ENGlobal Corporation: One Year Later

Rev. 1.1

It was just a year ago on 1 April I revived and renamed the Engineering Blog. A few of you guessed that the date renewed on was no coincidence. Let’s examine where has ENGlobal gone in the last year? I thought the then presiding CEO was ineffective. Despite the long time it took for others to see the problem the CEO “resigned” and his fruitless management finally ended, albeit with severe damage. Just look at the financial results of the last year Q4 2012 – (.15), Q1 2013 – (.01), Q2 2013 – (.37), & Q3 2013 – (.83). It looks like some pretty nasty situations were uncovered after he left and had to be accounted for.

What will the financial results be in Q4 & FY 2013? I do not think it will be good news. Notice that this report did not come out in March as usual before last year. You may recall last year was delayed also. This FY report is delayed and to the extent that a NT 10-K had to be filed. ENG usually delays when the news is bad and/or when news can be bundled for a better street reaction.

NT 10-K

From the filing: “The Registrant has limited staffing and extremely limited resources. Accordingly, the Company will be unable to file its Annual Report on Form 10-K for the year ended December 29, 2012 within the prescribed period. We believe that the subject annual report will be available for
filing on or before Monday, April 15, 2013.” Does this sound good to you?

http://www.sec.gov/Archives/edgar/data/933738/000117184313001182/nt10k_032813.htm

There is more bad news within. Look at note (3) question: “Is it anticipated that any significant change in results of operations from the corresponding period for the last fiscal year will be reflected by the earnings statements to be included in the subject report or portion thereof? ☒ Yes ☐ No”
And, then the Explanation:  The Registrant’s results of operations for the year ended December 29, 2012 will differ materially from the same period in 2011.  For fiscal year 2012, the Registrant expects to report a net loss from continuing operations of $30.1 million and loss per share from continuing operations of $1.13 compared to net loss from continuing operations of $4.4 million and loss per share from continuing operations of $0.16 in fiscal year 2011. In addition, due to the Registrant’s losses from operations and defaults under its debt covenants, the Registrant’s auditors have informed us that their opinion will include a going concern qualification.

I added the underlining but the bad news is clear. A FY 2012 loss from continuing operations of $1.13 per share and a decrease of .97 cents over last year’s loss is phenomenal. This is the severe damage I spoke of earlier. Please note that this is comparing Continuing Operations. ENGlobal’s loss form continuing operations was (.16) in FY 2011, however, their Net Loss was (.27)! In comparing apples to apples the Net Loss for FY 2012 is sure to be much higher than the $1.13 per share because the YTD Net loss from discontinued operations at the end of 3Q 2012 was already (.18).  Even without additional losses in the fourth quarter from discontinued operations they are looking at a Net loss of $1.31 which would exceed FY 2011 by a whopping $1.04 per share.

I would have thought ENG would be sold or nearly so by now. The length of time with no announcement as such or even other such indicators is worrisome. The auditors are not rendering an opinion for nothing. It would be a moot point in the event of a sale. So in reality with what we know, with no sale in sight; what do you think the ENGlobal’s auditor’s opinion as the company being a “going concern” will be?

Continuation of an entity as a “going concern” is assumed in financial reporting in the absence of significant information to the contrary. Ordinarily, information that significantly contradicts the “going concern” assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.  By including a “going concern” qualification in their opinion, ENGlobal’s external auditors may be forcing disclosures about continuity that might not be otherwise forthcoming from management.  If you are interested in more information on this subject just “Google” the subject “concerning auditors going concern qualification”.

Additionally, the NASDAQ should be delisting ENGlobal soon by the stock not recovering to over $1 for the required amount of time. Moreover, the Credit Facility is on a multiple extension, expiring April 30 – lending money to a company with consistent losses…doesn’t take a genius to figure the rest out.

If you look at all the recent SEC filings you will see some SC 13G/As and a SC 13G filed. Statement and amended statements of ownership. Given the number of shared amended and owned there exists the possibility of taking the company private. That would mean an end with a low recovery for investors and a smaller company that can still provide some jobs after the cuts. If that possibility happens the comapny still needs to be run competently.

You may see the dialog here change as more information becomes available. ENG has discontinued many operations and sold of several business units. Revenue will decrease and I hope they can balance to something profitable. Good luck to everyone.

ENGlobal Corporation - 3Q Press Release and 10Q Analyses

Rev. 1.1

It was a record breaking quarterly report so let’s take a look.

Press Release

“ENGlobal reported a net loss of $22.3 million, or $0.83 per diluted share, for the quarter ended September 29, 2012…” Well folks, one thing we have learned about ENGlobal, they always seem to deliver more than you expect.

I am astounded. Are you guys kidding me? When you go cleaning up the books and get a number that bad it is sure sign the BOD, CEO and many others were not doing their jobs.

The next paragraph was a standard we have heard for x number of quarters (I have lost count for 3+ years). “Commenting on the results, William A. Coskey, P.E., ENGlobal's Founder, Chairman and Chief Executive Officer, said, "To a large extent, the third quarter is comprised of heritage financial items that have impacted our Company and mask some recent improving financial trends in our business.  For example, we continue to see gradual improvements across several of our working capital-related metrics. I am very pleased with current business activity in our operations, and also the progress we have made on several fronts since August 1st of this year."

Well you didn’t see gradual improvements in DOS as it appeared to increase to around 85 days for 3Q.  Wonder why ENG stopped reporting that metric?

Some facts here:

• Mr. Pagano resigned at the beginning of August. 
• He was CEO for one month of the third quarter. 

Examine "Heritage financial items". Is Mr. Coskey throwing Mr. Pagano under the bus or patting himself on the back, or maybe both? For once, I would like to see a CEO or Chairman of the Board take responsibility for results and not try to 'Pass the Buck'. Regardless, who was the Chairman of the Board during the creation of these “heritage financial items”? I am surprised it wasn't Bush's fault.

Too bad the miniscule positives don’t outweigh continuing operations' negatives, much less the every quarter “non-recurring special event”. These improvements are really just polishing the silverware on the Titanic. To explain it another way. Lets say you have stalled your aircraft and are in an unrecoverable spin with a downward velocity of 10,000 ft per minute. You eject and your upward velocity for a short period is 2,000 ft per minute. Guess what? You are still losing altitude and if you don't have enough altitude above ground level you are going to impact. 

Results were so bad ENGlobal is not even going to hold a conference call. If ever they needed a conference call it is now!  If Mr. Coskey truly believes this rhetoric he should get on the line and tell the world about all their accomplishments and provide some supportive details for the, I quote, “progress on our strategic priorities, including collaborating with our management consultant to improve financial performance, reorganizing our management team, pursuing opportunities to improve margins and reduce expenses, and completing the divestiture of our Land and Right-of-Way division of the Field Solutions segment”.  Details would be a nice change from the ongoing ‘trust us’ situation because we have seen what that got us for those x number of quarters.


10Q Analysis

From the Condensed Consolidated Balance Sheets (Unaudited):

Goodwill - $2,805,000

How does this remain?  Any Goodwill has been lost to the clients, employees, and shareholders.  They did say it was an interim assessment so there is more to come!

Long-term trade and notes receivable, net of current portion and allowances - $899,000

This looks like another SLE write-down if not collected in the forth quarter.

Current portion of debt - $29,406,000 

Almost doubled since the end of the year. The right-away sale should help reduce this amount by approx. $4.5 mil as retained AR is collected because there was no immediate cash in the deal!

Total Stockholders' Equity - $26,352,000

Lost $32.1 mil in equity in 9 months.  Book value @ approx. $0.98 per share; Tangible Net Worth (book value less Goodwill and Other Intangibles) @ $0.80 per share)


From Condensed Consolidated Statements of Cash Flows (Unaudited):

Net cash provided by (used in) operating activities for the first nine months - ($8,278,000)

Still negative cash flow for the year but positive for the 3rd quarter by $910k… a good sign!


Note 2 - Liquidity

"Although we have sold assets and reduced personnel in an attempt to improve our liquidity position, we cannot assure you that we will be successful in obtaining the cure or waiver of the defaults under the respective credit facilities. If we fail to obtain the cure or waiver of the defaults under the facilities after any forbearance period, the lenders may exercise any and all rights and remedies available to them under their respective agreements, including demanding immediate repayment of all amounts then outstanding or initiating foreclosure or insolvency proceedings. In such event and if we are unable to obtain alternative financing, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease our operations. In addition, based on current conditions, it is probable that our independent registered public accounting firm will include an explanatory paragraph with respect to our ability to continue as a going concern in its report on our financial statements for the year ending December 31, 2012."


Notes to Unaudited Interim Condensed Consolidated Financial Statements:

"The Company has been unable to sell the Electrical Services group as planned and has decided to dispose of substantially all of the group’s remaining assets. During the third quarter of 2012, the Company completed the disposal of the group’s remaining assets concurrent with the completion of the last remaining lump sum project. During the third quarter, the Company incurred approximately $0.5 million of costs to complete the remaining lump sum project. Going forward, the Company will have no continuing involvement with these operations after the completion of the remaining lump sum project."

I wonder when this discontinued project will be completed? This was going to be taken care of several quarters ago.

"On September 10, 2012, the Company entered into a definitive agreement to sell its Field Solutions segment...The transaction was valued at approximately $7.5 million, consisting of approximately $4.5 million in working capital at closing to the Company [NO CASH!] and a $3 million promissory note payable to the Company over four years."

"The results of the discontinued operations are shown on the Condensed Consolidated Statements of Operations as "Loss from discontinued operations, net of taxes". During the third quarter, the Company incurred or accrued approximately $3.6 million [shows $3.717 mil in the actual table] of additional costs (which includes a loss on the sale of the Land and Right-of-Way division of approximately $1.1 million) related to the sale of these divisions."

Sounds like the Electrical Group took another $2.5 mil hit on the project.


Note 7 - Line of Credit and Debt

"Pursuant to generally accepted accounting principles, the combination of both a subjective acceleration clause and a lock-box arrangement required by the lender results in borrowings outstanding under the PNC Credit Facility being classified as short-term obligations despite the three-year term of the agreement."

Nothing like long-term being classified as short-term. Unfortunately by the same token ENGlobal finally now has long-term losses.


Notes to Unaudited Interim Condensed Consolidated Financial Statements:

"On October 30, 2012, the Forbearance Period was extended to November 15, 2012.  On November 14, 2012, the Forbearance Period was extended to November 30, 2012 (or earlier should any forbearance default occur)."

Looks like PNC is only giving ENG relief in 2-week increments. Wonder if ENG has received another 2-week extension last Friday?

"As of the result of covenant violations, including those described above, the Company is currently in default under the terms of the PNC Credit Facility. As of the date of this filing, the Agent has not taken any action with respect to the Company's defaults and the Company was actively discussing with the Agent the terms under which such defaults may be cured or waived. Although the Company is in active discussions with the Agent, if the Company is not successful in obtaining the cure or waiver of such defaults, at the end of the Forbearance Period, the Agent may exercise any and all rights and remedies available to it, including demanding immediate repayment of all amounts then outstanding or initiating foreclosure or insolvency proceedings. In such event and if we are unable to obtain alternative financing, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease our operations."

Now we get the same for the Ex-Im Bank Facility.

"As of the result of covenant violations, including those described above, the Company is currently in default under the terms of the Ex-Im Bank Facility.  As of the date of this filing, Wells Fargo had not taken any action with respect to the Company's defaults and the Company was actively discussing with Wells Fargo the terms under which such defaults may be cured or waived.  Although the Company is in active discussions with Wells Fargo, if the Company is not successful in obtaining the cure or waiver of such defaults, Wells Fargo may exercise any and all rights and remedies available to it, up to and including terminating the Ex-Im Bank Facility. In such event and if we are unable to obtain an alternative facility, our business will be materially and adversely affected, and we may be forced to sharply curtail or cease our operations."


Notes to Unaudited Interim Condensed Consolidated Financial Statements, Total Assets by Segment, As of September 29, 2012:

If you subtract the discontinued operations (see the asterisk note) in the table from the Total Assets ($86,493,000) it looks like continuing operations has only $72,680,00 in assets!

Now stroll down to Net Loss ($22,330,000):

If you add back Goodwill at $14.6 mil and Discontinued Ops at $3.7 mil continuing Ops still lost $4.0 million! Consider E&C making 6.5% and Automation making 16.4% in margin with overall rate at 5.7%.  With a $6.0 million overhead they need to double revenue to just break even OR they need to double margins.


Note 12 – Subsequent Events

Notice of Delisting:

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

Closing of Sale of the Land and Right of Way Division of the Field Solutions Segment:

"Pursuant to the final agreement, the Company will retain approximately $4.5 million of this division's working capital at the time of closing [again, that means no cash received], in addition to receiving a $3.0 million promissory note payable over four years."

"As previously reported, the original agreement provided for the sale of substantially all of the assets of both divisions of its Field Solutions segment, the Land and Right-of-Way, and Inspection. However, the Inspection division was not sold as part of the final transaction, and ENGlobal will retain the Tulsa-based business for the foreseeable future, while actively pursuing its sale and reporting its financial position and results of operations as discontinued operations. The Company expects no changes to the personnel of its Inspection operation as a result of this transaction."

Maybe another mandate from division management and employees to ‘sell or we leave’ will prompt accelerate selling activity.


Financial Overview of Continuing Operations:

"Improving our margins on our existing work is an important area of focus.  During the recent period of industry-wide decline in demand for the types of services we provide, we reduced our rates significantly, as was required to obtain and retain business. Although the level of demand has increased, pricing in certain geographical markets is still extremely competitive and we have not yet been able to increase our margins to prior levels. We have recently engaged a management consultant to assist us in improving our profit margins."

Does that mean the remaining management cannot come up with ideas to improve margins?  Are they "energized" but just do not know what to do?


Results of Continuing Operations– Three Months ended September 29, 2012 versus September 30, 2011:

Overall comments - As noted in the summary Revenue down 5% and Gross Profit down 52%.  Concerned should be that the core business is no longer able to make margins to cover SG&A.  The drop in revenue probably comes out of in-office projects, which is making margins (as a percent of revenue) decline, as in-plant revenue becomes a bigger piece of the pie. Bad market mix for E&C. Risk of losing Caspian due to ENG’s cash issues and paying subs. A loss or delay of the next phase of the work could materially impact revenue and margins coming out of Automation. SG&A is saddled with office rents that are not easily re-negotiated and will make it difficult to downsize quickly.

Gross Profit (Loss):

"Gross profit for the three months ended September 29, 2012, as compared to the comparable 2011 period, decreased by approximately $3.5 million, or 5.8%.  As a percentage of revenue, gross profit decreased from 11.2% to 5.7% [massive] for the three months ended September 29, 2012, as compared to the same period in 2011"

"Our gross profit and gross profit margin decreased primarily due to increased direct and variable costs [wonder what their utilization rate is running, or how billable man-hours are trending?] in our E&C Segment, resulting in lower profit margins.  We continue to be affected by intense competition and pricing pressures."

This seems to be a rather lame excuse when you look at apparent growth of competition in similar markets.


Liquidity and Capital Resources

Overview:

"ENGlobal does not intend to provide updates or make any further comment regarding its exploration and evaluation of strategic alternatives unless and until the Board of Directors has approved a definitive course of action."

Based on the Board’s reactions to what appear to be critical items this could take a while for them to approve anything. This does not really surprise you, does it?

Cash Flows from Operating Activities:

"The primary changes in working capital during the nine months ended September 29, 2012 included increased Costs in Excess of Billings [not getting billings out on time] and Decreased Billings in Excess of Costs [not getting favorable contract terms to allow for positive cash flows on lump sum projects] on uncompleted contracts of $1.3 million on fixed price projects where billing milestones have not been met, partially offset by an increase in accounts receivable of $2.8 million."

Again, bad terms, or poor order-to-cash processes.


PNC Credit Facility:

"Forbearance Period was subsequently extended to November 15, 2012 and again to November 30, 2012 (or earlier should any forbearance default occur) at a cost of $17,500 for each extension."

That could get expensive at $35k per month.


Conclusions and Opinion

Glancing at the latest financials posted (November 24th) and the revenue trends certainly are an eye opener!  Revenue trends over the last 4 quarters go from approx. $150mm as December 2011, $75mm in Q1, $77mm in Q2, and then $23mm in Q3 although I suspect the December 2011 numbers may not be correct*.  The Q3 results give ENG a current continuing revenue run-rate of less than $95mm which is about where it started in 2001.  Would be interesting to look back at what level of SG&A ENG had at that time.

*(According to SEC filings ENG 2011 annual revenue was approx $313mm and the 2011 3Q revenue was approx $222mm, or a net revenue for the 4th quarter of approx $91mm.)

Back to the press release and 10Q - OK folks, it is a disaster. No profit is going to be made. So what is going to happen?

Let's look at the recent history. ENG's losses were increasing. It is obvious PNC didn't trust management anymore. A consultant was forced upon ENG through the Credit Facility by PNC to manage ENGlobal.

Then, parts of the company are/were being sold and this continues. It is a liquidation process in my honest opinion.

Now another firm comes in (Simmons) assigned to help determine the future of ENG, however, ENG is not indicating any particular avenue. Cutting through the BS, I believe they are trying to sell the company. Moreover, we are getting close to that time. Why? One, for tax reasons - before the end of the year. Two, it sure looks like they threw in everything that would be a loss into this quarter to take all problems off the balance sheet. This would clean up those books for a potential sale. Three, PNC would never extend more time to ENGlobal with their risks increasing from further company losses unless a deal is imminent.

If you own stock I think you will get something for it, either in stock trade or cash. This is better than nothing. If you have a job there you may continue to have one, adjustments will be made. Who will buy ENG? First, let me say the deeper the buyer’s pockets are the better off you will be. In addressing who would be a buyer - who wants to create or increase their presence in the Golden Triangle, someone like CDI, Jacobs or CDI.

Good luck to everyone.

Late Summer 2012 Stock News And Events

Rev 6.6

I Love The Smell Of Burned Pizza In The Morning - It Smells Like....Inevitability.

• Edd Pagano has resigned and Mr. Coskey picked up the loose reins. Well folks, that took some time to happen. See new post - ENGlobal CEO Resigns.
• The stock markets so far seem unimpressed. The price is virtually unaffected near the multi-year lows at ~ $1.45. The volume is up huge with big blocks trading.  Looks like no increase in confidence so far.
• 8/2 New 5-year low on ENG stock, $1.34 on 71K shares.
• 8/7 New 5-year intraday low on ENG stock, $1.26.Closed at $1.28 on 157K shares.
• 8/9  New 5-year intraday low on ENG stock, $1.16. Closed at $1.18 on 55K shares.
• 8/10  New 5-year intraday low on ENG stock, $1.0302. Closed at $1.12 on 114K shares. Market Cap is below liquidation value.
• 8/13 New 5-year intraday low and close on ENG stock, $1.01 on 192K shares.
• 8/13 1630 No announcements currently. I would think that if there were some hopeful news it would be before 2Q earnings. It maybe possible 2Q will be delayed but now we wait and see if it will be tomorrow as announced and what other possible news may accompany it.
• 8/13 NT 10Q Filed by ENGlobal - Earnings Delay.  PART III--NARRATIVE
  
  State below in reasonable detail why forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-SAR, or the transition report or portion thereof, could not be filed within the prescribed time period.
  
  The Registrant’s management deemed additional time is necessary to ensure full, complete and accurate disclosure and to complete the financial statements required for inclusion within the Quarterly Report on Form 10-Q for the period ended June 30, 2012. We believe that the subject quarterly report will be available for filing on or before August 20, 2012.
• 8/14 New 5-year intraday low on ENG stock, $0.92. Closed at $0.97 on 123K shares.
• 8/15 New 5-year intraday low on ENG stock, $0.80. Closed at $0.87 on 92K shares
• 8/16 The stock rose today on heavy volume to $0.98. As stated above in the NT 10Q the report filing may occur on or before August 20, 2012.
• Friday should be an interesting day for the stock. Watch for the SEC filing from now until Monday: http://sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=eng&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany
• Friday 8/17 The PR came out and made proper reference to the last set report date of 8/14 with the delayed date set on 8/20 "After Market Close". The Conference Call will be held the next day 8/21 at 1100 EDT. Should be interesting. Maybe some more PR issued then also.
• 8/21 New 5-year intraday low on ENG stock, $0.68. Closed at $0.79 on 1.2M shares.
• 8/22 New 5-year low close of .77 on 419K shares.
• 8/27 New 5-year low close of .73 on 104K shares.
• 8/31 New 5-year low close of .70 on 56K shares.
• 9/7 New 5-year intraday low on ENG stock, $0.65. New 5-year close at $0.69 on 246K shares. 

• HOUSTON, Aug. 1, 2012 /PRNewswire/ -- Express Energy Services, LLC (EES) today announces that John R. Beall has joined as Chief Financial Officer, effective July 5, 2012. Mr. Beall replaces Jim Davis, who is retiring from EES.  See "Appointments And Moves" for more information.

8/21 0753 EDT KeyBanc Downgrades ENGlobal Corporation (ENG) to Hold; Q2 Miss, Visibility Weak KeyBanc downgraded ENGlobal Corporation (NASDAQ: ENG) from Buy to Hold.

Analyst, Matt Tucker, said, "We are downgrading ENGlobal following its weaker-than-expected 2Q12 results, which have dampened our near to medium-term earnings outlook and have put the firm in violation of covenants under its new credit facility, generating some concerns around ENG's near-term liquidity. This follows several quarters of disappointing performance from ENG and adds to a series of events that have contributed to the uncertainty around the firm's direction, including recent credit issues that we believe impacted competitiveness in 1H12 (at least temporarily), the abrupt June 13 departure of its CFO (still without full-time replacement), and the unexpected August 1 departure of two-year CEO Edd Pagano, who was replaced by co-founder, Chairman and former CEO Bill Coskey."

 "...the unexpected August 1 departure of two-year CEO Edd Pagano" Don't read much, huh Matt?

KeyBanc lowers FY13 EPS estimate from $0.38 to $0.00.

Are you kidding me? What do you think they believe what conditions should constitute a Sell rating?

Opinion 8/10

Having thought about the situation ENGlobal is in for some time I think the most likely outcome and smart transition for ENGlobal is a merger/buyout of some type. Why? It is the best outcome for everyone. If the BOD lets this company go bankrupt what risk does that pose for them given the total loss for investors (the stock would be cancelled) and catastrophic blow to thousands of employees? This would be the poster child for reckless management for sure and lawyers to the SEC would agree.

To avoid all this, a merger/buyout is the best option. Most certainly they have been approached and received offers. Who would buy? A good question, however, ENG is not without value, there are assets, AR, contracts, backlog and loyal employees. I think large companies may find something imbedded within ENG that would interest them and there are a lot of large companies. Smaller local companies like Burrow Global or RDS are the major local players. BG would be eliminated purely on their competent, quick gentleman’s success story and prehistory. That leaves also successful and larger RDS along with a multitude of even larger players and with possible capitol investor groups.

The real problem I think happening within ENGlobal is cash and loss of personnel. Not paying vendors is problematic and costs trust and time. Not paying employees – well, they walk and this erodes ability to make money. Employees are the real long-term value in a company. Another scenario threat would have desperate people doing desperate things and not operating ethically with the highest integrity, without exception.  Managing in the face of crisis requires courage from the leadership.  Does ENG management, and the BOD, have it? Time for them to demonstrate such virtues may have gone by or at best is running out quickly.

I think there is a real race going on now to hold things together by the clock ticking with PNC using their power in some fashion, keeping employees paid, and getting a deal done with a company or capitol group to transition the company.  When may this be announced? This could occur Friday 8/10 after the close until Tuesday; before the 2Q announcement. That surely would render bad news moot by degree or level of transition. If this does not happen expect more stock volatility and anxiety from uncertainty - people do not do well with uncertainty, especially when they have a great deal at stake.

The prospect of ENGlobal continuing otherwise is not likely unless downsizing to core profitable services occurs. Additionally, a change in management style to one that is "hands-on" and active in a recession would be necessary. It is a “survival of the fittest” business environment.

ENGlobal SEC Filing 8/7/2012

Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On August 3, 2012, Michael G. Bryant advised the Registrant of his resignation as Executive Vice President – Field Solutions for personal reasons effective immediately.  Mr. Bryant has served as Executive Vice President of Field Solutions since November 2011.  David Sinclair will replace Mr. Bryant.

David Sinclair, 54, has served as the Registrant’s Senior Vice President of its Field Solutions segment in November 2011.  From 2001 to November 2011, he served as the Vice President of Land in the Field Solutions segment for the Registrant and a predecessor company.  Mr. Sinclair brings over 30 years of experience in both domestic and international assignments for the pipeline industry. Prior to joining the Registrant, he spent 16 years at Enron as the Director of Right of Way and as an independent land consultant.  He is presently a Trustee and former President of the Right of Way International Education Foundation, an IRWA course facilitator, Past Chairman of the IRWA Pipeline Committee, Past President of IRWA Chapter 8, and a Past Chairman of the Southern Gas Association’s (SGA) Right of Way Roundtable. Mr. Sinclair holds a Bachelor of Business Administration from Texas Tech University.

Opinion

"Another one bites the dust"  Great as a song - bad as status quo for any company. This was revealed earlier on this website in an earlier comment on ENGlobal CEO Resigns.

David Sinclair who will take over the duties brings good experience to the job. Do not make the mistake of thinking that his working for Enron is a detriment, it isn't, it was good professional experience added to his career. I have had lunch with David in the past and have spoken with him several times at ENGlobal. I mentioned him within the past Annual Meeting posts that I made on the message boards. He is rock solid and a good man for the job.

2Q 2012 Predictions And "What Ifs"

I have been getting a lot of questions for an opinion on ENGlobal’s forthcoming 2Q financial results. This is a good opportunity to examine the Profit or No Profit scenarios and the “What If” permutations.

What if ENGlobal makes a Profit?

That could mean more “Pagano” for everyone, extra cheese and free delivery...enjoy.

How many of you think ENGlobal will make a profit? I don’t!  Please leave comments and reasons to why you think they will make a profit.  That’s it for this section.

What if ENGlobal makes No Profit?

I want to say outright I hope ENG makes some clean profit.  However, I do not think ENG will make a profit based on their past results, especially 1Q.  As illustrated in previous postings, reported financial results, conference call comments and SEC filings the numbers looked to be potentially embellished in 1Q for reasons I will leave up to readers.  Despite numbers that do not meet the smell test the 1Q results were still a loss. With just basic logic I think continuing operations (the true operational value without affect of questionable numbers) will be a severe loss.  Without further help from these questionable numbers or errors 2Q may be a real horror show.  If you have followed ENG you know traditionally 2Q has been one of the strongest financial reporting periods for the company.

At this stage in the game, 3+ years of losses, how do you think investors, employees and public opinion will think of the CEO and BOD?  The factors of fiduciary responsibility, competence, denial and ego have reached epic proportions and are in question.

I see several scenarios that could result from another “no profit” quarter…

First, if ENG is having difficulty paying bills while running out of money, the bank, PNC, will know this with the continuous reporting requirements ENG has to make to them.  The continuous reporting was done so PNC could simply monitor and control their investment (see the Credit Facility post) to hopefully prevent losses and increased investment risk. Remember the terms of the CF make current operations a near Chapter 13, Receivership, condition.  If PNC pulls the plug, I think ENG will partially or wholly cease to function while assets are sold to satisfy the CF. There was a clear equal statement of this featured in a previous post and SEC filing. At this point vendors, creditors and clients are dealing with the bank.  Chapter 11 may follow.

Second, ENG goes direct to Chapter 11.  No one at ENG takes responsibility and blames others for the “sudden” collapse. After a few weeks the determination will be that this blog caused it.

And a third possibility is that the BOD sees bad results or bank action coming and negotiates to sell part of or all of ENG to raise cash and prevent total loss.  At this time the BOD and upper management have to know the results for April and May, and with only 14 working days remaining until the 2Q report is filed and they should have an idea what it looks like for the last 90 days.  Even if they are successful in negotiating a sale there won’t be much saved this late in the decision game.  A White Knight scenario would seemingly be preposterous given the personality of the company unless it was preplanned.

I would say realistically you might see class action lawsuits or government investigations take place based on the strange numbers and calculations reported in past news releases, conference calls and SEC filings.  The stock may soon be below acceptable NASDAQ levels and when the time limit is reached (30 days) ENG will be notified, a SEC filing made and ENG will file for an extension to remain on the NASDAQ under probation status.  If they rise above $1 within the time requirement, they stay, if not – it will be to the small penny stock boards or back to the AMEX.

Other "What Ifs"…

What if DSO increases to 85 days?  First, that could depend on how it is calculated for 2Q.  It could also mean the struggle with the “order to cash process” of not getting bills out to clients and not collecting them in a timely manner continues.  Maybe operations should take over that function!

What if vendors and subcontractors are not getting paid?  Not paying vendors and sub-contractors could mean projects, shipments and work schedules may suffer, and that new government contract may be in jeopardy as well as that large international project.  These types of issues could have an impact on getting work completed, thus reducing revenues.

What if billable man-hours decline?  How can billable man-hours not decline when it appears the loss of management and staff to competitors continues?  Maybe bonuses could be paid to management to keep them around! Wouldn’t that be ironic! Have you heard or read about that recently, companies (our government/banks) not making money, not paying debts, and yet paying out bonuses?

What if manpower utilization increases? That could mean corporate and operational overhead staffing levels have been scaled back to coincide with a decline in manpower or it could mean billable man-hours have actually increased.  Either scenario would be good news. A combination of the two would be GREAT news.

What if the BOD suddenly awakened to the fact ENG may be in trouble and stepped-up with an action plan calling for one or all of the following:
·    New management;
·    A renewed emphasis on a “core” business;
·    The divestiture of “non-core” business operations for cash to allow for acquisitions or expansion supporting its “core” business;
·    A reduction, reorganization and centralization of overhead services to fit a new model;
·    Recognition that “customers” and “cash” are king;
·    Another reverse merger;
·    An equity partner;
·    A follow-on stock offering of 10,000,000 shares at $3.50 a share to reduce debt and provide working capital (yes this would dilute earnings, but WHAT earnings?); or
·     A 7-cent per share dividend beginning January 1st?

Conclusion

What if you were in charge for a day, what solutions or changes would you make?
It won’t be long until the earnings news will be out. Given the critical nature of what we have seen the sensible logic dictates the existing operational condition and same management practices cannot continue much longer. The credit facility and Bank simply will not let it or tolerate it, respectively. Some big event will happen and it will happen soon. There are a lot of great people working for ENGlobal, I wish you the best. Good luck to everyone.

Comments are welcome.