NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - ORGANIZATION AND BASIS OF PRESENTATION
Organization
and Operations
–
ENGlobal Corporation is a Nevada corporation formed in 1994. Unless the context requires otherwise,
references to “we”, “us”, “our”, “the Company” or “ENGlobal” are intended
to mean the consolidated business and operations of ENGlobal Corporation. Our business operations consist of providing engineered
modular solutions and professional services related to design, assembly, procurement, maintenance, environmental and other governmental
compliance and construction management, primarily with respect to energy sector infrastructure facilities throughout the United
States of America (“U.S.”). Please see “Note 12 - 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 29, 2018 and December 30, 2017, and the results of our operations, cash flows and changes in
stockholders’ equity for the 52 week period ended December 29, 2018 and for the 52 week period ended December 30, 2017.
They are prepared in accordance with accounting principles generally accepted in the U.S. Certain amounts for prior periods have
been reclassified to conform to the current presentation. In preparing financial statements, management makes informed judgments
and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect
the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management reviews its estimates,
including those related to percentage-of-completion contracts in progress, litigation, income taxes, impairment of long-lived
assets and fair values. Changes in facts and circumstances or discovery of new information may result in revised estimates. Actual
results could differ from these estimates.
NOTE
2 - ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS
Consolidation
Policy
–
Our consolidated financial statements include our accounts and those of our wholly-owned subsidiaries.
Fair
Value Measurements
–
Fair value is defined as the amount that would be received for the sale of an asset or paid
for the transfer of a liability in an orderly transaction between unrelated third party market participants at the measurement
date. In determination of fair value measurements for assets and liabilities we consider the principal, or most advantageous market,
and assumptions that market participants would use when pricing the asset or liability.
Cash
and cash equivalents
–
Cash and cash equivalents include all cash on hand, demand deposits and investments with
original maturities of three months or less. We consider cash equivalents to include short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. We have $10
thousand in cash in foreign banks as of December 29, 2018.
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 relatively few 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. For the year ended December 29, 2018, three customers
provided more than 10% each of our consolidated operating revenues (20.1%, 14.7% and 10.1%). Two customers provided more than
10% each of our consolidated operating revenues for the year ended December 30, 2017 (22.5% and 10.9%). Amounts included in trade
receivables related to these customers totaled $1.3 million, $0.6 million and $1.3 million, respectively, at December 29, 2018
and $0.7 million and zero at December 30, 2017.
We
extend credit to customers in the normal course of business. We have established various procedures to manage our credit exposure,
including initial credit approvals, credit limits and terms, letters of credit, and occasionally through rights of offset. We
also use prepayments and guarantees to limit credit risk to ensure that our established credit criteria are met. Our most significant
exposure to credit risks relates to situations under which we provide services early in the life of a project that is dependent
on financing. Risks increase in times of general economic downturns and under conditions that threaten project feasibility.
Property
and Equipment
–
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets. The estimated service lives of our asset
groups are as follows:
Asset Group
|
|
|
Years
|
|
Shop equipment
|
|
|
5
– 10
|
|
Furniture and fixtures
|
|
|
5 – 7
|
|
Computer equipment; Autos and trucks
|
|
|
3 – 5
|
|
Software
|
|
|
3 – 5
|
|
Leasehold
improvements are amortized over the 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.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.
The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical
purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is
measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard
also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This
standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with
early adoption permitted for impairment tests performed after January 1, 2017. The Company early adopted ASU 2017-04 on December
29, 2018, the last day of its fiscal 2018 year.
The
Company compares its fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment
loss as required by ASU 2017-04. Fair value was determined by applying a historical earnings multiple times the cash flow of the
operating unit after allocation of certain corporate overhead.
The
Company completed its annual goodwill impairment test as of December 29, 2018. Revenues and operating income for the Automation
operating unit were improving through the first three quarters of 2018, however, there were unforeseen costs in the fourth quarter
that negatively impacted the Statement of operations such that the Automation reporting unit operating income was lower for fiscal
2018 than for fiscal 2017, the last period tested. Additionally, the calculation of fair value demonstrated that the fair value
did not support the current carrying value. As a result of this testing, the Company recognized an impairment of its Automation
reporting unit goodwill of $2.1 million.
Impairment
of Long-Lived Assets
–
We review property and equipment for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The recoverability of long-lived assets is measured by
comparison the future undiscounted cash flows expected to result from the use and eventual disposition of the asset to the carrying
value of the asset. Estimates of expected future cash flows represent management’s best estimate based on reasonable and
supportable assumptions. If the carrying amount is not recoverable, an impairment loss is measured as the excess of the asset’s
carrying value over its fair value. We assess the fair value of long-lived assets using commonly accepted techniques, and may
use more than one method, including, but not limited to, recent third party comparable sales, internally developed discounted
cash flow analysis and analysis from outside advisors. During 2018 and 2017 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. Revenue is not recognized over these limits until authorization by
the client has been received.
A
majority of sales of fabrication and assembled systems are under fixed-price contracts. We account for a contract when it has
approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract
has commercial substance and collectability of consideration is probable.
We
generally recognize revenue over time as we perform because of continuous transfer of control to the customer. Our customer typically
controls the work in process as evidenced either by contractual termination clauses or by our rights to payment for work performed
to date plus a reasonable profit to deliver products or services that do not have an alternative use to the Company. The selection
of the method to measure progress towards completion requires judgment and is based on the nature of the products or service to
be provided, which measures the ratio of costs incurred to date to the total estimated costs at completion of the performance
obligation. We generally use the cost-to-cost method on the labor portion of a project for revenue recognition to measure progress
of our contracts because it best depicts the transfer of control to the customer which occurs as we consume the materials on the
contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.
Under
the typical payment terms of our fixed-price contracts, the customer pays us progress payments. These progress payments are based
on quantifiable measures of performance or on the achievement of specified events or milestones. The customer may retain a small
portion of the contract price until completion of the contract. Revenue recognized in excess of billings is recorded as a contract
asset on the balance sheet. Amounts billed and due from our customers are classified as receivables on the balance sheet. The
portion of the payments retained by the customer until final contract settlement is not considered a significant financing component
because the intent is to protect the customer should we fail to adequately complete some or all of our obligations under the contract.
For some contracts we may receive advance payments from the customer. We record a liability for these advance payments in contract
liabilities on the balance sheet. The advance payment typically is not considered a significant financing component because it
is used to meet working capital demand that can be higher in the early stages of a contract and to protect us from the other party
failing to adequately complete some or all of its obligations under the contract.
To
determine proper revenue recognition for contracts, we evaluate whether two or more contracts should be combined and accounted
for as one single performance obligation or whether a single contract should be accounted for as more than one performance obligation.
This evaluation requires significant judgment and the decision to combine a group of contracts or separate a single contract into
multiple performance obligations could change the amount of revenue and profit recorded in a given period. For most of our contracts,
we provide a significant service of integrating a complex set of tasks and components into a single project. Hence, the entire
contract is accounted for as one performance obligation. Less commonly, we may provide distinct goods or services within a contract
in which case we separate the contract into more than one performance obligation. If a contract is separated into more than one
performance obligation, we allocate the total transaction price to each performance obligation in an amount based on the estimated
relative standalone selling price of the promised goods or services underlying each performance obligation and use the expected
cost plus margin approach to estimate the standalone selling price of each performance obligation. Due to the nature of the work
required to be performed on many of our performance obligations, the estimation of total revenue and cost at completion is complex,
subject to variables and requires significant judgment. We estimate variable consideration at the most likely amount to which
we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant
reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are
based largely on an assessment of our anticipated performance and all information (historical, current and forecasted) that is
reasonably available to us.
Contracts
are often modified to account for changes in contract specifications and requirements. We consider contract modifications to exist
when the modification either creates new or changes the existing enforceable rights and obligations. Most of our contract modifications
are for goods or services that are not distinct from the existing contract due to the significant integration service provided
in the context of the contract and are accounted for as if they were part of that existing contract. The effect of a contract
modification on the transaction price and our measure of progress for the performance obligation to which it relates, is recognized
as an adjustment to revenue (either as an increase or a reduction of revenue) on a cumulative catch-up basis.
We
have a standard, monthly process in which management reviews the progress and execution of our performance obligations. As part
of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress
towards completion and the related program schedule, identified risks and opportunities and the related changes in estimates of
revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the
schedule, technical requirements, and other contractual requirements. Management must make assumptions and estimates regarding
labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of
time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from our
customer and overhead cost rates, among other variables.
Based
on this analysis, any adjustments to revenue, operating costs and the related impact to operating income are recognized as necessary
in the period they become known. These adjustments may result from positive performance and may result in an increase in operating
income during the performance of individual performance obligations if we determine we will be successful in mitigating risks
surrounding the technical, schedule and cost aspects of those performance obligations or realizing related opportunities. When
estimates of total costs to be incurred exceed total estimates to be earned, a provision for the entire loss on the performance
obligation is recognized in the period the loss is recorded. 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 2018 or 2017
Income
Taxes
–
For years beginning January 1, 2018, the Tax Cuts and Jobs Act (the “Act”) includes significant
changes to the U.S. corporate income tax system including the reduction of the corporate tax rate from 35% to 21% and the repeal
of the corporate alternative minimum tax (“AMT”) providing full reimbursement of any AMT credit by 2021.
Under
the Act, for net operating loss carryforwards (“NOLs”) generated in tax year 2018 and forward, the 2 year carryback
is repealed and the carryforward is indefinite. However, the utilization of these post 2017 NOLs are limited to 80% of taxable
income. For NOLs incurred in tax year 2017 and prior, the limitation to 80% of taxable income does not apply, but the NOLs are
subject to expiration. At this time, it is not determinable if there will be sufficient taxable income available in future years
to utilize the NOLs generated prior to 2018.
Income
tax effects resulting from changes in tax laws are accounted for in accordance with Financial Accounting Standards Board (“FASB”)
ASC Topic 740.
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 2018.
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. All shares acquired during 2017 and 2018 were retired.
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.
Changes
in Accounting
-
In May 2014, the FASB issued ASU No. 2014-09
, Revenue From Contracts with Customers (Topic 606),
a comprehensive new revenue recognition standard that supersedes most of the existing revenue recognition guidance under U.S.
GAAP. The core principle of the new guidance is that a company should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange
for those goods or services. The standard creates a five step model that requires companies to exercise judgment when considering
the terms of a contract and all relevant facts and circumstances. The standard allows for several transition methods: (a) a full
retrospective adoption in which the standard is applied to all of the periods presented, or (b) a modified retrospective adoption
in which the standard is applied only to the most current period presented in the financial statements with a cumulative effect
adjustment reflected in retained earnings. The standard also requires expanded disclosures regarding the qualitative and quantitative
information of an entity’s nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. This new revenue recognition standard became effective for annual reporting periods beginning after December 15, 2017,
including interim periods within that reporting period. We adopted the new standard effective December 31, 2017 utilizing the
modified retrospective method. There was no cumulative-effect adjustment to retained earnings upon adoption of this standard.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments.
This amendment addresses how certain specified cash receipts and cash payments are presented in the statement
of cash flows. This guidance became effective for interim and annual reporting periods beginning after December 15, 2017. The
adoption of this standard had an immaterial impact to our consolidated statements of cash flows and related disclosures.
In
January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment.
The standard simplifies the subsequent measurement of goodwill by removing the requirement to perform a hypothetical
purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, goodwill impairment is
measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard
also clarifies the treatment of the income tax effect of tax-deductible goodwill when measuring goodwill impairment loss. This
standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with
early adoption permitted for impairment tests performed after January 1, 2017. The Company early adopted ASU 2017-04 on December
29, 2018, the last day of its fiscal 2018 year.
The
Company compares its fair value of a reporting unit and the carrying value of the reporting unit to measure goodwill impairment
loss as required by ASU 2017-04. Fair value was determined by applying a historical earnings multiple times the cash flow of the
operating unit after allocation of certain corporate overhead.
The
Company completed its annual goodwill impairment test as of December 29, 2018. Revenues and operating income for the Automation
operating unit were improving through the first three quarters of 2018, however, there were unforeseen costs in the fourth quarter
that negatively impacted the Statement of operations such that the Automation reporting unit operating income was lower for fiscal
2018 than for fiscal 2017, the last period tested. Additionally, the calculation of fair value demonstrated that the fair value
did not support the current carrying vaaaalue. As a result of this testing, the Company recognized an impairment of its Automation
reporting unit goodwill of $2.1 million.
New
Accounting Pronouncements Not Yet Adopted
– In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic
842)
, which amends the existing accounting standards for lease accounting, including requiring lessees to recognize most operating
leases on their balance sheets. This accounting guidance is eFffective for fiscal years, and interim periods within those years,
beginning after December 15, 2018, with early adoption permitted. ASU 2016-02 includes a number of optional practical expedients
as part of the transition guidance. We plan to elect the package of practical expedients permitted under the transition guidance,
which among other things, allows us to carry forward the historical lease classification. In July 2018, the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, which allows the option to use the effective date of the new leases standard
as the date of initial application on transition. We expect to apply this transition option at the effective date of December
30, 2018, without adjusting comparative periods and, if necessary, recognize a cumulative-effect adjustment to the opening balance
of retained earnings in the period of adoption. We have evaluated the changes from this new standard to our future financial reporting
and disclosures, and have designed, and implemented as of December 30, 2018, related processes and controls to address these changes.
We expect the standard will result in the recognition of right-of-use assets of $1.3 million and lease liabilities of $1.3 million
as of December 30, 2018, with no cumulative adjustment to retained earnings. We do not expect a material impact to the Company’s
Consolidated Statements of Operations or Cash Flows.
NOTE
3 - DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
The
following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated financial
statements (amounts in thousands):
|
|
2018
|
|
|
2017
|
|
Cash and cash equivalents
|
|
$
|
6,060
|
|
|
$
|
8,988
|
|
Restricted cash
|
|
|
—
|
|
|
|
660
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
6,060
|
|
|
$
|
9,648
|
|
Amounts
included in restricted cash represent those required to be set aside to collateralize a letter of credit required by a customer.
This letter of credit expired December 31, 2017.
The
components of trade receivables, net as of December 29, 2018 and December 30, 2017, are as follows (amounts in thousands):
|
|
2018
|
|
|
2017
|
|
Amounts billed
|
|
$
|
8,029
|
|
|
$
|
7,753
|
|
Amounts unbilled
|
|
|
2,368
|
|
|
|
1,985
|
|
Retainage
|
|
|
16
|
|
|
|
71
|
|
Less: Allowance for uncollectible accounts
|
|
|
(202
|
)
|
|
|
(695
|
)
|
Trade receivables, net
|
|
$
|
10,211
|
|
|
$
|
9,114
|
|
The
components of prepaid expense and other current assets are as follows as of December 29, 2018 and December 30, 2017 (amounts in
thousands):
|
|
2018
|
|
|
2017
|
|
Prepaid expenses
|
|
$
|
934
|
|
|
$
|
884
|
|
Tax receivable
|
|
|
69
|
|
|
|
—
|
|
Other receivables - employee
|
|
|
50
|
|
|
|
43
|
|
Note Receivable
|
|
|
43
|
|
|
|
67
|
|
Other current liabilities
|
|
$
|
1,096
|
|
|
$
|
994
|
|
The
components of other current liabilities are as follows as of December 29, 2018 and December 30, 2017 (amounts in thousands):
|
|
2018
|
|
|
2017
|
|
Accrual for known contingencies
|
|
$
|
194
|
|
|
$
|
472
|
|
Customer prepayments
|
|
|
78
|
|
|
|
37
|
|
Deferred rent
|
|
|
17
|
|
|
|
64
|
|
Current portion of capital leases
|
|
|
2
|
|
|
|
63
|
|
State income taxes payable
|
|
|
79
|
|
|
|
54
|
|
Insurance payable
|
|
|
370
|
|
|
|
378
|
|
Other current liabilities
|
|
$
|
740
|
|
|
$
|
1,068
|
|
Our
accrual for known contingencies includes litigation accruals, if any. See “Note 13 – Commitments and Contingencies”
for further information.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consist of the following at December 29, 2018 and December 30, 2017 (amounts in thousands):
|
|
2018
|
|
|
2017
|
|
Computer equipment and software
|
|
$
|
3,767
|
|
|
$
|
3,984
|
|
Shop equipment
|
|
|
1,270
|
|
|
|
1,214
|
|
Furniture and fixtures
|
|
|
290
|
|
|
|
290
|
|
Building and leasehold improvements
|
|
|
2,182
|
|
|
|
2,167
|
|
Autos and trucks
|
|
|
87
|
|
|
|
107
|
|
|
|
$
|
7,596
|
|
|
$
|
7,762
|
|
Accumulated depreciation and amortization
|
|
|
(6,919
|
)
|
|
|
(6,735
|
)
|
Property and equipment, net
|
|
$
|
677
|
|
|
$
|
1,027
|
|
Depreciation
expense was $0.5 million and $0.9 million for the years ended December 29, 2018 and December 30, 2017, respectively.
NOTE
5 - CONTRACTS
Costs,
estimated earnings and billings on uncompleted contracts consist of the following at December 29, 2018 and December 30, 2017 (amounts
in thousands):
|
|
2018
|
|
|
2017
|
|
Costs incurred on uncompleted contracts
|
|
$
|
34,800
|
|
|
$
|
57,916
|
|
Estimated earnings on uncompleted contracts
|
|
|
6,921
|
|
|
|
15,423
|
|
Earned revenues
|
|
|
41,721
|
|
|
|
73,339
|
|
Less: billings to date
|
|
|
39,150
|
|
|
|
69,400
|
|
Net costs in excess of billings on uncompleted contracts
|
|
$
|
2,571
|
|
|
$
|
3,939
|
|
|
|
|
|
|
|
|
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
3,175
|
|
|
$
|
5,273
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
|
(604
|
)
|
|
|
(1,334
|
)
|
Net costs in excess of billings on uncompleted contracts
|
|
$
|
2,571
|
|
|
$
|
3,939
|
|
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 currently have $1.0 million in contingency amounts as of December 29, 2018 and December 30, 2017. 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 currently have $0.2 million in deferred revenue recognition as of December 29, 2018 compared
to $0.4 million as of December 30, 2017. This deferred revenue represents work on not to exceed contracts that has been performed
but has not been billed nor been booked 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
6 - OPERATING LEASES
We
lease equipment and office space under long-term operating lease agreements. The future minimum lease payments on leases (with
initial or remaining non-cancelable terms in excess of one year) as of December 29, 2018 are as follows (amounts in thousands):
Years Ending
|
|
Amount
|
|
December 28, 2019
|
|
|
1,381
|
|
December 26, 2020
|
|
|
446
|
|
December 25, 2021
|
|
|
397
|
|
December 31, 2022 and after
|
|
|
64
|
|
Total minimum lease payments
|
|
$
|
2,288
|
|
Rent
expense was $2.0 million for the year ended December 29, 2018 and $2.3 million for the year ended December 30, 2017. Certain of
our lease agreements may include items such as abated lease payments, capital improvement funding, step rent provisions and escalation
clauses that affect the lease payment schedule and do not qualify as contingent rentals. These items have been included in the
minimum lease payment amount on a straight-line basis over the minimum lease term. Any lease payments that are dependent on a
factor related to the future use of the property have been excluded from the minimum lease payment amount and are recognized as
incurred.
NOTE
7 - EMPLOYEE BENEFIT PLANS
ENGlobal
sponsors a 401(k) profit sharing 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. For active participants in 2018 and 2017, we matched 33.3% of elective deferrals up to 6%, for a maximum of 2% of
employee’s compensation. We made contributions totaling $0.3 million to the plan for each of the years ended December 29,
2018 and December 30, 2017. The match was suspended beginning December 30, 2018.
NOTE
8 - STOCK COMPENSATION PLANS
The
Company’s 2009 Equity Incentive Plan, as amended (the “Equity Plan,” or the “Plan”) currently provides
for the aggregate issuance of up to 2,580,000 shares of common stock. The Equity 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 29, 2018, 554,671 shares of common stock are available
to be issued pursuant to the Equity Plan.
We
recognized non-cash stock-based compensation expense related to our Equity Plan of $0.1 million and $0.4 million for the fiscal
years ended December 29, 2018 and December 30, 2017, respectively.
Restricted
Stock Awards
–
Restricted stock awards granted to 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 30
th
of the year of grant, so long as the grantee continues to serve as a director of the Company
as of each vesting date; however, the vesting of these shares has been delayed. 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. Shares are generally issued from new shares at the time of grant. The grant-date fair value of restricted
stock grants is determined using the closing quoted market price on the grant date.
The
following is a summary of the status of our restricted stock awards and of changes in restricted stock outstanding for the year
ended December 29, 2018:
|
|
Number of
unvested restricted
shares
|
|
|
Weighted-average grant-date fair
value
|
|
Outstanding at December 30, 2017
|
|
|
399,949
|
|
|
$
|
0.97
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(106,756
|
)
|
|
|
1.42
|
|
Forfeited
|
|
|
(5,063
|
)
|
|
|
1.98
|
|
Outstanding at December 29, 2018
|
|
|
288,130
|
|
|
$
|
0.96
|
|
As
of December 29, 2018, 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 1.34 years. During 2018, the Company did not grant any restricted
stock awards. During 2017, the Company granted the following restricted stock awards.
Date Issued
|
|
Issued to
|
|
Number of Shares
|
|
|
Market Price
|
|
|
Fair Value
|
|
August 10, 2017
|
|
Employees (6)
|
|
|
127,500
|
|
|
$
|
1.13
|
|
|
$
|
144,075
|
|
July 6, 2017
|
|
Consultant
|
|
|
176,000
|
|
|
$
|
1.28
|
|
|
$
|
225,280
|
|
June 16, 2017
|
|
Directors (3)
|
|
|
128,205
|
|
|
$
|
1.17
|
|
|
$
|
150,000
|
|
NOTE
9 - TREASURY STOCK
On
April 21, 2015, we announced that the Board of Directors had authorized the repurchase of up to $2.0 million of our common stock
from time to time through open market or privately negotiated transactions, based on prevailing market conditions. We are not
obligated to repurchase any dollar amount or specific number of shares of common stock under the repurchase program, which may
be suspended, discontinued or reinstated at any time. As of December 29, 2018, the Company had purchased and retired 1,212,773
shares for $1.5 million under this program of which 21,723 shares were purchased in the three months ended December 29, 2018 for
$15 thousand. The stock repurchase program was suspended from May 16, 2017 to December 19, 2018.
NOTE
10 - REDEEMABLE PREFERRED STOCK
We
are authorized to issue 2,000,000 shares of Preferred Stock, par value $0.001 per share (the “Preferred Stock”). The
Board of Directors has the authority to approve the issuance of all or any of these shares of the Preferred Stock in one or more
series, to determine the number of shares constituting any series and to determine any voting powers, conversion rights, dividend
rights and other designations, preferences, limitations, restrictions and rights relating to such shares without any further action
by the stockholders. While there are no current plans to issue the Preferred Stock, it was authorized in order to provide the
Company with flexibility to take advantage of contingencies such as favorable acquisition opportunities.
NOTE
11 - FEDERAL AND STATE INCOME TAXES
The
components of our income tax expense for the years ended December 29, 2018 and December 30, 2017 were as follows (amounts in thousands):
|
|
2018
|
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
(139
|
)
|
State
|
|
|
129
|
|
|
|
(15
|
)
|
Foreign
|
|
|
(19
|
)
|
|
|
33
|
|
Total current
|
|
|
110
|
|
|
|
(121
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(113
|
)
|
|
|
10,070
|
|
State
|
|
|
113
|
|
|
|
138
|
|
Total deferred
|
|
|
—
|
|
|
|
10,208
|
|
Total income tax expense
|
|
$
|
110
|
|
|
$
|
10,087
|
|
The
following is a reconciliation of expected income tax benefit to actual income tax expense for the years ended December 29, 2018
and December 30, 2017 (amounts in thousands):
|
|
2018
|
|
|
2017
|
|
Federal income tax (benefit) at statutory rate of 21%
|
|
$
|
(1,167
|
)
|
|
$
|
(2,160
|
)
|
State income tax, net of federal income tax effect
|
|
|
20
|
|
|
|
(90
|
)
|
Change of effective federal and state tax rate
|
|
|
—
|
|
|
|
3,927
|
|
Nondeductible expenses
|
|
|
213
|
|
|
|
14
|
|
Research and development credit
|
|
|
—
|
|
|
|
(68
|
)
|
Stock Compensation
|
|
|
—
|
|
|
|
344
|
|
Foreign Tax credit
|
|
|
19
|
|
|
|
—
|
|
Prior year adjustments and true-ups
|
|
|
169
|
|
|
|
(141
|
)
|
Change in valuation allowance
|
|
|
856
|
|
|
|
8,261
|
|
Total tax expense
|
|
$
|
110
|
|
|
$
|
10,087
|
|
The
components of the deferred tax asset (liability) consisted of the following at December 29, 2018 and December 30, 2017 (amounts
in thousands):
|
|
2018
|
|
|
2017
|
|
Noncurrent Deferred tax assets
|
|
|
|
|
|
|
|
|
Federal and state net operating loss carryforward
|
|
$
|
6,531
|
|
|
$
|
5,643
|
|
Tax credit carryforwards
|
|
|
1,971
|
|
|
|
2,085
|
|
Allowance for uncollectible accounts
|
|
|
46
|
|
|
|
159
|
|
Accruals not yet deductible for tax purposes
|
|
|
357
|
|
|
|
368
|
|
Goodwill
|
|
|
632
|
|
|
|
475
|
|
Depreciation
|
|
|
295
|
|
|
|
297
|
|
Total noncurrent deferred tax assets
|
|
|
9,832
|
|
|
|
9,027
|
|
Less: Valuation allowance
|
|
|
(9,710
|
)
|
|
|
(8,854
|
)
|
Total noncurrent deferred tax assets, net
|
|
$
|
122
|
|
|
$
|
173
|
|
Noncurrent deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(122
|
)
|
|
|
(173
|
)
|
Total noncurrent deferred tax liabilities
|
|
|
(122
|
)
|
|
|
(173
|
)
|
Net deferred tax assets/deferred tax Liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
We
account for uncertain tax positions in accordance with ASC 740. When uncertain tax positions exist, we recognize the tax benefit
of the tax positions to the extent that the benefit will more likely than not be realized. The determination as to whether the
tax benefit will more likely than not be realized is based upon technical merits of the tax positions as well as consideration
of the available facts and circumstances. We recognize interest and penalties related to unrecognized tax benefits in the provision
for income taxes. As of December 29, 2018 and December 30, 2017, we do not have any significant uncertain tax positions.
We
record a valuation allowance to reduce the carrying value of our deferred tax assets when it is more likely than not that a portion
or all of the deferred tax assets will expire before realization of the benefit or future deductibility is not probable. The ultimate
realization of the deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character
and in the related jurisdiction in the future. In evaluating our ability to recover our deferred tax assets, we consider the available
positive and negative evidence, including our past operating results, the existence of cumulative losses in the most recent years
and our forecast of future taxable income. In estimating future taxable income, we develop assumptions, including the amount of
pretax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.
These assumptions require significant judgment. During 2017, after evaluating all available evidence, we recorded a valuation
allowance on all net deferred tax assets.
For
the year ended December 29, 2018, we recognized a total income tax expense of $110 thousand on a pretax book loss of $5.6 million
compared to an income tax expense of $10.1 million on $6.2 million of pretax book loss for the year ended December 30, 2017. As
a result of permanent difference add-backs to taxable income related to meals, entertainment, fines and penalties, stock compensation,
and goodwill impairment, a decrease to the tax benefit in the amount of $213 thousand resulted in a decrease in the effective
tax rate of 3.83%. A research and development credit true-up of $68 thousand decreased the effective tax rate by 1.22%. A deferred
tax true-up of $121 thousand related to federal expense on State benefit and foreign tax credit true-up decreased the effective
tax rate by 2.17%. An increase of $855 thousand in the valuation allowance decreased the effective tax rate by 15.39%. State income
tax (net of Federal) expense in the amount of $20 thousand decreased the effective tax rate by 0.37% mainly due to Texas margins
tax. Foreign payable true-ups created an additional tax benefit of $19 thousand and increased the effective tax rate by 0.34%.
The foreign payable true-up offsets foreign tax credit in the amount of $19 thousand which creates a tax expense and decreases
the effective tax rate by 0.34%.
We
had a gross federal net operating loss carryforward at December 29, 2018 of approximately $27.8 million, which will begin to expire
starting 2032. At December 30, 2017, we had Alternative Minimum Tax (AMT) and federal research and development tax credit carryforwards
of approximately $0.1 and $1.1 million respectively, available to reduce future tax liabilities. The AMT credit is available to
use against regular tax liability and, in accordance with recent tax law reform, the credit will become refundable beginning in
2018. The research and development tax credit begins to expire starting in 2030. Foreign tax credits will expire beginning in
2025. Under pre-Tax Cuts and Jobs Act law, net operating losses were generally carried back 2 years and then carried forward 20
years. Taxpayers could elect to forego the carryback. Under the new law, for NOLs generated in tax year 2018 and forward, the
2 year carryback is repealed and the carryforward is indefinite. However, the utilization of 2018 generated NOLs are limited to
80% of taxable income. For NOLs incurred in tax year 2017 and prior, the limitation to 80% of taxable income does not apply, but
the NOLs are subject to expiration.
NOTE
12 - SEGMENT INFORMATION
Reporting
Segments
Our
segments are strategic business units that offer different services and products and therefore require different marketing and
management strategies. The operating performance is regularly reviewed with the operational leaders of the two segments, the chief
executive officer (“CEO”), the chief financial officer (“CFO”) and others. This group represents the chief
operating decision maker (“CODM”) for ENGlobal.
Our
corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate
expenses.
The
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 and the fabrication operations. The
Automation segment provides services related to the design, integration and implementation of process distributed control and
analyzer systems, advanced automation, information technology and electrical projects primarily to the upstream and downstream
sectors 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.
Sales,
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 29, 2018 and December
30, 2017 is as follows (amounts in thousands):
For the year ended
December 29, 2018:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
24,152
|
|
|
$
|
29,844
|
|
|
$
|
—
|
|
|
$
|
53,996
|
|
Operating income (loss)
|
|
|
1,141
|
|
|
|
(740
|
)
|
|
|
(5,584
|
)
|
|
|
(5,183
|
)
|
Depreciation and amortization
|
|
|
123
|
|
|
|
122
|
|
|
|
215
|
|
|
|
460
|
|
Tangible assets
|
|
|
4,792
|
|
|
|
9,811
|
|
|
|
6,964
|
|
|
|
21,567
|
|
Goodwill
|
|
|
—
|
|
|
|
720
|
|
|
|
—
|
|
|
|
720
|
|
Other intangible assets
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
Total assets
|
|
|
4,792
|
|
|
|
10,550
|
|
|
|
6,964
|
|
|
|
22,306
|
|
Capital expenditures
|
|
|
66
|
|
|
|
6
|
|
|
|
35
|
|
|
|
107
|
|
For the year ended
December 30, 2017:
|
|
EPCM
|
|
|
Automation
|
|
|
Corporate
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
22,595
|
|
|
$
|
33,170
|
|
|
$
|
—
|
|
|
$
|
55,765
|
|
Operating income (loss)
|
|
|
(1,786
|
)
|
|
|
2,162
|
|
|
|
(6,519
|
)
|
|
|
(6,143
|
)
|
Depreciation and amortization
|
|
|
85
|
|
|
|
272
|
|
|
|
613
|
|
|
|
970
|
|
Tangible assets
|
|
|
5,976
|
|
|
|
9,660
|
|
|
|
10,772
|
|
|
|
26,408
|
|
Goodwill
|
|
|
—
|
|
|
|
2,806
|
|
|
|
—
|
|
|
|
2,806
|
|
Other intangible assets
|
|
|
—
|
|
|
|
19
|
|
|
|
19
|
|
|
|
38
|
|
Total assets
|
|
|
5,976
|
|
|
|
12,485
|
|
|
|
10,791
|
|
|
|
29,252
|
|
Capital expenditures
|
|
|
490
|
|
|
|
46
|
|
|
|
173
|
|
|
|
709
|
|
Financial
Information by Geographic Area and Segments
Revenue
from our Caspian Pipeline Consortium Project in Russia and Kazakhstan contributed $4.6 million in revenues in our Automation segment
for the year ended December 30, 2017. The project was completed in 2017. Company assets, other than cash and trade receivables,
located in this region are insignificant.
NOTE
13 - 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, if any.
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.