BGSF, INC. 10-K

Item 8. Financial Statements and Supplementary Data. Page Audited Consolidated Financial Statements of BGSF, Inc. Report of Independent Registered Public Accounting Firm - Whitley Penn LLP (PCAOB ID 726) 40 Consolidated Balance Sheets as of December 31, 2023 and January 1, 2023 42 Consolidated Statements of Operations and Comprehensive (Loss) Income for each of the three fiscal years ended December 31, 2023 43 Consolidated Statements of Changes in Stockholders’ Equity for each of the three fiscal years ended December 31, 2023 44 Consolidated Statements of Cash Flows for each of the three fiscal years ended December 31, 2023 46 Notes to Consolidated Financial Statements 48 39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of BGSF, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of BGSF, Inc., and its subsidiaries (the “Company”) as of December 31, 2023 and January 1, 2023, and the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and January 1, 2023, and the results of their operations and cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2024 expressed an unqualified opinion. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 40 Acquisition of Arroyo Consulting, LLC – Fair Value of Intangible Assets Description of the Matter As discussed in Note 3 to the consolidated financial statements, the Company acquired substantially all of the assets and assumed certain liabilities of Arroyo Consulting, LLC (“Arroyo”) for a purchase price of up to $8.7 million in cash and contingent consideration of up to $8.5 million. The acquisition of Arroyo resulted in a total of $13.9 million of intangible assets, which are comprised primarily of client partner lists. The determination of fair value for the client partner lists required management to make estimates of discounted future cash flows and included their subjective assumptions of the appropriate discount rate, the growth of revenue, and rate of attrition for the related customers. The contingent consideration of up to $8.5 million is based on the forecasted performance of the acquired business for the two years following the date of the acquisition. We identified the fair value of the intangible assets acquired and contingent consideration liability in the Arroyo business combination to be a critical audit matter due to the significant judgments made by management to estimate their fair values. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of discount and customer attrition rates, as well as forecasts of future revenues and cash flows. How We Addressed the Matter in Our Audit Our audit procedures related to the discount rates, and forecasts of future revenues and cash flows used by management to estimate the fair value of both the intangible assets acquired and contingent consideration liability in the Arroyo business combination included the following, among others: • We tested the effectiveness of controls over management’s Arroyo purchase price allocation, including those over the determination of the fair value of intangible assets, such as controls related to management’s selection of discount rates, client attrition rate, and forecasts of future revenues and cash flows. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (i) valuation methodology, (ii) discount rates, (iii) client attrition rate, and (iv) future revenue and growth rates, including testing the source information underlying the determination of the discount rates, testing the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management. • We evaluated management’s ability to accurately forecast future revenues and cash flows by considering the past financial performance of Arroyo and current economic factors. /s/ Whitley Penn LLP We have served as the Company’s auditor since 2013. Plano, Texas March 14, 2024 41 BGSF, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) December 31, 2023 January 1, 2023 ASSETS Current assets Accounts receivable (net of allowance for credit losses of $554 and $558, respectively) $ 56,776 $ 66,285 Prepaid expenses 2,963 2,418 Other current assets 7,172 7,459 Total current assets 66,911 76,162 Property and equipment, net 1,217 2,081 Other assets Deposits 2,699 2,616 Software as a service, net 5,026 4,411 Deferred income taxes, net 7,271 2,196 Right-of-use asset - operating leases 5,435 4,462 Intangible assets, net 30,370 47,552 Goodwill 59,588 55,193 Total other assets 110,389 116,430 Total assets $ 178,517 $ 194,673 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 95 $ 587 Accrued payroll and expenses 14,902 19,171 Line of credit (net of debt issuance costs of $128) 24,746 — Long-term debt, current portion 34,000 4,000 Accrued interest 438 273 Income taxes payable 282 253 Contingent consideration, current portion 4,208 1,081 Convertible note 4,368 — Other current liabilities — 1,000 Lease liabilities, current portion 2,016 1,842 Total current liabilities 85,055 28,207 Line of credit (net of debt issuance costs of $259) — 22,303 Long-term debt, less current portion — 36,000 Contingent consideration, less current portion 4,112 — Convertible note — 4,368 Lease liabilities, less current portion 3,814 3,049 Other long-term liabilities — 10 Total liabilities 92,981 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, 10,887,509 and 10,772,515 shares issued and outstanding, respectively, net of treasury stock, at cost, of 3,930 and 1,845 shares, respectively 52 70 Additional paid in capital 68,551 67,003 Retained earnings 16,933 33,663 Total stockholders’ equity 85,536 100,736 Total liabilities and stockholders’ equity $ 178,517 $ 194,673 The accompanying notes are an integral part of these consolidated financial statements. 42 BGSF, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (in thousands, except per share and dividend amounts) Years ended December 31, 2023, January 1, 2023 and December 26, 2021 2023 2022 2021 Revenues $ 313,167 $ 298,422 $ 239,027 Cost of services 201,383 194,874 158,086 Gross profit 111,784 103,548 80,941 Selling, general and administrative expenses 88,650 83,211 65,116 Gain on contingent consideration — — ( 2,403 ) Impairment losses 22,545 — — Depreciation and amortization 7,774 4,054 3,698 Operating (loss) income ( 7,185 ) 16,283 14,530 Interest expense, net ( 5,976 ) ( 1,363 ) ( 1,433 ) (Loss) income from continuing operations before income taxes ( 13,161 ) 14,920 13,097 Income tax benefit (expense) from continuing operations 2,938 ( 3,659 ) ( 2,639 ) (Loss) income from continuing operations ( 10,223 ) 11,261 10,458 Income from discontinued operations: Income — 1,235 4,570 Gain on sale — 17,675 — Income tax expense — ( 4,810 ) ( 919 ) Net (loss) income $ ( 10,223 ) $ 25,361 $ 14,109 Change in unrealized (losses) gains on cash flow hedges — ( 58 ) 181 Other comprehensive (loss) gain — ( 58 ) 181 Net comprehensive (loss) income $ ( 10,223 ) $ 25,303 $ 14,290 Net (loss) income per share - basic: Net (loss) income from continuing operations $ ( 0.95 ) $ 1.08 $ 1.01 Net income from discontinued operations: Income — 0.12 0.44 Gain on sale — 1.69 — Income tax expense — ( 0.46 ) ( 0.09 ) Net (loss) income per share - basic $ ( 0.95 ) $ 2.43 $ 1.36 Net (loss) income per share - diluted: Net (loss) income from continuing operations $ ( 0.95 ) $ 1.07 $ 1.00 Net income from discontinued operations: Income — 0.12 0.44 Gain on sale — 1.69 — Income tax expense — ( 0.46 ) ( 0.09 ) Net (loss) income per share - diluted $ ( 0.95 ) $ 2.42 $ 1.35 Weighted average shares outstanding: Basic 10,766 10,427 10,367 Diluted 10,766 10,473 10,417 Cash dividends declared per common share $ 0.60 $ 0.60 $ 0.44 The accompanying notes are an integral part of these consolidated financial statements. 43 BGSF, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) Years ended December 31, 2023, January 1, 2023 and December 26, 2021 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 27, 2020 — 10,328 $ 103 $ ( 29 ) $ 60,457 $ 5,050 $ ( 123 ) $ 65,458 Share-based compensation from continuing operations — — — — 1,058 — — 1,058 Share-based compensation from discontinued operations — — — — 54 — — 54 Issuance of shares, net of offering costs — — — — ( 40 ) — — ( 40 ) Issuance of restricted shares, net of 610 shares of treasury stock — 64 1 ( 9 ) ( 1 ) — — ( 9 ) Issuance of ESPP shares — 32 — — 340 — — 340 Exercise of common stock shares — 1 — — 8 — — 8 Cash dividends declared — — — — — ( 4,567 ) — ( 4,567 ) Net income — — — — — 14,109 — 14,109 Other comprehensive gain — — — — — — 181 181 Stockholders’ equity, December 26, 2021 — 10,425 104 ( 38 ) 61,876 14,592 58 76,592 Share-based compensation from continuing operations — — — — 1,085 — — 1,085 Share-based compensation from discontinued operations — — — — 7 — — 7 Transaction fees related to sale of discontinued operations — — — — 35 — — 35 Issuance of shares — 254 3 — 3,338 — — 3,341 Issuance of restricted shares — 32 1 — ( 1 ) — — — Issuance of ESPP shares — 60 — — 653 — — 653 Exercise of common stock options — 1 — — 10 — — 10 Cash dividends declared — — — — — ( 6,290 ) — ( 6,290 ) Net income — — — — — 25,361 — 25,361 Other comprehensive loss — — — — — — ( 58 ) ( 58 ) Stockholders’ equity, January 01, 2023 — 10,772 $ 108 $ ( 38 ) $ 67,003 $ 33,663 $ — $ 100,736 The accompanying notes are an integral part of these consolidated financial statements. 44 BGSF, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED) (in thousands) Years ended December 31, 2023, January 1, 2023 and December 26, 2021 Common Stock Preferred Stock Shares Par Value Treasury Stock Amount Additional Paid in Capital Retained Earnings Accumulated Other Comprehensive (Loss)/Income Total Stockholders’ equity, January 01, 2023 — 10,772 $ 108 $ ( 38 ) $ 67,003 $ 33,663 $ — $ 100,736 Share-based compensation — — — — 1,029 — — 1,029 Issuance of restricted shares, net of 2,085 shares of treasury stock — 57 1 ( 19 ) ( 23 ) — — ( 41 ) Issuance of ESPP shares — 54 — — 512 — — 512 Exercise of common stock options — 5 — — 30 — — 30 Cash dividends declared — — — — — ( 6,507 ) — ( 6,507 ) Net loss — — — — — ( 10,223 ) — ( 10,223 ) Stockholders’ equity, December 31, 2023 — 10,888 $ 109 $ ( 57 ) $ 68,551 $ 16,933 $ — $ 85,536 The accompanying notes are an integral part of these consolidated financial statements. 45 BGSF, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Years ended December 31, 2023, January 1, 2023 and December 26, 2021 2023 2022 2021 Cash flows from operating activities Net (loss) income $ ( 10,223 ) $ 25,361 $ 14,109 (Income) from discontinued operations — ( 1,235 ) ( 4,570 ) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation 446 597 685 Amortization 7,328 3,457 3,013 Gain on sale of discontinued operations — ( 17,675 ) — Impairment losses 22,545 — — CARES Act credit — — ( 2,368 ) Loss on disposal of property and equipment 17 6 8 Contingent consideration adjustment — — ( 2,403 ) Amortization of debt issuance costs 199 172 75 Interest expense on contingent consideration payable 740 128 252 Provision for credit losses 798 315 221 Share-based compensation 1,029 1,085 1,058 Deferred income taxes, net of acquired deferred tax liability ( 5,075 ) 2,353 1,279 Net changes in operating assets and liabilities, net of effects of acquisitions: Accounts receivable 12,163 ( 14,793 ) ( 15,178 ) Prepaid expenses and other current assets ( 2,159 ) ( 866 ) ( 200 ) Deposits ( 83 ) 1,503 ( 126 ) Software as a service 720 660 319 Accounts payable ( 492 ) ( 228 ) 156 Accrued payroll and expenses ( 7,426 ) 1,633 5,730 Accrued interest 165 171 24 Income taxes receivable and payable 729 ( 1,202 ) ( 560 ) Other current liabilities ( 1,000 ) ( 4,551 ) 19 Operating leases ( 35 ) ( 127 ) ( 107 ) Other long-term liabilities — ( 64 ) ( 78 ) Net cash provided by (used in) continuing operating activities 20,386 ( 3,300 ) 1,358 Net cash (used in) provided by discontinued operating activities — ( 3,822 ) 5,305 Net cash provided by (used in) operating activities 20,386 ( 7,122 ) 6,663 Cash flows from investing activities Businesses acquired, net of cash acquired ( 6,917 ) ( 33,940 ) ( 3,791 ) Businesses sold — 30,722 — Capital expenditures ( 2,597 ) ( 5,680 ) ( 3,204 ) Proceeds from sale of property and equipment — — 5 Net cash used in continuing investing activities ( 9,514 ) ( 8,898 ) ( 6,990 ) Net cash used in discontinued investing activities — ( 26 ) ( 34 ) Net cash used in investing activities ( 9,514 ) ( 8,924 ) ( 7,024 ) The accompanying notes are an integral part of these consolidated financial statements. 46 BGSF, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (in thousands) Years ended December 31, 2023, January 1, 2023 and December 26, 2021 2023 2022 2021 Cash flows from financing activities Net borrowings under line of credit 2,312 9,781 6,804 Proceeds from issuance of long-term debt — 40,000 — Principal payments on long-term debt ( 6,000 ) ( 26,863 ) ( 2,063 ) Payments of dividends ( 6,507 ) ( 6,290 ) ( 4,567 ) Issuance of ESPP shares 512 653 340 Issuance of shares under the 2013 Long-Term Incentive Plan and Form S-3 registration statement costs, net of exercises ( 10 ) ( 1 ) ( 41 ) Contingent consideration paid ( 1,110 ) ( 1,110 ) — Debt issuance costs ( 69 ) ( 236 ) — Net cash (used in) provided by continuing financing activities ( 10,872 ) 15,934 473 Net change in cash and cash equivalents — ( 112 ) 112 Cash and cash equivalents, beginning of year — 112 — Cash and cash equivalents, end of year $ — $ — $ 112 Supplemental cash flow information: Cash paid for interest, net $ 4,668 $ 641 $ 879 Cash paid for taxes, net of refunds $ 1,378 $ 7,562 $ 3,676 The accompanying notes are an integral part of these consolidated financial statements. 47 BGSF, Inc. and Subsidiaries NOTES TO 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 information technology (“IT”), Finance & Accounting, Managed Solutions, and Property Management (formally known as Real Estate which includes apartment communities and commercial buildings) (collectively, with its consolidated subsidiaries, the “Company”). On March 21, 2022, the Company completed the sale of substantially all its Light Industrial segment (“InStaff”) assets to Jobandtalent (“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 and offshore workforce solutions company that specializes in IT and software development with operations in the United States, Colombia, and India. See “Note 3- Acquisitions.” The Company operates primarily within the United States of America (“U.S.”) through the Property Management and Professional segments. The Property Management segment provides office and maintenance talent in 38 states and D.C., to property management companies responsible for the apartment communities’ and commercial buildings’ day-to-day operations. The Professional segment provides specialized talent and business consultants for information technology (“IT”), managed services, finance, accounting, legal and human resource. The segment operates across the U.S. in three divisions, IT, Managed Solutions, and Finance & Accounting, with the IT division providing additional nearshore and offshore solutions in Colombia and India. 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 Year The Company has a 52/53 week fiscal year. Fiscal years for the consolidated financial statements included herein are for the 52 weeks ended December 31, 2023, and 53 weeks ended January 1, 2023, and the 52 weeks ended December 26, 2021, referred as Fiscal 2023, 2022, and 2021, respectively. Reclassifications Certain reclassifications have been made to the 2022 and 2021 financial statements to conform with the 2023 presentation. Management Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles in United States of America (“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 liabilities, 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 48 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, convertible debt, contingent consideration, and interest rate swap agreements. The carrying values of cash, accounts receivables, accounts payable, accrued payroll and expenses, 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. In Fiscal 2022 and 2021, Management determined the fair value on the interest rate swap based on quoted prices from BMO. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less. Concentration of Credit Risk Concentration of credit risk is limited due to the Company’s diverse client partner base and their dispersion across many different industries and geographic locations nationwide. No single client partner accounted for more than 10% of the Company’s accounts receivable as of December 31, 2023 and January 1, 2023 or revenue from continuing operations in Fiscal 2023, 2022 and 2021. 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 and 2021 was generated in the following areas at: December 31, 2023 January 1, 2023 December 26, 2021 Tennessee 13 % 10 % 12 % Texas 25 % 23 % 23 % 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, credit loss, 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 at (in thousands): December 31, 2023 January 1, 2023 Beginning balance $ 558 $ 449 Acquired allowance for credit losses - Horn Solutions — 109 Provision for credit losses, net 798 315 Amounts written off, net ( 802 ) ( 315 ) Ending balance $ 554 $ 558 49 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Property and Equipment The Company depreciates the cost of property and equipment over the estimated useful lives of the assets using the straight-line method ranging from five to seven years . The costs of leasehold improvements are amortized over the shorter of the estimated useful life or lease term. The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization, are removed from the accounts, and any gains or losses are reflected in current operations. 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 December 31, 2023 and January 1, 2023. Software as a service The Company capitalizes direct costs incurred in cloud computing implementation costs from hosting arrangements, and are reported as a component of Software as a service. All other internal-use software development costs are capitalized and reported as a component of computer software within Intangible assets. In Fiscal 2023, the Company added software assets of $ 0.6 million and reclassified $ 0.7 million from property and equipment related to the information technology improvement project. 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, 2022 or 2021. Leases The Company leases all their office space through operating leases, which expire at various dates through 2030. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of the Company’s lease arrangements contain renewal provisions from 1 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. The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Right-of-use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined using the incremental borrowing rate based on the information available at lease commencement date, unless the implicit rate in the lease is readily determinable. 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 finite lives. 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. 50 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company capitalizes purchased software and internal payroll costs directly incurred in the modification of internal use software. 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. In the first quarter of Fiscal 2023, management decided to eliminate the use of various trade names and go to market under the BGSF brand. Management’s rebranding created an impairment charge of $ 22.5 million. The Company determined that there were no impairment indicators for these assets in Fiscal 2022. Goodwill Goodwill represents the difference between the total consideration paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. The Company reviews 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. Based on annual testing, the Company has determined that there was no goodwill impairment in Fiscal 2023, 2022 or 2021. The Company first evaluates 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, the Company determines 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, the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares 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, the Company assesses 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, the Company compares 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, the Company 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. Cash Flow Hedge The unrealized gains or losses associated with the change in the fair value of the effective portion of the hedging instrument was recorded in accumulated other comprehensive income or loss. The Company reclassified the interest rate swap from accumulated other comprehensive gain or loss against interest expense in the same period in which the hedge transaction affected earnings. There were no outstanding cash flow hedges at December 31, 2023 or January 1, 2023. Debt Issuance Costs Debt issuance costs 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. 51 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Property Management and Professional segments by providing 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 (loss) 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. 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 19 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 December 31, 2023 or January 1, 2023. There were no revenues recognized during Fiscal 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 Fiscal 2023, 2022, and 2021. The opening balance of accounts receivable at December 26, 2021, was $ 48.1 million. Advertising The Company recognizes advertising expense in selling, general and administrative expenses as the services are incurred. Total advertising expense from continuing operations for Fiscal 2023, 2022, and 2021 was $ 2.1 million, $ 2.0 million, and $ 2.0 million, respectively. 52 BGSF, Inc. and Subsidiaries NOTES TO 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): December 31, 2023 January 1, 2023 December 26, 2021 Weighted-average number of common shares outstanding: 10,766 10,427 10,367 Effect of dilutive securities: Stock options and restricted stock — 46 50 Weighted-average number of diluted common shares outstanding 10,766 10,473 10,417 Stock options and restricted stock 812 360 402 Convertible note 255 255 — Antidilutive shares 1,067 615 402 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. The Company recognizes any penalties when necessary as part of selling, general and administrative expenses. As a matter of operation, we first calculated the effective tax on continuing operations, and then allocated the remaining taxes to our discontinued operations, in accordance with Accounting Standards Codification (“ASC”) Topic 740. As of December 31, 2023 and January 1, 2023, goodwill of $ 45.9 million and $ 50.4 million, respectively, which is limited annually and 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 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 31, 2023, the Company has a $ 2.6 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 an increase of $ 5.2 million to the deferred tax assets related to the $ 22.5 million in impairment losses as of December 31, 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 believes 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 31, 2023 or January 1, 2023. The Company follows the guidance of 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. 53 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued ASU 2023-07, Segment Reporting: Improvements to Reportable Segment Disclosures. The new standard provides guidance to improve reportable segment disclosure with enhanced reporting of significant segment expenses. The new guidance is effective after December 15, 2023, and interim periods beginning after December 15, 2024, early adoption is permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements and related disclosures. In December 2023, FASB issued ASU 2023-09, Income Taxes: Improvements to Income Tax Disclosures. The new standard requires annual disclosure of the specific categories in the rate reconciliation, and additional information for reconciling items that meet a quantitative threshold. Additional information may be required on reconciling items. The new guidance is effective after December 15, 2024, early adoption is permitted. The Company is evaluating the impact of the new guidance on its consolidated financial statements and related disclosures. 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 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, was held back as partial security for a post-closing purchase price adjustment. The asset purchase agreement contained a provision for a “true up” of acquired working capital within 120 days after the closing date. In May 2023, the hold back and true-up were paid, adjusting businesses acquired by $ 0.1 million in goodwill. The purchase price at closing was paid out of funds under the Company’s credit agreement led by BMO, see “Note 12 - Debt”. The acquired business was assigned to the Professional segment. The acquisition of Horn Solutions allowed 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. Shortly after closing, Horn Solutions was fully integrated into the Company's organizational structure and does not operate as a discrete entity. Consequently, the amount of revenue and earnings of Horn Solutions included in the Consolidated Statement of Comprehensive (Loss) Income since the acquisition date is impracticable to provide. 54 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows (in thousands): Accounts receivable $ 3,734 Prepaid expenses and other assets 118 Property and equipment, net 83 Right-of-use asset - operating leases 1,528 Intangible assets 13,484 Goodwill (deductible tax basis of $26.1 million) 26,610 Current liabilities assumed ( 1,787 ) Lease liability - operating leases ( 1,528 ) Total net assets acquired $ 42,242 Cash $ 33,940 Hold back 1,000 Convertible Note 4,368 Common stock 3,351 Working capital adjustment ( 417 ) Total fair value of consideration transferred for acquired business $ 42,242 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 in Fiscal 2023 and Fiscal 2022 related to the Horn Solutions acquisition. These costs were expensed as incurred in selling, general and administrative expenses. Arroyo Consulting On April 24, 2023, the Company acquired substantially all of the assets, and assumed certain of the liabilities, of Arroyo Consulting for cash consideration of $ 6.8 million. Certain post-closing liabilities were held back of $ 0.4 million and a partial security for any indemnification obligation was held back for one year of $ 0.9 million. The purchase agreement further provides for contingent consideration of up to $ 8.5 million based on the performance of the acquired business for the two years following the date of acquisition. The purchase price at closing was paid out of funds under the Company’s credit agreement led by BMO, see “Note 12 - Debt”. The purchase agreement contained a provision for a “true up” of acquired working capital within 120 days after the closing date, which has not yet been finalized with the seller. The acquired business was assigned to the Professional segment. The acquisition of Arroyo Consulting allows the Company to strengthen the go-to-market cross-selling efforts providing clients a cost effective alternative offering nearshore and offshore IT resources. Arroyo Consulting provides nearshore and offshore professional workforce solutions specializing in IT and software development with operations in the United States, Colombia, and India. The 2022 and 2021 consolidated statements of operations do not include any operating results of Arroyo Consulting. The Fiscal 2023 consolidated statement of operation and comprehensive (loss) income included thirty-six weeks for approximately $ 14.8 million of revenue and $ 4.0 million of operating income, which included $ 0.7 million in amortization expense on acquisition intangibles. 55 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The preliminary purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows (in thousands): Accounts receivable $ 3,452 Right-of-use asset - operating leases 141 Intangible assets 11,468 Goodwill (no deductible tax basis) 3,836 Current liabilities assumed ( 2,471 ) Lease liability - operating leases ( 140 ) Total net assets acquired $ 16,286 Cash $ 6,800 Hold back, working capital* 350 Hold back, indemnities* 850 Working capital adjustment* 677 Fair value of contingent consideration 7,609 Total fair value of consideration transferred for acquired business $ 16,286 *Included in Other current liabilities The allocation of the intangible assets is as follows (in thousands): Estimated Fair Value Estimated Useful Lives Covenants not to compete $ 352 5 years Client partner list 10,946 10 years Computer software 170 3 years Total $ 11,468 The Company incurred costs of $ 0.6 million in Fiscal 2023 related to the Arroyo Consulting acquisition. These costs were expensed as incurred in selling, general and administrative expenses. Supplemental Unaudited Pro Forma Information The Company estimates what would have been reported if the revenues and net income from continuing operations of the Horn Solutions and Arroyo Consulting acquisitions had taken place on the first day of the Company’s Fiscal 2022 (in thousands, except income per share): December 31, 2023 January 1, 2023 Revenues $ 320 $ 346 Gross profit $ 114 $ 123 Net (loss) income from continuing operations $ ( 10 ) $ 13 Net (loss) income per share from continuing operations: Basic $ ( 0.89 ) $ 1.29 Diluted $ ( 0.89 ) $ 1.29 Pro forma net (loss) income includes amortization of primarily client partner lists, interest expense on additional borrowings on the New Term Loan and the revolving facility (the “Revolving Facility”)(see “Note 12 - Debt”) at a rate of 2.5 %. The tax benefit of the pro forma adjustments at an effective tax rate of 22.3 % for Fiscal 2023 and 24.5 % for Fiscal 2022. The pro forma operating results include adjustments to Horn Solutions and Arroyo Consulting related to synergy adjustments for expenses that would be duplicative and other non-recurring, non-operating and out of period expense items once integrated with the Company. There were no material nonrecurring adjustments. 56 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts set forth above are not necessarily indicative of the results that would have been attained had the Horn Solutions and Arroyo Consulting acquisitions taken place on the first day of Fiscal 2022 or of 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 April 3, 2023. The sale resulted in an original pre-tax gain on sale of discontinued operations of $ 17.3 million, with an additional pre-tax 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. The financial results of InStaff are as follows at (in thousands): January 1, 2023 December 26, 2021 Revenue $ 16,465 $ 71,292 Cost of services 14,144 60,948 Gross profit 2,321 10,344 Selling expenses 1,062 5,684 Depreciation 24 90 Income from discontinued operations before gain on sale and income taxes $ 1,235 $ 4,570 NOTE 5 - OTHER CURRENT ASSETS Other current assets consist of the following at (in thousands): December 31, 2023 January 1, 2023 CARES Act receivable $ 2,188 $ 2,368 Deferred consideration — 2,000 Income tax receivable 685 1,667 Horn Solutions working capital adjustment — 534 Workers’ compensation deposit refund receivable — 448 Due from Arroyo and Sentech, respectively 3,843 411 Other 456 31 $ 7,172 $ 7,459 CARES Act Receivable The Employee Retention Credit (“ERC”) was established by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act allows relief to businesses affected by the coronavirus pandemic, by providing payment to employers for qualified wages and health insurance benefits for team members. The CARES Act applies to taxes incurred from March 27, 2020, through the second quarter of 2021. 57 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - PROPERTY AND EQUIPMENT, NET Property and equipment consist of the following at (in thousands): December 31, 2023 January 1, 2023 Leasehold improvements $ 665 $ 1,397 Furniture and fixtures 1,152 1,506 Computer systems 3,476 4,077 5,293 6,980 Accumulated depreciation ( 4,076 ) ( 4,899 ) Property and equipment, net $ 1,217 $ 2,081 Total depreciation expense from continuing operations in Fiscal 2023, 2022 and 2021 was $ 0.4 million, $ 0.6 million, and $ 0.7 million, respectively. In Fiscal 2023, the Company completed software assets and reclassed $ 0.7 million to Software as a service and $ 0.2 million to Intangible assets related to the information technology improvement project. NOTE 7 - LEASES The Company’s future continuing operating lease obligations that have not yet commenced are immaterial. Short-term leases were immaterial. The supplemental balance sheet and cash flow information related to the Company's operating leases were as follows at (dollars in thousands): December 31, 2023 January 1, 2023 December 26, 2021 Weighted average remaining lease term of operation leases 3.5 years 3.3 years 2.7 years Weighted average discount rate for continuing operating leases 6.5 % 5.2 % 5.0 % Cash paid for continuing operating leases $ 2,185 $ 2,115 $ 2,136 Continuing operating lease expense $ 2,155 $ 1,887 $ 1,907 Right-of -use assets obtained in exchange for new operating lease liabilities $ 2,837 $ 2,248 $ 6 The undiscounted annual future minimum lease payments of continuing operations consist of the following at (in thousands): December 31, 2023 2024 $ 2,306 2025 1,591 2026 1,211 2027 852 2028 512 Thereafter 74 Total lease payment 6,546 Interest ( 716 ) Present value of lease liabilities $ 5,830 NOTE 8 - INTANGIBLE ASSETS In the first quarter of Fiscal 2023, management decided to eliminate the use of various trade names and go to market under the BGSF brand. Management’s rebranding created an impairment charge of $ 22.5 million. The Company determined that there were no impairment indicators for these assets in Fiscal 2022. 58 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Finite and indefinite lived intangible assets consist of the following at (in thousands): December 31, 2023 Gross Value Accumulated Amortization Net Carrying Value Finite lives: Client partner lists $ 69,114 $ 44,150 $ 24,964 Covenants not to compete 2,743 2,153 590 Computer software 7,825 3,009 4,816 Total $ 79,682 $ 49,312 $ 30,370 January 1, 2023 Gross Value Accumulated Amortization Net Carrying Value Finite lives: Client partner lists $ 58,609 $ 38,227 $ 20,382 Covenants not to compete 2,391 1,886 505 Computer software 7,208 3,087 4,121 68,208 43,200 25,008 Indefinite lives: Trade names 23,977 1,433 22,544 Total $ 92,185 $ 44,633 $ 47,552 Estimated future amortization expense for the next five years and thereafter is as follows (in thousands): Fiscal Years Ending: 2024 $ 7,185 2025 5,593 2026 4,332 2027 3,125 2028 2,469 Thereafter 7,666 Total $ 30,370 Total amortization expense from continuing operations for Fiscal 2023, 2022 and 2021 was $ 7.3 million, $ 3.5 million and $ 3.0 million, respectively. In Fiscal 2023, the Company added software assets of $ 1.5 million and reclassified $ 0.2 million from property and equipment related to the information technology improvement project. NOTE 9 - GOODWILL The changes in the carrying amount of goodwill as of and during the years ended were as follows at (in thousands): Property Management Professional Total December 26, 2021 $ 1,074 $ 28,068 $ 29,142 Additions from acquisitions — 26,051 26,051 January 1, 2023 1,074 54,119 55,193 Additions from acquisitions — 4,395 4,395 December 31, 2023 $ 1,074 $ 58,514 $ 59,588 59 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - ACCRUED PAYROLL AND EXPENSES AND CONTINGENT CONSIDERATION Accrued payroll and expenses consist of the following at (in thousands): December 31, 2023 January 1, 2023 Field talent payroll $ 5,014 $ 6,923 Field talent payroll related 1,039 941 Accrued bonuses and commissions 2,931 5,740 Other 5,918 5,567 Accrued payroll and expenses $ 14,902 $ 19,171 The following is a schedule of future estimated contingent consideration payments at (in thousands): December 31, 2023 Estimated Cash Payment Discount Net Due in: Less than one year $ 4,250 $ ( 42 ) $ 4,208 One to two years 4,250 ( 138 ) 4,112 Contingent consideration $ 8,500 $ ( 180 ) $ 8,320 NOTE 11 - INCOME TAXES At December 31, 2023, federal income tax receivable of $ 0.7 million is included in Other current assets and state income tax payable of $ 0.3 million is included in Income taxes payable. At January 1, 2023, federal income tax receivable of $ 1.7 million is included in Other current assets and state income tax payable of $ 0.3 million is included in Income taxes payable. The Company’s income tax expense for the fiscal years are comprised of the following at (in thousands): December 31, 2023 January 1, 2023 December 26, 2021 Current federal income tax $ ( 1,312 ) $ ( 589 ) $ ( 594 ) Current state income tax ( 825 ) ( 717 ) ( 766 ) Deferred tax benefit (income) 5,075 ( 2,353 ) ( 1,279 ) Income tax benefit (expense) from continuing operations 2,938 ( 3,659 ) ( 2,639 ) Income tax (expense) from discontinued operations — ( 4,810 ) ( 919 ) Income tax benefit (expense) $ 2,938 $ ( 8,469 ) $ ( 3,558 ) 60 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant components of the Company’s deferred income taxes are as follows at (in thousands): December 31, 2023 January 1, 2023 Deferred tax assets: Allowance for credit losses $ 120 $ 127 Goodwill and intangible assets 5,242 787 Accrued payroll and expenses 681 404 Contingent consideration 2,087 271 Share-based compensation 602 504 Net operating loss carry forward 662 985 Deferred tax liabilities: Prepaid expenses and other current assets ( 735 ) ( 579 ) Property and equipment ( 1,388 ) ( 303 ) Deferred income taxes, net $ 7,271 $ 2,196 The income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows at (in thousands): December 31, 2023 January 1, 2023 December 26, 2021 Tax benefit (expense) at federal statutory rate $ 2,764 ( 21.0 ) % $ ( 3,133 ) ( 21.0 ) % $ ( 2,750 ) ( 21.0 ) % State income tax benefit (expense), net of federal benefit 194 ( 1.5 ) % ( 795 ) ( 5.3 ) % ( 1,100 ) ( 8.4 ) % Equity, permanent differences and other ( 319 ) 2.3 % ( 178 ) ( 1.2 ) % 503 3.7 % Work Opportunity Tax Credit, net 299 ( 2.3 ) % 447 3.0 % 708 5.4 % Income tax benefit (expense) from continuing operations 2,938 ( 22.5 ) % ( 3,659 ) ( 24.5 ) % ( 2,639 ) ( 20.3 ) % Income tax (expense) from discontinued operations — — % ( 4,810 ) ( 24.5 ) % ( 919 ) ( 20.3 ) % Income tax benefit (expense) $ 2,938 ( 22.5 ) % $ ( 8,469 ) ( 24.5 ) % $ ( 3,558 ) ( 20.3 ) % NOTE 12 - 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 provided for 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 in the aggregate Term Loan by $ 40 million, which was done in connection with the Horn Solutions acquisition. The Company’s obligations under the Credit Amendment are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries. The Credit Agreement bore interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin through August 17, 2022 (as such terms are defined in the Credit Agreement). The Company pays an unused commitment fee on the daily average unused amount of the Revolving Facility. On August 18, 2022, the Company entered into an amendment to the Credit Agreement with BMO, which changed the interest rate component from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus the Applicable Margin (as such terms are defined in the amended credit agreement). In connection with the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”), the Company exercised the option to borrow $ 40.0 million, as noted above, pursuant to a second amendment to the Credit Agreement (“Second Credit Amendment”). The Second Credit Amendment requires 2.5 % of the original principal balance of the New Term Loan payable on the last business day of each quarter, beginning on March 31, 2023. On April 24, 2023, in connection with the acquisition of Arroyo Consulting, the Company entered into a Third Amendment to the Credit Agreement (“Third Credit Amendment”) with BMO. The Third Credit Amendment revised language to permit an acquisition of a foreign entity under certain circumstances and modified the terms of permitted distributions and guarantors. 61 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On May 19, 2023, the Company entered into a Fourth Amendment to the Credit Agreement (“Fourth Credit Amendment”) increasing the Revolving Facility by $ 6.0 million to an aggregate amount up to $ 41.0 million. The Company is subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio (as such terms are defined in the amended Second Credit Amendment). The Company was in compliance with the customary affirmative and negative covenants as of December 31, 2023. The indebtedness under the Credit Agreement had a maturity date of July 16, 2024, which has been classified within current liabilities as of December 31, 2023. The Credit Agreement was amended and restated on March 12, 2024. See Note 21 - Subsequent Events. Letter of Credit In March 2020, in conjunction with the 2020 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 December 31, 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 December 31, 2023 or January 1, 2023. Line of Credit At December 31, 2023 and January 1, 2023, $ 24.9 million and $ 22.6 million, respectively, was outstanding on the revolving facilities. Average daily balance for Fiscal 2023, 2022 and 2021 was $ 23.1 million, $ 18.4 million, and $ 9.9 million, respectively. Borrowings under the revolving facilities consisted of and bore interest at (in thousands): December 31, 2023 January 1, 2023 Base Rate $ 4,874 9.75 % $ 2,562 8.25 % SOFR 3,000 7.69 % 20,000 6.45 % SOFR 2,000 7.71 % — — % SOFR 15,000 7.77 % — — % Total $ 24,874 $ 22,562 Long-Term Debt Long-term debt consisted of and bore interest at (in thousands): December 31, 2023 January 1, 2023 SOFR $ 34,000 7.79 % $ 40,000 6.72 % Long-term debt $ 34,000 $ 40,000 Maturities on the Revolving Facility with BMO and long-term debt as of , are as follows at (in thousands): Fiscal: December 31, 2023 2024 $ 58,874 Less debt issuance costs ( 128 ) Total, net $ 58,746 62 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash Flow Hedge In April 2020, the Company entered into a pay-fixed/receive-floating interest rate swap agreement with our bank syndicate led by BMO that reduces the floating interest rate component on the Term Loan obligation. The $ 25.0 million notional amount was designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate. In accordance with cash flow hedge accounting treatment, the Company had determined that the hedge was perfectly effective using the change-in-variable-cash-flow method. On March 21, 2022, the Company paid down the balance, which cancelled the agreement. 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. Convertible Note At December 31, 2023 and January 1, 2023, the Company had a two-year convertible unsecured 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, prior to the maturity date of December 12, 2024. The promissory note is subordinate to the Company’s senior debt. NOTE 13 - 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 December 31, 2023 January 1, 2023 Convertible note Convertible note Level 2 $ 4,368 $ 4,368 Contingent consideration, net Contingent consideration, net - current and long-term Level 3 $ 8,320 $ 1,081 The changes in the Level 3 fair value measurements from January 1, 2023 to December 31, 2023 relates primarily to an increase from Arroyo Consulting acquisition, including $ 0.7 million in accretion, offset by a $ 1.1 million payment for the 2021 Momentum Solutionz acquisition. Key inputs in determining the fair value of the contingent consideration as of December 31, 2023 and January 1, 2023 included discount rates of approximately 7 % and 9 %, respectively, as well as management’s estimates of future sales volumes and earnings before interest, income taxes, depreciation, and amortization (“EBITDA”). 63 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 14 - 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. Employment Agreements The CEO’s employment agreement was effective as of October 1, 2018 and the agreement remains in effect under successive one-year extensions unless terminated pursuant to its terms. In the event that her employment is terminated by the Company without cause or by her for good reason, she will be entitled to (i) twelve months of base salary, (ii) accrued bonus, and (iii) eighteen months of COBRA premiums for her and her dependents, grossed-up for federal income taxes. Additionally, she will become 100% vested in any awards outstanding under the Company’s 2013 Long-Term Incentive Plan, as amended, (“2013 Plan”) or similar plan. Should there be a sale of the Company that results in the termination of her employment or a material adverse change in her duties and responsibilities, she will be entitled to all of the amounts listed above, however, base salary shall equal eighteen months. The CFO’s employment agreement was effective as of March 20, 2023 and remains in effect through December 31, 2025 with successive one-year extensions unless terminated pursuant to its terms. In the event that his employment is terminated by the Company without cause or by him for good reason, he will be entitled to (i) twelve months of base salary, (ii) accrued bonus, and (iii) eighteen months of COBRA premiums for him and his dependents, grossed-up for federal income taxes. Additionally, he will become 100% vested in any awards outstanding under the 2013 Plan or similar plan. Should there be a sale of the Company that results in the termination of his employment, he will be entitled to all of the amounts listed above, however, base salary shall equal eighteen months. NOTE 15 - 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 net restricted common stock of 56,889 and 32,344 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 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. In connection with the vesting portions of the restricted stock, the Company repurchased 2,085 , - 0 -, and 610 shares of company stock, or treasury stock, to satisfy the withholding obligation in connection with the vesting of a portion of the restricted stock for Fiscal 2023, 2022, and 2021, respectively. Treasury stock is accounted for under the cost method whereby the entire cost of the acquired stock is recorded. 64 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16 - SHARE-BASED COMPENSATION Stock Options In December 2013, the board of directors adopted the original 2013 Plan. Under the original 2013 Plan team members, directors and consultants of the Company may receive incentive stock options and other awards. To the extent any option or award expires unexercised or is canceled, terminated or forfeited in any manner without the issuance of common stock thereunder, such shares shall again be available for issuance under the original 2013 Plan. As of December 31, 2023, a total of 1,215,987 shares remain available for issuance under the 2013 Plan. The term of each option is determined by the board of directors but cannot exceed 10 years. Unless otherwise specified in an option agreement, options vest and become exercisable on the following schedule: 20 % immediately and 20 % on each anniversary date of the grant date. Each option shall be designated as an incentive stock option (“ISO”) or a non-qualified option (“NQO”). The exercise price of an ISO shall not be less than the fair market value of the stock covered by the ISO at the grant date; provided, however, the exercise price of an ISO granted to any person who owns, directly or indirectly, stock of the Company constituting more than 10% of the total combined voting power of all classes of outstanding stock of the Company or of any affiliate of the Company, shall not be less than 110% of such fair market value. The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model and the assumptions in the following table. Because this option valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed below. The Company bases the estimate of expected volatility on the historical volatilities of the Company for a period equal to the expected life of the option. The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company expects to use historical data to estimate team member termination within the valuation model; separate groups of team members that have similar historical termination behavior are considered separately for valuation purposes. The Company believes these estimates and assumptions are reasonable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions. For Fiscal 2023, 2022 and 2021, the Company recognized $ 0.4 million, $ 0.7 million and $ 0.6 million of compensation expense from continuing operations related to stock awards, respectively. Unamortized share-based compensation expense from continuing operations as of December 31, 2023 amounted to $ 0.9 million which is expected to be recognized over the next 2.6 years. The following assumptions were used to estimate the fair value of stock options for the years ended: December 31, 2023 January 1, 2023 December 26, 2021 Weighted-average fair value of awards $ 3.00 $ 5.17 $ 4.91 Weighted-average risk-free interest rate 4.2 % 2.7 % 0.8 % Weighted-average dividend yield $ 0.60 $ 0.54 $ 0.35 Weighted-average volatility factor 52.8 % 54.6 % 53.3 % Weighted-average expected life 10.0 yrs 10.0 yrs 10.0 yrs 65 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Options (in thousands) Awards outstanding at December 27, 2020 652,655 $ 17.63 7.1 $ 665 Granted 116,374 $ 11.57 Exercised ( 1,350 ) $ 9.72 Forfeited / Canceled ( 72,350 ) $ 15.01 Awards outstanding at December 26, 2021 695,329 $ 16.91 6.7 $ 665 Granted 164,000 $ 12.87 Exercised ( 1,000 ) $ 9.75 Forfeited / Canceled ( 36,650 ) $ 17.65 Awards outstanding at January 1, 2023 821,679 $ 16.08 6.4 $ 1,907 Granted 126,470 $ 10.02 Exercised ( 4,800 ) $ 6.25 Forfeited / Canceled ( 21,039 ) $ 17.38 Awards outstanding at December 31, 2023 922,310 $ 15.30 6.0 $ 104 Awards exercisable at January 1, 2023 573,863 $ 17.50 5.4 $ 1,164 Awards exercisable at December 31, 2023 663,740 $ 16.84 5.0 $ 103 Number of Shares Weighted Average Grant Date Fair Value Non-vested outstanding at January 1, 2023 247,816 $ 7.64 Non-vested outstanding at December 31, 2023 258,570 $ 7.84 During Fiscal 2023 and 2022, there were no cashless stock option exercises. During Fiscal 2021 the Company issued 213 shares of common stock upon the cashless exercise of 600 stock options. Restricted Stock For Fiscal 2023, 2022 and 2021, the Company recognized $ 0.6 million, $ 0.4 million, and $ 0.5 million, respectively, of compensation expense related to restricted stock. Unamortized share-based compensation expense as of December 31, 2023 amounted to $ 0.6 million which is expected to be recognized over the next 1.8 years. 66 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of restricted stock activity is presented as follows: Number of Shares Weighted Average Grant Date Fair Value Restricted outstanding at December 27, 2020 25,218 $ 16.01 Issued 64,702 $ 12.04 Vested ( 29,076 ) $ 15.75 Restricted outstanding at December 26, 2021 60,844 $ 11.91 Issued 32,344 $ 13.14 Vested ( 31,168 ) $ 11.79 Restricted outstanding at January 1, 2023 62,020 $ 12.21 Issued 57,974 $ 11.22 Vested ( 43,303 ) $ 11.71 Forfeited / Canceled ( 967 ) $ 12.62 Restricted outstanding at December 31, 2023 75,724 $ 11.73 Nonvested outstanding at January 1, 2023 62,020 $ 12.21 Nonvested outstanding at December 31, 2023 75,724 $ 11.73 Warrant Activity For Fiscal 2023, 2022 and 2021, the Company did not recognize compensation cost related to warrants. There was no unamortized stock compensation expense remaining to be recognized as of December 31, 2023. A summary of warrant activity is presented as follows: Number of Shares Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Life Total Intrinsic Value of Warrants (in thousands) Warrants outstanding at December 27, 2020 25,862 $ 16.80 0.4 $ — Expired ( 25,862 ) $ 16.80 Warrants outstanding at December 26,2021, January 1, 2023, and December 31, 2023 — $ — 0.0 $ — Warrants exercisable January 1, 2023 and December 31, 2023 — $ — 0.0 $ — There were no non-vested warrants outstanding at December 31, 2023, January 1, 2023, and December 26, 2021. There were no exercises of warrants in Fiscal 2023, 2022, and 2021. The intrinsic value in the tables above is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options or warrants, before applicable income taxes and represents the amount holders would have realized if all in-the-money options or warrants had been exercised on the last business day of the period indicated. 67 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2020 Employee Stock Purchase Plan (“2020 ESPP”) In November 2020, the Company’s shareholders approved the 2020 ESPP. Under the 2020 ESPP, eligible team members of the Company may elect for payroll deductions to purchase shares on each purchase date during an offering period. A total of 250,000 shares of common stock of BGSF, Inc. were initially reserved for issuance pursuant to the 2020 ESPP. For Fiscal 2023, and 2022, the Company issued 54,305 and 59,506 shares of common stock under the 2020 ESPP, respectively. NOTE 17 - RELATED PARTY TRANSACTIONS There were no related party transactions in Fiscal 2023, 2022, or 2021. NOTE 18 - 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 or field talent’s compensation. The Company contributed $ 2.0 million, $ 1.5 million and $ 1.5 million from continuing operations to the 401(k) Plan for Fiscal 2023, 2022 and 2021, respectively. NOTE 19 - BUSINESS SEGMENTS The Company has continuing operations through the Property Management and Professional segments. Segment (loss) 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 tax assets, and other assets. The following table provides a reconciliation of revenue and (loss) income from continuing operations by reportable segment to consolidated results for the periods indicated at (in thousands): December 31, 2023 January 1, 2023 December 26, 2021 Revenue: Property Management $ 125,077 $ 121,093 $ 92,018 Professional 188,090 177,329 147,009 Total $ 313,167 $ 298,422 $ 239,027 Depreciation: Property Management $ 133 $ 179 $ 210 Professional 263 355 390 Home office 50 63 85 Total $ 446 $ 597 $ 685 Amortization: Professional $ 6,198 $ 2,338 $ 2,431 Home office 1,130 1,119 582 Total $ 7,328 $ 3,457 $ 3,013 68 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2023 January 1, 2023 December 26, 2021 Operating (loss) income: Property Management $ 23,155 $ 19,803 $ 14,663 Professional - without CARES Act credit and impairment loss 12,292 15,604 10,340 Professional - CARES Act credit — — 921 Professional - impairment loss ( 22,545 ) — — Home office - general and administrative ( 20,087 ) ( 19,124 ) ( 14,948 ) Home office - CARES Act credit — — 1,150 Home office - gain on contingent consideration — — 2,404 Total $ ( 7,185 ) $ 16,283 $ 14,530 Capital Expenditures: Property Management $ 70 $ 135 $ 106 Professional 444 90 107 Home office 2,083 5,455 2,991 Total $ 2,597 $ 5,680 $ 3,204 Total Assets: Property Management $ 29,884 $ 29,302 Professional 122,751 141,018 Home office 25,882 24,353 Total $ 178,517 $ 194,673 NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED) December 31, 2023 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Revenues $ 75,316 $ 80,800 $ 83,484 $ 73,567 $ 313,167 Gross profit $ 26,784 $ 29,574 $ 29,979 $ 25,447 $ 111,784 Net (loss) income $ ( 16,466 ) $ 2,604 $ 2,640 $ 999 $ ( 10,223 ) Net (loss) income per share: Basic $ ( 1.54 ) $ 0.24 $ 0.24 $ 0.11 $ ( 0.95 ) Diluted $ ( 1.54 ) $ 0.24 $ 0.24 $ 0.11 $ ( 0.95 ) Weighted-average shares outstanding: Basic 10,712 10,759 10,791 10,812 10,766 Diluted 10,712 10,770 10,803 10,823 10,766 69 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 1, 2023 First Quarter Second Quarter Third Quarter Fourth Quarter Fiscal Year Revenues $ 68,542 $ 74,089 $ 78,508 $ 77,283 $ 298,422 Gross Profit $ 23,431 $ 25,059 $ 28,000 $ 27,058 $ 103,548 Income from continuing operations $ 2,008 $ 3,184 $ 4,652 $ 1,417 $ 11,261 Income (loss) from discontinued operations, net of tax $ 13,792 $ ( 7 ) $ — $ 315 $ 14,100 Net income $ 15,800 $ 3,177 $ 4,652 $ 1,732 $ 25,361 Net income per share - basic: Income from continuing operations $ 0.19 $ 0.31 $ 0.44 $ 0.14 $ 1.08 Income from discontinued operations 0.12 — — — 0.12 Gain on sale 1.65 — — 0.04 1.69 Income tax expense ( 0.45 ) — — ( 0.01 ) ( 0.46 ) Net income per share - basic $ 1.51 $ 0.31 $ 0.44 $ 0.17 $ 2.43 Net income per share - diluted: Income from continuing operations $ 0.19 $ 0.30 $ 0.44 $ 0.14 $ 1.07 Income from discontinued operations 0.12 — — — 0.12 Gain on sale 1.66 — — 0.03 1.69 Income tax expense ( 0.45 ) — — ( 0.01 ) ( 0.46 ) Net income per share - diluted $ 1.52 $ 0.30 $ 0.44 $ 0.16 $ 2.42 Weighted-average shares outstanding: Basic 10,429 10,472 10,492 10,501 10,427 Diluted 10,485 10,514 10,533 10,544 10,473 70 BGSF, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 21 - SUBSEQUENT EVENTS Dividend On February 7, 2024, 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 February 27, 2024 to all shareholders of record as of the close of business on February 20, 2024. Credit Agreement On March 12, 2024, the Credit Agreement was amended and restated through the Company’s entry into an Amended and Restated Credit Agreement with certain lenders, BMO Bank, N.A., as administrative agent, letter of credit Issuer, and swing line lender, and BMO Capital Markets Corp., as sole lead arranger and sole book runner. The Amended and Restated Credit Agreement has a maturity date of March 12, 2028. The Amended and Restated Credit Agreement provides for a revolving credit facility permitting us to borrow funds from time to time in an aggregate amount up to $40 million. Term loans with an outstanding principal balance of $34 million were outstanding under the Credit Agreement remain outstanding under the Amended and Restated Credit Agreement. The Amended and Restated Credit Agreement further provides for a delayed draw term loan commitment of $4.3 million. The Company is required to repay the term loans in quarterly principal installments in an amount equal to 2.5% of the aggregate principal balance thereof. The Amended and Restated Credit Agreement provides for interest either at the Base Rate plus the Applicable Margin, or the Adjusted Term SOFR plus the Applicable Margin (in each case, as such terms are defined in the Amended and Restated Credit Agreement). The Amended and Restated Credit Agreement also provides for letter of credit fees and commitment fees as further described therein. The Company’s obligations under the Amended and Restated Credit Amendment are secured by a first priority security interest in substantially all of the Company’s and its Subsidiaries’ tangible and intangible property. The Amended and Restated Credit Agreement provides for a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio (as such terms are defined in the Amended and Restated Credit Amendment), and also provides for, among other items, representations and warranties and affirmative and negative covenants, as described therein. 71 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.