Note 6 - Acquisitions and Divestitures

12 Months Ended

Dec. 30, 2023

Notes to Financial Statements

Business Combination Disclosure [Text Block]

6.    ACQUISITIONS AND DIVESTITURES

The purchase method of accounting in accordance with FASB ASC 805, “Business Combination,” was applied for all acquisitions. This requires the cost of an acquisition to be allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition with the excess cost accounted for as goodwill. Goodwill arising from the acquisitions is attributable to expected sales synergies from combining the operations of the acquired business with those of the Company.

TalentHerder Acquisition

Effective October 2, 2022, the Company acquired the business operations of TalentHerder, LLC, a California limited liability company. TalentHerder is a leading talent acquisition services company.  TalentHerder’s business bridges the gap between in-house and external recruiting, specializing in high-growth companies. It works with clients to help identify and hire top-quality talent across all critical functions, enabling companies to scale teams quickly, efficiently, and cost-effectively. TalentHerder’s proven recruitment processes can help scale both in-person and remote working environments for companies across the globe. The acquisition will bolster the Company’s existing capabilities by expanding its recruitment process outsourcing ("RPO") service footprint, enhancing the Company's candidate sourcing reach, and enabling the Company's in-house recruiting team to respond more rapidly to client needs.

The consideration and estimated fair value of assets acquired and liabilities assumed is as follows:

Cash	$	4,150
Common stock of the Company		631
Contingent consideration, at fair value		1,927
Total consideration	$	6,708

The seller of TalentHerder is eligible to receive post-closing contingent consideration upon the business exceeding certain base levels of operating income, potentially earned over five years.  The amount recorded for the contingent consideration represents the acquisition date fair value of expected consideration to be paid based on TalentHerder’s forecasted operating income during the five year period. Expected consideration was valued based on different possible scenarios for projected operating income.  Each case was assigned a probability which was used to calculate an estimate of the forecasted future payments.  Then a discount rate was applied to these forecasted future payments to determine the acquisition date fair value to be recorded.  The preliminary estimated purchase price has been allocated as follows:

Property and equipment, net	$	5
Customer relationships		910
Goodwill(a)		5,793
Total consideration	$	6,708

(a) The goodwill is expected to be fully deductible for tax purposes over a period of 15 years, except for the portion of contingent consideration which is deductible only when paid.

In the fourth quarter of 2021, the Company remeasured the value of its contingent consideration. The primary driver for remeasuring the contingent consideration was the performance by TKE.  This remeasurement led to a $1.7 million reduction to the contingent consideration liability relating to the TKE acquisition. TKE had high yearly performance targets to achieve earn-out consideration.  Two factors primarily contributed to TKE not hitting its performance targets.  The first was the COVID-19 pandemic which overlapped earn-out years two and three.  TKE had numerous projects in its pipeline that were delayed or eliminated by prospective clients.   The second factor relates to a specific client in earn-out year three.  This client was dissatisfied with the product output, and TKE agreed to fix the equipment. The additional cost caused TKE to miss its earn-out target.  Based on these factors, the Company determined to amend its asset purchase agreement with TKE, whereby TKE could receive maximum contingent consideration of $0.4 million in 2022 and $0.3 million in 2023. TKE earned $0.3 million in 2022, so the Company recorded a remeasurement of contingent consideration for $0.1 million in 2022.

Potential future contingent payments to be made to all active acquisitions after December 30, 2023 are capped at a cumulative maximum of $9.6 million. The Company paid contingent consideration of $0.3 million, $0.1 million and $0.5 million during the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively.

The changes in the liability for contingent consideration from acquisitions for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022 are as follows:

Balance as of January 2, 2021	$	2,858
Contingent payments made		(494	)
Changes in fair value of contingent consideration		52
Remeasurement of contingent consideration		(1,713	)
Balance as of January 1, 2022	$	703
Contingent payments made		(99	)
Remeasurement of contingent consideration		(88	)
Acquisition of TalentHerder		1,926
Balance as of December 31, 2022	$	2,442
Contingent payments - cash		(339	)
Contingent payments - stock		(132	)
Balance as of December 30, 2023	$	1,971

Future Contingent Payments

As of December 30, 2023, the Company had two acquisition agreements whereby additional contingent consideration may be earned by the sellers: 1) effective September 30, 2018, the Company acquired certain assets of Thermal Kinetics Engineering, PLLC and Thermal Kinetics Systems, LLC, and 2) effective October 2, 2022, the Company acquired certain assets of TalentHerder LLC. The Company estimates future contingent payments at December 30, 2023 as follows:

	Total
The four quarters following December 30, 2023	$	300
Thereafter		1,671
Estimated future contingent consideration payments	$	1,971

For acquisitions that involve contingent consideration, the Company records a liability equal to the fair value of the estimated contingent consideration obligation as of the acquisition date. The Company determines the acquisition date fair value of the contingent consideration based on the likelihood of paying the additional consideration. The fair value is estimated using projected future operating results and the corresponding future earn-out payments that can be earned upon the achievement of specified operating objectives and financial results by acquired companies using Level 3 inputs and the amounts are then discounted to present value. These liabilities are measured quarterly at fair value, and any change in the fair value of the contingent consideration liability is recognized in the consolidated statements of operations. During the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recognized in the consolidated statements of operations.

Estimates of future contingent payments are subject to significant judgment and actual payments may materially differ from estimates.  The Company estimates future contingent consideration payments based on forecasted performance and recorded the fair value of those expected payments as of December 30, 2023.  Contingent consideration related to acquisitions is recorded at fair value (level 3) with changes in fair value recorded in other (expense) income, net.

Divestiture of Assets

On July 30, 2021, the Company sold the principal assets and certain liabilities of its Pickering and Kincardine offices in Ontario, Canada.  These two offices were often called Canada Power Systems and principally provided engineering services to two major nuclear power providers in Canada.  The two Canada Power Systems offices were part of a reporting unit within the Company’s Engineering segment.  The Company will continue to offer other engineering services in Canada and similar services in the United States.  The Company evaluated this transaction under ASC 205-20, discontinued operations, and determined it did not meet the requirements to be treated as such.  The transaction netted a gain on sale of assets of $2.4 million for the year ended January 1, 2022.  The purchase agreement provided for a typical indemnity escrow held by an independent escrow agent.  The net proceeds released from the escrow account generated a gain on sale of assets of $0.4 million and $0.2 million for the years ended December 30, 2023, and December 31, 2022, respectively.  For the fiscal year ended January 1, 2022, these two offices generated revenue of $4.9 million.