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BGSF, INC. - Quarter Report: 2017 March (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 March 26, 2017
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
 image0a20.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
þ
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
þ
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 27, 2017 was 8,739,978.




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 "aim," "potential," “may,” “could,” “would,” “might,” “will,” “expect,” “intend,” “plan,” “budget,” “scheduled,” “estimate,” “anticipate,” “believe,” “forecast,” “future” or “continue” or the negative thereof or similar variations.
 
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, state and local 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 25, 2016.

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 
 
 
 
 
March 26,
2017
 
December 25, 2016
ASSETS
 
 
 
 
Current assets
 
 

 
 

 
Accounts receivable (net of allowance for doubtful accounts of $473,573 at 2017 and 2016)
 
$
31,407,679

 
$
33,328,900

 
Prepaid expenses
 
1,017,667

 
950,696

 
Other current assets
 
152,577

 
154,673

 
 
Total current assets
 
32,577,923

 
34,434,269

 
 
 
 
 
 
 
Property and equipment, net
 
2,098,379

 
1,910,858

 
 
 
 
 
 
Other assets
 
 

 
 

 
Deposits
 
2,697,641

 
2,657,517

 
Deferred income taxes, net
 
9,512,455

 
9,512,455

 
Intangible assets, net
 
22,282,533

 
23,514,376

 
Goodwill
 
9,184,659

 
9,184,659

 
 
Total other assets
 
43,677,288

 
44,869,007

 
Total assets
 
$
78,353,590

 
$
81,214,134

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
Current liabilities
 
 

 
 

 
Accrued interest
 
$
100,379

 
$
100,868

 
Accounts payable
 
1,302,156

 
951,672

 
Accrued payroll and expenses
 
10,422,809

 
9,668,475

 
Accrued workers’ compensation
 
470,536

 
754,556

 
Contingent consideration, current portion
 
3,757,026

 
3,580,561

 
Income taxes payable
 
1,023,170

 
193,264

 
 
Total current liabilities
 
17,076,076

 
15,249,396

 
 
 
 
 
 
 
Line of credit (net of deferred finance fees of $239,721 and $264,520 for 2017 and 2016, respectively)
 
19,665,547

 
23,618,194

Contingent consideration, less current portion
 
1,667,975

 
1,586,324

Other long-term liabilities
 
243,471

 
271,766

 
Total liabilities
 
38,653,069

 
40,725,680

 
 
 
 
 
 
 
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,8,669,308 and 8,668,485 shares issued and outstanding for 2017 and 2016, respectively
 
86,693

 
86,685

Additional paid in capital
 
36,220,243

 
36,142,688

Retained earnings
 
3,393,585

 
4,259,081

 
Total stockholders’ equity
 
39,700,521

 
40,488,454

 
Total liabilities and stockholders’ equity
 
$
78,353,590

 
$
81,214,134

 
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 Week Periods Ended March 26, 2017 and March 27, 2016
 
 
 
 
Thirteen Weeks Ended
 
 
 
2017
 
2016
Revenues
 
$
56,843,687

 
$
59,550,986

Cost of services
 
43,172,453

 
46,204,356

 
Gross profit
 
13,671,234

 
13,346,630

Selling, general and administrative expenses
 
9,606,444

 
8,902,999

Depreciation and amortization
 
1,371,434

 
1,781,470

 
Operating income
 
2,693,356


2,662,161

Interest expense, net
 
(558,619
)
 
(1,279,657
)
 
Income before income taxes
 
2,134,737

 
1,382,504

Income tax expense
 
832,906

 
549,366

 
Net income
 
$
1,301,831

 
$
833,138

 
 
 
 
 
 
Net income per share:
 
 

 
 

 
Basic
 
$
0.15

 
$
0.11

 
Diluted
 
$
0.15

 
$
0.11

 
 
 
 
 
 
Weighted-average shares outstanding:
 
 

 
 

 
Basic
 
8,668,955

 
7,388,536

 
Diluted
 
8,924,419

 
7,646,726

 
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 Thirteen Week Period Ended March 26, 2017
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Preferred
Stock
 
Shares
 
Par
Value
 
Additional Paid in Capital
 
Retained
Earnings
 
Total
Stockholders’ equity, December 25, 2016
 
$

 
8,668,485

 
$
86,685

 
$
36,142,688

 
$
4,259,081

 
$
40,488,454

Share-based compensation
 

 

 

 
77,563

 

 
77,563

Exercise of common stock options
 

 
823

 
8

 
(8
)
 

 

Cash dividend declared ($0.25 per share)
 

 

 

 

 
(2,167,327
)
 
(2,167,327
)
Net income
 

 

 

 

 
1,301,831

 
1,301,831

Stockholders’ equity, March 26, 2017
 
$

 
8,669,308

 
$
86,693

 
$
36,220,243

 
$
3,393,585

 
$
39,700,521


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


6



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

For the Thirteen Week Periods Ended March 26, 2017 and March 27, 2016
 
 
 
 
 
2017
 
2016
Cash flows from operating activities
 
 

 
 

 
Net income
 
$
1,301,831

 
$
833,138

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

 
 

 
 
Depreciation
 
139,591

 
110,661

 
 
Amortization
 
1,231,843

 
1,670,809

 
 
Gain on disposal of property and equipment
 

 
(7,576
)
 
 
Amortization of deferred financing fees
 
24,798

 
35,463

 
 
Amortization of debt discounts
 

 
10,785

 
 
Interest expense on contingent consideration payable
 
258,116

 
542,594

 
 
Paid-in-kind interest
 

 
115,014

 
 
Provision for doubtful accounts
 
4,254

 

 
 
Share-based compensation
 
77,563

 
70,901

 
 
Deferred income taxes
 

 
(288,140
)
 
 
Net changes in operating assets and liabilities, net of effects of acquisitions:
 
 

 
 

 
 
 
Accounts receivable
 
1,916,967

 
2,195,540

 
 
 
Prepaid expenses
 
(66,971
)
 
(2,085
)
 
 
 
Other current assets
 
2,096

 
(69,321
)
 
 
 
Deposits
 
(40,123
)
 
(106,332
)
 
 
 
Accrued interest
 
(489
)
 
(25,420
)
 
 
 
Accounts payable
 
350,484

 
(557,925
)
 
 
 
Accrued payroll and expenses
 
754,333

 
618,890

 
 
 
Accrued workers’ compensation
 
(284,020
)
 
164,575

 
 
 
Other current liabilities
 

 
(899,907
)
 
 
 
Income taxes payable
 
829,905

 
437,506

 
 
 
Other long-term liabilities
 
(28,294
)
 
(5,626
)
 
 
Net cash provided by operating activities
 
6,471,884

 
4,843,544

 
 
 
 
 
 
 
 
Cash flows from investing activities
 
 

 
 

 
Capital expenditures
 
(327,112
)
 
(236,305
)
 
Proceeds from the sale of property and equipment
 

 
7,576

 
 
Net cash used in investing activities
 
(327,112
)
 
(228,729
)
Cash flows from financing activities
 
 

 
 

 
Net payments under line of credit
 
(3,977,445
)
 
(1,151,000
)
 
Payments of dividends
 
(2,167,327
)
 
(1,846,989
)
 
Contingent consideration paid
 

 
(1,616,826
)
 
 
Net cash used in financing activities
 
(6,144,772
)
 
(4,614,815
)
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
 
$
240,845

 
$
567,315

 
Cash paid for taxes, net of refunds
 
$

 
$
400,000


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



7

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. We now have 57 branch offices and 17 on-site locations located across 26 states.
 
The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 23 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.
 
Our business experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our customers’ business. Demand for our Multifamily staffing services increase in the second and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our Commercial staffing services increases during the third quarter of the year and peaks in the fourth quarter. Demand for our Commercial staffing services is lower during the first quarter, in part due to customer shutdowns and adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.
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 25, 2016, 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 26, 2017 and December 25, 2016, and include the thirteen week periods ended March 26, 2017 and March 27, 2016, referred to herein as Fiscal 2017 and 2016, respectively.
 
Reclassifications
 
Certain reclassifications have been made to the 2016 financial statements to conform with the 2017 presentation.
 

8

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



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. Additionally, the valuation of share based compensation option expense uses a model based upon interest rates, stock prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.

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 and contingent consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of 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 March 26, 2017 and December 25, 2016 or revenue for the thirteen week periods ended March 26, 2017 and March 27, 2016. Geographic revenue in excess of 10% of the Company's consolidated revenue in Fiscal 2017 and the related percentage for Fiscal 2016 was generated in the following areas:     
 
 
Thirteen Weeks Ended
 
 
March 26,
2017
 
March 27,
2016
Maryland
 
14
%
 
14
%
Rhode Island
 
16
%
 
15
%
Texas
 
30
%
 
36
%

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 expected 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.


9

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



Changes in the allowance for doubtful accounts are as follows:
 
 
Thirteen Weeks Ended
 
 
March 26, 2017
 
March 27, 2016
Beginning balance
 
$
473,573

 
$
446,548

Provision for doubtful accounts
 
4,254

 

Amounts (written off) collected, net
 
(4,254
)
 
3,275

Ending balance
 
$
473,573

 
$
449,823

 
Property and Equipment
 
Property and equipment are stated net of accumulated depreciation and amortization of $1,440,886 and $1,301,295 at March 26, 2017 and December 25, 2016, respectively.

Deposits
 
The Company maintains guaranteed costs policies for workers' compensation coverage in the states in which it operates, with minimal loss retention for employees in the commercial segment. Under these policies, the Company is required to maintain refundable deposits of $2,506,073 and $2,476,201, which are included in Deposits the accompanying consolidated balance sheets as of March 26, 2017 and December 25, 2016, 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 Fiscal 2017 and Fiscal 2016.

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 recorded 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.


10

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



Deferred Financing Fees
 
Deferred financing fees 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. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.
 
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 start their 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 income 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 diluted earnings per share.


11

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
 
 
 
March 26,
2017
 
March 27,
2016
Weighted-average number of common shares outstanding:
 
8,668,955

 
7,388,536

Effect of dilutive securities: 
 
 
 
 
 
Stock options 
 
227,214

 
228,987

 
Warrants 
 
28,250

 
29,203

Weighted-average number of diluted common shares outstanding
 
8,924,419

 
7,646,726

 
 
 
 
 
 
 
Stock options 
 
50,000

 

 
Warrants 
 
32,250

 

Antidilutive shares
 
82,250

 


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 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 2017 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.

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.
 
Recent Accounting Pronouncements
 
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") 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 was effective for the Company beginning with the first quarter of 2017. The Company adopted this ASU on a prospective basis which had no impact on the consolidated financial statements.


12

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



In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new standard is effective for the Company beginning with the fourth quarter of 2020. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on the Company's financial condition or results of operations.

NOTE 3 - INTANGIBLE ASSETS
 
Intangible assets are stated net of accumulated amortization of $31,437,277 and $30,205,434 at March 26, 2017 and December 25, 2016, respectively. Total amortization expense for the thirteen week periods ended March 26, 2017 and March 27, 2016 was $1,231,843 and $1,670,809, respectively.

NOTE 4 - ACCRUED PAYROLL AND EXPENSES AND CONTINGENT CONSIDERATION
 
Accrued payroll and expenses consist of the following at:
 

March 26,
2017

December 25,
2016
Temporary worker payroll

$
5,793,322


$
5,547,161

Temporary worker payroll related

2,190,973


2,033,602

Accrued bonuses and commissions

800,655


892,742

Other

1,637,859


1,194,970

 

$
10,422,809


$
9,668,475


The following is a schedule of future estimated contingent consideration payments to various parties as of March 26, 2017
 
Estimated Cash Payment
 
Discount
 
Net
Due date:
 
 
 
 
 
December 2017
$
4,250,000

 
$
(492,974
)
 
$
3,757,026

December 2018
2,250,000

 
(582,025
)
 
1,667,975

Contingent consideration
$
6,500,000

 
$
(1,074,999
)
 
$
5,425,001


NOTE 5 - DEBT
 
The Company had a credit agreement (the “Credit Agreement”) with TCB providing for a 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 $35.0 million.

In connection with the acquisition of substantially all the assets and certain of the liabilities of Zycron, Inc. on April 3, 2017, the Company entered into an amended and restated credit agreement with TCB (see Note 12).

Line of Credit

At March 26, 2017 and December 25, 2016, $19.9 million and $23.9 million, respectively, was outstanding on the Revolving Facility with TCB. Borrowings under the Revolving Facility bore 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 paid an unused commitment fee of 0.25% on the unfunded portion of the Revolving Facility.


13

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



Borrowings under the Revolving Facility bore interest as follows:
 
 
March 26,
2017
 
December 25,
2016
Base Rate
 
$
14,905,268

4.50
%
 
$
8,882,714

4.25
%
LIBOR
 
5,000,000

4.10
%
 
5,000,000

3.95
%
LIBOR
 

%
 
5,000,000

3.99
%
LIBOR
 

%
 
5,000,000

4.16
%
Total
 
$
19,905,268

 
 
$
23,882,714

 

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 coverage ratio, minimum current ratio and maximum leverage ratio. As of March 26, 2017, the Company was in compliance with these covenants.

NOTE 6 - 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 26,
2017
 
December 25,
2016
Contingent consideration, net
 
Contingent consideration, net - current and long-term
 
Level 3
 
$
5,425,001

 
$
5,166,885


The changes in the Level 3 fair value measurements from December 25, 2016 to March 26, 2017 relate to $0.3 million in accretion. The key inputs in determining the fair value of the contingent consideration as of March 26, 2017 and December 25, 2016 included discount rates ranging from 20% to 22% and management's estimates of future sales volumes and EBITDA.

NOTE 7 - 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.


14

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 8 – 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 9 – SHARE-BASED COMPENSATION

Stock Options
 
For the thirteen week periods ended March 26, 2017 and March 27, 2016, the Company recognized $77,563 and $70,901 of compensation cost related to stock option awards, respectively. Unamortized stock compensation expense as of March 26, 2017 amounted to $448,619, which is expected to be recognized over the next 2.2 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 25, 2016
678,411

 
$
8.95

 
7.8
 
$
4,511

Granted

 
$

 
 
 
 
Exercised
(4,800
)
 
$
11.07

 
 
 
 
Forfeited / Canceled
(10,200
)
 
$
11.00

 
 
 
 
Options outstanding at March 26, 2017
663,411

 
$
8.90

 
7.6
 
$
3,524

 
 
 
 
 
 
 
 
Options exercisable at December 25, 2016
395,911

 
$
8.01

 
7.6
 
$
2,965

Options exercisable at March 26, 2017
437,511

 
$
7.79

 
7.3
 
$
2,730

 
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
Nonvested outstanding at December 25, 2016
 
282,500

 
$
2.57

Nonvested outstanding at March 26, 2017
 
225,900

 
$
2.52


For the thirteen week periods ended March 26, 2017, the Company issued 823 shares of common stock upon the cashless exercise of 4,800 stock options.

Warrant Activity
 
For the thirteen week periods ended March 26, 2017 and March 27, 2016, the Company did not recognize compensation cost related to warrants. There was no unamortized stock compensation expense to be recognized as of March 26, 2017.
 

15

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 25, 2016
123,984

 
$
11.51

 
2.8
 
$
532

Warrants outstanding at March 26, 2017
123,984

 
$
11.51

 
2.6
 
$
394

 
 
 
 
 
 
 
 
Warrants exercisable at December 25, 2016
91,734

 
$
9.65

 
2.2
 
$
532

Warrants exercisable at March 26, 2017
91,734

 
$
9.65

 
2.0
 
$
394

 
 
Number of
Shares
 
Weighted Average Grant Date Fair Value
Nonvested outstanding at December 25, 2016
 
32,250

 
$

Nonvested outstanding at March 26, 2017
 
32,250

 
$


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 10 - 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 $202,421 and $178,638 to the 401(k) Plan for the thirteen week periods ended March 26, 2017 and March 27, 2016, respectively.

NOTE 11 - 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 23 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, fixed assets, deferred tax assets, and other assets.


16

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
 
 
March 26, 2017
 
March 27, 2016
Revenue:
 
 

 
 

Multifamily
 
$
13,091,645

 
$
10,736,765

Professional
 
25,832,624

 
27,642,629

Commercial
 
17,919,418

 
21,171,592

Total
 
$
56,843,687

 
$
59,550,986

 
 
 
 
 
Depreciation:
 
 

 
 

Multifamily
 
$
23,310

 
$
9,744

Professional
 
41,161

 
37,149

Commercial
 
26,169

 
21,939

Corporate
 
48,951

 
41,829

Total
 
$
139,591

 
$
110,661

Amortization:
 
 

 
 

Multifamily
 
$

 
$
37,708

Professional
 
1,137,222

 
1,490,710

Commercial
 
94,621

 
142,391

Total
 
$
1,231,843

 
$
1,670,809

 
 
 
 
 
Operating income:
 
 
 
 
Multifamily
 
$
1,701,517

 
$
1,464,992

Professional
 
1,811,980

 
1,592,035

Commercial
 
853,645

 
1,280,086

Corporate - selling
 
(126,921
)
 

Corporate - general and administrative
 
(1,546,865
)
 
(1,674,952
)
Total
 
$
2,693,356

 
$
2,662,161

 
 
 
 
 
Capital expenditures:
 
 
 
 
Multifamily
 
$
43,287

 
$
18,949

Professional
 
117,819

 

Commercial
 
34,157

 
33,321

Corporate
 
131,849

 
184,035

Total
 
$
327,112

 
$
236,305


17

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



 

March 26,
2017

December 25,
2016
Total Assets:

 


 

Multifamily

$
8,440,668


$
9,320,335

Professional

40,490,528


39,548,308

Commercial
 
18,252,695

 
21,574,855

Corporate

11,169,699


10,770,636

Total

$
78,353,590


$
81,214,134


NOTE 12 - SUBSEQUENT EVENTS
 
Zycron, Inc.

On April 3, 2017, the Company acquired substantially all of the assets, and assumed certain of the liabilities, of Zycron, Inc. (“Zycron”), for an initial cash consideration paid of $18.5 million and issued $1 million (70,670 shares privately placed) of the Company's common stock at closing. An additional $500,000 was held back as partial security for post-closing purchase price adjustments and indemnification obligations. The purchase agreement further provides for contingent earn-out consideration payments of up to $3.0 million, based on the performance of the acquired business for the two years following the date of acquisition.

The net assets acquired from the acquired business were assigned to the Professional segment. The acquisition of the assets of Zycron allows the Company to strengthen and expand its IT operations throughout the southeastern U.S. region and selected markets across the country with talent and project management services. As the transaction was recently completed, the initial accounting for the acquisition, including estimating the fair values of assets and liabilities acquired, has not been completed.

Debt

In connection with the acquisition of the assets of Zycron described above, on April 3, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with TCB with an aggregate commitment of $35 million. The Amended Credit Agreement provides for a revolving credit facility maturing April 3, 2022 (the “Revolving Facility”) and also provides for a term loan maturing April 3, 2022 (the “Term Loan”) in the amount of $20.0 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Amended Credit Agreement. TCB may also make loans (“Swing Line Loans”) not to exceed the lesser of $7.5 million or the aggregate commitment.

The Revolving Facility and Term Loan bear interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Credit Agreement). Swing Line Loans bear interest at the Base Rate plus the Applicable Margin. All interest and commitment fees are generally paid quarterly. The Company’s obligations under the Amended Credit Agreement are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries.


18

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



The Amended Credit Agreement's customary affirmative and negative covenants remain substantially the same as those in effect under the Credit Agreement and the Company must comply with certain financial covenants. The Company may not permit the Leverage Ratio (as defined in the Amended Credit Agreement) to be greater than the following: 2.50 to 1.0 (April 3, 2017 to end of fiscal March 2018), 2.00 to 1.0 (March 31, 2018 to end of fiscal March 2019), 1.50 to 1.0 (March 31, 2019 to end of fiscal March 2020), 1.0 to 1.0 (From and after end of fiscal March, 2020). Moreover, the Company may not permit, for any four fiscal quarter period, the Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than 1.50 to 1.00, and may not permit the Dividend Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than (a) 1.10 to 1.00 for any four fiscal quarter period ending on or before September 30, 2017 or (b) 1.20 to 1.00 for any four fiscal quarter period thereafter.

The Company borrowed $20.0 million on the Term Loan in conjunction with the closing of the Zycron acquistion on April 3, 2017. Proceeds from the foregoing loan arrangements were used to pay off existing indebtedness of the Company on the revolving credit facility under the Credit Agreement, dated as of August 21, 2015, as amended, with TCB.

Dividend

On April 18, 2017, 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 8, 2017 to all shareholders of record as of the close of business on May 1, 2017.


19



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 25, 2016, for a description of important factors that could cause actual results to differ from expected results.
 
Overview
 
We are a leading national provider of professional 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 Holding Corporation and InStaff Personnel, LLC in June 2013, D&W Talent, LLC ("D&W") in March 2015, Vision Technology Services, Inc., Vision Technology Services, LLC, and VTS-VM, LLC (collectively, “VTS”) in October 2015, Zycron, Inc. in April 2017. We operate within three industry segments: Multifamily, Professional, and Commercial. We provide services to customers primarily within the United States of America. We now have 57 branch offices and 17 on-site locations located across 26 states.
 
The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 23 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.
 
Our business experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our customers’ business. Demand for our Multifamily staffing services increase in the second and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our Commercial staffing services increases during the third quarter of the year and peaks in the fourth quarter. Demand for our Commercial staffing services is lower during the first quarter, in part due to customer shutdowns and adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.
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.
  

20



 
 
 
Thirteen Weeks Ended
 
 
 
March 26, 2017
 
March 27, 2016
 
 
(dollars in thousands)
Revenues
 
$
56,844

 
$
59,551

Cost of services
 
43,173

 
46,204

 
Gross profit
 
13,671

 
13,347

Selling, general and administrative expenses
 
9,606

 
8,904

Depreciation and amortization
 
1,371

 
1,781

 
Operating income
 
2,694

 
2,662

Interest expense, net
 
(559
)
 
(1,280
)
 
Income before income tax
 
2,135

 
1,382

Income tax expense
 
833

 
549

 
Net income
 
$
1,302

 
$
833

 
 
 
 
 
 
Revenues
 
100.0
 %
 
100.0
 %
Cost of services
 
75.9
 %
 
77.6
 %
 
Gross profit
 
24.1
 %
 
22.4
 %
Selling, general and administrative expenses
 
16.9
 %
 
15.0
 %
Depreciation and amortization
 
2.4
 %
 
3.0
 %
 
Operating income
 
4.7
 %
 
4.5
 %
Interest expense, net
 
(1.0
)%
 
(2.1
)%
 
Income before income tax
 
3.8
 %
 
2.3
 %
Income tax expense
 
1.5
 %
 
0.9
 %
 
Net income
 
2.3
 %
 
1.4
 %

Thirteen Week Fiscal Period Ended March 26, 2017 ("Fiscal 2017") Compared with Thirteen Week Fiscal Period Ended March 27, 2016 ("Fiscal 2016")
 
Revenues:
 
Thirteen Weeks Ended
 
 
 
March 26,
2017
 
March 27,
2016
 
 
 
(dollars in thousands)
Revenues by segment:
 
 

 
 
 
 

 
 
 
Multifamily
 
$
13,092

 
23.0
%
 
$
10,737

 
18.0
%
 
Professional
 
25,833

 
45.5
%
 
27,643

 
46.4
%
 
Commercial
 
17,919

 
31.5
%
 
21,171

 
35.6
%
 
Total Revenues
 
$
56,844

 
100.0
%
 
$
59,551

 
100.0
%
 
Multifamily Revenues: Multifamily revenues increased approximately $2.4 million (21.9%) due to our continued focus on expansion outside of Texas. Revenue from branches outside of Texas accounted for approximately $2.1 million of the increase and revenue from branches in Texas increased approximately $0.3 million. The increase was due to a 15.2% increase in billed hours and a 5.6% increase in average bill rate. Revenue from existing offices accounted for approximately $0.8 million of the increase and revenue from new offices provided approximately $1.6 million.
 
Professional Revenues: Professional revenues decreased approximately $1.8 million (6.5%) primarily due to the IT group. The IT group decreased $1.5 million and the finance and accounting group decreased $0.3 million. The overall decrease was due to a 14.3% decrease in billed hours, which was partially offset by an increase of 9.1% in average bill rate and increased permanent placements of $0.2 million.
 
Commercial Revenues: Commercial revenues decreased approximately $3.3 million (15.4%) primarily from operations in Texas. Texas branches decreased revenues $1.8 million, other branches outside of the Midwest decreased $1.3 million, and our

21



Illinois and Wisconsin locations decreased $0.2 million. The overall revenue decrease was due to a 20.9% decrease in billed hours that was offset by a 6.7% 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 26,
2017
March 27,
2016
 
 
 
(dollars in thousands)
Gross Profit by segment:
 
 

 
 

 
Multifamily
 
$
4,984

 
$
3,952

 
Professional
 
6,211

 
6,386

 
Commercial
 
2,476

 
3,009

 
Total Gross Profit
 
$
13,671

 
$
13,347


 
 
 
Thirteen Weeks Ended
 
 
 
March 26,
2017
 
March 27,
2016
Gross Profit Percentage by segment:
 
 

 
 

 
Multifamily
 
38.1
%
 
36.8
%
 
Professional
 
24.0
%
 
23.1
%
 
Commercial
 
13.8
%
 
14.2
%
 
Company Gross Profit Percentage
 
24.1
%
 
22.4
%
 
Overall, our gross profit has increased approximately $0.4 million (2.4%) due primarily to increased revenues in our Multifamily segment. As a percentage of revenue, gross profit has increased to 24.1% from 22.4% primarily due to a higher percentage of our revenues from our Multifamily and Professional segments.
 
We determine spread as the difference between average bill rate and average pay rate.

Multifamily Gross Profit: Multifamily gross profit increased approximately $1.0 million (26.1%) mainly due to an increase in revenue. The increase in gross profit percentage of 1.3% was due primarily to 7.3% increase in average spread.
 
Professional Gross Profit: Professional gross profit decreased approximately $0.1 million (2.7%). The overall decrease in gross profit was offset by an average spread increase of 13.3% within the IT group and the finance and accounting group increasing 10.6%.

Commercial Gross Profit: Commercial gross profit decreased approximately $0.5 million (17.7%) due to the corresponding decreased revenue. The average spread increased 6.7%.
 
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $0.7 million (7.9%), primarily related to an increase in Multifamily of $0.8 million of which approximately 51% was due to new office expansion. The increase in Multifamily was partially offset by a decrease in back office costs of $0.1 million.
 
Depreciation and Amortization: Depreciation and amortization charges decreased approximately $0.4 million (23.0%). The decrease in depreciation and amortization is primarily due to the end of Professional segment intangible amortization of the 2011 Extrinsic, LLC acquisition.

Interest Expense, net: Interest expense, net decreased approximately $0.7 million (56.3%) primarily due to the decrease in the interest of $0.5 million related to the payoff of subordinated debt that accrued interest at a rate of 13% per annum and the decrease in the amortization of contingent consideration discounts of $0.3 million from the D&W and VTS acquisitions.
 

22



Income Taxes: Income tax expense increased approximately $0.3 million primarily due to higher taxable income 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 Amended 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 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 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 26,
2017
 
March 27,
2016
 
(dollars in thousands)
Net income
 
$
1,302

 
$
833

Interest expense, net
 
559

 
1,280

Income tax expense
 
833

 
549

Operating income
 
2,694

 
2,662

Depreciation and amortization
 
1,371

 
1,781

Share-based compensation
 
78

 
71

Adjusted EBITDA
 
$
4,143

 
$
4,514


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”) as amended and restated that provides for a revolving credit facility maturing April 3, 2022 (the “Revolving Facility”). Our primary uses of cash are payments to temporary workers, employees, related payroll liabilities, 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 $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:
 

Thirteen Weeks Ended
 

March 26,
2017

March 27,
2016
 

(dollars in thousands)
Net cash provided by operating activities

$
6,472


$
4,844

Net cash used in investing activities

(327
)

(229
)
Net cash used in financing activities

(6,145
)

(4,615
)
Net change in cash and cash equivalents

$


$

 
Operating Activities
 
Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense on contingent consideration payable, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable and accrued payroll and expenses.


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During Fiscal 2017, net cash provided by operating activities was $6.4 million an increase of $1.6 million compared with $4.8 million for Fiscal 2016. This increase is primarily attributable to the timing of payments on accounts payable and other current liabilities.

 Investing Activities
 
Cash used in investing activities consists primarily of cash paid for capital expenditures.
 
In Fiscal 2017, we made capital expenditures of $0.3 million mainly related to computer equipment purchased in the ordinary course of business. In Fiscal 2016, 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 dividends and contingent consideration paid.

For Fiscal 2017, we paid down $4.0 million under our revolving line of credit and we paid $2.1 million in cash dividends on our common stock. For Fiscal 2016, we paid down $1.2 million under our revolving line of credit, we paid $1.8 million in cash dividends on our common stock, and we paid $1.6 million of contingent consideration primarily related to the March 2015 D&W acquisition.

On April 3, 2017, the Company acquired substantially all of the assets, and assumed certain of the liabilities, of Zycron, Inc. (“Zycron”), for an initial cash consideration paid of $18.5 million and issued $1 million (70,670 shares privately placed) of the Company's common stock at closing.

Credit Agreements

The Company had a 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, and TCB’s commitment of $35.0 million.

Borrowings under the Revolving Facility bore 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 paid an unused commitment fee of 0.25% on the unfunded portion of the Revolving Facility.

The 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); (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 26, 2017, the Company was in compliance with these covenants.

In connection with the acquisition of the assets of Zycron described above, on April 3, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with TCB with an aggregate commitment of $35 million. The Amended Credit Agreement provides for a revolving credit facility maturing April 3, 2022 (the “Revolving Facility”) and also provides for a term loan maturing April 3, 2022 (the “Term Loan”) in the amount of $20.0 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Amended Credit Agreement. TCB may also make loans (“Swing Line Loans”) not to exceed the lesser of $7.5 million or the aggregate commitment.

The Revolving Facility and Term Loan bear interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Credit Agreement). Swing Line Loans bear interest at the Base Rate plus the Applicable Margin. All interest and commitment fees are generally paid quarterly. The Company’s obligations under the Amended Credit Agreement are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries.


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The Amended Credit Agreement's customary affirmative and negative covenants remain substantially the same as those in effect under the Credit Agreement and the Company must comply with certain financial covenants. The Company may not permit the Leverage Ratio (as defined in the Amended Credit Agreement) to be greater than the following: 2.50 to 1.0 (April 3, 2017 to end of fiscal March 2018), 2.00 to 1.0 (March 31, 2018 to end of fiscal March 2019), 1.50 to 1.0 (March 31, 2019 to end of fiscal March 2020), 1.0 to 1.0 (From and after end of fiscal March, 2020). Moreover, the Company may not permit, for any four fiscal quarter period, the Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than 1.50 to 1.00, and may not permit the Dividend Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than (a) 1.10 to 1.00 for any four fiscal quarter period ending on or before September 30, 2017 or (b) 1.20 to 1.00 for any four fiscal quarter period thereafter.

The Company borrowed $20.0 million on the Term Loan in conjunction with the closing of the Zycron acquisition on April 3, 2017. Proceeds from the foregoing loan arrangements were used to pay off existing indebtedness of the Company on the revolving credit facility under the Credit Agreement, dated as of August 21, 2015, as amended, with TCB.

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 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 25, 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 fiscal year ended December 25, 2016.
 
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 have elected 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.
 
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 fiscal quarter ended March 26, 2017, 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 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.
 

27



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 25, 2016
  
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 25, 2016 (our “2016 Form 10-K”), and filed with the SEC on March 6, 2017. There have been no material changes from the risk factors as previously disclosed in our 2016 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 2016 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. 


28



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)
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.
 

29



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 27, 2017



30