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 September 24, 2017March 29, 2020
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to .
Commission File Number: 001-36704
BG STAFFING, INC. 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, Texas75024
(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. Yesþ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesþ 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 | þ | |
| 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 |
The number of shares outstanding of the registrant’s common stock as of October 30, 2017May 6, 2020 was 8,759,376.10,306,986.
TABLE OF CONTENTS
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,"“aim,” “potential,” “may,” “could,” “can,” “would,” “might,” “likely,” “will,” “expect,” “intend,” “plan,” “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 workers’field talents’ compensation insurance coverage at commercially reasonable terms;
the availability of qualified temporary workers;field talent;
compliance with federal, state and local labor and employment laws and regulations and changes in such laws and regulations;
the ability to compete with new competitors and competitors with superior marketing and financial resources;
management team changes;
the favorable resolution of current or future litigation;
the impact of outstanding indebtedness on the ability to fund operations or obtain additional financing;
the ability to leverage the benefits of recent acquisitions and successfully integrate newly acquired operations;
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;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 25, 2016.29, 2019.
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.
Where You Can Find Other Information
Our website is www.bgstaffing.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. These reports and other information, including exhibits filed or furnished therewith, are also available at the SEC’s website at www.sec.gov. You may also obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
BG Staffing, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED BALANCE SHEETS
| September 24, 2017 | December 25, 2016 | March 29, 2020 | December 29, 2019 | |||||||||||||||||
| ASSETS | ASSETS | ASSETS | ||||||||||||||||||
| Current assets | Current assets | Current assets | ||||||||||||||||||
| Accounts receivable (net of allowance for credit losses of $518,481 at 2020 and $468,233 for 2019) | $ | 42,634,730 | $ | 39,423,801 | ||||||||||||||||
| Accounts receivable (net of allowance for doubtful accounts of $473,573 at 2017 and 2016) | $ | 40,618,312 | $ | 33,328,900 | Prepaid expenses | 2,452,485 | 1,224,230 | |||||||||||||
| Prepaid expenses | 529,469 | 950,696 | Income taxes receivable | — | 69,649 | |||||||||||||||
| Other current assets | 98,261 | 154,673 | Other current assets | 515,897 | 19,516 | |||||||||||||||
| Total current assets | 41,246,042 | 34,434,269 | Total current assets | 45,603,112 | 40,737,196 | |||||||||||||||
| Property and equipment, net | Property and equipment, net | 1,700,470 | 1,910,858 | Property and equipment, net | 4,822,162 | 3,545,049 | ||||||||||||||
| Other assets | Other assets | Other assets | ||||||||||||||||||
| Deposits | 2,799,813 | 2,657,517 | Deposits | 3,915,441 | 3,843,023 | |||||||||||||||
| Deferred income taxes, net | 9,916,170 | 9,512,455 | Deferred income taxes, net | 2,849,646 | 4,071,847 | |||||||||||||||
| Intangible assets, net | 38,803,342 | 23,514,376 | Right-of-use asset - operating leases | 5,696,218 | 4,386,317 | |||||||||||||||
| Goodwill | 17,826,199 | 9,184,659 | Intangible assets, net | 43,875,709 | 33,807,973 | |||||||||||||||
| Total other assets | 69,345,524 | 44,869,007 | Goodwill | 31,372,990 | 25,194,639 | |||||||||||||||
| Total assets | $ | 112,292,036 | $ | 81,214,134 | Total other assets | 87,710,004 | 71,303,799 | |||||||||||||
| Total assets | $ | 138,135,278 | $ | 115,586,044 | ||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||||
| Current liabilities | Current liabilities | Current liabilities | ||||||||||||||||||
| Long-term debt, current portion (net of deferred finance fees of $142,090 and $-0- for 2017 and 2016, respectively) | $ | 2,614,160 | $ | — | Long-term debt, current portion | $ | 1,300,000 | $ | 375,000 | |||||||||||
| Accrued interest | 308,979 | 100,868 | Accrued interest | 181,376 | 73,027 | |||||||||||||||
| Accounts payable | 1,946,662 | 951,672 | Accounts payable | 226,729 | 479,422 | |||||||||||||||
| Accrued payroll and expenses | 12,566,637 | 9,668,475 | Accrued payroll and expenses | 13,672,842 | 10,079,832 | |||||||||||||||
| Accrued workers’ compensation | 281,237 | 754,556 | Accrued workers’ compensation | 53,598 | 405,207 | |||||||||||||||
| Contingent consideration, current portion | 5,535,068 | 3,580,561 | Contingent consideration, current portion | 1,159,956 | — | |||||||||||||||
| Other current liabilities | 317,294 | — | Lease liability, current portion | 1,612,277 | 1,277,843 | |||||||||||||||
| Income taxes payable | 437,337 | 193,264 | Other current liabilities | 1,000,000 | 1,016,565 | |||||||||||||||
| Total current liabilities | 24,007,374 | 15,249,396 | Income taxes payable | 330,623 | — | |||||||||||||||
| Total current liabilities | 19,537,401 | 13,706,896 | ||||||||||||||||||
| Line of credit (net of deferred finance fees of $791,699 and $264,520 for 2017 and 2016, respectively) | 19,598,722 | 23,618,194 | ||||||||||||||||||
| Long-term debt, less current portion (net of deferred finance fees of $277,750 and $-0- for 2017 and 2016, respectively) | 21,466,000 | — | ||||||||||||||||||
| Line of credit (net of deferred finance fees of $324,185 and $351,128 for 2020 and 2019, respectively) | Line of credit (net of deferred finance fees of $324,185 and $351,128 for 2020 and 2019, respectively) | 20,687,209 | 19,993,829 | |||||||||||||||||
| Long-term debt, less current portion | Long-term debt, less current portion | 24,700,000 | 7,125,000 | |||||||||||||||||
| Contingent consideration, less current portion | Contingent consideration, less current portion | 4,891,847 | 1,586,324 | Contingent consideration, less current portion | 1,063,783 | 2,174,378 | ||||||||||||||
| Other long-term liabilities | 219,061 | 271,766 | ||||||||||||||||||
| Lease liability, less current portion | Lease liability, less current portion | 5,090,893 | 4,128,951 | |||||||||||||||||
| Total liabilities | 70,183,004 | 40,725,680 | Total liabilities | 71,079,286 | 47,129,054 | |||||||||||||||
| Commitments and contingencies | Commitments and contingencies | Commitments and contingencies | ||||||||||||||||||
| Preferred stock, $0.01 par value per share, 500,000 shares authorized, -0- shares issued and outstanding | Preferred stock, $0.01 par value per share, 500,000 shares authorized, -0- shares issued and outstanding | — | — | Preferred stock, $0.01 par value per share, 500,000 shares authorized, -0- shares issued and outstanding | — | — | ||||||||||||||
| Common stock, $0.01 par value per share; 19,500,000 shares authorized,8,759,376 and 8,668,485 shares issued and outstanding for 2017 and 2016, respectively | 87,594 | 86,685 | ||||||||||||||||||
| Common stock, $0.01 par value per share; 19,500,000 shares authorized, 10,306,986 and 10,309,236 shares issued and outstanding for 2020 and 2019, respectively, net of treasury stock, at cost, 1,004 shares for 2020 and 2019 | Common stock, $0.01 par value per share; 19,500,000 shares authorized, 10,306,986 and 10,309,236 shares issued and outstanding for 2020 and 2019, respectively, net of treasury stock, at cost, 1,004 shares for 2020 and 2019 | 75,752 | 75,775 | |||||||||||||||||
| Additional paid in capital | Additional paid in capital | 37,585,052 | 36,142,688 | Additional paid in capital | 59,810,723 | 59,617,787 | ||||||||||||||
| Retained earnings | Retained earnings | 4,436,386 | 4,259,081 | Retained earnings | 7,169,517 | 8,763,428 | ||||||||||||||
| Total stockholders’ equity | 42,109,032 | 40,488,454 | Total stockholders’ equity | 67,055,992 | 68,456,990 | |||||||||||||||
| Total liabilities and stockholders’ equity | $ | 112,292,036 | $ | 81,214,134 | Total liabilities and stockholders’ equity | $ | 138,135,278 | $ | 115,586,044 | |||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
BG Staffing, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
For the Thirteen Week Periods Ended March 29, 2020 and March 31, 2019
| Thirteen Weeks Ended | |||||||||
| 2020 | 2019 | ||||||||
| Revenues | $ | 74,067,429 | $ | 68,776,067 | |||||
| Cost of services | 53,791,698 | 50,337,427 | |||||||
| Gross profit | 20,275,731 | 18,438,640 | |||||||
| Selling, general and administrative expenses | 16,203,624 | 13,620,423 | |||||||
| Depreciation and amortization | 1,414,713 | 1,231,509 | |||||||
| Operating income | 2,657,394 | 3,586,708 | |||||||
| Interest expense, net | 456,025 | 353,237 | |||||||
| Income before income taxes | 2,201,369 | 3,233,471 | |||||||
| Income tax expense | 702,509 | 737,447 | |||||||
| Net income | $ | 1,498,860 | $ | 2,496,024 | |||||
| Net income per share: | |||||||||
| Basic | $ | 0.15 | $ | 0.24 | |||||
| Diluted | $ | 0.14 | $ | 0.24 | |||||
| Weighted-average shares outstanding: | |||||||||
| Basic | 10,308,445 | 10,229,462 | |||||||
| Diluted | 10,382,999 | 10,404,355 | |||||||
| Cash dividends declared per common share | $ | 0.30 | $ | 0.30 | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
BG Staffing, Inc. and Subsidiaries
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | ||||||||||||||
| Revenues | $ | 71,281,674 | $ | 67,407,350 | $ | 196,899,224 | $ | 189,573,350 | |||||||||
| Cost of services | 53,033,615 | 50,975,462 | 147,752,650 | 144,610,307 | |||||||||||||
| Gross profit | 18,248,059 | 16,431,888 | 49,146,574 | 44,963,043 | |||||||||||||
| Selling, general and administrative expenses | 11,175,596 | 10,291,746 | 31,562,377 | 28,668,466 | |||||||||||||
| Depreciation and amortization | 1,436,279 | 1,673,546 | 4,672,755 | 5,181,456 | |||||||||||||
| Operating income | 5,636,184 | 4,466,596 | 12,911,442 | 11,113,121 | |||||||||||||
| Loss on extinguishment of debt | — | — | — | (404,119 | ) | ||||||||||||
| Interest expense, net | (883,668 | ) | (701,968 | ) | (2,279,652 | ) | (3,278,182 | ) | |||||||||
| Income before income taxes | 4,752,516 | 3,764,628 | 10,631,790 | 7,430,820 | |||||||||||||
| Income tax expense | 1,615,653 | 1,416,773 | 3,908,570 | 2,852,346 | |||||||||||||
| Net income | $ | 3,136,863 | $ | 2,347,855 | $ | 6,723,220 | $ | 4,578,474 | |||||||||
| Net income per share: | |||||||||||||||||
| Basic | $ | 0.36 | $ | 0.27 | $ | 0.77 | $ | 0.58 | |||||||||
| Diluted | $ | 0.35 | $ | 0.26 | $ | 0.75 | $ | 0.56 | |||||||||
| Weighted-average shares outstanding: | |||||||||||||||||
| Basic | 8,759,376 | 8,658,061 | 8,724,811 | 7,920,000 | |||||||||||||
| Diluted | 9,077,147 | 9,028,398 | 9,019,878 | 8,219,876 | |||||||||||||
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Thirty-nineThirteen Week PeriodPeriods Ended September 24, 2017March 31, 2019 and March 29, 2020
| Common Stock | |||||||||||||||||||||||
Preferred Stock | Shares | Par Value | Additional Paid in Capital | Retained Earnings | Total | ||||||||||||||||||
| Stockholders’ equity, December 25, 2016 | $ | — | 8,668,485 | $ | 86,685 | $ | 36,142,688 | $ | 4,259,081 | $ | 40,488,454 | ||||||||||||
| Share-based compensation | — | — | — | 357,024 | — | 357,024 | |||||||||||||||||
| Issuance of shares, net of offering costs | — | 70,670 | 707 | 991,793 | — | 992,500 | |||||||||||||||||
| Exercise of common stock options | — | 20,221 | 202 | 93,547 | — | 93,749 | |||||||||||||||||
| Cash dividend declared ($0.25 per share) | — | — | — | — | (6,545,915 | ) | (6,545,915 | ) | |||||||||||||||
| Net income | — | — | — | — | 6,723,220 | 6,723,220 | |||||||||||||||||
| Stockholders’ equity, September 24, 2017 | $ | — | 8,759,376 | $ | 87,594 | $ | 37,585,052 | $ | 4,436,386 | $ | 42,109,032 | ||||||||||||
| Common Stock | |||||||||||||||||||||||||||
| Preferred Stock | Shares | Par Value | Treasury Stock Amount | Additional Paid in Capital | Retained Earnings | Total | |||||||||||||||||||||
| Stockholders’ equity, December 30, 2018 | $ | — | 10,227,247 | $ | 102,273 | $ | (24,027 | ) | $ | 57,624,379 | $ | 7,999,388 | $ | 65,702,013 | |||||||||||||
| Share-based compensation | — | — | — | — | 320,084 | — | 320,084 | ||||||||||||||||||||
| Cancellation of restricted shares | — | (2,250 | ) | (23 | ) | — | 23 | — | — | ||||||||||||||||||
| Exercise of common stock options and warrants | — | 4,916 | 49 | — | (49 | ) | — | — | |||||||||||||||||||
| Change in accounting principal - operating leases | — | — | — | — | — | (200,607 | ) | (200,607 | ) | ||||||||||||||||||
| Cash dividend declared | — | — | — | — | — | (3,068,847 | ) | (3,068,847 | ) | ||||||||||||||||||
| Net income | — | — | — | — | — | 2,496,024 | 2,496,024 | ||||||||||||||||||||
| Stockholders’ equity, March 31, 2019 | $ | — | 10,229,913 | $ | 102,299 | $ | (24,027 | ) | $ | 57,944,437 | $ | 7,225,958 | $ | 65,248,667 | |||||||||||||
| Stockholders’ equity, December 29, 2019 | $ | — | 10,309,236 | $ | 103,093 | $ | (27,318 | ) | $ | 59,617,787 | $ | 8,763,428 | $ | 68,456,990 | |||||||||||||
| Share-based compensation | — | — | — | — | 192,913 | — | 192,913 | ||||||||||||||||||||
| Cancellation of restricted shares | — | (2,250 | ) | (23 | ) | — | 23 | — | — | ||||||||||||||||||
| Cash dividend declared | — | — | — | — | — | (3,092,771 | ) | (3,092,771 | ) | ||||||||||||||||||
| Net income | — | — | — | — | — | 1,498,860 | 1,498,860 | ||||||||||||||||||||
| Stockholders’ equity, March 29, 2020 | $ | — | 10,306,986 | $ | 103,070 | $ | (27,318 | ) | $ | 59,810,723 | $ | 7,169,517 | $ | 67,055,992 | |||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
BG Staffing, Inc. and Subsidiaries
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Thirty-nineThirteen Week Periods Ended September 24, 2017March 29, 2020 and September 25, 2016March 31, 2019
| 2017 | 2016 | 2020 | 2019 | |||||||||||||||||||
| Cash flows from operating activities | Cash flows from operating activities | Cash flows from operating activities | ||||||||||||||||||||
| Net income | $ | 6,723,220 | $ | 4,578,474 | Net income | $ | 1,498,860 | $ | 2,496,024 | |||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||||||
| Depreciation | 428,155 | 355,833 | Depreciation | 227,271 | 202,426 | |||||||||||||||||
| Amortization | 4,244,600 | 4,825,623 | Amortization | 1,187,442 | 1,029,083 | |||||||||||||||||
| Loss on disposal of property and equipment | 17,373 | 10,192 | Amortization of deferred financing fees | 18,703 | 68,991 | |||||||||||||||||
| Loss on extinguishment of debt, net | — | 404,119 | Interest expense on contingent consideration payable | 49,360 | 48,874 | |||||||||||||||||
| Contingent consideration adjustment | — | 24,642 | Provision for credit losses | 31,658 | (53,457 | ) | ||||||||||||||||
| Amortization of deferred financing fees | 168,797 | 80,049 | Share-based compensation | 192,913 | 320,084 | |||||||||||||||||
| Amortization of debt discounts | — | 32,355 | Deferred income taxes | 311,700 | 543,023 | |||||||||||||||||
| Interest expense on contingent consideration payable | 907,340 | 1,449,316 | Net changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||||||||||
| Provision for doubtful accounts | 88,000 | 209,528 | Accounts receivable | 3,488,673 | 1,951,758 | |||||||||||||||||
| Share-based compensation | 357,024 | 252,972 | Prepaid expenses | (1,197,668 | ) | (1,475,294 | ) | |||||||||||||||
| Deferred income taxes | (403,715 | ) | (1,101,702 | ) | Other current assets | (6,381 | ) | — | ||||||||||||||
| Net changes in operating assets and liabilities, net of effects of acquisitions: | Deposits | (72,417 | ) | (325,480 | ) | |||||||||||||||||
| Accounts receivable | (1,803,486 | ) | (3,362,087 | ) | Accrued interest | 108,349 | (207,343 | ) | ||||||||||||||
| Prepaid expenses | 519,859 | 285,304 | Accounts payable | (272,290 | ) | 7,902 | ||||||||||||||||
| Other current assets | 72,150 | 30,547 | Accrued payroll and expenses | 1,100,437 | 748,466 | |||||||||||||||||
| Deposits | (137,726 | ) | (321,925 | ) | Accrued workers’ compensation | (351,609 | ) | (79,436 | ) | |||||||||||||
| Accrued interest | 208,111 | (291,954 | ) | Other current liabilities | (16,565 | ) | — | |||||||||||||||
| Accounts payable | (518,921 | ) | (324,372 | ) | Income taxes receivable and payable | 344,488 | 128,812 | |||||||||||||||
| Accrued payroll and expenses | 1,252,864 | 1,024,696 | Operating leases | 5,298 | (22,891 | ) | ||||||||||||||||
| Accrued workers’ compensation | (473,319 | ) | (56,101 | ) | Net cash provided by operating activities | 6,648,222 | 5,381,542 | |||||||||||||||
| Other current liabilities | 120,569 | (945,382 | ) | |||||||||||||||||||
| Income taxes payable | 244,072 | (7,159 | ) | |||||||||||||||||||
| Other long-term liabilities | (52,703 | ) | (41,398 | ) | ||||||||||||||||||
| Net cash provided by operating activities | 11,962,264 | 7,111,570 | ||||||||||||||||||||
| Cash flows from investing activities | Cash flows from investing activities | Cash flows from investing activities | ||||||||||||||||||||
| Business acquired, net of cash received | (24,500,000 | ) | — | Business acquired, net of cash received | (21,680,455 | ) | — | |||||||||||||||
| Capital expenditures | (895,989 | ) | (618,157 | ) | Capital expenditures | (1,049,673 | ) | (341,464 | ) | |||||||||||||
| Proceeds from the sale of property and equipment | 1,500 | 7,587 | Net cash used in investing activities | (22,730,128 | ) | (341,464 | ) | |||||||||||||||
| Net cash used in investing activities | (25,394,489 | ) | (610,570 | ) | ||||||||||||||||||
| 2017 | 2016 | |||||||||||||||||||||
| Cash flows from financing activities | Cash flows from financing activities | Cash flows from financing activities | ||||||||||||||||||||
| Net (payments) borrowings under line of credit | (3,492,293 | ) | 3,041,612 | |||||||||||||||||||
| Proceeds from issuance of long-term debt | 25,000,000 | — | ||||||||||||||||||||
| Principal payments on long-term debt | (500,000 | ) | (15,281,657 | ) | ||||||||||||||||||
| Payments of dividends | (6,545,915 | ) | (5,863,801 | ) | Net borrowings (payments) under line of credit | 674,677 | (133,731 | ) | ||||||||||||||
| Net proceeds from issuance of common stock | 86,249 | 15,254,406 | Proceeds from issuance of long-term debt | 18,500,000 | — | |||||||||||||||||
| Contingent consideration paid | — | (3,498,197 | ) | Principal payments on long-term debt | — | (1,837,500 | ) | |||||||||||||||
| Deferred financing costs | (1,115,816 | ) | (153,363 | ) | Payments of dividends | (3,092,771 | ) | (3,068,847 | ) | |||||||||||||
| Net cash provided by (used in) financing activities | 13,432,225 | (6,501,000 | ) | Net cash provided by (used in) financing activities | 16,081,906 | (5,040,078 | ) | |||||||||||||||
| Net change in cash and cash equivalents | Net change in cash and cash equivalents | — | — | Net change in cash and cash equivalents | — | — | ||||||||||||||||
| Cash and cash equivalents, beginning of period | Cash and cash equivalents, beginning of period | — | — | Cash and cash equivalents, beginning of period | — | — | ||||||||||||||||
| Cash and cash equivalents, end of period | Cash and cash equivalents, end of period | $ | — | $ | — | Cash and cash equivalents, end of period | $ | — | $ | — | ||||||||||||
| Supplemental cash flow information: | Supplemental cash flow information: | Supplemental cash flow information: | ||||||||||||||||||||
| Cash paid for interest | $ | 930,811 | $ | 2,221,430 | Cash paid for interest | $ | 235,493 | $ | 510,280 | |||||||||||||
| Cash paid for taxes, net of refunds | $ | 4,058,353 | $ | 3,961,226 | Cash paid for taxes, net of refunds | $ | 30,624 | $ | 54,201 | |||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
BG Staffing, Inc. is a national provider of temporary staffing servicesworkforce solutions that operates, along with its wholly owned subsidiaries BG Staffing, LLC, B G Staff Services Inc., BG Personnel, LP, and BG Finance and Accounting, Inc. (“BGFA”), BG California IT Staffing, Inc., BG California Multifamily Staffing, Inc., BG California Finance & Accounting Staffing, Inc., EdgeRock Technology Holdings, Inc. and EdgeRock Technologies, LLC (collectively, the “Company”), primarily within the United States of America in three3 industry segments: Multifamily,Real Estate, Professional, and Commercial. We now have 63 branch offices and 15 on-site locations located across 26 states.Light Industrial.
The MultifamilyReal Estate segment provides front office and maintenance temporary workersfield talent to various apartment communities and commercial buildings in 2329 states, via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.
The Professional segment provides skilled temporary workersfield talent on a nationwide basis for information technology ("IT"(“IT”) and finance, accounting, legal and accounting customerhuman resource client partner projects.
The CommercialLight Industrial segment provides temporary workersfield talent primarily to manufacturing, distribution, logistics, distribution, and call center customersclient partners needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.7 states.
Our business experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our customers’client partners’ business. Demand for our MultifamilyReal Estate staffing services typically increase in the second and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our CommercialLight Industrial staffing services typically increases during the third quarter of the year and peaks in the fourth quarter. Demand for our Commercial staffing services is lower during the first quarter in part due to customer shutdowns andincreases in the demand for holiday help. Overall demand can be affected by adverse weather conditions in the winter months.months as well as fluctuations in client partner demand. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.
The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of theirits knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended December 25, 2016,29, 2019, included in its Annual Report on Form 10-K.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.
Fiscal Periods
The Company has a 52/53 week fiscal year. Fiscal periods for the consolidated financial statements included herein are as of September 24, 2017March 29, 2020 and December 25, 2016,29, 2019, and include the thirteen and thirty-nine week periods ended September 24, 2017March 29, 2020 and September 25, 2016. The thirty-nine weeks ended September 24, 2017 and September 25, 2016 areMarch 31, 2019, referred to herein as Fiscal 20172020 and 2016,2019, respectively.
Reclassifications
Certain reclassifications have been made to the 20162019 financial statements to conform with the 20172020 presentation.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Management Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include allowances for credit losses, goodwill, intangible assets, income taxes, leave liability, and contingent consideration obligations related to acquisitions. Additionally, the valuation of share basedshare-based compensation option expense uses a model based upon interest rates, stock prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
Financial Instruments
The Company uses fair value measurements in areas that include, but are not limited to:to, the allocation of purchase price consideration to tangible and identifiable intangible assets and contingent consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of the bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with Texas CapitalBMO Harris Bank, National AssociationN.A. (“TCB”BMO”) that providesprovided for a revolving credit facility and term loan and current rates available to the Company for debt with similar terms and risk.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Concentration of Credit Risk
Concentration of credit risk is limited due to the Company's diverse customerclient partner base and their dispersion across many different industries and geographic locations nationwide. No single customerclient partner accounted for more than 10% of the Company’s accounts receivable as of September 24, 2017March 29, 2020 and December 25, 201629, 2019 or revenue for the thirty-ninethirteen week periods ended September 24, 2017March 29, 2020 (“Fiscal 2020”) and September 25, 2016.March 31, 2019 (“Fiscal 2019”). Geographic revenue in excess of 10% of the Company's consolidated revenue in Fiscal 20172020 and the related percentage for Fiscal 20162019 was generated in the following areas:
| Thirteen Weeks Ended | ||||||
| March 29, 2020 | March 31, 2019 | |||||
| Maryland | 11 | % | 11 | % | ||
| Massachusetts | 10 | % | 1 | % | ||
| Tennessee | 16 | % | 16 | % | ||
| Texas | 24 | % | 29 | % | ||
| Thirty-nine Weeks Ended | ||||||
| September 24, 2017 | September 25, 2016 | |||||
| Maryland | 12 | % | 13 | % | ||
| Tennessee | 11 | % | 5 | % | ||
| Texas | 30 | % | 32 | % | ||
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 customersclient partners in the normal course of business. Accounts receivable represents unpaid balances due from customers.client partners. The Company maintains an allowance for doubtful accountscredit losses for expected losses resulting from customers’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 customersclient 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 the recent coronavirus pandemic (“COVID-19”) on expected credit losses.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Changes in the allowance for doubtful accountscredit losses are as follows:
| Thirteen Weeks Ended | ||||||||
| March 29, 2020 | March 31, 2019 | |||||||
| Beginning balance | $ | 468,233 | $ | 468,233 | ||||
| EdgeRock Technology Holdings, Inc. (“EdgeRock”) acquisition | 47,498 | — | ||||||
| Provision for (recovery of) credit losses, net | 31,658 | (53,457 | ) | |||||
| Amounts (written off) collected, net | (28,908 | ) | 53,457 | |||||
| Ending balance | $ | 518,481 | $ | 468,233 | ||||
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
| September 24, 2017 | September 25, 2016 | September 24, 2017 | September 25, 2016 | |||||||||||||
| Beginning balance | $ | 473,573 | $ | 449,823 | $ | 473,573 | $ | 446,548 | ||||||||
| Provision for doubtful accounts | 75,772 | 162,612 | 88,000 | 209,528 | ||||||||||||
| Amounts written off, net | (75,772 | ) | (162,612 | ) | (88,000 | ) | (206,253 | ) | ||||||||
| Ending balance | $ | 473,573 | $ | 449,823 | $ | 473,573 | $ | 449,823 | ||||||||
Property and Equipment
Property and equipment are stated net of accumulated depreciation and amortization of $1,213,156$3.6 million and $1,301,295$2.8 million at September 24, 2017March 29, 2020 and December 25, 2016,29, 2019, respectively. During the thirty-nine week periods ended September 24, 2017, the Company disposed of fully depreciated assets primarily not in use with an original cost of $426,066.
Deposits
The Company maintains guaranteed costs policies for workers' compensation coverage in the states in which it operates, withTexas, Washington, and Ohio and minimal loss retention coverage for employeesteam members and field talent in the commercial segment.Light Industrial segment and its other non-Texas workforce. Under these policies, the Company is required to maintain refundable deposits of $2,565,817$3.7 million and $2,476,201,$3.6 million, which are included in Deposits in the accompanying consolidated balance sheets as of September 24, 2017March 29, 2020 and December 25, 2016,29, 2019, respectively.
Long-Lived Assets
The Company reviews its long-lived assets, primarily fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments during Fiscal 20172020 or Fiscal 2019.
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 Fiscal 2016.certain maintenance costs, which are accounted for separately. Certain of the Company’s lease arrangements contain renewal provisions from 1 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.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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 considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. Further, the Company assessed the current market capitalization, forecasts and the amount in the 2019 impairment test. The Company determined that a triggering event has not occurred which would require an interim impairment test to be performed.
Goodwill
Goodwill is not amortized, but instead is evaluated at the reporting unit level for impairment annually at the end of each fiscal year, or more frequently, if conditions indicate an earlier review is necessary. If the Company has determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, the Company may use a qualitative assessment for the annual impairment test.
The Company recognizes rental expenseconsidered the current and expected future economic and market conditions surrounding COVID-19 and its impact on a straight-line basis over the lifeeach of the agreement. Deferred rent is recognized as the difference between cash payments and rent expense, including any landlord incentives.
reporting units. The Company recorded paid-in-kind interest ondetermined that a monthly basistriggering event has not occurred which would require an interim impairment test to accrued interest. The first month following a quarter, the paid-in-kind accrued interest is reclassed to the related debt principal if not paid.be performed.
Deferred Financing Fees
Deferred financing fees are amortized onusing 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 hashad obligations, to be paid in cash, related to its acquisitions if certain future operating and financial goals arewere met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. Prior to Fiscal 2017, the calculation of the fair value of the expected future payments uses a discount rate that approximates the Company's weighted average cost of capital. For acquisitions beginning in Fiscal 2017, based on new valuation methodology, theThe fair value calculation of the expected future payments uses a discount rate that is 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 three3 segments: Multifamily,Real Estate, Professional, and Commercial.Light Industrial. The Company provides temporary staffingworkforce solutions and permanent 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 as presented on the consolidated statements of operations represent services rendered to customersclient partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalentthe related amounts of reimbursable expenses are included in cost of services.
Temporary staffing revenues - OurField talent revenues are generated based on negotiated rates and invoiced on a per-hour basis. Accordingly, temporary staffing revenuesfrom contracts with client partners are recognized onin the hours workedamount to which the Company has a right to invoice, when the services are rendered by the Company’s temporary workers.field talent.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Contingent placement staffing revenues - Permanent placement staffingAny revenues associated with services 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 permanent employment.
Retained search placement staffing revenues - any revenues from these services 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 permanent placement candidates who do not remain with its customersclient 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 customersclient partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period.
Refer to Note 13 for disaggregated revenues by segment.
Payment terms in the Company's contracts vary by the type and location of its client partner and the services offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of March 29, 2020. There were no revenues recognized during the thirteen week period ended March 29, 2020 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 29, 2020.
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 diluted 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 29, 2020 | March 31, 2019 | ||||||
| Weighted-average number of common shares outstanding: | 10,308,445 | 10,229,462 | |||||
| Effect of dilutive securities: | |||||||
| Stock options and restricted stock | 61,859 | 127,104 | |||||
| Warrants | 12,695 | 47,789 | |||||
| Weighted-average number of diluted common shares outstanding | 10,382,999 | 10,404,355 | |||||
| Stock options and restricted stock | 423,150 | 243,750 | |||||
| Antidilutive shares | 423,150 | 243,750 | |||||
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | ||||||||||||
| September 24, 2017 | September 25, 2016 | September 24, 2017 | September 25, 2016 | ||||||||||
| Weighted-average number of common shares outstanding: | 8,759,376 | 8,658,061 | 8,724,811 | 7,920,000 | |||||||||
| Effect of dilutive securities: | |||||||||||||
| Stock options | 279,735 | 323,313 | 260,404 | 263,915 | |||||||||
| Warrants | 38,036 | 47,024 | 34,663 | 35,961 | |||||||||
| Weighted-average number of diluted common shares outstanding | 9,077,147 | 9,028,398 | 9,019,878 | 8,219,876 | |||||||||
| Stock options | 178,000 | 50,000 | 178,000 | 50,000 | |||||||||
| Warrants | 32,250 | — | 32,250 | — | |||||||||
| Antidilutive shares | 210,250 | 50,000 | 210,250 | 50,000 | |||||||||
Income Taxes
The current provision for income taxes represents estimated amounts payable or refundable oneffective tax returns filed or to be filedrates of 31.9% and 22.8% for the year. The Company recognizes any penalties when necessary as partthirteen week periods ended March 29, 2020 and March 31, 2019, respectively, were primarily due to state taxes offset by the Work Opportunity Tax Credit in Fiscal 2019 and Fiscal 2020 and the non-deductibility of selling, general and administrative expenses. Goodwill is deductible for tax purposes.transaction costs related to the EdgeRock acquisition in Fiscal 2020.
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. The Company acquired a $6.9 million net operating loss carry forward in the 2020 EdgeRock acquisition.
When appropriate, wethe 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, we considerthe 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.
The Company recognizes any penalties when necessary as part of Selling, general and administrative expenses. Goodwill of $25.2 million is deductible for tax purposes.
The Company follows the guidance of Accounting Standards Codification ("ASC"(“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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") ASU 2014-09, Revenue from Contracts with Customers. Since May 2014, the FASB has issued additional and amended authoritative guidance regarding revenue from contracts with customers in order to clarify and improve the understanding of the implementation guidance. As amended, the new guidance requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The new standard is effective for annual and interim periods beginning after December 15, 2017. The Company is in the process of evaluating the impact of adoption. Based on the progress to date, the Company does not believe the adoption of this accounting guidance will have a material impact on the Company's financial condition or results of operations.
In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new standardguidance is effective for the Company beginning with the fourth quarter of 2020. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on the Company's financial condition or results of operations.
In May 2017,August 2018, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting which provides clarification on when modification accounting should be used for changes2018-13, Fair Value Measurement: Disclosure Framework - Changes to the terms or conditions of a share-based payment award.Disclosure Requirements for Fair Value Measurement. The new standard is effectivepart of the disclosure framework project and eliminates certain disclosure requirements for thefair value measurements, requires entities to disclose new information, and modifies existing disclosure requirements. The Company beginning withadopted this ASU on a prospective basis in the first quarter 2018.of fiscal 2020 which did not have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications on financial reporting, caused by reference rate reform. The new guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is still evaluating the impact, but does not anticipateexpect the adoption of ASU 2017-09 willthe standard to have a material impact on the Company's financial condition or results of operations.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
On April 3, 2017,December 13, 2019, the Company acquired substantially all of the assets and assumed certain liabilities of Zycron, Inc.L.J. Kushner & Associates, L.L.C. (“Zycron”LJK”) for an initial cash consideration paid of $18.5$8.5 million and issued $1.0 million (70,670(47,403 shares privately placed) of the Company's common stock at closing. An additional $0.5$1.0 million was held back as partial security for certain post-closing purchase price adjustments and indemnification obligations.liabilities. The purchase agreement further provides for contingent consideration of up to $3.0$2.5 million based on the performance of the acquired business for the two years following the date of acquisition. The purchase agreement contained a provision for a “true up” of acquired working capital under a process that is currently in progress.
The net assets acquired were assigned to the Professional segment. The acquisition of ZycronLJK allows the Company to strengthen and expand its IT operations throughoutthrough cybersecurity retained search services specializing in recruiting high and mid-level security professionals.
EdgeRock Technology Holding, Inc.
On February 3, 2020, the southeastern U.S. region and selected markets acrossCompany acquired 100% of the country with talent and project management services.equity of EdgeRock for a purchase price cash consideration of $21.7 million, subject to customary purchase price adjustments as specified in the purchase agreement. The purchase price at closing was paid out of available funds under the Company’s credit agreement led by BMO.
The 2016acquired business was assigned to the Professional segment. The acquisition of EdgeRock allows the Company to strengthen its operations in specialized IT consultants and technology professionals specialized in leading software and data ecosystems, as well as expand its IT geographic operations with offices in Arizona, Florida and Massachusetts.
The 2019 consolidated statement of operationsincome does not include any operating results of Zycron. 13 and 25EdgeRock. Eight weeks of ZycronEdgeRock operations are included in the thirteen and thirty-nine week periodsperiod ended September 24, 2017,March 29, 2020, which is approximately $9.0$6.5 million and $17.6 million, respectively, of revenue and and $0.9$0.4 million and $1.6 million, respectively, of operating income. The preliminary purchase priceacquisition has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows:
| Accounts receivable | $ | 4,345,312 | ||
| Prepaid expenses and other assets | 82,122 | |||
| Property and equipment | 128,431 | |||
| Intangible assets | 13,818,474 | |||
| Goodwill | 6,901,101 | |||
| Liabilities assumed | (2,983,222 | ) | ||
| Total net assets acquired | $ | 22,292,218 | ||
| Cash | $ | 18,500,000 | ||
| Hold back | 500,000 | |||
| Common stock | 1,000,000 | |||
| Working capital adjustment | (299,835 | ) | ||
| Fair value of contingent consideration | 2,592,053 | |||
| Total fair value of consideration transferred for acquired business | $ | 22,292,218 | ||
| Accounts receivable | $ | 6,731,260 | ||
| Prepaid expenses and other assets | 520,587 | |||
| Property and equipment, net | 296,309 | |||
| Right-of-use asset - operating leases | 1,714,984 | |||
| Intangible assets | 11,274,000 | |||
| Goodwill (non-deductible for tax purposes) | 6,178,351 | |||
| Current liabilities assumed | (2,409,551 | ) | ||
| Deferred income taxes, net | (910,501 | ) | ||
| Lease liability - operating leases | (1,714,984 | ) | ||
| Total net assets acquired | $ | 21,680,455 | ||
| Cash | $ | 21,680,455 | ||
| Total fair value of consideration transferred for acquired business | $ | 21,680,455 | ||
Estimated Fair Value | Estimated Useful Lives | |||||
| Covenants not to compete | $ | 475,000 | 5 years | |||
| Trade name | 5,006,000 | Indefinite | ||||
| Customer list | 8,337,474 | 10 years | ||||
| Total | $ | 13,818,474 | ||||
Estimated Fair Value | Estimated Useful Lives | |||||
| Covenants not to compete | $ | 302,000 | 5 years | |||
| Trade name | 7,000,000 | Indefinite | ||||
| Client partner list | 3,972,000 | 5 years | ||||
| Total | $ | 11,274,000 | ||||
For the thirteen week period ended March 29, 2020, the Company's incurred costs of Smart Resources, Inc. and Accountable Search, LLC (collectively, "Smart") for an initial cash consideration paid of $6.0 million. The purchase agreement provides for contingent consideration of up to $2.0$0.5 million based on the performance of the acquired business for the two years following the date of acquisition. The purchase agreement contained a provision for a “true up” of acquired working capital under a process that will begin approximately 90 days after the closing date.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| Accounts receivable | $ | 1,228,614 | ||
| Prepaid expenses and other assets | 36,816 | |||
| Property and equipment | 40,626 | |||
| Intangible assets | 4,927,045 | |||
| Goodwill | 1,740,439 | |||
| Liabilities assumed | (216,343 | ) | ||
| Total net assets acquired | $ | 7,757,197 | ||
| Cash | $ | 6,000,000 | ||
| Working capital adjustment | (3,440 | ) | ||
| Fair value of contingent consideration | 1,760,637 | |||
| Total fair value of consideration transferred for acquired business | $ | 7,757,197 | ||
Estimated Fair Value | Estimated Useful Lives | |||||
| Covenants not to compete | $ | 20,000 | 5 years | |||
| Customer list | 4,907,045 | 10 years | ||||
| Total | $ | 4,927,045 | ||||
Supplemental Unaudited Pro Forma Information
The Company estimates that the revenues and net income for the periods below that would have been reported if the ZycronLJK and SmartEdgeRock acquisitions had taken place on the first day of the Company's 20162019 fiscal year would be as follows (dollars in thousands, except per share amounts):
| Thirteen Weeks Ended | ||||||||
| March 29, 2020 | March 31, 2019 | |||||||
| Revenues | $ | 77,176 | $ | 79,890 | ||||
| Gross profit | $ | 21,184 | $ | 22,590 | ||||
| Net income | $ | 1,277 | $ | 3,041 | ||||
| Income per share: | ||||||||
| Basic | $ | 0.12 | $ | 0.30 | ||||
| Diluted | $ | 0.12 | $ | 0.29 | ||||
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | |||||||||||||||
| September 24, 2017 | September 25, 2016 | September 24, 2017 | September 25, 2016 | |||||||||||||
| Revenues | $ | 73,782 | $ | 80,519 | $ | 214,659 | $ | 228,577 | ||||||||
| Gross profit | $ | 19,196 | $ | 18,428 | $ | 54,391 | $ | 54,034 | ||||||||
| Net income | $ | 3,203 | $ | 2,933 | $ | 6,992 | $ | 5,270 | ||||||||
| Income per share: | ||||||||||||||||
| Basic | $ | 0.37 | $ | 0.34 | $ | 0.80 | $ | 0.67 | ||||||||
| Diluted | $ | 0.35 | $ | 0.32 | $ | 0.78 | $ | 0.64 | ||||||||
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 4.5%3.41% and tax expense of the pro forma adjustments at an effective tax raterates of approximately 36.8%31.9% for Fiscal 20172020 and 38.4%24.5% for Fiscal 2016.2019. The pro forma information presented includesoperating results include adjustments to LJK and EdgeRock related to synergy adjustments for expenses that will have a continuing impact onwould be duplicative and other non-recurring, non-operating and out of period expense items once integrated with the operations that management considers non-recurring in assessing Zycron and Smart's historical performances.Company.
Amounts set forth above are not necessarily indicative of the results that would have been attained had the ZycronLJK and SmartEdgeRock acquisitions taken place on the first day of the Company’s 20162019 fiscal year or of the results that may be achieved by the combined enterprise in the future.
NOTE 4 - LEASES
At March 29, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases was 4.0 years and 5.2%, respectively. The Company's future operating lease obligations that have not yet commenced are immaterial. For the thirteen week period ended March 29, 2020, the Company's cash paid for operating leases was $505,531, and operating lease and short-term lease costs were $491,019 and $126,378, respectively.
The undiscounted annual future minimum lease payments consist of the following at:
| March 29, 2020 | ||||
| 2020 | $ | 1,892,473 | ||
| 2021 | 1,925,177 | |||
| 2022 | 1,745,463 | |||
| 2023 | 1,136,654 | |||
| 2024 | 590,910 | |||
| Thereafter | 142,601 | |||
| Total lease payments | 7,433,278 | |||
| Interest | (730,108 | ) | ||
| Present value of lease liabilities | $ | 6,703,170 | ||
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 45 - INTANGIBLE ASSETS
Intangible assets are stated net of accumulated amortization of $34,501,414$45.5 million and $30,205,434$44.3 million at September 24, 2017March 29, 2020 and December 25, 2016,29, 2019, respectively. During the thirty-nine week periods ended September 24, 2017, the Company added $440,668 and reclassified $347,379 of software assets from property and equipment. Total amortizationAmortization expense for the thirteen week periods ended September 24, 2017 and September 25, 2016 was $1,291,925 and $1,548,914, respectively. Total amortization expense for the thirty-nine week periods ended September 24, 2017 and September 25, 2016 was $4,244,600 and $4,825,623, respectively.
fiscal years are comprised of following:
| Thirteen Weeks Ended | ||||||||
| March 29, 2020 | March 31, 2019 | |||||||
| Client partner lists | $ | 1,050,616 | $ | 908,099 | ||||
| Covenant not to compete | 69,689 | 42,250 | ||||||
| Acquisition intangibles | 1,120,305 | 950,349 | ||||||
| Computer software - amortization expense | 67,137 | 78,734 | ||||||
| Amortization expense | 1,187,442 | 1,029,083 | ||||||
| Computer software - selling, general and administrative expense | 18,822 | 5,806 | ||||||
| Total expense | $ | 1,206,264 | $ | 1,034,889 | ||||
NOTE 56 - ACCRUED PAYROLL AND EXPENSES AND CONTINGENT CONSIDERATION
Accrued payroll and expenses consist of the following at:
| March 29, 2020 | December 29, 2019 | |||||||
| Field talent payroll | $ | 6,952,089 | $ | 4,505,264 | ||||
| Field talent payroll related | 1,503,458 | 1,246,353 | ||||||
| Accrued bonuses and commissions | 1,682,872 | 1,585,681 | ||||||
| Other | 3,534,423 | 2,742,534 | ||||||
| Accrued payroll and expenses | $ | 13,672,842 | $ | 10,079,832 | ||||
| September 24, 2017 | December 25, 2016 | |||||||
| Temporary worker payroll | $ | 6,672,200 | $ | 5,547,161 | ||||
| Temporary worker payroll related | 2,570,505 | 2,033,602 | ||||||
| Accrued bonuses and commissions | 1,181,071 | 892,742 | ||||||
| Other | 2,142,861 | 1,194,970 | ||||||
| $ | 12,566,637 | $ | 9,668,475 | |||||
The following is a schedule of future estimated contingent consideration payments to various parties as of September 24, 2017:March 29, 2020:
| Estimated Cash Payment | Discount | Net | |||||||||
| Due in: | |||||||||||
| Less than one year | $ | 1,250,000 | $ | (90,044 | ) | $ | 1,159,956 | ||||
| One to two years | 1,250,000 | (186,217 | ) | 1,063,783 | |||||||
| Contingent consideration | $ | 2,500,000 | $ | (276,261 | ) | $ | 2,223,739 | ||||
| Estimated Cash Payment | Discount | Net | |||||||||
| Due in: | |||||||||||
| Less than one year | $ | 5,750,000 | $ | (214,932 | ) | $ | 5,535,068 | ||||
| One to two years | 3,250,000 | (727,741 | ) | 2,522,259 | |||||||
| Two to three years | 2,500,000 | (130,412 | ) | 2,369,588 | |||||||
| Contingent consideration | $ | 11,500,000 | $ | (1,073,085 | ) | $ | 10,426,915 | ||||
NOTE 67 - DEBT
Company and its subsidiaries. The Revolving Facility and Term Loan bearCredit 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 Amended Credit Agreement). Swing Line Loans bear interest at the Base Rate plus the Applicable Margin. All interest and commitment fees are generally paid quarterly. The Company’s obligations under the Amended Credit Agreement are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 29, 2020.
On February 3, 2020, the Company borrowed $18.5 million on the Term Loan in conjunction with the closing of the EdgeRock acquisition.
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 29, 2020, 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 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 29, 2020.
Line of Credit
At March 29, 2020 and December 29, 2019, $21.0 million and $20.3 million, respectively, was outstanding on the revolving facilities. Average daily balance for the thirteen week periods ended March 29, 2020 and March 31, 2019 was $19.2 million and $10.0 million, respectively.
Borrowings under the Revolving Facilityrevolving facilities consisted of and bore interest at:
| March 29, 2020 | December 29, 2019 | |||||||||||
| Base Rate | $ | 1,011,394 | 3.75 | % | $ | 2,844,957 | 5.25 | % | ||||
| LIBOR | 10,000,000 | 3.13 | % | 17,500,000 | 3.26 | % | ||||||
| LIBOR | 10,000,000 | 3.18 | % | — | — | % | ||||||
| Total | $ | 21,011,394 | $ | 20,344,957 | ||||||||
| September 24, 2017 | December 25, 2016 | |||||||||||
| Base Rate | $ | 5,390,421 | 5.25 | % | $ | 8,882,714 | 4.25 | % | ||||
| LIBOR | 5,000,000 | 4.05 | % | 5,000,000 | 3.95 | % | ||||||
| LIBOR | 5,000,000 | 4.06 | % | 5,000,000 | 3.99 | % | ||||||
| LIBOR | 5,000,000 | 4.07 | % | 5,000,000 | 4.16 | % | ||||||
| Total | $ | 20,390,421 | $ | 23,882,714 | ||||||||
Long-Term Debt
Long-term debt consists of and bore interest at:
| March 29, 2020 | December 29, 2019 | |||||||||||
| Base Rate | $ | 18,500,000 | 3.75 | % | $ | 7,500,000 | 5.25 | % | ||||
| LIBOR | 7,500,000 | 3.18 | % | — | — | % | ||||||
| Long-term debt | $ | 26,000,000 | $ | 7,500,000 | ||||||||
| September 24, 2017 | December 25, 2016 | |||||||||||
| Base Rate | $ | 700,000 | 5.25 | % | $ | — | — | % | ||||
| LIBOR | 6,500,000 | 4.30 | % | — | — | % | ||||||
| LIBOR | 6,500,000 | 4.31 | % | — | — | % | ||||||
| LIBOR | 6,000,000 | 4.32 | % | — | — | % | ||||||
| LIBOR | 4,800,000 | 4.33 | % | — | — | % | ||||||
| Less current portion on long-term debt | (2,756,250 | ) | — | |||||||||
| Long-term debt, less current portion | $ | 21,743,750 | $ | — | ||||||||
NOTE 78 - FAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value. The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities - includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets, for substantially the full term of the financial instrument; and
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 29, 2020 | December 29, 2019 | ||||||||
| Contingent consideration, net | Contingent consideration, net - current and long-term | Level 3 | $ | 2,223,739 | $ | 2,174,378 | ||||||
| Amounts Recorded at Fair Value | Financial Statement Classification | Fair Value Hierarchy | September 24, 2017 | December 25, 2016 | ||||||||
| Contingent consideration, net | Contingent consideration, net - current and long-term | Level 3 | $ | 10,426,915 | $ | 5,166,885 | ||||||
The changes in the Level 3 fair value measurements from December 25, 201629, 2019 to September 24, 2017 relateMarch 29, 2020 relates to $4.4 million in the Zycron and Smart acquisitions and $0.9 million in accretion. The keyKey inputs in determining the fair value of the contingent consideration as of September 24, 2017March 29, 2020 and December 25, 201629, 2019 included the discount ratesrate of ranging from 8% and 22%7.5% as well as management's estimates of future sales volumes and EBITDA.
NOTE 89 - CONTINGENCIES
The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made.
The Company is not currently a party to any material litigation; however, in the ordinary course of our business the Company is periodically threatened with or named as a defendant in various lawsuits or actions. The principal risks that the Company insures against, subject to and upon the terms and conditions of various insurance policies, areclaims or losses from workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses and director and officer liability.
Under the Company's bylaws, the Company’s directors and officers are indemnified against certain liabilities arising out of the performance of their duties to the Company. The Company also has an insurance policy for our directors and officers to insure them against liabilities arising from the performance of their positions with the Company or its subsidiaries. The Company has also entered into indemnification agreements with its directors and certain officers.
NOTE 910 – EQUITY
Authorized capital stock consists of 19,500,000 shares of common stock, par value $0.01 per share and 500,000 shares of undesignated preferred stock, par value $0.01 per share.
NOTE 1011 – SHARE-BASED COMPENSATION
Stock Options and Restricted Stock
For the thirteen week periods ended September 24, 2017March 29, 2020 and September 25, 2016,March 31, 2019, the Company recognized $92,293$0.2 million and $111,134$0.3 million of compensation costexpense related to stock option awards, respectively. For the thirty-nine week periods ended September 24, 2017 and September 25, 2016, the Company recognized $357,024 and $252,972 of compensation cost related to stock option awards, respectively. Unamortized stockshare-based compensation expense as of September 24, 2017March 29, 2020 amounted to $680,321,$1.5 million which is expected to be recognized over the next 2.62.5 years.
A summary of stock option and restricted stock 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) | |||||||||
| Awards outstanding at December 29, 2019 | 582,845 | $ | 18.32 | 7.5 | $ | 2,793 | ||||||
| Awards outstanding at March 29, 2020 | 582,845 | $ | 18.32 | 7.3 | $ | 241 | ||||||
| Awards exercisable at December 29, 2019 | 313,645 | $ | 16.05 | 6.8 | $ | 1,991 | ||||||
| Awards exercisable at March 29, 2020 | 326,395 | $ | 16.45 | 6.7 | $ | 85 | ||||||
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life | Total Intrinsic Value of Options (in thousands) | |||||||||
| Options outstanding at December 25, 2016 | 678,411 | $ | 8.95 | 7.8 | $ | 4,511 | ||||||
| Granted | 128,000 | $ | 16.76 | |||||||||
| Exercised | (28,800 | ) | $ | 7.71 | ||||||||
| Forfeited / Canceled | (12,200 | ) | $ | 11.00 | ||||||||
| Options outstanding at September 24, 2017 | 765,411 | $ | 10.27 | 7.5 | $ | 5,096 | ||||||
| Options exercisable at December 25, 2016 | 395,911 | $ | 8.01 | 7.6 | $ | 2,965 | ||||||
| Options exercisable at September 24, 2017 | 479,611 | $ | 8.65 | 7.0 | $ | 3,963 | ||||||
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||
| Nonvested outstanding at December 29, 2019 | 269,200 | $ | 20.96 | ||||
| Nonvested outstanding at March 29, 2020 | 256,450 | $ | 20.69 | ||||
| Number of Shares | Weighted Average Grant Date Fair Value | ||||||
| Nonvested outstanding at December 25, 2016 | 282,500 | $ | 2.57 | ||||
| Nonvested outstanding at September 24, 2017 | 285,800 | $ | 3.01 | ||||
For the thirty-ninethirteen week periodsperiod ended September 24, 2017,March 31, 2019, the Company issued 5,2214,493 shares of common stock upon the cashless exercise of 9,40211,840 stock options.
Included in awards outstanding are 18,000 and 20,250 shares of restricted stock, at a grant date price per share of $28.61, issued under the 2013 Plan as of March 29, 2020 and December 29, 2019, respectively. For the thirteen week periods ended March 29, 2020 and March 31, 2019, the Company recognized $0.1 million of compensation expense related to restricted stock.
Warrant Activity
For the thirteen and thirty-nine week periods ended September 24, 2017March 29, 2020 and September 25, 2016,March 31, 2019, the Company did not recognize compensation cost related to warrants. There was no0 unamortized stock compensation expense to be recognized as of September 24, 2017.March 29, 2020.
A summary of warrant activity is presented as follows:
Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life | Total Intrinsic Value of Options (in thousands) | |||||||||
| Warrants outstanding at December 29, 2019 | 64,482 | $ | 13.84 | 0.8 | $ | 473 | ||||||
| Warrants outstanding at March 29, 2020 | 64,482 | $ | 13.84 | 0.5 | $ | — | ||||||
| Warrants exercisable at December 29, 2019 | 64,482 | $ | 13.84 | 0.8 | $ | 473 | ||||||
| Warrants exercisable at March 29, 2020 | 64,482 | $ | 13.84 | 0.5 | $ | — | ||||||
Number of Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Life | Total Intrinsic Value of Options (in thousands) | |||||||||
| Warrants outstanding at December 25, 2016 | 123,984 | $ | 11.51 | 2.8 | $ | 532 | ||||||
| Warrants outstanding at September 24, 2017 | 123,984 | $ | 11.89 | 2.6 | $ | 494 | ||||||
| Warrants exercisable at December 25, 2016 | 91,734 | $ | 9.65 | 2.2 | $ | 532 | ||||||
| Warrants exercisable at September 24, 2017 | 123,984 | $ | 11.89 | 2.6 | $ | 494 | ||||||
There were no nonvested warrants outstanding at March 29, 2020 and December 29, 2019.
For the thirteen week period ended March 31, 2019, the Company issued 423 shares of common stock upon the cashless exercise of 1,020 warrants.
The intrinsic value in the tables above is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options or warrants, before applicable income taxes and represents the amount holders would have realized if all in-the-money options or warrants had been exercised on the last business day of the period indicated.
NOTE 1112 - EMPLOYEETEAM MEMBER BENEFIT PLAN
The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees.team members and field talent. The 401(k) Plan allows employeesparticipants to make contributions subject to applicable statutory limitations. The Company matches employeeparticipants contributions 100% up to the first 3% and 50% of the next 2% of an employee’sa team member or field talent’s compensation. The Company contributed $232,863 and $217,103$0.3 million to the 401(k) Plan for the thirteen week periods ended September 24, 2017March 29, 2020 and September 25, 2016, respectively. The Company contributed $657,623 and $622,772 to the 401(k) Plan for the thirty-nine week periods ended September 24, 2017 and September 25, 2016, respectively.March 31, 2019.
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1213 - BUSINESS SEGMENTS
The Company operates within three3 industry segments: Multifamily,Real Estate, Professional, and Commercial.Light Industrial. The MultifamilyReal Estate segment provides front office and maintenance temporary workersfield talent to various apartment communities and commercial buildings in 2329 states, via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. The Professional segment provides skilled temporary workersfield talent on a nationwide basis for IT and finance, accounting, legal and accounting customerhuman resource client partner projects. The CommercialLight Industrial segment provides temporary workersfield talent primarily to manufacturing, distribution, logistics, distribution, and call center customersclient partners needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.7 states.
Segment operating income includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (corporate)(home office) expenses. Assets of corporatehome office include cash, unallocated prepaid expenses, fixed assets, deferred tax assets, and other assets.
The following table provides a reconciliation of revenue and operating income by reportable segment to consolidated results for the periods indicated:
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||
| September 24, 2017 | September 25, 2016 | September 24, 2017 | September 25, 2016 | March 29, 2020 | March 31, 2019 | |||||||||||||||||||
| Revenue: | ||||||||||||||||||||||||
| Multifamily | $ | 21,758,642 | $ | 18,889,265 | $ | 51,436,393 | $ | 43,556,297 | ||||||||||||||||
| Real Estate | $ | 20,027,833 | $ | 19,175,782 | ||||||||||||||||||||
| Professional | 31,739,816 | 25,821,676 | 91,769,877 | 80,828,787 | 36,343,906 | 30,593,668 | ||||||||||||||||||
| Commercial | 17,783,216 | 22,696,409 | 53,692,954 | 65,188,266 | ||||||||||||||||||||
| Light Industrial | 17,695,690 | 19,006,617 | ||||||||||||||||||||||
| Total | $ | 71,281,674 | $ | 67,407,350 | $ | 196,899,224 | $ | 189,573,350 | $ | 74,067,429 | $ | 68,776,067 | ||||||||||||
| Depreciation: | ||||||||||||||||||||||||
| Multifamily | $ | 23,255 | $ | 17,122 | $ | 70,159 | $ | 40,577 | ||||||||||||||||
| Real Estate | $ | 55,340 | $ | 44,113 | ||||||||||||||||||||
| Professional | 44,261 | 39,071 | 129,968 | 113,482 | 99,432 | 84,483 | ||||||||||||||||||
| Commercial | 27,690 | 23,018 | 80,231 | 68,447 | ||||||||||||||||||||
| Corporate | 49,148 | 45,421 | 147,797 | 133,327 | ||||||||||||||||||||
| Light Industrial | 27,105 | 25,421 | ||||||||||||||||||||||
| Home office | 45,394 | 48,409 | ||||||||||||||||||||||
| Total | $ | 144,354 | $ | 124,632 | $ | 428,155 | $ | 355,833 | $ | 227,271 | $ | 202,426 | ||||||||||||
| Amortization: | ||||||||||||||||
| Multifamily | $ | — | $ | — | $ | — | $ | 62,848 | ||||||||
| Professional | 1,222,402 | 1,454,293 | 3,993,474 | 4,399,296 | ||||||||||||
| Commercial | 66,151 | 94,621 | 245,903 | 363,479 | ||||||||||||
| Corporate | 3,372 | — | 5,223 | — | ||||||||||||
| Total | $ | 1,291,925 | $ | 1,548,914 | $ | 4,244,600 | $ | 4,825,623 | ||||||||
| Operating income: | ||||||||||||||||
| Multifamily | $ | 4,020,995 | $ | 3,331,981 | $ | 8,524,536 | $ | 6,859,318 | ||||||||
| Professional | 2,119,550 | 1,163,674 | 6,344,222 | 4,737,610 | ||||||||||||
| Commercial | 1,108,842 | 1,364,353 | 3,000,444 | 4,070,037 | ||||||||||||
| Corporate - selling | (119,097 | ) | — | (371,906 | ) | — | ||||||||||
| Corporate - general and administrative | (1,494,106 | ) | (1,393,412 | ) | (4,585,854 | ) | (4,553,844 | ) | ||||||||
| Total | $ | 5,636,184 | $ | 4,466,596 | $ | 12,911,442 | $ | 11,113,121 | ||||||||
| Capital expenditures: | ||||||||||||||||
| Multifamily | $ | 3,947 | $ | 23,185 | $ | 76,542 | $ | 119,592 | ||||||||
| Professional | 52,987 | 73,168 | 501,928 | 82,336 | ||||||||||||
| Commercial | 2,463 | 19,908 | 71,262 | 60,229 | ||||||||||||
| Corporate | — | 71,194 | 246,257 | 356,000 | ||||||||||||
| Total | $ | 59,397 | $ | 187,455 | $ | 895,989 | $ | 618,157 | ||||||||
| Amortization: | ||||||||
| Professional | $ | 1,180,834 | $ | 1,022,805 | ||||
| Home office | 6,608 | 6,278 | ||||||
| Total | $ | 1,187,442 | $ | 1,029,083 | ||||
| Operating income (expense): | ||||||||
| Real Estate | $ | 3,039,274 | $ | 2,819,711 | ||||
| Professional | 1,839,783 | 1,833,559 | ||||||
| Light Industrial | 1,097,098 | 1,202,991 | ||||||
| Home office - selling | (92,662 | ) | (132,428 | ) | ||||
| Home office - general and administrative | (3,226,099 | ) | (2,137,125 | ) | ||||
| Total | $ | 2,657,394 | $ | 3,586,708 | ||||
BG Staffing, Inc. and Subsidiaries
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
| September 24, 2017 | December 25, 2016 | |||||||
| Total Assets: | ||||||||
| Multifamily | $ | 13,283,021 | $ | 9,320,335 | ||||
| Professional | 70,887,537 | 39,548,308 | ||||||
| Commercial | 17,359,515 | 21,574,855 | ||||||
| Corporate | 10,761,963 | 10,770,636 | ||||||
| Total | $ | 112,292,036 | $ | 81,214,134 | ||||
| Thirteen Weeks Ended | ||||||||
| March 29, 2020 | March 31, 2019 | |||||||
| Capital expenditures: | ||||||||
| Real Estate | $ | 25,724 | $ | 10,661 | ||||
| Professional | 40,972 | 328,648 | ||||||
| Light Industrial | — | 2,155 | ||||||
| Home office | 982,977 | — | ||||||
| Total | $ | 1,049,673 | $ | 341,464 | ||||
| March 29, 2020 | December 29, 2019 | |||||||
| Total Assets: | ||||||||
| Real Estate | $ | 15,024,352 | $ | 16,785,163 | ||||
| Professional | 96,523,696 | 72,623,242 | ||||||
| Light Industrial | 13,423,703 | 15,223,581 | ||||||
| Home office | 13,163,527 | 10,954,058 | ||||||
| Total | $ | 138,135,278 | $ | 115,586,044 | ||||
NOTE 1314 - SUBSEQUENT EVENTS
Debt
On April 6, 2020, the Company borrowed the remaining $4.0 million on the Term Loan under its Credit Agreement led by BMO, as described in Note 7 above. The proceeds were used to pay down the Revolving Facility.
Dividend
On October 20, 2017,May 5, 2020, the Company's board of directors declared a cash dividend in the amount of $0.25$0.05 per share of common stock to be paid on November 7, 2017May 27, 2020 to all shareholders of record as of the close of business on November 2, 2017.May 20, 2020
COVID-19
The Company has adjusted its operations in response to COVID-19 in all of its segment and Home Office operations. The extent of the impact from the outbreak on its operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, its impact on the Company's client partners and the range of governmental and community reactions to the pandemic, which are uncertain and cannot be fully predicted at this time.
CARES Act
The Coronavirus Aid, Relief, and Economic Security (CARES) Act allows relief to employers affected by the coronavirus pandemic. In order to provide liquidity and retain employees during this period, the CARES Act allows employers to delay the payment of the employer’s share of Old-Age, Survivors, and Disability Insurance Tax (“Social Security”), which is 6.2% of wages up to the annual wage base ($137,700 in 2020). The CARES Act only applies to taxes incurred from March 27, 2020 through December 31, 2020. Half of the delayed payments are due by December 31, 2021, and the other half by December 31, 2022. The Company has elected to delay the payment of these taxes.
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.thereto and our Annual Report on Form 10-K for the fiscal year ended December 29, 2019. Comparative segment revenues and related financial information are discussed herein and are presented in Note 1213 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 Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 25, 2016,29, 2019, for a description of important factors that could cause actual results to differ from expected results.
Overview
We are a leading national provider of professional temporary staffing servicesworkforce solutions and have completed a series of acquisitions including the acquisition of BG Personnel, LP and B G Staff Services Inc. in June 2010, and substantially all of the assets of JNA Staffing, Inc. in December 2010, Extrinsic, LLC in December 2011, American Partners, Inc. in December 2012, InStaff Holding Corporation and InStaff Personnel, LLC in June 2013, D&W Talent, LLC ("D&W") in March 2015, Vision Technology Services, Inc., Vision Technology Services, LLC, and VTS-VM, LLC (collectively, “VTS”) in October 2015, Zycron, Inc. in April 2017, and Smart Resources, Inc. and Accountable Search, LLC in September 2017.2017, and LJK in December 2019, and 100% of the equity of EdgeRock in February 2020. We operate within three industry segments: Multifamily,Real Estate, Professional, and Commercial.Light Industrial. We provide services to customersclient partners primarily within the United States of America. We now have 63operate through 88 branch offices and 1512 on-site locations located across 26 states.40 states and D.C.
The MultifamilyReal Estate segment provides front office and maintenance temporary workersfield talent to various apartment communities and commercial buildings in 2329 states, via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations.
The Professional segment provides skilled temporary workersfield talent on a nationwide basis for information technology ("IT"(“IT”) and finance, accounting, legal and accounting customerhuman resource client partner projects.
The CommercialLight Industrial segment provides temporary workersfield talent primarily to manufacturing, distribution, logistics, distribution, and call center customersclient partners needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.7 states.
Our business experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our customers’client partners’ business. Demand for our MultifamilyReal Estate staffing services typically increase in the second and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our CommercialLight Industrial staffing services typically increases during the third quarter of the year and peaks in the fourth quarter. Demand for our Commercial staffing services is lower during the first quarter in part due to customer shutdowns andincreases in the demand for holiday help. Overall demand can be affected by adverse weather conditions in the winter months.months as well as fluctuations in client partner demand. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes.
Impact of COVID-19
After the World Health Organization announced the outbreak of COVID-19 on March 11, 2020, we began to observe the negative impact on our consolidated operating results, our candidate and field talent supply chain, and our client partners demand in all segments. We expect that the social distancing measures, the reduced operational status of our client partners, reductions in production at certain client partners facilities, and general business uncertainty will continue to significantly effect demand in all our segments in the second quarter, and possibly beyond.
During this uncertain time, our critical priorities are the health and safety of our team members, field talent, candidates and client partners. Our team members began working from home and reduced travel to essential business needs. We launched a new website where candidates can search for open job positions, apply, and get approved using digital interviews. In this changing business atmosphere, we are providing support, resources and innovative solutions to our client partners. We do not believe these protocols have materially adversely impacted our internal controls, financial reporting systems or our operations.
Revenues began declining during the last two weeks of March in all of our segments. In April, the first month of Q2, overall revenues have declined 26% from pre COVID-19 levels. We had significant declines in the Real Estate and Light Industrial segments with declines of 54% and 26%, respectively, while the Professional segment was off 11%. As a result of these workforce trends and the continuing social distancing and “shelter in place” orders, we took actions in March to reduce actual and planned operating costs by approximately 10% compared to the pre COVID-19 levels, as well as manage liquidity.
These actions included:
Hiring and Capital Expenditures:
Implemented a hiring freeze;
Laid off lower performing team members;
Delaying non-essential capital expenditures; and
Delaying the start of any new IT Roadmap initiatives.
Working Capital & Liquidity:
Borrowed $4 million on Term Loan and reduced Revolving Facility balance, providing more short-term liquidity;
Increased emphasis on liquidity forecasting;
Strict compliance with vendor payment terms;
Election to delay the payment of the employer's share of Social Security under the CARES Act; and
Reduced our dividend for Q1 2020.
Safety & Cost Containment:
Eliminating all travel, client partner visits, meals and entertainment, as well as any conferences and association events; and
Implemented a Company-wide work-from-home program (only essential office visits are allowed).
Our business, results of operations, and financial condition have been, and may continue to be, adversely impacted in material respects by COVID-19 and by related government actions (including declared states of emergency and quarantine, “shelter in place” orders, or similar orders), non-governmental organization recommendations, and public perceptions, all of which have led and may continue to lead to disruption in global economic and labor markets. These effects have had a significant impact on our business, including reduced demand for our services and workforce solutions, early terminations or reductions in projects, and hiring freezes, and a shift of a majority of our workforce to remote operations, all of which have contributed to a decline in revenues and other significant adverse impacts on our financial results. Other potential impacts of COVID-19 may include continued or expanded closures or reductions of operations with respect to our client partners’ operations or facilities, the possibility our client partners will not be able to pay for our services or workforce solutions, or that they will attempt to defer payments owed to us, either of which could materially impact our liquidity, the possibility that the uncertain nature of the pandemic may not yield the increase in certain of our workforce solutions that we have historically observed during periods of economic downturn, and the possibility that various government-sponsored programs to provide economic relief may be inadequate. Further, we may continue to experience adverse financial impacts, some of which may be material, if we cannot offset revenue declines with cost savings through expense-related initiatives, human capital management initiatives, or otherwise. As a result of these observed and potential developments, we expect our business, results of operations, and financial condition to continue to be negatively affected.
We will continue to actively monitor the situation and may 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. The potential effects are not clear for any such alterations or modifications on our business, our client partners, candidates, vendors, or on our financial results.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our unaudited consolidated financial statements.
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | Thirteen Weeks Ended | ||||||||||||||||||||||||
| September 24, 2017 | September 25, 2016 | September 24, 2017 | September 25, 2016 | March 29, 2020 | March 31, 2019 | |||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||
| Revenues | Revenues | $ | 71,282 | $ | 67,407 | $ | 196,899 | $ | 189,573 | Revenues | $ | 74,067 | $ | 68,776 | ||||||||||||
| Cost of services | Cost of services | 53,034 | 50,975 | 147,753 | 144,610 | Cost of services | 53,792 | 50,337 | ||||||||||||||||||
| Gross profit | 18,248 | 16,432 | 49,146 | 44,963 | Gross profit | 20,275 | 18,439 | |||||||||||||||||||
| Selling, general and administrative expenses | Selling, general and administrative expenses | 11,175 | 10,291 | 31,561 | 28,670 | Selling, general and administrative expenses | 16,203 | 13,621 | ||||||||||||||||||
| Depreciation and amortization | Depreciation and amortization | 1,436 | 1,674 | 4,673 | 5,181 | Depreciation and amortization | 1,415 | 1,232 | ||||||||||||||||||
| Operating income | 5,637 | 4,467 | 12,912 | 11,112 | Operating income | 2,657 | 3,586 | |||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | (404 | ) | |||||||||||||||||||||
| Interest expense, net | Interest expense, net | (884 | ) | (702 | ) | (2,280 | ) | (3,278 | ) | Interest expense, net | 456 | 353 | ||||||||||||||
| Income before income tax | 4,753 | 3,765 | 10,632 | 7,430 | Income before income tax | 2,201 | 3,233 | |||||||||||||||||||
| Income tax expense | Income tax expense | 1,616 | 1,417 | 3,909 | 2,852 | Income tax expense | 703 | 737 | ||||||||||||||||||
| Net income | $ | 3,137 | $ | 2,348 | $ | 6,723 | $ | 4,578 | Net income | $ | 1,499 | $ | 2,496 | |||||||||||||
| Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||
| Cost of services | 74.4 | % | 75.6 | % | 75.0 | % | 76.3 | % | ||||||||||||||||||
| Gross profit | 25.6 | % | 24.4 | % | 25.0 | % | 23.7 | % | ||||||||||||||||||
| Selling, general and administrative expenses | 15.7 | % | 15.3 | % | 16.0 | % | 15.1 | % | ||||||||||||||||||
| Depreciation and amortization | 2.0 | % | 2.5 | % | 2.4 | % | 2.7 | % | ||||||||||||||||||
| Operating income | 7.9 | % | 6.6 | % | 6.6 | % | 5.9 | % | ||||||||||||||||||
| Loss on extinguishment of debt | — | % | — | % | — | % | (0.2 | )% | ||||||||||||||||||
| Interest expense, net | (1.2 | )% | (1.0 | )% | (1.2 | )% | (1.7 | )% | ||||||||||||||||||
| Income before income tax | 6.7 | % | 5.6 | % | 5.4 | % | 3.9 | % | ||||||||||||||||||
| Income tax expense | 2.3 | % | 2.1 | % | 2.0 | % | 1.5 | % | ||||||||||||||||||
| Net income | 4.4 | % | 3.5 | % | 3.4 | % | 2.4 | % | ||||||||||||||||||
| Thirteen Weeks Ended | |||||||
| March 29, 2020 | March 31, 2019 | ||||||
| Revenues | 100.0 | % | 100.0 | % | |||
| Cost of services | 72.6 | % | 73.2 | % | |||
| Gross profit | 27.4 | % | 26.8 | % | |||
| Selling, general and administrative expenses | 21.9 | % | 19.8 | % | |||
| Depreciation and amortization | 1.9 | % | 1.8 | % | |||
| Operating income | 3.6 | % | 5.2 | % | |||
| Interest expense, net | 0.6 | % | 0.5 | % | |||
| Income before income tax | 3.0 | % | 4.7 | % | |||
| Income tax expense | 0.9 | % | 1.1 | % | |||
| Net income | 2.0 | % | 3.6 | % | |||
Thirteen Week Fiscal Period Ended September 24, 2017 (Fiscal Quarter 2017)March 29, 2020 (“Fiscal 2020”) Compared with Thirteen Week Fiscal Period Ended September 25, 2016 (Fiscal Quarter 2016) March 31, 2019 (“Fiscal 2019”)
| Revenues: | Revenues: | Thirteen Weeks Ended | Revenues: | Thirteen Weeks Ended | ||||||||||||||||||||||||||
| September 24, 2017 | September 25, 2016 | March 29, 2020 | March 31, 2019 | |||||||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||
| Revenues by segment: | Revenues by segment: | Revenues by segment: | ||||||||||||||||||||||||||||
| Multifamily | $ | 21,759 | 30.5 | % | $ | 18,889 | 28.0 | % | Real Estate | $ | 20,028 | 27.0 | % | $ | 19,176 | 27.9 | % | |||||||||||||
| Professional | 31,740 | 44.5 | % | 25,822 | 38.3 | % | Professional | 36,344 | 49.1 | % | 30,594 | 44.5 | % | |||||||||||||||||
| Commercial | 17,783 | 25.0 | % | 22,696 | 33.7 | % | Light Industrial | 17,695 | 23.9 | % | 19,006 | 27.6 | % | |||||||||||||||||
| Total Revenues | $ | 71,282 | 100.0 | % | $ | 67,407 | 100.0 | % | Total Revenues | $ | 74,067 | 100.0 | % | $ | 68,776 | 100.0 | % | |||||||||||||
Professional Revenues: Professional revenues increased approximately $5.9$5.7 million (22.9%(18.8%), primarily from Zycron,LJK and EdgeRock acquisitions, which contributed approximately $9.0$6.9 million of new revenues. The remaining ITprofessional group decreased $2.1 million and the finance and accounting group decreased $0.9$1.1 million. The overall increase was due to a 26.8%an increase of 23.4% in billed hoursaverage bill rate and increasedan increase in permanent placements of $0.2$0.6 million that was offset by a 3.2%8.9% decrease in average bill rate.billed hours.
Gross Profit:
Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, temporary workerfield talent costs, and reimbursable costs.
| Thirteen Weeks Ended | |||||||||||||||
| September 24, 2017 | September 25, 2016 | ||||||||||||||
| (dollars in thousands) | |||||||||||||||
| Gross Profit by segment: | |||||||||||||||
| Multifamily | $ | 8,198 | 44.9 | % | $ | 7,009 | 42.7 | % | |||||||
| Professional | 7,487 | 41.0 | % | 6,198 | 37.7 | % | |||||||||
| Commercial | 2,563 | 14.1 | % | 3,225 | 19.6 | % | |||||||||
| Total Gross Profit | $ | 18,248 | 100.0 | % | $ | 16,432 | 100.0 | % | |||||||
| Thirteen Weeks Ended | |||||||||||||||
| March 29, 2020 | March 31, 2019 | ||||||||||||||
| (dollars in thousands) | |||||||||||||||
| Gross Profit by segment: | |||||||||||||||
| Real Estate | $ | 7,628 | 37.6 | % | $ | 7,387 | 40.1 | % | |||||||
| Professional | 10,108 | 49.9 | % | 8,283 | 44.9 | % | |||||||||
| Light Industrial | 2,539 | 12.5 | % | 2,769 | 15.0 | % | |||||||||
| Total Gross Profit | $ | 20,275 | 100.0 | % | $ | 18,439 | 100.0 | % | |||||||
| Thirteen Weeks Ended | |||||||
| September 24, 2017 | September 25, 2016 | ||||||
| Gross Profit Percentage by segment: | |||||||
| Multifamily | 37.7 | % | 37.1 | % | |||
| Professional | 23.6 | % | 24.0 | % | |||
| Commercial | 14.4 | % | 14.2 | % | |||
| Company Gross Profit | 25.6 | % | 24.4 | % | |||
| Thirteen Weeks Ended | |||||||
| March 29, 2020 | March 31, 2019 | ||||||
| Gross Profit Percentage by segment: | |||||||
| Real Estate | 38.1 | % | 38.5 | % | |||
| Professional | 27.8 | % | 27.1 | % | |||
| Light Industrial | 14.3 | % | 14.6 | % | |||
| Company Gross Profit | 27.4 | % | 26.8 | % | |||
Overall, our gross profit has increased approximately $1.8 million (11.1%(10.0%) due primarily to Zycron ($1.8 million) and growth in our Multifamily segment, offset by decreased revenues in our Commercial segment.. As a percentage of revenue, gross profit has increased to 25.6%27.4% from 24.4%26.8% primarily due to a greater percentage of revenues coming fromhigher gross profits across our Multifamily and Professional segments.segment.
We determine spread as the difference between average bill rate and average pay rate.
| Revenues: | Thirty-nine Weeks Ended | ||||||||||||||
| September 24, 2017 | September 25, 2016 | ||||||||||||||
| (dollars in thousands) | |||||||||||||||
| Revenues by segment: | |||||||||||||||
| Multifamily | $ | 51,436 | 26.1 | % | $ | 43,556 | 23.0 | % | |||||||
| Professional | 91,770 | 46.6 | % | 80,829 | 42.6 | % | |||||||||
| Commercial | 53,693 | 27.3 | % | 65,188 | 34.4 | % | |||||||||
| Total Revenues | $ | 196,899 | 100.0 | % | $ | 189,573 | 100.0 | % | |||||||
| Thirty-nine Weeks Ended | |||||||||||||||
| September 24, 2017 | September 25, 2016 | ||||||||||||||
| (dollars in thousands) | |||||||||||||||
| Gross Profit by segment: | |||||||||||||||
| Multifamily | $ | 19,506 | 39.7 | % | $ | 16,172 | 36.0 | % | |||||||
| Professional | 21,984 | 44.7 | % | 19,450 | 43.3 | % | |||||||||
| Commercial | 7,656 | 15.6 | % | 9,341 | 20.7 | % | |||||||||
| Total Gross Profit | $ | 49,146 | 100.0 | % | $ | 44,963 | 100.0 | % | |||||||
| Thirty-nine Weeks Ended | |||||||
| September 24, 2017 | September 25, 2016 | ||||||
| Gross Profit Percentage by segment: | |||||||
| Multifamily | 37.9 | % | 37.1 | % | |||
| Professional | 24.0 | % | 24.1 | % | |||
| Commercial | 14.3 | % | 14.3 | % | |||
| Company Gross Profit | 25.0 | % | 23.7 | % | |||
Professional Gross Profit: Professional gross profit increased approximately $2.5$1.9 million (13.0%(22.0%), consistent with the increase in revenue. The increase in gross profit was due to Zycron of $3.8 million, a 5.4%21.7% increase in average spread, offset by a $0.9 million decrease in the remaining IT group and a $0.4 million decrease in the finance and accounting group.spread.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $2.9$2.6 million (10.1%(19.0%) related to an increase in Multifamily of $1.7 million, primarily from growth, including $0.7LJK and EdgeRock acquisitions, which contributed $1.9 million of new officeexpense and other various costs associated with our revenue growth and geographic expansion including increased headcount, commissions and an increasebonuses as detailed in Professional of $1.8 million from Zycron.the following table.
| Thirteen Weeks Ended | |||||||||||||||||||||
| March 29, 2020 | March 31, 2019 | ||||||||||||||||||||
| Amount | % of Revenue | Amount | % of Revenue | $ Change | % Change | ||||||||||||||||
| (dollars in thousands) | |||||||||||||||||||||
| Compensation and related | $ | 11,698 | 16 | % | $ | 10,280 | 15 | % | $ | 1,418 | 14 | % | |||||||||
| Advertising and recruitment | 407 | 1 | % | 473 | 1 | % | (66 | ) | (14 | )% | |||||||||||
| Occupancy and office operations | 1,062 | 1 | % | 968 | 1 | % | 94 | 10 | % | ||||||||||||
| Client engagement | 273 | — | % | 366 | 1 | % | (93 | ) | (25 | )% | |||||||||||
| Software | 480 | 1 | % | 513 | 1 | % | (33 | ) | (6 | )% | |||||||||||
| Professional fees | 457 | 1 | % | 421 | 1 | % | 36 | 9 | % | ||||||||||||
| Public company related costs | 132 | — | % | 165 | — | % | (33 | ) | (20 | )% | |||||||||||
| Bad debt | 32 | — | % | (53 | ) | — | % | 85 | (160 | )% | |||||||||||
| Share-based compensation | 193 | — | % | 320 | — | % | (127 | ) | (40 | )% | |||||||||||
| Transaction fees | 541 | 1 | % | 21 | — | % | 520 | 2,476 | % | ||||||||||||
| IT roadmap | 459 | 1 | % | — | — | % | 459 | — | % | ||||||||||||
| Workers compensation loss retention return | — | — | % | (258 | ) | — | % | 258 | (100 | )% | |||||||||||
| Other | 469 | 1 | % | 405 | 1 | % | 64 | 16 | % | ||||||||||||
| $ | 16,203 | 22 | % | $ | 13,621 | 20 | % | $ | 2,582 | 19 | % | ||||||||||
Depreciation and Amortization: Depreciation and amortization charges decreasedincreased approximately $0.5$0.2 million (9.8%(14.9%). The decreaseincrease in depreciation and amortization is primarily due to Professional segment fully amortized intangible assets related to the 2011 Extrinsic, LLC acquisition of $0.9 million that was partially offset by an increase in the Professional segment intangible assets acquired in the Zycron acquisition of $0.4 million.2019 LJK and 2020 EdgeRock acquisitions.
Interest Expense, net: Interest expense, net decreased approximately $1.0increased $0.1 million (30.4%(29.2%) primarily due to the decreaserecording of annual interest received from our workers compensation loss retention program in the interest of $1.2 millionfirst quarter 2019, increased borrowings under our credit agreement, offset by decreases in deferred financing fees and unused fee.
Income Taxes: Income tax expense decreased slightly primarily due to lower pre tax 2020 income, which was partially offset by non-deductible fees related to the payoff of the 13% subordinated debt, the decrease2020 EdgeRock transaction that resulted in contingent consideration discounts of $0.5 million, partially offset by the increase of $0.4 million in new term debt and the increase of $0.2 million in the revolver.
Use of Non-GAAP Financial Measures
We present Adjusted EBITDA (defined below), a measure that is not in accordance with generally accepted accounting principles (non-GAAP)(“non-GAAP”), in this Quarterly Report to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for companyour management. In addition, certainthe financial covenants in our Amended Credit Agreement (as defined below)credit agreement are based on this measure.EBITDA as defined in the credit agreement.
We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, transaction fees, and otherthe non-capital information technology improvement project (“IT roadmap”) and certain non-cash expenses such as the loss on extinguishment of debt and share-based compensation expense. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of
companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income (loss).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, the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-goingongoing operating performance.
| Thirteen Weeks Ended | Thirty-nine Weeks Ended | Thirteen Weeks Ended | Trailing Twelve Months Ended | |||||||||||||||||||||||||
| September 24, 2017 | September 25, 2016 | September 24, 2017 | September 25, 2016 | March 29, 2020 | March 31, 2019 | March 29, 2020 | ||||||||||||||||||||||
| (dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||
| Net income | $ | 3,137 | $ | 2,348 | $ | 6,723 | $ | 4,578 | $ | 1,499 | $ | 2,496 | $ | 12,250 | ||||||||||||||
| Interest expense, net | 884 | 702 | 2,280 | 3,278 | 456 | 353 | 1,672 | |||||||||||||||||||||
| Income tax expense | 1,616 | 1,417 | 3,909 | 2,852 | 703 | 737 | 4,271 | |||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | 404 | — | — | 541 | |||||||||||||||||||||
| Operating income | 5,637 | 4,467 | 12,912 | 11,112 | 2,658 | 3,586 | 18,734 | |||||||||||||||||||||
| Depreciation and amortization | 1,436 | 1,674 | 4,673 | 5,181 | 1,415 | 1,232 | 5,004 | |||||||||||||||||||||
| Share-based compensation | 92 | 111 | 357 | 253 | 193 | 320 | 826 | |||||||||||||||||||||
| Transaction fees | 541 | 21 | 954 | |||||||||||||||||||||||||
| IT roadmap | 459 | — | 1,180 | |||||||||||||||||||||||||
| Adjusted EBITDA | $ | 7,165 | $ | 6,252 | $ | 17,942 | $ | 16,546 | $ | 5,266 | $ | 5,159 | $ | 26,698 | ||||||||||||||