BGSF, INC.

Previous wording

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 31, 2023. 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 31, 2023, for a description of important factors that could cause actual results to differ from expected results.

Current wording

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 29, 2024. Comparative segment revenues and related financial information are discussed herein and are presented in Note 13 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 29, 2024, for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance.

Previous wording

On May 8, 2024, we announced that our Board of Directors has initiated a process to evaluate potential strategic alternatives and engaged financial advisors in an endeavor to maximize shareholder value(“Strategic alternatives review”).

Current wording

On May 8, 2024, we announced that our Board of Directors has initiated a process to evaluate potential strategic alternatives and engaged financial advisors in an endeavor to maximize shareholder value (“Strategic alternatives review”). During December 2024, we announced a cost restructuring plan as part of our strategic review process.

Previous wording

Our Property Management segment provides office and maintenance field talent in 39 states and D.C., to property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.

Current wording

Our Property Management segment provides office and maintenance field talent in 38 states and D.C., to property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.

Previous wording

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’ business. Demand for our Property Management workforce solutions typically 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. 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.

Current wording

Our business normally experiences seasonal fluctuations, primarily in the Property Management segment. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our client partners’ business. Demand for our Property Management workforce solutions typically 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. 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.

Previous wording

Property Management Revenues: Property Management revenues decreased approximately $6.2 million (17.1%). The decrease was primarily due to a reduction in billed hours, which was driven by a combination of increased competition in certain markets and lower demand from cost pressures at the property management companies.

Current wording

Property Management Revenues: Property Management revenues decreased approximately $3.6 million (14.9%). The decrease was primarily due to a reduction in billed hours, which was driven by a combination of lower demand from cost pressures at the property management companies and increased competition in certain markets offset by higher permanent placement business.

Previous wording

Professional Revenues: Professional revenues decreased $6.1 million (12.9%). The decrease was primarily due to a decrease in billed hours in the Finance & Accounting division, and clients continuing to delay projects or expand project timelines using less field talent in the IT division. The Professional segment decrease was partially offset by growth in Managed Solutions.

Current wording

Professional Revenues: Professional revenues decreased $1.8 million (4.2%). The decrease was primarily due to a decrease in billed hours in the Finance & Accounting division, due to clients continuing to delay projects or expand project timelines using less field talent in the IT division. The Professional segment decrease was partially offset by growth in Managed Solutions.

Previous wording

Total Company gross profit decreased approximately $5.7 million (18.8%) due to reduced customer demand in both segments. As a percentage of revenue, gross profit decreased to 34.2% from 35.9%, primarily due to the margin decline in Property Management.

Current wording

Total Company gross profit decreased approximately $2.5 million (10.7%) due to reduced customer demand in both segments. As a percentage of revenue, gross profit decreased to 33.1% from 34.1%, primarily due to the margin decline in Property Management.

Previous wording

Property Management Gross Profit: Property Management gross profit decreased approximately $3.5 million (24.7%), The decrease was primarily due to to a reduction in revenue, which was driven by a combination of increased competition in certain markets, lower demand from cost pressures at the property management companies and lower permanent placement business, which has no cost of service.

Current wording

Property Management Gross Profit: Property Management gross profit decreased approximately $1.7 million (19.1%), The decrease was primarily due to to a reduction in revenue, which was driven by a combination of increased competition in certain markets and lower demand from cost pressures at the property management companies offset by higher permanent placement business, which has no cost of service.

Previous wording

Professional Gross Profit: Professional gross profit decreased approximately $2.2 million (13.6%), primarily due to lower revenues. The Professional segment decrease was partially offset by growth in Managed Solutions.

Current wording

Professional Gross Profit: Professional gross profit decreased approximately $0.7 million (5.2%), primarily due to lower revenues. The Finance & Accounting division and the IT division decreases were partially offset by growth in Managed Solutions.

Previous wording

Selling, General and Administrative Expenses: Selling, general and administrative expenses decreased $0.7 million (3.1%), primarily due to expense reduction and cost control efforts in response to the decline in revenues. The components of selling, general and administrative expense are detailed in the following table:

Current wording

Selling, General, and Administrative Expenses: Selling, general, and administrative expenses decreased $2.1 million (10.0%), primarily due to expense reduction and cost control efforts enacted primarily in December 2024 and to smaller effect, with additional reduction measures taken March of 2025 in response to the decline in revenues. The components of selling, general, and administrative expense are detailed in the following table:

Previous wording

Depreciation and Amortization: Depreciation and amortization charges decreased $0.1 million (6.9%) primarily due to lower amortization of intangible assets related to the 2023 Arroyo Consulting acquisition.

Current wording

Depreciation and Amortization: Depreciation and amortization charges decreased $0.3 million (16.7%) primarily due to lower amortization of intangible assets related to the 2022 Horn Solutions acquisition that were fully amortized during 2024.

Previous wording

Interest Expense, net: Interest expense, net decreased $0.5 million (26.9%) primarily due to lower average balance on the Revolving Facility and reduced accretion in 2024 on contingent consideration associated with the 2023 Arroyo Consulting acquisition.

Current wording

Interest Expense, net: Interest expense, net decreased $0.1 million (7.2%) primarily due to lower average balance on the Revolving Facility.

Previous wording

We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, impairment losses, costs associated with the evaluation of potential strategic alternatives (“Strategic alternatives review”), transaction fees, and certain non-cash expenses such as 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 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 (loss) income from 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.

Current wording

We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, impairment losses, costs associated with the Strategic alternatives review, transaction fees, software as a service costs, and certain non-cash expenses such as 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 equipment and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an 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 loss from 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.

Previous wording

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 (loss) income. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from 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.

Current wording

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 loss. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from 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.

Previous wording

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 (loss) income, 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 (loss) 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.

Current wording

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 loss, 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 loss 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.

Previous wording

Cash provided by operating activities consists of net (loss) income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense, provision for credit losses, impairment losses, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, accrued payroll and expenses, and other current assets.

Current wording

Cash provided by operating activities consists of net loss adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense, provision for credit losses, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable and accounts payable.

Previous wording

During Fiscal 2024, net cash provided by operating activities was $21.2 million, an increase of $6.2 million compared with net cash provided by operating activities of $15.1 million for Fiscal 2023. The increase is primarily due to increased payments on accounts receivable, decreased payments on accrued payroll and expenses, and within other current assets there were payments made in 2024 related to the 2023 Arroyo Consulting acquisition which were partially offset by payments received in 2023 related to sale of the Light Industrial segment.

Current wording

During Fiscal 2025, net cash provided by operating activities was $1.1 million, a decrease of $6.3 million compared with net cash provided by operating activities of $7.4 million for Fiscal 2024. The decrease is primarily due to decreased receipts on accounts receivable and decreased payments on accounts payable.

Previous wording

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

Current wording

Cash used in investing activities consists primarily of capital expenditures.

Previous wording

In Fiscal 2024, we made capital expenditures of $1.4 million primarily related to continued IT improvements. In Fiscal 2023, we paid $6.8 million for the acquisition of Arroyo Consulting and we made capital expenditures of $2.0 million mainly related to the continued IT improvements.

Current wording

In Fiscal 2025, capital expenditure were flat. In Fiscal 2024, we made capital expenditures of $0.5 million primarily related to the continued IT improvements.

Previous wording

For Fiscal 2024, we reduced our Revolving Facility $17.2 million, we made a payment of $4.3 million of contingent consideration related to the Arroyo Consulting Acquisition, we disbursed $1.6 million in cash dividends on our common stock, and we paid down $0.9 million on the Term Loan. For Fiscal 2023, we disbursed $4.9 million in cash dividends on our common stock, we paid down $5.0 million on the Term Loan, we made payments of $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed $4.3 million on our Revolving Facility for increased operating needs.

Current wording

For Fiscal 2025, we borrowed $1.6 million on our Revolving Facility for increased operating needs and we paid down $1.0 million on the Term Loan. For Fiscal 2024, we reduced our Revolving Facility $4.9 million for decreased operating needs and we disbursed $1.6 million in cash dividends on our common stock.

Previous wording

On November 6, 2024, we entered into the First Amendment to Amended and Restated Credit Agreement, maturing December 31, 2026, led by BMO as administrative agent, letter of credit issuer, and swing line lender (the “First Credit Amendment”). The availability on the Revolving Facility, which permits us to borrow funds from time to time, was reduced in an aggregate amount up to $20 million. We are required to repay the Term Loan in quarterly principal installments equal to 2.5% of the aggregate principal balance. The First Credit Amendment provides for interest either at the Base Rate plus the Applicable Margin, or the Adjusted Term SOFR plus the Applicable Margin (as defined in the First Credit Amendment). Our obligations are secured by a first priority security interest in substantially all our tangible and intangible property. The First Credit Amendment provides for an amended financial covenants with a maximum Leverage Ratio, a minimum Fixed Charge Coverage Ratio, and a minimum EBITDA (as such terms are defined in the First Credit Amendment). We will pay an unused commitment fee on the daily average unused amount of Revolving Facility. We were in compliance with the affirmative and negative covenants as of September 29, 2024.

Current wording

On November 6, 2024, we entered into the First Amendment to Restated Agreement, maturing December 31, 2026, led by BMO as administrative agent, letter of credit issuer, and swing line lender (the “First Credit Amendment”). The availability on the Revolving Facility, which permits us to borrow funds from time to time, was reduced in an aggregate amount up to $20 million. We are required to repay the Term Loan in quarterly principal installments equal to 2.5% of the aggregate principal balance. The First Credit Amendment provides for interest either at the Base Rate plus the Applicable Margin, or the Adjusted Term SOFR plus the Applicable Margin (as defined in the First Credit Amendment). Our obligations are secured by a first priority security interest in substantially all our tangible and intangible property. The First Credit Amendment provides for an amended financial covenants with a maximum Leverage Ratio, a minimum Fixed Charge Coverage Ratio, and a minimum EBITDA (as such terms are defined in the First Credit Amendment). We will pay an unused commitment fee on the daily average unused amount of Revolving Facility.

Previous wording

In March 2020, in conjunction with the EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expires February 12, 2028, for purposes of protecting a lessor against default on lease payments. As of September 29, 2024 and December 31, 2023, 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.

Current wording

In conjunction with the EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expired, for purposes of protecting a lessor against default on lease payments. As of December 29, 2024, we had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which was considered usage against our Revolving Facility.

Previous wording

We derive our revenues from operations in our Property Management and Professional segments. We provide workforce solutions, placement services, and managed 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. We recognize revenue through the following types of services: workforce solutions, contingent placements, retained search placements, and managed services.

Current wording

We derive our revenues from operations in our Property Management and Professional segments. We provide workforce solutions, placement services, and managed 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. We recognize revenue through the following types of services: workforce solutions, contingent placements, and managed services.

Previous wording

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. 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.

Current wording

We hold 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. We develop and implement software modifications to our IT infrastructure with direct internal payroll costs and external costs capitalized. Minor upgrades and enhancements to software systems are expensed in the period incurred as software maintenance and training costs.

Previous wording

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. 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. When appropriate, we will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. We follow the guidance of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes.

Current wording

The current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for the year. We recognize any penalties when necessary as part of selling, general, and administrative expenses. 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. When appropriate, we will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. We follow the guidance of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes.