[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| 77060-5914 | |
(Address of principal executive offices) | (Zip code) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, $0.001 par value | ENG | NASDAQ |
Large Accelerated Filer | [ ] | Accelerated Filer | [ ] | |
Non-Accelerated Filer | [X] | Smaller Reporting Company | [X] | |
Emerging growth company | [ ] |
Securities registered pursuant to Section 12(b)
Indicate the number ofregistrant had outstanding 27,413,626 shares outstanding of each of the issuer’s classes of common stock, as of the close of business on November 12, 2019.
JUNE 27, 2020
| ||
Part I. | 3 | |
Item 1. | 3 | |
3 | ||
4 | ||
5 | ||
6 | ||
7 | ||
Item 2. | ||
Item 3. | ||
24 | ||
Item 4. | ||
Part II. | 24 | |
Item 1. | 24 | |
Item 1A. | 24 | |
Item 2. | 26 | |
Item 3. | 26 | |
Item 4. | 26 | |
Item 5. | 26 | |
Item 6. | 27 | |
28 |
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||||
Operating revenues | $ | 13,974 | $ | 14,255 | $ | 39,758 | $ | 41,314 | ||||||||
Operating costs | 12,299 | 11,962 | 34,803 | 35,355 | ||||||||||||
Gross profit | 1,675 | 2,293 | 4,955 | 5,959 | ||||||||||||
Selling, general and administrative expenses | 2,371 | 2,483 | 7,125 | 7,935 | ||||||||||||
Operating loss | (696 | ) | (190 | ) | (2,170 | ) | (1,976 | ) | ||||||||
Other income (expense): | ||||||||||||||||
Other income (expense), net | 7 | 11 | 48 | (367 | ) | |||||||||||
Interest expense, net | (5 | ) | (1 | ) | (12 | ) | (14 | ) | ||||||||
Loss from operations before income taxes | (694 | ) | (180 | ) | (2,134 | ) | (2,357 | ) | ||||||||
Provision for federal and state income taxes | 22 | 17 | 73 | 31 | ||||||||||||
Net loss | (716 | ) | (197 | ) | (2,207 | ) | (2,388 | ) | ||||||||
Basic and diluted loss per common share: | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.08 | ) | $ | (0.09 | ) | ||||
Basic and diluted weighted average shares used in computing loss per share: | 27,410 | 27,509 | 27,417 | 27,511 |
For the Three Months Ended | For the Six Months Ended | |||
June 27, 2020 | June 29, 2019 | June 27, 2020 | June 29, 2019 | |
Operating revenues | $17,882 | $13,621 | $37,142 | $25,784 |
Operating costs | 15,429 | 11,679 | 31,429 | 22,504 |
Gross profit | 2,453 | 1,942 | 5,713 | 3,280 |
Selling, general and administrative expenses | 2,314 | 2,450 | 4,447 | 4,755 |
Operating profit (loss) | 139 | (508) | 1,266 | (1,475) |
Other income (expense): | ||||
Other income, net | 1 | 26 | 2 | 41 |
Interest expense, net | (36) | (4) | (41) | (6) |
Income (loss) from operations before income taxes | 104 | (486) | 1,227 | (1,440) |
Provision for federal and state income taxes | 36 | 31 | 58 | 51 |
Net income (loss) | 68 | (517) | 1,169 | (1,491) |
Basic and diluted income (loss) per common share: | $0.00 | $(0.02) | $0.04 | $(0.05) |
Basic and diluted weighted average shares used in computing income (loss) per share: | 27,413 | 27,408 | 27,413 | 27,420 |
September 28, 2019 | December 29, 2018 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 6,088 | $ | 6,060 | ||||
Trade receivables, net of allowances of $202 and $202 | 7,463 | 10,211 | ||||||
Prepaid expenses and other current assets | 184 | 1,096 | ||||||
Contract assets | 4,128 | 3,175 | ||||||
Total Current Assets | 17,863 | 20,542 | ||||||
Property and equipment, net | 878 | 677 | ||||||
Goodwill | 720 | 720 | ||||||
Other assets | ||||||||
Right of use asset | 2,377 | — | ||||||
Deposits and other assets | 300 | 367 | ||||||
Total Other Assets | 2,677 | 367 | ||||||
Total Assets | $ | 22,138 | $ | 22,306 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 2,944 | $ | 3,172 | ||||
Accrued compensation and benefits | 2,175 | 2,301 | ||||||
Current portion of leases | 994 | — | ||||||
Contract liabilities | 813 | 604 | ||||||
Other current liabilities | 293 | 740 | ||||||
Total Current Liabilities | 7,219 | 6,817 | ||||||
Long Term Leases | 1,652 | — | ||||||
Total Liabilities | 8,871 | 6,817 | ||||||
Commitments and Contingencies (Note 8) | ||||||||
Stockholders’ Equity: | ||||||||
Common stock - $0.001 par value;75,000,000 shares authorized; 27,413,626 and 27,487,594 shares issued and outstanding at September 28, 2019 and December 29, 2018, respectively | 27 | 27 | ||||||
Additional paid-in capital | 36,918 | 36,934 | ||||||
Accumulated deficit | (23,678 | ) | (21,472 | ) | ||||
Total Stockholders’ Equity | 13,267 | 15,489 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 22,138 | $ | 22,306 |
June 27, 2020 | December 28, 2019 | |
ASSETS | ||
Current Assets: | ||
Cash | $14,401 | $8,307 |
Trade receivables, net of allowances of $270 and $236 | 9,866 | 11,435 |
Prepaid expenses and other current assets | 391 | 889 |
Contract assets | 5,118 | 3,862 |
Total Current Assets | 29,776 | 24,493 |
Property and equipment, net | 1,192 | 1,033 |
Goodwill | 720 | 720 |
Other assets | ||
Right of use asset | 2,367 | 2,133 |
Deposits and other assets | 461 | 307 |
Total Other Assets | 2,828 | 2,440 |
Total Assets | $34,516 | $28,686 |
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||
Current Liabilities: | ||
Accounts payable | $3,095 | $3,261 |
Accrued compensation and benefits | 3,760 | 2,783 |
Current portion of leases | 1,605 | 1,041 |
Contract liabilities | 2,329 | 5,438 |
Current portion of note | 2,212 | — |
Other current liabilities | 709 | 681 |
Total Current Liabilities | 13,710 | 13,204 |
Long-term debt | 4,158 | — |
Long-term leases | 1,323 | 1,458 |
Total Liabilities | 19,191 | 14,662 |
Commitments and Contingencies (Note 8) | ||
Stockholders’ Equity: | ||
Common stock - $0.001 par value; 75,000,000 shares authorized; 27,413,626 shares issued and outstanding at June 27, 2020 and December 28, 2019 | 27 | 27 |
Additional paid-in capital | 37,066 | 36,934 |
Accumulated deficit | (21,768) | (22,937) |
Total Stockholders’ Equity | 15,325 | 14,024 |
Total Liabilities and Stockholders’ Equity | $34,516 | $28,686 |
For the Nine Months Ended | ||||||||
September 28, 2019 | September 29, 2018 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net loss | $ | (2,207 | ) | $ | (2,388 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 258 | 386 | ||||||
Share-based compensation expense | 45 | 171 | ||||||
Gain on sale of asset | — | (2 | ) | |||||
Changes in current assets and liabilities: | ||||||||
Trade accounts receivable | 2,748 | (1,379 | ) | |||||
Contract assets | (953 | ) | 982 | |||||
Other current assets | 956 | 678 | ||||||
Accounts payable | (229 | ) | (445 | ) | ||||
Accrued compensation and benefits | (126 | ) | (453 | ) | ||||
Contract liabilities | 209 | (1,048 | ) | |||||
Income taxes payable | 16 | (58 | ) | |||||
Other current liabilities, net | (460 | ) | (708 | ) | ||||
Net cash provided by (used in) operating activities | $ | 257 | $ | (4,264 | ) | |||
Cash Flows from Investing Activities: | ||||||||
Proceeds from notes receivable | 24 | 19 | ||||||
Property and equipment acquired | (191 | ) | (89 | ) | ||||
Net cash used in investing activities | $ | (167 | ) | $ | (70 | ) | ||
Cash Flows from Financing Activities: | ||||||||
Purchase of treasury stock | (61 | ) | — | |||||
Payments on finance leases | (1 | ) | (62 | ) | ||||
Net cash used in financing activities | $ | (62 | ) | $ | (62 | ) | ||
Net change in cash, cash equivalents and restricted cash | 28 | (4,396 | ) | |||||
Cash, cash equivalents and restricted cash, at beginning of period | 6,060 | 9,648 | ||||||
Cash, cash equivalents and restricted cash, at end of period | $ | 6,088 | $ | 5,252 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for interest | $ | 12 | $ | 15 | ||||
Right of use assets obtained in exchange for new operating lease liability | $ | 2,377 | $ | — | ||||
Leased assets obtained in exchange for new finance lease liabilities | $ | 236 | $ | — | ||||
Cash paid (received) during the period for income taxes (net of refunds) | $ | — | $ | 96 |
For the Six Months Ended | ||
June 27, 2020 | June 29, 2019 | |
Cash Flows from Operating Activities: | ||
Net income (loss) | $1,169 | $(1,491) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||
Depreciation and amortization | 205 | 177 |
Share-based compensation expense | 132 | 32 |
Changes in current assets and liabilities: | ||
Trade accounts receivable | 1,569 | 2,022 |
Contract assets | (1,256) | 985 |
Prepaids and other current assets | 344 | 492 |
Accounts payable | (166) | (16) |
Accrued compensation and benefits | 977 | 192 |
Contract liabilities | (3,109) | 2,046 |
Income taxes payable | 219 | (430) |
Other current liabilities, net | (192) | (44) |
Net cash provided by (used in) operating activities | $(108) | $3,965 |
Cash Flows from Investing Activities: | ||
Proceeds from notes receivable | — | 5 |
Property and equipment acquired | (126) | (72) |
Net cash used in investing activities | $(126) | $(67) |
Cash Flows from Financing Activities: | ||
Purchase of common stock | — | (61) |
Proceeds from PPP loan | 4,925 | — |
Proceeds from revolving credit facility | 1,445 | — |
Payments on finance leases | (42) | (1) |
Net cash provided by (used in) financing activities | $6,328 | $(62) |
Net change in cash | 6,094 | 3,836 |
Cash at beginning of period | 8,307 | 6,060 |
Cash at end of period | $14,401 | $9,896 |
Supplemental disclosure of cash flow information: | ||
Cash paid during the period for interest | $12 | $9 |
Right of use assets obtained in exchange for new operating lease liability | $1,182 | $2,619 |
Cash paid during the period for income taxes (net of refunds) | $86 | $— |
Debt issuance costs | $131 | $— |
For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
September 28, 2019 | September 29, 2018 | September 28, 2019 | September 29, 2018 | |||||||||||||
Common Stock | ||||||||||||||||
Balance at beginning of period | $ | 27 | $ | 27 | $ | 27 | $ | 27 | ||||||||
Treasury stock retired | — | — | — | — | ||||||||||||
Balance at end of period | 27 | 27 | 27 | 27 | ||||||||||||
Additional Paid-in Capital | ||||||||||||||||
Balance at beginning of period | 36,906 | 36,965 | 36,934 | 36,843 | ||||||||||||
Share-based compensation - employee | 12 | 48 | 45 | 170 | ||||||||||||
Treasury stock retired | — | — | (61 | ) | — | |||||||||||
Balance at end of period | 36,918 | 37,013 | 36,918 | 37,013 | ||||||||||||
Accumulated Earnings (Deficit) | ||||||||||||||||
Balance at beginning of period | (22,962 | ) | (17,992 | ) | (21,471 | ) | (15,801 | ) | ||||||||
Net loss | (716 | ) | (197 | ) | (2,207 | ) | (2,388 | ) | ||||||||
Balance at end of period | (23,678 | ) | (18,189 | ) | (23,678 | ) | (18,189 | ) | ||||||||
Total Stockholders’ Equity | 13,267 | 18,851 | $ | 13,267 | $ | 18,851 |
For the Three Months Ended | ||
June 27, 2020 | June 29, 2019 | |
Common Stock | 27 | 27 |
Additional Paid-in Capital | ||
Balance at beginning of period | 36,949 | 36,890 |
Share-based compensation - employee | 117 | 16 |
Balance at end of period | 37,066 | 36,906 |
Accumulated Earnings (Deficit) | ||
Balance at beginning of period | (21,836) | (22,445) |
Net income (loss) | 68 | (517) |
Balance at end of period | (21,768) | (22,962) |
Total Stockholders’ Equity | $15,325 | $13,971 |
For the Six Months Ended | ||
June 27, 2020 | June 29, 2019 | |
Common Stock | 27 | 27 |
Additional Paid-in Capital | ||
Balance at beginning of period | 36,934 | 36,934 |
Share-based compensation - employee | 132 | 32 |
Treasury stock retired | — | (60) |
Balance at end of period | 37,066 | 36,906 |
Accumulated Earnings (Deficit) | ||
Balance at beginning of period | (22,937) | (21,471) |
Net income (loss) | 1,169 | (1,491) |
Balance at end of period | (21,768) | (22,962) |
Total Stockholders’ Equity | $15,325 | $13,971 |
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. incurred. September 28, 2019 December 29, 2018 As of September 28, 2019 As of December 29, 2018 ITEM 2. SEC. 28, 2019. operations. For additional information, see Part II. Item 1A “Risk Factors.” 2019 Increase (Decrease) in Operating Results: Increase (Decrease) in Operating Results: 2020 partially offset by Government Service projects that had delays due to COVID-19 worksite closures and 2019 projects that were not renewed in 2020. personnel and projects awards that began in 2019 and have continued into 2020. million. 2019 with no comparable occurrence in 2020. 2019. 2019. higher margin projects from our Automation segment partially offset by project delays due to the COVID-19 pandemic. The Company defines liquidity as its ability to pay its liabilities as they become due, fund business operations and meet monetary contractual obligations. equipment. $61 thousand. ITEM 3. 29, 2018,28, 2019, included in the Company’s 20182019 Annual Report on Form 10-K filed with the Securities and Exchange Commission.ninesix month periods ended September 28,June 27, 2020 and June 29, 2019, and September 29, 2018, and in the case of the condensed balance sheet as of December 29, 201828, 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.In February 2016, the Financial Statements Accounting Board (“FASB”) issued ASU No. 2016-02,Leases (Topic 842), that amends the accounting standards for leases. This new standard retains a distinction between finance leases and operating leases but the primary change is the recognition of lease assets and lease liabilities by lessees for leases classified as operating leases on the lessee’s balance sheet and certain aspects of lease accounting have been simplified. This new standard requires additional qualitative and quantitative disclosures along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This pronouncement is effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 842): Targeted Improvements, which allows for an additional transition method under the modified retrospective approach for the adoption of Topic 842. The two permitted transition methods are now: (1) to apply the new lease requirements at the beginning of the earliest period presented, and (2) to apply the new lease requirements at the effective date. Under both transition methods there is a cumulative effect adjustment. We adopted the standard effective December 30, 2018 using the modified retrospective transition approach and elected not to adjust prior comparative periods. The Company elected the practical expedient to not reassess prior conclusions related to contracts containing leases, lease classification, lease term and initial direct costs. Upon adoption, the Company recognized right-of-use assets and lease liabilities of $1.3 million at December 30, 2018.NOTE 3 – CRITICAL ACCOUNTING POLICIES UPDATEOur critical accounting policies are detailed in “Note 2 – Accounting Policies and New Accounting Pronouncements” within Item 8 of our Annual Report on Form 10-K for the year ended December 29, 2018 . Significant changes to our accounting policies as a result of adopting Topic 606 are discussed below:forof our contracts because it best depicts the transfer of control to the customer which occurs as we consume the costsmaterials on the contracts. Therefore, revenues and estimated profits are recorded proportionally as labor costs are incurred.reduction of revenue)reduction) on a cumulative catch-up basis. on the performance obligation is recognized in the period the loss is recorded.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. See Note 6 – Segment Information for disaggregated revenue information.Incremental Costs – Our incremental costs of obtaining a contract, which consists 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 amortization expense related to incremental costs in the third quarter of 2019 or 2018.43 – REVENUE RECOGNITIONfollows: For the Three Months Ended For the Nine Months Ended September 28, 2019 September 29, 2018 September 28, 2019 September 29, 2018 Fixed-price revenue $ 5,334 $ 5,425 $ 14,418 $ 17,370 Time-and-material revenue 8,640 8,830 25,340 23,944 Total Revenue 13,974 14,255 39,758 41,314
follows (dollars in thousands):9 Fixed-price revenue Time-and-material revenue 54 – CONTRACT ASSETS AND CONTRACT LIABILITIESincurred and deferred revenue. The noncurrent portion of deferred revenue is included in other long-term liabilities in our consolidated balance sheets.September 28, 2019June 27, 2020 and December 29, 2018:28, 2019: (dollars in thousands) Costs incurred on uncompleted contracts $ 24,451 $ 34,800 Estimated earnings on uncompleted contracts 4,843 6,921 Earned revenues 29,294 41,721 Less: billings to date 25,979 39,150 Net costs and estimated earnings in excess of billings (billings in excess of costs) on uncompleted contracts $ 3,315 $ 2,571 Contract assets $ 4,128 $ 3,175 Contract liabilities (813 ) (604 ) Net contract assets $ 3,315 $ 2,571 Costs incurred on uncompleted contracts Estimated earnings on uncompleted contracts Earned revenues Less: billings to date Contract assets Contract liabilities Net contract assets PPP Loan (1) Revolving Credit Facility (2) Total debt Amount due within one year Total long-term debt 2020 2021 2022 2023 2024 Thereafter two 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.September 28,June 27, 2020 and June 29, 2019 and September 29, 2018 is as follows (dollars in thousands):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 ) For the three months ended September 29, 2018: EPCM Automation Corporate Consolidated Revenue $ 6,821 $ 7,434 $ — $ 14,255 Gross profit 1,133 1,160 — 2,293 Gross Profit Margin 16.6 % 15.6 % 16.1 % SG&A 469 633 1,381 2,483 Operating income (loss) 664 527 (1,381 ) (190 ) Other income, net 11 Interest expense, net (1 ) Tax expense (17 ) Net loss $ (197 ) For the three months ended June 27, 2020: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net income For the three months ended June 29, 2019: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net loss ninesix months ended September 28,June 27, 2020 and June 29, 2019 and September 29, 2018 is as follows (dollars in thousands):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 ) For the nine months ended September 29, 2018: EPCM Automation Corporate Consolidated Revenue $ 18,568 $ 22,746 $ — $ 41,314 Gross profit 2,879 3,080 — 5,959 Gross Profit Margin 15.5 % 13.5 % 14.4 % SG&A 1,426 2,001 4,508 7,935 Operating income (loss) 1,453 1,079 (4,508 ) (1,976 ) Other expense, net (367 ) Interest expense, net (14 ) Tax expense (31 ) Net loss $ (2,388 ) Total Assets by Segment (dollars in thousands) EPCM $ 6,276 $ 4,792 Automation 9,906 10,550 Corporate 5,956 6,964 Consolidated $ 22,138 $ 22,306 For the six months ended June 27, 2020: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net income For the six months ended June 29, 2019: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net loss Total Assets by Segment EPCM Automation Corporate Consolidated 20142016 and Texas margins tax returns prior to 20142016 are closed. Generally, the applicable statues of limitations are three to four years from their filings.$22$36 thousand and $73$58 thousand for the three and ninesix months ended September 28, 2019,June 27, 2020, respectively, as compared to income tax expense of $17$31 thousand and $31$51 thousand for the three and ninesix months ended SeptemberJune 29, 2018,2019, respectively.ninesix months ended September 28, 2019June 27, 2020 was (3.2)%34.6% and (3.4)%4.7%, respectively, as compared to (9.3)(2.06)% and (1.3)(0.20)% for the three and ninesix months ended SeptemberJune 29, 2018.2019, 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., and are 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. Financial Statement Classification Three months ended September 28, 2019 Nine months ended September 28, 2019 Finance leases: Amortization expense SG&A Expense $ 4 $ 4 Interest expense Interest expense, net 2 2 6 6 Operating leases: Operating costs Operating costs 427 845 Selling, general and administrative expenses SG&A Expense 476 1,398 903 2,243 Total lease expense $ 909 $ 2,249 Financial Statement Classification Finance leases: Amortization expense SG&A Expense Interest expense Interest expense, net Total finance lease expense Operating leases: Operating costs Operating costs Selling, general and administrative expenses SG&A Expense Total operating lease expense Short-term leases: Operating costs Operating costs Selling, general and administrative expenses SG&A Expense Total short-term lease expense Total lease expense Financial Statement Classification September 28, 2019 ROU Assets: Operating leases Right of Use asset $ 2,377 Finance leases Property and equipment, net 232 Total ROU Assets: $ 2,609 Lease liabilities: Current liabilities Operating leases Current portion of leases $ 947 Finance leases Current portion of leases 47 Noncurrent Liabilities: Operating leases Long Term Leases 1,467 Finance leases Long Term Leases 185 Total lease liabilities $ 2,646 Financial Statement Classification ROU Assets: Operating leases Right of Use asset Finance leases Property and equipment, net Lease liabilities: Current liabilities Operating leases Current portion of leases Finance leases Current portion of leases Noncurrent Liabilities: Operating leases Long-term leases Finance leases Long-term leases Total lease liabilities September 28, 2019June 27, 2020 Weighted average remaining lease term (years) Operating leases 2.4Finance leases 4.9Weighted average discount rate Operating leases 3.7Finance leases 14.5 operating lease liabilities as of September 28, 2019June 27, 2020 are as follows (dollars in thousands):Year ending: Operating leases Finance leases Total 2019 (remaining months) $ 249 $ 14 $ 263 2020 1,012 55 1,067 2021 957 55 1,012 2022 289 55 344 2023 - 55 55 2024 - 36 36 Total lease payments 2,507 270 2,777 Less: imputed interest (92 ) (39 ) (131 ) Total lease liabilities $ 2,415 $ 231 $ 2,646 Years ending: 2020 (remaining months) 2021 2022 2023 2024 2025 2026 Total lease payments Less: imputed interest Total lease liabilities ENGLOBAL CORPORATION AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSISMANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1934.1934 (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 29, 2018,28, 2019, and those described from time to time in our future reports filed with the Securities and Exchange Commission.29, 2018.We are making strides implementing the multi-year strategic initiative we began in the fall of 2017. sevensix 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 sevensix targeted market initiatives include: (1) natural gas and crude oil and renewable energy production systems; (2) synthesis gas processing; (3) control systems implementation; (4)(3) continuous emission monitoring systems; (5)(4) pipeline pump, compression, metering, loading and blending systems; (6)(5) adding customer relationships in specific markets for automation; and (7)(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.have madecontinue to make investments in key individuals, product developments and new facilities and equipment, which have allmay negatively impactedimpact our selling, general and administrative expense (“SG&A,&A”), we have been able to offset those increases with decreases in other areas and, overall, our SG&A costs have continued to decrease.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 revenueoperating levels.18, 2018,13, 2020, we announced thatobtained 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 Boardemployees and our business. Further, we are utilizing some of Directors had initiatedthe tax payment deferral opportunities and federal refund acceleration opportunities provided by the IRS and the CARES Act.reviewLoan 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 strategic alternatives, whichrevolving 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.include strategic mergers, reverse mergers, the issuance or buybackexperience a material adverse effect on our business, financial condition, and results 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.20182019 Annual Report on Form 10-K. Our critical accounting policies are further disclosed in Note 2 to the consolidated financial statements included in our 20182019 Annual Report on Form 10-K.company’sCompany’s activities.September 28, 2019June 27, 2020 versus the three months ended SeptemberJune 29, 2018September 28, 2019June 27, 2020 versus the three months ended SeptemberJune 29, 2018,2019, 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 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 (expense), net 7 Interest expense, net (5 ) Tax expense (22 ) Net loss $ (716 ) (5.1 )% Basic and diluted loss per share $ (0.03 ) Three months ended September 29, 2018: Revenue $ 6,821 $ 7,434 $ — $ 14,255 100 % Gross profit 1,133 1,160 — 2,293 Gross Profit Margin 16.6 % 15.6 % 16.1 % SG&A 469 633 1,381 2,483 17.4 % Operating income (loss) 664 527 (1,381 ) (190 ) (1.3 )% Other income (expense), net 11 Interest expense, net (1 ) Tax expense (17 ) Net loss $ (197 ) (1.4 )% Basic and diluted loss per share $ (0.01 ) Revenue $ (2,565 ) $ 2,284 $ — $ (281 ) (2.0 )% Gross profit (1,058 ) 440 — (618 ) SG&A 182 (206 ) (88 ) (112 ) (4.5 )% Operating income (loss) (1,240 ) 646 88 (506 ) 266.3 % Other income (expense), net (4 ) Interest expense, net (4 ) Tax expense (5 ) Net loss $ (519 ) 263.5 % Basic and diluted loss per share $ (0.02 ) Operations Data Three months ended June 27, 2020: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net income Basic and diluted income per share Three months ended June 29, 2019: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net loss Basic and diluted loss per share Increase (Decrease) in Operating Results: Revenue Gross profit SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net income Basic and diluted income per share ninesix months ended September 28, 2019June 27, 2020 versus the ninesix months ended SeptemberJune 29, 2018,2019, 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 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 (expense), net 48 Interest expense, net (12 ) Tax expense (73 ) Net loss $ (2,207 ) (5.6 )% Basic and diluted loss per share $ (0.08 ) Nine months ended September 29, 2018: Revenue $ 18,568 $ 22,746 $ — $ 41,314 100 % Gross profit 2,879 3,080 — 5,959 Gross Profit Margin 15.5 % 13.5 % 14.4 % SG&A 1,426 2,001 4,508 7,935 19.2 % Operating income (loss) 1,453 1,079 (4,508 ) (1,976 ) (4.8 )% Other income (expense), net (367 ) Interest expense, net (14 ) Tax expense (31 ) Net loss $ (2,388 ) (5.8 )% Basic and diluted loss per share $ (0.09 ) Revenue $ (3,020 ) $ 1,464 $ — $ (1,556 ) (3.8 )% Gross profit (1,305 ) 301 — (1,004 ) SG&A 400 (755 ) (455 ) (810 ) (10.2 )% Operating income (loss) (1,705 ) 1,056 455 (194 ) 9.8 % Other income (expense), net 415 Interest expense, net 2 Tax expense (42 ) Net loss $ 181 (7.5 )% Basic and diluted loss per share $ 0.01 Operations Data Six months ended June 27, 2020: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net income Basic and diluted income per share Six months ended June 29, 2019: Revenue Gross profit Gross Profit Margin SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net loss Basic and diluted loss per share Revenue Gross profit SG&A Operating income (loss) Other income, net Interest expense, net Tax expense Net income Basic and diluted income per share decreased $0.3increased $4.3 million to $14.0$17.9 million from $14.3$13.6 million, or a decreasean increase of 2.0%31.3%, for the three months ended September 28, 2019,June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018.2019. Revenue from the EPCM segment decreased $2.6increased $1.0 million to $4.2$6.6 million from $6.8$5.6 million, or a decreasean increase of 37.6%17.2%, for the three months ended September 28, 2019,June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018,2019. The increase is primarily due to the progress on a large project during the second quarter of 2020 partially offset by the completion of several large projects in 2018.2019 with no subsequent renewal into 2020 including a project cancellation due to COVID-19. Revenue from the Automation segment increased $2.3$3.3 million to $9.7$11.3 million from $7.4$8.0 million, or an increase of 30.7%41.3%, for the three months ended September 28, 2019,June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018.2019. This increase is primarily due to a large projecttwo projects that was awardedhave increased in the first half of 2019scope in 2020 partially offset by Government Service projects that had delays due to COVID-19 worksite closures.decreased $1.5increased $11.3 million to $39.8$37.1 million from $41.3$25.8 million, or a decreasean increase of 3.8%44.1%, for the ninesix months ended September 28, 2019,June 27, 2020 as compared to the ninesix months ended SeptemberJune 29, 2018.2019. Revenue from the EPCM segment decreased $3.0increased $0.5 million to $15.5$11.8 million from $18.5$11.3 million, or a decreasean increase of 16.3%4.1%, for the ninesix months ended September 28, 2019,June 27, 2020 as compared to the ninesix months ended SeptemberJune 29, 2018.2019. The decrease wasincrease is primarily due to the progress on a large project during the first half of 2020 partially offset by the completion of several large projects in 2018.2019 that were not extended into the current year. Revenue from the Automation segment increased $1.5$10.9 million to $24.2$25.4 million from $22.7$14.5 million, or an increase of 6.4%75.2%, for the ninesix months ended September 28, 2019,June 27, 2020 as compared to the ninesix months ended SeptemberJune 29, 2018. The2019. This increase wasis primarily due to a large projecttwo projects that was awardedhave increased in scope during the first half of 2019.4.1%0.6% to 12.0%13.7% from 16.1%14.3% for the three months ended September 28, 2019,June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018.2019. Gross profit for the EPCM segment decreased $1.0$0.2 million to $0.1$0.6 million from $1.1$0.8 million and its gross profit margin decreased 14.8%4.9% to 1.8%9.7% from 16.6%14.6% for the three months ended September 28, 2019,June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018.2019. The decrease in gross profit margin is primarily attributable to the cost associated with underutilized staffing in placeat one of our locations as projects were completed without subsequent renewals during the second quarter of 2020 including a project cancellation due to COVID-19 and supply purchases for awards expectedour employees to start in the fourth quarter.adhere to COVID-19 safe work practices. Gross profit margin for the Automation segment increased 0.9%2.1% to 16.5%16.1% from 15.6%14.0% for the three months ended September 28, 2019,June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018,2019, primarily due to increased utilizationincrease in production on project awards that began in 2019 and have continued into 2020 partially offset by inefficiencies on one of personnel.our large projects in addition to delays caused from COVID-19 restrictions prompting employees to work remotely and supply purchases for our employees to adhere to COVID-19 safe work practices.decreased 1.9%increased 2.7% to 12.5%15.4% from 14.4%12.7% for the ninesix months ended September 28, 2019,June 27, 2020 as compared to the ninesix months ended September 29, 2018.June 27, 2019. Gross profit for the EPCM segment decreased $1.3$0.6 million to $1.6$0.9 million from $2.9$1.5 million and its gross profit margin decreased 5.4% to 10.1%7.9% from 15.5%13.3% for the ninesix months ended September 28, 2019,June 27, 2020 as compared to the ninesix months ended SeptemberJune 29, 2018. The decrease in gross profit was primarily due to the completion of several large projects in 2018.2019. The decrease in gross profit margin wasis primarily attributable to the cost associated with underutilized staffing in place for awards expected to start inat one of our locations as projects were completed without subsequent renewals during the fourth quarter.first half of 2020. Gross profit margin for the Automation segment increased $0.3 million6.6% to $3.4 million18.9% from $3.1 million and its gross profit margin increased to 14.0% from 13.5%12.3% for the ninesix months ended September 28, 2019,June 27, 2020 as compared to the ninesix months ended SeptemberJune 29, 2018,2019, primarily due to increased utilization of personnel.declineddecreased by $0.1 million for the three months ended September 28, 2019 as compared to three months ended September 29, 2018. Professional services declined by $0.1 million for the three months ended September 28, 2019June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018.2019 primarily due to the reduction of legal services by $0.1 million.declineddecreased by $0.8$0.3 million for the ninesix months ended September 28, 2019June 27, 2020 as compared to the ninesix months ended SeptemberJune 29, 2018. Depreciation2019 primarily due to decreases in facilities costs, legal services, and amortization declined by $0.2 million, and our stock compensationtravel costs decreaseddue to COVID-19 travel restrictions, each, by $0.1 million for the nine months ended September 28, 2019 as compared to the nine months ended September 29, 2018, which included approximately $0.3 million in costs for bad debt reserve and professional services.(expense)net of expense, decreased $4$25 thousand for the three months ended September 28, 2019June 27, 2020 as compared to the three months ended SeptemberJune 29, 2018.Other income (expense) decreased $0.4 million2019 and $39 thousand for the ninesix months ended September 28,June 27, 2020 as compared to the six months ended June 29, 2019 primarily due to a $0.3 million legal settlement paidrental income received in 2018.our insurance financingthe Revolving Credit Facility and our finance leases.on the PPP Loan. Our interest expense increased to $5$36 thousand for the three months ended September 28, 2019June 27, 2020 from $1$4 thousand for the three months ended SeptemberJune 29, 2018.2019.Interestdecreasedincreased to $12$41 thousand for the ninesix months ended September 28, 2019June 27, 2020 from approximately $14$6 thousand for the ninesix months ended SeptemberJune 29, 2018.$22$36 thousand for the three months ended September 28, 2019 as compared to income tax expense of $17 thousand for the three months ended September 29, 2018.We recorded income tax expense of $73 thousand for the nine months ended September 28, 2019June 27, 2020 as compared to income tax expense of $31 thousand for the ninethree months ended SeptemberJune 29, 2018.LossIncome (Loss) – Net lossincome for the three months ended September 28, 2019June 27, 2020 was $0.7$0.1 million, or a $0.5$0.6 million increase from a net loss of $0.2$0.5 million for the three months ended SeptemberJune 29, 2018,2019, primarily as a result of lower gross profitour increase in revenue and higher margin projects from our EPCM segment.Automation segment partially offset by project delays due to the COVID-19 pandemic.lossincome for the ninesix months ended September 28, 2019June 27, 2020 was $2.2$1.2 million, or a $0.2$2.7 million increase from a net loss of $2.4$1.5 million for the ninesix months ended SeptemberJune 29, 2018,2019, primarily as a result of lower selling, generalour increase in revenue and administrative expense.OverviewAs we are currently operating without a credit facility, ourOur primary sources of liquidity are cash on hand, and internally generated funds.funds, and borrowings under the PPP Loan and the Revolving Credit Facility. We had cash of approximately $6.1$14.4 million at both SeptemberJune 27, 2020 and $8.3 million at December 28, 2019 and December 29, 2018.2019. Our working capital as of September 28, 2019June 27, 2020 was $10.6$16.1 million versus $13.7$11.3 million as of December 29, 2018. This decrease is primarily attributable28, 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 June 27, 2020, the credit limit under the Revolving Credit Facility was $3.5 million and outstanding borrowings were $1.5 million, which yields enough interest to cover our minimum monthly interest charge. As of June 27, 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 year-to-date loss and the adoptionfinancial statements included in Part I of ASC 842, “Leases,” right-of-use (“ROU”) assets and lease liabilities, which decreased our working capital by approximately $1.0 million.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 growthactivity for the next twelve months. billed are not collected or are not collected in a timely manner, (2) circumstances prevent the timely internal processing of invoices, (3) we lose one or more of our major customers or our major customers significantly reduce the amount of work requested from us, (4) we are unable to win new projects that we can perform on a profitable basis, or (5) we are awarded projects that require a significant amount of cash to fund other components of working capital or (6) we are unable to reverse our use of cash to fund losses.capital. If any such event occurs, we would be forced to consider alternative financing options.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.$0.3$4.0 million of cash for the ninesix months ended September 28, 2019June 29, 2019. The primary drivers of our cash used by operations for the six months ended June 27, 2020 were an increase in contract assets net of contract liabilities of $4.3 million and used $4.3a decrease in trade payables of $0.2 million, partially offset by our operating income of $1.2 million, cash provided by a decrease in trade receivables of $1.6 million, an increase in accrued compensation liability of $1.0 million, a decrease in other current assets of $0.3 million, an increase in income taxes payable of $0.2 million, and $0.1 million of cash for the nine months ended September 29, 2018. provided by other components of working capital.ninesix months ended September 28,June 29, 2019 were decreases of contract assets net of contract liabilities of $0.7$2.0 million, and a decrease in trade receivables of $2.8$2.0 million, offset by our operating loss before non-cash expenses of $2.2$1.5 million, and cash provided by an increase in other components of working capital of $0.5$1.5 million.The primary drivers of our cash used in operations for the nine months ended September 29, 2018 were our operating loss before non-cash expenses of $2.4 million, an increase in trade receivables of $1.4 million and increases of contract assets net of contract liabilities of $0.1 million partially offset by other components of working capital of $0.4 million.$167$126 thousand for the ninesix months ended September 28, 2019 as expenditures for propertyJune 27, 2020 and equipment of $191 thousand were partially offset by proceeds from notes receivable of $24 thousand.Investing activities used cash of $70$67 thousand for the ninesix months ended September 29, 2018June 27, 2019 primarily due to expenditures for the purchase of property and equipment of $89 thousand partially offset by proceeds from notes receivable of $19 thousand.ninesix months ended September 28,June 29, 2019 primarily for the purchase of treasury stock.Financing activities for the nine months ended September 29, 2018common stock, which used $62 thousand for the payment of our capital leases obligations.Changes in AccountingIn February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842), that amends the accounting standards for leases. This new standard retains a distinction between finance leases and operating leases but the primary change is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases on the lessee’s balance sheet and certain aspects of lease accounting have been simplified. This new standard requires additional qualitative and quantitative disclosures along with specific quantitative disclosures required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This pronouncement is effective for interim and annual reporting periods beginning after December 15, 2018, with early application permitted. In July 2018, the FASB issued ASU 2018-11,Leases (Topic 842): Targeted Improvements, which allows for an additional transition method under the modified retrospective approach for the adoption of Topic 842. The two permitted transition methods are now: (1) to apply the new lease requirements at the beginning of the earliest period presented, and (2) to apply the new lease requirements at the effective date. Under both transition methods there is a cumulative effect adjustment. We adopted the standard effective December 30, 2018 using the modified retrospective transition approach and elected not to adjust prior comparative periods. Upon adoption, the Company recognized right-of-use assets and lease liabilities of $1.3 million at December 30, 2018. See Note 9.QUANTITATIVEQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKOur financial instruments include cash and cash equivalents, accounts and notes receivable, accounts payable, capital leases payable and debt obligations. The book value of cash and cash equivalents, accounts and notes receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments.We do not utilize financial instruments for trading purposes and we do not hold any derivative financial instruments that could expose us to significant market risk. In the normal course of business, our results of operations are exposed to risks associated with fluctuations in interest rates and, to a minor extent, currency exchange rates.Securities and Exchange Commission’s (“SEC”)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.September 28, 2019,June 27, 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 28, 2019,June 27, 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.September 28, 2019,June 27, 2020, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.LEGALLEGAL PROCEEDINGSismay be involved in various legal proceedings or ismay 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. We believe, asAs of the date of this filing, allmanagement is not aware of any such active proceedings and claims of substance that have been asserted against ENGlobal or one or more of its subsidiaries have been adequately allowed for, or are covered by insurance, such that, if determined adversely to the Company individually or in the aggregate, they would not have a material adverse effect on our results of operations or financial position.RISKRISK FACTORS“ItemItem 1A. Risk“Risk Factors” in our Annual Report on Form 10-K for the year ended December 29, 2018,28, 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.We are reviewing strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic alternative, that any such strategic alternative will result in additional value for our shareholders or that the process will not have an adverse impact on our business. On April 18, 2018, we announced that our Board of Directors had initiated a review of strategic alternatives. These alternativesThe COVID–19 pandemic could include, but are not limited to, 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. There can be no assurance that the review of strategic alternatives will result in the identification or consummation of any transaction. Our Board of Directors may also determine that our most effective strategy is to continue to effectuate our current business plan. The process of reviewing strategic alternatives may be time consuming and disruptive to our business operations and, if we are unable to effectively manage the process,adversely affect our business, financial condition and results of operations could be adversely affected. We could incur substantial expenses associated. Our business is dependent upon the willingness and ability of our customers to conduct transactions with identifyingus. The spread of the COVID–19 coronavirus has caused severe disruptions in the worldwide economy, including the global demand for oil and evaluating potential strategic alternatives. No decision has been madenatural 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 any transaction and we cannot assure you that we willexisting project awards. The continued spread of COVID–19 may result in a significant decrease in business and/or cause our customers to be ableunable to identify and undertake any transaction that allows our shareholdersmeet existing payment or other obligations to realize an increaseus, particularly in the valueevent of their common stock or provide any guidance on the timinga spread of such action, if any.We also cannot assure you that any potential transaction or other strategic alternative, if identified, evaluated and consummated, will provide greater value to our shareholders than that reflected in the current price of our common stock. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, but not limited to, market conditions, industry trends, the interest of third partiesCOVID–19 in our business andmarket areas. The continued spread of COVID–19 could also negatively impact the availability of financingour 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 buyers on reasonable terms. We do not intend to comment regardingCOVID-19 exposure. Because the evaluation of strategic alternatives until such time as our Board of Directors has determined the outcomeseverity, magnitude and duration of the processCOVID-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 otherwise has deemed that disclosureif the response to contain the COVID-19 pandemic is appropriate or required by applicable law. Asunsuccessful, we could experience a consequence, perceived uncertainties relatedmaterial adverse effect on our business, financial condition, and results of operations.our future may result in the loss of potential business opportunitiesCOVID-19 pandemic and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and business partners.Our backlog 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 $17.2 million from $59.2 million as of SeptemberDecember 28, 2019 our backlog was approximately $25.6 million.to $42.0 million as of June 27, 2020. We expect athe majority of thisour 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 2019replacing our backlog as quickly as it has been converted to revenues, which will reduce future revenue and 2020. Weprofits 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 our chosen area of concentration, the energy industry. The energy industry has experiencedwhich is experiencing a sustained periodsignificant decline in oil prices since the beginning of low crude oil2020 due to concerns about the COVID–19 pandemic and natural gas prices which has reducedits 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 clients’ activities in the energy industry.backlog.September 28, 2019June 27, 2020, we had twothree projects that had $0.1$0.9 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.Period March 29, 2020 to April 25, 2020 April 26, 2020 to May 30, 2020 May 31, 2020 to June 27, 2020 Total OTHEROTHER INFORMATIONOn November 5, 2019, ENGlobal U.S. Inc., a Texas Corporation (the “Corporation”), adopted this ENGLOBAL GROWTH INCENTIVE PLAN (the “GIP” or the “Plan”) to promote and advance the interest of the Corporation and its stockholders by enabling the Corporation and its Affiliates to attract, retain and reward selected employees (the “Participants”).This plan is intended to provide a variable compensation (the “Incentive Bonus”) component for developing and selling significant projects and services for the Company.The Chief Executive Officer (CEO) (“Authorized Officer”), in consultation with senior officers of the Corporation, will be responsible for making the determination as to which employees are Participants of this Plan. Company management, business development, executives or other employees that are under other incentive bonus plans of the Company, except the Equity Incentive Plan, will not be eligible for this Plan.The Incentive Bonus is divided into two components, both of which are based upon gross margin of specifically identified projects. The first portion of the Incentive Bonus is calculated at a percentage of the “as-sold” Booked Gross Margin (“BGM”) determined at the time the contract (or purchase order or release order) for the project is received accordance with ENGlobal’s standard accounting practices. The second portion of the Incentive Bonus is calculated as a percentage of the “as-executed” Final Gross Margin (“FGM”) determined at the completion and closeout of the project and is payable only if the FGM of the project is equal or greater than a pre-approved amount of the BGM at project opening.The first Incentive payment will be scheduled to be paid after receipt of the first milestone payment. The second Incentive payment will be schedule to be paid after receipt of the final milestone payment and other items listed above. Incentive payments will be considered a gross amount and subject to payroll withholdings.The Plan shall be operated on a fiscal year. The Plan may be reviewed periodically by the CEO and the Compensation Committee of the Company’s Board of Directors.The preceding summary of The Plan is qualified in its entirety by reference to the full text of such plan, a copy of which is attached as Exhibit 10.1 herewith and incorporated herein by reference.EXHIBITSEXHIBITS Incorporated by Reference to: Exhibit No. Description Form or Schedule Exhibit No. Filing Date with SEC SEC File Number Restated Articles of Incorporation of Registrant dated August 8, 2002 10-Q 3.1 11/14/2002 001-14217 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 Second Amended and Restated Bylaws of Registrant dated April 14, 2016 8-K 3.1 4/15/2016 001-14217 U.S. Small Business Administration Note dated as of April 13, 2020, by ENGlobal Corporation in favor of Origin Bank, as lender. 8-K 10.1 4/16/2020 001-14217 Loan and Security Agreement dated as of May 18, 2020, by and among ENGlobal Corporation, ENGlobal U.S., Inc., ENGlobal Government Services, Inc., and Pacific Western Bank, a California bank, as lender. 8-K 10.1 5/26/2020 001-14217 DEF 14A Appendix A 4/27/2020 001-14217 Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the Third Quarter 2019 Certifications Pursuant to Rule 13a – 14(a) of the Securities Exchange Act of 1934 for the Third Quarter 2019 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 *101.lab XBRL taxonomy extension label linkbase document *101.pre XBRL taxonomy extension presentation linkbase document SIGNATUREIGNATUREDated: November 12, 2019August 6, 2020 ENGlobal Corporation By: /s/ Mark A. Hess Mark A. Hess