BGSF, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations from continuing 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. Risk Factors” of this Annual Report on Form 10-K. Our actual results of operations may differ materially from those contained in any forward-looking statements. 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. Financial information provided is based on the results of our continuing operations. Please refer to “Note 4 — Discontinued Operations” of our audited consolidated financial statements for information regarding our discontinued operations. Our historical financial information may not be indicative of our future performance. Company Overview We are a leading national provider of professional workforce solutions and have completed a series of acquisitions including the acquisition of BG Personnel, LP and B G Staff Services Inc. in June 2010, substantially all of the assets of JNA Staffing, Inc. 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, 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 have continuing operations in two industry segments Real Estate and Professional, and discontinued operations in the Light Industrial segment. We provide workforce solutions to client partners primarily within the United States of America. We now operate across 46 states and D.C. On February 28, 2022, we signed a definitive agreement to sell substantially all our Light Industrial segment, (“InStaff”) assets to Jobandtalent (“J&T”), through their wholly-owned subsidiary, Sentech Engineering Services, Inc. We will receive approximately $30.3 million at the closing of the sale, and, subject to the terms of the Asset Purchase Agreement, receive an additional $2 million on the first anniversary of the closing of the transaction. The Company anticipates that the transaction will close during the first fiscal quarter of 2022, and anticipates using the proceeds from the transaction to, among other things, deploy additional capital into managed services and high-end consulting solutions, drive geographic expansion in the Company’s Real Estate segment, pursue potential acquisition opportunities, reduce outstanding indebtedness, and for general corporate purposes. The Light Industrial segment provides field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce currently out of 11 locations and 13 on-sites in 11 states. We have classified the related assets and liabilities associated with our Light Industrial segment, InStaff, as discontinued operations in our Consolidated Balance Sheets. The results of InStaff business have been presented as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented. The sale represents a strategic shift in our business that will have a major effect on our operations and financial results. See “Note 4 — Discontinued Operations” of our audited consolidated financial statements for information regarding our discontinued operations. InStaff’s historical financial results have been reflected in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations in the prior periods have been classified as discontinued operations in our Consolidated Balance Sheets. The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 35 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. The Professional segment operates through three divisions, IT Consulting, IT Infrastructure & Development, and Finance and Accounting under various trade names including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and Momentum Solutionz. 30 Impact of COVID-19 We continue to observe the impact of the COVID-19 on our consolidated operating results, our candidate and field talent supply chain, and our client partners demand in all segments. We will continue to monitor the situation and may find it necessary, in the future, to 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. Results of Operations The following tables summarize key components of our results from continuing operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our consolidated financial statements. Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 (dollars in thousands) Revenues $ 239,027 $ 207,125 $ 219,764 Cost of services 158,086 141,085 149,938 Gross Profit 80,941 66,040 69,826 Selling, general and administrative expenses 65,115 55,244 50,222 Gain on contingent consideration (2,403) (76) — Impairment losses — 7,240 — Depreciation and amortization 3,698 4,861 4,718 Operating income (loss) 14,531 (1,229) 14,886 Loss on extinguishment of debt — — 541 Interest expense, net 1,433 1,584 1,569 Income (loss) from continuing operations before income taxes 13,098 (2,813) 12,776 Income tax expense (benefit) from continuing operations 2,640 (741) 3,135 Income (loss) from continuing operations 10,458 (2,072) 9,641 Income from discontinued operations, net of tax 3,652 3,513 3,606 Net income $ 14,109 $ 1,441 $ 13,247 Fiscal Year Ended December 26, 2021 December 27, 2020 December 29, 2019 Revenues 100.0 % 100.0 % 100.0 % Cost of services 66.1 68.1 68.2 Gross Profit 33.9 31.9 31.8 Selling, general and administrative expenses 27.2 26.7 22.9 Gain on contingent consideration (1.0) — — Impairment losses — 3.5 — Depreciation and amortization 1.5 2.3 2.1 Operating income (loss) 6.1 (0.6) 6.8 Loss on extinguishment of debt — — 0.2 Interest expense, net 0.6 0.8 0.7 Income (loss) from continuing operations before income taxes 5.5 (1.4) 5.8 Income tax expense (benefit) from continuing operations 1.1 (0.4) 1.4 Income (loss) from continuing operations 4.4 % (1.0) % 4.4 % 31 Fifty-two Week Fiscal Year Ended December 26, 2021 (Fiscal 2021) Compared with Fifty-two Week Fiscal Year Ended December 27, 2020 (Fiscal 2020) Revenues: Fiscal Year Ended December 26, 2021 December 27, 2020 (dollars in thousands) Revenues by Segment: Real Estate $ 92,018 38.5 % $ 68,755 33.2 % Professional 147,009 61.5 % 138,370 66.8 % Total Revenues $ 239,027 100.0 % $ 207,125 100.0 % Real Estate Revenues : Real Estate revenues increased approximately $23.3 million (33.8%). The increase was due to a 20.1% increase in billed hours and a 11.0% increase in average bill rate. Professional Revenues : Professional revenues increased approximately $8.6 million (6.2%), primarily due to the 2020 EdgeRock acquisition which contributed fifty-two weeks of revenue in Fiscal 2021 vs. forty-seven weeks in Fiscal 2020, the 2021 Momentum acquisition which contributed $3.5 million of new revenues, an increase in permanent placements revenue of $1.2 million, and billed hours increased 5.5%. These increases were partially offset by a decrease in the IT Infrastructure & Development division of approximately $11.6 million in revenue and a decrease of 0.2% in average bill rate. 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. Fiscal Year Ended December 26, 2021 December 27, 2020 (dollars in thousands) Gross Profit by Segment: Real Estate $ 34,969 43.2 % $ 25,813 39.1 % Professional 45,972 56.8 % 40,227 60.9 % Total Gross Profit $ 80,941 100.0 % $ 66,040 100.0 % Fiscal Year Ended December 26, 2021 December 27, 2020 Gross Profit Percentage by Segment: Real Estate 38.0 % 37.5 % Professional 31.3 % 29.1 % Company Gross Profit Percentage 33.9 % 31.9 % Overall, our gross profit increased approximately $14.9 million (22.6%). As a percentage of revenue, gross profit has increased to 33.9% from 31.9%, primarily due to higher gross profits across all our segments. We determine spread as the difference between bill rate and pay rate. Real Estate Gross Profit: Real Estate gross profit increased approximately $9.1 million (35.5%) consistent with the increase in revenue, and an 11.6% increase in average spread. 32 Professional Gross Profit: Professional gross profit increased approximately $5.8 million (14.3%) from the 2020 EdgeRock acquisition which contributed fifty-two weeks of gross profit in Fiscal 2021 vs. forty-seven weeks in Fiscal 2020, the Momentum acquisition which provided gross profit of $1.7 million, and an overall increase of 1.4% in average spread. These increases were partially offset by a decrease in the IT Infrastructure & Development division of approximately $2.4 million in gross profit. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $9.9 million (17.9%), primarily due to additional compensation generated from increased overall gross profit, from the EdgeRock acquisition with fifty-two weeks in Fiscal 2021 vs. forty-seven weeks in Fiscal 2020, and the Momentum acquisition. The components of selling, general and administrative expense are detailed in the following table: Fiscal Year Ended December 26, 2021 December 27, 2020 Amount % of Revenue Amount % of Revenue $ Change % Change (dollars in thousands) Compensation and related $ 53,332 22 % $ 41,563 20 % $ 11,769 28 % Advertising and recruitment 1,379 1 % 1,552 1 % (173) (11) % Occupancy and office operations 3,128 1 % 3,456 2 % (328) (9) % Client engagement 389 — % 321 — % 68 21 % Software 2,538 1 % 2,044 1 % 494 24 % Professional fees 1,111 — % 1,143 1 % (32) (3) % Public company related costs 727 — % 691 — % 36 5 % Bad debt 145 — % 344 — % (199) (58) % Share-based compensation 1,058 — % 786 — % 272 35 % Transaction fees 170 — % 615 — % (445) (72) % IT roadmap 1,689 1 % 1,563 1 % 126 8 % Workers' compensation loss retention return (348) — % (464) — % 116 (25) % CARES Act credit, net (2,083) (1) % — — % (2,083) — % Other 1,879 1 % 1,630 1 % 250 15 % Total $ 65,115 27 % $ 55,244 27 % $ 9,871 18 % Gain on contingent consideration: As a result of the certain business developments in Fiscal 2021, the Company recognized a $2.4 million gain on contingent consideration related to the 2019 LJK acquisition. Depreciation and Amortization: Depreciation and amortization charges decreased approximately $1.2 million (23.9%). The decrease in depreciation and amortization is primarily due to the Professional segment with a decrease related to the 2015 Vision Technology Services acquisition, which was partially offset by an increase related to the information technology improvement project. Impairment loss: As a result of the certain business developments in Fiscal 2020 and changes in the Company's long-term projections, the Company 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. In the Professional segment, the Company recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss in Fiscal 2020. Interest Expense, net: Interest expense, net decreased approximately $0.2 million (10)% primarily due to the lower average balance on the Revolving Facility, offset by an increase in interest income from our workers compensation loss retention program. Income Taxes: Income tax expense increased $3.4 million primarily due to higher pre-tax 2021 income, intangible impairment losses in 2020, non-deductible transaction fees in 2020 related to the EdgeRock acquisition, and a higher Work Opportunity Tax Credit in 2021. 33 Fifty-two Week Fiscal Year Ended December 27, 2020 (Fiscal 2020) Compared with Fifty-two Week Fiscal Year Ended December 29, 2019 (Fiscal 2019) Revenues: Fiscal Year Ended December 27, 2020 December 29, 2019 (dollars in thousands) Revenues by Segment: Real Estate $ 68,756 33.2 % $ 96,422 43.9 % Professional 138,370 66.8 % 123,342 56.1 % Total Revenues $ 207,126 100.0 % $ 219,764 100.0 % Real Estate Revenues : 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 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 revenues 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 revenue of $1.2 million. 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. Fiscal Year Ended December 27, 2020 December 29, 2019 (dollars in thousands) Gross Profit by Segment: Real Estate $ 25,812 39.1 % $ 36,928 52.9 % Professional 40,228 60.9 % 32,898 47.1 % Total Gross Profit $ 66,040 100.0 % $ 69,826 100.0 % Fiscal Year Ended December 27, 2020 December 29, 2019 Gross Profit Percentage by Segment: Real Estate 37.5 % 38.3 % Professional 29.1 % 26.7 % Company Gross Profit Percentage 31.9 % 31.8 % Overall, our gross profit decreased approximately $3.8 million (5.4%). As a percentage of revenue, gross profit has increased to 31.9% from 31.8%, primarily due to higher gross profits in the Professional segment. We determine spread as the difference between bill rate and pay rate. 34 Real Estate Gross Profit: 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 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. Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $5.0 million (10.0%), 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 2020 related to the COVID-19 pandemic to reduce actual and planned operating costs as detailed in the following table. Fiscal Year Ended December 27, 2020 December 29, 2019 Amount % of Revenue Amount % of Revenue $ Change % Change (dollars in thousands) Compensation and related $ 41,563 20 % $ 37,144 17 % $ 4,419 12 % Advertising and recruitment 1,552 1 % 1,796 1 % (244) (14) % Occupancy and office operations 3,456 2 % 3,356 2 % 100 3 % Client engagement 321 — % 1,348 1 % (1,027) (76) % Software 2,044 1 % 1,571 1 % 473 30 % Professional fees 1,143 1 % 1,132 1 % 11 1 % Public company related costs 691 — % 675 — % 16 2 % Bad debt 344 — % 115 — % 229 199 % Share-based compensation 786 — % 850 — % (64) (8) % Transaction fees 615 — % 434 — % 181 42 % IT roadmap 1,563 1 % 721 — % 842 117 % Workers' compensation loss retention return (464) — % (357) — % (107) 30 % Other 1,630 1 % 1,437 1 % 193 13 % Total $ 55,244 27 % $ 50,222 23 % $ 5,022 10 % Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.1 million (3.0%). 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 in Fiscal 2020 and changes in the Company's long-term projections, the Company 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. In the Professional segment, the Company recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss in Fiscal 2020. Interest Expense, net: 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 decreased $3.9 million (123.6%) 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. 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. 35 Our primary sources of liquidity are cash generated from operations and borrowings under our credit agreement with BMO Harris Bank, N.A. (“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. 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 December 26, 2021 December 27, 2020 December 29, 2019 (dollars in thousands) Working capital from continuing operations $ 25,851 $ 17,960 $ 20,532 Net cash provided by (used in): Continuing operating activities $ 1,358 $ 19,680 $ 13,244 Continuing investing activities (6,990) (24,078) (9,576) Continuing financing activities 473 1,890 (8,225) Net change in cash and cash equivalents discontinued operations 5,271 2,508 4,557 Net change in cash and cash equivalents $ 112 $ — $ — Operating Activities 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 income taxes payable. During Fiscal 2021, net cash provided by continuing operating activities was $1.4 million, a decrease of $18.3 million compared with $19.7 million for Fiscal 2020. This decrease is primarily attributable to increased accounts receivable and payments on accrued payroll and expenses, which were partially offset by an increase in the accrual in other long-term liabilities from deferred employer FICA for the CARES Act in Fiscal 2020. During Fiscal 2020, net cash provided by continuing operating activities was $19.7 million, an increase of $6.4 million compared with $13.2 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. 36 During Fiscal 2019, net cash provided by continuing operating activities was $13.2 million 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 2021, we paid $3.8 million in connection with the Momentum acquisition and we made capital expenditures of $3.2 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap. 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 $2.1 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap project. Financing Activities Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement, payment of dividends, and contingent consideration paid. For Fiscal 2021, we borrowed $6.8 million on our Revolving Facility for increased working capital needs and to fund the Momentum acquisition, paid $4.6 million in cash dividends on our common stock, and paid down $2.1 million on the Term Loan, as defined below. 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 Facility and borrowed $7.5 million on our Term Loan in connection with the LJK acquisition. Credit Agreements On July 16, 2019, we 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 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). We also pay an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan. The Credit Agreement contains customary affirmative covenants and negative covenants. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement. The Company was in compliance with these covenants as of December 26, 2021. On February 3, 2020, we borrowed $18.5 million on the Term Loan in conjunction with the closing of the EdgeRock acquisition. 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. 37 On February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility in conjunction with the closing of the Momentum acquisition, as described in Note 3 in the Notes to Consolidated Financial Statements Contractual Obligations The following table summarizes our cash contractual obligations as of December 26, 2021. Payments due by period Total Less than 1 year 1–3 years 3–5 years More than 5 years (dollars in thousands) Long-term debt obligations $ 39,643 $ 3,563 $ 36,081 $ — $ — Contingent consideration 2,220 1,110 1,110 — — Deferred employer FICA* 7,100 3,550 3,550 — — Operating lease obligations 4,886 2,073 2,535 277 — Contractual cash obligations $ 53,849 $ 10,295 $ 43,276 $ 277 $ — * included in Other current liabilities of continuing operations and Other long-term liabilities of continuing operations (see Note 9 in the Notes to Consolidated Financial Statements) 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 26, 2021, 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 We have identified the policies listed below as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. 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. 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. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions. We have classified the related assets and liabilities associated with our Light Industrial segment, InStaff, as discontinued operations in our Consolidated Balance Sheets. The results of InStaff business have been presented as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented. The sale represents a strategic shift in our business that will have a major effect on our operations and financial results. See “Note 4 — Discontinued Operations” for additional information. 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. 38 Revenue Recognition We derive our revenues from continuing operations in Real Estate and Professional segments. We provide workforce solutions and placement 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. Revenues as presented on the consolidated statements of operations and comprehensive income 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. We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. 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. 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. 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. 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. 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 considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. 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. In the Professional segment, we recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss in Fiscal 2020 (see Note 7 in the Notes to Consolidated Financial Statements). We determined that there were no impairment indicators for these assets in Fiscal 2021 and 2019. 39 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. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. Based on annual testing, the Company has determined that there was no goodwill impairment in Fiscal 2021, 2020 or 2019. 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 We have obligations, to be paid in cash, related to our acquisitions if certain future 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. Leases We lease all their office space through operating leases, which expire at various dates through 2025. Many of the lease agreements obligate us to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of our lease arrangements contain renewal provisions from 3 to 10 years, exercisable at our option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We determine 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 primarily using the incremental borrowing rate based on the information available at lease commencement date. Our operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. 40 Financial Instruments 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. 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. As of December 26, 2021, goodwill of $29.7 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 26, 2021, we have a $5.2 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 $1.3 million. 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 26, 2021 or December 27, 2020. 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 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 Consolidated Financial Statements of this Annual Report on Form 10-K.