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BGSF, INC. - Quarter Report: 2016 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
  
FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 25, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                    .
 
Commission File Number: 001-36704
 image0a19.jpg
BG STAFFING, INC. 
(exact name of registrant as specified in its charter)
Delaware
26-0656684
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
5850 Granite Parkway, Suite 730
Plano, Texas 75024
(972) 692-2400
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    þ      No    ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes    þ      No    ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    ¨      No    þ
 
The number of shares outstanding of the registrant’s common stock as of October 31, 2016 was 8,668,485.




TABLE OF CONTENTS

 
 
 
 
 
 
 
 
 

2



Forward-Looking Statements
 
This Quarterly Report on Form-10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:
 
future financial performance and growth targets or expectations;
market and industry trends and developments; and
the benefits of our completed and future merger, acquisition and disposition transactions.

You can identify these and other forward-looking statements by the use of words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” "might," "aims," "scheduled," “will,” “should,” “would,” “could,” “potential,” “future,” “continue,” “ongoing,” “forecast,” “project,” “target” and similar expressions, and variations or negatives of these words.
 
These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and our current expectations, forecasts and assumptions and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:
 
the availability of workers’ compensation insurance coverage at commercially reasonable terms;
the availability of qualified temporary workers;
compliance with federal and state labor and employment laws and regulations and changes in such laws and regulations;
the ability to compete with new competitors and competitors with superior marketing and financial resources;
management team changes;
the favorable resolution of current or future litigation;
the impact of outstanding indebtedness on the ability to fund operations or obtain additional financing;
the ability to leverage the benefits of recent acquisitions and successfully integrate newly acquired operations;
adverse changes in the economic conditions of the industries or markets that we serve;
disturbances in world financial, credit, and stock markets;
unanticipated changes in regulations affecting the company’s business;
a decline in consumer confidence and discretionary spending;
the general performance of the U.S. and global economies;
continued or escalated conflict in the Middle East; and
other risks referenced from time to time in our past and future filings with the Securities and Exchange Commission (“SEC”), including in our Annual Report on Form 10-K for the fiscal year ended December 27, 2015.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.
 
Where You Can Find Other Information
 
Our website is www.bgstaffing.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. These reports and other information, including exhibits filed or furnished therewith, are also available at the SEC’s website at www.sec.gov. You may also obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.

3



PART I—FINANCIAL INFORMATION
Item 1. Financial Statements. 
BG Staffing, Inc. and Subsidiaries
 
UNAUDITED CONSOLIDATED BALANCE SHEETS 
 
 
 
 
September 25,
2016
 
December 27, 2015
ASSETS
 
 
 
 
Current assets
 
 

 
 

 
Accounts receivable (net of allowance for doubtful accounts of $449,823 and $446,548 at 2016 and 2015, respectively)
 
$
35,476,843

 
$
32,324,284

 
Prepaid expenses
 
575,842

 
861,146

 
Other current assets
 
103,623

 
134,170

 
 
Total current assets
 
36,156,308

 
33,319,600

 
 
 
 
 
 
 
Property and equipment, net
 
1,720,923

 
1,489,061

 
 
 
 
 
 
Other assets
 
 

 
 

 
Deposits
 
2,555,334

 
2,233,410

 
Deferred income taxes, net
 
9,513,494

 
8,411,792

 
Intangible assets, net
 
24,935,413

 
29,761,035

 
Goodwill
 
9,184,659

 
9,184,659

 
 
Total other assets
 
46,188,900

 
49,590,896

 
Total assets
 
$
84,066,131

 
$
84,399,557

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 

 
 

 
Accrued interest
 
$
105,277

 
$
627,638

 
Accounts payable
 
1,247,823

 
1,572,195

 
Accrued payroll and expenses
 
12,619,372

 
11,554,868

 
Accrued workers’ compensation
 
732,777

 
788,878

 
Contingent consideration, current portion
 
4,112,194

 
6,856,121

 
Other current liabilities
 
489,195

 
1,459,838

 
Income taxes payable
 
298,250

 
444,165

 
 
Total current liabilities
 
19,604,888

 
23,303,703

 
 
 
 
 
 
 
Line of credit (net of deferred finance fees of $288,818 and $175,524 for 2016 and 2015, respectively)
 
18,969,794

 
16,041,476

Long-term debt (net of deferred finance fees of $-0- and $443,800 for 2016 and 2015, respectively)
 

 
14,607,450

Contingent consideration, less current portion
 
4,914,578

 
4,191,160

Other long-term liabilities
 
286,245

 
327,344

 
Total liabilities
 
43,775,505

 
58,471,133

 
 
 
 
 
 
 
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, 8,668,485 and 7,387,955 shares issued and outstanding for 2016 and 2015, respectively
 
86,685

 
73,880

Additional paid in capital
 
36,081,672

 
20,446,948

Retained earnings
 
4,122,269

 
5,407,596

 
Total stockholders’ equity
 
40,290,626

 
25,928,424

 
Total liabilities and stockholders’ equity
 
$
84,066,131

 
$
84,399,557

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

4



BG Staffing, Inc. and Subsidiaries
 
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
 
For the Thirteen and Thirty-nine Week Periods Ended September 25, 2016 and September 27, 2015
 
 
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
$
67,407,350

 
$
60,170,823

 
$
189,573,350

 
$
150,836,360

Cost of services
 
50,975,462

 
46,315,310

 
144,610,307

 
117,773,906

 
Gross profit
 
16,431,888

 
13,855,513

 
44,963,043

 
33,062,454

Selling, general and administrative expenses
 
10,291,746

 
7,703,447

 
28,668,466

 
20,929,397

Depreciation and amortization
 
1,673,546

 
1,294,137

 
5,181,456

 
3,734,414

 
Operating income
 
4,466,596

 
4,857,929

 
11,113,121


8,398,643

Loss on extinguishment of debt
 

 
(438,507
)
 
(404,119
)
 
(438,507
)
Interest expense, net
 
(701,968
)
 
(660,590
)
 
(3,278,182
)
 
(1,751,083
)
Change in fair value of put option
 

 
(102,821
)
 

 
66,560

 
Income before income taxes
 
3,764,628

 
3,656,011

 
7,430,820

 
6,275,613

Income tax expense
 
1,416,773

 
1,441,333

 
2,852,346

 
2,434,692

 
Net income
 
$
2,347,855

 
$
2,214,678

 
$
4,578,474

 
$
3,840,921

 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 

 
 

 
Basic
 
$
0.27

 
$
0.30

 
$
0.58

 
$
0.55

 
Diluted
 
$
0.26

 
$
0.29

 
$
0.56

 
$
0.53

 
 
 
 
 
 
 
 
 
 
Weighted-average shares outstanding:
 
 

 
 

 
 

 
 

 
Basic
 
8,658,061

 
7,359,632

 
7,920,000

 
6,978,309

 
Diluted
 
9,028,398

 
7,573,530

 
8,219,876

 
7,181,518

 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

5



BG Staffing, Inc. and Subsidiaries 

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Thirty-nine Week Period Ended September 25, 2016
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Preferred
Stock
 
Shares
 
Par
Value
 
Additional Paid in Capital
 
Retained
Earnings
 
Total
Stockholders’ equity, December 27, 2015
 
$

 
7,387,955

 
$
73,880

 
$
20,446,948

 
$
5,407,596

 
$
25,928,424

Share-based compensation
 

 

 

 
252,972

 

 
252,972

Issuance of shares, net of offering costs
 

 
1,191,246

 
11,912

 
15,096,844

 

 
15,108,756

Exercise of common stock options and warrants
 

 
89,284

 
893

 
284,908

 

 
285,801

Cash dividend declared ($0.25 per share)
 

 

 

 

 
(5,863,801
)
 
(5,863,801
)
Net income
 

 

 

 

 
4,578,474

 
4,578,474

Stockholders’ equity, September 25, 2016
 
$

 
8,668,485

 
$
86,685

 
$
36,081,672

 
$
4,122,269

 
$
40,290,626


 The accompanying notes are an integral part of these consolidated financial statements.
 


6



BG Staffing, Inc. and Subsidiaries
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Thirty-nine Week Periods Ended September 25, 2016 and September 27, 2015
 
 
 
 
 
2016
 
2015
Cash flows from operating activities
 
 

 
 

 
Net income
 
$
4,578,474

 
$
3,840,921

 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

 
 
Depreciation
 
355,833

 
232,486

 
 
Amortization
 
4,825,623

 
3,501,928

 
 
Loss on disposal of property and equipment
 
10,192

 
1,380

 
 
Loss on extinguishment of debt, net
 
404,119

 
438,507

 
 
Contingent consideration adjustment
 
24,642

 
(8,688
)
 
 
Amortization of deferred financing fees
 
80,049

 
129,141

 
 
Amortization of debt discounts
 
32,355

 
32,355

 
 
Interest expense on contingent consideration payable
 
1,449,316

 
208,263

 
 
Put option adjustment
 

 
(66,560
)
 
 
Provision for doubtful accounts
 
209,528

 
371,953

 
 
Share-based compensation
 
252,972

 
231,563

 
 
Deferred income taxes
 
(1,101,702
)
 
18,376

 
 
Net changes in operating assets and liabilities, net of effects of acquisitions:
 
 

 
 

 
 
 
Accounts receivable
 
(3,362,087
)
 
(5,706,619
)
 
 
 
Prepaid expenses
 
285,304

 
251,541

 
 
 
Other current assets
 
30,547

 
(343,703
)
 
 
 
Deposits
 
(321,925
)
 
(331,375
)
 
 
 
Accrued interest
 
(291,954
)
 
11,002

 
 
 
Accounts payable
 
(324,372
)
 
125,348

 
 
 
Accrued payroll and expenses
 
1,024,696

 
2,560,233

 
 
 
Accrued workers’ compensation
 
(56,101
)
 
(295,451
)
 
 
 
Other current liabilities
 
(945,382
)
 
(176,998
)
 
 
 
Income taxes payable
 
(7,159
)
 
858,955

 
 
 
Other long-term liabilities
 
(41,398
)
 
10,188

 
 
Net cash provided by operating activities
 
7,111,570

 
5,894,746

 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 

 
 

 
Business acquired, net of cash received
 

 
(8,781,091
)
 
Capital expenditures
 
(618,157
)
 
(510,403
)
 
Proceeds from the sale of property and equipment
 
7,587

 
1,259

 
 
Net cash used in investing activities
 
(610,570
)
 
(9,290,235
)

 The accompanying notes are an integral part of these unaudited consolidated financial statements.

7



BG Staffing, Inc. and Subsidiaries
 
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the Thirty-nine Week Periods ended September 25, 2016 and September 27, 2015
 
 
 
 
 
2016
 
2015
 
 
 
 
 
 
 
 
Cash flows from financing activities
 
 

 
 

 
Net borrowings under line of credit
 
3,041,612

 
4,850,000

 
Proceeds from issuance of long-term debt
 

 
15,000,000

 
Principal payments on long-term debt
 
(15,281,657
)
 
(17,187,500
)
 
Payments of dividends
 
(5,863,801
)
 
(4,645,751
)
 
Net proceeds from issuance of common stock
 
15,254,406

 
7,025,382

 
Contingent consideration paid
 
(3,498,197
)
 
(854,454
)
 
Deferred financing costs
 
(153,363
)
 
(727,356
)
 
 
Net cash (used in) provided by financing activities
 
(6,501,000
)
 
3,460,321

Net change in cash and cash equivalents
 

 
64,832

Cash and cash equivalents, beginning of period
 

 

Cash and cash equivalents, end of period
$

 
$
64,832

 
 
 
 
 
 
 
 
Supplemental cash flow information:
 
 

 
 

 
Cash paid for interest
 
$
2,221,430

 
$
1,144,221

 
Cash paid for taxes, net of refunds
 
$
3,961,226

 
$
1,947,636

Non-cash transactions:
 
 

 
 

 
Retirement of put options
 
$

 
$
1,466,326

 
Leasehold improvements funded by landlord incentives
 
$

 
$
321,450


The accompanying notes are an integral part of these unaudited consolidated financial statements.



8

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 




NOTE 1 - NATURE OF OPERATIONS
 
BG Staffing, Inc. is a provider of temporary staffing services that operates, along with its wholly owned subsidiaries BG Staffing, LLC, B G Staff Services Inc., BG Personnel, LP and BG Finance and Accounting, Inc. (“BGFA”) (collectively, the “Company”), primarily within the United States of America in three industry segments: Multifamily, Professional, and Commercial.
 
The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 18 states, via property management companies responsible for the apartment communities' day to day operations.
 
The Professional segment provides skilled temporary workers on a nationwide basis for information technology ("IT") customer projects, and finance and accounting needs in Texas and Louisiana.

The Commercial segment provides temporary workers primarily to logistics, distribution, and call center customers needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.
 
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended December 27, 2015, included in its Annual Report on Form 10-K.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation
 
The consolidated financial statements include the accounts of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.
 
Fiscal Periods
 
The Company has a 52/53 week fiscal year. Fiscal periods for the consolidated financial statements included herein are as of September 25, 2016 and December 27, 2015, and include the thirteen and thirty-nine week periods ended September 25, 2016 and September 27, 2015.
  
Reclassifications
 
Certain reclassifications have been made to the 2015 financial statements to conform with the 2016 presentation.
 
Management Estimates
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include goodwill, intangible assets and contingent consideration obligations related to acquisitions and put option valuation.
 

9

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



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, contingent consideration and put option liability. The carrying values of cash and cash equivalents, accounts receivables, accounts payable, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of the bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with Texas Capital Bank, National Association (“TCB”) that provides for a revolving credit facility (“Revolving Facility”) and current rates available to the Company for debt with similar terms and risk.

Cash and Cash Equivalents
 
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.

Concentration of Credit Risk
 
Concentration of credit risk is limited due to the Company's diverse customer base and their dispersion across many different industries and geographic locations nationwide. No single customer accounted for more than 10% of the Company’s accounts receivable as of September 25, 2016 and December 27, 2015 or revenue for the thirty-nine week periods ended September 25, 2016 and September 27, 2015. Geographic revenue in excess of 10% of the Company's consolidated revenue was generated in the following areas:     
 
 
Thirty-nine Weeks Ended
 
 
September 25,
2016
 
September 27,
2015
North Carolina
 
10
%
 
12
%
Maryland
 
13
%
 
%
Rhode Island
 
14
%
 
19
%
Texas
 
32
%
 
43
%

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 customers in the normal course of business. Accounts receivable represents unpaid balances due from customers. The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers’ non-payment of balances due to the Company. The Company’s determination of the allowance for uncollectible amounts is based on management’s judgments and assumptions, including general economic conditions, portfolio composition, prior loss experience, evaluation of credit risk related to certain individual customers and the Company’s ongoing examination process. Receivables are written off after they are deemed to be uncollectible after all means of collection have been exhausted. Recoveries of receivables previously written off are recorded when received.

Changes in the allowance for doubtful accounts are as follows:
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
 
September 25, 2016
 
September 27, 2015
 
September 25, 2016
 
September 27, 2015
Beginning balance
 
$
449,823

 
$
812,964

 
$
446,548

 
$
748,187

Provision for doubtful accounts
 
162,612

 
146,291

 
209,528

 
371,953

Amounts written off, net
 
(162,612
)
 
(219,395
)
 
(206,253
)
 
(380,280
)
Ending balance
 
$
449,823

 
$
739,860

 
$
449,823

 
$
739,860

 

10

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



Property and Equipment
 
Property and equipment are stated net of accumulated depreciation and amortization of $1,170,445 and $859,274 at September 25, 2016 and December 27, 2015, respectively.

Long-Lived Assets
 
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 during 2016 and 2015.

Intangible Assets
 
The Company holds intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to five years, based on a pattern in which the economic benefit of the respective intangible asset is realized.
 
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.
 
Goodwill
 
Goodwill is not amortized, but instead is evaluated at the reporting unit level for impairment annually at the end of each fiscal year, or more frequently, if conditions indicate an earlier review is necessary. If the Company has determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, the Company may use a qualitative assessment for the annual impairment test.

Deferred Rent
 
The Company recognizes rental expense on a straight-line basis over the life of the agreement. Deferred rent is recognized as the difference between cash payments and rent expense, including any landlord incentives.

Paid-in-kind Interest

The Company records paid-in-kind interest on a monthly basis to accrued interest. The first month following a quarter, the paid-in-kind accrued interest is reclassed to the related debt principal if not paid.

Deferred Financing Fees
 
Deferred financing charges are amortized on a straight-line basis, which approximates the effective interest method, over the term of the respective loans. Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability.
 
Contingent Consideration

The Company has obligations, to be paid in cash, related to its acquisitions if certain 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 calculation of the fair value of the expected future payments uses a discount rate that approximates the Company's weighted average cost of capital.
 

11

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



Put Option

The Company granted a put option to certain holders of equity in BG Staffing, Inc., which was carried at fair market value in other long-term liabilities in the consolidated balance sheet. Prior to second quarter 2015, the liability was revalued at each balance sheet date at the greater of an adjusted earnings before income taxes, depreciation and amortization method or the fair market value. During third quarter 2015, the liability calculation of fair market value was based on the closing price of the Company's stock. Changes in fair value are recorded as non-cash, non-operating income (expense) in the Company’s consolidated statements of operations. In October 2015, the remaining shares were sold that contained the put right to third parties, which caused the put rights on those shares to expire.
 
Revenue Recognition
 
The Company derives its revenues from three segments: Multifamily, Professional, and Commercial. The Company provides temporary and consultant staffing and permanent placement services. Revenues as presented on the consolidated statements of operations represent services rendered to customers less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalent amounts of reimbursable expenses are included in cost of services.

The Company and its customers enter into agreements that outline the general terms and conditions of the staffing arrangement. Revenue is recognized as services are performed and associated costs have been incurred. 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 workers, (ii) has the discretion to select the workers and establish their price and duties and (iii) bears the risk for services that are not fully paid for by customers.

Temporary and consultant staffing revenues - Temporary and consultant staffing revenues are recognized when the services are rendered by the Company’s temporary workers or consultants. The Company assumes the risk of acceptability of its workers to its customers.

Permanent placement staffing revenues - Permanent placement staffing revenues are recognized when employment candidates accept offers of permanent employment. The Company estimates the effect of permanent placement candidates who do not remain with its customers through the guarantee period (generally 90 days) based on historical experience. Allowances are established to estimate these losses. Fees to customers are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates.
 
Share-Based Compensation
 
The Company recognizes compensation expense in selling, general and administrative expenses over the service period for options 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 earnings 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.


12

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



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:
 
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
 
 
September 25,
2016
 
September 27,
2015
 
September 25,
2016
 
September 27,
2015
Weighted-average number of common shares outstanding:
 
8,658,061

 
7,359,632

 
7,920,000

 
6,978,309

Effect of dilutive securities: 
 
 
 
 
 
 
 
 
 
Stock options 
 
323,313

 
189,074

 
263,915

 
181,810

 
Warrants 
 
47,024

 
24,824

 
35,961

 
21,399

Weighted-average number of diluted common shares outstanding
 
9,028,398

 
7,573,530

 
8,219,876

 
7,181,518

 
 
 
 
 
 
 
 
 
 
 
Stock options 
 
50,000

 
21,042

 
50,000

 
21,042

 
Warrants 
 

 

 

 
77,970

Antidilutive shares
 
50,000

 
21,042

 
50,000

 
99,012


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. 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. The Company recognizes any penalties and interest when necessary as part of selling, general and administrative expenses.
 
When appropriate, we 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. 
 
The Company follows the guidance of Accounting Standards Codification ("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. 

Income tax expense attributable to income from operations for 2016 differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes primarily as a result of state taxes and permanent differences related to share-based compensation.

Income tax expense attributable to income from operations for 2015 differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes primarily as a result of state taxes, permanent differences related to share-based compensation, and the fair value of the put option adjustment.
 
Recent Accounting Pronouncements
 
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 2016-02 Leases, which applies to lease transactions. Under the new guidance, lessees will be required to recognize a lease liability, measured on a discounted basis; and a right-of-use asset, for the lease term. The new guidance is effective for annual and interim periods beginning after December 15, 2018. Early application is permitted for all entities upon issuance. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative

13

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



period presented in the financial statements. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-03, Intangibles - Goodwill and Other, Business Combinations, Consolidation, Derivatives and Hedging, which amends prior guidance by removing their effective dates. The new standard was effective immediately. The Company adopted this ASUs in the first quarter of 2016 on a prospective basis for intangibles and business combinations and retrospective basis for consolidation and derivatives. The adoption of ASU had no impact of the on the consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The new standard will become effective for the Company beginning with the first quarter of 2017, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers, which amends certain aspects of the Board's new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with the adoption of ASU 2014-09, which is effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which provides guidance on how certain transactions are classified in the statement of cash flows. The standard will become effective for annual and interim periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of this accounting guidance will have on the consolidated financial statements.

NOTE 3 - ACQUISITIONS
 
D&W Talent, LLC

On February 23, 2015, the Company acquired substantially all of the assets and assumed certain liabilities of D&W Talent, LLC (“D&W”) for an initial cash consideration paid of $8.5 million and an undiscounted contingent consideration of up to $3.5 million based on the performance of the acquired business for the three years following the date of acquisition. The fair value of the contingent consideration at the acquisition date was estimated at $2.0 million and later adjusted to $3.5 million in November 2015. All contingent consideration was paid by April 24, 2016. The purchase agreement contained a provision for a “true up” of acquired working capital 120 days after the closing date.

The 2015 consolidated statements of operations include the operating results of D&W operations for 13 weeks and 31 weeks from the date of acquisition for the thirteen and thirty-nine week periods ended, respectively, from the date of acquisition. D&W operations contributed approximately $4.6 million and $6.0 million of revenue for the thirteen week periods ended September 25, 2016 and September 27, 2015, respectively, and approximately $14.0 million and $13.8 million of revenue for the thirty-nine week periods ended September 25, 2016 and September 27, 2015, respectively.

Vision Technology Services

On September 28, 2015, the Company acquired substantially all of the assets and assumed certain liabilities of Vision Technology Services, Inc., Vision Technology Services, LLC, and VTS-VM, LLC (collectively, “VTS”) for an initial cash consideration paid of $10.0 million and an undiscounted contingent consideration of up to $10.75 million based on the performance of the acquired business for the three years following the date of acquisition. The fair value of the contingent consideration at the acquisition date was estimated at $7.3 million. The purchase agreement contained a provision for a “true up” of acquired working capital 120 days after the closing date.

The 2015 consolidated statement of operations does not include any operating results of VTS. VTS operations contributed approximately $8.1 million and $25.3 million of revenue for the thirteen and thirty-nine week periods ended September 25, 2016, respectively.

14

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 




Supplemental Unaudited Pro Forma Information

The Company estimates that the revenues and net income for the periods below that would have been reported if the D&W and VTS acquisitions had taken place on the first day of the Company's 2015 fiscal year would be as follows (dollars in thousands, except per share amounts):
 
 
September 27, 2015
 
 
Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
Revenues
 
$
68,657

 
$
179,116

Gross profit
 
$
15,802

 
$
40,133

Net income
 
$
2,338

 
$
4,683

Income per share:
 
 
 
 
Basic
 
$
0.32

 
$
0.67

Diluted
 
$
0.31

 
$
0.65


Pro forma net income includes amortization of identifiable intangible assets, interest expense on additional borrowings on the Revolving Facility at a rate of 3.75% and tax expense of the pro forma adjustments at an effective tax rate of approximately 37.9%.

NOTE 4 - INTANGIBLE ASSETS
 
Intangible assets are stated net of accumulated amortization of $28,784,398 and $23,958,775 at September 25, 2016 and December 27, 2015, respectively. Total amortization expense for the thirteen week periods ended September 25, 2016 and September 27, 2015 was $1,548,914 and $1,197,449, respectively. Total amortization expense for the thirty-nine week periods ended September 25, 2016 and September 27, 2015 was $4,825,623 and $3,501,928, respectively.

NOTE 5 - ACCRUED PAYROLL AND EXPENSES AND CONTINGENT CONSIDERATION
 
Accrued payroll and expenses consist of the following at:
 

September 25,
2016

December 27,
2015
Temporary worker payroll

$
6,567,263


$
5,667,704

Temporary worker payroll related

2,404,292


1,965,931

Accrued bonuses and commissions

1,513,317


1,050,495

Other

2,134,500


2,870,738

 

$
12,619,372


$
11,554,868


The following is a schedule of future estimated contingent consideration payments to various parties as of September 25, 2016
 
Estimated Cash Payment
 
Discount
 
Net
Due date:
 
 
 
 
 
December 2016
$
4,250,000

 
$
(137,806
)
 
$
4,112,194

December 2017
4,250,000

 
(841,496
)
 
3,408,504

December 2018
2,250,000

 
(743,926
)
 
1,506,074

Contingent consideration
$
10,750,000

 
$
(1,723,228
)
 
$
9,026,772



15

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



NOTE 6 - DEBT
 
On August 21, 2015, the Company entered into a credit agreement (the “Credit Agreement”) with TCB. The Credit Agreement provides for the Revolving Facility maturing August 21, 2019 permitting the Company to borrow funds from time to time in an aggregate amount equal to the lesser of the borrowing base amount, which is 85% of eligible accounts, and TCB’s commitment of $25.0 million. The Company's obligations are secured by a first priority security interest in all assets of the Company.

Effective September 21, 2016, pursuant to the terms of the Credit Agreement, the Company obtained an additional $10.0 million in credit commitments from TCB pursuant to a Commitment Increase Agreement, raising TCB's total commitment under the Credit Agreement to $35.0 million. All other terms and conditions of the Credit Agreement remain the same as those in effect prior to the increase.

On August 21, 2015, the Company also entered into a senior subordinated credit agreement (the “Senior Subordinated Credit Agreement”) with Patriot Capital III SBIC, L.P. and Patriot Capital III, L.P. (together, “PC Subordinated Debt”), pursuant to which the foregoing lenders made term loans of $14,250,000 and $750,000, respectively, with a maturity date of February 21, 2020. Interest accrued at a rate of 13% per annum (with at least 10% paid in cash quarterly and the remainder in cash or PIK interest added to the principal amount of the term loans). Prepayment of the loans prior to maturity was subject to an early repayment fee. The Company's obligations were secured by a security interest in all assets of the Company.

Proceeds from the foregoing loan arrangements were used to pay off existing indebtedness of the Company under the Fifth Third Bank senior credit facility described below.

Proceeds from the June 2016 common stock issuance (See Note 9) were used to pay off outstanding amounts under the Senior Subordinated Credit Agreement, $404,119 was recorded as a loss on extinguishment of debt, and a 2% repayment fee was recorded in interest expense in the second quarter 2016.

On January 29, 2014, the Company amended the senior credit facility, which provided for a revolving line of credit of $20.0 million, increased the original principal amount of the term loan facility from $7.1 million to $11.3 million and added $8.0 million of subordinated debt (“Term Loan B”).
 
In connection with the acquisition of the assets of D&W (see Note 3) on February 23, 2015, the Company entered into an amendment with its lenders under senior credit facility to add BGFA as an additional borrower under the agreement and increased the borrowing base amount from 80% to 85% of eligible receivables.

Line of Credit

At September 25, 2016 and December 27, 2015, $19.3 million and $16.2 million, respectively, was outstanding on the Revolving Facility with TCB. Borrowings under the Revolving Facility bear interest equal to (i) Base Rate (the higher of Prime Rate, Federal Funds Rate plus 0.5%, or LIBOR plus 1.0%) plus 0.5% or (ii) LIBOR plus 3.25%. Additionally, the Company pays an unused commitment fee of 0.25% on the unfunded portion of the Revolving Facility.

Borrowings under the Revolving Facility bore interest as follows:
 
 
September 25,
2016
 
December 27,
2015
Base Rate
 
$
5,258,612

4.00
%
 
$
6,217,000

4.00
%
LIBOR
 
14,000,000

3.79
%
 
3,000,000

3.57
%
LIBOR
 

%
 
4,000,000

3.61
%
LIBOR
 

%
 
3,000,000

3.77
%
Total
 
$
19,258,612

 
 
$
16,217,000

 

The Credit Agreement contains, and the Senior Subordinated Credit Agreement contained, customary affirmative covenants as well as negative covenants restricting the ability of the Company and its subsidiaries to, among other things (with certain exceptions): (i) incur indebtedness; (ii) incur liens; (iii) enter into mergers, consolidations, or similar transactions; (iv) pay dividends or make distributions (except for permitted distributions as defined in the agreements); (v) make loans; (vi) dispose of assets; (vii)

16

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



enter into transactions with affiliates; or (viii) change the nature of their business. In addition, the Company must comply with certain financial covenants, including minimum debt service coverage ratio, minimum current ratio and maximum leverage ratio. As of September 25, 2016, the Company was in compliance with these covenants.

NOTE 7 - 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 in the standard 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:
Amounts Recorded at Fair Value 
 
Financial Statement Classification 
 
Fair Value  Hierarchy 
 
September 25,
2016
 
December 27,
2015
Contingent consideration, net
 
Contingent consideration, net - current and long-term
 
Level 3
 
$
9,026,772

 
$
11,047,281


In connection with the acquisition of substantially all of the assets and assumption of certain liabilities of InStaff Holding Corporation and InStaff Personnel, LLC, a wholly owned subsidiary of InStaff Holding Corporation (collectively, “InStaff”), the Company granted a put option to certain holders of equity in BG Staffing, Inc. The liability was transferred from Level 3 to Level 2 during the third quarter 2015 due to an increased active market. In October 2015, the remaining shares were sold that contained the put right to third parties, which caused the put rights on those shares to expire.

NOTE 8 - 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 is not currently a party to any material litigation; however, in the ordinary course of our business the Company is periodically threatened with or named as a defendant in various lawsuits or actions. The principal risks that the Company insures against, subject to and upon the terms and conditions of various insurance policies, are workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses 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.
 

17



NOTE 9 – 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.

In June 2016, the Company issued and sold 1,191,246 shares of common stock, $0.01 par value per share, to various investors in a registered underwritten offering for aggregate gross proceeds of $16,677,444 in cash. The purchase price to the public was $14.00 per share. The newly issued shares constituted approximately 16.1% of the total of issued and outstanding shares of common stock immediately before the initial execution of the Underwriting Agreement. In connection with the closing, the Company incurred $1,568,688 in offering costs. Proceeds were used to pay off existing indebtedness of the Company under the Senior Subordinated Credit Agreement.

NOTE 10 – SHARE-BASED COMPENSATION

Stock Options
 
For the thirteen week periods ended September 25, 2016 and September 27, 2015, the Company recognized $111,134 and $48,564 of compensation cost related to stock option awards, respectively. For the thirty-nine week periods ended September 25, 2016 and September 27, 2015, the Company recognized $252,972 and $225,039 of compensation cost related to stock option awards, respectively. Unamortized stock compensation expense as of September 25, 2016 amounted to $621,379, which is expected to be recognized over the next 2.6 years.
 
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)
Options outstanding at December 27, 2015
775,666

 
$
8.19

 
8.7
 
$
5,246

Granted
50,000

 
$
17.46

 
9.9
 
 
Exercised
(103,055
)
 
$
6.91

 
7.6
 
 
Forfeited / Canceled
(37,000
)
 
$
9.72

 
0.0
 
 
Options outstanding at September 25, 2016
685,611

 
$
8.97

 
8.1
 
$
5,699

 
 
 
 
 
 
 
 
Options exercisable at December 27, 2015
377,666

 
$
7.30

 
8.3
 
$
2,889

Options exercisable at September 25, 2016
374,511

 
$
7.84

 
7.7
 
$
3,535

 
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
Nonvested outstanding at December 27, 2015
 
398,000

 
$
2.34

Nonvested outstanding at September 25, 2016
 
311,100

 
$
2.27


For the thirty-nine week periods ended September 25, 2016, the Company issued 71,374 shares of common stock upon the cashless exercise of 87,655 stock options.

Warrant Activity
 
For the thirteen week periods ended September 25, 2016 and September 27, 2015, the Company did not recognize any compensation cost related to warrants. For the thirty-nine week periods ended September 25, 2016 and September 27, 2015, the Company recognized $-0- and $6,524 of compensation cost related to warrants, respectively. There was no unamortized stock compensation expense to be recognized as of September 25, 2016.
 

18

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



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 Options
(in thousands)
Warrants outstanding at December 27, 2015
133,833

 
$
10.21

 
3.5
 
$
634

Granted
32,250

 
$
16.80

 
4.7
 
 
Exercised
(42,099
)
 
$
11.42

 
3.3
 
 
Warrants outstanding at September 25, 2016
123,984

 
$
11.51

 
3.1
 
$
714

 
 
 
 
 
 
 
 
Warrants exercisable at December 27, 2015
133,833

 
$
10.21

 
3.5
 
$
634

Warrants exercisable at September 25, 2016
91,734

 
$
9.65

 
2.5
 
$
699

 
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
Nonvested outstanding at December 27, 2015
 

 
$

Nonvested outstanding at September 25, 2016
 
32,250

 
$


For the thirty-nine week periods ended September 25, 2016, the Company issued 17,910 shares of common stock upon the cashless exercise of 42,099 warrants.

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.

NOTE 11 - EMPLOYEE BENEFIT PLAN
 
The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees. The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company matches employee contributions 100% up to the first 3% and 50% of the next 2% of an employee’s compensation. The Company contributed $217,103 and $69,405 to the 401(k) Plan for the thirteen week periods ended September 25, 2016 and September 27, 2015, respectively. The Company contributed $622,772 and $187,856 to the 401(k) Plan for the thirty-nine week periods ended September 25, 2016 and September 27, 2015, respectively.

NOTE 12 - BUSINESS SEGMENTS
 
The Company operates within three industry segments: Multifamily, Professional, and Commercial. The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 18 states, via property management companies responsible for the apartment communities' day to day operations. The Professional segment provides skilled temporary workers on a nationwide basis for IT customer projects, and finance and accounting needs in Texas and Louisiana. The Commercial segment provides temporary workers primarily to logistics, distribution, and call center customers needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.

Segment operating income includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (corporate) expenses. Assets of corporate include cash, unallocated prepaid expenses, deferred tax assets, and other assets.


19

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the periods indicated:
 

Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 

September 25, 2016
 
September 27, 2015
 
September 25, 2016
 
September 27, 2015
Revenue:

 

 
 

 
 

 
 

Multifamily

$
18,889,265

 
$
14,073,077

 
$
43,556,297

 
$
31,743,075

Professional

25,821,676

 
22,170,557

 
80,828,787

 
56,738,701

Commercial
 
22,696,409

 
23,927,189

 
65,188,266

 
62,354,584

Total

$
67,407,350

 
$
60,170,823

 
$
189,573,350

 
$
150,836,360

 
 
 
 
 
 
 
 
 
Depreciation:

 

 
 

 
 

 
 

Multifamily

$
17,122

 
$
8,342

 
$
40,577

 
$
36,745

Professional

39,071

 
19,100

 
113,482

 
43,309

Commercial
 
23,018

 
23,460

 
68,447

 
68,608

Corporate

45,421

 
45,786

 
133,327

 
83,824

Total

$
124,632

 
$
96,688

 
$
355,833

 
$
232,486

 
 
 
 
 
 
 
 
 
Amortization:
 
 

 
 

 
 

 
 

Multifamily
 
$

 
$
37,708

 
$
62,848

 
$
113,125

Professional
 
1,454,293

 
1,000,700

 
4,399,296

 
2,848,100

Commercial
 
94,621

 
159,041

 
363,479

 
540,703

Total
 
$
1,548,914

 
$
1,197,449

 
$
4,825,623

 
$
3,501,928

 
 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
 
Multifamily
 
$
3,331,981

 
$
2,405,266

 
$
6,859,318

 
$
4,731,719

Professional
 
1,163,674

 
2,041,230

 
4,737,610

 
3,918,553

Commercial
 
1,364,353

 
1,592,570

 
4,070,037

 
3,658,154

Corporate
 
(1,393,412
)
 
(1,181,137
)
 
(4,553,844
)
 
(3,909,783
)
Total
 
$
4,466,596

 
$
4,857,929

 
$
11,113,121

 
$
8,398,643

 
 
 
 
 
 
 
 
 
Capital expenditures:
 
 
 
 
 
 
 
 
Multifamily
 
$
23,185

 
$
15,219

 
$
119,592

 
$
73,779

Professional
 
73,168

 
88,572

 
82,336

 
142,590

Commercial
 
19,908

 
30,541

 
60,229

 
136,672

Corporate
 
71,194

 
16,075

 
356,000

 
157,362

Total
 
$
187,455

 
$
150,407

 
$
618,157

 
$
510,403


20

BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 



 

September 25,
2016

December 27,
2015
Total Assets:

 


 

Multifamily

$
11,683,042


$
7,394,459

Professional

41,726,601


46,750,518

Commercial
 
20,361,313

 
20,820,483

Corporate

10,295,175


9,434,097

Total

$
84,066,131


$
84,399,557


NOTE 13 - SUBSEQUENT EVENTS
 
On October 19, 2016, the Company's board of directors declared a cash dividend in the amount of $0.25 per share of common stock to be paid on November 7, 2016 to all shareholders of record as of the close of business on October 31, 2016.


21



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
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. Comparative segment revenues and related financial information are discussed herein and are presented in Note 12 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 Annual Report on Form 10-K for the fiscal year ended December 27, 2015, for a description of important factors that could cause actual results to differ from expected results.
 
Overview
 
We are a leading national provider of temporary staffing services and have completed a series of acquisitions including the acquisition of BG Personnel, LP and B G Staff Services Inc. in June 2010, and substantially all of the assets of JNA Staffing, Inc. in December 2010, Extrinsic, LLC in December 2011, American Partners, Inc. in December 2012, InStaff in June 2013, D&W in March 2015 and VTS in October 2015. We operate within three industry segments: Multifamily, Professional, and Commercial. We provide services to customers primarily within the United States of America.
 
The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 18 states, via property management companies responsible for the apartment communities' day to day operations.
 
The Professional segment provides skilled temporary workers on a nationwide basis for information technology ("IT") customer projects, and finance and accounting needs in Texas and Louisiana.

The Commercial segment provides temporary workers primarily to logistics, distribution, and call center customers needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.
 
Results of Operations
 
The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our unaudited consolidated financial statements.
  

22



 
 

Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 
 

September 25, 2016

September 27, 2015
 
September 25, 2016
 
September 27, 2015
 
 

(dollars in thousands)
Revenues

$
67,407

 
$
60,171

 
$
189,573

 
$
150,836

Cost of services

50,975

 
46,315

 
144,610

 
117,774

 
Gross profit

16,432

 
13,856

 
44,963

 
33,062

Selling, general and administrative expenses

10,291

 
7,703

 
28,670

 
20,929

Depreciation and amortization

1,674

 
1,294

 
5,181

 
3,734

 
Operating income

4,467

 
4,859

 
11,112

 
8,399

Loss on extinguishment of debt
 

 
(439
)
 
(404
)
 
(439
)
Interest expense, net

(702
)
 
(661
)
 
(3,278
)
 
(1,751
)
Change in fair value of put option


 
(103
)
 

 
67

 
Income before income tax

3,765

 
3,656

 
7,430

 
6,276

Income tax expense

1,417

 
1,441

 
2,852

 
2,435

 
Net income

$
2,348


$
2,215

 
$
4,578

 
$
3,841

 
 
 
 
 
 
 
 
 
 
Revenues

100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of services

75.6
 %
 
77.0
 %
 
76.3
 %
 
78.1
 %
 
Gross profit

24.4
 %
 
23.0
 %
 
23.7
 %
 
21.9
 %
Selling, general and administrative expenses

15.3
 %
 
12.8
 %
 
15.1
 %
 
13.9
 %
Depreciation and amortization

2.5
 %
 
2.2
 %
 
2.7
 %
 
2.5
 %
 
Operating income

6.6
 %
 
8.1
 %
 
5.9
 %
 
5.6
 %
Loss on extinguishment of debt
 
 %
 
(0.7
)%
 
(0.2
)%
 
(0.3
)%
Interest expense, net

(1.0
)%
 
(1.1
)%
 
(1.7
)%
 
(1.2
)%
Change in fair value of put option

 %
 
(0.2
)%
 
 %
 
 %
 
Income before income tax

5.6
 %
 
6.1
 %
 
3.9
 %
 
4.2
 %
Income tax expense

2.1
 %
 
2.4
 %
 
1.5
 %
 
1.6
 %
 
Net income

3.5
 %
 
3.7
 %
 
2.4
 %
 
2.5
 %

Thirteen Week Fiscal Period Ended September 25, 2016 (Fiscal Quarter 2016) Compared with Thirteen Week Fiscal Period Ended September 27, 2015 (Fiscal Quarter 2015

Revenues:
 
Thirteen Weeks Ended
 
 
 
September 25,
2016
 
September 27,
2015
 
 
 
(dollars in thousands)
Revenues by segment:
 
 

 
 
 
 

 
 
 
Multifamily
 
$
18,889

 
28.0
%
 
$
14,073

 
23.4
%
 
Professional
 
25,822

 
38.3
%
 
22,171

 
36.8
%
 
Commercial
 
22,696

 
33.7
%
 
23,927

 
39.8
%
 
Total Revenues
 
$
67,407

 
100.0
%
 
$
60,171


100.0
%
 
Multifamily Revenues: Multifamily revenues increased approximately $4.8 million (34.2%), due to our continued focus on expansion outside of Texas. Revenue from branches outside of Texas accounted for approximately $4.2 million of the increase and revenue from branches in Texas increased approximately $0.6 million. The increase was due to a 28.8% increase in billed hours and a 4.0% increase in average bill rate.
 
Professional Revenues: Professional revenues increased approximately $3.6 million (16.5%), primarily from the VTS acquisition, which contributed approximately $8.0 million of new revenues. The increase was offset by a decrease of $4.4 million in the remaining segment due to an 18.6% decrease in billed hours and a 1.1% decrease in average bill rate.
 

23



Commercial Revenues: Commercial revenues decreased approximately $1.2 million (5.1%), primarily from branches in Illinois, Wisconsin and Texas. Illinois and Wisconsin locations decreased $0.7 million, Texas branches decreased revenues $0.6 million, and other branches outside of the Midwest increased $0.1 million. The overall revenue decrease was due to a 9.7% decrease in billed hours, offset by a 4.6% increase in average bill rate.

Gross Profit:
 
Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, temporary worker costs, and reimbursable costs.
 
 
 
Thirteen Weeks Ended
 
 
 
September 25,
2016
September 27,
2015
 
 
 
(dollars in thousands)
Gross Profit by segment:
 
 

 
 

 
Multifamily
 
$
7,009

 
$
4,988

 
Professional
 
6,198

 
5,428

 
Commercial
 
3,225

 
3,440

 
Total Gross Profit
 
$
16,432

 
$
13,856


 
 
 
Thirteen Weeks Ended
 
 
 
September 25,
2016
 
September 27,
2015
Gross Profit Percentage by segment:
 
 

 
 

 
Multifamily
 
37.1
%
 
35.4
%
 
Professional
 
24.0
%
 
24.5
%
 
Commercial
 
14.2
%
 
14.4
%
 
Company Gross Profit Percentage
 
24.4
%
 
23.0
%
 
Overall, our gross profit has increased approximately $2.5 million (18.6%) due primarily to the VTS ($2.1 million) acquisition and increased revenues in our Multifamily segment. As a percentage of revenue, gross profit has increased to 24.4% from 23.0% primarily due to higher revenues in our Multifamily and Professional segments.
 
Multifamily Gross Profit: Multifamily gross profit increased approximately $2.0 million (40.5%) mainly due to an increase in revenue. The increase in gross profit percentage of 1.7% was due primarily to 6.2% increase in average spread.
 
Professional Gross Profit: Professional gross profit increased approximately $0.8 million (14.2%) due primarily to the VTS acquisition of $2.1 million with a gross profit of 25.5%. This increase was offset by a decrease in gross profit of $0.8 million with a gross profit percentage decrease of 6.1% in the finance and accounting group due to an 11% decrease in average spread. The IT group decreased gross profit $0.5 million with a gross profit percentage increase of 0.8% due to a 1.2% increase in average spread.

Commercial Gross Profit: Commercial gross profit decreased approximately $0.2 million (6.3%) due to decreased revenue. The decrease in gross profit percentage of 0.2% is primarily due to a 9.7% decrease in billed hours, offset by a 1.7% increase in average spread.
 
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $2.6 million (33.6%) primarily due to the VTS acquisition of $1.1 million, increased headcount, commissions and bonuses, and other cost associated with our growth.
 
Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.4 million (29.4%). The increase in depreciation and amortization is primarily due to Professional segment intangible assets acquired in the VTS acquisition in October 2015.

 Interest Expense, net: Interest expense, net was relatively consistent due to a decrease in the interest of $0.4 million under our debt from the payoff of the subordinated loan balance, which included a 2% repayment fee and the increase in the amortization of contingent consideration discounts of $0.4 million from the VTS acquisition.

24



Income Taxes: Income tax expense decreased approximately 1.7% primarily due to higher taxable income offset by a decrease in the effective rate.

Thirty-nine Week Fiscal Period Ended September 25, 2016 Compared with Thirty-nine Week Fiscal Period Ended September 27, 2015
 
Revenues:
 
Thirty-nine Weeks Ended
 
 
 
September 25,
2016
 
September 27,
2015
 
 
 
(dollars in thousands)
Revenues by segment:
 
 

 
 
 
 

 
 
 
Multifamily
 
$
43,556

 
23.0
%
 
$
31,743

 
21.0
%
 
Professional
 
80,829

 
42.6
%
 
56,739

 
37.6
%
 
Commercial
 
65,188

 
34.4
%
 
62,354

 
41.4
%
 
Total Revenues
 
$
189,573

 
100.0
%
 
$
150,836

 
100.0
%
 
Multifamily Revenues: Multifamily revenues increased approximately $11.8 million (37.2%) due to our continued focus on expansion outside of Texas. Revenue from branches outside of Texas accounted for approximately $10.5 million of the increase and revenue from branches in Texas increased approximately $1.3 million. The increase was due to a 31.3% increase in billed hours and a 4.4% increase in average bill rate.
 
Professional Revenues: Professional revenues increased approximately $24.1 million (42.5%) primarily from the VTS acquisition, which contributed approximately $25.3 million of new revenues. The finance and accounting group increased $0.2 million due to 4.0% increase in billed hours offset by a decrease of 2.0% in average bill rate. These revenue increases were offset by a decrease in the IT group of $1.4 million due to a decrease of 4.1% in average bill rate offset by a 1.4% increase in billed hours.
 
Commercial Revenues: Commercial revenues increased approximately $2.8 million (4.5%) primarily from operations in Texas. Texas branches increased revenues $4.1 million, other branches outside of the Midwest increased $1.9 million, and our Illinois and Wisconsin locations decreased $3.2 million. The overall revenue increase was due to a 0.4% decrease in billed hours and a 4.9% increase in average bill rate.

Gross Profit:
 
Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, temporary worker costs, and reimbursable costs.
 
 
 
Thirty-nine Weeks Ended
 
 
 
September 25,
2016
September 27,
2015
 
 
 
(dollars in thousands)
Gross Profit by segment:
 
 

 
 

 
Multifamily
 
$
16,172

 
$
11,213

 
Professional
 
19,450

 
13,023

 
Commercial
 
9,341

 
8,826

 
Total Gross Profit
 
$
44,963

 
$
33,062



25



 
 
 
Thirty-nine Weeks Ended
 
 
 
September 25,
2016
 
September 27,
2015
Gross Profit Percentage by segment:
 
 

 
 

 
Multifamily
 
37.1
%
 
35.3
%
 
Professional
 
24.1
%
 
23.0
%
 
Commercial
 
14.3
%
 
14.2
%
 
Company Gross Profit Percentage
 
23.7
%
 
21.9
%
 
Overall, our gross profit has increased approximately $11.9 million (36.0%) due primarily to the VTS ($6.4 million) acquisition and increased revenues in our Multifamily and Commercial segments. As a percentage of revenue, gross profit has increased to 23.7% from 21.9% primarily due to a higher percentage of our revenues from our Multifamily and Professional segments.
 
Multifamily Gross Profit: Multifamily gross profit increased approximately $5.0 million (44.2%) mainly due to an increase in revenue. The increase in gross profit percentage of 1.8% was due primarily to 7.4% increase in average spread.
 
Professional Gross Profit: Professional gross profit increased approximately $6.4 million (49.4%) due primarily to the VTS acquisitions of $6.4 million with a gross profit of 25.2% and the IT group of $0.4 million. These increases were offset by a gross profit decrease of $0.4 million with a gross profit percentage decrease of 3.1% in the finance and accounting group due to a 7.5% decrease in average spread.

Commercial Gross Profit: Commercial gross profit increased approximately $0.5 million (5.8%) due to the corresponding increased revenue. The increase in gross profit percentage of 0.1% is primarily due to a 3.2% increase in average spread.
 
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $7.7 million (37.0%) primarily due to the D&W acquisition with $0.1 million and the VTS acquisition with $3.0 million, increased headcount, commissions and bonuses, and other costs associated with our growth.
 
Depreciation and Amortization: Depreciation and amortization charges increased approximately $1.4 million (38.8%). The increase in depreciation and amortization is primarily due to Professional segment intangible assets acquired in the D&W and VTS acquisitions.

Interest Expense, net: Interest expense, net increased approximately $1.5 million (87.2%) primarily due to the increase in the amortization of contingent consideration discounts of $1.2 million from the D&W and VTS acquisitions and an increase in the interest of $0.3 million from the payoff of the subordinated loan balance, which included a 2% repayment fee.
 
Income Taxes: Income tax expense increased approximately $0.4 million primarily due to higher taxable income and a decrease in the effective rate.

Use of Non-GAAP Financial Measures
 
We present Adjusted EBITDA (defined below), a measure that is not in accordance with generally accepted accounting principles (non-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 company management. In addition, certain financial covenants in our Credit Agreement (as defined below) are based on this measure.
  
We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, and other non-cash expenses such as the put option adjustment, loss on extinguishment of debt, 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

26



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 income 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 (loss). 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, 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 on-going operating performance.
 
 

Thirteen Weeks Ended
 
Thirty-nine Weeks Ended
 

September 25,
2016
 
September 27,
2015
 
September 25,
2016
 
September 27,
2015
 

(dollars in thousands)
Net income

$
2,348

 
$
2,215

 
$
4,578

 
$
3,841

Interest expense, net

702

 
661

 
3,278

 
1,751

Income tax expense

1,417

 
1,441

 
2,852

 
2,435

Loss on extinguishment of debt
 

 
439

 
404

 
439

Change in fair value of put option


 
103

 

 
(67
)
Operating income
 
4,467

 
4,859

 
11,112

 
8,399

Depreciation and amortization

1,674

 
1,294

 
5,181

 
3,734

Share-based compensation

111

 
49

 
253

 
232

Adjusted EBITDA

$
6,252

 
$
6,202

 
$
16,546

 
$
12,365


Liquidity and Capital Resources
 
Our working capital requirements are primarily driven by temporary worker payments and customer accounts receivable receipts. Since receipts from customers lag payments to temporary workers, 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 (the “Credit Agreement”) with Texas Capital Bank, National Association (“TCB”) that provides for a revolving credit facility maturing August 21, 2019 (the “Revolving Facility”). Our primary uses of cash are payments to temporary workers, operating expenses, capital expenditures, cash interest, cash taxes, dividends and contingent consideration 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 branches 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.

27



 
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 adversely affected.
 
The Company has an effective Form S-3 shelf registration statement allowing for the offer and sale of up to approximately $34 million of common stock. There is no guarantee that we will be able to consummate any offering on terms we consider acceptable or at all.

A summary of our operating, investing and financing activities are shown in the following table:
 

Thirty-nine Weeks Ended
 

September 25,
2016

September 27,
2015
 

(dollars in thousands)
Net cash provided by operating activities

$
7,112


$
5,895

Net cash used in investing activities

(611
)

(9,290
)
Net cash (used in) provided by financing activities

(6,501
)

3,460

Net change in cash and cash equivalents

$


$
65

 
Operating Activities
 
Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, put option adjustment, 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 the thirty-nine week period ended September 25, 2016, net cash provided by operating activities was $7.1 million an increase of $1.2 million compared with $5.9 million for the corresponding period in 2015. This increase is primarily attributable to the timing of payments on accounts receivables and accrued payroll and expenses.

 Investing Activities
 
Cash used in investing activities consists primarily of cash paid for businesses acquired and capital expenditures.
 
In the thirty-nine week period ended September 25, 2016, we made capital expenditures of $0.6 million mainly related to computer equipment purchased in the ordinary course of business. In the thirty-nine week period ended September 27, 2015, we paid $8.8 million in connection with the D&W acquisition and we made capital expenditures of approximately $0.5 million mainly related to computer equipment purchased in the ordinary course of business and furniture and fixtures related to the new corporate offices.
 
Financing Activities
 
Cash flows from financing activities consisted principally of borrowings and payments under our Revolving Facility, payment of other long-term obligations, stock sales and contingent consideration paid.

For the thirty-nine weeks ended September 25, 2016, we increased our borrowings on our revolving line of credit by $3.0 million and received net proceeds from issuance of common stock of $15.3 million mainly to pay off amounts owing under the Senior Subordinated Credit Agreement of $15.3 million. We also paid $5.9 million in cash dividends on our common stock and $3.5 million of contingent consideration related to the fiscal March 2015 D&W acquisition.
 
For the thirty-nine weeks ended September 27, 2015, we increased our borrowings under our revolving line of credit by $4.9 million and received proceeds from issuance of common stock of $7.0 million mainly to fund the D&W acquisition. We paid $4.6 million in cash dividends on our common stock, we decreased our net debt by $2.2 million using excess cash flows from operations, and we paid $0.9 million of contingent consideration primarily related to the June 2013 InStaff acquisition and the December 2012 acquisition of the American Partners division.


28



Credit Agreements

On August 21, 2015, the Company entered into the Credit Agreement with TCB. The Credit Agreement provides the Revolving Facility permitting the Company to borrow funds from time to time in an aggregate amount equal to the lesser of the borrowing base amount, which is 85% of eligible accounts receivable, and TCB’s commitment of $25.0 million. The Company's obligations are secured by a first priority security interest in all assets of the Company.

Effective September 21, 2016, pursuant to the terms of the Credit Agreement, the Company obtained an additional $10.0 million in credit commitments from TCB pursuant to a Commitment Increase Agreement, raising TCB's total commitment under the Credit Agreement to $35.0 million. All other terms and conditions of the Credit Agreement remain the same as those in effect prior to the increase.

On August 21, 2015, the Company also entered into a senior subordinated credit agreement (the “Senior Subordinated Credit Agreement”) with Patriot Capital III SBIC, L.P. and Patriot Capital III, L.P. (together, “PC Subordinated Debt”), pursuant to which the forgoing lender made term loans of $14,250,000 and $750,000, respectively, with a maturity date of February 21, 2020. The Company's obligations were secured by a security interest in all assets of the Company.

Proceeds from the foregoing loan arrangements were used to pay off existing indebtedness of the Company under the Fifth Third Bank senior credit facility.

Proceeds from the June 2016 common stock issuance were used to pay off outstanding indebtedness under the Senior Subordinated Credit Agreement.

Borrowings under the Revolving Facility bear interest equal to (i) Base Rate (the higher of Prime Rate, Federal Funds Rate plus 0.5%, or LIBOR plus 1.0%) plus 0.5% or (ii) LIBOR plus 3.25%. The PC Subordinated Debt bore interest of 10% paid quarterly plus a compounding deferred interest of 3%. Additionally, the Company pays an unused commitment fee of 0.25% on the unfunded portion of the Revolving Facility.

The Credit Agreement contains customary affirmative covenants as well as negative covenants restricting the ability of the Company and its subsidiaries to, among other things (with certain exceptions): (i) incur indebtedness; (ii) incur liens; (iii) enter into mergers, consolidations, or similar transactions; (iv) pay dividends or make distributions (except for permitted distributions as defined in the agreements); (v) make loans; (vi) dispose of assets; (vii) enter into transactions with affiliates; or (viii) change the nature of their business. In addition, the Company must comply with certain financial covenants, including minimum debt service ratio, minimum current ratio and maximum leverage ratio. As of September 25, 2016, the Company was in compliance with these covenants.

Off-Balance Sheet Arrangements
 
We are not party to any off-balance sheet arrangements.
 
Critical Accounting Policies and Estimates
 
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“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.
 
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 27, 2015 for a more detailed discussion of our critical accounting policies.
 

29



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 27, 2015.
 
JOBS Act
 
The Jumpstart Our Business Startups Act of 2012 provides that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We may elect to delay the adoption of new or revised accounting pronouncements applicable to public and private companies until such pronouncements become mandatory for private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public and private companies.
 
Additionally, as an “emerging growth company,” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404 or (ii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis).
 
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
 
Our Revolving Facility provides available borrowing to us at variable interest rates. Accordingly, future interest rate changes could potentially put us at risk for an adverse impact on future earnings and cash flows.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
 
Changes in Internal Controls Over Financial Reporting
 
For the fiscal quarter ended September 25, 2016, there have been no changes in our internal control over financial reporting identified in connection with the evaluations required by Rule 13a-15(d) or Rule 15d-15(d) under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls
 
Our management, including our CEO and our CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These

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inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
 
PART II—OTHER INFORMATION 
ITEM 1. LEGAL PROCEEDINGS
 
No change from the information provided in ITEM 3. LEGAL PROCEEDINGS included in our Annual Report on Form 10-K for the year ended December 27, 2015
  
ITEM 1A. RISK FACTORS
 
In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the year ended December 27, 2015 (our “2015 Form 10-K”), and filed with the SEC on March 7, 2016. There have been no material changes from the risk factors as previously disclosed in our 2015 Form 10-K. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. of Part I of our 2015 Form 10-K, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Date of Sale
Number of Shares
Exercise Price
July 5, 2016
2,900

$
11.85

July 6, 2016
8,900

$
11.85

July 7, 2016
25,525

$
11.85

July 12, 2016
200

$
4.51

July 13, 2016
2,949

$
6.25

July 13, 2016
1,625

$
11.85

 
42,099

 
All issuances were cashless and made in reliance upon the exemption from registration set forth in Section 4(a)(2) of the Securities Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None. 

ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable. 

ITEM 5. OTHER INFORMATION
 
None. 


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Item 6. Exhibits
 
The following exhibits are filed or furnished with this Quarterly Report on Form 10-Q.
Exhibit
Number
 
Description
 
 
 
3.1
 
Certificate of Incorporation of BG Staffing, Inc. (incorporated by reference from Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-191683) filed on November 4, 2013)
3.2
 
Bylaws of BG Staffing, Inc. (incorporated by reference from Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-191683) filed on November 4, 2013)
4.1
 
Form of Common Stock Certificate (incorporated by reference from Amendment No. 1 to the registrant’s registration statement on Form S-1 (File No. 333-191683) filed on October 28, 2013)
10.1
 
Employment Agreement, entered into August 5, 2016 to be effective as of August 1, 2016, between B G Staff Services, Inc. and Beth Garvey (incorporated by reference from the registrant's Form 8-K filed on August 10, 2016)
10.2
 
Form of Incentive Stock Option Agreement (incorporated by reference from the registrant’s Form 8-K filed on February 12, 2014)
10.3
 
Commitment Increase Agreement, effective as of September 21, 2016, by and among BG Staffing, Inc., BG Personnel, LP, BG Staffing, LLC, B G Staff Services, Inc., and BG Finance and Accounting, Inc.
(incorporated by reference from the registrant's Form 8-K filed on September 23, 2016)
31.1*
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†
 
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS *
 
XBRL Instance Document.
101.SCH *
 
XBRL Taxonomy Extension Schema Document.
101.CAL *
 
XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF *
 
XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB *
 
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE *
 
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
Filed herewith.
 
This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
 

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
BG STAFFING, INC.
 
 
 
 
 
/s/ L. Allen Baker, Jr.
 
Name:
L. Allen Baker, Jr.
 
Title:
President and Chief Executive Officer
 
 
(Principal Executive Officer)
 
 
 
 
 
/s/ Dan Hollenbach
 
Name:
Dan Hollenbach
 
Title:
Chief Financial Officer and Secretary
 
 
(Principal Financial Officer)
 
 
 
Date: October 31, 2016



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