I of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which we expect to be forgiven. We are also utilizing relief for employees impacted by COVID-19 under the Families First Coronavirus Response Act in order to minimize the impact to both our employees and our business. Further, we are utilizing some of the tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS and the CARES Act.

On May 21, 2020, in order to provide additional liquidity, the Company and its subsidiaries (collectively, the “Borrowers”) entered into a Loan and Security Agreement (the “Revolving Credit Facility”) with Pacific Western Bank dba Pacific Western Business Finance, a California state-chartered bank (the “Lender”), pursuant to which the Lender agreed to extend credit to the Borrowers in the form of revolving loans in the aggregate amount of up to $6.0 million, subject to a credit limit. For additional information, see “Liquidity and Capital Resources.” As we continue to monitor the situation and assess the operational and financial impact on our business, we may determine to take further actions in response.

On June 27, 2020, we temporarily closed one of our operational facilities and sponsored COVID-19 testing for employees in response to a potential COVID-19 exposure. During the closure, we cleaned and sanitized the facility, and we reopened the facility after one week. Employees and visitors were allowed to return to the facility only after negative test results were received or after a fourteen day quarantine period. Although the closure was only for one week, the disruption to our operations was longer as testing results were received slower than expected and project progress was delayed.

Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations. For additional information, see Part II. Item 1A “Risk Factors.”

Critical Accounting Policies Update

A summary of our critical accounting policies is described under the caption “Critical Accounting Policies” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report on Form 10-K. Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 2019 Annual Report on Form 10-K.

Results of Operations

In the course of providing our time-and-material services, we routinely provide materials and equipment and may provide construction management services on a subcontractor basis. Generally, these materials, equipment and subcontractor costs are passed through to our clients and reimbursed, along with handling fees, which in general are at margins lower than those of our normal core business. In accordance with industry practice and generally accepted accounting principles, all such costs and fees are included in revenue. The material purchases and the use of subcontractor services can vary significantly from project to project; therefore, changes in revenue and gross profit, SG&A expense and operating income as a percentage of revenue may not be indicative of the Company’s core business trends.

Segment operating SG&A expense includes management and staff compensation, office costs such as rents and utilities, depreciation, amortization, travel, and other expenses generally unrelated to specific client contracts, but directly related to the support of a segment’s operations. Corporate SG&A expenses include finance, accounting, human resources, business development, legal and information technology which are unrelated to specific projects or segments but which are incurred to support the Company’s activities.

Comparison of the three months ended September 26, 2020 versus the three months ended September 28, 2019

The following table, for the three months ended September 26, 2020 versus the three months ended September 28, 2019, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

Operations Data	EPCM	Automation	Corporate	Consolidated
Three months ended September 26, 2020:
Revenue	$8,016	$7,713	$—	$15,729	100%
Gross profit	754	390	—	1,144
Gross Profit Margin	9.4%	5.1%		7.3%
SG&A	574	417	1,183	2,174	13.8%
Operating income (loss)	180	(27)	(1,183)	(1,030)	(6.5)%
Other income, net				4
Interest expense, net				(62)
Tax expense				(22)
Net loss				$(1,110)	(7.1)%
Basic and diluted loss per share				$(0.04)

Three months ended September 28, 2019:
Revenue	$4,256	$9,718	$—	$13,974	100%
Gross profit	75	1,600	—	1,675
Gross Profit Margin	1.8%	16.5%		12.0%
SG&A	651	427	1,293	2,371	17.0%
Operating income (loss)	(576)	1,173	(1,293)	(696)	(5.0)%
Other income, net				7
Interest expense, net				(5)
Tax expense				(22)
Net loss				$(716)	(5.1)%
Basic and diluted loss per share				$(0.03)

Increase (Decrease) in Operating Results:
Revenue	$3,760	$(2,005)	$—	$1,755	12.6%
Gross profit	679	(1,210)	—	(531)
SG&A	(77)	(10)	(110)	(197)	(8.3)%
Operating income (loss)	756	(1,200)	110	(334)	48.0%
Other income, net				(3)
Interest expense, net				(57)
Tax expense				—
Net loss				$(394)	55.0%
Basic and diluted loss per share				$(0.01)

Comparison of the nine months ended September 26, 2020 versus the nine months ended September 28, 2019

The following table, for the nine months ended September 26, 2020 versus the nine months ended September 28, 2019, provides relevant financial data that is derived from our consolidated statements of operations (amounts in thousands except per share data).

Operations Data	EPCM	Automation	Corporate	Consolidated
Nine months ended September 26, 2020:
Revenue	$19,771	$33,100	$—	$52,871	100%
Gross profit	1,677	5,180	—	6,857
Gross Profit Margin	8.5%	15.6%		13.0%
SG&A	1,852	1,121	3,648	6,621	12.5%
Operating income (loss)	(175)	4,059	(3,648)	236	0.4%
Other income, net				6
Interest expense, net				(103)
Tax expense				(80)
Net income				$59	0.1%
Basic and diluted income per share				$0.00

Nine months ended September 28, 2019:
Revenue	$15,548	$24,210	$—	$39,758	100%
Gross profit	1,574	3,381	—	4,955
Gross Profit Margin	10.1%	14.0%		12.5%
SG&A	1,826	1,246	4,053	7,125	17.9%
Operating income (loss)	(252)	2,135	(4,053)	(2,170)	(5.5)%
Other income, net				48
Interest expense, net				(12)
Tax expense				(73)
Net loss				$(2,207)	(5.6)%
Basic and diluted loss per share				$(0.08)

Increase (Decrease) in Operating Results:
Revenue	$4,223	$8,890	$—	$13,113	33.0%
Gross profit	103	1,799	—	1,902
SG&A	26	(125)	(405)	(504)	(7.1)%
Operating income (loss)	77	1,924	405	2,406	(110.9)%
Other income, net				(42)
Interest expense, net				(91)
Tax expense				(7)
Net income				$2,266	(102.7)%
Basic and diluted income per share				$0.08

Revenue – Revenue increased $1.7 million to $15.7 million from $14.0 million, or an increase of 12.6%, for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019. Revenue from the EPCM segment increased $3.8 million to $8.0 million from $4.2 million, or an increase of 88.3%, for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019. The increase is primarily due to the progress on two large projects during the period partially offset by the completion of several projects with no subsequent renewals in 2020, including a project cancellation due to COVID-19. Revenue from the Automation segment decreased $2.0 million to $7.7 million from $9.7 million, or a decrease of 20.6%, for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019. This decrease is primarily due to projects that ended without subsequent renewals in addition to delays in government projects due to base closures and travel restrictions imposed by the U.S. Government as a result of COVID-19.

Revenue increased $13.1 million to $52.9 million from $39.8 million, or an increase of 33.0%, for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019. Revenue from the EPCM segment increased $4.2 million to $19.8 million from $15.6 million, or an increase of 27.2%, for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019. The increase is primarily due to the progress on a large project during the first three quarters of 2020 partially offset by the completion of several projects that were not renewed. Revenue from the Automation segment increased $8.9 million to $33.1 million from $24.2 million, or an increase of 36.7%, for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019. This increase is primarily due to two projects that have increased in scope during the first two quarters of 2020 partially offset by delays in government projects due to base closures and travel restrictions imposed by the U.S. Government as a result of COVID-19, and Automation projects that were not renewed or replaced due to the uncertainty from the COVID-19 pandemic.

Gross Profit – Gross profit margin decreased 4.7% to 7.3% from 12.0% for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019. Gross profit for the EPCM segment increased $0.7 million to $0.8 million from $0.1 million and its gross profit margin increased 7.6% to 9.4% from 1.8% for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019. The increase in gross profit margin is primarily attributable to one large project that began in 2020 and is expected to be competed in 2021, partially offset by costs associated with underutilized staffing at one of our locations as projects were completed without subsequent renewals during the first three quarters of 2020 including a project cancellation due to COVID-19 and supply purchases for our employees to adhere to COVID-19 safe work practices. Gross profit for the Automation segment decreased $1.2 million to $0.4 million from $1.6 million and its gross profit margin decreased 11.4% to 5.1% from 16.5% for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019, primarily due to inefficiencies on one of our large projects in addition to delays caused from COVID-19 restrictions prompting employees to work remotely, supply purchases for our employees to adhere to COVID-19 safe work practices, and delays in government projects due to base closures and travel restrictions imposed by the U.S. Government as a result of COVID-19.

Gross profit margin increased 0.5% to 13.0% from 12.5% for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019. Gross profit for the EPCM segment increased $0.1 million to $1.7 million from $1.6 million and its gross profit margin decreased 1.6% to 8.5% from 10.1% for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019. The decrease in gross profit margin is primarily attributable to costs associated with underutilized staffing at one of our locations as projects were completed without subsequent renewals during the first three quarters of 2020, including a project cancellation due to COVID-19 and supply purchases for our employees to adhere to COVID-19 safe work practices partially offset by one large project that began in 2020 and is expected to be competed in 2021. Gross profit for the Automation segment increased $1.8 million to $5.2 million from $3.4 million and its gross profit margin increased 1.6% to 15.6% from 14.0% for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019, primarily due to increased utilization of personnel on a project during the first three months of 2020 partially offset by delays in government projects due to COVID-19 base closures and travel restrictions, and Automation projects that were not renewed or replaced due to the uncertainty from the COVID-19 pandemic.

Selling, General and Administrative Expense – SG&A expenses decreased by $0.2 million for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019 primarily due to the decreases in salary costs and travel costs due to COVID-19 restrictions, legal services costs, and facility costs.

SG&A expenses decreased by $0.5 million for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019 primarily due to the decreases in salary costs and travel costs due to COVID-19 restrictions, legal services costs, and facility costs.

Other Income (Expense), Net – Other income, net of expense, decreased $3 thousand for the three months ended September 26, 2020 as compared to the three months ended September 28, 2019 and $42 thousand for the nine months ended September 26, 2020 as compared to the nine months ended September 28, 2019 primarily due to rental income received in 2019 with no comparable occurrence in 2020.

Interest Expense, net – Interest expense is incurred primarily in connection with the Revolving Credit Facility and on the PPP Loan. Our interest expense increased to $62 thousand for the three months ended September 26, 2020 from $5 thousand for the three months ended September 28, 2019. PPP Loan interest was $12 thousand for the three months ended September 26, 2020 which may be forgiven as allowed by the PPP.

Our interest expense increased to $0.1 million for the nine months ended September 26, 2020 from $12 thousand for the nine months ended September 28, 2019. PPP Loan interest was $23 thousand for the nine months ended September 26, 2020 which may be forgiven as allowed by the PPP.

Tax Expense – We recorded income tax expense of $22 thousand for the three months ended September 26, 2020 as compared to income tax expense of $22 thousand for the three months ended September 28, 2019.

We recorded income tax expense of $80 thousand for the nine months ended September 26, 2020 as compared to income tax expense of $73 thousand for the nine months ended September 28, 2019.

Net Income (Loss) – Net loss for the three months ended September 26, 2020 was $1.1 million, or a $0.4 million increase from a net loss of $0.7 million for the three months ended September 28, 2019, primarily from project delays and inefficiencies due to the COVID-19 pandemic partially offset by higher margin projects from our EPCM segment.

Net income for the nine months ended September 26, 2020 was $0.1 million, or a $2.3 million increase from a net loss of $2.2 million for the nine months ended September 28, 2019, primarily as a result of our increase in revenue and higher margin projects from our Automation segment, increase in projects from our EPCM segment, and decrease in SG&A expense year-over-year, partially offset by project delays and inefficiencies due to the COVID-19 pandemic.

Liquidity and Capital Resources

Overview

The Company defines liquidity as its ability to pay its liabilities as they become due, fund business operations and meet monetary contractual obligations. Our primary sources of liquidity are cash on hand, internally generated funds, and borrowings under the PPP Loan and the Revolving Credit Facility. We had cash of approximately $12.7 million at September 26, 2020 and $8.3 million at December 28, 2019. Our working capital as of September 26, 2020 was $15.1 million versus $11.3 million as of December 28, 2019. On April 13, 2020, we obtained the PPP Loan, which was a significant cash injection for us. In addition, on May 21, 2020, we entered into the Revolving Credit Facility pursuant to which the Lender agreed to extend credit of up to $6.0 million, subject to a credit limit. As of September 26, 2020, the credit limit under the Revolving Credit Facility was $2.5 million and outstanding borrowings were $1.5 million, which yields enough interest to cover our minimum monthly interest charge. As of September 26, 2020, we were in compliance with all of the covenants under the PPP Loan and Revolving Credit Facility. For additional information on the PPP Loan and Revolving Credit Facility, see “Note 5 – Debt” to our financial statements included in Part I of this Form 10-Q. We believe our cash on hand, internally generated funds and availability under the Revolving Credit Facility along with other working capital will be sufficient to fund our current operations and expected activity for the next twelve months.

Cash and the availability of cash could be materially restricted if (1) outstanding invoices 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 awarded projects that require a significant amount of cash to fund other components of working capital. If any such event occurs, we would be forced to consider alternative financing options.

Cash Flows from Operating Activities

Operating activities used $1.7 million of cash for the nine months ended September 26, 2020 and generated $0.3 million of cash for the nine months ended September 28, 2019. The primary drivers of our cash used by operations for the nine months ended September 26, 2020 were an increase in contract assets net of contract liabilities of $1.9 million, a decrease in trade payables of $0.2 million, an increase in trade receivables of $1.3 million, and an increase in income taxes payable of $0.1 million, partially offset by our operating income of $0.1 million, a decrease in other current assets of $0.6 million, an increase in accrued compensation liability of $0.9 million, and $0.2 million of cash used by an increase in share-based compensation.

The primary drivers of our cash provided by operations for the nine months ended September 28, 2019 were decreases of contract assets net of contract liabilities of $0.7 million, and a decrease in trade receivables of $2.8 million, offset by our operating loss before non-cash expenses of $2.2 million, and cash provided by an increase in other components of working capital of $0.5 million.

Cash Flows from Investing Activities

Investing activities used cash of $228 thousand for the nine months ended September 26, 2020 and $167 thousand for the nine months ended September 28, 2019 primarily for the purchase of property and equipment.

Cash Flows from Financing Activities

Financing activities provided cash of $6.3 million for the nine months ended September 26, 2020 primarily due to the proceeds from the PPP Loan and Revolving Credit Facility partially offset by the interest incurred on our finance leases.

Financing activities used cash of $62 thousand for the nine months ended September 28, 2019 primarily for the purchase of common stock, which used $61 thousand.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 26, 2020, as required by Rule 13a-15 of the Exchange Act. Based on the evaluation described above, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 26, 2020, our disclosure controls and procedures were effective insofar as they are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No changes in our internal control over financial reporting occurred during the three months ended September 26, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, ENGlobal or one or more of its subsidiaries may be involved in various legal proceedings or may be subject to claims that arise in the ordinary course of business alleging, among other things, claims of breach of contract or negligence in connection with the performance or delivery of goods and/or services. The outcome of any such claims or proceedings cannot be predicted with certainty. As of the date of this filing, management is not aware of any such claims against the Company or any subsidiary business entity.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 28, 2019, which outline factors that could materially affect our business, financial condition or future results, and the additional risk factors below. These risks are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial conditions or operating results.

The COVID–19 pandemic could 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 spread of the COVID–19 coronavirus has caused severe disruptions in the worldwide economy, including the global demand for oil and natural gas. In response, companies within the energy industry (including many of our customers) have announced capital spending cuts which, in turn, may result in a decrease in new project awards or adjustments, reductions, suspensions, cancellations or payment defaults with respect to existing project awards. The continued spread of COVID–19 may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID–19 in our market areas. The continued spread of COVID–19 could also negatively impact the availability of our key personnel necessary to conduct our business as well as the business and operations of third party service providers who perform critical services for our business. For example, in June 2020 we temporarily closed one of our operational facilities for one week in response to a potential COVID-19 exposure. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the impact on our business, financial condition and results of operations remains uncertain and difficult to predict. If COVID–19 continues to spread or if the response to contain the COVID-19 pandemic is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.

Our backlog is declining due to the COVID-19 pandemic and is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future revenue or earnings. While our backlog has not been materially impacted by the COVID-19 pandemic in terms of project cancellations, we have not been successful in replacing our backlog as quickly as it has been converted to revenues due to inefficiencies and complications resulting from many of our clients’ remote working conditions combined with the uncertainty of new project necessity and funding caused by COVID-19 related disruptions that have led to delays in project awards. Further, the COVID-19 pandemic has affected our ability to make business development contacts with customers. As a result, our backlog has decreased by approximately $27.4 million from $59.2 million as of December 28, 2019 to $31.8 million as of September 26, 2020. We expect the majority of our backlog to be completed by 2021. While we believe our backlog is sufficient to keep a significant portion of our workforce productive for the balance of this year, it may not be at our current operating levels. We cannot assure investors that we will be successful in replacing our backlog as quickly as it has been converted to revenues, which will reduce future revenue and profits and impact our financial performance. In addition, we cannot assure investors that the revenue projected in our backlog will be realized or, if realized, will result in profits. Projects currently in our backlog may be canceled or may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, project terminations, suspensions or reductions in scope occur from time to time with respect to contracts reflected in our backlog, reducing the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog in addition to the revenue and profits that we actually earn. The potential for project cancellations, terminations, suspensions or reductions in scope and adjustments to our backlog are exacerbated by economic conditions, particularly in the energy industry which is experiencing a significant decline in oil prices since the beginning of 2020 due to concerns about the COVID–19 pandemic and its impact on the worldwide economy and global demand for oil. We are unable to predict when market conditions may improve and worsening overall market conditions could result in further declines in our backlog.

If we are unable to collect our receivables, our results of operations and cash flows could be adversely affected. Our business depends on our ability to successfully obtain payment from our clients of the amounts they owe us for work performed and materials supplied. In the ordinary course of business, we extend unsecured credit to our customers. We may also agree to allow our customers to defer payment on projects until certain milestones have been met or until the projects are substantially completed, and customers typically withhold some portion of amounts due to us as retainage. As of September 26, 2020, we had three projects that had $1.6 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 September 26, 2020, we had a total of approximately $6.4 million in debt from the PPP Loan and the Revolving Credit Facility. We may incur additional debt in order to fund our operational activities. A higher level of indebtedness increases the risk that our financial flexibility may deteriorate. Our ability to meet our debt obligations and service our debt depends on future performance. General economic conditions, commodity prices, and financial, business and other factors may affect our operations and our future performance. Many of these factors are beyond our control and we may not be able to generate sufficient cash flow to pay the debt, and future working capital, borrowings and equity financing may not be available to pay or refinance such debt.

Our loan under the Paycheck Protection Program may not be forgiven in full. On April 13, 2020, we obtained the PPP Loan pursuant to the PPP under the CARES Act. The United States Small Business Administration administers PPP loans and may partially or fully forgive the PPP Loan if the proceeds are used for covered payroll, rent and utility costs incurred during the 24-week covered period that commenced on the date of funding and if at least 60% of the proceeds are used for covered payroll costs. Although the Company currently believes it may be able to seek full PPP Loan forgiveness, no assurance can be provided that we will be eligible for and obtain forgiveness of all or a portion of the PPP Loan.

Our common stock may be delisted from NASDAQ, which may make it more difficult for you to sell your shares. On September 28, 2020, we received written notice from The NASDAQ Stock Market (“NASDAQ”) indicating that we are not in compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market, as set forth in Listing Rule 5550(a)(2). In accordance with Listing Rule 5810(c)(3)(A), we have a period of 180 calendar days, or until March 29, 2021, to regain compliance with the minimum bid price requirement. 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 during this 180-day period.

If we are not in compliance with the minimum bid price requirement by March 29, 2021, 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 The NASDAQ Capital Market, except 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.

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. Delisting of our common stock by NASDAQ would adversely affect the market price and liquidity of our common stock, your ability to sell your shares of our common stock and our ability to raise capital.

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

The following table sets forth certain information with respect to repurchases of our common stock for the third quarter of 2020:

Period	Total Number of SharesPurchased	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)
June 28, 2020 to July 25, 2020	—	—	—	$—
July 26, 2020 to August 29, 2020	—	—	—	$—
August 30, 2020 to September 26, 2020	—	—	—	$—
Total	—	—	1,290,460	$425,589

(1)

On April 21, 2015, the Company announced that its Board of Directors had authorized the repurchase of up to $2.0 million of the Company’s common stock from time to time through open market or privately negotiated transactions, based on prevailing market conditions. The Company is not obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase program, which may be suspended, discontinued or reinstated at any time. The stock repurchase program was suspended on May 16, 2017 and was reinstated on December 19, 2018. As of September 26, 2020, the Company had purchased and retired 1,290,460 shares at an aggregate cost of $1.6 million under this repurchase program. Management does not intend to repurchase any shares in the near future.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

		Incorporated by Reference to:
Exhibit No.	Description	Form or Schedule	Exhibit No.	Filing Date with SEC	SEC File Number

3.1	Restated Articles of Incorporation of Registrant dated August 8, 2002	10-Q	3.1	11/14/2002	001-14217

3.2	Amendment to the Restated Articles of Incorporation of the Registrant, filed with the Nevada Secretary of State on June 2, 2006	8-A12B	3.1	12/17/2007	001-14217

3.3	Second Amended and Restated Bylaws of Registrant dated April 14, 2016	8-K	3.1	4/15/2016	001-14217

*31.1	Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the Third Quarter 2019

*31.2	Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the Third Quarter 2019

**32.1	Certification Pursuant to Rule 13a – 14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for the Third Quarter 2019

*101.ins	XBRL instance document

*101.sch	XBRL taxonomy extension schema document

*101.cal	XBRL taxonomy extension calculation linkbase document

*101.def	XBRL taxonomy extension definition linkbase document

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* Filed herewith

** Furnished herewith

SIGNATURE

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

Dated: November 5, 2020
	ENGlobal Corporation

	By:	/s/ Mark A. Hess
		Mark A. Hess
		Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)

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