BGSF, INC. 10-Q

Item 1. Financial Statements. BGSF, Inc. and Subsidiaries UNAUDITED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) April 2, 2023 January 1, 2023 ASSETS Current assets Cash and cash equivalents $ 70 $ — Accounts receivable (net of allowance for credit losses of $ 558 , respectively) 62,540 66,285 Prepaid expenses 3,202 2,418 Other current assets 6,569 7,459 Total current assets 72,381 76,162 Property and equipment, net 1,249 2,081 Other assets Deposits 2,616 2,616 Other assets, net 5,207 4,411 Deferred income taxes, net 7,388 2,196 Right-of-use asset - operating leases 3,995 4,462 Intangible assets, net 23,410 47,552 Goodwill 55,635 55,193 Total other assets 98,251 116,430 Total assets $ 171,881 $ 194,673 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Long-term debt, current portion $ 4,000 $ 4,000 Accrued interest 171 273 Accounts payable 551 587 Accrued payroll and expenses 16,157 19,171 Contingent consideration, current portion 1,102 1,081 Lease liability, current portion 1,703 1,842 Other current liabilities 1,000 1,000 Income taxes payable 302 253 Total current liabilities 24,986 28,207 Line of credit (net of deferred finance fees of $ 219 and $ 259 respectively) 21,697 22,303 Long-term debt, less current portion 35,000 36,000 Convertible note 4,368 4,368 Lease liability, less current portion 2,662 3,049 Other long-term liabilities 10 10 Total liabilities 88,723 93,937 Commitments and contingencies Preferred stock,$ 0.01 par value per share, 500,000 shares authorized, -0- shares issued and outstanding — — Common stock, $ 0.01 par value per share; 19,500,000 shares authorized, 10,806,371 and 10,772,515 shares issued and outstanding, respectively, net of treasury stock, at cost, 1,845 , respectively. 70 70 Additional paid in capital 67,509 67,003 Retained earnings 15,579 33,663 Total stockholders’ equity 83,158 100,736 Total liabilities and stockholders’ equity $ 171,881 $ 194,673 The accompanying notes are an integral part of these unaudited consolidated financial statements. 4 BGSF, Inc. and Subsidiaries UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (in thousands, except per share and dividend amounts) For the Thirteen Week Periods Ended April 2, 2023 and March 27, 2022 Thirteen Weeks Ended 2023 2022 Revenues $ 75,316 $ 68,542 Cost of services 48,532 45,111 Gross profit 26,784 23,431 Selling, general and administrative expenses 23,212 19,717 Impairment losses 22,545 — Depreciation and amortization 1,757 899 Operating (loss) income ( 20,730 ) 2,815 Interest expense, net ( 1,200 ) ( 273 ) (Loss) income from continuing operations before income taxes ( 21,930 ) 2,542 Income tax benefit (expense) from continuing operations 5,464 ( 534 ) (Loss) income from continuing operations ( 16,466 ) 2,008 Income from discontinued operations: Income — 1,235 Gain on sale — 17,273 Income tax expense — ( 4,716 ) Net (loss) income $ ( 16,466 ) $ 15,800 Change in unrealized losses on cash flow hedges — 59 Other comprehensive loss — 59 Net comprehensive (loss) income $ ( 16,466 ) $ 15,741 Net (loss) income per share - basic Net (loss) income from continuing operations $ ( 1.54 ) $ 0.19 Net income from discontinued operations: Income — 0.12 Gain on sale — 1.66 Income tax expense — ( 0.45 ) Net (loss) income per share - basic $ ( 1.54 ) $ 1.52 Net (loss) income per share - diluted Net (loss) income from continuing operations $ ( 1.54 ) $ 0.19 Net income from discontinued operations: Income — 0.11 Gain on sale — 1.66 Income tax expense — ( 0.45 ) Net (loss) income per share - diluted $ ( 1.54 ) $ 1.51 Weighted-average shares outstanding: Basic 10,712 10,429 Diluted 10,712 10,485 Cash dividends declared per common share $ 0.15 $ 0.15 The accompanying notes are an integral part of these unaudited consolidated financial statements. 5 BGSF, Inc. and Subsidiaries UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) For the Thirteen Week Period Ended April 2, 2023 Common Stock Preferred Stock Shares Par Value Treasury Stock Amount Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ equity, January 1, 2023 — 10,772 $ 108 $ ( 38 ) $ 67,003 $ 33,663 $ — $ 100,736 Share-based compensation from continuing operations — — — — 361 — — 361 Issuance of restricted shares — 23 — — — — — — Issuance of ESPP shares — 11 — — 145 — — 145 Cash dividend declared — — — — — ( 1,618 ) — ( 1,618 ) Net loss — — — — — ( 16,466 ) — ( 16,466 ) Stockholders’ equity, April 2, 2023 — 10,806 $ 108 $ ( 38 ) $ 67,509 $ 15,579 $ — $ 83,158 The accompanying notes are an integral part of these unaudited consolidated financial statements. 6 BGSF, Inc. and Subsidiaries UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands, except per share amounts) For the Thirteen Week Period Ended March 27, 2022 Common Stock Preferred Stock Shares Par Value Treasury Stock Amount Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss)/Income Total Stockholders’ equity, December 26, 2021 — 10,425 $ 104 $ ( 38 ) $ 61,876 $ 14,592 $ 59 $ 76,593 Share-based compensation from continuing operations — — — — 211 — — 211 Share-based compensation from discontinued operations — — — — 8 — — 8 Fully vested shares related to the sale of discontinue operations — — — — 35 — — 35 Issuance of restricted shares — 6 — — — — — — Issuance of ESPP shares — 14 — — 169 — — 169 Cash dividend declared — — — — — ( 1,565 ) — ( 1,565 ) Net income — — — — — 15,800 — 15,800 Other comprehensive gain — — — — — — ( 59 ) ( 59 ) Stockholders’ equity, March 27, 2022 — 10,445 $ 104 $ ( 38 ) $ 62,299 $ 28,827 $ — $ 91,192 The accompanying notes are an integral part of these unaudited consolidated financial statements. 7 BGSF, Inc. and Subsidiaries UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Thirteen Week Periods Ended April 2, 2023 and March 27, 2022 2023 2022 Cash flows from operating activities Net (loss) income $ ( 16,466 ) $ 15,800 (Income) from discontinued operations — ( 1,235 ) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation 127 160 Amortization 1,630 739 Gain on sale of discontinued operations — ( 17,273 ) Impairment losses 22,545 — Amortization of deferred financing fees 46 132 Interest expense on contingent consideration payable 22 64 Provision for credit losses 79 51 Share-based compensation 361 211 Deferred income taxes, net of acquired deferred tax liability ( 5,193 ) 1,012 Net changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable 3,666 ( 1,432 ) Prepaid expenses ( 784 ) ( 327 ) Other current assets 1,247 ( 202 ) Deposits — 108 Other assets 180 171 Accrued interest ( 103 ) 17 Accounts payable ( 36 ) 737 Accrued payroll and expenses ( 3,014 ) ( 851 ) Other current liabilities — ( 3,336 ) Income taxes receivable and payable ( 310 ) 4,479 Operating leases ( 58 ) ( 27 ) Other long-term liabilities — ( 58 ) Net cash provided by (used in) continuing operating activities 3,939 ( 1,060 ) Net cash provided by discontinued operating activities — 675 Net cash provided by (used in) operating activities 3,939 ( 385 ) Cash flows from investing activities Business sold — 30,313 Capital expenditures ( 745 ) ( 2,051 ) Net cash (used in) provided by continuing investing activities ( 745 ) 28,262 Net cash used in discontinued investing activities — ( 26 ) Net cash (used in) provided by activities ( 745 ) 28,236 The accompanying notes are an integral part of these unaudited consolidated financial statements. 8 BGSF, Inc. and Subsidiaries UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands) For the Thirteen Week Periods Ended April 2, 2023 and March 27, 2022 2023 2022 Cash flows from financing activities Net (payments) borrowings under line of credit ( 646 ) 1,405 Principal payments on long-term debt ( 1,000 ) ( 26,862 ) Payments of dividends ( 1,618 ) ( 1,565 ) Issuance of ESPP shares 145 169 Contingent consideration paid — ( 1,110 ) Deferred financing costs ( 5 ) — Net cash used in continuing financing activities ( 3,124 ) ( 27,963 ) Net cash used in discontinued financing activities — — Net cash used in financing activities ( 3,124 ) ( 27,963 ) Net change in cash and cash equivalents 70 ( 112 ) Cash and cash equivalents, beginning of period — 112 Cash and cash equivalents, end of period $ 70 $ — Supplemental cash flow information: Cash paid for interest, net $ 1,183 $ 300 Cash paid for taxes, net of refunds $ 34 $ 59 The accompanying notes are an integral part of these unaudited consolidated financial statements. 9 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS BGSF, Inc. provides consulting, managed services, and professional workforce solutions to a variety of industries through its various divisions in IT, Cyber, Finance & Accounting, Managed Services, and Real Estate (apartment communities and commercial buildings) (collectively, the “Company”). On March 21, 2022, the Company completed the sale of substantially all its Light Industrial segment (“InStaff”) assets to Jobandtalent (“J&T”), through the wholly-owned subsidiary, Sentech Engineering Services, Inc. Instaff's financial results for reported periods have been reflected in our Consolidated Statements of Operations and Comprehensive (Loss) Income and Consolidated Statements of Cash Flows as discontinued operations. See “Note 4 - Discontinued Operations” in the Consolidated Financial Statements included elsewhere in this report for additional information. On December 12, 2022, the Company acquired substantially all of the assets, and assumed certain of the liabilities of Horn Solutions, Inc. and Horn Solutions Dallas, LLC (collectively “Horn Solutions”). See “Note 3- Acquisitions.” On April 24, 2023, the Company acquired substantially all of the assets and assumed certain of the liabilities of Arroyo Consulting, LLC ("Arroyo Consulting"), which is a nearshore/offshore workforce solutions firm that specializes in IT and software development with operations in the United States, Columbia, and India. See “Note 16- Subsequent Events.” The Company currently operates primarily within the United States of America in its Real Estate and Professional segments. The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 37 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. The Professional segment provides specialized talent and business consultants on a nationwide basis for information technology (“IT”), managed services, finance, accounting, legal, and human resources. The Professional segment operates through three divisions, Information Technology, Managed Services, and Finance and Accounting. The Company normally experiences seasonal fluctuations. The quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of client partners’ businesses. Demand for the Real Estate workforce solutions has historically increased in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Overall first quarter demand can be affected by adverse weather conditions in the winter months. The current inflationary environment and related interest rate impacts continue to have an adverse impact on the economy and market conditions. These factors may impact labor markets by reducing demand for the Company's workforce solutions, increasing early terminations, or diminishing projects. As a result, the Company's business, financial condition and results of operations may be negatively affected. The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of its knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying consolidated financial statements through the date the financial statements were issued, except for the disclosure in Note 16. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended January 1, 2023, included in its Annual Report on Form 10-K. 10 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company. All significant intercompany transactions and balances have been eliminated in consolidation. Fiscal Periods The Company has a 52/53 week fiscal year. Fiscal periods for the consolidated financial statements included herein are as of April 2, 2023 and January 1, 2023, and include the thirteen week periods ended April 2, 2023 and March 27, 2022, referred to herein as Fiscal 2023 and 2022, respectively. Reclassifications Certain reclassifications have been made to the 2022 financial statements to conform with the 2023 presentation. Management Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include allowances for credit losses, goodwill, intangible assets, lease liability, contingent consideration obligations related to acquisitions, and income taxes. Additionally, the valuation of share-based compensation expense uses a model based upon interest rates, stock prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions. Financial Instruments The Company uses fair value measurements in areas that include, but are not limited to, the allocation of purchase price consideration to tangible and identifiable intangible assets, and contingent consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with BMO Harris Bank, N.A. (“BMO”) that provides for a revolving credit facility, term loan and current rates available to the Company for debt with similar terms and risk. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Concentration of Credit Risk Concentration of credit risk is limited due to the Company’s diverse client partner base and their dispersion across many different industries and geographic locations nationwide. No single client partner accounted for more than 10% of the Company’s accounts receivable from continuing operations as of April 2, 2023 and January 1, 2023 or revenue from continuing operations for the thirteen week periods ended April 2, 2023 and March 27, 2022. Geographic revenue from continuing operations in excess of 10% of the Company's consolidated revenue in Fiscal 2023 and the related percentage for Fiscal 2022 was generated in the following areas: Thirteen Weeks Ended April 2, 2023 March 27, 2022 Tennessee 10 % 12 % Texas 23 % 23 % 11 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Consequently, weakness in economic conditions in these regions could have a material adverse effect on the Company’s financial position and results of future operations. Accounts Receivable The Company extends credit to its client partners in the normal course of business. Accounts receivable represents unpaid balances due from client partners. The Company maintains an allowance for credit losses for expected losses resulting from client partners’ non-payment of balances due to the Company. The Company’s determination of the allowance for uncollectible amounts is based on management’s judgments and assumptions, including general economic conditions, portfolio composition, prior loss experience, evaluation of credit risk related to certain individual client partners and the Company’s ongoing examination process. Receivables are written off after they are deemed to be uncollectible after all reasonable means of collection have been exhausted. Recoveries of receivables previously written off are recorded when received. Changes in the allowance for credit losses from continuing operations are as follows (in thousands): Thirteen Weeks Ended April 2, 2023 March 27, 2022 Beginning balance $ 558 $ 449 Provision for credit losses, net 79 51 Amounts written off, net ( 79 ) ( 51 ) Ending balance $ 558 $ 449 Property and Equipment Property and equipment are stated net of accumulated depreciation and amortization of $ 5.0 million and $ 4.9 million at April 2, 2023 and January 1, 2023, respectively. During the thirteen week period ended April 2, 2023, $ 1.0 million was reclassified to Other assets and Intangible assets from Property and equipment, primarily related to continued information technology improvements. Deposits The Company maintains guaranteed costs policies for workers' compensation coverage in monopolistic states and minimal loss retention coverage in all other states. Under these policies, the Company is required to maintain refundable deposits of $ 2.4 million, which are included in deposits in the accompanying consolidated balance sheets, as of April 2, 2023 and January 1, 2023, respectively. Other Assets The Company capitalizes direct costs incurred in cloud computing implementation costs from hosting arrangements, and are reported as a component of Other assets. All other internal-use software development costs are capitalized and reported as a component of computer software within Intangible assets. Other assets are stated net of accumulated amortization of $ 1.4 million and $ 0.7 million at April 2, 2023 and January 1, 2023, respectively. During the thirteen week period ended April 2, 2023, the Company added $ 0.2 million and reclassified $ 0.7 million to Other assets from Property and equipment, primarily related to continued information technology improvements. The Company reviews its long-lived assets, primarily fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments with respect to long-lived assets during Fiscal 2023 or Fiscal 2022. Leases The Company leases all their office space through operating leases, which expire at various dates through 2028. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of the Company’s lease arrangements contain renewal provisions from 3 to 10 years, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. 12 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses. Intangible Assets The Company holds 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. The Company capitalizes purchased software and internal payroll costs directly incurred in the modification of internal use software. During the thirteen week period ended April 2, 2023, the Company added $ 0.3 million and reclassified $ 0.2 million to Intangible assets from Property and equipment, primarily related to continued information technology improvements. Software maintenance and training costs are expensed in the period incurred. The Company evaluates the recoverability of Intangible assets whenever events or changes in circumstances indicate that an Intangible asset’s carrying amount may not be recoverable. The Company considered the current and expected future economic and market conditions and its impact on each of the reporting units. The Company annually evaluates the remaining useful lives of all Intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. At the February 2023 Board of Directors meeting, managements's plan to rebrand as BGSF was approved, which will eliminate various trade names. The decision to rebrand created an impairment of $ 22.5 million in trade names, which was written-off during Fiscal 2023. There were no impairment indicators for these assets during Fiscal 2022. See “Note 7 - Intangible Assets.” Goodwill Goodwill is not amortized, but instead is evaluated at the reporting unit level for impairment annually at the end of each fiscal year, or more frequently, if conditions indicate an earlier review is necessary. The Company considered the current and expected future economic and market conditions and its impact on each of the reporting units. If the Company has determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, the Company may use a qualitative assessment for the annual impairment test. The Company determined there were no impairment indicators for goodwill assets during Fiscal 2023 or Fiscal 2022. Cash Flow Hedge The unrealized gains or losses associated with the change in the fair value of the effective portion of the hedging instrument was recorded in accumulated other comprehensive income or loss. The Company reclassified the interest rate swap from accumulated other comprehensive gain or loss against interest expense in the same period in which the hedge transaction affected earnings. 13 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Deferred Financing Fees Deferred financing fees are amortized using the effective interest method over the term of the respective loans. Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. Contingent Consideration The Company has obligations, to be paid in cash, related to its acquisitions if certain operating and financial goals are met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. The fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method. Revenue Recognition The Company derives its revenues from continuing operations in Real Estate and Professional segments. The Company provides workforce solutions, placement services, and managed services. Revenues are recognized when promised services are delivered to client partners, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues from continuing operations as presented on the consolidated statements of operations and comprehensive income represent services rendered to client partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services. The Company records revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company (i) has the risk of identifying and hiring qualified field talent, (ii) has the discretion to select the field talent and establish their price and duties and (iii) bears the risk for services that are not fully paid for by client partners. Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which the Company has a right to invoice, when the services are rendered by the Company’s field talent. Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control is transferred to the client partner, usually when employment candidates start their employment. Retained search placement revenues - Any revenues from these workforce solutions are recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services, which is less than 1% of consolidated revenues. Managed services revenues - include both workforce solution revenues and fixed fee revenues from client partner contracts. Services performed represent the transfer of control to the client partner over a given period of time. Fixed fee revenues are recognized in equal amounts at fixed intervals as promised services are delivered. Contracts generally include an enforceable right to payment for services provided to date. The Company estimates the effect of placement candidates who do not remain with its client partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period. Refer to Note 15 for disaggregated revenues by segment. Payment terms in the Company's contracts vary by the type and location of its client partner and the workforce solutions offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of April 2, 2023. There were no revenues recognized during the thirteen week period ended April 2, 2023 related to performance obligations satisfied or partially satisfied in previous periods. There are no contract costs capitalized. The Company did not recognize any contract impairments during the thirteen week period ended April 2, 2023. 14 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Share-Based Compensation The Company recognizes compensation expense in selling, general and administrative expenses over the service period for options or restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates. Earnings Per Share Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period adjusted to reflect potentially dilutive securities. Antidilutive shares are excluded from the calculation of earnings per share. The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the respective periods (in thousands): Thirteen Weeks Ended April 2, 2023 March 27, 2022 Weighted-average number of common shares outstanding: 10,712 10,429 Effect of dilutive securities: Stock options and restricted stock — 56 Weighted-average number of diluted common shares outstanding 10,712 10,485 Stock options and restricted stock 360 387 Convertible note 255 — Antidilutive shares 615 387 Income Taxes The consolidated effective tax rates were 24.9 % for both thirteen week periods ended April 2, 2023 and March 27, 2022. Effective tax rates for all periods consist of federal statutory rate plus state income taxes. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. As of April 2, 2023, the Company has a $ 3.6 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. Additionally, there was a $ 5.2 million increase to deferred taxes related to the $ 22.5 million in impairment losses as of April 2, 2023. When appropriate, the Company will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results. The Company recognizes any penalties when necessary as part of selling, general and administrative expenses. As of April 2, 2023, goodwill with an adjusted tax basis of $ 49.9 million is remaining to be amortized for tax purposes. As a matter of operation, we first calculated the effective tax on continuing operations, and then allocated the remaining taxes to our discontinued operations, in accordance with Accounting Standards Codification (“ASC”) Topic 740. The Company follows the guidance ASC Topic 740, Accounting for Uncertainty in Income Taxes. ASC Topic 740 prescribes a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return. 15 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements Management has considered all recent accounting pronouncements issued. The Company's management believes that these pronouncements will not have a material effect on the Company's financial statements. NOTE 3 - ACQUISITIONS Horn Solutions On December 12, 2022, the Company acquired substantially all of the assets, and assumed certain of the liabilities, of Horn Solutions. The purchase price of $ 42.7 million was paid at closing with $ 33.9 million in cash and $ 3.4 million of the Company common stock ( 254,455 shares of the Company common stock privately placed under Section 4(a)(2) of the Securities Act of 1933, as amended), as well as a two-year convertible promissory note of $ 4.4 million with an annual interest rate of 6 %, with interest paid quarterly. The promissory note is convertible into shares of the Company's common stock at any time after the one-year anniversary of the promissory note at a conversion price equal to $ 17.12 per share. The promissory note is subordinate to the Company’s senior debt. An additional portion of the purchase price, $ 1.0 million in cash, net of the true-up of working capital, was held back as partial security for a post-closing purchase price adjustment, which is expected to fund in May 2023, net of the net working capital and AR buyback adjustments. The asset purchase agreement contains a provision for a “true up” of acquired working capital, and unpaid accounts receivable within 120 days after the closing date. The purchase price at closing was paid out of funds under the Company's credit agreement led by BMO, see “Note 9 - Debt”. The acquired business was assigned to the Professional segment. The acquisition of Horn Solutions allows the Company to strengthen and expand its finance and accounting operations by providing consulting, project loan staff, interim staff, direct hire, and managed services through three complementary business units, strategic accounting and finance, information technology, and transactional accounting and office staffing. Horn Solutions provides services to clients in a variety of industries including, but not limited to energy, financial services, healthcare, real estate and construction, service, manufacturing, and software industries. The purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows (in thousands): Accounts receivable $ 3,734 Prepaid expenses and other assets 118 Property and equipment, net 83 Right-of-use asset - operating leases 1,528 Intangible assets 13,484 Goodwill 26,493 Current liabilities assumed ( 1,787 ) Lease liability - operating leases ( 1,528 ) Total net assets acquired $ 42,125 Cash $ 33,940 Hold back (included in Other current liabilities) 1,000 Convertible Note 4,368 Common stock 3,351 Working capital adjustment (included in Other current assets) ( 534 ) Total fair value of consideration transferred for acquired business $ 42,125 16 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The allocation of the intangible assets is as follows (in thousands): Estimated Fair Value Estimated Useful Lives Covenants not to compete $ 50 5 years Client partner list 13,434 10 years Total $ 13,484 The Company incurred costs of $ 0.4 million related to the Horn Solutions acquisition. These costs were expensed as incurred in selling, general and administrative expenses. Supplemental Unaudited Pro Forma Information The Company estimates what would have been reported if the revenues and net income from continuing operations of the Horn Solutions acquisition had taken place on the first day of Fiscal 2022 (in thousands, except income per share): Thirteen Weeks Ended March 27, 2022 Revenues $ 76,494 Gross profit $ 27,186 Net Income $ 2,558 Income per share from continuing operations: Basic $ 0.25 Diluted $ 0.24 Pro forma net income includes amortization of primarily client partner lists, interest expense on additional borrowings on the New Term Loan (see “Note 9 - Debt”) at a rate of 2.5 %, and tax benefit of the pro forma adjustments at an effective tax rate of 24.9 % for Fiscal 2022. The pro forma operating results include adjustments to Horn Solutions related to synergy adjustments for expenses that would be duplicative and other non-recurring, non-operating and out of period expense items once integrated with the Company. Amounts set forth above are not necessarily indicative of the results that would have been attained had the Horn Solutions acquisition taken place on the first day of Fiscal 2022 or the results that may be achieved by the combined enterprise in the future. NOTE 4 - DISCONTINUED OPERATIONS On March 21, 2022, the Company sold substantially all of the assets and certain liabilities of InStaff to Sentech Engineering Services, Inc. (“Sentech”) for a sale price of approximately $ 30.3 million cash, subject to customary sales price and working capital adjustments specified in the purchase agreement. The purchase agreement provided for deferred consideration of $ 2.0 million, which was received by April 3, 2023. The sale resulted in an original pre-tax gain on sale of discontinued operations of $ 17.3 million, with an additional gain of $ 0.4 million recognized as part of the net working capital adjustment in October 2022. The InStaff financial results for periods prior to the sale have been reflected in our Consolidated Statements of Operations and Comprehensive (Loss) Income and Consolidated Statements of Cash Flows as discontinued operations. 17 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The financial results of InStaff are as follows (in thousands): Thirteen Weeks Ended March 27, 2022 Revenue $ 16,465 Cost of services 14,144 Gross profit 2,321 Selling expenses 1,062 Depreciation 24 Income from discontinued operations before gain on sale and income taxes $ 1,235 NOTE 5 - OTHER CURRENT ASSETS Other current assets as of April 2, 2023 and January 1, 2023 consist of the following (in thousands): April 2, 2023 January 1, 2023 CARES Act receivable $ 2,368 $ 2,368 Deferred consideration - See “Note 4 - Discontinued Operations” 1,178 2,000 Income tax receivable 2,026 1,667 Other 997 1,424 Total $ 6,569 $ 7,459 NOTE 6 - LEASES The Company's future operating lease obligations that have not yet commenced are immaterial. Short-term leases were immaterial. Supplemental information related to leases consisted of the following: The supplement cash flow information related to the Company's operating leases were as follows (dollars in thousands): Thirteen Weeks Ended April 2, 2023 March 27, 2022 Weighted average remaining lease term of operation leases 3.2 years 2.5 years Weighted average discount rate for continuing operating leases 5.3 % 5.0 % Cash paid for operating leases $ 584 $ 558 Operating lease costs $ 525 $ 502 18 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The undiscounted annual future minimum lease payments consist of the following at (in thousands): April 2, 2023 2023 (remaining) $ 1,459 2024 1,538 2025 805 2026 402 2027 379 Thereafter 168 Total lease payments 4,751 Imputed interest ( 386 ) Present value of lease liabilities $ 4,365 NOTE 7 - INTANGIBLE ASSETS Intangible assets from continuing operations are stated net of accumulated amortization of $ 44.8 million and $ 44.6 million at April 2, 2023 and January 1, 2023, respectively. During the quarter, the Company reevaluated the Horn Solutions client partner lists, reclassifying $ 0.4 million reducing the carrying value of the client lists and increasing $ 0.4 million to goodwill. Amortization expense from continuing operations for Fiscal 2023 and Fiscal 2022 are comprised of following (in thousands): Thirteen Weeks Ended April 2, 2023 March 27, 2022 Client partner lists $ 1,306 $ 502 Covenant not to compete 57 55 Acquisition intangibles 1,363 557 Computer software - amortization expense 267 182 Amortization expense 1,630 739 Computer software - selling, general and administrative expense — 38 Total expense $ 1,630 $ 777 NOTE 8 - ACCRUED PAYROLL AND EXPENSES, OTHER LONG-TERM LIABILITIES, AND CONTINGENT CONSIDERATION Accrued payroll and expenses from continuing operations consist of the following at (in thousands): April 2, 2023 January 1, 2023 Field talent payroll $ 6,423 $ 6,923 Field talent payroll related 1,428 941 Accrued bonuses and commissions 2,968 5,740 Other 5,338 5,567 Accrued payroll and expenses $ 16,157 $ 19,171 The contingent consideration of $ 1.1 million was paid April 25, 2023. 19 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - DEBT On July 16, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for the revolving facility (the "Revolving Facility") permitting the Company to borrow funds from time to time in an aggregate amount up to $ 35 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting the Company to borrow funds from time to time in an aggregate amount not to exceed $ 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 and repaid. The Company also had the option to request an increase in the aggregate Term Loan by $ 40 million, which was done in connection with the Horn Solutions acquisition. The Credit Agreement bore interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin through August 17, 2022 (as such terms are defined in the Credit Agreement). The Company pays an unused commitment fee on the daily average unused amount of Revolving Facility. On August 18, 2022, the Company entered into an amendment to the Credit Agreement with BMO, which changed the interest rate component from LIBOR to the Secured Overnight Financing Rate ("SOFR"), plus the Applicable Margin. In connection with the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”), the Company borrowed $ 40 million, as noted above, pursuant to a second amendment to the Credit Agreement (“Second Credit Amendment”). The Company’s obligations under the Second Credit Amendment are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries. The Second Credit Amendment bears interest either at the Base Rate plus the Applicable Margin or Adjusted Term SOFR plus the Applicable Margin (as such terms are defined in the Second Credit Amendment), with 2.5 % of the original principal balance of the New Term Loan payable on the last business day of each quarter, beginning on March 31, 2023. The Second Credit Amendment contains customary affirmative and negative covenants. The Company is subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Second Credit Amendment. The Company was in compliance with these covenants as of April 2, 2023. On April 24, 2023, in connection with the acquisition of Arroyo Consulting (See "Note 16 - Subsequent Events") the Company entered into a third amendment to the Credit Agreement ("Third Credit Amendment") with BMO. The Third Credit Amendment revised language to permit an acquisition of a foreign entity under certain circumstances and modified the terms of permitted distributions and guarantors. Letter of Credit In March 2020, in conjunction with the EdgeRock acquisition, the Company entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of April 2, 2023, the Company had a maximum financial exposure from this standby letter of credit totaling $ 0.1 million, all of which is considered usage against the Revolving Facility. The Company has no history of default, nor is it aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any disputes thereunder that might arise in the future would not materially affect the Company’s consolidated financial statements. Accordingly, no liability has been recorded in respect to these arrangements as of April 2, 2023. Line of Credit At April 2, 2023 and January 1, 2023, $ 21.9 million and $ 22.6 million respectively, was outstanding on the revolving facilities. Average daily balance for the thirteen week periods ended April 2, 2023 and March 27, 2022 was $ 20.7 million and $ 15.3 million, respectively. Borrowings under the revolving facilities consisted of and bore interest at (in thousands): April 2, 2023 January 1, 2023 Base Rate $ 1,916 8.75 % $ 2,562 8.25 % SOFR 20,000 6.66 % 20,000 6.45 % Total $ 21,916 $ 22,562 20 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Long-Term Debt Long-term debt consisted of and bore interest at (in thousands): April 2, 2023 January 1, 2023 SOFR $ 39,000 6.72 % $ 40,000 6.72 % Convertible Note At April 2, 2023 and January 1, 2023, the Company had a two-year convertible promissory note of $ 4.4 million due to the seller with an annual interest rate of 6 %, with interest paid quarterly related to the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”). The promissory note is convertible into shares of our common stock at any time after the one-year anniversary of the promissory note at a conversion price equal to $ 17.12 per share. The promissory note is subordinate to the Company’s senior debt. NOTE 10 - FAIR VALUE MEASUREMENTS The accounting standard for fair value measurements defines fair value and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value. The fair value hierarchy established prioritizes the inputs used in valuation techniques into three levels as follows: Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities; Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities - includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets, for substantially the full term of the financial instrument; and Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions. The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis and the level they fall within the fair value hierarchy (in thousands): Amounts Recorded at Fair Value Financial Statement Classification Fair Value Hierarchy April 2, 2023 January 1, 2023 Convertible note Convertible note Level 2 4,368 4,368 Contingent consideration, net Contingent consideration, net - current Level 3 1,102 1,081 Key inputs in determining the fair value of the contingent consideration as of April 2, 2023 and January 1, 2023 included discount rates of approximately 9 % as well as management's estimates of future sales volumes and earnings before interest, income taxes, depreciation, and amortization (“EBITDA”). 21 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - CONTINGENCIES The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made. The Company insures against, subject to and upon the terms and conditions of various insurance policies, claims or losses from workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses, crime and cyber risk, and director and officer liability. Under the Company's bylaws, the Company’s directors and officers are indemnified against certain liabilities arising out of the performance of their duties to the Company. The Company also has an insurance policy for our directors and officers to insure them against liabilities arising from the performance of their positions with the Company or its subsidiaries. The Company has also entered into indemnification agreements with its directors and certain officers. NOTE 12 – EQUITY Authorized capital stock consists of 19,500,000 shares of common stock, par value $ 0.01 per share and 500,000 shares of undesignated preferred stock, par value $ 0.01 per share. Restricted Stock The Company issued restricted common stock of 22,688 and 5,795 shares to team members and non-team member (non-employee) directors in Fiscal 2023 and Fiscal 2022, respectively. The restricted shares of $ 0.01 par value per share were issued under the 2013 Long-Term Incentive Plan (“2013 Plan”) and contain a three-year service condition. The restricted stock constitutes issued and outstanding shares of the Company’s common stock, except for the right of disposal, for all purposes during the period of restriction including voting rights and dividend distributions. NOTE 13 – SHARE-BASED COMPENSATION Stock Options For the thirteen week periods ended April 2, 2023 and March 27, 2022, the Company recognized $ 0.2 million and $ 0.1 million of compensation expense from continuing operations related to stock options, respectively. Unamortized share-based compensation expense from continuing operations as of April 2, 2023 amounted to $ 1.0 million which is expected to be recognized over the next 2.7 years. As of April 2, 2023, a total of 1.0 million shares remain available for issuance under 2013 Plan. A summary of stock option activity is presented as follows: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life Total Intrinsic Value of Awards (in thousands) Options outstanding at January 1, 2023 821,679 $ 16.08 6.4 $ 1,907 Granted 22,970 $ 11.84 Forfeited / Canceled ( 8,000 ) $ 11.91 Options outstanding at April 2, 2023 836,649 $ 16.00 6.3 $ 248 Options exercisable at January 1, 2023 573,863 $ 17.50 5.4 $ 1,164 Options exercisable at April 2, 2023 581,928 $ 17.65 5.2 $ 213 22 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Number of Shares Weighted Average Grant Date Fair Value Nonvested outstanding at January 1, 2023 247,816 $ 7.64 Nonvested outstanding at April 2, 2023 254,721 $ 7.34 For the thirteen week periods ended April 2, 2023 and March 27, 2022, the Company did not issue shares under a cashless exercise. Restricted Stock For the thirteen week periods ended April 2, 2023 and March 27, 2022, the Company recognized $ 0.2 million and $ 0.1 million of compensation expense related to restricted stock awards, respectively. Unamortized share-based compensation expense as of April 2, 2023 amounted to $ 0.8 million which is expected to be recognized over the next 1.9 years. NOTE 14 - TEAM MEMBER BENEFIT PLAN Defined Contribution Plan The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible team members and field talent. The 401(k) Plan allows participants to make contributions subject to applicable statutory limitations. The Company matches participants contributions 100 % up to the first 3 % and 50 % of the next 2 % of a team member's or field talent’s compensation. The Company contributed $ 0.5 million from continuing operations to the 401(k) Plan for the thirteen week periods ended April 2, 2023 and March 27, 2022. NOTE 15 - BUSINESS SEGMENTS The Company has continuing operations in two industry segments Real Estate and Professional. Segment income from continuing operations includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (home office) expenses. Assets of home office include cash, unallocated prepaid expenses, property and equipment, deferred income taxes, and other assets. The following table provides a reconciliation of revenue and income from continuing operations by reportable segment to consolidated results for the periods indicated (in thousands): Thirteen Weeks Ended April 2, 2023 March 27, 2022 Revenue: Real Estate $ 28,405 $ 25,916 Professional 46,911 42,626 Total $ 75,316 $ 68,542 Depreciation: Real Estate $ 35 $ 47 Professional 76 96 Home office 16 17 Total $ 127 $ 160 23 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Thirteen Weeks Ended April 2, 2023 March 27, 2022 Amortization: Professional $ 1,363 $ 558 Home office 267 181 Total $ 1,630 $ 739 Operating (loss) income: Real Estate $ 4,690 $ 4,035 Professional - without impairment losses 2,627 3,470 Professional - impairment losses ( 22,545 ) — Home office ( 5,502 ) ( 4,690 ) Total $ ( 20,730 ) $ 2,815 Capital expenditures: Real Estate $ 33 $ 9 Professional 48 24 Home office 664 2,018 Total $ 745 $ 2,051 April 2, 2023 January 1, 2023 Total Assets: Real Estate $ 28,421 $ 29,302 Professional 114,074 141,018 Home office 29,386 24,353 Total $ 171,881 $ 194,673 NOTE 16 - SUBSEQUENT EVENTS Dividend On May 3, 2023 , the Company's board of directors declared a cash dividend in the amount of $ 0.15 per share of common stock to be paid on May 22, 2023 to all shareholders of record as of the close of business on May 15, 2023 . Arroyo Consulting On April 24, 2023, the Company acquired substantially all of the assets and assumed certain of the liabilities of Arroyo Consulting for an initial purchase price of $ 8.0 million cash, subject to customary price adjustments as specified in the acquisition agreement. The purchase includes $ 0.4 million which was held back until the later of (i) the working capital adjustment, if any, or (ii) the Company’s receipt of a tax clearance letter from Seller, and $ 0.9 million which was held back for a period of one year as security for any indemnification obligation of the Seller. The Purchase Agreement further provides for earn-out payments of up to an aggregate of $ 8.5 million, provided certain agreed upon performance targets are met over a two-year period following the acquisition date. At closing, $ 6.8 million of the closing price was paid out of currently available funds under the Company's credit agreement led by BMO. The acquired business was assigned to the Professional segment. The acquisition of Arroyo Consulting adds global delivery capabilities, expands the Company’s presence into Latin America and India, expands our recruitment and retention of IT talent, and brings strategic pricing flexibility. Arroyo Consulting is a nearshore/offshore workforce solutions firm that specializes in IT and software development with operations in the United States, Columbia, and India. As the transaction was recently completed, the initial accounting for the acquisition, including estimating the fair values of assets and liabilities acquired, has not been completed. 24 BGSF, Inc. and Subsidiaries NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Credit Agreement On April 24, 2023, in connection with the acquisition of Arroyo Consulting, the Company entered into the Third Credit Amendment with BMO. The Third Credit Amendment revised language to permit an acquisition of a foreign entity under certain circumstances and modified the terms of permitted distributions and guarantors.