This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our accompanying Unaudited Consolidated Financial Statements and related notes thereto and our Annual Report on Form 10-K for the fiscal year ended
December 26, 2021. Comparative segment revenues and related financial information are discussed herein and are presented in Note 14 to our Unaudited Consolidated Financial Statements. See "Forward Looking Statements" on page 3 of this report and "Risk Factors" included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 26, 2021, for a description of important factors that could cause actual results to differ from expected results. Please also refer to Note 4- Discontinued Operation, and to our unaudited consolidated financial statements.
Our historical financial information may not be indicative of our future
We are a leading national provider of professional workforce solutions and have completed a series of acquisitions including the acquisition of
BG Personnel, LPand B G Staff Services Inc.in June 2010, substantially all of the assets of JNA Staffing, Inc.in December 2010, Extrinsic, LLCin December 2011, American Partners, Inc.in December 2012, InStaffin June 2013, D&W in March 2015, VTS October 2015, Zycron, in April 2017, Smart in September 2017, and LJK in December 2019, 100% of the equity of EdgeRock in February 2020, and substantially all of the assets of Momentum Solutionz in February 2021. We have continuing operations in two industry segments: Real Estate and Professional, and discontinued operations in the Light Industrialsegment (see Note 4, and our unaudited consolidated financial statements). We provide workforce solutions to client partners primarily within the United States of America. We currently operate across 46 states and D.C. On March 21, 2022, we completed the sale of substantially all our Light Industrialsegment, ("InStaff") assets to Jobandtalent("J&T"), through their wholly-owned subsidiary, Sentech Engineering Services, Inc.We received approximately $30.3 millionat the closing of the sale, and, subject to the terms of the Asset Purchase Agreement, will receive an additional $2 millionon the first anniversary of the closing of the transaction. We have classified the related assets and liabilities associated with our Light Industrialsegment, InStaff, as discontinued operations in our Consolidated Balance Sheets. The results of InStaffbusiness have been presented as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented. The sale represents a strategic shift in our business that will have a major effect on our operations and financial results. See "Note 4 - Discontinued Operations" of our unaudited consolidated financial statements for information regarding our discontinued operations. Our Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings currently in 34 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent. Our Professional segment provides skilled field talent on a nationwide basis for IT and finance, accounting, legal and human resource client partner projects. Our Professional segment operates through three divisions, IT Consulting, IT Infrastructure & Development, and Finance and Accounting under various trade names including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and Momentum Solutionz. Our business normally experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our client partners' businesses. Demand for our Real Estate workforce solutions increase in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our Light Industrialworkforce solutions increases during the third quarter of the year and peaks in the fourth quarter due to increases in the demand for holiday help. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes. 27 --------------------------------------------------------------------------------
Impact of COVID-19
We continue to observe the impact of the COVID-19 on our consolidated operating results, our candidate and field talent supply chain, and our client partners demand in all segments. We will continue to monitor the situation and may find it necessary, in the future, to take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our team members, field talent, client partners, and stockholders. Results of Operations The following tables summarize key components of our results from continuing operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our unaudited consolidated financial statements. The Fiscal 2021 (as defined below) consolidated statement of operations and comprehensive income includes eight weeks of Momentum operations. Thirteen Weeks Ended March 27, March 28, 2022 2021 (dollars in thousands) Revenues
$ 68,542 $ 49,750Cost of services 45,111 33,535 Gross profit 23,431 16,215 Selling, general and administrative expenses 19,716 15,302 Depreciation and amortization 899 836 Operating income 2,816 77 Interest expense, net (273) (377)
Income (loss) from continuing operations before income taxes 2,542 (300) Income tax (expense) benefit from continuing operations (534) 89 Income (loss) from continuing operations 2,008 (212)
Income from discontinued operations:
Income 1,235 1,156 Gain on sale 17,273 - Income tax expense (4,716) (232) Net income
$ 15,800 $ 712Thirteen Weeks Ended March 27, March 28, 2022 2021 Revenues 100.0 % 100.0 % Cost of services 65.8 % 67.4 % Gross profit 34.2 % 32.6 % Selling, general and administrative expenses 28.8 % 30.8 % Depreciation and amortization 1.3 % 1.7 % Operating income 4.1 % 0.2 % Interest expense, net (0.4) % (0.8) % Income (loss) from continuing operations before income taxes 3.7 % (0.6) % Income tax (expense) benefit from continuing operations (0.8) % 0.2 % Income (loss) from continuing operations 2.9 % (0.4) % 28
Thirteen Week Fiscal Period Ended
Thirteen Week Fiscal Period Ended
Revenues: Thirteen Weeks Ended
March 27, March 28, 20222021 (dollars in thousands)
Revenues by segment: Real Estate
$ 25,91637.8 % $ 18,61337.4 % Professional 42,626 62.2 % 31,137 62.6 % Total Revenues $ 68,542100.0 % $ 49,750100.0 % Real Estate Revenues: Real Estate revenues increased approximately $7.3 million(39.2%). The increase was due to a 25.6% increase in billed hours and a 9.6% increase in average bill rate. Professional Revenues: Professional revenues increased approximately $11.4 million(36.9%), primarily due to the IT Consultingdivision of approximately $8.9 million, the 2021 Momentum acquisition incrementally added $1.2 millionfrom thirteen weeks of revenue in Fiscal 2022 vs. eight weeks in Fiscal 2021, a 37% increase in billed hours, and a slight increase in average bill rate.
Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs. Thirteen Weeks Ended March 27, March 28, 2022 2021 (dollars in thousands) Gross Profit by segment: Real Estate
$ 9,97142.6 % $ 6,86642.3 % Professional 13,460 57.4 % 9,349 57.7 % Total Gross Profit $ 23,431100.0 % $ 16,215100.0 % Thirteen Weeks Ended March 27, March 28, 2022 2021
Gross Profit Percentage by segment:
Real Estate 38.5 % 36.9 % Professional 31.6 % 30.0 % Company Gross Profit 34.2 % 32.6 % Overall, our gross profit increased approximately
$7.2 million(44.5%). As a percentage of revenue, gross profit has increased to 34.2% from 32.6%, primarily due to higher gross profits from across all segments.
We determine spread as the difference between bill rate and pay rate.
Real Estate Gross Profit: Real Estate gross profit increased approximately
$3.1 million(45.2%) in line with the increase in revenue and an 11.5% increase in average spread. Professional Gross Profit: Professional gross profit increased approximately $4.1 million(44.0%) primarily due to the IT Consultingdivision of approximately $3.0 million, the 2021 Momentum acquisition incrementally added $0.6 millionfrom thirteen weeks of revenue in Fiscal 2022 vs. eight weeks in Fiscal 2021, and overall increase in gross profit was affected by a 3.1% increase in average spread. 29 -------------------------------------------------------------------------------- Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $4.4 million(28.8%), primarily due to additional compensation generated from increased overall gross profit and from the Momentum acquisition with thirteen weeks of operations in Fiscal 2022 vs. eight weeks in Fiscal 2021. The components of selling, general and administrative expense are detailed in the following table: Thirteen Weeks Ended March 27, March 28, 2022 2021 $ % Amount % of Revenue Amount % of Revenue Change Change (dollars in thousands) Compensation and related $ 15,23622 % $ 11,65923 % $ 3,57731 % Advertising and recruitment 483 1 % 358 1 % 125 35 % Occupancy and office operations 797 1 % 812 2 % (15) (2) % Client engagement 189 - % 29 - % 160 552 % Software 1,115 2 % 603 1 % 512 85 % Professional fees 421 1 % 436 1 % (15) (3) % Public company related costs 173 - % 192 - % (19) (10) % Bad debt 51 - % 34 - % 17 50 % Share-based compensation 211 - % 221 - % (10) (5) % Transaction fees - - % 136 - % (136) (100) % IT roadmap 365 1 % 422 1 % (58) (14) % Other 674 1 % 401 1 % 274 68 % Total $ 19,71629 % $ 15,30231 % $ 4,41229 % Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.1 million(7.5%). The increase in depreciation and amortization is primarily due to the information technology improvement project. Interest Expense, net: Interest expense, net decreased primarily due to the gain from the cancellation of the interest rate swap arrangement that was partially offset by increases to amortization on the deferred finance costs from the pay down of the balance on the exiting Term Loan and a portion of the Revolving Facility, and a higher average balance on the Revolving Facility. Income Tax (Expense) Benefit: Income tax (expense) benefit increased primarily due to higher state taxes, offset by a higher Work Opportunity Tax Credit in Fiscal 2022.
Use of Non-GAAP Financial Measures
We present Adjusted EBITDA (defined below), a measure that is not in accordance with accounting principles generally accepted in
the United States of America("GAAP"), in this Quarterly Report to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for our management. In addition, the financial covenants in our credit agreement are based on EBITDA as defined in the credit agreement. We define "Adjusted EBITDA" as earnings before interest expense, income taxes, depreciation and amortization expense, intangible impairment losses, transaction fees, and the non-capital information technology project ("IT roadmap") and certain non-cash expenses such as the gain on contingent consideration and share-based compensation expense. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors' ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an 30 -------------------------------------------------------------------------------- important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income or income (loss) from continuing operations for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness. To properly and prudently evaluate our business, we encourage you to review our unaudited consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from net income or income (loss) from continuing operations the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect ongoing operating performance. Trailing Twelve Thirteen Weeks Ended Months Ended March 27, March 28, March 27, 2022 2021 2022 (dollars in thousands) Income (loss) from continuing operations $ 2,008 $ (212) $ 12,677Income tax expense (benefit) from continuing operations 534 (89) 3,262 Interest expense, net 274 377 1,330 Operating income 2,816 76 17,269 CARES Act credit - - (2,084) Depreciation and amortization 899 836 3,761 Gain on contingent consideration - - (2,403) Share-based compensation 211 221 1,049 Transaction fees - 136 35 Adjusted EBITDA from continuing operations 3,926 1,269 17,627 Adjusted EBITDA from discontinued operations, net of gain 985 1,194 4,504 Adjusted EBITDA, net of gain $ 4,911 $ 2,463 $ 22,131
Liquidity and Capital Resources
Our working capital requirements are primarily driven by field talent payments, tax payments and client partner accounts receivable receipts. Since receipts from client partners lag payments to field talent, working capital requirements increase substantially in periods of growth. Our primary sources of liquidity are cash generated from operations and borrowings under our credit agreement with
BMO Harris Bank, N.A. ("BMO"), that provides for a revolving credit facility maturing July 16, 2024(the "Revolving Facility"). Our primary uses of cash are payments to field talent, team members, related payroll liabilities, operating expenses, capital 31 -------------------------------------------------------------------------------- expenditures, cash interest, cash taxes, dividends, and contingent consideration and debt payments. We believe that the cash generated from operations, together with the borrowing availability under our Revolving Facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new markets throughout the next year. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to obtain additional debt or equity capital or refinance all or a portion of our debt.
While we believe we have sufficient liquidity and capital resources to meet our
current operating requirements and expansion plans, we may elect to pursue
additional growth opportunities within the next year that could require
additional debt or equity financing. If we are unable to secure additional
financing at favorable terms in order to pursue such additional growth
opportunities, our ability to pursue such opportunities could be materially
The Company has an effective Form S-3 shelf registration statement allowing for the offer and sale of up to approximately
$100 millionof common stock. There is no guarantee that we will be able to consummate any offering on terms we consider acceptable or at all.
During this period of uncertainty of volatility related to COVID-19, we will
continue to monitor our liquidity, particularly payments from our client
A summary of our working capital, operating, investing and financing activities
are shown in the following table:
March 27, December 26, 2022 2021 (dollars in thousands) Working capital from continuing operations
$ 28,276 $ 25,851Thirteen Weeks Ended March 27, March 28, 2022 2021 (dollars in thousands)
Net cash provided by (used in) continuing operations:
$ (1,060) $ (1,184)Investing activities 28,263 (4,320) Financing activities (27,963) 2,417 Net change in cash and cash equivalents discontinued operations 648 3,087 Net change in cash and cash equivalents $ (112)$ - Operating Activities Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense on contingent consideration payable, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable and accrued payroll and expenses. During Fiscal 2022, net cash used in continuing operations activities was $1.1 million, a decrease of $0.1 millioncompared with $1.2 millionfor Fiscal 2021. This increase is primarily attributable to payments of deferred employer FICA for the CARES Act in other current liabilities and payments on accrued payroll and expenses, which were partially offset by additional income taxes payable.
Cash used in investing activities consists primarily of cash paid for businesses
acquired and capital expenditures.
In Fiscal 2022, we received
$30.3 millionin connection to the sale of InStaffand we made capital expenditures of $2.1 millionmainly related to the IT roadmap and for software and computer equipment purchased in the ordinary course of business. In Fiscal 2021, we paid $3.8 millionin connection with the Momentum acquisition and we made capital expenditures 32 --------------------------------------------------------------------------------
the ordinary course of business and for the IT roadmap.
Cash flows from financing activities consisted principally of borrowings and
payments under our credit agreement and payment of dividends.
For Fiscal 2022, we paid down
$26.9 millionon the Term Loan, as discussed below, we paid $1.6 millionin cash dividends on our common stock, we paid $1.1 millionof contingent consideration related to the Momentum acquisition, and borrowed $1.4 millionon our Revolving Facility for increased working capital needs. For Fiscal 2021, we borrowed $3.8 millionon our Revolving Facility, and paid $1.0 millionin cash dividends on our common stock, and paid down $0.4 millionon the Term Loan.
July 16, 2019, we entered into a Credit Agreement (the "Credit Agreement"), maturing July 16, 2024, with BMO, as led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for a Revolving Facility permitting us to borrow funds from time to time in an aggregate amount up to $35 million. The Credit Agreement also provided for a term loan commitment (the "Term Loan") permitting us to borrow funds from time to time in an aggregate amount not to exceed $30 millionwith principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded. We may from time to time, with a maximum of two, request an increase in the aggregate Term Loan commitment by $40 million, with minimum increases of $10 million. Our obligations under the Credit Agreement are secured by a first priority security interest in substantially all our tangible and intangible property. The Credit Agreement bears interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Credit Agreement). We also pay an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan. The Credit Agreement contains customary affirmative covenants and negative covenants. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement. The Company was in compliance with these covenants as of March 27, 2022. On February 8, 2021, the Company borrowed $3.8 millionon the Revolving Facility in conjunction with the closing of the Momentum acquisition. On March 21, 2022, the Company paid down the balance on the existing Term Loan and a portion of the Revolving Facility using the proceeds from the sale of the Light industrial segment (See Note 4).
Off-Balance Sheet Arrangements
Letter of Credit
March 2020, in conjunction with the 2020 EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of March 27, 2022, we had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which is considered usage against our Revolving Facility.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. 33 -------------------------------------------------------------------------------- Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Consolidated Financial Statements included in "Item 1. Financial Statements." Please also refer to our Annual Report on Form 10-K for the fiscal year ended
December 26, 2021for a more detailed discussion of our critical accounting policies. We have classified the related assets and liabilities associated with our Light Industrialsegment, InStaff, as discontinued operations in our Consolidated Balance Sheets. The results of InStaffbusiness have been presented as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented. The sale represents a strategic shift in our business that will have a major effect on our operations and financial results. See "Note 4 - Discontinued Operations" for additional information. The COVID-19 pandemic continues to have a significant impact on our economy as a result of measures designed to stop the spread of the virus. In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. As COVID-19 continues to develop, management may make changes to these estimates and judgments over time, which could result in meaningful impacts to our financial statements in future periods. Actual results and outcomes may differ from management's estimates and assumptions. Revenue Recognition We derive our revenues from continuing operations in Real Estate and Professional segments. We provide workforce solutions and placement services. Revenues are recognized when promised workforce solutions are delivered to client partners, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations and comprehensive income represent workforce solutions rendered to client partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services. We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified field talent, (ii) have the discretion to select the field talent and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client partners. Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which we have a right to invoice, when the services are rendered by our field talent. Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control transferred to the client partner, usually when employment candidates start their employment. Retained search placement revenues - Any revenues from these workforce solutions are recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services, which is less than 1% of consolidated revenues. We estimate the effect of placement candidates who do not remain with our client partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker's annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period. Payment terms in 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 March 27, 2022. There were no revenues recognized during the thirteen week period ended March 27, 2022related 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 March 27, 2022. 34 --------------------------------------------------------------------------------
We hold intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized. Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets are discounted back to their net present value. We capitalize purchased software and internal payroll costs directly incurred in the modification of software for internal use. Software maintenance and training costs are expensed in the period incurred. We evaluate the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset's carrying amount may not be recoverable. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. We annually evaluate the remaining useful lives of all intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization.
Goodwillis 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. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. If we have determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, we may use a qualitative assessment for the annual impairment test. We determined there were no impairment indicators for goodwill assets during Fiscal 2022 or Fiscal 2021
We have obligations, to be paid in cash, related to our acquisitions if certain future operating and financial goals are met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. The fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.
We lease all their office space through operating leases, which expire at various dates through 2025. Many of the lease agreements obligate us to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of our lease arrangements contain renewal provisions from 3 to 10 years, exercisable at our option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We determine if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term. Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Our operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.
We use fair value measurements in areas that include, but are not limited to,
interest rate swap agreements used to mitigate interest rate risk, and the
allocation of purchase price consideration to tangible and identifiable
intangible assets and contingent
35 -------------------------------------------------------------------------------- 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 the revolving credit facility and term loan and current rates available to us for debt with similar terms and risk. The fair value on the interest rate swap is based on quoted prices from BMO.
We recognize compensation expense in selling, general and administrative
expenses over the service period for options or restricted stock that are
expected to vest and records adjustments to compensation expense at the end of
the service period if actual forfeitures differ from original estimates.
The current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for the year. We recognizes any penalties when necessary as part of selling, general and administrative expenses. As of
March 27, 2022, goodwill of $26.4 million, which is limited annually, is expected to be deductible for tax purposes. As a matter of operation, we first calculate 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. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified net as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. As of March 27, 2022, we have a $4.9 millionnet operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date. These net operating losses are subject to an annual Internal Revenue Code Section 382 limitation of $1.3 million. When appropriate, we will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management's judgments regarding future events and past operating results. We follow 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. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 2 in the Notes to the Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and Note 2 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 26, 2021. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to certain market risks from transactions we enter into in the normal course of business. Our primary market risk exposure relates to interest rate risk. Interest Rates
A portion of our Revolving Facility and Term Loan are priced at variable
interest rates. Accordingly, future interest rate increases could potentially
put us at risk for an adverse impact on future earnings and cash flows.
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