BGSF, INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 27, 2022


☐			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

BGSF, 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 every Interactive Data File required to be submitted 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

☑

Emerging growth company

☐

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	BGSF	NYSE

As of as of May 4, 2022 there were 10,468,267 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Unaudited Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Operations and Comprehensive Income	6
	Unaudited Consolidated Statement of Changes in Stockholders' Equity	7
	Unaudited Consolidated Statements of Cash Flows	9
	Notes to Unaudited Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II	OTHER INFORMATION	37
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mine Safety Disclosures	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

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,” “can,” “would,” “might,” “likely,” “will,” “expect,” “intend,” “plan,” “predict,” “ongoing,” “project,” “budget,” “scheduled,” “estimate,” “anticipate,” “believe,” “forecast,” “committed,” “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 field talents’ workers' compensation insurance coverage at commercially reasonable terms;

•the availability of qualified field talent;

•compliance with federal, state, local labor and foreign 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;

•the impact of, and the ability to mitigate or manage disruptions posed by, the novel coronavirus pandemic (“COVID-19”) or other pandemics;

•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 or elsewhere; 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 26, 2021.

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.bgsf.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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED BALANCE SHEETS


			March 27, 2022		December 26, 2021
ASSETS
Current assets
	Cash and cash equivalents		$	—	$	112,104
	Accounts receivable (net of allowance for credit losses of $448,622 for 2022 and 2021, respectively)		47,677,430		48,132,896
	Prepaid expenses		2,673,068		2,345,948


	Other current assets		4,847,128		2,381,197
	Current assets of discontinued operations		—		7,198,104
		Total current assets	55,197,626		60,170,249

Property and equipment, net			6,223,457		4,331,052

Other assets
	Deposits		4,011,179		4,106,622
	Other assets		1,097,243		1,283,629
	Deferred income taxes, net		3,536,023		4,548,285
	Right-of-use asset - operating leases		3,501,592		3,914,060
	Intangible assets, net		32,807,369		33,584,910
	Goodwill		29,141,883		29,141,883
	Noncurrent assets of discontinued operations		—		7,213,276
		Total other assets	74,095,289		83,792,665
	Total assets		$	135,516,372	$	148,293,966
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Long-term debt, current portion		$	—	$	3,562,500
	Accrued interest		118,823		102,304
	Accounts payable		1,138,617		401,175
	Accrued payroll and expenses		15,491,877		16,153,920
	Contingent consideration, current portion		—		1,073,901
	Lease liability, current portion		1,859,893		1,896,253
	Other current liabilities		3,763,718		3,549,785
	Income taxes payable		4,548,605		381,806
	Current liabilities of discontinued operations		—		1,262,056
		Total current liabilities	26,921,533		28,383,700

Line of credit (net of deferred finance fees of $61,163 and $193,264 at 2022 and 2021, respectively)			14,124,318		12,587,591
Long-term debt, less current portion			—		23,300,000
Contingent consideration, less current portion			1,017,330		989,608
Lease liability, less current portion			2,245,524		2,685,270
Other long-term liabilities			15,307		3,565,218
Noncurrent liabilities of discontinued operations			—		190,395
	Total liabilities		44,324,012		71,701,782

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

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED BALANCE SHEETS (CONTINUED)


		March 27, 2022		December 26, 2021
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, 10,445,208 and 10,425,210 shares issued and outstanding for 2022 and 2021, respectively, net of treasury stock, at cost, 1,845 shares for 2022 and 2021, respectively.		66,560		66,360
Additional paid in capital		62,298,581		61,875,406
Retained earnings		28,827,219		14,592,087
Accumulated other comprehensive gain		—		58,331
	Total stockholders’ equity	91,192,360		76,592,184
	Total liabilities and stockholders’ equity	$	135,516,372	$	148,293,966

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

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the Thirteen Week Periods Ended March 27, 2022 and March 28, 2021


		Thirteen Weeks Ended
			2022		2021
Revenues			$	68,542,277	$	49,750,192
Cost of services			45,111,478		33,535,483
	Gross profit		23,430,799		16,214,709
Selling, general and administrative expenses			19,716,312		15,302,424


Depreciation and amortization			898,973		836,242
	Operating income		2,815,514		76,043

Interest expense, net			(273,379)		(376,527)
	Income (loss) from continuing operations before income taxes		2,542,135		(300,484)
Income tax (expense) benefit from continuing operations			(534,366)		88,901
	Income (loss) from continuing operations		2,007,769		(211,583)
Income from discontinued operations:
	Income		1,234,996		1,155,670
	Gain on sale		17,272,789		—
	Income tax expense		(4,715,771)		(232,290)
	Net income		$	15,799,783	$	711,797

Change in unrealized (losses) gains on cash flow hedges, net			(58,331)		32,215
	Other comprehensive (loss) income		(58,331)		32,215
	Net comprehensive income		$	15,741,452	$	744,012

Net income per share - basic
	Net income from continuing operations		$	0.19	$	(0.02)
	Net income from discontinued operations		1.33		0.09
	Net income per share - basic		$	1.52	$	0.07

Net income per share - diluted
	Net income from continuing operations		$	0.19	$	(0.02)
	Net income from discontinued operations		1.32		0.09
	Net income per share - diluted		$	1.51	$	0.07

Weighted-average shares outstanding:
	Basic		10,428,897		10,332,815
	Diluted		10,485,104		10,394,839

Cash dividends declared per common share			$	0.15	$	0.10

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

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Thirteen Week Periods Ended March 28, 2021


		Common Stock
	Preferred Stock	Shares	Par Value		Treasury Stock Amount		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)/Income		Total
Stockholders’ equity, December 26, 2020	—	10,328,379	$	103,284	$	(29,450)	$	60,457,044	$	5,049,748	$	(122,874)	$	65,457,752
Share-based compensation from continuing operations	—	—	—		—		220,611		—		—		220,611
Share-based compensation from discontinued operations	—	—	—		—		15,396		—		—		15,396
Share issuance cost	—	—	—		—		(10,000)		—		—		(10,000)
Issuance of restricted shares	—	7,518	75		—		(75)		—		—		—
Exercise of common stock options	—	213	2		—		(2)		—		—		—
Cash dividend declared	—	—	—		—		—		(1,033,597)		—		(1,033,597)
Net income	—	—	—		—		—		711,797		—		711,797
Other comprehensive gain	—	—	—		—		—		—		32,215		32,215
Stockholders’ equity, March 28, 2021	—	10,336,110	$	103,361	$	(29,450)	$	60,682,974	$	4,727,948	$	(90,659)	$	65,394,174

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

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Thirteen Week Periods Ended March 27, 2022


		Common Stock
	Preferred Stock	Shares	Par Value		Treasury Stock Amount		Additional Paid in Capital		Retained Earnings		Accumulated Other Comprehensive Income		Total
Stockholders’ equity, December 26, 2021	—	10,425,210	$	104,252	$	(37,892)	$	61,875,406	$	14,592,087	$	58,331	$	76,592,184
Share-based compensation from continuing operations	—	—	—		—		211,449		—		—		211,449
Share-based compensation from discontinued operations	—	—	—		—		7,697		—		—		7,697
Fully vested shares related to the sale of discontinued operations	—	—	—		—		35,093		—		—		35,093
Issuance of restricted shares	—	5,795	58		—		(58)		—		—		—
Issuance of ESPP shares	—	14,203	142		—		168,994		—		—		169,136
Cash dividend declared	—	—	—		—		—		(1,564,651)		—		(1,564,651)
Net income	—	—	—		—		—		15,799,783		—		15,799,783
Other comprehensive gain	—	—	—		—		—		—		(58,331)		(58,331)
Stockholders’ equity, March 27, 2022	—	10,445,208	$	104,452	$	(37,892)	$	62,298,581	$	28,827,219	$	—	$	91,192,360

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

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Thirteen Week Periods Ended March 27, 2022 and March 28, 2021


				2022		2021
Cash flows from operating activities
	Net income			$	15,799,783	$	711,797
	(Income) from discontinued operations			(1,234,996)		(1,155,670)
		Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation		160,253		177,835
		Amortization		738,720		658,407

		Gain on sale of discontinued operations		(17,272,789)		—




		Amortization of deferred financing fees		132,100		18,703

		Interest expense on contingent consideration payable		63,819		58,477
		Provision for credit losses		51,237		33,998
		Share-based compensation		211,449		220,611
		Deferred income taxes, net of acquired deferred tax liability		1,012,262		(46,776)
		Net changes in operating assets and liabilities, net of effects of acquisitions:
			Accounts receivable	(1,432,492)		(2,976,993)
			Prepaid expenses	(327,120)		(520,474)
			Other current assets	(202,518)		(1,152)
			Deposits	108,194		45,021
			Other assets	171,203		—
			Accrued interest	16,519		27,544
			Accounts payable	737,442		16,297
			Accrued payroll and expenses	(850,898)		1,494,704
			Other current liabilities	(3,335,978)		18,977
			Income taxes receivable and payable	4,479,253		256,607
			Operating leases	(27,546)		(75,308)
			Other long-term liabilities	(58,331)		(146,881)
		Net cash used in continuing operating activities		(1,060,434)		(1,184,276)
		Net cash provided by discontinued operating activities		674,947		3,095,409
		Net cash (used in) provided by operating activities		(385,487)		1,911,133

Cash flows from investing activities
	Business acquired, net of cash received			—		(3,780,000)
	Business sold			30,312,751		—
	Capital expenditures			(2,050,225)		(540,311)

		Net cash provided by (used in) continuing investing activities		28,262,526		(4,320,311)
		Net cash used in discontinued investing activities		(25,755)		(7,326)
		Net cash provided by (used in) investing activities		28,236,771		(4,327,637)

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

BGSF, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the Thirteen Week Periods Ended March 27, 2022 and March 28, 2021



			2022		2021
Cash flows from financing activities
	Net borrowings under line of credit		1,404,627		3,835,101

	Principal payments on long-term debt		(26,862,500)		(375,000)

	Payments of dividends		(1,564,651)		(1,033,597)
	Issuance of ESSP Shares		169,136		—
	Issuance of shares, net of offering costs		—		(10,000)

	Contingent consideration paid		(1,110,000)		—

		Net cash (used in) provided by continuing financing activities	(27,963,388)		2,416,504
		Net cash provided by discontinued financing activities	—		—
		Net cash (used in) provided by financing activities	(27,963,388)		2,416,504
Net change in cash and cash equivalents			(112,104)		—
Cash and cash equivalents, beginning of period			112,104		—
Cash and cash equivalents, end of period			$	—	$	—

Supplemental cash flow information:
	Cash paid for interest		$	299,690	$	223,804
	Cash paid for taxes, net of refunds		$	58,812	$	147,953

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

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS

BGSF, Inc., along with its wholly owned subsidiaries BGSF Professional, LLC (formally BG Staffing, LLC), B G Staff Services Inc., BG Personnel, LP, BG Finance and Accounting, Inc., BG California IT Staffing, Inc., BG California Multifamily Staffing, Inc., BG California Finance & Accounting Staffing, Inc., EdgeRock Technology Holdings, Inc., EdgeRock Technologies, LLC, and BG Personnel of Texas, LLC (collectively, the “Company”), is a national provider of workforce solutions.

On March 21, 2022, we completed the sale of substantially all our Light Industrial segment (“InStaff”) assets to Jobandtalent (“J&T”), through their wholly-owned subsidiary, Sentech Engineering Services, Inc.

Instaff's financial results for reported periods have been reflected in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations are classified as discontinued operations in our Consolidated Balance Sheets.

See “Note 4 - Discontinued Operations” in our Consolidated Financial Statements included elsewhere in this report for additional information.

The Company operates primarily within the United States of America in Real Estate and Professional industry segments, and prior to March 21, 2022, discontinued operations in Light Industrial (see Note 4).

The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings currently in 34 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. The Real Estate segment operates through two divisions, BG Multifamily and BG Talent.

The Professional segment provides skilled field talent on a nationwide basis for information technology (“IT”) and finance, accounting, legal and human resource client partner projects. The Professional segment operates through three divisions, IT Consulting, IT Infrastructure & Development, and Finance and Accounting under various trade names including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and Momentum Solutionz.

The Company normally experiences seasonal fluctuations. The quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of client partners’ businesses. Demand for the Real Estate workforce solutions has historically increased in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, the cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.

The Company has adjusted, and continues to monitor and change, its operations in response to COVID-19 in all of it's segments, client partner, and home office locations. The pandemic may continue to impact both operational and financial performance. The impact on the Company's client partners, and the ongoing government and community reactions to the pandemic remain unpredictable.

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America (“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 its 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, except for disclosure in Note 15. 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 26, 2021, included in its Annual Report on Form 10-K.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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, 2022 and December 26, 2021, and include the thirteen week periods ended March 27, 2022 and March 28, 2021, referred to herein as Fiscal 2022 and 2021, respectively.

Reclassifications

Certain reclassifications have been made to the 2021 financial statements to conform with the 2022 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 allowances for credit losses, goodwill, intangible assets, lease liability, contingent consideration obligations related to acquisitions, and income taxes. Additionally, the valuation of share-based compensation 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.

The COVID-19 pandemic continues to have an impact on our economy as a result of measures designed to stop the spread of the virus. In light of the ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply the Company’s significant accounting policies. While the ongoing COVID-19 response continues to evolve, management may continue to make changes to these estimates and judgments over time, which could result in meaningful impacts to the Company’s financial statements in future periods. Actual results and outcomes may differ from management’s estimates and assumptions.

Financial Instruments

The Company uses fair value measurements in areas that include, but are not limited to, interest rate swap agreements used to mitigate interest rate risk, and 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 bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with BMO Harris Bank, N.A. (“BMO”) that provides for a revolving credit facility and term loan and current rates available to the Company for debt with similar terms and risk. The fair value on the interest rate swap is based on quoted prices from BMO.

Cash and Cash Equivalents

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

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Concentration of Credit Risk

Concentration of credit risk is limited due to the Company’s diverse client partner base and their dispersion across many different industries and geographic locations nationwide. No single client partner accounted for more than 10% of the Company’s accounts receivable from continuing operations as of March 27, 2022 and December 26, 2021 or revenue from continuing operations for the thirteen week periods ended March 27, 2022 and March 28, 2021. Geographic revenue from continuing operations in excess of 10% of the Company's consolidated revenue in Fiscal 2022 and the related percentage for Fiscal 2021 was generated in the following areas:


	Thirteen Weeks Ended
	March 27, 2022		March 28, 2021


Tennessee	12	%	14	%
Texas	23	%	22	%

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 client partners in the normal course of business. Accounts receivable represents unpaid balances due from client partners. The Company maintains an allowance for credit losses for expected losses resulting from client partners’ 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 client partners and the Company’s ongoing examination process. Receivables are written off after they are deemed to be uncollectible after all reasonable means of collection have been exhausted. Recoveries of receivables previously written off are recorded when received. The Company will continue to actively monitor the impact of COVID-19 on expected credit losses.

Changes in the allowance for credit losses from continuing operations are as follows:


	Thirteen Weeks Ended
		March 27, 2022		March 28, 2021
Beginning balance		$	448,622	$	492,087
Provision for credit losses, net		51,237		33,998
Amounts written off, net		(51,237)		(33,998)
Ending balance		$	448,622	$	492,087

CARES Act Receivable

Other current assets from continuing operations includes $2.6 million of the Employee Retention Credit ("ERC") at March 27, 2022. The ERC was established by the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act allows relief to businesses affected by the coronavirus pandemic, by providing payment to employers for qualified wages and health insurance benefits for team members. The CARES Act applies to taxes incurred from March 27, 2020, through the second quarter of 2021.

Property and Equipment

Property and equipment are stated net of accumulated depreciation and amortization of $4.5 million and $4.3 million at March 27, 2022 and December 26, 2021, respectively.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Deposits

The Company maintains guaranteed costs policies for workers' compensation coverage in monopolistic states and minimal loss retention coverage in all other states. Under these policies, the Company is required to maintain refundable deposits of $3.8 million and $3.9 million, which are included in deposits in the accompanying consolidated balance sheets, as of March 27, 2022 and December 26, 2021, respectively.

Long-Lived Assets

The Company capitalizes direct costs incurred in the development of internal-use software. Cloud computing implementation costs incurred in hosting arrangements are capitalized and reported as a component of other assets. All other internal-use software development costs are capitalized and reported as a component of computer software within intangible 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 with respect to long-lived assets during Fiscal 2022 or Fiscal 2021.

Leases

The Company leases all their office space through operating leases, which expire at various dates through 2025. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of the Company’s lease arrangements contain renewal provisions from 3 to 10 years, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term.

Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.

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 ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized.

Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets are discounted back to their net present value.

The Company capitalizes purchased software and internal payroll costs directly incurred in the modification of software for internal use. Software maintenance and training costs are expensed in the period incurred.

The Company evaluates the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. The Company considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. 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. The Company determined there were no impairment indicators for these assets during Fiscal 2022 or Fiscal 2021.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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. The Company considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. 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. The Company determined there were no impairment indicators for goodwill assets during Fiscal 2022 or Fiscal 2021.

Deferred Financing Fees

Deferred financing fees are amortized using 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 operating and financial goals are met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. The fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. 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 continuing operations in Real Estate and Professional segments. The Company provides workforce solutions and placement services. Revenues are recognized when promised services are delivered to client partners, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. Revenues from continuing operations as presented on the consolidated statements of operations and comprehensive income represent services rendered to client partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services.

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 field talent, (ii) has the discretion to select the field talent and establish their price and duties and (iii) bears the risk for services that are not fully paid for by client partners.

Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which the Company has a right to invoice, when the services are rendered by the Company’s field talent.

Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control is transferred to the client partner, usually when employment candidates start their employment.

Retained search placement revenues - Any revenues from these workforce solutions are recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services, which is less than 1% of consolidated revenues.

The Company estimates the effect of placement candidates who do not remain with its client partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period.

Refer to Note 14 for disaggregated revenues by segment.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Payment terms in the Company's contracts vary by the type and location of its client partner and the workforce solutions offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of March 27, 2022. There were no revenues recognized during the thirteen week period ended March 27, 2022 related to performance obligations satisfied or partially satisfied in previous periods. There are no contract costs capitalized. The Company did not recognize any contract impairments during the thirteen week period ended March 27, 2022.

Share-Based Compensation

The Company recognizes compensation expense in selling, general and administrative expenses over the service period for options or restricted stock 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 earnings per share.

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 27, 2022	March 28, 2021
Weighted-average number of common shares outstanding:			10,428,897	10,332,815
Effect of dilutive securities:
	Stock options and restricted stock		56,207	62,024

Weighted-average number of diluted common shares outstanding			10,485,104	10,394,839

	Stock options and restricted stock		387,350	423,350
	Warrants		—	25,862
Antidilutive shares			387,350	449,212

Income Taxes

The consolidated effective tax rates of 24.9% and 16.8% for the thirteen week periods ended March 27, 2022 and March 28, 2021, respectively, were primarily due to higher state taxes, offset by higher Work Opportunity Tax Credit in Fiscal 2022.

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. As of March 27, 2022, the Company has a $4.9 million net operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date. These net operating losses are subject to an annual Internal Revenue Code Section 382 limitation of $1.3 million.

When appropriate, the Company will 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, the Company considers 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.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company recognizes any penalties when necessary as part of selling, general and administrative expenses. As of March 27, 2022, goodwill with an adjusted tax basis of $26.4 million is remaining to be amortized for tax purposes. As a matter of operation, we first calculate the effective tax on continuing operations, and then allocated the remaining taxes to our discontinued operations, in accordance with Accounting Standards Codification (“ASC”) Topic 740.

The Company follows the guidance 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.

Recent Accounting Pronouncements

In March 2020 and January 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) and ASU No. 2021-01, Reference Rate Reform: Scope (“ASU 2021-01”), respectively. Together, ASU 2020-04 and ASU 2021-01 provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications, hedging relationships, and other arrangements that are expected to be impacted by the global transition away from certain reference rates, such as the London Interbank Offered Rate, towards new reference rates. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company is evaluating the impact that the guidance will have on its consolidated financial statements and related disclosures, if adopted, and currently does not expect that it would be material.

NOTE 3 - ACQUISITIONS

Momentum Solutionz LLC

On February 8, 2021, the Company acquired substantially all of the assets and assumed certain liabilities of Momentum Solutionz (“Momentum”) for a purchase price of $3.8 million cash, subject to customary purchase price adjustments as specified in the purchase agreement. The purchase agreement further provides for contingent consideration of up to $2.2 million based on the performance of the acquired business for the two years following the date of acquisition. At closing, the purchase price was paid out of currently available funds under the Company’s credit agreement led by BMO. The purchase agreement contained a provision for a “true up” of acquired working capital 60 days after the closing date.

The acquired business was assigned to the Professional segment. The acquisition of Momentum allows the Company to strengthen its operations in IT consultants and technology professionals. Momentum provides IT consulting and managed workforce solutions for organizations utilizing ERP systems. The IT consulting workforce solutions include strategic planning, software selection, road mapping, cloud migration, and implementation of ERP systems. The IT managed workforce solutions include optimization and maintenance of ERP systems. Momentum provides workforce solutions to clients throughout the United States in a variety of industries, including but not limited to hospitals, retail, universities and mid-size businesses.

The Fiscal 2021 Momentum operations included eight weeks for approximately $0.2 million of revenue and $0.1 million of operating income. All amounts recorded to goodwill are expected to be deductible for tax purposes. The acquisition has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows:


Accounts receivable	$	345,121
Prepaid expenses and other assets	3,626
Property and equipment, net	5,101
Intangible assets	3,347,970
Goodwill	2,089,823
Liabilities assumed	(73,708)
Total net assets acquired	$	5,717,933

Cash	$	3,780,000


Working capital adjustment	11,210
Fair value of contingent consideration	1,926,723
Total fair value of consideration transferred for acquired business	$	5,717,933

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The allocation of the intangible assets is as follows:


	Estimated Fair Value		Estimated Useful Lives
Covenants not to compete	$	37,800	5 years
Trade name	1,420,000		Indefinite
Client partner list	1,890,170		10 years
Total	$	3,347,970

Supplemental Unaudited Pro Forma Information

The Company estimates the revenues and net income from continuing operations for the periods below that would have been reported if the Momentum acquisition had taken place on the first day of Fiscal 2021 would be as follows (dollars in thousands, except per share amounts):


	Thirteen Weeks Ended
	March 28, 2021
Revenues	$	49,986
Gross profit	$	16,380
Net loss	$	(175)
Loss per share:
Basic	$	(0.02)
Diluted	$	(0.02)

Pro forma net income includes amortization of identifiable intangible assets, interest expense on additional borrowings on the Revolving Facility (as defined below) at a rate of 2.5% and tax benefit of the pro forma adjustments at a consolidated effective tax rate of 16.8% for Fiscal 2021, respectively. The pro forma operating results include adjustments to Momentum related to synergy adjustments for expenses that would be duplicative and other non-recurring, non-operating and out of period expense items once integrated with the Company.

Amounts set forth above are not necessarily indicative of the results that would have been attained had the Momentum acquisitions taken place on the first day of the Company’s 2021 fiscal year or of the results that may be achieved by the combined enterprise in the future.

NOTE 4 - DISCONTINUED OPERATIONS

On March 21, 2022, the Company sold substantially all of the assets and certain liabilities of the Light Industrial segment (“InStaff”) to Sentech Engineering Services, Inc. (“Sentech”) for a sale price of approximately $30.3 million cash, subject to customary sale price and working capital adjustments specified in the purchase agreement. The purchase agreement further provides for deferred consideration of $2.0 million one year following the date of the acquisition. The sale resulted in a gain on sale of discontinued operations of $17.3 million. The Company will provide certain back-office services to Sentech for a limited period of time.

The Light Industrial financial results for periods prior to the sale have been reflected in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations in the periods presented are classified as discontinued operations in our Consolidated Balance Sheets.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The financial results of InStaff are as follows (dollars in thousands):


	Thirteen Weeks Ended
	March 27, 2022		March 28, 2021
Revenue	$	16,465,067	$	17,961,498
Cost of services	14,143,775		15,361,476
Gross profit	2,321,292		2,600,022
Selling expenses	1,062,044		1,420,920
Depreciation	24,252		23,432
Income from operations of discontinued operations before taxes	1,234,996		1,155,670


	December 26, 2021
Carrying amount of assets included as part of discontinued operations:
Accounts receivable	$	7,198,104
Property and equipment, net	201,012
Deposits	35,784
Right-of-use assets - operating leases	303,660
Intangible assets, net	1,648,000
Goodwill	5,024,820
Total assets classified as discontinued operations	$	14,411,380

Carrying amount of liabilities included as part of discontinued operations:
Accrued payroll and expenses	$	1,129,448
Lease liability, current portion	132,608
Lease liability, less current portion	190,395
Total liabilities classified as discontinued operations	$	1,452,451

NOTE 5 - LEASES

For operating leases, the weighted average remaining lease term was 2.5 years and 2.7 years at March 27, 2022 and December 26, 2021, respectively. The weighted average discount rate was 5.0% at March 27, 2022 and December 26, 2021. The Company's future operating lease obligations that have not yet commenced are immaterial.

The supplement cash flow information related to the Company's operating leases were as follows:


	Thirteen Weeks Ended
		March 27, 2022		March 28, 2021
Cash paid for operating leases		$	558,314	$	579,316
Operating lease costs		$	502,194	$	523,296
Short-term lease costs		$	75,230	$	48,101

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The undiscounted annual future minimum lease payments consist of the following at:


	March 27, 2022
2022	$	1,719,327
2023	1,561,952
2024	973,510
2025	277,095


Total lease payments	4,531,884
Interest	(426,467)
Present value of lease liabilities	$	4,105,417

NOTE 6 - INTANGIBLE ASSETS

Intangible assets from continuing operations are stated net of accumulated amortization of $41.8 million and $41.1 million at March 27, 2022 and December 26, 2021, respectively. Amortization expense from continuing operations for Fiscal 2022 and Fiscal 2021are comprised of following:


	Thirteen Weeks Ended
		March 27, 2022		March 28, 2021
Client partner lists		$	502,265	$	545,327
Covenant not to compete		55,245		54,615
Acquisition intangibles		557,510		599,942
Computer software - amortization expense		181,210		58,465
Amortization expense		738,720		658,407
Computer software - selling, general and administrative expense		38,821		18,822
Total expense		$	777,541	$	677,229

NOTE 7 - ACCRUED PAYROLL AND EXPENSES, OTHER LONG-TERM LIABILITIES, AND CONTINGENT CONSIDERATION

Accrued payroll and expenses from continuing operations consist of the following at:


	March 27, 2022		December 26, 2021
Field talent payroll	$	6,662,593	$	6,042,341
Field talent payroll related	2,111,031		1,310,918
Accrued bonuses and commissions	3,547,705		4,522,723
Other	3,170,548		4,277,938
Accrued payroll and expenses	$	15,491,877	$	16,153,920

Other current liabilities of continuing operations includes $3.8 million of deferred employer FICA at of March 27, 2022. Under CARES Act, employers affected by the coronavirus epidemic were allowed relief from the payment of employer FICA taxes. The CARES Act only applies to taxes incurred from March 27, 2020 through December 31, 2020. Half of the delayed payments were due by December 31, 2021, and the other half are due by December 31, 2022. The Company elected to delay the payment of these taxes.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The following is a schedule of future estimated contingent consideration payments from continuing operations to various parties as of March 27, 2022:


	Estimated Cash Payment		Discount		Net
Due in:

One to two years	$	1,110,000	$	(92,670)	$	1,017,330




Contingent consideration	$	1,110,000	$	(92,670)	$	1,017,330

NOTE 8 - DEBT

On July 16, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for a revolving credit facility (the “Revolving Facility”) permitting the Company to borrow funds from time to time in an aggregate amount up to $35 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting the Company to borrow funds from time to time in an aggregate amount not to exceed $30 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded. The Company may from time to time, with a maximum of two, request an increase in the aggregate Term Loan by $40 million, with minimum increases of $10 million. The Company’s obligations under the Credit Agreement are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries. The Credit Agreement bears 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). The Company also pays an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan.

The Credit Agreement contains customary affirmative and negative covenants. The Company is subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement. The Company was in compliance with these covenants as of March 27, 2022.

On February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility in conjunction with the closing of the Momentum acquisition. On March 21, 2022, the Company paid down the balance on the existing Term Loan and a portion of the Revolving Facility using the proceeds from the sale of the Light industrial segment (See Note 4).

Letter of Credit

In March 2020, in conjunction with the 2020 EdgeRock acquisition, the Company entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of March 27, 2022, the Company had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which is considered usage against the Revolving Facility. The Company has no history of default, nor is it aware of circumstances that would require it to perform under any of these arrangements and believes that the resolution of any disputes thereunder that might arise in the future would not materially affect the Company’s consolidated financial statements. Accordingly, no liability has been recorded in respect to these arrangements as of March 27, 2022.

Line of Credit

At March 27, 2022 and December 26, 2021, $14.2 million and $12.8 million, respectively, was outstanding on the revolving facilities. Average daily balance for the thirteen week periods ended March 27, 2022 and March 28, 2021 was $15.3 million and $6.3 million, respectively.

Borrowings under the revolving facilities consisted of and bore interest at:


	March 27, 2022				December 26, 2021
Base Rate	$	14,185,481	4.25	%	$	2,780,854	4.50	%
LIBOR	—		—	%	10,000,000		2.35	%


Total	$	14,185,481			$	12,780,854

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Long-Term Debt

Long-term debt consisted of and bore interest at:


	March 27, 2022				December 26, 2021
Base Rate	$	—	—	%	$	2,237,500	2.35	%
Fixed rate	—		—	%	24,625,000		2.39	%



Long-term debt	$	—			$	26,862,500

Cash Flow Hedge

In April 2020, the Company entered into a pay-fixed/receive-floating interest rate swap agreement with our bank syndicate led by BMO that reduces the floating interest rate component on the Term Loan obligation. The $25.0 million notional amount was effective on June 3, 2020 and designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate. On March 21, 2022, the Company paid down the balance on the existing Term Loan and a portion of the Revolving Facility, and cancelled the interest rate swap arrangement.

The unrealized gains or losses associated with the change in the fair value of the effective portion of the hedging instrument was recorded in accumulated other comprehensive income or loss. The Company reclassified the interest rate swap from accumulated other comprehensive gain or loss against interest expense in the same period in which the hedge transaction affected earnings. See Note 9 for location on the balance sheet.

NOTE 9 - 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 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, 2022		December 26, 2021
Interest rate swap	Other long-term assets	Level 2	$	—	$	58,331
Contingent consideration, net	Contingent consideration, net - current and long-term	Level 3	$	1,017,330	$	2,063,509

The changes in the Level 2 fair value measurements from December 26, 2021 to March 27, 2022 relate to the cancellation of the interest rate swap arrangement. Key inputs in determining the fair value of the interest rate swap as of December 26, 2021 were quoted prices from BMO (See Note 8).

The changes in the Level 3 fair value measurements from December 26, 2021 to March 27, 2022 relates primarily to payments of $1.1 million on the Momentum acquisition, partially offset by $0.1 million in accretion. Key inputs in determining the fair value of the contingent consideration as of March 27, 2022 and December 26, 2021 included discount rates of approximately 9% as well as management's estimates of future sales volumes and earnings before interest, income taxes, depreciation, and amortization (“EBITDA”).

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 - CONTINGENCIES

The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made.

The Company insures against, subject to and upon the terms and conditions of various insurance policies, claims or losses from workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses, crime and cyber risk, 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.

Impact of COVID-19

Our business, results of operations, and financial condition have been, and may continue to be, impacted in material respects by COVID-19 and by related government actions, non-governmental organization recommendations, and public perceptions, all of which have led and may continue to lead to disruption in economic and labor markets.

NOTE 11 – 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.

Restricted Stock

The Company issued net restricted common stock of 5,795 shares to non-team member (non-employee) directors in Fiscal 2022. The restricted shares of $0.01 par value per share were issued under the 2013 Long-Term Incentive Plan and contain a three-year service condition. The restricted stock constitutes issued and outstanding shares of the Company’s common stock, except for the right of disposal, for all purposes during the period of restriction including voting rights and dividend distributions.

NOTE 12 – SHARE-BASED COMPENSATION

Stock Options

For the thirteen week periods ended March 27, 2022 and March 28, 2021, the Company recognized $0.1 million of compensation expense from continuing operations related to stock options. Unamortized share-based compensation expense from continuing operations as of March 27, 2022 amounted to $0.7 million 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 Awards (in thousands)
Options outstanding at December 26, 2021	695,329	$	16.91	6.7	$	665



Options outstanding at March 27, 2022	695,329	$	16.91	6.5	$	822

Options exercisable at December 26, 2021	475,765	$	17.62	5.9	$	452
Options exercisable at March 27, 2022	496,415	$	17.75	5.7	$	595

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested outstanding at December 26, 2021	219,564	$	12.73
Nonvested outstanding at March 27, 2022	198,914	$	12.73

For the thirteen week period ended March 27, 2022, the Company did not issue shares under a cashless exercise. For the thirteen week period ended March 28, 2021, the Company issued 213 shares of common stock upon the cashless exercise of 600 stock options.

Restricted Stock

For the thirteen week periods ended March 27, 2022 and March 28, 2021, the Company recognized $0.1 million of compensation expense related to restricted stock awards. Unamortized share-based compensation expense as of March 27, 2022 amounted to $0.6 million which is expected to be recognized over the next 2.2 years.

A summary of restricted stock activity is presented as follows:


	Number of Shares	Weighted Average Grant Date Fair Value
Restricted stock outstanding at December 26, 2021	60,844	$	11.91
Issued	5,795	$	11.99
Vested	(4,828)	$	17.51

Restricted stock outstanding at March 27, 2022	61,811	$	11.62

Nonvested outstanding at December 26, 2021	60,844	$	11.91
Nonvested outstanding at March 27, 2022	61,811	$	11.62

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.

2020 Employee Stock Purchase Plan (“2020 ESPP”)

In November 2020, the Company's shareholders approved the 2020 ESPP. Under the 2020 ESPP, eligible team members of the Company may elect for payroll deductions to purchase shares on each purchase date during an offering period. A total of 250,000 shares of common stock of BGSF, Inc. were initially reserved for issuance pursuant to the 2020 ESPP. For the thirteen week period ended March 27, 2022, the Company issued 14,203 shares of common stock under the ESPP.

NOTE 13 - TEAM MEMBER BENEFIT PLAN

Defined Contribution Plan

The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible team members and field talent. The 401(k) Plan allows participants to make contributions subject to applicable statutory limitations. The Company matches participants contributions 100% up to the first 3% and 50% of the next 2% of a team member's or field talent’s compensation. The Company contributed $0.5 million and $0.4 million from continuing operations to the 401(k) Plan for the thirteen week periods ended March 27, 2022 and March 28, 2021.

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 14 - BUSINESS SEGMENTS

The Company operates within two industry segments: Real Estate and Professional. Segment income from continuing operations includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (home office) expenses. Assets of home office include cash, unallocated prepaid expenses, property and equipment, deferred tax assets, and other assets.

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


	Thirteen Weeks Ended
		March 27, 2022		March 28, 2021
Revenue:
Real Estate		$	25,916,088	$	18,612,744
Professional		42,626,189		31,137,448
Total		$	68,542,277	$	49,750,192

Depreciation:
Real Estate		$	47,282	$	54,990
Professional		96,227		98,809
Home office		16,744		24,036
Total		$	160,253	$	177,835




Amortization:

Professional	$	557,576	$	600,008

Home office	181,144		58,399
Total	$	738,720	$	658,407

Operating income:
Real Estate	$	4,034,881	$	2,452,873
Professional	3,469,799		1,493,276
Home office	(4,689,166)		(3,870,106)
Total	$	2,815,514	$	76,043





Capital expenditures:
Real Estate	$	8,723	$	40,979
Professional	24,140		60,019
Home office	2,017,362		439,313
Total	$	2,050,225	$	540,311


	March 27, 2022		December 26, 2021
Total Assets:
Real Estate	$	19,163,937	$	20,753,085
Professional	92,710,217		92,782,442
Home office	23,642,218		20,347,059
Discontinued operations	—		14,411,380
Total	$	135,516,372	$	148,293,966

BGSF, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 15 - SUBSEQUENT EVENTS

Dividend

On April 27, 2022, the Company's board of directors declared a cash dividend in the amount of $0.15 per share of common stock to be paid on May 24, 2022 to all shareholders of record as of the close of business on May 17, 2022.

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 and our Annual Report on Form 10-K for the fiscal year ended December 26, 2021. Comparative segment revenues and related financial information are discussed herein and are presented in Note 14 to our Unaudited Consolidated Financial Statements. See “Forward Looking Statements” on page 3 of this report and “Risk Factors” included in our filings with the SEC, including our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 26, 2021, for a description of important factors that could cause actual results to differ from expected results. Please also refer to Note 4- Discontinued Operation, and to our unaudited consolidated financial statements.

Our historical financial information may not be indicative of our future performance.

Overview

We are a leading national provider of professional workforce solutions 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, VTS October 2015, Zycron, in April 2017, Smart in September 2017, and LJK in December 2019, 100% of the equity of EdgeRock in February 2020, and substantially all of the assets of Momentum Solutionz in February 2021. We have continuing operations in two industry segments: Real Estate and Professional, and discontinued operations in the Light Industrial segment (see Note 4, and our unaudited consolidated financial statements). We provide workforce solutions to client partners primarily within the United States of America. We currently operate across 46 states and D.C.

On March 21, 2022, we completed the sale of substantially all our Light Industrial segment, (“InStaff”) assets to Jobandtalent (“J&T”), through their wholly-owned subsidiary, Sentech Engineering Services, Inc. We received approximately $30.3 million at the closing of the sale, and, subject to the terms of the Asset Purchase Agreement, will receive an additional $2 million on the first anniversary of the closing of the transaction.

We have classified the related assets and liabilities associated with our Light Industrial segment, InStaff, as discontinued operations in our Consolidated Balance Sheets. The results of InStaff business have been presented as discontinued operations in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows for all periods presented. The sale represents a strategic shift in our business that will have a major effect on our operations and financial results. See “Note 4 — Discontinued Operations” of our unaudited consolidated financial statements for information regarding our discontinued operations.

Our Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings currently in 34 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent.

Our Professional segment provides skilled field talent on a nationwide basis for IT and finance, accounting, legal and human resource client partner projects. Our Professional segment operates through three divisions, IT Consulting, IT Infrastructure & Development, and Finance and Accounting under various trade names including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and Momentum Solutionz.

Our business normally experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our client partners’ businesses. Demand for our Real Estate workforce solutions increase in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our Light Industrial workforce solutions increases during the third quarter of the year and peaks in the fourth quarter due to increases in the demand for holiday help. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.

Impact of COVID-19

We continue to observe the impact of the COVID-19 on our consolidated operating results, our candidate and field talent supply chain, and our client partners demand in all segments. We will continue to monitor the situation and may find it necessary, in the future, to take further actions that alter our business operations as may be required by federal, state, local authorities, or that we determine are in the best interests of our team members, field talent, client partners, and stockholders.

Results of Operations

The following tables summarize key components of our results from continuing operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our unaudited consolidated financial statements. The Fiscal 2021 (as defined below) consolidated statement of operations and comprehensive income includes eight weeks of Momentum operations.


		Thirteen Weeks Ended
			March 27, 2022		March 28, 2021
			(dollars in thousands)
Revenues			$	68,542	$	49,750
Cost of services			45,111		33,535
	Gross profit		23,431		16,215
Selling, general and administrative expenses			19,716		15,302


Depreciation and amortization			899		836
	Operating income		2,816		77

Interest expense, net			(273)		(377)
	Income (loss) from continuing operations before income taxes		2,542		(300)
Income tax (expense) benefit from continuing operations			(534)		89
	Income (loss) from continuing operations		2,008		(212)
Income from discontinued operations:
	Income		1,235		1,156
	Gain on sale		17,273		—
	Income tax expense		(4,716)		(232)
	Net income		$	15,800	$	712


		Thirteen Weeks Ended
			March 27, 2022		March 28, 2021
Revenues			100.0	%	100.0	%
Cost of services			65.8	%	67.4	%
	Gross profit		34.2	%	32.6	%
Selling, general and administrative expenses			28.8	%	30.8	%


Depreciation and amortization			1.3	%	1.7	%
	Operating income		4.1	%	0.2	%

Interest expense, net			(0.4)	%	(0.8)	%
	Income (loss) from continuing operations before income taxes		3.7	%	(0.6)	%
Income tax (expense) benefit from continuing operations			(0.8)	%	0.2	%
	Income (loss) from continuing operations		2.9	%	(0.4)	%

Thirteen Week Fiscal Period Ended March 27, 2022 (“Fiscal 2022”) Compared with Thirteen Week Fiscal Period Ended March 28, 2021 (“Fiscal 2021”)


Revenues:		Thirteen Weeks Ended
		March 27, 2022				March 28, 2021
		(dollars in thousands)
Revenues by segment:
	Real Estate	$	25,916	37.8	%	$	18,613	37.4	%
	Professional	42,626		62.2	%	31,137		62.6	%
	Total Revenues	$	68,542	100.0	%	$	49,750	100.0	%

Real Estate Revenues: Real Estate revenues increased approximately $7.3 million (39.2%). The increase was due to a 25.6% increase in billed hours and a 9.6% increase in average bill rate.

Professional Revenues: Professional revenues increased approximately $11.4 million (36.9%), primarily due to the IT Consulting division of approximately $8.9 million, the 2021 Momentum acquisition incrementally added $1.2 million from thirteen weeks of revenue in Fiscal 2022 vs. eight weeks in Fiscal 2021, a 37% increase in billed hours, and a slight increase in average bill rate.

Gross Profit:

Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs.


		Thirteen Weeks Ended
		March 27, 2022				March 28, 2021
		(dollars in thousands)
Gross Profit by segment:
	Real Estate	$	9,971	42.6	%	$	6,866	42.3	%
	Professional	13,460		57.4	%	9,349		57.7	%
	Total Gross Profit	$	23,431	100.0	%	$	16,215	100.0	%


		Thirteen Weeks Ended
		March 27, 2022		March 28, 2021
Gross Profit Percentage by segment:
	Real Estate	38.5	%	36.9	%
	Professional	31.6	%	30.0	%
	Company Gross Profit	34.2	%	32.6	%

Overall, our gross profit increased approximately $7.2 million (44.5%). As a percentage of revenue, gross profit has increased to 34.2% from 32.6%, primarily due to higher gross profits from across all segments.

We determine spread as the difference between bill rate and pay rate.

Real Estate Gross Profit: Real Estate gross profit increased approximately $3.1 million (45.2%) in line with the increase in revenue and an 11.5% increase in average spread.

Professional Gross Profit: Professional gross profit increased approximately $4.1 million (44.0%) primarily due to the IT Consulting division of approximately $3.0 million, the 2021 Momentum acquisition incrementally added $0.6 million from thirteen weeks of revenue in Fiscal 2022 vs. eight weeks in Fiscal 2021, and overall increase in gross profit was affected by a 3.1% increase in average spread.

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $4.4 million (28.8%), primarily due to additional compensation generated from increased overall gross profit and from the Momentum acquisition with thirteen weeks of operations in Fiscal 2022 vs. eight weeks in Fiscal 2021. The components of selling, general and administrative expense are detailed in the following table:


	Thirteen Weeks Ended
	March 27, 2022				March 28, 2021
	Amount		% of Revenue		Amount		% of Revenue		$ Change		% Change
	(dollars in thousands)
Compensation and related	$	15,236	22	%	$	11,659	23	%	$	3,577	31	%
Advertising and recruitment	483		1	%	358		1	%	125		35	%
Occupancy and office operations	797		1	%	812		2	%	(15)		(2)	%
Client engagement	189		—	%	29		—	%	160		552	%
Software	1,115		2	%	603		1	%	512		85	%
Professional fees	421		1	%	436		1	%	(15)		(3)	%
Public company related costs	173		—	%	192		—	%	(19)		(10)	%
Bad debt	51		—	%	34		—	%	17		50	%
Share-based compensation	211		—	%	221		—	%	(10)		(5)	%
Transaction fees	—		—	%	136		—	%	(136)		(100)	%
IT roadmap	365		1	%	422		1	%	(58)		(14)	%

Other	674		1	%	401		1	%	274		68	%
Total	$	19,716	29	%	$	15,302	31	%	$	4,412	29	%

Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.1 million (7.5%). The increase in depreciation and amortization is primarily due to the information technology improvement project.

Interest Expense, net: Interest expense, net decreased primarily due to the gain from the cancellation of the interest rate swap arrangement that was partially offset by increases to amortization on the deferred finance costs from the pay down of the balance on the exiting Term Loan and a portion of the Revolving Facility, and a higher average balance on the Revolving Facility.

Income Tax (Expense) Benefit: Income tax (expense) benefit increased primarily due to higher state taxes, offset by a higher Work Opportunity Tax Credit in Fiscal 2022.

Use of Non-GAAP Financial Measures

We present Adjusted EBITDA (defined below), a measure that is not in accordance with accounting principles generally accepted in the United States of America (“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 our management. In addition, the financial covenants in our credit agreement are based on EBITDA as defined in the credit agreement.

We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, intangible impairment losses, transaction fees, and the non-capital information technology project (“IT roadmap”) and certain non-cash expenses such as the gain on contingent consideration 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 or income (loss) from continuing operations for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

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. 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 or income (loss) from continuing operations 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 ongoing operating performance.


	Thirteen Weeks Ended			Trailing Twelve Months Ended
		March 27, 2022		March 28, 2021		March 27, 2022
		(dollars in thousands)
Income (loss) from continuing operations		$	2,008	$	(212)	$	12,677
Income tax expense (benefit) from continuing operations		534		(89)		3,262
Interest expense, net		274		377		1,330

Operating income		2,816		76		17,269
CARES Act credit		—		—		(2,084)
Depreciation and amortization		899		836		3,761

Gain on contingent consideration		—		—		(2,403)
Share-based compensation		211		221		1,049
Transaction fees		—		136		35
Adjusted EBITDA from continuing operations		3,926		1,269		17,627
Adjusted EBITDA from discontinued operations, net of gain		985		1,194		4,504
Adjusted EBITDA, net of gain		$	4,911	$	2,463	$	22,131

Liquidity and Capital Resources

Our working capital requirements are primarily driven by field talent payments, tax payments and client partner accounts receivable receipts. Since receipts from client partners lag payments to field talent, 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 with BMO Harris Bank, N.A. (“BMO”), that provides for a revolving credit facility maturing July 16, 2024 (the “Revolving Facility”). Our primary uses of cash are payments to field talent, team members, related payroll liabilities, operating expenses, capital

expenditures, cash interest, cash taxes, dividends, and contingent consideration and debt 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 markets 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 $100 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.

During this period of uncertainty of volatility related to COVID-19, we will continue to monitor our liquidity, particularly payments from our client partners.

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


		March 27, 2022		December 26, 2021
		(dollars in thousands)
Working capital from continuing operations		$	28,276	$	25,851

		Thirteen Weeks Ended
		March 27, 2022		March 28, 2021
		(dollars in thousands)
Net cash provided by (used in) continuing operations:
	Operating activities	$	(1,060)	$	(1,184)
	Investing activities	28,263		(4,320)
	Financing activities	(27,963)		2,417
Net change in cash and cash equivalents discontinued operations		648		3,087
Net change in cash and cash equivalents		$	(112)	$	—

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.

During Fiscal 2022, net cash used in continuing operations activities was $1.1 million, a decrease of $0.1 million compared with $1.2 million for Fiscal 2021. This increase is primarily attributable to payments of deferred employer FICA for the CARES Act in other current liabilities and payments on accrued payroll and expenses, which were partially offset by additional income taxes payable.

Investing Activities

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

In Fiscal 2022, we received $30.3 million in connection to the sale of InStaff and we made capital expenditures of $2.1 million mainly related to the IT roadmap and for software and computer equipment purchased in the ordinary course of business. In Fiscal 2021, we paid $3.8 million in connection with the Momentum acquisition and we made capital expenditures

of $0.5 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap.

Financing Activities

Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement and payment of dividends.

For Fiscal 2022, we paid down $26.9 million on the Term Loan, as discussed below, we paid $1.6 million in cash dividends on our common stock, we paid $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed $1.4 million on our Revolving Facility for increased working capital needs. For Fiscal 2021, we borrowed $3.8 million on our Revolving Facility, and paid $1.0 million in cash dividends on our common stock, and paid down $0.4 million on the Term Loan.

Credit Agreements

On July 16, 2019, we entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, with BMO, as led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for a Revolving Facility permitting us to borrow funds from time to time in an aggregate amount up to $35 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting us to borrow funds from time to time in an aggregate amount not to exceed $30 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded. We may from time to time, with a maximum of two, request an increase in the aggregate Term Loan commitment by $40 million, with minimum increases of $10 million. Our obligations under the Credit Agreement are secured by a first priority security interest in substantially all our tangible and intangible property. The Credit Agreement bears 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). We also pay an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan.

The Credit Agreement contains customary affirmative covenants and negative covenants. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement. The Company was in compliance with these covenants as of March 27, 2022.

Off-Balance Sheet Arrangements

Letter of Credit

In March 2020, in conjunction with the 2020 EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of March 27, 2022, we had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which is considered usage against our Revolving Facility.

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 26, 2021 for a more detailed discussion of our critical accounting policies.

The COVID-19 pandemic continues to have a significant impact on our economy as a result of measures designed to stop the spread of the virus. In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. As COVID-19 continues to develop, management may make changes to these estimates and judgments over time, which could result in meaningful impacts to our financial statements in future periods. Actual results and outcomes may differ from management’s estimates and assumptions.

Revenue Recognition

We derive our revenues from continuing operations in Real Estate and Professional segments. We provide workforce solutions and placement services. Revenues are recognized when promised workforce solutions are delivered to client partners, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations and comprehensive income represent workforce solutions rendered to client partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services.

We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified field talent, (ii) have the discretion to select the field talent and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client partners.

Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which we have a right to invoice, when the services are rendered by our field talent.

Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control transferred to the client partner, usually when employment candidates start their employment.

We estimate the effect of placement candidates who do not remain with our client partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period.

Intangible Assets

We hold intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized.

We capitalize purchased software and internal payroll costs directly incurred in the modification of software for internal use. Software maintenance and training costs are expensed in the period incurred.

We evaluate the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. We annually evaluate 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. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. If we have determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, we may use a qualitative assessment for the annual impairment test. We determined there were no impairment indicators for goodwill assets during Fiscal 2022 or Fiscal 2021

Contingent Consideration

We have obligations, to be paid in cash, related to our 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 fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.

Leases

We lease all their office space through operating leases, which expire at various dates through 2025. Many of the lease agreements obligate us to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of our lease arrangements contain renewal provisions from 3 to 10 years, exercisable at our option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

We determine if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term.

Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Our operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.

Financial Instruments

We use fair value measurements in areas that include, but are not limited to, interest rate swap agreements used to mitigate interest rate risk, and 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 bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with BMO Harris Bank, N.A. ("BMO") that provides for the revolving credit facility and term loan and current rates available to us for debt with similar terms and risk. The fair value on the interest rate swap is based on quoted prices from BMO.

Share-Based Compensation

We recognize compensation expense in selling, general and administrative expenses over the service period for options or restricted stock 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.

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. We recognizes any penalties when necessary as part of selling, general and administrative expenses. As of March 27, 2022, goodwill of $26.4 million, which is limited annually, is expected to be deductible for tax purposes. As a matter of operation, we first calculate the effective tax on continuing operations, and then allocated the remaining taxes to our discontinued operations, in accordance with Accounting Standards Codification (“ASC”) Topic 740.

Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified net as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. 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. As of March 27, 2022, we have a $4.9 million net operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date. These net operating losses are subject to an annual Internal Revenue Code Section 382 limitation of $1.3 million.

When appropriate, we will 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.

We follow the guidance of 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.

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 26, 2021.

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

A portion of our Revolving Facility and Term Loan are priced at variable interest rates. Accordingly, future interest rate increases could potentially put us at risk for an adverse impact on future earnings and cash flows.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective, at a reasonable assurance level, in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls Over Financial Reporting

For the fiscal quarter ended March 27, 2022, 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. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our team members are working remotely due to COVID-19. We are continually monitoring and assessing the impact of the ongoing COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.

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 errors 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.

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 fiscal year ended December 26, 2021.

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 fiscal year ended December 26, 2021 (our “2021 Form 10-K”), and filed with the SEC on March 10, 2021. 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 2021 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.

Item 6. Exhibits

The following exhibits are filed or furnished with this Quarterly Report on Form 10-Q.


Exhibit Number						Description

2.1						Asset Purchase Agreement, dated as of February 8, 2021, between BG Staffing, LLC, Momentum Solutionz LLC, Lorne Kaufman, and Jeff Servidio (incorporated by reference from the registrant’s Current Report on Form 8-K filed on February 11, 2021)
2.2						As set Purchase Agreement, dated as of February 28, 2022, between BGSF, Inc., Sentech Engineering Services, Inc., and Jobandtalent Holding Limited (incorporated by reference from the registrant's Current Report on Form 8-K filed on March 1, 2022)
3.1						Certificate of Incorporation of BG Staffing, Inc. (incorporated by reference from Amendment No. 2 to the Company’s registration statement on Form S-1 (File No. 333-191683) filed on November 4, 2013).
3.2						Certificate of Amendment to Certificate of Incorporation of BGSF, Inc. (incorporated by reference from the registrant's Current Report on Form 8-K filed on February 12, 2021).
3.3						Bylaws of BG Staffing, Inc. (incorporated by reference from Amendment No. 2 to the Company’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 Company’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 to Section 906 of the Sarbanes-Oxley Act of 2002.
101*						The following financial information from BGSF's Quarterly Report on Form 10-Q for the quarter ended March 27, 2022 formatted in Inline XBRL (Extensible Business Reporting Language) includes: (i) the Unaudited Consolidated Balance Sheets, (ii) the Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) the Unaudited Statements of Changes in Stockholders' Equity, (iv) the Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Consolidated Financial Statements.
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


			*			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.

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.


			BGSF, INC.

						/s/ Beth Garvey
			Name:			Beth Garvey
			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: May 5, 2022