ENGlobal Corporation

Good morning and welcome to the ENG's 2021 Annual Financial Results Conference Call. Your host for this morning is Chief Executive Officer Mark Hess. At the request of ENG, today's call is being recorded and will be available for replay on the Investor Relations section of the company's corporate website www.englobal.com. You may access the replay by dialing toll-free 877-481- or 919-882-2331 internationally and referencing conference ID 44765. This replay will be available shortly after the completion of this event through 9 a.m. Eastern Time on March 17, 2022. I would like to inform all parties that your lines have now been placed in a listen-only mode until the question and answer segment of the call begins. To ask a question in that segment, you will receive instructions from the operator. At this point, I would like to turn the call over to Rick Eisenberg, Media Relations Director with Eisenberg Communications.

Thank you, operator, and thanks everyone for joining us on this call. Before we begin, I'd like to review our forward-looking statements provision. During today's conference call, company representatives may make forward-looking statements. Any statements made in this presentation about future operating results or other future events are forward looking statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Please note that actual results achieved by the company may differ materially from such forward looking statements. A discussion of factors that could cause such differences appears in the risk factors section of the company's 10K. Presenting on the call today will be Darren Spriggs, ENG's CFO, and Mark Hess, ENG's CEO. Following the presentations, Darren, Mark, and Roger Westerlund, ENG's president, will be available for questions. And now I'll turn it over to Darren Spriggs. Darren?

Thank you, Rick. I would also like to extend my welcome and appreciation for those on the call today. For the year, we reported approximately $36.4 billion in operating revenue and $37.1 million in direct operating costs. Included in the direct operating costs is $5.6 million related to underutilized staff and proposal costs, which has significantly increased over prior periods. During the year, we recorded an employee retention tax credit of $3.1 million for retaining our staff. In addition, our PPE loan, also intended to retain our people, was completely forgiven during the year. These credits and the loan forgiveness totaling approximately $8 million are recorded in other income in accordance with GAAP. Our SG&A was $12.8 million for 2021. which included non-recurring legal and advisory fees of $300,000 and an uncollectible account receivable of $1.4 million, compared to $8.8 million for last year. The remaining increase of $2.3 million is primarily related to the investment in our business leaders and staff that Mark will discuss later in his comments. As a result, our net operating loss for 2021 was $5.6 million, compared to $500,000 last year. Our income tax expense consists of state income taxes, primarily in states that do not use net income to calculate tax, like Texas. Our federal income tax expense is offset by an adjustment to the valuation allowance recorded against it. As a result, we recorded a net loss of $5.7 million, or 18 cents per share, for the year compared to a loss of $600,000, or .2 cents per share last year. We ended the year with 12.8 million in backlog compared to 24.3 million last year. However, we saw an increase in our backlog in the fourth quarter of 4.4 million. Our cash balance was 19.2 million as of the end of the year, an increase of 5.5 million over last year. Last year's balance of 13.7 million. Our working capital increased 12.2 million over last year to 26.2 million as of the end of 2021. Significant changes in our working capital include the forgiveness of the PPE loan, of which 3.7 million was included in working capital, and the issuance of approximately 20 million of equity during the year. We believe this cash on hand, along with internally generated funds, availability under the company's revolving credit facility, and other sources of working capital will be sufficient to fund Englobal's current operations and expected near-term growth. And now to you, Mark.

Thank you, Darren. As you mentioned, 2021 was a challenging year for us. We reported in our press release this morning we had a significant decrease in our revenue for the year. mostly due to the continued impact of COVID-19 upon the segments of the energy industry in which we typically participate. Due to this impact, we were not able to replace several large commercial segment projects when they completed, which materially affected our top and bottom line. Compounding the reduction in revenue was the cost of retaining our core talented employees that you referred to. Another factor that affected our performance last year was that also due to COVID, a number of our current clients and potential customers and their staffs were still working from home and in many cases reducing their staffing levels. As a result, more and more of these clients and potential customers began seeking a broader range of services from their service providers. A preference for one-stop shopping for complete engineering procurement fabrication, or EPF, or engineering, procurement, fabrication, and construction, or EPC, project delivery, which reduces the complexity of dealing with multiple service providers on a single project. Last year, therefore, we undertook a number of initiatives designed to better align ourselves with the needs of our clients. At the center of these initiatives was our recruitment of seasoned and well-connected leaders for most of our focus markets, renewables, integration, automation, government services, and traditional oil and gas. This process started in late 2020 with the addition of our president, Roger Westerlin, who then, through collaboration with each of our new and existing leaders, developed and implemented improved strategies for each respective market. These strategies, as I mentioned, are aimed at targeted customers and increasing our capabilities and core competencies in order to provide a broader range of services desired by them. For example, last October, we added light field construction to our capabilities. The following month, we broadened our carbon capture expertise and partnered with a leading technology university to build a prototype CO2 sequestration reactor designed for capturing the carbon dioxide formed during the generation and other industrial processes and storing it so that it is not released into the atmosphere. In early this month, to satisfy the significant increase in demand for field services in the Permian Basin, we commenced operations based out of Monaghan, Texas. Not only will that office provide its own direct field services, it will also connect clients with our engineering and project support teams from our Houston, Denver, and Tulsa offices as well as our fabrication facilities in Henderson, Texas, and our integration facilities in Houston as needed. As a result, our current and future Permian Basin clients can receive complete EPC, EPF project delivery services from conception to completion. Lastly, during 2021, we moved our Houston sales and engineering office to be within easier reach of many of our major clients. and we rebranded ourselves, creating a new logo, new website, and new marketing materials to introduce our broadened capabilities to our clients and potential customers. The first indication that these changes are producing positive results is that in the fourth quarter of last year, our quarterly backlog increased for the first time in over a year. Another indication that these initiatives are paying off is that the opportunity pipeline for our base recurring business, meaning the total value of outstanding proposals for which we believe our base recurring business has a reasonable chance of landing, has grown to over 350 million. Additionally, during the first quarter of 2022, we've been awarded a $4.4 million contract extension by the U.S. Defense Logistics Agency $2.2 million in orders to build parking lot security trailers. And most impressively, we've been selected by a confidential client for a major renewable fuels plant intended to produce over 100 million gallons per year of sustainable aviation fuel and renewable diesel fuel from renewable feedstocks, among others. This project, which followed up on the hydrogen plant that we delivered to Seaboard Energy last June, and is in the startup phase now, will utilize licensed processes from our technology partner. These processes produce renewable jet and diesel fuels with a low carbon footprint, thus helping limit the release of greenhouse gases into the atmosphere. Looking forward, we believe We are now positioned ourselves well to potentially capture several other large projects in the renewable and green energy space. These projects worth anywhere from 30 million to well in excess of 100 million each. At the present time, in fact, we estimate that our opportunity pipeline for such projects totals over $750 million. In addition to these opportunities, we're now also well positioned to take advantage of numerous smaller capital EPC project opportunities. These opportunities, we estimate, now total over 100 million in our pipeline. We are guardedly optimistic that we can convert a reasonable portion of these combined pipeline of over 1.2 billion to secure business for this year. As always, safety continues to be our highest focus and priority. We have shared details of our safety programs, Zero Impact and First Things First, with you in the past. A strong commitment to safety is not only paramount for the health and well-being of our employees, it also makes us more attractive and reputable service provider in the eyes of our clients. And speaking of employees, I would like to take this opportunity to thank all of our hardworking and dedicated employees for all of their efforts getting us through this transition period to where we are today. We could not have done it without them. Lastly, we continue to believe wholeheartedly in our people and the expert strategies that they have chosen and implemented. I am proud and excited to report that we are now seeing real results directly related to these efforts, and we are therefore very optimistic about 2022 and the future of Englobal. This concludes my prepared remarks, and now I'd like to turn the call back over to the operator for questions.

Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. If you wish to remove yourself from the queue, you may press star 2. We do ask that if you are listening via speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions, please press star 1 on your phone now. Our first question today is coming from Jeffrey Campbell at Alliance Global Partners. Your line is live. You may begin.

Hi, Mark, and good morning.

I have three questions I'll ask this morning. The first one is, can you provide some more color information? on the type of commercial projects most negatively affected by COVID-19, and if you expect any or all of these to come up for renewal again in 2022.

So, as you know, we're a project-based company, which means that we typically are not working on repeat projects. So we work with our clients, and our clients will have repeat projects, but it's not the same one. So while we will get repeat work from our clients, it won't be the same project. So as these projects complete, if there's not another one in our client's queue, then that's where we're not able to replace that work. What we see coming from our clients is a significant increase in the projects in their queue, not only increase in number of projects, but also the funding levels. So that's why we're so optimistic about this year.

Okay, great. Thanks for that, Collar. You recently announced a renewable fuels contract that indicated the ability to produce both diesel and jet fuel as opposed to the seaboard project, which I believe was primarily renewable diesel. Can you discuss the meaningful differences between these projects and if you believe this sort of fuel flexibility is likely to be required in the future?

I'll answer the last part of that first. I don't know if the flexibility to produce SAF or renewable jet fuel versus diesel is a requirement. I think the way the client is looking at it is it's an opportunity. And so they can then produce whichever one is most economical at the given market at any given time. And so depending upon the sales price of diesel versus jet fuel, they can change their output. the same input so they have the same they're using the same feedstock for either one it's a slight increase in the in the cost of the project in order to be able to switch between the two outputs a typical plant like this would would cost somewhere and this is a It's a semi-greenfield plant, so there's some existing infrastructure. Typically, the cost of a plant is dependent upon quite a few factors. Those factors are availability of land, utilities, et cetera, et cetera, et cetera. In this particular case, there's some infrastructure already available. And so I'm not sure exactly what the cost of this plant is, but typically these plants run anywhere from $300 to $450 million.

Okay.

Well, it sounds like from what – just to follow up on that, it sounds like from what you said that apples to apples, the cost for the increased flexibility is not –

is not onerous or not hugely significant. Is that fair? That's fair. Okay. Great. Thanks. And my last question is with regard to the carbon capture and sequestration effort that you noted in your prepared remarks. Just wanted to see if we get a little bit more color on it. How is it progressing? What's sort of the overall timeline for this? And what's the first endpoint expected should the research that's ongoing be successful?

So as I believe, where we are in that project, I believe, is we have gone through the first phase of building this reactor. And it's a skidded situation where a reactor is on a skid, and so it can be moved around. We've designed the skid. We did all the engineering and now we're in the fabrication phase. This would then be turned back over to the university and they would utilize this for testing purposes around the country.

Got it.

Do you have any kind of a rough timeline as to when between the two of you you'll determine that you've had the success that you hoped going in or not, or that there needs to be some additional changes or just kind of trying to get an idea of what the overall timeline of the scope is.

Yeah, I don't have that at my fingertips. I'm happy to get back to you on it. I would say it's within six months, but I don't have the exact timeframe.

That's fine. Six months to a year. I mean, that's very helpful. Thank you. Okay.

Once again, ladies and gentlemen, the floor is open for questions. If you have any questions or comments, please press star 1 on your phone now.

We have no further questions in queue at this time.

Well, thank you very much, Operator, and thank you, everyone, for listening to us this morning, and we look forward to hearing from you. You all have a great day.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.