Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.46M
2: EX-31 Ex-31.1 HTML 27K
3: EX-31 Ex-31.2 HTML 27K
4: EX-32 Ex-32.1 HTML 25K
10: R1 Document And Entity Information HTML 74K
11: R2 Unaudited Consolidated Balance Sheets HTML 147K
12: R3 Unaudited Consolidated Balance Sheets - HTML 47K
Parenthetical
13: R4 Unaudited Consolidated Statements of Operations HTML 148K
and Comprehensive Income
14: R5 Unaudited Consolidated Statement of Stockholders' HTML 121K
Equity
15: R6 Unaudited Consolidated Statements of Cash Flows HTML 144K
16: R7 Nature of Operations HTML 31K
17: R8 Summary of Significant Accounting Policies HTML 95K
18: R9 Acquisitions HTML 27K
19: R10 Discontinued Operations HTML 33K
20: R11 Other Assets HTML 32K
21: R12 Leases HTML 44K
22: R13 Intangible Assets HTML 42K
23: R14 Accrued Payroll and Expenses, Other Long-Term HTML 32K
Liabilities, and Contingent Consideration
24: R15 Debt HTML 53K
25: R16 Fair Value Measurements HTML 36K
26: R17 Contingencies HTML 26K
27: R18 Equity HTML 29K
28: R19 Share-Based Compensation HTML 46K
29: R20 Team Member Benefit Plan HTML 25K
30: R21 Business Segments HTML 92K
31: R22 Subsequent Event HTML 24K
32: R23 Summary of Significant Accounting Policies HTML 99K
(Policies)
33: R24 Summary of Significant Accounting Policies HTML 63K
(Tables)
34: R25 Acquisitions (Tables) HTML 47K
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36: R27 Deferred Costs, Capitalized, Prepaid, and Other HTML 32K
Assets (Tables)
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Liabilities, and Contingent Consideration (Tables)
40: R31 Debt (Tables) HTML 41K
41: R32 Fair Value Measurements (Tables) HTML 32K
42: R33 Share-Based Compensation (Tables) HTML 45K
43: R34 Business Segments (Tables) HTML 88K
44: R35 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 30K
Concentration of Credit Risk (Details)
45: R36 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - HTML 30K
Changes In The Allowance For Credit Losses
(Details)
46: R37 Summary of Significant Accounting Policies HTML 65K
(Details Textual)
47: R38 Summary of Significant Accounting Policies - HTML 39K
Earnings Per Share (Details)
48: R39 ACQUISITIONS - Acquisitions (Details Textual) HTML 62K
49: R40 ACQUISITIONS - Schedule of Recognized Identified HTML 35K
Assets Acquired and Liabilities Assumed (Details)
50: R41 DISCONTINUED OPERATIONS - Narrative (Details) HTML 33K
51: R42 DISCONTINUED OPERATIONS - Financial Results of HTML 43K
Instaff (Details)
52: R43 Deferred Costs, Capitalized, Prepaid, and Other HTML 36K
Assets (Details)
53: R44 LEASES - Narrative (Details) HTML 24K
54: R45 LEASES - Supplemental Balance Sheet Information HTML 26K
Related to Leases (Details)
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Related to Leases (Details)
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Payments (Details)
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(Details)
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LIABILITIES, AND CONTINGENT CONSIDERATION -
Accrued Payroll and Expenses (Details)
60: R51 ACCRUED PAYROLL AND EXPENSES, OTHER LONG-TERM HTML 24K
LIABILITIES, AND CONTINGENT CONSIDERATION -
Narrative (Details)
61: R52 ACCRUED PAYROLL AND EXPENSES, OTHER LONG-TERM HTML 24K
LIABILITIES, AND CONTINGENT CONSIDERATION -
Schedule of Future Estimated Earn Out Payments
(Details)
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(Details)
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68: R59 Share-Based Compensation - Summary of Stock Option HTML 73K
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Operating Income) (Details)
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The
allocation of the intangible assets is as follows (in thousands):
Estimated Fair Value
Estimated Useful Lives
Covenants not to compete
$
298
5 years
Client
partner list
11,017
10 years
Total
$
11,315
i
The Company
estimates what would have been reported if the revenues and net income from continuing operations of the Horn Solutions and Arroyo Consulting acquisition had taken place on the first day of Fiscal 2022 (in thousands, except income per share):
(exact name of registrant as specified in its charter)
iDelaware
i26-0656684
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i5850 Granite Parkway, Suite 730
iPlano, iTexasi75024
(i972) i692-2400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
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 shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesþ No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
iAccelerated
Filer
þ
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
i☑
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with 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 i☐ No
þ
Securities registered pursuant to Section 12(b) of the Act:
This Quarterly Report on Form-10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
•future financial performance and growth targets or expectations;
•market and industry trends and developments; and
•the benefits of our completed and future merger, acquisition and disposition transactions.
You can identify these and other forward-looking statements by the use of words
such as “aim,”“potential,”“may,”“could,”“can,”“would,”“might,”“likely,”“will,”“expect,”“intend,”“plan,”“predict,”“ongoing,”“project,”“budget,”“scheduled,”“estimate,”“anticipate,”“believe,”“forecast,”“committed,”“future” or “continue” or the negative thereof or similar variations.
These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and our current expectations, forecasts and assumptions and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured. Actual results may differ materially
from those in the forward-looking statements. Some factors that could cause actual results to differ include:
•the availability of field talents’ workers' compensation insurance coverage at commercially reasonable terms;
•insurance coverage may not be adequate for our needs (including but not limited to general liability, crime, fiduciary, property, umbrella and excess, and cybersecurity);
•the availability of qualified field talent;
•compliance with federal, state, local labor and foreign labor and employment laws and regulations and changes in such laws and regulations;
•the ability to compete
with new competitors and competitors with superior marketing and financial resources;
•management team changes;
•the favorable resolution of current or future litigation;
•the impact of outstanding indebtedness on the ability to fund operations or obtain additional financing;
•our ability to repay, refinance, extend or restructure existing indebtedness at or prior to its maturity date on favorable or comparable terms, or at all;
•the ability to leverage the benefits of recent acquisitions and successfully integrate newly acquired operations;
•the impact of, and the ability
to mitigate or manage disruptions posed by pandemics;
•adverse changes in the economic conditions of the industries or markets that we serve;
•disturbances in world financial, credit, and stock markets;
•unanticipated changes in regulations affecting our business;
•a decline in consumer confidence and discretionary spending;
•inflationary pressures and our responses thereto;
•the general performance of the U.S. and global economies;
•continued or escalated conflict in the Middle East or elsewhere; and
•other
risks referenced from time to time in our past and future filings with the Securities and Exchange Commission (“SEC”), including in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.
Where You Can Find Other Information
Our
website is https://bgsf.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. These reports and other information, including exhibits filed
or furnished therewith, are also available at the SEC’s website at www.sec.gov.
Accounts
receivable (net of allowance for credit losses of $ii558/)
i67,284
i66,285
Prepaid
expenses
i2,105
i2,418
Other
current assets
i3,300
i7,459
Total
current assets
i72,689
i76,162
Property
and equipment, net
i1,603
i2,081
Other
assets
Deposits
i2,700
i2,616
Other
assets, net
i5,069
i4,411
Deferred
income taxes, net
i7,288
i2,196
Right-of-use
asset - operating leases
i4,253
i4,462
Intangible
assets, net
i31,619
i47,552
Goodwill
i58,453
i55,193
Total
other assets
i109,382
i116,430
Total assets
$
i183,674
$
i194,673
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current liabilities
Line of credit (net of debt issuance costs of $i179 and $0, respectively)
$
i26,666
$
i—
Long-term
debt, current portion
i35,000
i4,000
Accrued
interest
i296
i273
Accounts payable
i250
i587
Accrued
payroll and expenses
i18,068
i19,171
Income
taxes payable
i211
i253
Contingent consideration, current
portion
i3,798
i1,081
Other
current liabilities
i1,200
i1,000
Lease
liabilities, current portion
i1,759
i1,842
Total
current liabilities
i87,248
i28,207
Line
of credit (net of debt issuance costs of $0 and $i259, respectively)
i—
i22,303
Long-term
debt, less current portion
i—
i36,000
Contingent
consideration, less current portion
i3,309
i—
Convertible
note
i4,368
i4,368
Lease
liabilities, less current portion
i2,823
i3,049
Other
long-term liabilities
i10
i10
Total
liabilities
i97,758
i93,937
Commitments
and contingencies
i
i
Preferred
stock, $ii0.01/ par value per share, ii500,000/
shares authorized, -iiii0///-
shares issued and outstanding
i—
i—
Common
stock, $ii0.01/ par value per share; ii19,500,000/
shares authorized ii10,864,506/ and ii10,772,515/
shares issued and outstanding, respectively, net of treasury stock, at cost, i2,963 and i1,845 shares, respectively.
i60
i70
Additional
paid in capital
i68,289
i67,003
Retained
earnings
i17,567
i33,663
Total
stockholders’ equity
i85,916
i100,736
Total
liabilities and stockholders’ equity
$
i183,674
$
i194,673
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - iNATURE
OF OPERATIONS
BGSF, Inc. provides consulting, managed services, and professional workforce solutions to a variety of industries through its various divisions in information technology (“IT”), Finance & Accounting, Managed Services, and Property Management (formally known as Real Estate which includes apartment communities and commercial buildings) (collectively, with its consolidated subsidiaries, the “Company”).
On March 21, 2022, the Company completed the sale of substantially all its Light Industrial segment (“InStaff”) assets to Jobandtalent,
through the wholly-owned subsidiary, Sentech Engineering Services, Inc. Instaff's financial results for reported periods have been reflected in our Consolidated Statements of Operations and Comprehensive Income (Loss) and Consolidated Statements of Cash Flows as discontinued operations. See “Note 4 - Discontinued Operations” in the Consolidated Financial Statements included elsewhere in this report for additional information.
On December 12, 2022, the Company acquired substantially all of the assets, and assumed certain of the liabilities of Horn
Solutions, Inc. and Horn Solutions Dallas, LLC (collectively “Horn Solutions”). See “Note 3- Acquisitions.”
On
April 24, 2023, the Company acquired substantially all of the assets and assumed certain of the liabilities of Arroyo Consulting, LLC ("Arroyo Consulting"), which is a nearshore/offshore workforce solutions firm that specializes in IT and software development with operations in the United States, Colombia, and India. See “Note 3- Acquisitions.”
The Company currently operates primarily within the United States of America (“U.S.”) through the Property Management and Professional segments.
The Property Management segment provides office and maintenance field talent to
various apartment communities and commercial buildings in 38 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.
The Professional segment provides specialized talent and business consultants for IT, managed services, finance, accounting, legal, and human resources. The segment operates across the U.S. in three divisions, IT, Managed Services, and Finance & Accounting, with the IT division providing additional nearshore/offshore solutions in Colombia and India.
The Company normally experiences seasonal fluctuations. The quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality
of client partners’ businesses. Demand for the Property Management workforce solutions has historically increased in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, the Company's cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.
The current inflationary environment and related interest rate impacts continue to have an adverse impact on the economy and market conditions. These factors may continue to impact labor markets by reducing demand for the
Company's workforce solutions, increasing early terminations, or diminishing projects. As a result, the Company's business, financial condition and results of operations may be negatively affected.
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the
Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of its knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying unaudited consolidated financial statements through the date the financial statements were issued, except for the disclosure in Note 16. The
accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended January 1, 2023, included in its Annual Report on Form 10-K.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - iSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis of Presentation
The consolidated financial statements include the accounts of the
Company. All significant intercompany transactions and balances have been eliminated in consolidation.
i
Fiscal Periods
The Company has a 52/53 week fiscal year. Fiscal periods for the consolidated financial statements included herein are as of October 1, 2023 and January 1, 2023, and include the thirteen and thirty-nine week periods ended October 1,
2023 and September 25, 2022, referred to herein as Fiscal 2023 and 2022, respectively.
i
Reclassifications
Certain reclassifications have been made to the 2022 financial statements to conform with the 2023 presentation.
iManagement
Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include allowances for credit losses, goodwill, intangible assets, lease liability, contingent consideration obligations related to acquisitions, and income taxes. Additionally, the valuation of share-based compensation expense uses a model based upon interest rates, stock prices, maturity estimates, volatility and other factors. The
Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
i
Financial Instruments
The Company uses fair value measurements in areas that include, but are not limited to, the allocation of purchase price consideration to tangible and identifiable intangible assets, convertible debt, and contingent
consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with BMO Harris Bank, N.A. (“BMO”) that provides for a revolving credit facility, term loan and current rates available to the Company for debt with similar terms and risk.
i
Cash
and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Concentration of Credit Risk
Concentration of credit risk is limited due to the Company’s diverse client partner base and their dispersion across many different industries and geographic locations nationwide. No single client partner accounted for more than 10% of the Company’s accounts receivable as of October 1, 2023 and January 1,
2023 or revenue from continuing operations for the thirty-nine week periods ended October 1, 2023 and September 25, 2022. iGeographic revenue from continuing operations in excess of 10% of the Company's consolidated revenue in Fiscal 2023 and the related percentage for Fiscal 2022 was generated in the following areas:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consequently, weakness in economic conditions in these regions could have a material adverse effect on the Company’s financial position and results of future operations.
Accounts Receivable
The Company extends credit to its client partners in the normal course of business. Accounts receivable represents unpaid balances due from client partners. The
Company maintains an allowance for credit losses for expected losses resulting from client partners’ non-payment of balances due to the Company. The Company’s determination of the allowance for credit losses amounts is based on management’s judgments and assumptions, including general economic conditions, portfolio composition, prior loss experience, evaluation of credit risk related to certain individual client partners and the Company’s ongoing examination process. Receivables are written off after they are deemed to be uncollectible after all reasonable means of collection have been exhausted. Recoveries of receivables previously written off are recorded when received.
i
Changes
in the allowance for credit losses from continuing operations are as follows (in thousands):
Property and equipment are stated net of accumulated depreciation and amortization of $i5.2 million and $i4.9
million at October 1, 2023 and January 1, 2023, respectively. During the thirty-nine week period ended October 1, 2023, $i1.0 million was reclassified to Other assets and Intangible assets from Property and equipment, primarily related to continued information technology improvements.
i
Deposits
The
Company maintains guaranteed costs policies for workers' compensation coverage in monopolistic states and minimal loss retention coverage in all other states. Under these policies, the Company is required to maintain refundable deposits of $i2.4 million, which are included in deposits in the accompanying consolidated balance sheets, as of October 1, 2023 and January 1, 2023, respectively.
/
Other
Assets
The Company capitalizes direct costs incurred in cloud computing implementation costs from hosting arrangements, and are reported as a component of Other assets. All other internal-use software development costs are capitalized and reported as a component of computer software within Intangible assets. Other assets are stated net of accumulated amortization of $i1.7 million and $i1.2
million at October 1, 2023 and January 1, 2023, respectively. During the thirty-nine week period ended October 1, 2023, the Company added $i0.4 million and reclassified $i0.8
million to Other assets from Property and equipment, primarily related to continued information technology improvements.
The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were iino/
impairments with respect to other assets during Fiscal 2023 or Fiscal 2022.
i
Leases
The Company leases all their office space through operating leases, which expire at various dates through 2030. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted
for separately. Certain of the Company’s lease arrangements contain renewal provisions from i3 to i10 years, exercisable at the Company's option. The
Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases
are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term.
Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.
i
Intangible
Assets
The Company holds Intangible assets with finite lives. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to iten years, based on a pattern in which the economic benefit of the respective Intangible asset is realized.
Identifiable Intangible assets recognized in conjunction with acquisitions are recorded
at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable Intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable Intangible assets are discounted back to their net present value.
The Company capitalizes purchased software and internal payroll costs directly incurred in the modification of internal use software. During the thirty-nine week period ended October 1, 2023, the Company added $i0.9
million and reclassified $i0.2 million to Intangible assets from Property and equipment, primarily related to continued information technology improvements. Software maintenance and training costs are expensed in the period incurred.
The Company evaluates the recoverability of Intangible assets whenever events or changes in circumstances indicate that an Intangible asset’s carrying amount may not be recoverable. The
Company considered the current and expected future economic and market conditions and its impact on each of the reporting units. The Company annually evaluates the remaining useful lives of all Intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization.
At the February 2023 Board of Directors meeting, managements's plan to rebrand as BGSF was approved, which eliminated various trade names. The decision to rebrand created an impairment of $i22.5
million in trade names, which was written-off during the first quarter of Fiscal 2023. There were no impairment indicators for these assets during Fiscal 2022. See “Note 7 - Intangible Assets.”
/
i
Goodwill
Goodwill is not amortized, but instead is evaluated at the reporting unit level for impairment annually at the end of each fiscal year, or more frequently, if conditions
indicate an earlier review is necessary. The Company considered the current and expected future economic and market conditions and its impact on each of the reporting units. If the Company has determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, the Company may use a qualitative assessment for the annual impairment test. The Company determined there were no impairment indicators for goodwill assets during Fiscal 2023 or Fiscal 2022.
i
Cash
Flow Hedge
The unrealized gains or losses associated with the change in the fair value of the effective portion of the hedging instrument was recorded in accumulated other comprehensive income or loss. The Company reclassified the interest rate swap from accumulated other comprehensive gain or loss against interest expense in the same period in which the hedge transaction affected earnings. There were no outstanding cash flow hedges during Fiscal 2023.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i
Debt Issuance Costs
Debt issuance costs are presented on the balance sheet as a direct deduction of the related liability and are amortized using the effective interest method over the term of the respective loans.
i
Contingent
Consideration
The Company has obligations, to be paid in cash, related to its acquisitions if certain operating and financial goals are met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. The fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.
i
Revenue
Recognition
The Company derives its revenues from continuing operations in Property Management and Professional segments. The Company provides workforce solutions, placement services, and managed services. Revenues are recognized when promised services are delivered to client partners, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues from continuing operations as presented on the consolidated statements of operations and comprehensive income (loss) represent services rendered to client partners less sales adjustments and allowances. Reimbursements, including
those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services.
The Company records revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company (i) has the risk of identifying and hiring qualified field talent, (ii) has the discretion to select the field talent and establish their price and duties and (iii) bears the risk for services that are not fully paid for by client partners.
Workforce
solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which the Company has a right to invoice, when the services are rendered by the Company’s field talent.
Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control is transferred to the client partner, usually when employment candidates start their employment.
Retained search placement revenues - Any revenues
from these workforce solutions are recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services, which is less than 1% of consolidated revenues.
Managed services revenues - include both workforce solution revenues and fixed fee revenues from client partner contracts. Services performed represent the transfer of control to the client partner over a given period of time. Fixed fee revenues are recognized in equal amounts at fixed intervals as promised services are delivered.
The Company estimates the effect of placement candidates who do not remain with its client
partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period.
Refer to Note 15 for disaggregated revenues by segment.
Payment terms in the Company's contracts vary by the type and location of its client partner and the workforce solutions offered. The term between
invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of October 1, 2023. There were no revenues recognized during the thirteen and thirty-nine week periods ended October 1, 2023 related to performance obligations satisfied or partially satisfied in previous periods. There are no contract costs capitalized. The Company did not recognize any contract impairments during the thirteen and thirty-nine week periods ended October 1, 2023.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
i
Share-Based Compensation
The Company recognizes compensation expense in selling, general and administrative expenses over the service period for options or restricted stock that are expected to vest
and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
i
Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period adjusted to reflect potentially dilutive securities.
Antidilutive shares are excluded from the calculation of earnings per share.
i
The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the respective periods (in thousands):
Weighted-average number of common shares outstanding:
i10,791
i10,492
i10,753
i10,465
Effect
of dilutive securities:
Stock options and restricted stock
i12
i41
i—
i46
Weighted-average
number of diluted common shares outstanding
i10,803
i10,533
i10,753
i10,511
Stock
options and restricted stock
i805
i459
i736
i364
Convertible
note
i255
i—
i255
i—
Antidilutive
shares
i1,060
i459
i991
i364
/
i
Income
Taxes
The consolidated effective tax rates were i26.6% and i24.1% for the thirteen and thirty-nine week periods ended October 1,
2023, respectively. The consolidated rates were i23.6% and i24.5% for the thirteen and thirty-nine week periods ended September 25, 2022, respectively. Effective tax rates for all periods consist of federal
statutory rate plus state income taxes. The higher effective tax rate for the thirteen period ended October 1, 2023 is primarily due to greater state taxes.
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. As of October 1, 2023, the
Company has a $i3.0 million net operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date. These net operating losses are subject to an annual Internal Revenue Code Section 382 limitation of $i1.3 million.
Additionally, there was a $i5.2 million increase to the deferred tax assets related to the $i22.5 million
in impairment losses as of October 1, 2023.
When appropriate, the Company will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results.
The Company recognizes
any penalties and interest when necessary as part of selling, general and administrative expenses. As a matter of operation, we first calculated the effective tax on continuing operations, and then allocated the remaining taxes to our discontinued operations, in accordance with Accounting Standards Codification (“ASC”) Topic 740.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The
Company follows the guidance ASC Topic 740, Accounting for Uncertainty in Income Taxes. ASC Topic 740 prescribes a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return.
i
Recent Accounting Pronouncements
Management has considered all recent accounting pronouncements issued. The Company's management
believes that these pronouncements will not have a material effect on the Company's consolidated financial statements.
NOTE 3 - iACQUISITIONS
Horn Solutions
On December
12, 2022, the Company acquired substantially all of the assets, and assumed certain of the liabilities, of Horn Solutions. The purchase price of $i42.7 million was paid at closing with $i33.9 million
in cash and $i3.4 million of the Company common stock (i254,455 shares of the Company
common stock privately placed under Section 4(a)(2) of the Securities Act of 1933, as amended), as well as a two-year convertible promissory note of $i4.4 million with an annual interest rate of i6%, with interest paid quarterly. The promissory note is convertible into shares of the
Company's common stock at any time after the one-year anniversary of the promissory note at a conversion price equal to $i17.12 per share. The promissory note is subordinate to the Company’s senior debt. An additional portion of the purchase price, $i1.0
million in cash was held back as partial security for a post-closing purchase price adjustment. The asset purchase agreement contained a provision for a “true-up” of acquired working capital within 120 days after the closing date. In May 2023, the hold back and true-up were paid, adjusting businesses acquired by $i0.1 million in goodwill. The purchase price at closing was paid out of funds under the Company's credit agreement led by BMO, see “Note 9 - Debt”.
The
acquired business was assigned to the Professional segment. The acquisition of Horn Solutions allows the Company to strengthen and expand its finance and accounting operations by providing consulting, project loan staff, interim staff, direct hire, and managed services through three complementary business units, strategic accounting and finance, information technology, and transactional accounting and office staffing. Horn Solutions provides services to clients in a variety of industries including, but not limited to energy, financial services, healthcare, real estate and construction, service, manufacturing, and software industries.
For the thirteen week period ended October 1, 2023, Horn Solutions contributed $i5.9
million of revenue and $i0.3 million of operating loss, which included $i0.9
million in amortization expense on acquisition intangibles. For the thirty-nine week period ended October 1, 2023, Horn Solutions contributed $i19.0 million of revenue and $i0.7
million of operating loss, which included $i2.6 million in amortization expense on acquisition intangibles.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows (in thousands):
Accounts receivable
$
3,734
Prepaid expenses and other assets
118
Property and equipment,
net
83
Right-of-use asset - operating leases
1,528
Intangible assets
13,484
Goodwill (deductible tax basis of $26.1 million)
26,493
Current liabilities assumed
(1,787)
Lease liabilities - operating leases
(1,528)
Total
net assets acquired
$
42,125
Cash
$
33,940
Hold back
1,000
Convertible note
4,368
Common stock
3,351
Working
capital adjustment
(534)
Total fair value of consideration transferred for acquired business
$
42,125
The allocation of the intangible assets is as follows (in thousands):
Estimated Fair Value
Estimated Useful Lives
Covenants
not to compete
$
50
5 years
Client partner list
13,434
10 years
Total
$
13,484
The
Company incurred total costs of $0.4 million in Fiscal 2022 and Fiscal 2023 related to the Horn Solutions acquisition. These costs were expensed as incurred in selling, general and administrative expenses.
Arroyo Consulting
On April 24, 2023, the Company acquired substantially all of the assets, and assumed certain of the liabilities, of Arroyo Consulting for cash consideration of $6.8 million. $0.4 million was held back for certain post-closing liabilities and $0.9 million was held back for one year as partial security for any indemnification obligations. The purchase agreement further provides for contingent consideration of up to $8.5 million based on the performance
of the acquired business for the two years following the date of acquisition. The purchase price at closing was paid out of funds under the Company's credit agreement led by BMO, see “Note 9 - Debt”. The purchase agreement contained a provision for a “true up” of acquired working capital within 120 days after the closing date.
The acquired business was assigned to the Professional segment. The acquisition of Arroyo Consulting allows the Company to strengthen the go-to-market cross-selling efforts providing clients a cost effective alternative offering nearshore and offshore IT resources. Arroyo Consulting provides nearshore and offshore professional workforce solutions specializing in IT and software development
with operations in the United States, Colombia, and India.
For the thirteen week period ended October 1, 2023, Arroyo Consulting contributed $5.7 million of revenue and $1.2 million of operating income, which included $0.5 million in amortization expense on acquisition intangibles. For the thirty-nine week period ended October 1, 2023, Arroyo Consulting included twenty-three weeks for approximately $9.8 million of revenue and $2.2 million of operating income, which included $0.5 million in amortization expense on acquisition intangibles.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The preliminary purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows (in thousands):
Accounts receivable
$
3,452
Property
and equipment, net
170
Right-of-use asset - operating lease
141
Intangible assets
11,315
Goodwill (no deductible tax basis)
2,879
Current liabilities assumed
(2,471)
Lease liabilities
- operating leases
(141)
Total net assets acquired
$
15,345
Cash
$
6,800
Hold back, working capital*
350
Hold
back, indemnities*
850
Working capital adjustment*
677
Fair value of contingent consideration
6,668
Total fair value of consideration transferred for acquired business
$
15,345
*Included in Other current liabilities
The
allocation of the intangible assets is as follows (in thousands):
Estimated Fair Value
Estimated Useful Lives
Covenants not to compete
$
298
5 years
Client
partner list
11,017
10 years
Total
$
11,315
The Company incurred costs of $0.6 million in Fiscal 2023 related to the Arroyo Consulting acquisition. These costs were expensed as incurred in selling, general and administrative expenses.
Supplemental Unaudited
Pro Forma Information
The Company estimates what would have been reported if the revenues and net income from continuing operations of the Horn Solutions and Arroyo Consulting acquisition had taken place on the first day of Fiscal 2022 (in thousands, except income per share):
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Pro forma net income (loss) includes amortization of primarily client partner lists, interest expense on additional borrowings on the New Term Loan and the Revolving Facility (see “Note 9 - Debt”) at a rate of i2.5%. The tax benefit of the pro forma adjustments at effective tax rates of i26.6%
and i24.1% for the thirteen and thirty-nine week periods ended October 1, 2023, respectively, and effective tax rates of i23.6% and i24.5%
for the thirteen and thirty-nine week periods ended September 25, 2022, respectively. The pro forma operating results include adjustments to Horn Solutions and Arroyo Consulting related to synergy adjustments for expenses that would be duplicative and other non-recurring, non-operating and out of period expense items once integrated with the Company.
Amounts set forth above are not necessarily indicative of the results that would have been attained had the Horn Solutions and Arroyo Consulting acquisitions taken place on the first day of Fiscal 2022 or the results that may be achieved by the combined enterprise in the future.
NOTE
4 - iDISCONTINUED OPERATIONS
On March 21, 2022, the Company sold substantially all of the assets and certain liabilities of InStaff to Sentech Engineering Services, Inc. (“Sentech”) for a sale price of approximately $i30.3 million
cash, subject to customary sales price and working capital adjustments specified in the purchase agreement. The purchase agreement provided for deferred consideration of $i2.0 million, which was received April 3, 2023. The sale resulted in an original pre-tax gain on sale of discontinued operations of $i17.3
million, with an additional pre-tax gain of $i0.4 million recognized as part of the net working capital adjustment in October 2022.
The InStaff financial results for periods prior to the sale have been reflected in our Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) and Unaudited Consolidated Statements of Cash Flows as discontinued operations.
i
The
financial results of InStaff are as follows (in thousands):
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - iLEASES
The Company's future operating lease obligations that have not yet commenced are immaterial. Short-term leases were immaterial. The
Company had $ii0.5/ million from continuing operations in operating lease costs for the thirteen week periods ended October 1, 2023 and September 25, 2022. The
Company had $i1.6 million and $i1.4 million from continuing operations in operating lease expense for the thirty-nine week periods ended October 1, 2023 and September 25, 2022, respectively.
i
The
supplemental balance sheet information related to the Company's operating leases were as follows:
Intangible assets from continuing operations are stated net of accumulated amortization of $i47.4 million and $i44.6
million at October 1, 2023 and January 1, 2023, respectively. iAmortization expense from continuing operations for Fiscal 2023 and Fiscal 2022 are comprised of following (in thousands):
On July 16, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for the revolving facility (the "Revolving Facility") permitting the
Company to borrow funds from time to time in an aggregate amount up to $i35.0 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting the Company to borrow funds from time to time in an aggregate amount not to exceed $i30.0
million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded and repaid. The Company also had the option to request an increase in the aggregate Term Loan by $i40.0 million, which was done in connection with the Horn Solutions acquisition. The Company’s obligations under the Credit Amendment are secured by a first priority
security interest in substantially all tangible and intangible property of the Company and its subsidiaries. The Credit Agreement bore interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin through August 17, 2022 (as such terms are defined in the Credit Agreement). The Company pays an unused commitment fee on the daily average unused amount of Revolving Facility.
On August 18, 2022, the Company entered
into an amendment to the Credit Agreement with BMO, which changed the interest rate component from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus the Applicable Margin (as such terms are defined in the amended credit agreement). In connection with the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”), the Company exercised the option to borrow $i40.0 million, as noted above, pursuant to a second amendment
to the Credit Agreement (“Second Credit Amendment”). The Second Credit Amendment requires i2.5% of the original principal balance of the New Term Loan payable on the last business day of each quarter, beginning on March 31, 2023. On April 24, 2023, in connection with the acquisition of Arroyo Consulting, the Company entered into a Third Amendment to the Credit Agreement (“Third Credit Amendment”)
with BMO. The Third Credit Amendment revised language to permit an acquisition of a foreign entity under certain circumstances and modified the terms of permitted distributions and guarantors. On May 19, 2023, the Company entered into a Fourth Amendment to the Credit Agreement (“Fourth Credit Amendment”). The Fourth Credit Amendment increased the Revolving Facility by $i6.0 million to an aggregate amount up to $i41.0 million.
The Company is subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio (as such terms are defined in the amended Second Credit Amendment). The Company was in compliance with the customary affirmative and negative covenants as of October 1, 2023.
The indebtedness under the Credit Agreement matures on July 16, 2024, which has been classified within current liabilities as of October 1, 2023. The
Company is currently in active and advanced discussions with the Company’s lenders to refinance such indebtedness with an extended maturity date. While the Company currently intends to close such refinancing during the Company’s fourth fiscal quarter of 2023, the Company cannot guarantee that such refinancing, which involve risks and uncertainties, will occur on favorable or comparable terms, or at all.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Letter of Credit
In March 2020, in conjunction with the EdgeRock acquisition, the Company entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of October 1, 2023, the Company had a maximum financial exposure from this standby letter of credit totaling $i0.1
million, all of which is considered usage against the Revolving Facility. The Company has no history of default, nor is it aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any disputes thereunder that might arise in the future would not materially affect the Company’s consolidated financial statements. Accordingly, no liability has been recorded in respect to these arrangements as of October 1, 2023.
Line of Credit
At October 1, 2023 and January 1,
2023, $i26.8 million and $i22.6 million respectively, was outstanding on the revolving facilities. Average daily balance for the thirteen week periods ended October 1, 2023 and September 25, 2022 was $i24.5
million and $i21.1 million, respectively. Average daily balance for the thirty-nine week periods ended October 1, 2023 and September 25, 2022 was $i23.5
million and $i16.7 million, respectively.
i
Borrowings under the revolving facilities consisted of and bore interest at (in thousands):
At October 1, 2023 and January 1, 2023, the Company had a two-year convertible promissory note of $i4.4 million due to the seller with an annual interest rate of i6%,
with interest paid quarterly related to the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”). The promissory note is convertible into shares of our common stock at any time after the one-year anniversary of the promissory note at a conversion price equal to $i17.12 per share. The promissory note is subordinate to the Company’s senior debt.
NOTE
10 - iFAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements defines fair value and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value. The fair value hierarchy established prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
Level
2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities - includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets, for substantially the full term of the financial instrument; and
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Level 3 - Unobservable inputs - includes amounts derived from valuation models where
one or more significant inputs are unobservable and require us to develop relevant assumptions.
i
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis and the level they fall within the fair value hierarchy (in thousands):
The
change in the Level 3 fair value measurements from January 1, 2023 to October 1, 2023 relates primarily to an increase from the Arroyo Consulting acquisition, including $i0.5 million in accretion, offset by a $i1.1 million
payment for Momentum Solutionz acquisition.
Key inputs in determining the fair value of the contingent consideration as of October 1, 2023 and January 1, 2023 included discount rates of approximately i16% as well as management's estimates of future sales volumes and earnings before interest, income taxes, depreciation, and amortization (“EBITDA”).
NOTE
11 - iCONTINGENCIES
The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has
incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made.
The Company insures against, subject to and upon the terms and conditions of various insurance policies, claims or losses from workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses, crime and cyber risk,
and director and officer liability. Under the Company's bylaws, the Company’s directors and officers are indemnified against certain liabilities arising out of the performance of their duties to the Company. The Company also has an insurance policy for our directors and officers to insure them against liabilities arising from the performance of their positions with the Company or its subsidiaries.
The Company has also entered into indemnification agreements with its directors and certain officers.
NOTE 12 – iEQUITY
Authorized capital stock consists of i19,500,000
shares of common stock, par value $i0.01 per share and i500,000 shares of undesignated preferred stock, par value $i0.01
per share.
Restricted Stock
The Company issued restricted common stock of i46,118 and i25,749
shares to team members and non-team member (non-employee) directors in Fiscal 2023 and Fiscal 2022, respectively. The restricted shares of $i0.01 par value per share were issued under the 2013 Long-Term Incentive Plan (“2013 Plan”) and contain a three-year service condition. The restricted stock constitutes issued and outstanding shares of the Company’s common stock, except for the right of disposal, for all purposes during the period of restriction including voting rights and dividend distributions.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – iSHARE-BASED COMPENSATION
Stock Options
For the thirteen
week periods ended October 1, 2023 and September 25, 2022, the Company recognized $i0.1 million and $i0.3
million of compensation expense related to stock options. For the thirty-nine week periods ended October 1, 2023 and September 25, 2022, the Company recognized $i0.3 million and $i0.6
million, respectively, of compensation expense from continuing operations related to stock options. Unamortized share-based compensation expense as of October 1, 2023 amounted to $i1.0 million which is expected to be recognized over the next i2.8
years. As of October 1, 2023, a total of i1.2 million shares remain available for issuance under 2013 Plan.
iA
summary of stock option activity is presented as follows:
For the thirteen week periods ended October 1, 2023 and September 25, 2022, the Company recognized $i0.3 million and $i0.1
million of compensation expense related to restricted stock awards, respectively. For the thirty-nine week periods ended October 1, 2023 and September 25, 2022, the Company recognized $i0.5 million and $i0.3
million of compensation expense from continuing operations related to restricted stock awards, respectively. Unamortized share-based compensation expense as of October 1, 2023 amounted to $i0.6 million which is expected to be recognized over the next i1.7
years.
NOTE 14 - iTEAM MEMBER BENEFIT PLAN
Defined Contribution Plan
The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible
team members and field talent. The 401(k) Plan allows participants to make contributions subject to applicable statutory limitations. The Company matches participants contributions i100% up to the first i3%
and i50% of the next i2% of a team member's or field talent’s compensation. The Company
contributed $i0.5 million and $i0.3 million from continuing operations to the 401(k) Plan for the thirteen week periods ended October 1, 2023 and September 25,
2022, respectively. The Company contributed $i1.4 million and $i1.2 million from continuing operations to the 401(k) Plan
for the thirty-nine week periods ended October 1, 2023 and September 25, 2022, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - iBUSINESS
SEGMENTS
The Company has continuing operations through the Property Management and Professional segments.
Segment income (loss) from continuing operations includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (home office) expenses. Assets of home office include cash, unallocated prepaid expenses, property and equipment, deferred income taxes, and other assets. iThe
following table provides a reconciliation of revenue and income (loss) from continuing operations by reportable segment to consolidated results for the periods indicated (in thousands):
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s
Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our accompanying Unaudited Consolidated Financial Statements and related notes thereto and our Annual Report on Form 10-K for the fiscal year ended January 1, 2023. Comparative segment revenues and related financial information are discussed herein and are presented in Note 15 to our Unaudited Consolidated Financial Statements. See “Forward Looking Statements” on page 3 of this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, for a description of important factors that could cause actual results to differ from expected results. Please also refer to Note 4- Discontinued Operations, to our Unaudited Consolidated Financial
Statements.
Our historical financial information may not be indicative of our future performance.
Overview
We provide consulting, managed services, and professional workforce solutions to a variety of industries through our various divisions in information technology (“IT”), Finance & Accounting, Managed Services, and Property Management (formally known as Real Estate which includes apartment communities and commercial buildings).
On March 21, 2022, we sold substantially all of the assets and certain liabilities of InStaff to Sentech Engineering
Services, Inc. for a sale price of approximately $30.3 million cash at closing and an additional $2 million one year following the date of the acquisition. See “Note 4 — Discontinued Operations” of our unaudited consolidated financial statements.
On December 12, 2022, we acquired substantially all of the assets, and assumed certain of the liabilities of Horn Solutions, Inc. and Horn Solutions Dallas, LLC (collectively “Horn Solutions”), which offers consulting, project loan staff, interim staff, direct hire, and managed services. At closing, we exercised the option to borrow $40 million in a second amendment to the Credit Agreement with BMO Harris Bank, N.A. (“BMO”). See “Note 3 — Acquisitions” of our our unaudited consolidated financial statements.
On
April 24, 2023, we acquired substantially all of the assets and assumed certain of the liabilities of Arroyo Consulting, LLC (“Arroyo Consulting”), which is a nearshore and offshore workforce solutions firm that specializes in IT and software development with operations in the United States, Colombia, and India. At closing, $6.8 million of the closing price was paid with proceeds from our Credit Agreement with BMO. See “Note 3 — Acquisitions” of our our unaudited consolidated financial statements.
We currently operate primarily within the United States of America in our Property Management and Professional segments.
Our Property Management segment provides office and maintenance field talent to various
apartment communities and commercial buildings in 38 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.
Our Professional segment provides specialized talent and business consultants for IT, managed services, finance, accounting, legal, and human resources. The segment operates across the U.S. in three divisions, IT, Managed Services, and Finance & Accounting, with the IT division providing additional nearshore/offshore solutions in Colombia and India.
26
Our business normally experiences seasonal fluctuations. Our
quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our client partners’ business. Demand for our Property Management workforce solutions typically increase in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes. In addition, our cost of services typically increase in the first quarter primarily due to the reset of payroll taxes.
Results of Operations
The following tables summarize key components of our
results for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our unaudited consolidated financial statements.
Property
Management Revenues: Property Management revenues increased approximately $2.8 million (8.2%). The increase was primarily due to an increase in billing rates.
Professional Revenues: Professional revenues were up $2.2 million (5.0%). Horn Solutions and Arroyo Consulting contributed a combined total of $11.6 million. The remaining Professional segment declined $9.4 million (20.7%).
Gross Profit:
Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs.
Total
company gross profit increased approximately $2.0 million (7.1%). As a percentage of revenue, gross profit increased to 35.9% from 35.7%, due to improved margins in our Professional segment.
We determine spread as the difference between bill rate and pay rate.
Property Management Gross Profit: Property Management gross profit increased approximately $0.7 million (4.8%), driven by an 8.2% increase in revenue offset by lower permanent placement business, which has no cost of service.
Professional Gross Profit: Professional gross profit increased approximately $1.3 million (9.2%). Horn Solutions and Arroyo Consulting contributed a total of $4.9 million in gross profit, while the
remaining Professional business decreased approximately $3.6 million (24.6%).
28
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $2.3 million versus the prior year. While selling expenses are not separated from general and administrative expenses in the expense categories below, total selling expenses increased $1.8 million (approximately 78% of the $2.3 million increase) versus the prior year. Total selling expense increase included $2.9 million related to Horn Solutions and Arroyo Consulting. Acquisition transaction fees increased $0.1 million over the prior year quarter.
Depreciation
and Amortization: Depreciation and amortization charges increased $0.9 million primarily due to amortization of intangible assets created by the Horn Solutions and Arroyo Consulting acquisitions.
Interest Expense, net: Interest expense, net increased $1.3 million primarily due to higher debt related to the Horn Solutions and Arroyo Consulting acquisitions and higher interest rates.
Income Tax: Income tax decreased $0.5 million primarily due to lower pre-tax 2023 income, partially offset by higher effective tax rates.
29
Thirty-nine
Week Fiscal Period Ended October 1, 2023 (“Fiscal 2023”) Compared with Thirty-nine Week Fiscal Period Ended September 25, 2022 (“Fiscal 2022”)
Property
Management Revenues: Property Management revenues increased approximately $6.4 million (7.1%). The increase was due to an increase in average bill rate, partially offset by a decrease in billed hours.
Professional Revenues: Professional revenues increased approximately $12.1 million (9.2%). Horn Solutions and Arroyo Consulting contributed a combined total of $28.9 million. The remaining Professional business declined $16.8 million (12.7)% primarily due to a decline in billing hours.
Gross Profit:
Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes,
payroll-related insurance, field talent costs, and reimbursable costs.
Overall,
our gross profit increased approximately $9.8 million (12.9%). As a percentage of revenue, gross profit has increased to 36.0% from 34.6%, with both segments contributing to the increase.
We determine spread as the difference between bill rate and pay rate.
Property Management Gross Profit: Property Management gross profit increased approximately $3.1 million (8.8%), including a 7.1% increase in total revenues with an increase in average spread partially offset by lower permanent placement revenue, which has no cost of service.
Professional Gross Profit: Professional gross profit increased approximately $6.7 million (16.3%). Horn Solutions and Arroyo Consulting contributed
a total of $12.3 million in gross profit, offset by a $5.6 million (13.4)% decline in the remaining Professional segment.
30
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $8.5 million versus the prior year. While selling expenses are not separated from general and administrative expenses in the expense categories below, total selling expenses increased $7.2 million (approximately 85% of the $8.5 million increase) versus the prior year. Total selling expense increase included $7.7 million related to Horn Solutions and Arroyo Consulting. Acquisition transaction fees increased $0.9 million and workers’ compensation loss retention return increased (expense reduction)
by $0.4 million over the prior year.
Impairment
losses: At the February 2023 Board of Directors meeting, managements's plan to rebrand as BGSF was approved, which eliminated the use of various trade names. The decision to rebrand created an impairment of $22.5 million in trade names, which were written-off during Fiscal 2023.
Depreciation and Amortization: Depreciation and amortization charges increased approximately $2.8 million (93.2%). The increase in depreciation and amortization is primarily due to the amortization of intangible assets related to the Horn Solutions and Arroyo Consulting acquisitions.
Interest Expense, net: Interest expense, net increased approximately $3.7 million primarily due to the increased debt balances related to the Horn Solutions and Arroyo Consulting
acquisitions and higher interest rates.
Income Tax Expense: We recorded a tax benefit of approximately $3.6 million primarily due to impairment losses on the trade names in the first quarter versus a tax expense of $3.0 million in 2022.
31
Use of Non-GAAP Financial Measures
We present Adjusted EBITDA (defined below), a measure that is not in accordance with accounting principles generally accepted in the United States of America
(“non-GAAP”), in this Quarterly Report to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under accounting principles generally accepted in the United States of America (“GAAP”) can provide alone. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for our management. In addition, the financial covenants in our credit agreement are based on EBITDA, as defined
in the credit agreement.
We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, impairment losses, transaction fees, and certain non-cash expenses such as share-based compensation expense. Omitting interest, taxes, and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA
as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income (loss) from continuing operations for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income (loss). Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are
excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness.
To properly and prudently evaluate our business, we encourage you to review our unaudited consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from continuing operations from net income (loss) from continuing operations the most directly comparable financial measure presented in accordance with GAAP, set forth
in the following table. All of the items included in the reconciliation from net income (loss) from continuing operations to Adjusted EBITDA from continuing operations are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect ongoing operating
performance.
Income
tax expense (benefit) from continuing operations
955
1,441
(3,565)
2,961
(2,866)
Interest expense, net
1,672
376
4,375
718
5,019
Operating
income (loss)
5,267
6,469
(10,412)
13,523
(7,652)
Depreciation and amortization
2,033
1,145
5,729
2,966
6,816
Impairment
losses
—
—
22,545
—
22,545
Share-based compensation
408
411
844
865
1,064
Transaction
fees
149
6
901
6
1,166
Adjusted EBITDA from continuing operations
$
7,857
$
8,031
$
19,607
$
17,360
$
23,939
Adjusted
EBITDA Margin (% of revenue)
9.4
%
10.2
%
8.2
%
7.9
%
7.6
%
Liquidity
and Capital Resources
Our working capital requirements are primarily driven by field talent payments, tax payments and client partner accounts receivable receipts. Since receipts from client partners lag payments to field talent, working capital requirements increase substantially in periods of growth.
Our primary sources of liquidity are cash generated from operations and borrowings under our amended credit agreement with BMO, that provides for a revolving credit facility maturing July 16, 2024 (the “Revolving Facility”). Our primary uses of cash are payments to field talent, team members, related payroll liabilities, operating expenses, capital expenditures, cash interest, cash taxes, dividends, and contingent consideration and debt payments.
We believe that the cash generated from operations, together with the borrowing availability under our Revolving Facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new markets throughout the next year. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to obtain additional debt or equity capital or refinance all or a portion of our debt.
While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional growth opportunities
within the next year that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected.
33
A summary of our working capital, operating, investing and financing activities are shown in the following table:
Net cash provided by (used in) continuing operations:
Operating activities
$
15,094
$
(5,557)
Investing
activities
(8,759)
25,633
Financing activities
(6,335)
(17,888)
Net change in cash and cash equivalents discontinued operations
—
(2,300)
Net change in cash and cash equivalents
$
—
$
(112)
Operating
Activities
Cash provided by operating activities consists of net income (loss) adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense, impairment losses, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, accrued payroll and expenses, and other current assets.
During Fiscal 2023, net cash provided by continuing operating activities was $15.1 million, an increase of $20.7 million compared with net cash used in continuing operating activities of $5.6 million for Fiscal 2022. This increase is primarily attributable to payments received on account receivable, Sentech deferred consideration received on other current assets, partially offset by decreased payments in accrued payroll
and expenses.
Investing Activities
Cash used in investing activities consists primarily of cash paid for businesses acquired, cash received for businesses sold, and capital expenditures.
In Fiscal 2023, we paid $6.8 million for the acquisition of Arroyo Consulting and we made capital expenditures of $2.0 million primarily related to continued information technology improvements. In Fiscal 2022, we received $30.3 million in connection to the sale of InStaff and we made capital expenditures of $4.7 million mainly related to the information technology improvement project and for software and computer equipment purchased in the ordinary course of business.
Financing
Activities
Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement and payment of dividends.
For Fiscal 2023, we disbursed $4.9 million in cash dividends on our common stock, we paid down $5.0 million on the Term Loan, we made payments of $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed $4.3 million on our Revolving Facility for increased operating needs. For Fiscal 2022, we paid down $26.9 million on the Term Loan, we disbursed $4.7 million in cash dividends on our common stock, we made payments of $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed $14.3 million on our Revolving Facility for increased working capital needs.
34
Credit
Agreements
On July 16, 2019, we entered into a Credit Agreement, as amended (the “Credit Agreement”), maturing July 16, 2024, led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for the Revolving Facility permitting us to borrow funds from time to time in an aggregate amount up to $35.0 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting us to borrow funds from time to time in an aggregate amount not to exceed $30.0 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded and repaid. We also had the option to request an increase in the aggregate
Term Loan by $40.0 million, which was done in connection with the Horn Solutions acquisition. Our obligations under the Second Credit Amendment are secured by a first priority security interest in substantially all our tangible and intangible property. The Credit Agreement bore interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin through August 17, 2022 (as such terms are defined in the Credit Agreement). We pay an unused commitment fee on the daily average unused amount of Revolving Facility.
On August 18, 2022, we entered into an amendment to the Credit Agreement with BMO, which changed the interest rate component from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus the Applicable Margin (as such terms are defined in the amended
credit agreement).
In connection with the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”), we exercised the option to borrow $40.0 million, as noted above, pursuant to a second amendment to the Credit Agreement (“Second Credit Amendment”). The Second Credit Amendment requires 2.5% of the original principal balance of the New Term Loan payable on the last business day of each quarter, beginning on March 31, 2023. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio (as such terms are defined in the amended Second Credit Amendment).
On April 24, 2023, in connection with the acquisition of Arroyo
Consulting, we entered into a Third Amendment to the Credit Agreement (“Third Credit Amendment”) with BMO. The Third Credit Amendment revised language to permit an acquisition of a foreign entity under certain circumstances and modified the terms of permitted distributions and guarantors.
On May 19, 2023, we entered into a Fourth Amendment to the Credit Agreement (“Fourth Credit Amendment”) and increased the Revolving Facility by $6.0 million to an aggregate amount up to $41.0 million. We were in compliance with the customary affirmative and negative covenants as of October 1, 2023.
The indebtedness under the Credit Agreement matures on July 16, 2024
and has therefore been classified within current liabilities on the Company’s unaudited consolidated balance sheet as of October 1, 2023. The Company is currently in active and advanced discussions with the Company’s lenders to refinance such indebtedness with an extended maturity date. While the Company currently intends to close such refinancing during the Company’s fourth fiscal quarter of 2023, the Company
cannot guarantee that such refinancing, which involve risks and uncertainties, will occur on favorable or comparable terms, or at all. The Company’s results of operations and financial condition could be materially and adversely affected by the ultimate terms of such refinancing or the Company’s inability to close such refinancing.
Off-Balance Sheet Arrangements
Letter of Credit
In March 2020, in conjunction with the EdgeRock acquisition,
we entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of October 1, 2023, we had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which is considered usage against our Revolving Facility.
35
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial
statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting
Policies, of the Notes to Unaudited Consolidated Financial Statements included in “Item 1. Financial Statements.” Please also refer to our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 for a more detailed discussion of our critical accounting policies.
As a result of the economic uncertainty, we may need to make necessary changes to accounting policy judgments and estimates over time, which could result in meaningful impacts to our financial statements in future periods. Actual results and outcomes may differ from our estimates and assumptions.
The current inflationary environment and related interest rate impacts continue to have significant adverse impact on the economy and market conditions. These factors may impact labor markets
by reducing demand for our workforce solutions, increase early terminations, or diminish projects. As a result, our business, financial condition and results of operations may be negatively affected, and could increase our cost of borrowing.
Revenue Recognition
We derive our revenues from continuing operations in our Property Management and Professional segments. We provide workforce solutions, placement services, and managed services. Revenues are recognized when promised workforce solutions are delivered to client partners, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We recognize revenue through the following types of services: workforce solutions, contingent placements, retained search placements, and managed services.
Intangible
Assets
We hold intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized. We capitalize purchased software and internal payroll costs directly incurred in the modification of software for internal use. Software maintenance and training costs are expensed in the period incurred.
Goodwill
Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in
a business combination. We review goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable.
Income Taxes
The current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for the year. We recognizes any penalties when necessary as part of selling, general and administrative expenses. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified net as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. When appropriate, we will record a valuation allowance
against net deferred tax assets to offset future tax benefits that may not be realized. We follow the guidance of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes.
36
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 2 in the Notes to the Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and Note 2 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal
year ended January 1, 2023.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to certain market risks from transactions we enter into in the normal course of business. Our primary market risk exposure relates to interest rate and inflation risks. Through the current period, we have been able to moderate the negative impacts of an inflationary market by adjusting our pricing model.
Interest Rates
Our
Revolving Facility and Term Loan are priced at a variable interest rates. Accordingly, future interest rate increases could potentially put us at risk for an adverse impact on future earnings and cash flows.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial Reporting
For
the fiscal quarter ended October 1, 2023, there have been no changes in our internal control over financial reporting identified in connection with the evaluations required by Rule 13a-15(d) or Rule 15d-15(d) under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our team members are working remotely. We are continually monitoring and assessing the impact of the ongoing situation on our internal controls to minimize the impact on their design and operating effectiveness.
Inherent Limitations on Effectiveness of Controls
Our
management, including our CEO and our CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
37
PART II—OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
No change from the information provided in ITEM 3. LEGAL PROCEEDINGS included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2023.
ITEM 1A. RISK FACTORS
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the fiscal year ended January 1, 2023 (our “2022 Form 10-K”), and filed with
the SEC on March 16, 2023, and in our other Quarterly Reports on Form 10-Q filed subsequently with the SEC. Any of the risks discussed in this Quarterly Report on Form 10-Q, and any of the risks disclosed in Item 1A. of Part I of our 2022 Form 10-K or in our other Quarterly Reports on Form 10-Q filed subsequently with the SEC, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
Item 6. Exhibits
The
following exhibits are filed or furnished with this Quarterly Report on Form 10-Q.
The following financial information from BGSF's Quarterly Report on Form 10-Q for the quarterly period ended October 1, 2023 formatted in Inline XBRL (Extensible
Business Reporting Language) includes: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income, (iii) the Unaudited Statements of Changes in Stockholders' Equity, (iv) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Consolidated Financial Statements.
104*
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
††
Pursuant to Item 601(a)(5) of Regulation S-K, certain schedules and similar attachments have been omitted. The Company hereby agrees to furnish a copy of any omitted schedule or attachment to the Securities and Exchange
Commission upon request.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
