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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-12 · 208 added, 115 removed, 196 unchanged (62% of the section changed)

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The following discussion and analysis of our financial condition and results of operations, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements.

See “Forward-Looking Statements” in this Annual Report on Form 10-K.

These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item 1A.

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You should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this Annual Report on Form 10-K.

Our financial information may not be indicative of our future performance.

Executive Overview

Demand for our field talent and consultants as well as placement services is dependent upon general economic and labor trends.

We believe that the Company is well positioned in the current macroeconomic environment.

The United States economic backdrop during 2019 was positive as real gross domestic product (“GDP”) grew an estimated 2.3%, while the unemployment rate declined from 3.9% in December 2018 to 3.5% in December 2019 recording to the U.S.

Bureau of Labor Statistics.

In the United States, the number of job openings has exceeded the number of hires since February 2015, creating competition for skilled talent that increases our value to client partners.

labor market remains robust, with significant demand due to talent shortages across our disciplines, where unemployment remains near a 50-year low.

Despite strong job growth over the last three months, there remains uncertainty in the market around the impact and duration of the Coronavirus outbreak.

While the outbreak of the virus began late in 2019, our results of operations for fiscal year 2019 do not include any material impact from this.

Disruptions to business operations resulting from travel restrictions and possible quarantines of our team members, field talent, client partners and suppliers in areas affected by the outbreak, as well as possible closures of offices, manufacturing facilities, warehouses and logistics supply chains, could have a material adverse impact on our financial condition and results of operations for an uncertain duration.

The impact of the outbreak on the labor market will depend on the amount of time it disrupts economic activity.

The impact over the next few months may be reflected in a drop in hours worked and reduced hiring.

However, if the disruption continues longer, then impacted companies are likely to reduce their workforce, including layoffs, especially of less skilled workers.

No determination of such impact on our financial condition or results of operations can be made at this time.

Our historical financial information may not be indicative of our future performance.

Company Overview

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in December 2010, Extrinsic, LLC in December 2011, American Partners, Inc.

in December 2012, InStaff in June 2013, D&W in March 2015, VTS in October 2015, Zycron in April 2017, Smart in September 2017, LJK in December 2019, and 100% of the equity of EdgeRock in February 2020.

in December 2012, InStaff in June 2013, D&W in March 2015, VTS in October 2015, Zycron in April 2017, Smart in September 2017, and LJK in December 2019, 100% of the equity of EdgeRock in February 2020, and substantially all of the assets of Momentum Solutionz in February 2021.

We operate within three industry segments:

Real Estate, Professional, and Light Industrial.

We provide services to client partners primarily within the United States of America.

We now operate through 83 branch offices and 15 on-site locations located across 43 states and D.C.

The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 29 states, via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.

The Professional segment provides skilled field talent on a nationwide basis for information technology (“IT”) and finance, accounting, legal and human resource client partner projects.

We provide workforce solutions to client partners primarily within the United States of America.

We now operate across 46 states and D.C., as well as 13 on-site locations.

The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 36 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.

Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent.

The Professional segment provides skilled field talent on a nationwide basis for information technology (“IT”) and finance, accounting, legal and human resource client partner projects on a national basis.

Our Professional segment operates through various divisions including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J.

Kushner & Associates, EdgeRock Technology Partners, and beginning in 2021, Momentum Solutionz.

The Light Industrial segment provides field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce in 7 states.

Our Light Industrial segment operates through our InStaff division.

Impact of COVID-19

We continue to observe the impact of the COVID-19 outbreak on our consolidated operating results, our candidate and field talent supply chain, and our client partners demand in all segments.

We expect that the social distancing measures, the changing operational status of our client partners, production levels at client partners facilities, and general business uncertainty will continue to effect demand in all our segments.

During this uncertain time, our critical priorities are the health and safety of our team members, field talent, candidates and client partners.

Starting in March 2020, we took several cost containment and liquidity actions, which we do not believe have materially adversely impacted our internal controls, financial reporting systems or our operations.

Our business, results of operations, and financial condition have been, and may continue to be, adversely impacted in material respects by COVID-19 and by related government actions, non-governmental organization recommendations, and public perceptions, all of which have led and may continue to lead to disruption in global economic and labor markets.

These effects have had a significant impact on our business, including reduced demand for our workforce solutions, early terminations or reductions in projects, and hiring freezes, and a shift of a majority of our workforce to remote operations, all of which have contributed to a decline in revenues and other significant adverse impacts on our financial results.

Other potential impacts of COVID-19 may include continued or expanded closures or reductions of operations with respect to our client partners’ operations or facilities, the possibility our client partners will not be able to pay for our workforce solutions, or that they will attempt to defer payments owed to us, either of which could materially impact our liquidity, the possibility that the uncertain nature of the pandemic may not yield the increase in certain of our workforce solutions that we have historically observed during periods of economic downturn, and the possibility that various government-sponsored programs to provide economic relief may be inadequate.

Further, we may continue to experience adverse financial impacts, some of which may be material, if we cannot offset revenue declines with cost savings through expense-related initiatives, human capital management initiatives, or otherwise.

As a result of these observed and potential developments, we expect our business, results of operations, and financial condition to continue to be negatively affected.

Real Estate was strongly affected by COVID-19 when client partners immediately stopped non-emergency maintenance, which is our largest revenue source.

Additional, during our high volume season, many client partners were forced into a virtual leasing model verses using onsite touring options.

With many government actions requiring eviction moratoriums, our client partners’ response was to tighten all expenses.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our team members, field talent, client partners, and stockholders.

The potential effects are not clear for any such alterations or modifications on our business, our client partners, candidates, vendors, or on our financial results.

Results of Operations

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Fiscal Year Ended

2020 December 29,

2019 December 30,

(dollars in thousands)

Revenues $ 277,891 $ 294,314 $ 286,863

Cost of services 201,671 213,633 210,268

Gross Profit 76,220 80,681 76,595

Selling, general and administrative expenses 60,558 56,199 51,066

Gain on contingent consideration (76) — (3,775)

Impairment losses 7,240 — —

Depreciation and amortization 4,960 4,820 5,044

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Income tax expense 513 4,305 3,860

Net income $ 1,441 $ 13,247 $ 17,550

Fiscal Year Ended

2020 December 29,

2019 December 30,

Revenues 100.0 % 100.0 % 100.0 %

Cost of services 72.6 72.6 73.3

Gross Profit 27.4 27.4 26.7

Selling, general and administrative expenses 21.8 19.1 17.8

Gain on contingent consideration — — (1.3)

Impairment losses 2.6 — —

Depreciation and amortization 1.8 1.6 1.8

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Income tax expense 0.2 1.5 1.3

Net income 0.5 % 4.5 % 6.1 %

Fifty-two Week Fiscal Year Ended December 27, 2020 (Fiscal 2020) Compared with Fifty-two Week Fiscal Year Ended December 29, 2019 (Fiscal 2019)

Fiscal Year Ended

2020 December 29,

(dollars in thousands)

Revenues by Segment:

Real Estate $ 68,756 24.7 % $ 96,422 32.8 %

Professional 138,370 49.8 % 123,343 41.9 %

Light Industrial 70,765 25.5 % 74,549 25.3 %

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Real Estate Revenues :

Real Estate revenues in creased approximately $9.5 million ( 11.0% ) due to our continued geographic expansion plan and overall growth in existing offices.

The in crease was due to a 5.1% in crease in billed hours and a 5.1% in crease in average bill rate.

Revenue from new offices provided approximately $2.5 million of the in crease.

Revenues from the commercial buildings group contributed $0.8 million of the in crease.

Real Estate revenues decreased approximately $27.7 million (28.7%) due to the effects of the COVID-19 pandemic discussed above.

The decrease was due to a 31.7% decrease in billed hours partially offset by a 4.1% increase in average bill rate.

Revenue from new offices was $0.8 million.

Professional Revenues :

Professional revenues in creased approximately $4.0 million ( 3.4% ).

The in crease was due to an in crease of 8.3% in average bill rate that was offset by a de crease in permanent placements of $0.1 million and a 5.7% de crease in billed hours.

Professional revenues increased approximately $15.1 million (12.2%), primarily from LJK and EdgeRock acquisitions, which contributed $36.1 million of new revenues.

The remaining professional group decreased $21.1 million.

Even with the overall increase, billed hours decreased 5.0% offsets by an increase of 17.7% in average bill rate and an increase in permanent placements of $1.2 million.

Light Industrial Revenues :

Light Industrial revenues de creased approximately $6.1 million ( 7.6% ).

The de crease was due to a 10.8% de crease in billed hours offset by a 3.5% in crease in average bill rate.

Light Industrial revenues decreased approximately $3.8 million (5.1%) due to the effects of the COVID-19 pandemic.

The decrease was due to a 11.8% decrease in billed hours partially offset by a 7.6% increase in average bill rate.

Gross Profit:

Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs.

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.

Fiscal Year Ended

2020 December 29,

(dollars in thousands)

Gross Profit by Segment:

Real Estate $ 25,812 33.9 % $ 36,928 45.8 %

Professional 40,227 52.7 % 32,898 40.8 %

Light Industrial 10,181 13.4 % 10,855 13.4 %

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Fiscal Year Ended

2020 December 29,

Gross Profit Percentage by Segment:

Real Estate 37.5 % 38.3 %

Professional 29.1 % 26.7 %

Light Industrial 14.4 % 14.6 %

Company Gross Profit Percentage 27.4 % 27.4 %

Overall, our gross profit in creased approximately $4.1 million ( 5.3% ).

As a percentage of revenue, gross profit has in creased to 27.4% from 26.7% , primarily due to higher gross profits across our Real Estate and Professional segments.

Overall, our gross profit decreased approximately $4.5 million (5.5%).

As a percentage of revenue, gross profit has remained consistent at 27.4%, primarily due to higher gross profits across our Professional segment.

We determine spread as the difference between bill rate and pay rate.

Real Estate Gross Profit:

Real Estate gross profit in creased approximately $4.0 million ( 12.1% ) consistent with the in crease in revenue.

The in crease in gross profit was due primarily to 5.0% in crease in average spread.

Real Estate gross profit decreased approximately $11.1 million (30.1%) consistent with the decrease in revenue, which was partially offset by a 2.2% increase in average spread.

Professional Gross Profit:

Professional gross profit in creased approximately $1.3 million ( 4.2% ) consistent with the increase in revenue.

The increase in gross profit was due to 9.3% in crease in average spread.

Professional gross profit increased approximately $7.3 million (22.3%) consistent with the increase in revenue, primarily from LJK and EdgeRock acquisitions, which contributed $12.2 million of gross profit and an overall increase of 19.5% in average spread.

Light Industrial Gross Profit:

Light Industrial gross profit de creased approximately $1.2 million ( 10.1% ) consistent with the de crease in revenue which was offset by a n in crease of 2.2% in the average spread.

Light Industrial gross profit decreased approximately $0.7 million (6.2%) in line with the decreased revenue, which was partially offset by an increase of 6.0% in the average spread.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses in creased approximately $5.1 million ( 10.1% ) primarily related to various costs associated with our revenue growth and geographic expansion including increased

headcount, commissions and bonuses as detailed in the following table.

Selling, general and administrative expenses increased approximately $4.4 million (7.8%), primarily related from LJK and EdgeRock acquisitions, which contributed $9.5 million of new expense that was partially offset by reduced compensation costs from the decline in gross profit and by many of our actions taken starting in March related to the COVID-19 pandemic to reduce actual and planned operating costs as detailed in the following table.

Fiscal Year Ended

2020 December 29,

Amount % of Revenue Amount % of Revenue $

(dollars in thousands)

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Client engagement 375 — % 1,443 — % (1,068) (74) %

Software 2,408 1 % 1,906 1 % 502 26 %

Professional fees 1,271 — % 1,327 — % (56) (4) %

Public company related costs 691 — % 675 — % 16 2 %

Bad debt 349 — % 128 — % 221 173 %

Share-based compensation 849 — % 953 — % (104) (11) %

Transaction fees 615 — % 434 — % 181 42 %

IT roadmap 1,563 1 % 721 — % 842 100 %

Other 1,397 1 % 1,299 — % 98 8 %

$ 60,558 22 % $ 56,199 19 % $ 4,359 8 %

Depreciation and Amortization:

Depreciation and amortization charges de creased approximately $0.2 million ( 4.4% ).

The de crease in depreciation and amortization is primarily due to fully amortized intangible assets in the Light Industrial segment

related to the 2013 InStaff acquisition and in the Professional segment related to the 2015 D&W acquisition.

Depreciation and amortization charges increased approximately $0.1 million (2.9%).

The increase in depreciation and amortization is primarily due to the Professional segment with increases related to the 2019 LJK and 2020 EdgeRock acquisitions that are partially offset by decreases related to the 2015 VTS and 2015 D&W Talent acquisitions.

Impairment loss :

As a result of the certain business developments and changes in our long-term projections, we calculated the quantitative impairment test of the finance and accounting group, within the Professional segment, using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets by asset group.

We recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss within the Professional segment.

Interest Expense, net:

Interest expense, net de creased $1.3 million ( 44.9% ) primarily due to the May 2018 offering of

common stock which proceeds were used to pay down on the existing indebtedness of the Company and the decrease in contingent consideration discounts related to the 2017 Zycron and Smart acquisitions.

Interest expense, net was flat due to the increased borrowings on the Term Loan related to the EdgeRock acquisition that was partially offset by decreases in the Revolving Facility, deferred financing fees, and unused fee.

Income Taxes:

Income tax expense in creased $0.4 million ( 11.5% ) primarily due to the 2018 Option Cancellation Agreement

and the share-based compensation exercises that are deductible for tax purposes that resulted in a reduced 2018 effective rate,

which was partially offset by higher pre tax 2018 income.

Fifty-two Week Fiscal Year Ended December 30, 2018 (Fiscal 2018 ) Compared with Fifty-three Week Fiscal Year Ended December 31, 2017 (Fiscal 2017 )

The Fiscal 2017 consolidated statement of operations includes 39 weeks of Zycron operations and 15 weeks of Smart operations.

Income tax expense decreased $3.8 million (88.1%) primarily due to lower pre-tax 2020 income and intangible impairment losses, which were partially offset by non-deductible fees related to the 2020 EdgeRock transaction.

Fifty-two Week Fiscal Year Ended December 29, 2019 (Fiscal 2019) Compared with Fifty-two Week Fiscal Year Ended December 30, 2018 (Fiscal 2018)

Fiscal Year Ended

2019 December 30,

(dollars in thousands)

Revenues by Segment:

Real Estate $ 96,422 32.8 % $ 86,874 30.3 %

Professional 123,343 41.9 % 119,300 41.6 %

Light Industrial 74,549 25.3 % 80,689 28.1 %

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Real Estate Revenues :

Real Estate revenues increased approximately $15.1 million (21.0%) due to our continued geographic expansion plan and continued growth in existing offices.

Real Estate revenues increased approximately $9.5 million (11.0%) due to our continued geographic expansion plan and overall growth in existing offices.

The increase was due to a 5.1% increase in billed hours and a 5.1% increase in average bill rate.

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Professional Revenues :

Professional revenues decreased approximately $7.3 million (5.8%).

The Zycron acquisition contributed an additional $5.8 million and the Smart acquisition contributed an additional $8.4 million increase over 2017.

The overall decrease was due to a 10.8% increase in billed hours and a decrease of 13.8% in average bill rate that was offset by an increase in permanent placements of $0.8 million.

Professional revenues increased approximately $4.0 million (3.4%).

The increase was due to an increase of 8.3% in average bill rate that was offset by a decrease in permanent placements of $0.1 million and a 5.7% decrease in billed hours.

Light Industrial Revenues :

Light Industrial revenues increased approximately $6.5 million (8.8%).

The overall revenue increase was due to a 2.6% increase in billed hours and a 6.4% increase in average bill rate.

Light Industrial revenues decreased approximately $6.1 million (7.6%).

The decrease was due to a 10.8% decrease in billed hours partially offset by a 3.5% increase in average bill rate.

Gross Profit:

Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs.

Fiscal Year Ended

2019 December 30,

(dollars in thousands)

Gross Profit by Segment:

Real Estate $ 36,928 45.8 % $ 32,955 43.0 %

Professional 32,898 40.7 % 31,565 41.2 %

Light Industrial 10,855 13.5 % 12,075 15.8 %

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Fiscal Year Ended

2019 December 30,

Gross Profit Percentage by Segment:

Real Estate 38.3 % 37.9 %

Professional 26.7 % 26.5 %

Light Industrial 14.6 % 15.0 %

Company Gross Profit Percentage 27.4 % 26.7 %

Overall, our gross profit increased approximately $8.2 million (12.0%) due primarily to increased revenues in our Real Estate segment of $5.8 million and our Professional segment's addition of Zycron of $1.4 million and Smart of $3.1 million.

As a percentage of revenue, gross profit has increased to 26.7% from 25.1%, primarily due to higher gross profits across all segments.

Overall, our gross profit increased approximately $4.1 million (5.3%).

As a percentage of revenue, gross profit has increased to 27.4% from 26.7%, primarily due to higher gross profits across our Real Estate and Professional segments.

We determine spread as the difference between bill rate and pay rate.

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Professional Gross Profit:

Professional gross profit increased approximately $1.0 million (3.1%) due to the decrease in cost of services which was offset by a 7.0% decrease in average spread.

The Zycron acquisition contributed $1.4 million.

The Smart acquisition contributed $3.1 million.

Professional gross profit increased approximately $1.3 million (4.2%) consistent with the increase in revenue.

The increase in gross profit was due to 9.3% increase in average spread.

Light Industrial Gross Profit:

Light Industrial gross profit increased approximately $1.4 million (13.5%) from an increase of 6.3% in the average spread.

Light Industrial gross profit decreased approximately $1.2 million (10.1%) consistent with the decrease in revenue which was partally offset by an increase of 2.2% in the average spread.

Selling, General and Administrative Expenses:

Selling, general and administrative expenses increased approximately $6.5 million (14.6%) related to various costs associated with our revenue growth and geographic expansion including increased

headcount, commissions and bonuses as detailed in the following table.

Selling, general and administrative expenses increased approximately $5.1 million (10.1%) primarily related to various costs associated with our revenue growth and geographic expansion including increased headcount, commissions and bonuses as detailed in the following table.

Fiscal Year Ended

2019 December 30,

Amount % of Revenue Amount % of Revenue $

(dollars in thousands)

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Client engagement 1,443 — % 1,270 — % 173 14 %

Software 1,906 1 % 1,342 — % 564 42 %

Professional fees 1,327 — % 1,155 — % 172 15 %

Public company related costs 675 — % 524 — % 151 29 %

Bad debt 128 — % 41 — % 87 212 %

Share-based compensation 953 — % 1,069 — % (116) (11) %

Transaction fees 434 — % 508 — % (74) (15) %

IT roadmap 721 — % — — % 721 100 %

Other 1,299 — % 801 — % 498 62 %

$ 56,199 19 % $ 51,066 18 % $ 5,133 10 %

Depreciation and Amortization:

Depreciation and amortization charges decreased approximately $0.2 million (4.4%).

The decrease in depreciation and amortization is primarily due to Professional segment fully amortized intangible assets related to the

2012 American Partners acquisition of $1.7 million that was partially offset by an increase in the Professional segment intangible assets acquired in the 2017 Zycron and Smart acquisitions of $0.6 million.

The decrease in depreciation and amortization is primarily due to fully amortized intangible assets in the Light Industrial segment related to the 2013 InStaff acquisition and in the Professional segment related to the 2015 D&W acquisition.

Interest Expense, net:

Interest expense, net decreased $0.4 million primarily due to the decrease in the interest of $0.6 million related to the amortization of contingent consideration discounts from the 2015 VTS acquisition which was offset by the increase of $0.2 million in amortization of the deferred financing fees related to the Amended Credit Agreement (as defined below).

Interest expense, net decreased $1.3 million (44.9%) primarily due to a May 2018 offering of common stock which proceeds were used to pay down existing indebtedness and the decrease in contingent consideration discounts related to the 2017 Zycron and Smart acquisitions.

Income Taxes:

Income tax expense decreased approximately $4.8 million primarily due to the rate change impact of the TCJA, the Option Cancellation Agreement, and share-based compensation exercises that are deductible for tax purposes, which resulted in a decrease in the effective rate, offset by higher pre-tax income of $6.9 million.

Non-GAAP Same Day Revenues:

Same Day Revenues are defined as a fifty-three week fiscal year ended December 31, 2017 (Fiscal 2017) revenues less five revenue days.

The Fiscal 2017 revenues of $272.6 million would be less $5.7 million for five revenue days resulting in Same Day Revenues of $266.9 million.

Same Day Revenues increased $20.0 million (7%) to $286.9 million in Fiscal 2018.

Same Day Revenues and GAAP revenues were equal for Fiscal 2018.

Non-GAAP Same Day Gross Profit:

Same Day Gross Profit is defined as a fifty-three week fiscal year ended December 31, 2017 (Fiscal 2017) gross profit less five gross profit days.

The Fiscal 2017 gross profit of $68.4 million would be less $1.4 million for five gross profit days resulting in Same Day Gross Profit of $67.0 million.

Same Day Gross Profit increased $9.6 million (14%) to $76.6 million in Fiscal 2018.

Same Day Gross Profit and GAAP gross profit were equal for Fiscal 2018.

Income tax expense increased $0.4 million (11.5%) primarily due to a May 2018 option cancellation agreement with a former senior executive and the share-based compensation exercises that are deductible for tax purposes that resulted in a reduced 2018 effective rate, which was partially offset by higher pre-tax 2018 income.

Liquidity and Capital Resources

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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 branches 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.

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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.

The Company has an effective Form S-3 shelf registration statement allowing for the offer and sale of up to approximately $13 million of common stock.

There is no guarantee that we will be able to consummate any offering on terms we consider acceptable or at all.

During this period of uncertainty of volatility related to COVID-19, we will continue to monitor our liquidity, particularly payments from our client partners.

A summary of our working capital, operating, investing and financing activities are shown in the following table:

Fiscal Year Ended

2020 December 29,

2019 December 30,

(dollars in thousands)

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Net cash used in investing activities (24,147) (9,729) (924)

Net cash (used in) provided by financing activities

Net cash provided by (used in) financing activities 1,890 (8,225) (17,502)

Net change in cash and cash equivalents $ — $ — $ —

Operating Activities

Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense on contingent consideration payable, and the effect of working capital changes.

The primary drivers of cash inflows and outflows are accounts receivable and accrued payroll and expenses.

During Fiscal 2019 , net cash provided by operating activities was $18.0 million , a de crease of $0.5 million compared with $18.4 million for Fiscal 2018 .

This de crease is primarily attributable to lower net income, the timing of payments on operating assets and liabilities, net deferred tax assets, which was partially offset by contingent consideration adjustments.

During Fiscal 2018 , net cash provided by operating activities was $18.4 million , a n in crease of $0.4 million compared with $18.1 million for Fiscal 2017 .

This in crease is primarily attributable to higher net income, which was partially offset by contingent consideration adjustments, the timing of payments on operating assets and liabilities, amortization expense, and net deferred tax assets.

Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, intangible impairment losses, interest expense on contingent consideration payable, gain on contingent consideration, loss on extinguishment of debt, 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 and long-term liabilities.

During Fiscal 2020, net cash provided by operating activities was $22.3 million, an increase of $4.3 million compared with $18.0 million for Fiscal 2019.

This increase is primarily attributable to the non-cash impact of intangible impairment losses, additional other long-term liabilities that includes the deferred employer FICA, and payments on accounts receivable, additional income taxes payable, which were partially offset by lower net income, reduced deferred income taxes, payments on accrued payroll and expenses, reduced prepaid expenses and other current assets, payments on accounts payable, and loss on extinguishment of debt in Fiscal 2019.

During Fiscal 2019, net cash provided by operating activities was $18.0 million, a decrease of $0.5 million compared with $18.4 million for Fiscal 2018.

This decrease is primarily attributable to higher net income, the timing of payments on operating assets and liabilities, net deferred tax assets, which was partially offset by contingent consideration adjustments.

Investing Activities

Cash used in investing activities consists primarily of cash paid for businesses acquired and capital expenditures.

In Fiscal 2019 , we paid $7.5 million in connection with the LJK acquisition and we made capital expenditures of $2.2 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap project.

In Fiscal 2020, we paid net $22.0 million in connection with the 2020 EdgeRock and 2019 LJK acquisitions and we made capital expenditures of $2.1 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap.

In Fiscal 2019, we paid $7.5 million in connection with the LJK acquisition, excluding the hold back paid in 2020, and we made capital expenditures of $2.2 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap project.

In Fiscal 2018, we made capital expenditures of $0.9 million mainly related to furniture and fixtures and computer equipment purchased in the ordinary course of business.

In Fiscal 2017, we paid $18.5 million in connection with the Zycron acquisition, $6.0 million in connection with the Smart acquisition and we made capital expenditures of $1.1 million mainly related to computer equipment and software purchased in the ordinary course of business.

Financing Activities

Cash flows from financing activities consisted principally of borrowings and payments under our credit agreements, dividends and contingent consideration paid.

Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement, payment of dividends, and contingent consideration paid.

For Fiscal 2020, we borrowed $22.5 million on our Term Loan, as defined below, to fund the EdgeRock acquisition and pay down the Revolving Facility, we reduced $14.4 million on our Revolving Facility, paid $5.2 million in cash dividends on our common stock, and paid down $1.1 million on the Term Loan.

For Fiscal 2019, we paid $12.3 million in cash dividends on our common stock, paid down $10.1 million on the term loan with Texas Capital Bank, National Association (“TCB”), and we paid $2.7 million of contingent consideration related to the Zycron acquisition.

We borrowed $9.7 million on our revolving credit facility and borrowed $7.5 million on our term loan in connection with the LJK acquisition.

We borrowed $9.7 million on our Revolving Facility and borrowed $7.5 million on our Term Loan in connection with the LJK acquisition.

For Fiscal 2018, we paid $13.8 million in principal payments on the term loan with TCB, paid $10.9 million in cash dividends on our common stock, reduced our revolving credit facility by $10.7 million, paid $3.3 million related to Option Cancellation Agreement, and paid $1.0 million of contingent consideration related to the VTS and Zycron acquisitions.

We received net proceeds from the issuance of the common stock of $22.2 million and used the net proceeds to reduce outstanding indebtedness under our credit agreement with TCB and cancel outstanding options pursuant to the Option Cancellation Agreement, as noted above.

For Fiscal 2017, we received proceeds from the issuance of the $25.0 million term loan mainly to fund the Zycron acquisition.

We paid $8.7 million in cash dividends on our common stock, paid $4.0 million of contingent consideration related to the VTS acquisition, we reduced our revolving credit facility by $2.5 million, paid $1.1 million in principal payments on the term loan with TCB, and paid $1.1 million in deferred financing costs related to the credit agreement with TCB.

Credit Agreements

On July 16, 2019, we entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, with BMO Harris Bank, N.A.

(“BMO”), as lead administrative agent, lender, letters of credit issuer, and swing line lender.

The Credit Agreement provides for a revolving credit facility (the “Revolving Facility”) permitting us to borrow funds from time to time in an aggregate amount up to $35 million.

The Credit Agreement also provides 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 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement.

On July 16, 2019, we entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, with BMO, as 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 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 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.

We may from time to time, with a maximum of two, request an increase in the aggregate Term Loan commitment by $40 million, with minimum increases of $10 million.

Our obligations under the Credit Agreement are secured by a first priority security interest in substantially all our tangible and intangible property.

The Credit Agreement bears interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Credit Agreement).

The Credit Agreement bears interest either at the Base Rate plus the Applicable Margin plus the Applicable Margin or LIBOR (as such terms are defined in the Credit Agreement).

We also pay an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan.

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We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement.

In April 2020, we entered into a pay-fixed/receive-floating interest rate swap agreement with BMO that reduces the floating interest rate component on the Term Loan obligation.

The $25.0 million notional amount was effective on June 3, 2020 and designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate that terminates on June 1, 2023.

In accordance with cash flow hedge accounting treatment, we have determined that the hedge is perfectly effective using the change-in-variable-cash-flow method.

On December 13, 2019, we borrowed $7.5 million on the Term Loan in conjunction with the closing of the LJK acquisition.

On February 3, 2020, we borrowed $18.5 million on the Term Loan in conjunction with the closing of the EdgeRock acquisition, as described in Note 19 in the Notes to Consolidated Financial Statements.

We borrowed $20 million under the Revolving Facility to pay off our existing indebtedness with TCB and such agreement (and related ancillary documentation) was terminated on July 16, 2019 in connection with such repayment.

On February 3, 2020, we borrowed $18.5 million on the Term Loan in conjunction with the closing of the EdgeRock acquisition.

On April 6, 2020, the Company borrowed the remaining $4.0 million on the Term Loan and the proceeds were used to pay down the Revolving Facility.

We borrowed $20 million under the Revolving Facility to pay off our existing indebtedness with TCB and our credit agreement with TCB (and related ancillary documentation) was terminated on July 16, 2019 in connection with such repayment.

We recognized a loss on extinguishment of debt of approximately $0.5 million related to the unamortized deferred finance fees.

On February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility in conjunction with the closing of the Momentum Solutionz acquisition, as described in Note 19 in the Notes to Consolidated Financial Statements.

Contractual Obligations

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Payments due by period

Total Less than 1

year 1–3 years 3–5 years More than 5

(dollars in thousands)

Long-term debt obligations

Contingent consideration and holdback

$ 34,902 $ 2,625 $ 6,750 $ 25,527 $ —

Contingent consideration 2,500 — 2,500 — —

Deferred employer FICA* 7,228 3,614 3,614 — —

Operating lease obligations 7,545 2,319 3,877 1,350 —

Contractual cash obligations $ 52,175 $ 8,558 $ 16,740 $ 26,877 $ —

* included in Other long-term liabilities (see Note 8 in the Notes to Consolidated Financial Statements)

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet arrangements.

Letter of Credit

In March 2020, in conjunction with the 2020 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 December 27, 2020, 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.

Critical Accounting Policies and Estimates

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The preparation of 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 at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowances for uncollectible accounts receivable, impairment of goodwill and intangible assets, lease liability and continent consideration obligations related to acquisitions, contingencies, litigation, income taxes, share-based compensation option expense.

Actual results could differ from those estimates.

On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowances for credit losses on accounts receivable, impairment of goodwill and intangible assets, lease liability and continent consideration obligations related to acquisitions, contingencies, litigation, income taxes, share-based compensation option expense.

Management bases its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances.

Actual results under circumstances and conditions different than those assumed could result in differences from the estimated amounts in the consolidated financial statements.

However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.

The COVID-19 pandemic continues to have a significant impact on our economy as a result of measures designed to stop the spread of the virus.

In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies.

As COVID-19 continues to develop, management may make changes to these estimates and judgments over time, which could result in meaningful impacts to our financial statements in future periods.

Actual results and outcomes may differ from management’s estimates and assumptions.

Revenue Recognition

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We provide workforce solutions and placement services.

Revenues are recognized when promised services are delivered to client partners, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

Revenues as presented on the consolidated statements of operations represent services rendered to client partners less sales adjustments and allowances.

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.

Revenues as presented on the consolidated statements of operations represent workforce solutions 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.

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We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified field talent, (ii) have the discretion to select the field talent and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client partners.

Temporary staffing revenues - Field talent revenues from contracts with client partners are recognized in the amount to which we have a right to invoice, when the services are rendered by our field talent.

Contingent placement staffing revenues - Any revenues associated with services that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control transferred to the client partner, usually when employment candidates start their employment.

Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which we have a right to invoice, when the services are rendered by our 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 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.

We estimate the effect of placement candidates who do not remain with our client partners through the guarantee period (generally 90 days) based on historical experience.

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Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation.

No fees for placement services are charged to employment candidates.

No fees for placement workforce solutions are charged to employment candidates.

These assumptions determine the timing of revenue recognition for the reported period.

Payment terms in our contracts vary by the type and location of our client partner and the services offered.

Payment terms in our contracts vary by the type and location of our client partner and the workforce solutions offered.

The term between invoicing and when payment is due is not significant.

Goodwill and Intangible Assets

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.

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.

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.

We evaluate the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable.

We annually evaluate the remaining useful lives of all intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization.

We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units.

Further, during second quarter 2020, we assessed the current market capitalization, forecasts and the current carrying value in the 2020 impairment test.

As a result of the certain business developments and changes in our long-term projections, we concluded a triggering event had occurred that required an interim impairment assessment to be performed.

The qualitative assessment thresholds were met on all reporting units except the finance and accounting group, within the Professional segment.

We calculated the quantitative impairment test of the finance and accounting group using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets by asset group (see Note 6 in the Notes to Consolidated Financial Statements).

We determined that there were no impairment indicators for these assets in Fiscal 2019 and 2018.

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.

Intangible assets consist of the value of contract-related intangible assets, trade names, non-compete agreements acquired in acquisitions, and purchased software and internal payroll costs directly incurred in the modification of software for internal use.

We amortize intangible assets over their respective estimated useful lives based on a pattern in which the economic benefit of the respective intangible asset is realized, unless their useful lives are determined to be indefinite.

We review goodwill and other intangible assets for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill and other intangible assets may not be recoverable.

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.

We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units.

As a result of the certain business developments and changes in our long-term

projections, during second quarter 2020, we concluded a triggering event had occurred that required an interim impairment assessment to be performed.

The qualitative assessment thresholds were met on all reporting units except the finance and accounting group.

We calculated the quantitative impairment test of the finance and accounting group using the discounted cash flow method and concluded there was no goodwill impairment loss.

Based on annual testing, the Company has determined that there was no goodwill impairment in Fiscal 2020, 2019 or 2018.

We first evaluate qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount, including goodwill.

If after qualitatively assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then further testing is unnecessary.

If after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we then estimate the fair value of the reporting unit and compare the fair value of the reporting unit with its carrying amount, including goodwill, as discussed below.

In assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, we assess relevant events and circumstances that could affect the significant inputs used to determine the fair value.

The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount.

If the carrying amount of an intangible asset exceeds its fair value, a reporting unit shall recognize an impairment loss in an amount equal to that excess.

The quantitative goodwill impairment test involves a two-step process.

In the first step,we compare the fair value of each reporting unit to its carrying value.

If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required.

If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss.

In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination.

If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.

Contingent Consideration

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Financial Instruments

We use fair value measurements in areas that include, but are not limited to, the allocation of purchase price consideration to tangible and identifiable intangible assets and contingent consideration.

We use fair value measurements in areas that include, but are not limited to, interest rate swap agreements used to mitigate interest rate risk, and the allocation of purchase price consideration to tangible and identifiable intangible assets 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 that provides for the revolving credit facility and term loan and current rates available to us for debt with similar terms and risk.

The fair value on the interest rate swap is based on quoted prices from BMO.

Share-Based Compensation

We recognize 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.

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.

As of December 27, 2020, goodwill of $ 31.6 million, which is limited annually, is expected to be deductible for tax purposes.

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.

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 December 27, 2020, we have a $ 6.5 million net operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date.

When appropriate, we 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, we consider 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.

We believe that it is more likely than not that all deferred tax assets will be realized and thus, believes that a valuation allowance is not required as of December 27, 2020 or December 29, 2019.

We follow the guidance of Accounting Standards Codification (“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.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis