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 March 27, 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

 

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 April 28, 2016 was 7,398,762.

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TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Unaudited Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Income	5
	Unaudited Consolidated Statement of Changes in Stockholders' Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II	OTHER INFORMATION	28
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	29

2

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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.

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PART I—FINANCIAL INFORMATION

Item  1. Financial Statements. 

BG Staffing, Inc. and Subsidiaries

 

UNAUDITED CONSOLIDATED BALANCE SHEETS 

				March 27, 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)			$	30,128,744			$	32,324,284
	Prepaid expenses			863,231				861,146
	Other current assets			203,491				134,170
		Total current assets		31,195,466				33,319,600
Property and equipment, net				1,614,705				1,489,061
Other assets
	Deposits			2,339,743				2,233,410
	Deferred income taxes, net			8,699,932				8,411,792
	Intangible assets, net			28,090,227				29,761,035
	Goodwill			9,184,659				9,184,659
		Total other assets		48,314,561				49,590,896
	Total assets			$	81,124,732			$	84,399,557
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Accrued interest			$	601,839			$	627,638
	Accounts payable			1,014,270				1,572,195
	Accrued payroll and expenses			12,231,374				11,554,868
	Accrued workers’ compensation			953,453				788,878
	Contingent consideration, current portion			5,546,208				6,856,121
	Other current liabilities			513,101				1,459,838
	Income taxes payable			881,671				444,165
		Total current liabilities		21,741,916				23,303,703
Line of credit (net of deferred finance fees of $163,556 and $175,524 for 2016 and 2015, respectively)				14,902,444				16,041,476
Long-term debt (net of deferred finance fees of $420,304 and $443,800 for 2016 and 2015, respectively)				14,746,339				14,607,450
Contingent consideration, less current portion				4,426,842				4,191,160
Other long-term liabilities				321,717				327,344
	Total liabilities			56,139,258				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, 7,393,762 and 7,387,955 shares issued and outstanding for 2016 and 2015, respectively				73,938				73,880
Additional paid in capital				20,517,791				20,446,948
Retained earnings				4,393,745				5,407,596
	Total stockholders’ equity			24,985,474				25,928,424
	Total liabilities and stockholders’ equity			$	81,124,732			$	84,399,557

 

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

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BG Staffing, Inc. and Subsidiaries

 

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

For the Thirteen Week Periods Ended March 27, 2016 and March 29, 2015

 

			Thirteen Weeks Ended
			2016				2015
Revenues			$	59,550,986			$	40,884,144
Cost of services			46,204,356				32,543,122
	Gross profit		13,346,630				8,341,022
Selling, general and administrative expenses			8,902,999				6,348,428
Depreciation and amortization			1,781,470				1,128,593
	Operating income		2,662,161				864,001
Interest expense, net			(1,279,657		)		(531,716		)
Change in fair value of put option			—				(21,089		)
	Income before income taxes		1,382,504				311,196
Income tax expense			549,366				146,960
	Net income		$	833,138			$	164,236
Net income per share:
	Basic		$	0.11			$	0.02
	Diluted		$	0.11			$	0.02
Weighted-average shares outstanding:
	Basic		7,388,536				6,598,145
	Diluted		7,646,726				6,935,949

 

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

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BG Staffing, Inc. and Subsidiaries 

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Thirteen Week Period Ended March 27, 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		—				—			—				70,901				—				70,901
Exercise of common stock options		—				5,807			58				(58		)		—				—
Cash dividend declared ($0.25 per share)		—				—			—				—				(1,846,989		)		(1,846,989		)
Net income		—				—			—				—				833,138				833,138
Stockholders’ equity, March 27, 2016		$	—			7,393,762			$	73,938			$	20,517,791			$	4,393,745			$	24,985,474

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

 

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BG Staffing, Inc. and Subsidiaries

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Thirteen Week Periods Ended March 27, 2016 and March 29, 2015

					2016				2015
Cash flows from operating activities
	Net income				$	833,138			$	164,236
		Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			1,781,470				1,128,593
		Gain on disposal of property and equipment			(7,576		)		—
		Amortization of deferred financing fees			35,463				42,786
		Amortization of debt discounts			10,785				10,785
		Interest expense on earn out payable			542,594				65,346
		Paid-in-kind interest			115,014				121,667
		Put option adjustment			—				21,089
		Provision for doubtful accounts			—				69,756
		Share-based compensation			70,901				59,935
		Deferred income taxes			(288,140		)		(151,165		)
		Net changes in operating assets and liabilities, net of effects of acquisitions:
			Accounts receivable		2,195,540				533,186
			Prepaid expenses		(2,085		)		60,001
			Other current assets		(69,321		)		(30,706		)
			Deposits		(106,332		)		(108,669		)
			Accrued interest		(25,420		)		(113,393		)
			Accounts payable		(557,925		)		(101,659		)
			Accrued payroll and expenses		618,890				443,595
			Accrued workers’ compensation		164,575				(239,729		)
			Other current liabilities		(899,907		)		(1,215		)
			Income taxes payable		437,506				244,525
			Other long-term liabilities		(5,626		)		—
		Net cash provided by operating activities			4,843,544				2,218,964
Cash flows from investing activities
	Business acquired, net of cash received				—				(8,500,000		)
	Capital expenditures				(236,305		)		(198,586		)
	Proceeds from the sale of property and equipment				7,576				—
		Net cash used in investing activities			(228,729		)		(8,698,586		)

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

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BG Staffing, Inc. and Subsidiaries

 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the Thirteen Week Periods ended March 27, 2016 and March 29, 2015

					2016				2015
Cash flows from financing activities
	Net (payments) borrowings under line of credit				(1,151,000		)		8,400,000
	Principal payments on long-term debt				—				(562,500		)
	Payments of dividends				(1,846,989		)		(989,722		)
	Net proceeds from issuance of common stock				—				(5,712		)
	Contingent consideration paid				(1,616,826		)		(318,568		)
	Deferred financing costs				—				(43,876		)
		Net cash (used in) provided by financing activities			(4,614,815		)		6,479,622
Net change in cash and cash equivalents					—				—
Cash and cash equivalents, beginning of period					—				—
Cash and cash equivalents, end of period					$	—			$	—
Supplemental cash flow information:
	Cash paid for interest				$	567,315			$	375,427
	Cash paid for taxes, net of refunds				$	400,000			$	53,600

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

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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 Texas and other 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 costumers 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 generally accepted accounting principles 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 March 27, 2016 and December 27, 2015, and include the thirteen week periods ended March 27, 2016 and March 29, 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 and intangible assets and earn out obligations related to acquisitions and put option valuation.

 

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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 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 March 27, 2016 and December 27, 2015 or revenue for the thirteen week periods ended March 27, 2016 and March 29, 2015. Geographic revenue in excess of 10% of the Company consolidated revenue was generated in the following areas:     

		Thirteen Weeks Ended
		March 27, 2016			March 29, 2015
North Carolina		10	%		13	%
Maryland		14	%		—	%
Rhode Island		15	%		19	%
Texas		36	%		38	%

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
		March 27, 2016				March 29, 2015
Beginning balance		$	446,548			$	748,187
Provision for doubtful accounts		—				69,756
Amounts collected (written off)		3,275				(140,972		)
Ending balance		$	449,823			$	676,971

 

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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 $961,323 and $859,274 at March 27, 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 historically 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.

 

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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 on 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.

 

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. 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.

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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 at:

			Thirteen Weeks Ended
			March 27, 2016			March 29, 2015
Weighted-average number of common shares outstanding:			7,388,536			6,598,145
Effect of dilutive securities:
	Stock options		228,987			237,699
	Warrants		29,203			100,105
Weighted-average number of diluted common shares outstanding			7,646,726			6,935,949

There were no outstanding securities excluded from the calculation of earnings per share as the effect of the assumed exercise would be anti-dilutive.

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 and 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, and permanent differences related to share-based compensation and the fair value of the put option adjustment.

 

Recent Accounting Pronouncements

 

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 impacts the adoption of this accounting guidance will have on the consolidated financial statements.

13

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BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED 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 $2.0 million. 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 4 weeks from the date of acquisition. D&W operations contributed approximately $4.9 million and $2.0 million of revenue for the thirteen weeks period ended March 27, 2016 and March 29, 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 $7.3 million.

The 2015 consolidated statements of operations does not include the operating results of VTS. VTS operations contributed approximately $8.5 million of revenue for the thirteen weeks period ended March 27, 2016.

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):

		Thirteen Weeks Ended
		March 29, 2015
Revenues		$	52,121
Gross profit		$	11,326
Net income		$	576
Income per share:
Basic		$	0.09
Diluted		$	0.08

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 38.6%.

NOTE 4 - INTANGIBLE ASSETS

 

Intangible assets are stated net of accumulated amortization of $25,629,584 and $23,958,775 at March 27, 2016 and December 27, 2015, respectively. Total amortization expense for the thirteen week periods ended March 27, 2016 and March 29, 2015 was $1,670,809 and $1,059,231, respectively.

14

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BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

NOTE 5 - ACCRUED PAYROLL AND EXPENSES AND CONTINGENT CONSIDERATION

 

Accrued payroll and expenses consist of the following at:

		March 27, 2016				December 27, 2015
Temporary worker payable		$	4,968,433			$	4,314,069
Accrued bonuses and commissions		897,227				1,050,495
Payroll and payroll related		4,180,834				3,611,507
Other		2,184,880				2,578,797
		$	12,231,374			$	11,554,868

The following is a schedule of future estimated earn out payments to various parties as of March 27, 2016: 

	Estimated Cash Payment				Discount				Net
Fiscal year ending:
2016	$	5,982,013			$	(435,805	)		$	5,546,208
2017	4,250,000				(1,172,842		)		3,077,158
2018	2,250,000				(900,316		)		1,349,684
Contingent consideration	$	12,482,013			$	(2,508,963	)		$	9,973,050

NOTE 6 - DEBT

 

On August 21, 2015, the Company entered into a credit agreement (the “Credit Agreement”) with Texas Capital Bank, National Association (“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.

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. The Company's obligations are 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.

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”).

 

On December 12, 2014, the Company executed an amendment to the senior credit facility that removed the limitation on the Company to pay dividends while the Term Loan B was outstanding. 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 March 27, 2016 and December 27, 2015, $15.1 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.

15

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BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

Borrowings under the Revolving Facility bore interest as follows:

		March 27, 2016						December 27, 2015
Base Rate		$	5,066,000		4.00	%		$	6,217,000		4.00	%
LIBOR		3,000,000			3.87	%		3,000,000			3.57	%
LIBOR		4,000,000			3.87	%		4,000,000			3.61	%
LIBOR		3,000,000			3.89	%		3,000,000			3.77	%
Total		$	15,066,000					$	16,217,000

The Credit Agreement and the Senior Subordinated Credit Agreement contain 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 coverage ratio, minimum current ratio and maximum leverage ratio. As of March 27, 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

March 27, 2016

December 27, 2015

Contingent consideration, net

Contingent consideration, net - current and long-term

Level 3

$

9,973,050

$

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.

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BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

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.

 

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.

NOTE 10 – SHARE-BASED COMPENSATION

Stock Options

 

For the thirteen week periods ended March 27, 2016 and March 29, 2015, the Company recognized $70,901 and $53,412 of compensation cost related to stock awards, respectively. Unamortized stock compensation expense as of March 27, 2016 amounted to $660,564 which is expected to be recognized over the next 2.8 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
Exercised	(14,000	)		$	7.61			8.2
Options outstanding at March 27, 2016	761,666			$	8.20			8.4		$	3,810
Options exercisable at December 27, 2015	377,666			$	7.30			8.3		$	2,889
Options exercisable at March 27, 2016	415,066			$	7.16			8.0		$	2,507

		Number of Shares			Weighted Average Grant Date Fair Value
Nonvested outstanding at December 27, 2015		398,000			$	2.34
Nonvested outstanding at March 27, 2016		346,600			$	2.24

For the thirteen week periods ended March 27, 2016, the Company issued 5,807 shares of common stock in the form of a cashless exercise from the conversion of 14,000 shares of stock options.

Warrant Activity

 

For the thirteen week periods ended March 27, 2016 and March 29, 2015, the Company recognized $-0- and $6,523 of compensation cost related to warrants, respectively. There was no unamortized stock compensation expense to be recognized as of March 27, 2016. All warrants were vested at March 27, 2016 and December 27, 2015.

 

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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 and exercisable at December 27, 2015	133,833			$	10.21			3.5		$	634
Warrants outstanding and exercisable at March 27, 2016	133,833			$	10.21			3.3		$	610

 

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 $178,638 and $61,474 to the 401(k) Plan in the thirteen week periods ended March 27, 2016 and March 29, 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, via property management companies responsible for the apartment communities' day to day operations. The Professional segment provides temporary workers for IT customer projects and finance and accounting needs. The Commercial segment provides temporary workers primarily to logistics customers needing a flexible workforce.

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.

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

		Thirteen Weeks Ended
		March 27, 2016				March 29, 2015
Revenue:
Multifamily		$	10,736,765			$	7,827,046
Professional		27,642,629				14,457,590
Commercial		21,171,592				18,599,508
Total		$	59,550,986			$	40,884,144
Depreciation:
Multifamily		$	9,744			$	19,440
Professional		37,149				10,890
Commercial		21,939				22,361
Corporate		41,829				16,671
Total		$	110,661			$	69,362

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BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 

		Thirteen Weeks Ended
		March 27, 2016				March 29, 2015
Amortization:
Multifamily		$	37,708			$	37,708
Professional		1,490,710				824,334
Commercial		142,391				197,189
Total		$	1,670,809			$	1,059,231
Operating income:
Multifamily		$	1,464,992			$	911,748
Professional		1,592,035				487,372
Commercial		1,280,086				905,404
Corporate		(1,674,952		)		(1,440,523		)
Total		$	2,662,161			$	864,001
Capital expenditures:
Multifamily		$	18,949			$	54,376
Professional		—				41,467
Commercial		33,321				56,541
Corporate		184,035				46,202
Total		$	236,305			$	198,586

		March 27, 2016				December 27, 2015
Total Assets:
Multifamily		$	6,764,936			$	7,394,459
Professional		$	45,734,310			$	46,750,518
Commercial		18,873,285				20,820,483
Corporate		9,752,201				9,434,097
Total		$	81,124,732			$	84,399,557

NOTE 13 - SUBSEQUENT EVENTS

 

On April 28, 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 May 16, 2016 to all shareholders of record as of the close of business on May 9, 2016.

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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 in 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, 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 Texas and other 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 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.

  

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			Thirteen Weeks Ended
			March 27, 2016				March 29, 2015
			(dollars in thousands)
Revenues			$	59,551			$	40,884
Cost of services			46,204				32,543
	Gross profit		13,347				8,341
Selling, general and administrative expenses			8,904				6,348
Depreciation and amortization			1,781				1,129
	Operating income		2,662				864
Interest expense, net			(1,280		)		(532		)
Change in fair value of put option			—				(21		)
	Income (loss) before income tax		1,382				311
Income tax expense			549				147
	Net income (loss)		$	833			$	164
Revenues			100.0		%		100.0		%
Cost of services			77.6		%		79.6		%
	Gross profit		22.4		%		20.4		%
Selling, general and administrative expenses			15.0		%		15.5		%
Depreciation and amortization			3.0		%		2.8		%
	Operating income		4.5		%		2.1		%
Interest expense, net			(2.1		)%		(1.3		)%
Change in fair value of put option			—		%		(0.1		)%
	Income (loss) before income tax		2.3		%		0.8		%
Income tax expense			0.9		%		0.4		%
	Net income (loss)		1.4		%		0.4		%

Thirteen Week Fiscal Period Ended March 27, 2016 Compared with Thirteen Week Fiscal Period Ended March 29, 2015

 

Revenues:			Thirteen Weeks Ended
			March 27, 2016							March 29, 2015
			(dollars in thousands)
Revenues by segment:
	Multifamily		$	10,737			18.0	%		$	7,827			19.1	%
	Professional		27,643				46.4	%		14,458				35.4	%
	Commercial		21,171				35.6	%		18,599				45.5	%
	Total Revenues		$	59,551			100.0	%		$	40,884			100.0	%

 

Multifamily Revenues: Multifamily revenues increased approximately $2.9 million (37.2%) due to our continued focus on expansion outside of the state of Texas. Revenue from branches outside of Texas accounted for approximately $2.6 million of the increase and revenue from branches in Texas increased approximately $0.3 million. The increase was due to a 31.2% increase in billed hours and a 4.7% increase in average bill rate.

 

Professional Revenues: Professional revenues increased approximately $13.2 million (91.2%) primarily from the D&W and VTS acquisitions, which contributed approximately $2.9 million and $8.5 million, respectively, of new revenues. The remaining increase was due to a 27.0% increase in billed hours offset by a 6.8% decrease in average bill rate.

 

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Commercial Revenues: Commercial revenues increased approximately $2.6 million (13.8%) primarily from operations in Texas. Texas branches increased revenues $2.9 million, other branches outside of the mid-west area increased $0.8 million, and our Illinois and Wisconsin locations decrease $1.2 million. The overall revenue increase was due to a 8.6% increase in billed hours and a 5.1% 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
			March 27, 2016				March 29, 2015
			(dollars in thousands)
Gross Profit by segment:
	Multifamily		$	3,952			$	2,713
	Professional		6,386				3,099
	Commercial		3,009				2,529
	Total Gross Profit		$	13,347			$	8,341

			Thirteen Weeks Ended
			March 27, 2016			March 29, 2015
Gross Profit Percentage by segment:
	Multifamily		36.8	%		34.7	%
	Professional		23.1	%		21.4	%
	Commercial		14.2	%		13.6	%
	Company Gross Profit Percentage		22.4	%		20.4	%

 

Overall, our gross profit has increased approximately $5.0 million (60.0%) due primarily to the D&W ($0.8 million) and VTS ($2.1 million) acquisitions and increased gross profit in our Multifamily and Commercial segments. As a percentage of revenue, gross profit has increased to 22.4% from 20.4% primarily due to higher revenues from our Multifamily and Professional segments.

 

Multifamily Gross Profit: Multifamily gross profit increased approximately $1.2 million (45.7%) mainly due to an increase in revenue. The increase in gross profit percentage of 2.1% was due primarily to 8.8% increase in average spread.

 

Professional Gross Profit: Professional gross profit increased approximately $3.3 million (106.1%) due primarily to the D&W and VTS acquisitions. The increase in gross profit percentage of 1.7% was due primarily to the addition of D&W and VTS business, which have higher gross profit percentages.

Commercial Gross Profit: Commercial gross profit increased approximately $0.5 million (19.0%) due to increased revenue. The increase in gross profit percentage of 0.6% is primarily due to a 4.2% increase in average spread.

 

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $2.6 million (40.2%) primarily due to the D&W acquisition $0.4 million with and the VTS acquisition with $0.9 million, increased commissions and bonuses, and other costs associated with our growth, which were offset by a decrease in transaction costs of $0.2 million.

 

Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.7 million (62.0%). The increase in depreciation and amortization is primarily due to Professional segment intangible assets acquired in the D&W acquisition of $0.2 million and the VTS acquisition of $0.5 million.

Interest Expense, net: Interest expense, net increased approximately $0.7 million (131.7%) primarily due to the increase in the amortization of earn out discounts of $0.5 million from the D&W and VTS acquisitions and an increase in the interest of $0.2 million under our debt from a higher subordinated loan balance.

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Income Taxes: Income tax expense increased approximately $0.4 million primarily due to an increase in taxable income, which was offset by 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 agreements 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 and share-based compensation expense. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an 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.

 

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		Thirteen Weeks Ended
		March 27, 2016				March 29, 2015
		(dollars in thousands)
Net income		$	833			$	164
Interest expense, net		1,280				532
Income tax expense		549				147
Change in fair value of put option		—				21
Operating income		2,662				864
Depreciation and amortization		1,781				1,129
Share-based compensation		71				60
Adjusted EBITDA		$	4,514			$	2,053

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.

 

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 $29 million of common stock, in a twelve month period. 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:

		Thirteen Weeks Ended
		March 27, 2016				March 29, 2015
		(dollars in thousands)
Net cash provided by operating activities		$	4,844			$	2,219
Net cash used in investing activities		(229		)		(8,699		)
Net cash (used in) provided by financing activities		(4,615		)		6,480
Net change in cash and cash equivalents		$	—			$	—

 

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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 earn out payable, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, accounts payable, accrued expenses.

During the thirteen week period ended March 27, 2016, net cash provided by operating activities was $4.8 million compared with $2.2 million for the corresponding period in 2015. This increase is primarily attributable to higher operating earnings and the timing of payments on accounts receivables.

 Investing Activities

 

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

 

In the thirteen week period ended March 27, 2016, we made capital expenditures of $0.2 million mainly related to computer equipment purchased in the ordinary course of business. In the thirteen week period ended March 29, 2015, we paid $8.5 million in connection with the D&W acquisition and we made capital expenditures of approximately $0.2 million mainly related to computer equipment purchased in the ordinary course of business.

 

Financing Activities

 

Cash flows from financing activities consisted principally of borrowings and payments under our Revolving Facility, payment of other long-term obligations and contingent consideration paid.

For the thirteen weeks ended March 27, 2016, we decreased our borrowings on our revolving line of credit by $1.2 million; we paid $1.8 million in cash dividends on our common stock, and paid $1.6 million of contingent consideration related to the March 2015 acquisition of D&W.

 

For the thirteen weeks ended March 29, 2015, we increased our borrowings under our revolving line of credit by $8.4 million mainly to fund the D&W acquisition. We paid $1.0 million in cash dividends on our common stock, we decreased our long-term debt and other long-term liabilities by $0.6 million using excess cash flows from operations, and we paid $0.3 million of contingent consideration primarily related to the December 2012 acquisition of American Partners division.

Credit Agreement   

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.

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 are 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.

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 bears 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.

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The Credit Agreement and the Senior Subordinated Credit Agreement contain 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 March 27, 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 filed with the SEC on March 7, 2016 for a more detailed discussion of our critical accounting policies.

 

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 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.

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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 quarter ended March 27, 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 Chief Executive Officer and our Chief Financial Officer, 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 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.

 

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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

None. 

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
10.1		Executive Employment Agreement, entered into January 26, 2016 to be effective as of December 28, 2015, between B G Staff Services, Inc. and L. Allen Baker, Jr. (incorporated by reference from registrant’s Form 8-K filed February 1, 2016)
10.2		Second Amendment to Asset Purchase Agreement, dated as of March 9, 2016, among BG Finance and Accounting, Inc., D&W Talent, LLC and Willis Group, LLC (incorporated by reference from Amendment No. 1 to the registrant's Annual Report on Form 10-K filed on April 25, 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: April 28, 2016

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