eng_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 28, 2024

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

Commission File No. 001-14217

ENGlobal Corporation

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of

incorporation or organization)

88-0322261

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

11740 Katy Fwy – Energy Tower III, 11th floor

Houston, TX

77079

(Address of principal executive offices)

(Zip code)

(281) 878-1000

(Registrant’s telephone number, including area code)

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

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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller Reporting Company	☒
Emerging growth company	☐

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

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

Yes ☐ No ☒

As of November 12, 2024, the registrant had outstanding 5,156,583 shares of common stock, par value $0.001 per share.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 28, 2024

TABLE OF CONTENTS

		Page Number

Part I.	Financial Information	3

Item 1.	Financial Statements	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 28, 2024 and September 30, 2023	3

	Unaudited Condensed Consolidated Balance Sheets at September 28, 2024 and December 30, 2023	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 28, 2024 and September 30, 2023	5

	Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 28, 2024 and September 30, 2023	6

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	26

Part II.	Other Information	28

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

Item 3.	Defaults Upon Senior Securities	30

Item 4.	Mine Safety Disclosures	30

Item 5.	Other Information	30

Item 6.	Exhibits	31

	Signatures	32

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENGlobal Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

(amounts in thousands, except per share data)

	For the Three Months Ended						For the Nine Months Ended
	September 28, 2024			September 30, 2023			September 28, 2024			September 30, 2023
Operating revenues	$	5,682		$	9,450		$	18,350		$	32,381
Operating costs		5,207			7,613			16,660			32,748
Gross profit (loss)		475			1,837			1,690			(367	)

Selling, general and administrative expenses		894			2,512			4,791			10,850
Operating loss		(419	)		(675	)		(3,101	)		(11,217	)

Other income (expense):
Other income, net		3			3			231			52
Interest expense, net		(62	)		(27	)		(166	)		(158	)
Loss from continuing operations before income taxes		(478	)		(699	)		(3,036	)		(11,323	)

Provision (benefit) for federal and state income taxes		22			22			66			66

Net loss		(500	)		(721	)		(3,102	)		(11,389	)

Basic and diluted loss per common share:	$	(0.10	)	$	(0.14	)	$	(0.60	)	$	(2.30	)

Basic and diluted weighted average shares used in computing loss per share:		5,157			5,104			5,157			4,949

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGlobal Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

(amounts in thousands, except share and per share amounts)

	September 28, 2024			December 30, 2023
ASSETS
Current Assets:
Cash	$	1,231		$	615
Trade receivables, net of allowances of $3,227 and $4,336		3,807			6,432
Prepaid expenses and other current assets		108			992
Payroll taxes receivable		102			102
Contract assets		4,376			3,296
Total Current Assets		9,624			11,437
Property and equipment, net		714			1,360
Goodwill		720			720
Other assets
Right-of-use asset		2,006			5,079
Deposits and other assets		166			191
Total Other Assets		2,172			5,270
Total Assets	$	13,230		$	18,787

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current Liabilities:
Accounts payable	$	7,614		$	7,005
Accrued compensation and benefits		1,283			1,445
Current portion of operating leases		955			1,726
Current portion of finance leases		131			263
Contract liabilities		1,064			1,195
Other current liabilities		941			977
Legal contingency		1,464			—
Short-term debt		2,304			1,047
Total Current Liabilities		15,756			13,658

Long-term debt		—			—
Long-term unearned revenue		338			375
Long-term operating leases		1,333			5,761
Long-term finance leases		238			548
Total Liabilities		17,665			20,342
Commitments and Contingencies (Note 8)
Stockholders’ Equity:
Common stock - $0.001 par value; 75,000,000 shares authorized; 5,156,583 shares issued and outstanding at September 28, 2024 and December 30, 2023		5			5
Additional paid-in capital		61,576			61,354
Accumulated deficit		(66,016	)		(62,914	)
Total Stockholders’ Deficit		(4,435	)		(1,555	)
Total Liabilities and Stockholders’ Deficit	$	13,230		$	18,787

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGlobal Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(amounts in thousands)

	For the Nine Months Ended
	September 28, 2024			September 30, 2023
Cash Flows from Operating Activities:
Net loss	$	(3,102	)	$	(11,389	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		467			450
Share-based compensation expense		222			202
Loss (gain) on disposal of fixed assets		(29	)		287
Impairment of ROU asset		(878	)		197
Reclassification of ROU liabilities, net		(1,413	)		—
Changes in current assets and liabilities:
Trade accounts receivable		2,625			140
Contract assets		(1,080	)		218
Other current assets		909			2,803
Accounts payable		609			2,632
Accrued compensation and benefits		(162	)		614
Contract liabilities		(131	)		910
Income taxes payable		51			10
Other current liabilities, net		1,340			(904	)
Net cash used in operating activities	$	(572	)	$	(3,830	)

Cash Flows from Investing Activities:
Property and equipment acquired		—			(277	)
Proceeds from sale of property and equipment		372			—
Net cash provided by (used in) investing activities	$	372		$	(277	)

Cash Flows from Financing Activities:
Common stock and warrants issued, net		—			2,962
Payments on finance leases		(168	)		(188	)
Payoff of finance leases		(272	)		—
Proceeds from Amended Credit Agreement		1,256			1,018
Payments on revolving credit facility, net		—			(1,661	)
Net cash provided by financing activities	$	816		$	2,131
Net change in cash		616			(1,976	)
Cash at beginning of period		615			3,464
Cash at end of period	$	1,231		$	1,488

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	166		$	158
Fair value of warrants at issuance date	$	—		$	2,782
Right of use assets obtained in exchange for new financing lease liability	$	—		$	289
Right of use assets obtained in exchange for new operating lease liability	$	—		$	524
Cash paid during the period for income taxes (net of refunds)	$	8		$	55

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGlobal Corporation

Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(Unaudited)

(amounts in thousands)

	For the Three Months Ended
	September 28, 2024			September 30, 2023
Common Stock
Balance at beginning of period	$	5		$	4
Common stock issued		—			—
Balance at the end of the period		5			4
Additional Paid-in Capital
Balance at beginning of period		61,562			61,138
Share-based compensation		14			113
Balance at end of period		61,576			61,251

Accumulated Deficit
Balance at beginning of period		(65,516	)		(58,429	)
Net loss		(500	)		(721	)
Balance at end of period		(66,016	)		(59,150	)

Total Stockholders’ Equity (Deficit)	$	(4,435	)	$	2,105

	For the Nine Months Ended
	September 28, 2024			September 30, 2023
Common Stock
Balance at beginning of period	$	5		$	4
Common stock issued		—			—
Balance at the end of the period		5			4
Additional Paid-in Capital
Balance at beginning of period		61,354			58,087
Proceeds from common stock issued, net		—			180
Fair value of warrants at issuance date		—			2,782
Share-based compensation		222			202
Balance at end of period		61,576			61,251

Accumulated Deficit
Balance at beginning of period		(62,914	)		(47,761	)
Net loss		(3,102	)		(11,389	)
Balance at end of period		(66,016	)		(59,150	)

Total Stockholders’ Equity (Deficit)	$	(4,435	)	$	2,105

See accompanying notes to unaudited interim condensed consolidated financial statements.

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ENGLOBAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of ENGlobal Corporation (which may be referred to as “ENGlobal,” the “Company,” “we,” “us,” or “our”) were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, these condensed financial statements do not include all of the information or note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 30, 2023, included in the Company’s 2023 Annual Report on Form 10-K filed with the SEC.

The condensed financial statements included herein are unaudited for the three- and nine-month periods ended September 28, 2024 and September 30, 2023, and in the case of the condensed balance sheet as of December 30, 2023 have been derived from the audited financial statements of the Company. These financial statements reflect all adjustments (consisting of normal recurring adjustments), which are, in the opinion of management, necessary to fairly present the results for the periods presented.

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

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

For our fiscal year 2024, all four quarters will be comprised of 13 weeks each.

Reverse Stock Split – We effected a one-for-eight reverse split of our common stock on November 30, 2023. There was no net effect on total stockholders’ equity, and the par value per share of our common stock remained at $0.001 per share after the reverse stock split. All references made to share or per share amounts in the accompanying condensed consolidated financial statements and applicable disclosures have been retroactively adjusted to reflect the effects of the reverse stock split.

NOTE 2 – ACCOUNTING STANDARDS

The Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) as of January 1, 2023. We adopted the standard using a modified retrospective approach which did not have a material impact on our financial position, results of operations, or cash flows.

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. Our services are provided under time-and-material and fixed-price 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.

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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.

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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 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.

Related Parties – The Company entered into the Credit Agreement (as defined below) and the Amended Credit Agreement (as defined below) with Alliance 2000, Ltd., a Texas limited partnership (“Alliance”), the family limited partnership of the Company’s Chairman and Chief Executive Officer, William A. Coskey, P.E. We apply provisions of subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions. The disclosures include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

Property and Equipment –Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the nine months ended September 28, 2024 was $305 thousand, compared to $404 thousand for the nine months ended September 30, 2023. For the nine months ended September 28, 2024, the Company recognized a net gain of $29 thousand and proceeds of $372 thousand from the sale of property and equipment.

NOTE 3 – REVENUE RECOGNITION

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

	For the Three Months Ended				For the Nine Months Ended
	September 28, 2024		September 30, 2023		September 28, 2024		September 30, 2023
Fixed-price revenue	$	3,250	$	7,079	$	10,815	$	23,596
Time-and-material revenue		2,432		2,371		7,535		8,785
Total Revenue		5,682		9,450		18,350		32,381

NOTE 4 – CONTRACT ASSETS AND CONTRACT LIABILITIES

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

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Costs, estimated earnings and billings on uncompleted contracts consisted of the following (dollars in thousands):

	September 28, 2024			December 30, 2023
Costs incurred on uncompleted contracts	$	16,433		$	23,318
Estimated earnings on uncompleted contracts		1,448			3,602
Earned revenues		17,881			26,920
Less: billings to date		14,569			24,819
Net costs in excess of billings on uncompleted contracts	$	3,312		$	2,101

Costs and estimated earnings in excess of billings on uncompleted contracts	$	4,376		$	3,296
Billings in excess of costs and estimated earnings on uncompleted contracts		(1,064	)		(1,195	)
Net costs in excess of billings on uncompleted contracts	$	3,312		$	2,101

NOTE 5 – DEBT

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

	September 28, 2024		December 30, 2023
Amended Credit Agreement (1)		2,304		1,047
Total debt		2,304		1,047
Amount due within one year		2,304		1,047
Total long-term debt	$	—	$	—

	(1)	On June 15, 2023, the Company entered into the Credit Agreement (the “Credit Agreement”) with Alliance, pursuant to which Alliance agreed, subject to certain terms and conditions, to extend up to two term loans in the aggregate principal amount of $1,250,000 to the Company. In connection with entering into the Credit Agreement, (i) the Company and its subsidiaries, ENGlobal U.S., Inc., a Texas corporation, ENGlobal Government Services, Inc., a Texas corporation, and ENGlobal Technologies, LLC, a Texas limited liability company (collectively, the “Guarantors”), entered into a security agreement granting a security interest in favor of Alliance on substantially all of the Company’s and Guarantors’ assets to secure all of the indebtedness and other obligations owed to Alliance under the Credit Agreement and (ii) the Guarantors entered into a continuing guaranty pursuant to which the Guarantors guaranteed the payment of all indebtedness owed to Alliance.

		On April 24, 2024, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with Alliance pursuant to which the parties amended and restated the Credit Agreement to, among other things, (i) modify the existing term loans in the aggregate original principal amount of $1,200,000 (the “Term Loans”) to (a) extend the maturity date to July 2, 2025, and (b) reduce the applicable interest rate from 8.5% to 8.0% per annum, and (ii) provide a revolving credit facility (the “Line of Credit”) of up to the lesser of (a) the Borrowing Base (as defined below) and (b) $1,000,000. The borrowing base (the “Borrowing Base”) will be an amount equal to up to 95% of Eligible Receivables (as defined in the Amended Credit Agreement) as determined by Alliance from time to time, less any reserves established by Lender in its sole discretion from time to time. As of September 28, 2024 and the date of the filing of this Quarterly Report on Form 10-Q, the Company does not have available funds to borrow under the Amended Credit Agreement.

		On November 11, 2024, the Company entered into an amendment to the Amended Credit Agreement with Alliance to (i) increase the interest rate from 8.0% per annum to 12.0% per annum under the Term Loans and (ii) provide that interest will be payable at maturity instead of monthly in arrears under the Term Loans and the Line of Credit.

		The Amended Credit Agreement matures on July 2, 2025.

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

	Amended Credit Agreement

2024		—
2025		2,304
Thereafter		—
	$	2,304

NOTE 6 – SEGMENT INFORMATION

Our operating segments are strategic business units that offer our services and products to customers in their respective industries. The operating performance is regularly reviewed with operational leaders in charge of these segments, the Chief Executive Officer (“CEO”), the Chief Financial Officer (“CFO”) and others. This group represents the chief operating decision maker (“CODM”) for ENGlobal.

Our three operating segments are: (i) Automation, (ii) Engineering, and (iii) Government Services.

Our Automation group provides the design and programming of automated control systems as well as designs, fabricates, integrates and commissions modular systems that include remote instrumentation control stations, on-line process analytical data, continuous emission monitoring, and electric power distribution. Often these packaged systems are housed in a fabricated metal enclosure, modular building or freestanding metal rack, which are commonly included in our scope of work. We provide automation engineering, procurement, fabrication, systems integration, programing and on-site commissioning services to our clients for both new and existing facilities.

Our Engineering group focuses on providing engineering, procurement, construction, and automation services as well as fabricated products to downstream refineries and petrochemical facilities as well as midstream pipeline, storage and other transportation related companies. These services are often applied to small capital improvement and maintenance projects within refineries and petrochemical facilities. For our transportation clients, we work on facilities that include pumping, compression, gas processing, metering, storage terminals, product loading and blending systems. This group also provides engineering, fabrication and automation services to clients who have operations in the U.S. oil and gas exploration and development markets. The operations are usually associated with the completion, purification, storage and transmission of the oil and gas from the well head to the terminal or pipeline destination.

Our Government Services group provides services related to the engineering, design, installation and maintenance of automated fuel handling and tank gauging systems for the U.S. military across the globe.

Our corporate and other expenses that do not individually meet the criteria for segment reporting are reported separately as Corporate expenses.

We have two reportable segments: Commercial and Government Services. Our Engineering and Automation groups are aggregated into one reportable segment, Commercial.

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

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Segment information is as follows (dollars in thousands):

	Commercial			Government Services			Corporate			Consolidated
For the three months ended September 28, 2024:
Revenue	$	4,292			1,390			—			5,682
Gross profit (loss)		538			(63	)		—			475
Gross profit (loss) margin		12.5	%		(4.5	)%					8.4	%
SG&A		(180	)		72			1,002			894
Operating profit (loss)		718			(135	)		(1,002	)		(419	)
Other income, net											3
Interest expense, net											(62	)
Tax expense											(22	)
Net loss											(500	)

	Commercial			Government Services			Corporate			Consolidated
For the three months ended September 30, 2023:
Revenue	$	5,862			3,588			—			9,450
Gross profit (loss)		323			1,514			—			1,837
Gross profit (loss) margin		5.5	%		42.2	%					19.4	%
SG&A		1,203			161			1,148			2,512
Operating profit (loss)		(880	)		1,353			(1,148	)		(675	)
Other income, net											3
Interest expense, net											(27	)
Tax expense											(22	)
Net loss											(721	)

	Commercial			Government Services			Corporate			Consolidated
For the nine months ended September 28, 2024:
Revenue	$	13,292			5,058			—			18,350
Gross profit (loss)		1,783			(93	)		—			1,690
Gross profit (loss) margin		13.4	%		(1.8	)%					9.2	%
SG&A		1,276			268			3,247			4,791
Operating income (loss)		507			(361	)		(3,247	)		(3,101	)
Other income, net											231
Interest expense, net											(166	)
Tax expense											(66	)
Net loss											(3,102	)

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	Commercial			Government Services			Corporate			Consolidated
For the nine months ended September 30, 2023:
Revenue	$	25,124			7,257			—			32,381
Gross profit (loss)		(2,479	)		2,112			—			(367	)
Gross profit (loss) margin		(9.9	)%		29.1	%					(1.1	)%
SG&A		6,448			438			3,964			10,850
Operating profit (loss)		(8,927	)		1,674			(3,964	)		(11,217	)
Other income, net											52
Interest expense, net											(158	)
Tax expense											(66	)
Net loss											(11,389	)

Total assets by segment are as follows (dollars in thousands):

Total Assets by Segment	As of September 28, 2024		As of December 30, 2023
	(dollars in thousands)
Commercial	$	7,026	$	11,740
Government Services		4,142		3,780
Corporate		2,062		3,267
Consolidated	$	13,230	$	18,787

NOTE 7 – FEDERAL AND STATE INCOME TAXES

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

The Company applies a more likely than not recognition threshold for all tax uncertainties. The FASB guidance for uncertain tax positions only allows the recognition of those tax benefits, based on their technical merits that are greater than 50 percent likelihood of being sustained upon examination by the taxing authorities. Management has reviewed the Company’s tax positions and determined there are no uncertain tax positions requiring recognition in the financial statements. U.S. federal tax returns prior to 2018 and Texas margins tax returns prior to 2017 are closed. Generally, the applicable statues of limitations are three to four years from their filings.

The Company recorded income tax expense of $22 thousand for the three months ended September 28, 2024 as compared to income tax expense of $22 thousand for the three months ended September 30, 2023. The effective income tax rate for the three months ended September 28, 2024 was (4.6)% as compared to (0.9)% for the three months ended September 30, 2023. The Company recorded income tax expense of $66 thousand for the nine months ended September 28, 2024 as compared to $66 thousand for the nine months ended September 30, 2023. The effective income tax rate for the nine months ended September 28, 2024 was (2.2)% and for the nine months ended September 30, 2023 was (0.6)%. The effective tax rate differed from the federal statutory rate of 21% primarily due to the effect of the valuation allowances related to the expected unrealized deferred tax asset generated by the current year benefit.

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NOTE 8 – COMMITMENTS AND CONTINGENCIES

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

On March 12, 2024, ENGlobal U.S. Inc. was served with a lawsuit by VEnergy Industrial Park I, LLC (the “Plaintiff”). The lawsuit is pending in the County Court of Waller County, Texas. The Plaintiff is seeking monetary damages of $1.3 million for a breach of lease cause of action. We disagree with the Plaintiff’s claims and expect to petition the court with affirmative defenses. However, litigation is inherently uncertain, and an adverse outcome could have a material impact on our financial condition.

On August 1, 2024, ENGlobal U.S. Inc. was served with a lawsuit by 5V Leasing, LLC and Hector Venegas (the “Plaintiffs”). The lawsuit is pending in the District Court of Ward County, Texas. The Plaintiffs are seeking monetary damages of $250 thousand for a breach of lease cause of action. We disagree with the Plaintiffs’ claims and expect to petition the court with affirmative defenses. However, litigation is inherently uncertain, and an adverse outcome could have a material impact on our financial condition.

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

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NOTE 9 – LEASES

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

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

		Three Months Ended					Nine Months Ended
	Financial Statement Classification	September 28, 2024			September 30, 2023		September 28, 2024		September 30, 2023
Finance leases:
Amortization expense	SG&A Expense	$	21		$	61	$	83	$	176
Interest expense	Interest expense, net		7			13		27		39
Total finance lease expense			28			74		110		215

Operating leases:
Operating costs	Operating costs		8			23		30		710
Selling, general and administrative expenses	SG&A Expense		(370	)		691		593		1,900
Total operating lease expense			(362	)		714		623		2,610
Total lease expense		$	(334	)	$	788	$	733	$	2,825

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

Financial Statement Classification

September 28,

2024

December 30,

2023

ROU Assets:

SEC Form 10-Q filed by ENGlobal Corporation