Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. See “Forward-Looking Statements” in this Annual Report on Form 10-K. These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Our actual results may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this Annual Report on Form 10-K.
Our historical financial information may not be indicative of our future performance.
Company Overview
We are a leading national provider of professional workforce solutions and have completed a series of acquisitions including the acquisition of BG Personnel, LP and B G Staff Services Inc. in June 2010, substantially all of the assets of JNA Staffing, Inc. in December 2010, Extrinsic, LLC in December 2011, American Partners, Inc. in December 2012, InStaff in June 2013, D&W in March 2015, VTS in October 2015, Zycron in April 2017, Smart in September 2017, and LJK in December 2019, 100% of the equity of EdgeRock in February 2020, and substantially all of the assets of Momentum Solutionz in February 2021. We operate within three industry segments: Real Estate, Professional, and Light Industrial. We provide workforce solutions to client partners primarily within the United States of America. We now operate across 46 states and D.C., as well as 13 on-site locations.
The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 36 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent.
The Professional segment provides skilled field talent on a nationwide basis for information technology (“IT”) and finance, accounting, legal and human resource client partner projects on a national basis. Our Professional segment operates through various divisions including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and beginning in 2021, Momentum Solutionz.
The Light Industrial segment provides field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce in 7 states. Our Light Industrial segment operates through our InStaff division.
Impact of COVID-19
We continue to observe the impact of the COVID-19 outbreak 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 changing operational status of our client partners, production levels at client partners facilities, and general business uncertainty will continue to effect demand in all our segments.
During this uncertain time, our critical priorities are the health and safety of our team members, field talent, candidates and client partners. Starting in March 2020, we took several cost containment and liquidity actions, which we do not believe have materially adversely impacted our internal controls, financial reporting systems or our operations.
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, 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 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 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.
Real Estate was strongly affected by COVID-19 when client partners immediately stopped non-emergency maintenance, which is our largest revenue source. Additional, during our high volume season, many client partners were forced into a virtual leasing model verses using onsite touring options. With many government actions requiring eviction moratoriums, our client partners’ response was to tighten all expenses.
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 consolidated financial statements.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
December 30,
2018
|
|
|
|
(dollars in thousands)
|
Revenues
|
|
$
|
277,891
|
|
|
$
|
294,314
|
|
|
$
|
286,863
|
|
Cost of services
|
|
201,671
|
|
|
213,633
|
|
|
210,268
|
|
|
Gross Profit
|
|
76,220
|
|
|
80,681
|
|
|
76,595
|
|
Selling, general and administrative expenses
|
|
60,558
|
|
|
56,199
|
|
|
51,066
|
|
Gain on contingent consideration
|
|
(76)
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|
|
—
|
|
|
(3,775)
|
|
Impairment losses
|
|
7,240
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
4,960
|
|
|
4,820
|
|
|
5,044
|
|
|
Operating income
|
|
3,538
|
|
|
19,662
|
|
|
24,260
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
541
|
|
|
—
|
|
Interest expense, net
|
|
1,584
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|
|
1,569
|
|
|
2,850
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|
|
Income before income tax
|
|
1,954
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|
|
17,552
|
|
|
21,410
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|
Income tax expense
|
|
513
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|
|
4,305
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|
|
3,860
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|
|
Net income
|
|
$
|
1,441
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|
|
$
|
13,247
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|
|
$
|
17,550
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|
|
|
|
|
|
|
|
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|
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|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
December 30,
2018
|
Revenues
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of services
|
|
72.6
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|
|
72.6
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|
|
73.3
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|
|
Gross Profit
|
|
27.4
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|
|
27.4
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|
|
26.7
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|
Selling, general and administrative expenses
|
|
21.8
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|
|
19.1
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|
|
17.8
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|
Gain on contingent consideration
|
|
—
|
|
|
—
|
|
|
(1.3)
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|
Impairment losses
|
|
2.6
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|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
1.8
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|
|
1.6
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|
|
1.8
|
|
|
Operating income
|
|
1.3
|
|
|
6.7
|
|
|
8.5
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Interest expense, net
|
|
0.6
|
|
|
0.5
|
|
|
1.0
|
|
|
Income before income tax
|
|
0.7
|
|
|
6.0
|
|
|
7.5
|
|
Income tax expense
|
|
0.2
|
|
|
1.5
|
|
|
1.3
|
|
|
Net income
|
|
0.5
|
%
|
|
4.5
|
%
|
|
6.1
|
%
|
Fifty-two Week Fiscal Year Ended December 27, 2020 (Fiscal 2020) Compared with Fifty-two Week Fiscal Year Ended December 29, 2019 (Fiscal 2019)
Revenues:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
|
(dollars in thousands)
|
Revenues by Segment:
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|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
68,756
|
|
|
24.7
|
%
|
|
$
|
96,422
|
|
|
32.8
|
%
|
Professional
|
|
138,370
|
|
|
49.8
|
%
|
|
123,343
|
|
|
41.9
|
%
|
Light Industrial
|
|
70,765
|
|
|
25.5
|
%
|
|
74,549
|
|
|
25.3
|
%
|
Total Revenues
|
|
$
|
277,891
|
|
|
100.0
|
%
|
|
$
|
294,314
|
|
|
100.0
|
%
|
Real Estate Revenues: Real Estate revenues decreased approximately $27.7 million (28.7%) due to the effects of the COVID-19 pandemic discussed above. The decrease was due to a 31.7% decrease in billed hours partially offset by a 4.1% increase in average bill rate. Revenue from new offices was $0.8 million.
Professional Revenues: Professional revenues increased approximately $15.1 million (12.2%), primarily from LJK and EdgeRock acquisitions, which contributed $36.1 million of new revenues. The remaining professional group decreased $21.1 million. Even with the overall increase, billed hours decreased 5.0% offsets by an increase of 17.7% in average bill rate and an increase in permanent placements of $1.2 million.
Light Industrial Revenues: Light Industrial revenues decreased approximately $3.8 million (5.1%) due to the effects of the COVID-19 pandemic. The decrease was due to a 11.8% decrease in billed hours partially offset by a 7.6% increase in average bill rate.
Gross Profit:
Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs.
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|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
|
(dollars in thousands)
|
Gross Profit by Segment:
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|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
25,812
|
|
|
33.9
|
%
|
|
$
|
36,928
|
|
|
45.8
|
%
|
Professional
|
|
40,227
|
|
|
52.7
|
%
|
|
32,898
|
|
|
40.8
|
%
|
Light Industrial
|
|
10,181
|
|
|
13.4
|
%
|
|
10,855
|
|
|
13.4
|
%
|
Total Gross Profit
|
|
$
|
76,220
|
|
|
100.0
|
%
|
|
$
|
80,681
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 27,
2020
|
|
December 29,
2019
|
Gross Profit Percentage by Segment:
|
|
|
|
|
Real Estate
|
|
37.5
|
%
|
|
38.3
|
%
|
Professional
|
|
29.1
|
%
|
|
26.7
|
%
|
Light Industrial
|
|
14.4
|
%
|
|
14.6
|
%
|
Company Gross Profit Percentage
|
|
27.4
|
%
|
|
27.4
|
%
|
Overall, our gross profit decreased approximately $4.5 million (5.5%). As a percentage of revenue, gross profit has remained consistent at 27.4%, primarily due to higher gross profits across our Professional segment.
We determine spread as the difference between bill rate and pay rate.
Real Estate Gross Profit: Real Estate gross profit decreased approximately $11.1 million (30.1%) consistent with the decrease in revenue, which was partially offset by a 2.2% increase in average spread.
Professional Gross Profit: Professional gross profit increased approximately $7.3 million (22.3%) consistent with the increase in revenue, primarily from LJK and EdgeRock acquisitions, which contributed $12.2 million of gross profit and an overall increase of 19.5% in average spread.
Light Industrial Gross Profit: Light Industrial gross profit decreased approximately $0.7 million (6.2%) in line with the decreased revenue, which was partially offset by an increase of 6.0% in the average spread.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $4.4 million (7.8%), primarily related from LJK and EdgeRock acquisitions, which contributed $9.5 million of new expense that was partially offset by reduced compensation costs from the decline in gross profit and by many of our actions taken starting in March related to the COVID-19 pandemic to reduce actual and planned operating costs as detailed in the following table.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
|
|
|
|
|
Amount
|
|
% of Revenue
|
|
Amount
|
|
% of Revenue
|
|
$
Change
|
|
%
Change
|
|
|
(dollars in thousands)
|
Compensation and related
|
|
$
|
45,418
|
|
|
16
|
%
|
|
$
|
41,401
|
|
|
14
|
%
|
|
$
|
4,017
|
|
|
10
|
%
|
Advertising and recruitment
|
|
1,648
|
|
|
1
|
%
|
|
1,925
|
|
|
1
|
%
|
|
(277)
|
|
|
(14)
|
%
|
Occupancy and office operations
|
|
3,974
|
|
|
1
|
%
|
|
3,987
|
|
|
1
|
%
|
|
(13)
|
|
|
—
|
%
|
Client engagement
|
|
375
|
|
|
—
|
%
|
|
1,443
|
|
|
—
|
%
|
|
(1,068)
|
|
|
(74)
|
%
|
Software
|
|
2,408
|
|
|
1
|
%
|
|
1,906
|
|
|
1
|
%
|
|
502
|
|
|
26
|
%
|
Professional fees
|
|
1,271
|
|
|
—
|
%
|
|
1,327
|
|
|
—
|
%
|
|
(56)
|
|
|
(4)
|
%
|
Public company related costs
|
|
691
|
|
|
—
|
%
|
|
675
|
|
|
—
|
%
|
|
16
|
|
|
2
|
%
|
Bad debt
|
|
349
|
|
|
—
|
%
|
|
128
|
|
|
—
|
%
|
|
221
|
|
|
173
|
%
|
Share-based compensation
|
|
849
|
|
|
—
|
%
|
|
953
|
|
|
—
|
%
|
|
(104)
|
|
|
(11)
|
%
|
Transaction fees
|
|
615
|
|
|
—
|
%
|
|
434
|
|
|
—
|
%
|
|
181
|
|
|
42
|
%
|
IT roadmap
|
|
1,563
|
|
|
1
|
%
|
|
721
|
|
|
—
|
%
|
|
842
|
|
|
100
|
%
|
Other
|
|
1,397
|
|
|
1
|
%
|
|
1,299
|
|
|
—
|
%
|
|
98
|
|
|
8
|
%
|
|
|
$
|
60,558
|
|
|
22
|
%
|
|
$
|
56,199
|
|
|
19
|
%
|
|
$
|
4,359
|
|
|
8
|
%
|
Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.1 million (2.9%). The increase in depreciation and amortization is primarily due to the Professional segment with increases related to the 2019 LJK and 2020 EdgeRock acquisitions that are partially offset by decreases related to the 2015 VTS and 2015 D&W Talent acquisitions.
Impairment loss: As a result of the certain business developments and changes in our long-term projections, we calculated the quantitative impairment test of the finance and accounting group, within the Professional segment, using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets by asset group. We recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss within the Professional segment.
Interest Expense, net: Interest expense, net was flat due to the increased borrowings on the Term Loan related to the EdgeRock acquisition that was partially offset by decreases in the Revolving Facility, deferred financing fees, and unused fee.
Income Taxes: Income tax expense decreased $3.8 million (88.1%) primarily due to lower pre-tax 2020 income and intangible impairment losses, which were partially offset by non-deductible fees related to the 2020 EdgeRock transaction.
Fifty-two Week Fiscal Year Ended December 29, 2019 (Fiscal 2019) Compared with Fifty-two Week Fiscal Year Ended December 30, 2018 (Fiscal 2018)
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 29,
2019
|
|
December 30,
2018
|
|
|
(dollars in thousands)
|
Revenues by Segment:
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
96,422
|
|
|
32.8
|
%
|
|
$
|
86,874
|
|
|
30.3
|
%
|
Professional
|
|
123,343
|
|
|
41.9
|
%
|
|
119,300
|
|
|
41.6
|
%
|
Light Industrial
|
|
74,549
|
|
|
25.3
|
%
|
|
80,689
|
|
|
28.1
|
%
|
Total Revenues
|
|
$
|
294,314
|
|
|
100.0
|
%
|
1
|
$
|
286,863
|
|
|
100.0
|
%
|
Real Estate Revenues: Real Estate revenues increased approximately $9.5 million (11.0%) due to our continued geographic expansion plan and overall growth in existing offices. The increase was due to a 5.1% increase in billed hours and a 5.1% increase in average bill rate. Revenue from new offices provided approximately $2.5 million of the increase. Revenues from the commercial buildings group contributed $0.8 million of the increase.
Professional Revenues: Professional revenues increased approximately $4.0 million (3.4%). The increase was due to an increase of 8.3% in average bill rate that was offset by a decrease in permanent placements of $0.1 million and a 5.7% decrease in billed hours.
Light Industrial Revenues: Light Industrial revenues decreased approximately $6.1 million (7.6%). The decrease was due to a 10.8% decrease in billed hours partially offset by a 3.5% increase in average bill rate.
Gross Profit:
Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 29,
2019
|
|
December 30,
2018
|
|
|
(dollars in thousands)
|
Gross Profit by Segment:
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
36,928
|
|
|
45.8
|
%
|
|
$
|
32,955
|
|
|
43.0
|
%
|
Professional
|
|
32,898
|
|
|
40.7
|
%
|
|
31,565
|
|
|
41.2
|
%
|
Light Industrial
|
|
10,855
|
|
|
13.5
|
%
|
|
12,075
|
|
|
15.8
|
%
|
Total Gross Profit
|
|
$
|
80,681
|
|
|
100.0
|
%
|
|
$
|
76,595
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 29,
2019
|
|
December 30,
2018
|
Gross Profit Percentage by Segment:
|
|
|
|
|
Real Estate
|
|
38.3
|
%
|
|
37.9
|
%
|
Professional
|
|
26.7
|
%
|
|
26.5
|
%
|
Light Industrial
|
|
14.6
|
%
|
|
15.0
|
%
|
Company Gross Profit Percentage
|
|
27.4
|
%
|
|
26.7
|
%
|
Overall, our gross profit increased approximately $4.1 million (5.3%). As a percentage of revenue, gross profit has increased to 27.4% from 26.7%, primarily due to higher gross profits across our Real Estate and Professional segments.
We determine spread as the difference between bill rate and pay rate.
Real Estate Gross Profit: Real Estate gross profit increased approximately $4.0 million (12.1%) consistent with the increase in revenue. The increase in gross profit was due primarily to 5.0% increase in average spread.
Professional Gross Profit: Professional gross profit increased approximately $1.3 million (4.2%) consistent with the increase in revenue. The increase in gross profit was due to 9.3% increase in average spread.
Light Industrial Gross Profit: Light Industrial gross profit decreased approximately $1.2 million (10.1%) consistent with the decrease in revenue which was partally offset by an increase of 2.2% in the average spread.
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $5.1 million (10.1%) primarily related to various costs associated with our revenue growth and geographic expansion including increased headcount, commissions and bonuses as detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 29,
2019
|
|
December 30,
2018
|
|
|
|
|
|
|
Amount
|
|
% of Revenue
|
|
Amount
|
|
% of Revenue
|
|
$
Change
|
|
%
Change
|
|
|
(dollars in thousands)
|
Compensation and related
|
|
$
|
41,401
|
|
|
14
|
%
|
|
$
|
38,756
|
|
|
14
|
%
|
|
$
|
2,645
|
|
|
7
|
%
|
Advertising and recruitment
|
|
1,925
|
|
|
1
|
%
|
|
1,915
|
|
|
1
|
%
|
|
10
|
|
|
1
|
%
|
Occupancy and office operations
|
|
3,987
|
|
|
1
|
%
|
|
3,685
|
|
|
1
|
%
|
|
302
|
|
|
8
|
%
|
Client engagement
|
|
1,443
|
|
|
—
|
%
|
|
1,270
|
|
|
—
|
%
|
|
173
|
|
|
14
|
%
|
Software
|
|
1,906
|
|
|
1
|
%
|
|
1,342
|
|
|
—
|
%
|
|
564
|
|
|
42
|
%
|
Professional fees
|
|
1,327
|
|
|
—
|
%
|
|
1,155
|
|
|
—
|
%
|
|
172
|
|
|
15
|
%
|
Public company related costs
|
|
675
|
|
|
—
|
%
|
|
524
|
|
|
—
|
%
|
|
151
|
|
|
29
|
%
|
Bad debt
|
|
128
|
|
|
—
|
%
|
|
41
|
|
|
—
|
%
|
|
87
|
|
|
212
|
%
|
Share-based compensation
|
|
953
|
|
|
—
|
%
|
|
1,069
|
|
|
—
|
%
|
|
(116)
|
|
|
(11)
|
%
|
Transaction fees
|
|
434
|
|
|
—
|
%
|
|
508
|
|
|
—
|
%
|
|
(74)
|
|
|
(15)
|
%
|
IT roadmap
|
|
721
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
721
|
|
|
100
|
%
|
Other
|
|
1,299
|
|
|
—
|
%
|
|
801
|
|
|
—
|
%
|
|
498
|
|
|
62
|
%
|
|
|
$
|
56,199
|
|
|
19
|
%
|
|
$
|
51,066
|
|
|
18
|
%
|
|
$
|
5,133
|
|
|
10
|
%
|
Depreciation and Amortization: Depreciation and amortization charges decreased approximately $0.2 million (4.4%). The decrease in depreciation and amortization is primarily due to fully amortized intangible assets in the Light Industrial segment related to the 2013 InStaff acquisition and in the Professional segment related to the 2015 D&W acquisition.
Interest Expense, net: Interest expense, net decreased $1.3 million (44.9%) primarily due to a May 2018 offering of common stock which proceeds were used to pay down existing indebtedness and the decrease in contingent consideration discounts related to the 2017 Zycron and Smart acquisitions.
Income Taxes: Income tax expense increased $0.4 million (11.5%) primarily due to a May 2018 option cancellation agreement with a former senior executive and the share-based compensation exercises that are deductible for tax purposes that resulted in a reduced 2018 effective rate, which was partially offset by higher pre-tax 2018 income.
Liquidity and Capital Resources
Our working capital requirements are primarily driven by field talent payments, tax payments and client partner accounts receivable receipts. Since receipts from client partners lag payments to field talent, working capital requirements increase substantially in periods of growth.
Our primary sources of liquidity are cash generated from operations and borrowings under our credit agreement with BMO Harris Bank, N.A. (“BMO”), that provides for a revolving credit facility maturing July 16, 2024 (the “Revolving Facility”). Our primary uses of cash are payments to field talent, team members, related payroll liabilities, operating expenses, capital expenditures, cash interest, cash taxes, dividends and contingent consideration and debt payments. We believe that the cash generated from operations, together with the borrowing availability under our Revolving Facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new markets throughout the next year. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to obtain additional debt or equity capital or refinance all or a portion of our debt.
While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional growth opportunities within the next year that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected.
During this period of uncertainty of volatility related to COVID-19, we will continue to monitor our liquidity, particularly payments from our client partners.
A summary of our working capital, operating, investing and financing activities are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
December 30,
2018
|
|
|
(dollars in thousands)
|
Working capital
|
|
$
|
25,385
|
|
|
$
|
27,030
|
|
|
$
|
20,555
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
22,257
|
|
|
$
|
17,954
|
|
|
$
|
18,426
|
|
Net cash used in investing activities
|
|
(24,147)
|
|
|
(9,729)
|
|
|
(924)
|
|
Net cash provided by (used in) financing activities
|
|
1,890
|
|
|
(8,225)
|
|
|
(17,502)
|
|
Net change in cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating Activities
Cash provided by operating activities consists of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, intangible impairment losses, interest expense on contingent consideration payable, gain on contingent consideration, loss on extinguishment of debt, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, accrued payroll and expenses, and other current and long-term liabilities.
During Fiscal 2020, net cash provided by operating activities was $22.3 million, an increase of $4.3 million compared with $18.0 million for Fiscal 2019. This increase is primarily attributable to the non-cash impact of intangible impairment losses, additional other long-term liabilities that includes the deferred employer FICA, and payments on accounts receivable, additional income taxes payable, which were partially offset by lower net income, reduced deferred income taxes, payments on accrued payroll and expenses, reduced prepaid expenses and other current assets, payments on accounts payable, and loss on extinguishment of debt in Fiscal 2019.
During Fiscal 2019, net cash provided by operating activities was $18.0 million, a decrease of $0.5 million compared with $18.4 million for Fiscal 2018. This decrease is primarily attributable to higher net income, the timing of payments on operating assets and liabilities, net deferred tax assets, which was partially offset by contingent consideration adjustments.
Investing Activities
Cash used in investing activities consists primarily of cash paid for businesses acquired and capital expenditures.
In Fiscal 2020, we paid net $22.0 million in connection with the 2020 EdgeRock and 2019 LJK acquisitions and we made capital expenditures of $2.1 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap. In Fiscal 2019, we paid $7.5 million in connection with the LJK acquisition, excluding the hold back paid in 2020, and we made capital expenditures of $2.2 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap project. In Fiscal 2018, we made capital expenditures of $0.9 million mainly related to furniture and fixtures and computer equipment purchased in the ordinary course of business.
Financing Activities
Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement, payment of dividends, and contingent consideration paid.
For Fiscal 2020, we borrowed $22.5 million on our Term Loan, as defined below, to fund the EdgeRock acquisition and pay down the Revolving Facility, we reduced $14.4 million on our Revolving Facility, paid $5.2 million in cash dividends on our common stock, and paid down $1.1 million on the Term Loan.
For Fiscal 2019, we paid $12.3 million in cash dividends on our common stock, paid down $10.1 million on the term loan with Texas Capital Bank, National Association (“TCB”), and we paid $2.7 million of contingent consideration related to the Zycron acquisition. We borrowed $9.7 million on our Revolving Facility and borrowed $7.5 million on our Term Loan in connection with the LJK acquisition.
For Fiscal 2018, we paid $13.8 million in principal payments on the term loan with TCB, paid $10.9 million in cash dividends on our common stock, reduced our revolving credit facility by $10.7 million, paid $3.3 million related to Option Cancellation Agreement, and paid $1.0 million of contingent consideration related to the VTS and Zycron acquisitions. We received net proceeds from the issuance of the common stock of $22.2 million and used the net proceeds to reduce outstanding indebtedness under our credit agreement with TCB and cancel outstanding options pursuant to the Option Cancellation Agreement, as noted above.
Credit Agreements
On July 16, 2019, we entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, with BMO, as administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for the Revolving Facility permitting us to borrow funds from time to time in an aggregate amount up to $35 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting us to borrow funds from time to time in an aggregate amount not to exceed $30 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement all of which has been funded. We may from time to time, with a maximum of two, request an increase in the aggregate Term Loan commitment by $40 million, with minimum increases of $10 million. Our obligations under the Credit Agreement are secured by a first priority security interest in substantially all our tangible and intangible property. The Credit Agreement bears interest either at the Base Rate plus the Applicable Margin plus the Applicable Margin or LIBOR (as such terms are defined in the Credit Agreement). We also pay an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan.
The Credit Agreement contains customary affirmative covenants and negative covenants, including certain limitations on our ability to pay cash dividends. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement.
In April 2020, we entered into a pay-fixed/receive-floating interest rate swap agreement with BMO that reduces the floating interest rate component on the Term Loan obligation. The $25.0 million notional amount was effective on June 3, 2020 and designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate that terminates on June 1, 2023. In accordance with cash flow hedge accounting treatment, we have determined that the hedge is perfectly effective using the change-in-variable-cash-flow method.
On December 13, 2019, we borrowed $7.5 million on the Term Loan in conjunction with the closing of the LJK acquisition. On February 3, 2020, we borrowed $18.5 million on the Term Loan in conjunction with the closing of the EdgeRock acquisition. On April 6, 2020, the Company borrowed the remaining $4.0 million on the Term Loan and the proceeds were used to pay down the Revolving Facility. We borrowed $20 million under the Revolving Facility to pay off our existing indebtedness with TCB and our credit agreement with TCB (and related ancillary documentation) was terminated on July 16, 2019 in connection with such repayment. We recognized a loss on extinguishment of debt of approximately $0.5 million related to the unamortized deferred finance fees. On February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility in conjunction with the closing of the Momentum Solutionz acquisition, as described in Note 19 in the Notes to Consolidated Financial Statements.
Contractual Obligations
The following table summarizes our cash contractual obligations as of December 27, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
Total
|
|
Less than 1
year
|
|
1–3 years
|
|
3–5 years
|
|
More than 5
years
|
|
|
(dollars in thousands)
|
Long-term debt obligations
|
|
$
|
34,902
|
|
|
$
|
2,625
|
|
|
$
|
6,750
|
|
|
$
|
25,527
|
|
|
$
|
—
|
|
Contingent consideration
|
|
2,500
|
|
|
—
|
|
|
2,500
|
|
|
—
|
|
|
—
|
|
Deferred employer FICA*
|
|
7,228
|
|
|
3,614
|
|
|
3,614
|
|
|
—
|
|
|
—
|
|
Operating lease obligations
|
|
7,545
|
|
|
2,319
|
|
|
3,877
|
|
|
1,350
|
|
|
—
|
|
Contractual cash obligations
|
|
$
|
52,175
|
|
|
$
|
8,558
|
|
|
$
|
16,740
|
|
|
$
|
26,877
|
|
|
$
|
—
|
|
* included in Other long-term liabilities (see Note 8 in the Notes to Consolidated Financial Statements)
|
Off-Balance Sheet Arrangements
Letter of Credit
In March 2020, in conjunction with the 2020 EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of December 27, 2020, we had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which is considered usage against our Revolving Facility.
Critical Accounting Policies and Estimates
We have identified the policies listed below as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. The preparation of 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 at 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.
On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowances for credit losses on accounts receivable, impairment of goodwill and intangible assets, lease liability and continent consideration obligations related to acquisitions, contingencies, litigation, income taxes, share-based compensation option expense. Management bases its estimates and judgments on historical experiences and on various other factors believed to be reasonable under the circumstances. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
The COVID-19 pandemic continues to have a significant impact on our economy as a result of measures designed to stop the spread of the virus. In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply our significant accounting policies. As COVID-19 continues to develop, management may make changes to these estimates and judgments over time, which could result in meaningful impacts to our financial statements in future periods. Actual results and outcomes may differ from management’s estimates and assumptions.
Revenue Recognition
We derive our revenues from three segments: Real Estate, Professional, and Light Industrial. We provide workforce solutions and placement services. Revenues are recognized when promised workforce solutions are delivered to client partners, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. Revenues as presented on the consolidated statements of operations represent workforce solutions rendered to client partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services.
We record revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. We have concluded that gross reporting is appropriate because we (i) have the risk of identifying and hiring qualified field talent, (ii) have the discretion to select the field talent and establish their price and duties and (iii) we bear the risk for services that are not fully paid for by client partners.
Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which we have a right to invoice, when the services are rendered by our field talent.
Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control transferred to the client partner, usually when employment candidates start their employment.
Retained search placement revenues - Any revenues from these workforce solutions are recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services, which is less than 1% of consolidated revenues.
We estimate the effect of placement candidates who do not remain with our client partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period.
Payment terms in our contracts vary by the type and location of our client partner and the workforce solutions offered. The term between invoicing and when payment is due is not significant.
Intangible Assets
We hold intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized.
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.
We capitalize purchased software and internal payroll costs directly incurred in the modification of software for internal use. Software maintenance and training costs are expensed in the period incurred.
We evaluate the recoverability of intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. We annually evaluate the remaining useful lives of all intangible assets to determine whether events and circumstances warrant a revision to the remaining period of amortization. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. Further, during second quarter 2020, we assessed the current market capitalization, forecasts and the current carrying value in the 2020 impairment test. As a result of the certain business developments and changes in our long-term projections, we concluded a triggering event had occurred that required an interim impairment assessment to be performed. The qualitative assessment thresholds were met on all reporting units except the finance and accounting group, within the Professional segment. We calculated the quantitative impairment test of the finance and accounting group using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets by asset group (see Note 6 in the Notes to Consolidated Financial Statements). We determined that there were no impairment indicators for these assets in Fiscal 2019 and 2018.
Goodwill
Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. We review goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. We considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. As a result of the certain business developments and changes in our long-term
projections, during second quarter 2020, we concluded a triggering event had occurred that required an interim impairment assessment to be performed. The qualitative assessment thresholds were met on all reporting units except the finance and accounting group. We calculated the quantitative impairment test of the finance and accounting group using the discounted cash flow method and concluded there was no goodwill impairment loss. Based on annual testing, the Company has determined that there was no goodwill impairment in Fiscal 2020, 2019 or 2018.
We first evaluate qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount, including goodwill. If after qualitatively assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then further testing is unnecessary. If after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, we then estimate the fair value of the reporting unit and compare the fair value of the reporting unit with its carrying amount, including goodwill, as discussed below.
In assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, we assess relevant events and circumstances that could affect the significant inputs used to determine the fair value.
The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, a reporting unit shall recognize an impairment loss in an amount equal to that excess.
The quantitative goodwill impairment test involves a two-step process. In the first step,we compare the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, we must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.
Contingent Consideration
We have obligations, to be paid in cash, related to our acquisitions if certain future operating and financial goals are met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. The fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.
Leases
We lease all their office space through operating leases, which expire at various dates through 2025. Many of the lease agreements obligate us to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of our lease arrangements contain renewal provisions from 3 to 10 years, exercisable at our option. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
We determine if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term.
Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. Our operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.
Financial Instruments
We use fair value measurements in areas that include, but are not limited to, interest rate swap agreements used to mitigate interest rate risk, and the allocation of purchase price consideration to tangible and identifiable intangible assets and contingent consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with BMO that provides for the revolving credit facility and term loan and current rates available to us for debt with similar terms and risk. The fair value on the interest rate swap is based on quoted prices from BMO.
Share-Based Compensation
We recognize compensation expense in selling, general and administrative expenses over the service period for options or restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
Income Taxes
The current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for the year. We recognizes any penalties when necessary as part of selling, general and administrative expenses. As of December 27, 2020, goodwill of $31.6 million, which is limited annually, is expected to be deductible for tax purposes.
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified net as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. As of December 27, 2020, we have a $6.5 million net operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date.
When appropriate, we will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, we consider whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results. We believe that it is more likely than not that all deferred tax assets will be realized and thus, believes that a valuation allowance is not required as of December 27, 2020 or December 29, 2019.
We follow the guidance of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes. ASC Topic 740 prescribes a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 2 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to certain market risks from transactions we enter into in the normal course of business. Our primary market risk exposure relates to interest rate risk.
Interest Rates
A portion of our Revolving Facility and Term Loan are priced at variable interest rates. Accordingly, future interest rate increases could potentially put us at risk for an adverse impact on future earnings and cash flows.
Item 8. Financial Statements and Supplementary Data.
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Page
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|
|
Audited Consolidated Financial Statements of BGSF, Inc.
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|
|
Consolidated Balance Sheets as of December 27, 2020 and December 29, 2019
|
|
|
|
Consolidated Statements of Operations and Comprehensive Income for each of the three fiscal years ended December 27, 2020
|
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|
|
Consolidated Statements of Changes in Stockholders' Equity for the three fiscal years ended December 27, 2020
|
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|
|
Consolidated Statements of Cash Flows for each of the three fiscal years ended December 27, 2020
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|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of BGSF, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of BGSF, Inc. (the “Company”) as of December 27, 2020 and December 29, 2019, and the related consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 27, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 27, 2020 and December 29, 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 27, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 27, 2020, based on criteria established in 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 11, 2021 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Acquisition of EdgeRock Technologies Holdings, Inc. – Fair Value of Intangible Assets
Description of the Matter
As discussed in Note 3 to the financial statements, the Company acquired 100% of the equity of EdgeRock Technologies Holdings, Inc. (EdgeRock) for a purchase price cash consideration of $21.7 million, which resulted in $10.3 million of intangible assets. The $10.3 million of intangible assets is primarily comprised of a customer relationship intangible asset and a tradename intangible asset. The determination of a fair value for the customer relationships required management to make estimates of discounted future cash flows and included their subjective assumptions of the appropriate discount rate, the growth of revenue, and rate of attrition for the related customers. Management estimated the fair value of the tradename using the relief from royalty method which is based on the costs saved by owning the tradename rather than licensing it. This method also required management to estimate discounted cash flows with subjective assumptions of the appropriate discount rate, an appropriate royalty rate, and future revenues.
We identified the fair value of intangible assets acquired in the EdgeRock business combination to be a critical audit matter due to the significant judgments made by management to estimate the fair value of the intangible assets. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of discount and royalty rates, as well as forecasts of future revenues and cash flows.
How We Addressed the Matter in Our Audit
Our audit procedures related to the discount rates, royalty rate, and forecasts of future revenue and cash flows used by management to estimate the fair value of intangible assets acquired in the EdgeRock business combination included the following, among others:
•We tested the effectiveness of controls over management’s EdgeRock purchase price allocation, including those over the determination of the fair value of intangible assets, such as controls related to management’s selection of discount rates, the royalty rate, and forecasts of future revenues and cash flows.
•With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology, (2) discount rates, (3) the royalty rate, and (4) future revenue and growth rates, including testing the source information underlying the determination of the discount rates and the royalty rate, testing the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.
•We evaluated management’s ability to accurately forecast future revenues and cash flows by considering the past financial performance of EdgeRock and current economic factors.
Goodwill and Intangibles
Description of the Matter
The Company’s evaluation of goodwill and intangible assets for impairment involves the comparison of the estimated fair value of each reporting unit to its carrying value. The annual impairment test of goodwill and intangible assets at a reporting unit level is performed annually during the fourth quarter, or more frequently if events or circumstances indicate the fair value of a reporting unit may be below its respective carrying value. The Company uses the discounted cash flow model to estimate the fair value of goodwill, which requires management to make significant estimates and assumptions related to discount rates and forecasts of future revenues and reporting unit profit margins. The Company uses a relief from royalty model and residual income model to estimate the fair value of intangibles which requires management to make significant estimates and assumptions related to discount
rates and forecasts of future revenues, reporting unit profit margins and customer turnover. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill or intangible assets impairment charge, or both.
During the second quarter of 2020, the company identified circumstances that caused it to evaluate the goodwill and intangibles associated with one of its reporting units, the finance and accounting group, within the Professional segment for potential impairment. The Company updated their valuation models as of June 28, 2020 to reflect current market conditions and as a result of the test recorded a $7.2 million impairment of intangibles using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets. As of December 27, 2020, the remaining goodwill and intangibles balance for the finance and accounting group was $2.4 million and $0.8 million, respectively.
Subsequent to the impairment charge recorded during the second quarter of 2020, the Company performed its annual impairment test of goodwill during the fourth quarter. Because the estimated fair values of each of the Company’s reporting units exceeded their carrying values, no additional impairments were recorded. Given that forecasted revenues and reporting unit profit margins for the Real Estate, Light Industrial and Professional reporting units are highly sensitive to changes in demand, sales and customer mix, and efficiency of operations, auditing management’s assumptions including the selection of discount rates involved especially subjective judgment. As a result, we identified the Company’s evaluations of goodwill impairment for the Real Estate, Light Industrial and Professional reporting units as a critical audit matter due to the high degree of auditor judgment and the increased extent of effort that was required when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of revenue and profit margins, as well as the selection of discount rates, including the need to involve our fair value specialists.
How We Addressed the Matter in Our Audit
Our audit procedures related to forecasts of future revenues and operating unit profit margins (“forecasts”), and the selection of discount rates for the Real Estate, Light Industrial and Professional reporting units included the following, among others:
•We tested the effectiveness of controls over goodwill and intangibles, including controls over the forecasts related to revenue and operating unit profit margin and selection of discount rates.
•We evaluated management’s ability to accurately forecast revenue and operating unit margins by performing a retrospective review of prior forecasts compared to actual results.
•We evaluated the reasonableness of management’s current revenue and operating unit margin forecasts by comparing the forecasts to historical results and internal communications to management and the Board of Directors.
/s/ Whitley Penn LLP
We have served as the Company’s auditor since 2013.
Dallas, Texas
March 11, 2021
BGSF, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
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|
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|
|
|
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|
|
|
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|
December 27, 2020
|
|
December 29, 2019
|
ASSETS
|
|
|
|
|
Current assets
|
|
|
|
|
|
Accounts receivable (net of allowance for credit losses of $492,087 for 2020 and $468,233 for 2019)
|
|
$
|
41,493,800
|
|
|
$
|
39,423,801
|
|
|
Prepaid expenses and other current assets
|
|
2,154,966
|
|
|
1,243,746
|
|
|
Income taxes receivable
|
|
—
|
|
|
69,649
|
|
|
|
Total current assets
|
|
43,648,766
|
|
|
40,737,196
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
3,723,582
|
|
|
3,545,049
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
|
|
|
Deposits and other assets
|
|
5,211,145
|
|
|
3,843,023
|
|
|
Deferred income taxes, net
|
|
5,827,673
|
|
|
4,071,847
|
|
|
Right-of-use asset - operating leases
|
|
6,009,054
|
|
|
4,386,317
|
|
|
Intangible assets, net
|
|
33,781,168
|
|
|
33,807,973
|
|
|
Goodwill
|
|
32,076,880
|
|
|
25,194,639
|
|
|
|
Total other assets
|
|
82,905,920
|
|
|
71,303,799
|
|
|
Total assets
|
|
$
|
130,278,268
|
|
|
$
|
115,586,044
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Long-term debt, current portion
|
|
$
|
2,625,000
|
|
|
$
|
375,000
|
|
|
Accrued interest
|
|
78,134
|
|
|
73,027
|
|
|
Accounts payable
|
|
219,693
|
|
|
479,422
|
|
|
Accrued payroll and expenses
|
|
11,448,403
|
|
|
10,485,039
|
|
|
|
|
|
|
|
|
Lease liability, current portion
|
|
2,031,898
|
|
|
1,277,843
|
|
|
Other current liabilities
|
|
—
|
|
|
1,016,565
|
|
|
Income taxes payable
|
|
1,861,116
|
|
|
—
|
|
|
|
Total current liabilities
|
|
18,264,244
|
|
|
13,706,896
|
|
|
|
|
|
|
|
|
Line of credit (net of deferred finance fees of $268,076 and $351,128 for 2020 and 2019, respectively)
|
|
5,709,266
|
|
|
19,993,829
|
|
Long-term debt, less current portion
|
|
26,300,000
|
|
|
7,125,000
|
|
Contingent consideration, less current portion
|
|
2,287,926
|
|
|
2,174,378
|
|
Lease liability, less current portion
|
|
4,903,539
|
|
|
4,128,951
|
|
Other long-term liabilities
|
|
7,355,541
|
|
|
—
|
|
|
|
Total liabilities
|
|
64,820,516
|
|
|
47,129,054
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value per share, 500,000 shares authorized, -0- shares issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, $0.01 par value per share; 19,500,000 shares authorized, 10,328,379 and 10,309,236 shares issued and outstanding for 2020 and 2019, respectively, net of treasury stock, at cost, 1,235 and 1,004 shares for 2020 and 2019, respectively
|
|
73,834
|
|
|
75,775
|
|
Additional paid in capital
|
|
60,457,044
|
|
|
59,617,787
|
|
Retained earnings
|
|
5,049,748
|
|
|
8,763,428
|
|
Accumulated other comprehensive loss
|
|
(122,874)
|
|
|
—
|
|
|
|
Total stockholders’ equity
|
|
65,457,752
|
|
|
68,456,990
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
130,278,268
|
|
|
$
|
115,586,044
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BGSF, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years ended December 27, 2020, December 29, 2019 and December 30, 2018
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
277,890,880
|
|
|
$
|
294,313,548
|
|
|
$
|
286,862,926
|
|
Cost of services
|
|
201,670,876
|
|
|
213,632,283
|
|
|
210,267,734
|
|
|
Gross profit
|
|
76,220,004
|
|
|
80,681,265
|
|
|
76,595,192
|
|
Selling, general and administrative expenses
|
|
60,558,697
|
|
|
56,199,521
|
|
|
51,066,327
|
|
Gain on contingent consideration
|
|
(76,102)
|
|
|
—
|
|
|
(3,775,307)
|
|
Impairment losses
|
|
7,239,514
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
|
4,959,705
|
|
|
4,820,256
|
|
|
5,044,487
|
|
|
Operating income
|
|
3,538,190
|
|
|
19,661,488
|
|
|
24,259,685
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
540,705
|
|
|
—
|
|
Interest expense, net
|
|
1,583,630
|
|
|
1,568,815
|
|
|
2,850,405
|
|
|
Income before income taxes
|
|
1,954,560
|
|
|
17,551,968
|
|
|
21,409,280
|
|
Income tax expense
|
|
513,092
|
|
|
4,304,978
|
|
|
3,859,739
|
|
|
Net income
|
|
$
|
1,441,468
|
|
|
$
|
13,246,990
|
|
|
$
|
17,549,541
|
|
|
|
|
|
|
|
|
|
Change in unrealized losses on cash flow hedges
|
|
122,874
|
|
|
—
|
|
|
—
|
|
|
Other comprehensive loss
|
|
122,874
|
|
|
—
|
|
|
—
|
|
|
Net comprehensive income
|
|
$
|
1,318,594
|
|
|
$
|
13,246,990
|
|
|
$
|
17,549,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.14
|
|
|
$
|
1.29
|
|
|
$
|
1.83
|
|
|
Diluted
|
|
$
|
0.14
|
|
|
$
|
1.28
|
|
|
$
|
1.79
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
10,311,606
|
|
|
10,238,565
|
|
|
9,577,498
|
|
|
Diluted
|
|
10,338,029
|
|
|
10,350,775
|
|
|
9,808,080
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.50
|
|
|
$
|
1.20
|
|
|
$
|
1.15
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BGSF, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years ended December 27, 2020, December 29, 2019 and December 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
Shares
|
|
Par
Value
|
|
Treasury Stock Amount
|
|
Additional Paid in Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive (Loss)/Income
|
|
Total
|
Stockholders’ equity, December 31, 2017
|
|
—
|
|
|
8,759,376
|
|
|
$
|
87,594
|
|
|
$
|
—
|
|
|
$
|
37,675,329
|
|
|
$
|
1,371,756
|
|
|
$
|
—
|
|
|
$
|
39,134,679
|
|
Share-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,069,482
|
|
|
—
|
|
|
—
|
|
|
1,069,482
|
|
Issuance of shares, net of offering costs
|
|
—
|
|
|
1,293,750
|
|
|
12,938
|
|
|
—
|
|
|
21,347,200
|
|
|
—
|
|
|
—
|
|
|
21,360,138
|
|
Issuance of restricted shares, net of 828 shares of treasury stock
|
|
—
|
|
|
41,172
|
|
|
412
|
|
|
(24,027)
|
|
|
(412)
|
|
|
—
|
|
|
—
|
|
|
(24,027)
|
|
Exercise of common stock options and warrants
|
|
—
|
|
|
132,949
|
|
|
1,329
|
|
|
—
|
|
|
867,949
|
|
|
—
|
|
|
—
|
|
|
869,278
|
|
Option cancellation agreement
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,335,169)
|
|
|
—
|
|
|
—
|
|
|
(3,335,169)
|
|
Cash dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,921,909)
|
|
|
—
|
|
|
(10,921,909)
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,549,541
|
|
|
—
|
|
|
17,549,541
|
|
Stockholders’ equity, December 30, 2018
|
|
—
|
|
|
10,227,247
|
|
|
102,273
|
|
|
(24,027)
|
|
|
57,624,379
|
|
|
7,999,388
|
|
|
—
|
|
|
65,702,013
|
|
Share-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
952,738
|
|
|
—
|
|
|
—
|
|
|
952,738
|
|
Cancellation of restricted shares
|
|
—
|
|
|
(2,250)
|
|
|
(23)
|
|
|
—
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of shares
|
|
—
|
|
|
47,403
|
|
|
474
|
|
|
—
|
|
|
999,526
|
|
|
—
|
|
|
—
|
|
|
1,000,000
|
|
Exercise of common stock options and warrants, net of 176 shares of treasury stock
|
|
—
|
|
|
36,836
|
|
|
369
|
|
|
(3,291)
|
|
|
41,121
|
|
|
—
|
|
|
—
|
|
|
38,199
|
|
Change in accounting principal - operating leases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(200,608)
|
|
|
—
|
|
|
(200,608)
|
|
Cash dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,282,342)
|
|
|
—
|
|
|
(12,282,342)
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,246,990
|
|
|
—
|
|
|
13,246,990
|
|
Stockholders’ equity, December 29, 2019
|
|
—
|
|
|
10,309,236
|
|
|
103,093
|
|
|
(27,318)
|
|
|
59,617,787
|
|
|
8,763,428
|
|
|
—
|
|
|
68,456,990
|
|
Share-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
849,448
|
|
|
—
|
|
|
—
|
|
|
849,448
|
|
Issuance of restricted shares, net of 231 shares of treasury stock
|
|
—
|
|
|
19,143
|
|
|
191
|
|
|
(2,132)
|
|
|
(191)
|
|
|
—
|
|
|
—
|
|
|
(2,132)
|
|
Share issuance costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,000)
|
|
|
—
|
|
|
—
|
|
|
(10,000)
|
|
Cash dividends declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,155,148)
|
|
|
—
|
|
|
(5,155,148)
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,441,468
|
|
|
—
|
|
|
1,441,468
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(122,874)
|
|
|
(122,874)
|
|
Stockholders’ equity, December 27, 2020
|
|
—
|
|
|
10,328,379
|
|
|
$
|
103,284
|
|
|
$
|
(29,450)
|
|
|
$
|
60,457,044
|
|
|
$
|
5,049,748
|
|
|
$
|
(122,874)
|
|
|
$
|
65,457,752
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BGSF, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 27, 2020, December 29, 2019 and December 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,441,468
|
|
|
$
|
13,246,990
|
|
|
$
|
17,549,541
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
|
|
|
|
|
|
|
|
Depreciation
|
|
855,955
|
|
|
830,299
|
|
|
746,443
|
|
|
|
Amortization
|
|
4,103,750
|
|
|
3,989,957
|
|
|
4,298,044
|
|
|
|
Impairment losses
|
|
7,239,514
|
|
|
—
|
|
|
—
|
|
|
|
Loss on disposal of property and equipment
|
|
—
|
|
|
30,767
|
|
|
17,765
|
|
|
|
Loss on extinguishment of debt, net
|
|
—
|
|
|
540,705
|
|
|
—
|
|
|
|
Contingent consideration adjustment
|
|
(76,102)
|
|
|
—
|
|
|
(3,775,307)
|
|
|
|
Amortization of deferred financing fees
|
|
83,052
|
|
|
173,018
|
|
|
453,513
|
|
|
|
Interest expense on contingent consideration payable
|
|
189,650
|
|
|
123,761
|
|
|
624,145
|
|
|
|
Provision for credit losses
|
|
349,362
|
|
|
128,260
|
|
|
40,618
|
|
|
|
Share-based compensation
|
|
849,448
|
|
|
952,738
|
|
|
1,069,482
|
|
|
|
Deferred income taxes, net of acquired deferred tax liability
|
|
(2,413,019)
|
|
|
799,150
|
|
|
1,531,516
|
|
|
|
Net changes in operating assets and liabilities, net of effects of acquisitions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
4,308,900
|
|
|
(1,758,340)
|
|
|
(939,454)
|
|
|
|
|
Prepaid expenses and other current assets
|
|
(855,112)
|
|
|
(222,794)
|
|
|
84,253
|
|
|
|
|
Deposits and other assets
|
|
(1,089,102)
|
|
|
(633,603)
|
|
|
(302,315)
|
|
|
|
|
Accrued interest
|
|
5,107
|
|
|
(235,520)
|
|
|
(22,083)
|
|
|
|
|
Accounts payable
|
|
(279,326)
|
|
|
333,165
|
|
|
(1,763,355)
|
|
|
|
|
Accrued payroll and expenses
|
|
(1,528,873)
|
|
|
(208,203)
|
|
|
(1,190,572)
|
|
|
|
|
Other current liabilities
|
|
(16,565)
|
|
|
16,565
|
|
|
(87,553)
|
|
|
|
|
Income taxes receivable and payable
|
|
1,874,981
|
|
|
(125,490)
|
|
|
246,753
|
|
|
|
|
Operating leases
|
|
(18,805)
|
|
|
(27,581)
|
|
|
—
|
|
|
|
|
Other long-term liabilities
|
|
7,232,667
|
|
|
—
|
|
|
(154,959)
|
|
|
|
Net cash provided by operating activities
|
|
22,256,950
|
|
|
17,953,844
|
|
|
18,426,475
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Businesses acquired, net of cash received
|
|
(22,002,109)
|
|
|
(7,500,000)
|
|
|
—
|
|
|
Capital expenditures
|
|
(2,144,946)
|
|
|
(2,229,509)
|
|
|
(923,994)
|
|
|
Proceeds from sale of property and equipment
|
|
—
|
|
|
440
|
|
|
—
|
|
|
|
Net cash used in investing activities
|
|
(24,147,055)
|
|
|
(9,729,069)
|
|
|
(923,994)
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BGSF, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 27, 2020, December 29, 2019 and December 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Net (payments) borrowings under line of credit
|
|
(14,367,615)
|
|
|
9,694,667
|
|
|
(10,717,778)
|
|
|
Proceeds from issuance of long-term debt
|
|
22,500,000
|
|
|
7,500,000
|
|
|
—
|
|
|
Principal payments on long-term debt
|
|
(1,075,000)
|
|
|
(10,121,000)
|
|
|
(13,766,500)
|
|
|
|
|
|
|
|
|
|
|
Payments of dividends
|
|
(5,155,148)
|
|
|
(12,282,342)
|
|
|
(10,921,909)
|
|
|
Issuance of shares under the 2013 Long-Term Incentive Plan and Form S-3 registration statement, net of exercises
|
|
(12,132)
|
|
|
38,200
|
|
|
22,205,389
|
|
|
Option cancellation agreement
|
|
—
|
|
|
—
|
|
|
(3,335,169)
|
|
|
Contingent consideration paid
|
|
—
|
|
|
(2,672,000)
|
|
|
(962,996)
|
|
|
Deferred financing costs
|
|
—
|
|
|
(382,300)
|
|
|
(3,518)
|
|
|
|
Net cash provided by (used in) financing activities
|
|
1,890,105
|
|
|
(8,224,775)
|
|
|
(17,502,481)
|
|
Net change in cash and cash equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents, beginning of year
|
|
—
|
|
|
—
|
|
|
—
|
|
Cash and cash equivalents, end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,133,323
|
|
|
$
|
1,350,713
|
|
|
$
|
1,764,960
|
|
|
Cash paid for taxes, net of refunds
|
|
$
|
995,361
|
|
|
$
|
3,563,703
|
|
|
$
|
2,012,325
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
Leasehold improvements funded by landlord incentives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
366,202
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS
BGSF, Inc. is a national provider of workforce 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., 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 three industry segments: Real Estate, Professional, and Light Industrial.
The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 36 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent.
The Professional segment provides skilled field talent on a nationwide basis for information technology (“IT”) and finance, accounting, legal and human resource client partner projects on a national basis. Our Professional segment operates through various divisions including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and beginning in 2021, Momentum Solutionz.
The Light Industrial segment provides field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce in 7 states. Our Light Industrial segment operates through our InStaff division.
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 Year
The Company has a 52/53 week fiscal year. Fiscal years for the consolidated financial statements included herein are for the 52 weeks ended December 27, 2020, December 29, 2019, and December 30, 2018, referred to herein as Fiscal 2020, 2019 and 2018, respectively.
Reclassifications
Certain reclassifications have been made to the 2018 and 2019 financial statements to conform with the 2020 presentation.
Management Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include allowances for credit losses, goodwill, intangible assets, lease liability, contingent consideration obligations related to acquisitions, and income taxes. Additionally, the valuation of share-based compensation expense uses a model based upon interest rates, stock prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
The COVID-19 pandemic continues to have a significant impact on our economy as a result of measures designed to stop the spread of the virus. In light of the currently unknown ultimate duration and severity of COVID-19, we face a greater degree of uncertainty than normal in making the judgments and estimates needed to apply the Company’s significant accounting policies. As COVID-19 continues to develop, management may make changes to these estimates and judgments over time, which could result in meaningful impacts to the Company’s financial statements in future periods. Actual results and outcomes may differ from management’s estimates and assumptions.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments
The Company uses fair value measurements in areas that include, but are not limited to, interest rate swap agreements used to mitigate interest rate risk, and the allocation of purchase price consideration to tangible and identifiable intangible assets and contingent consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with BMO Harris Bank, N.A. (“BMO”) that provides for a revolving credit facility and term loan and current rates available to the Company for debt with similar terms and risk. The fair value on the interest rate swap is based on quoted prices from BMO.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less.
Concentration of Credit Risk
Concentration of credit risk is limited due to the Company’s diverse client partner base and their dispersion across many different industries and geographic locations nationwide. No single client partner accounted for more than 10% of the Company’s accounts receivable as of December 27, 2020 and December 29, 2019 or revenue in Fiscal 2020, 2019 and 2018. Geographic revenue in excess of 10% of the Company's consolidated revenue in Fiscal 2020 and the related percentage for Fiscal 2019 and 2018 was generated in the following areas:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Maryland
|
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
Massachusetts
|
|
14
|
%
|
|
1
|
%
|
|
2
|
%
|
Tennessee
|
|
14
|
%
|
|
15
|
%
|
|
14
|
%
|
Texas
|
|
23
|
%
|
|
28
|
%
|
|
29
|
%
|
Consequently, weakness in economic conditions in these regions could have a material adverse effect on the Company’s financial position and results of future operations.
Accounts Receivable
The Company extends credit to its client partners in the normal course of business. Accounts receivable represents unpaid balances due from client partners. The Company maintains an allowance for credit losses for expected losses resulting from client partners’ non-payment of balances due to the Company. The Company’s determination of the allowance for uncollectible amounts is based on management’s judgments and assumptions, including general economic conditions, portfolio composition, prior loss experience, evaluation of credit risk related to certain individual client partners and the Company’s ongoing examination process. Receivables are written off after they are deemed to be uncollectible after all means of collection have been exhausted. Recoveries of receivables previously written off are recorded when received. The Company will continue to actively monitor the impact of COVID-19 on expected credit losses.
Changes in the allowance for credit losses for the fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Beginning balance
|
|
$
|
468,233
|
|
|
$
|
468,233
|
|
Provision for credit losses - EdgeRock Technology Holdings, Inc. (“EdgeRock”) acquisition
|
|
47,498
|
|
|
—
|
|
Provision for credit losses, net
|
|
349,362
|
|
|
128,260
|
|
Amounts written off, net
|
|
(373,006)
|
|
|
(128,260)
|
|
Ending balance
|
|
$
|
492,087
|
|
|
$
|
468,233
|
|
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
The Company depreciates the cost of property and equipment over the estimated useful lives of the assets using the straight-line method ranging from five to seven years. The costs of leasehold improvements are amortized over the shorter of the estimated useful life or lease term. The cost of normal maintenance and repairs is charged to operating expenses as incurred. Material expenditures that increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related accumulated depreciation or amortization, are removed from the accounts, and any gains or losses are reflected in current operations.
Deposits
The Company maintains guaranteed costs policies for workers' compensation coverage in monopolistic states and minimal loss retention coverage in all other states. Under these policies, the Company is required to maintain refundable deposits of $3.8 million and $3.6 million, which are included in Deposits and other other assets in the accompanying consolidated balance sheets, as of December 27, 2020 and December 29, 2019, respectively.
Long-Lived Assets
The Company capitalizes direct costs incurred in the development of internal-use software. Cloud computing implementation costs incurred in hosting arrangements are capitalized and reported as a component of other assets. All other internal-use software development costs are capitalized and reported as a component of computer software within intangible assets.
The Company reviews its long-lived assets, primarily fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments with respect to long-lived assets during Fiscal 2020, 2019 or 2018.
Leases
The Company leases all their office space through operating leases, which expire at various dates through 2025. Many of the lease agreements obligate the Company to pay real estate taxes, insurance and certain maintenance costs, which are accounted for separately. Certain of the Company’s lease arrangements contain renewal provisions from 3 to 10 years, exercisable at the Company's option. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other leases are recorded on the balance sheet as right-of-use assets and lease liabilities for the lease term.
Right of use lease assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at lease commencement date. The Company’s operating lease expense is recognized on a straight-line basis over the lease term and is recorded in selling, general and administrative expenses.
Intangible Assets
The Company holds intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years, based on a pattern in which the economic benefit of the respective intangible asset is realized.
Identifiable intangible assets recognized in conjunction with acquisitions are recorded at fair value. Significant unobservable inputs are used to determine the fair value of the identifiable intangible assets based on the income approach valuation model whereby the present worth and anticipated future benefits of the identifiable intangible assets are discounted back to their net present value.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, during second quarter 2020, the Company assessed the current market capitalization, forecasts and the current carrying value in the 2020 impairment test. As a result of the certain business developments and changes in the Company's long-term projections, the Company concluded a triggering event had occurred that required an interim impairment assessment to be performed. The qualitative assessment thresholds were met on all reporting units except the finance and accounting group, within the Professional segment. The Company calculated the quantitative impairment test of the finance and accounting group using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets by asset group (see Note 6). In the professional segment, the Company recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss during the thirteen week period ended June 28, 2020. The Company determined that there were no impairment indicators for these assets in Fiscal 2019 or 2018.
Goodwill
Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. The Company reviews goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company considered the current and expected future economic and market conditions surrounding COVID-19 and its impact on each of the reporting units. As a result of the certain business developments and changes in the Company's long-term projections, during second quarter 2020, the Company concluded a triggering event had occurred that required an interim impairment assessment to be performed. The qualitative assessment thresholds were met on all reporting units except the finance and accounting group. The Company calculated the quantitative impairment test of the finance and accounting group using the discounted cash flow method and concluded there was no goodwill impairment loss. Based on annual testing, the Company has determined that there was no goodwill impairment in Fiscal 2020, 2019 or 2018.
The Company first evaluates qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of the reporting unit is less than its carrying amount, including goodwill. If after qualitatively assessing the totality of events or circumstances, the Company determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then further testing is unnecessary. If after assessing the totality of events or circumstances, the Company determines that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company then estimates the fair value of the reporting unit and compares the fair value of the reporting unit with its carrying amount, including goodwill, as discussed below.
In assessing whether it is more likely than not that an indefinite-lived intangible asset is impaired, the Company assesses relevant events and circumstances that could affect the significant inputs used to determine the fair value.
The quantitative impairment test for an indefinite-lived intangible asset consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, a reporting unit shall recognize an impairment loss in an amount equal to that excess.
The quantitative goodwill impairment test involves a two-step process. In the first step, the Company compares the fair value of each reporting unit to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, the Company must perform the second step of the impairment test to measure the amount of impairment loss. In the second step, the reporting unit's fair value is allocated to all of the assets and liabilities of the reporting unit, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment loss.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Financing Fees
Deferred financing fees are amortized using the effective interest method over the term of the respective loans. Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability.
Contingent Consideration
The Company has obligations, to be paid in cash, related to its acquisitions if certain future operating and financial goals are met. The fair value of this contingent consideration is determined using expected cash flows and present value technique. The fair value calculation of the expected future payments uses a discount rate commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.
Revenue Recognition
The Company derives its revenues from three segments: Real Estate, Professional, and Light Industrial. The Company provides workforce solutions and placement services. Revenues are recognized when promised workforce solutions 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 workforce solutions rendered to client partners less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and the related amounts of reimbursable expenses are included in cost of services.
The Company records revenue on a gross basis as a principal versus on a net basis as an agent in the presentation of revenues and expenses. The Company has concluded that gross reporting is appropriate because the Company (i) has the risk of identifying and hiring qualified field talent, (ii) has the discretion to select the field talent and establish their price and duties and (iii) bears the risk for services that are not fully paid for by client partners.
Workforce solution revenues - Field talent revenues from contracts with client partners are recognized in the amount to which the Company has a right to invoice, when the services are rendered by the Company’s field talent.
Contingent placement revenues - Any revenues associated with workforce solutions that are provided on a contingent basis are recognized once the contingency is resolved, as this is when control is transferred to the client partner, usually when employment candidates start their employment.
Retained search placement revenues - Any revenues from these workforce solutions are recognized based on the contractual amount for services completed to date which best depicts the transfer of control of services, which is less than 1% of consolidated revenues.
The Company estimates the effect of placement candidates who do not remain with its client partners through the guarantee period (generally 90 days) based on historical experience. Allowances, recorded as a liability, are established to estimate these losses. Fees to client partners are generally calculated as a percentage of the new worker’s annual compensation. No fees for placement workforce solutions are charged to employment candidates. These assumptions determine the timing of revenue recognition for the reported period.
Refer to Note 17 for disaggregated revenues by segment.
Payment terms in the Company's contracts vary by the type and location of its client partner and the workforce solutions offered. The term between invoicing and when payment is due is not significant. There were no unsatisfied performance obligations as of December 27, 2020. There were no revenues recognized during Fiscal 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 Fiscal 2020.
Advertising
The Company recognizes advertising expense in selling, general and administrative expenses as the services are incurred. Total advertising expense for Fiscal 2020, 2019 and 2018 was $1.7 million, $1.9 million, and $1.9 million, respectively.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Share-Based Compensation
The Company recognizes compensation expense in selling, general and administrative expenses over the service period for options or restricted stock that are expected to vest and records adjustments to compensation expense at the end of the service period if actual forfeitures differ from original estimates.
Earnings Per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period adjusted to reflect potentially dilutive securities. Antidilutive shares are excluded from the calculation of earnings per share.
The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
|
December 30,
2018
|
Weighted-average number of common shares outstanding:
|
|
10,311,606
|
|
|
10,238,565
|
|
|
9,577,498
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
26,423
|
|
|
90,681
|
|
|
186,995
|
|
|
Warrants
|
|
—
|
|
|
21,529
|
|
|
43,587
|
|
Weighted-average number of diluted common shares outstanding
|
|
10,338,029
|
|
|
10,350,775
|
|
|
9,808,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
423,350
|
|
|
238,750
|
|
|
175,000
|
|
|
Warrants
|
|
25,862
|
|
|
—
|
|
|
—
|
|
Antidilutive shares
|
|
449,212
|
|
|
238,750
|
|
|
175,000
|
|
Income Taxes
The current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for the year. The Company recognizes any penalties when necessary as part of selling, general and administrative expenses. As of December 27, 2020, goodwill of $31.6 million, which is limited annually, is expected to be deductible for tax purposes.
Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified net as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. The overall change in deferred tax assets and liabilities for the period measures the deferred tax expense or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. As of December 27, 2020, the Company has a $6.5 million net operating loss carry forward from the 2020 EdgeRock acquisition with no expiration date.
When appropriate, the Company will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. In determining whether a valuation allowance is appropriate, the Company considers whether it is more likely than not that all or some portion of our deferred tax assets will not be realized, based in part upon management’s judgments regarding future events and past operating results. The Company believes that it is more likely than not that all deferred tax assets will be realized and thus, believes that a valuation allowance is not required as of December 27, 2020 or December 29, 2019.
The Company follows the guidance of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes. ASC Topic 740 prescribes a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to be taken in a tax return.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new standard was effective for the Company beginning with the fourth quarter of 2020. The Company early adopted this ASU in the second quarter of fiscal 2020, which did not have a material impact on the consolidated financial statements.
In March 2020 and January 2021, the FASB issued ASU No. 2020-04, Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) and ASU No. 2021-01, Reference Rate Reform: Scope (“ASU 2021-01”), respectively. Together, ASU 2020-04 and ASU 2021-01 provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) contract modifications, hedging relationships, and other arrangements that are expected to be impacted by the global transition away from certain reference rates, such as the London Interbank Offered Rate, towards new reference rates. The guidance in ASU 2020-04 and ASU 2021-01 was effective upon issuance and, once adopted, may be applied prospectively to contract modifications and hedging relationships through December 31, 2022. The Company is evaluating the impact that the guidance will have on its consolidated financial statements and related disclosures, if adopted, and currently does not expect that it would be material.
NOTE 3 - ACQUISITIONS
L.J. Kushner & Associates, L.L.C.
On December 13, 2019, the Company acquired substantially all of the assets and assumed certain liabilities of L.J. Kushner & Associates, L.L.C. (“LJK”) for cash consideration of $8.5 million and issued $1.0 million (47,403 shares privately placed) of the Company's common stock at closing. $1.0 million was held back as partial security for certain post-closing liabilities, which was paid on June 11, 2020. The purchase agreement further provides for contingent consideration of up to $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 90 days after the closing date.
The net assets acquired were assigned to the Professional segment. The acquisition of LJK allows the Company to strengthen and expand its IT operations through cybersecurity retained search workforce solutions specializing in recruiting high and mid-level security professionals.
The Fiscal 2019 consolidated statement of operations and comprehensive income includes two weeks of LJK operations and there are no revenues and minimal operating expenses. The purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition. All amounts recorded to goodwill are expected to be deductible for tax purposes. The allocation is as follows:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
187,000
|
|
Prepaid expenses and other assets
|
|
14,000
|
|
|
|
|
Intangible assets
|
|
4,249,430
|
|
Goodwill
|
|
7,211,090
|
|
|
|
|
Total net assets acquired
|
|
$
|
11,661,520
|
|
Cash
|
|
$
|
8,500,000
|
|
Common stock
|
|
1,000,000
|
|
|
|
|
Fair value of contingent consideration
|
|
2,161,520
|
|
Total fair value of consideration transferred for acquired business
|
|
$
|
11,661,520
|
|
The allocation of the intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
Value
|
|
Estimated
Useful Lives
|
Covenants not to compete
|
|
$
|
500,000
|
|
|
5 years
|
Trade name
|
|
3,000,000
|
|
|
Indefinite
|
Client partner list
|
|
749,430
|
|
|
10 years
|
Total
|
|
$
|
4,249,430
|
|
|
|
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company incurred costs of $0.1 million related to the LJK acquisition. These costs were expensed as incurred in selling, general and administrative expenses in 2019.
EdgeRock Technology Holding, Inc.
On February 3, 2020, the Company acquired 100% of the equity of EdgeRock for a net purchase price cash consideration of $21.0 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 acquired 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 income does not include any operating results of EdgeRock. The Fiscal 2020 consolidated statement of operations and comprehensive income includes forty-seven weeks of EdgeRock operations, which is approximately $34.7 million of revenue and $1.6 million of operating income. The acquisition has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
6,728,261
|
|
Prepaid expenses and other assets
|
|
56,108
|
|
Property and equipment
|
|
296,309
|
|
Right-of-use asset - operating leases
|
|
1,714,984
|
|
Intangible assets
|
|
10,264,000
|
|
Goodwill (non-deductible for tax purposes)
|
|
6,882,241
|
|
Current liabilities assumed
|
|
(2,567,617)
|
|
Deferred income taxes
|
|
(657,193)
|
|
Lease liability - operating leases
|
|
(1,714,984)
|
|
Total net assets acquired
|
|
$
|
21,002,109
|
|
|
|
|
Cash
|
|
$
|
21,600,000
|
|
Working capital adjustment
|
|
(597,891)
|
|
Total fair value of consideration transferred for acquired business
|
|
$
|
21,002,109
|
|
The allocation of the intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
Value
|
|
Estimated
Useful Lives
|
Covenants not to compete
|
|
$
|
171,000
|
|
|
5 years
|
Trade name
|
|
6,000,000
|
|
|
Indefinite
|
Client partner list
|
|
4,093,000
|
|
|
6 years
|
Total
|
|
$
|
10,264,000
|
|
|
|
The Company incurred costs of $0.7 million related to the EdgeRock acquisition. These costs were expensed as incurred in selling, general and administrative expenses.
Supplemental Unaudited Pro Forma Information
The Company estimates the revenues and net income for the periods below that would have been reported if the LJK and EdgeRock acquisitions had taken place on the first day of the Company's Fiscal 2019 would be as follows (dollars in thousands, except per share amounts):
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Revenues
|
|
$
|
280,999
|
|
|
$
|
337,971
|
|
Gross profit
|
|
$
|
77,128
|
|
|
$
|
96,229
|
|
Net income
|
|
$
|
1,253
|
|
|
$
|
15,100
|
|
Net income per share:
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
1.47
|
|
Diluted
|
|
$
|
0.12
|
|
|
$
|
1.46
|
|
Pro forma net income includes amortization of identifiable intangible assets, interest expense on additional borrowings on the Revolving Facility (as defined below) at a rate of 2.3% and tax expense of the pro forma adjustments at an effective tax rate of 26.2% for Fiscal 2020 and 24.5% for Fiscal 2019. The pro forma operating results include adjustments to LJK and EdgeRock related to synergy adjustments for expenses that would be duplicative and other non-recurring, non-operating and out of period expense items once integrated with the Company.
Amounts set forth above are not necessarily indicative of the results that would have been attained had the LJK and EdgeRock acquisitions taken place on the first day of Fiscal 2019 or of the results that may be achieved by the combined enterprise in the future.
NOTE 4 - PROPERTY AND EQUIPMENT, NET
Property and equipment as of December 27, 2020 and December 29, 2019 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Leasehold improvements
|
|
$
|
1,548,311
|
|
|
$
|
1,266,925
|
|
Furniture and fixtures
|
|
1,670,222
|
|
|
1,207,665
|
|
Computer systems
|
|
4,606,644
|
|
|
3,746,156
|
|
Vehicles
|
|
161,429
|
|
|
161,429
|
|
|
|
7,986,606
|
|
|
6,382,175
|
|
Accumulated depreciation
|
|
(4,263,024)
|
|
|
(2,837,126)
|
|
Property and equipment, net
|
|
$
|
3,723,582
|
|
|
$
|
3,545,049
|
|
Total depreciation expense in Fiscal 2020, 2019 and 2018 was $855,955, $830,299, and $746,443, respectively.
NOTE 5 - LEASES
At December 27, 2020, the weighted average remaining lease term and weighted average discount rate for operating leases was 3.5 years and 4.9%, respectively. The Company's future operating lease obligations that have not yet commenced are immaterial. For Fiscal 2020, the Company's cash paid for operating leases was $2,175,733, and operating lease and short-term lease costs were $2,078,089 and $374,261, respectively.
The undiscounted annual future minimum lease payments consist of the following at:
|
|
|
|
|
|
|
December 27, 2020
|
2021
|
$
|
2,318,837
|
|
2022
|
2,215,659
|
|
2023
|
1,660,916
|
|
2024
|
1,038,580
|
|
2025
|
311,375
|
|
|
|
Total lease payment
|
7,545,367
|
|
Interest
|
(609,930)
|
|
Present value of lease liabilities
|
$
|
6,935,437
|
|
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INTANGIBLE ASSETS
Finite and indefinite lived intangible assets consist of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27, 2020
|
|
|
Gross Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Finite lives:
|
|
|
|
|
|
|
Client partner lists
|
|
$
|
52,920,478
|
|
|
$
|
43,980,394
|
|
|
$
|
8,940,084
|
|
Covenant not to compete
|
|
2,786,585
|
|
|
1,926,094
|
|
|
860,491
|
|
Computer software
|
|
2,355,805
|
|
|
1,147,778
|
|
|
1,208,027
|
|
|
|
58,062,868
|
|
|
47,054,266
|
|
|
11,008,602
|
|
Indefinite lives:
|
|
|
|
|
|
|
Trade names
|
|
24,205,000
|
|
|
1,432,434
|
|
|
22,772,566
|
|
Total
|
|
$
|
82,267,868
|
|
|
$
|
48,486,700
|
|
|
$
|
33,781,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 29, 2019
|
|
|
Gross Value
|
|
Accumulated
Amortization
|
|
Net
Carrying
Value
|
Finite lives:
|
|
|
|
|
|
|
Client partner lists
|
|
$
|
52,358,991
|
|
|
$
|
40,462,549
|
|
|
$
|
11,896,442
|
|
Covenant not to compete
|
|
2,615,585
|
|
|
1,662,220
|
|
|
953,365
|
|
Computer software
|
|
1,228,057
|
|
|
750,457
|
|
|
477,600
|
|
|
|
56,202,633
|
|
|
42,875,226
|
|
|
13,327,407
|
|
Indefinite lives:
|
|
|
|
|
|
|
Trade names
|
|
21,913,000
|
|
|
1,432,434
|
|
|
20,480,566
|
|
Total
|
|
$
|
78,115,633
|
|
|
$
|
44,307,660
|
|
|
$
|
33,807,973
|
|
Estimated future amortization expense for the next five years and thereafter is as follows:
|
|
|
|
|
|
Fiscal Years Ending:
|
|
2021
|
$
|
2,396,218
|
|
2022
|
1,999,966
|
|
2023
|
1,837,442
|
|
2024
|
1,657,319
|
|
2025
|
1,223,626
|
|
Thereafter
|
1,894,031
|
|
Total
|
$
|
11,008,602
|
|
Total amortization expense for Fiscal 2020, 2019 and 2018 was $4.1 million, $4.0 million and $4.3 million, respectively.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - GOODWILL
The changes in the carrying amount of goodwill as of and during the years ended were as follows at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
Professional
|
|
Light Industrial
|
|
Total
|
December 30, 2018
|
|
$
|
1,073,755
|
|
|
$
|
11,884,974
|
|
|
$
|
5,024,820
|
|
|
$
|
17,983,549
|
|
Additions from acquisitions
|
|
—
|
|
|
7,211,090
|
|
|
—
|
|
|
7,211,090
|
|
December 29, 2019
|
|
1,073,755
|
|
|
19,096,064
|
|
|
5,024,820
|
|
|
25,194,639
|
|
Additions from acquisitions
|
|
—
|
|
|
6,882,241
|
|
|
—
|
|
|
6,882,241
|
|
December 27, 2020
|
|
$
|
1,073,755
|
|
|
$
|
25,978,305
|
|
|
$
|
5,024,820
|
|
|
$
|
32,076,880
|
|
NOTE 8 - ACCRUED PAYROLL AND EXPENSES, CONTINGENT CONSIDERATION, AND OTHER LONG-TERM LIABILITIES
Accrued payroll and expenses consist of the following at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
Field talent payroll
|
|
$
|
5,574,442
|
|
|
$
|
4,505,264
|
|
Field talent payroll related
|
|
1,036,135
|
|
|
1,396,972
|
|
Accrued bonuses and commissions
|
|
1,884,876
|
|
|
1,585,681
|
|
Other
|
|
2,952,950
|
|
|
2,997,122
|
|
Accrued payroll and expenses
|
|
$
|
11,448,403
|
|
|
$
|
10,485,039
|
|
Other long-term liabilities includes $7.2 million of deferred employer FICA and $0.1 million of interest rate swap (see Note 10) at December 27, 2020. The deferred employer FICA is under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which allows relief to employers affected by the coronavirus pandemic. 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.
The following is a schedule of future estimated contingent consideration payments to various parties as of December 27, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Cash Payment
|
|
Discount
|
|
Net
|
Due in:
|
|
|
|
|
|
|
|
|
|
|
|
One to two years
|
$
|
2,500,000
|
|
|
$
|
(212,074)
|
|
|
$
|
2,287,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
$
|
2,500,000
|
|
|
$
|
(212,074)
|
|
|
$
|
2,287,926
|
|
NOTE 9 - INCOME TAXES
The Company's income tax expense for the fiscal years are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current federal income tax
|
|
$
|
2,006,145
|
|
|
$
|
2,380,289
|
|
|
$
|
1,568,308
|
|
Current state income tax
|
|
919,966
|
|
|
1,125,539
|
|
|
759,915
|
|
Deferred income tax (credit)
|
|
(2,413,019)
|
|
|
799,150
|
|
|
1,531,516
|
|
Income tax expense
|
|
$
|
513,092
|
|
|
$
|
4,304,978
|
|
|
$
|
3,859,739
|
|
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred income taxes are as follows at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
Deferred tax assets:
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
110,998
|
|
|
$
|
105,015
|
|
|
Goodwill and intangible assets
|
|
2,082,214
|
|
|
3,764,556
|
|
|
Accrued payroll and expenses
|
90,510
|
|
|
97,003
|
|
|
Contingent consideration
|
|
573,812
|
|
|
560,001
|
|
|
Other long-term liabilities (deferred employer FICA)
|
|
1,812,682
|
|
|
—
|
|
|
Share-based compensation
|
|
353,442
|
|
|
278,095
|
|
|
Net operating loss carry forward
|
|
1,632,187
|
|
|
—
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
(517,271)
|
|
|
(427,166)
|
|
|
Fixed assets
|
|
(310,901)
|
|
|
(305,657)
|
|
|
|
|
|
|
|
Deferred income taxes, net
|
|
$
|
5,827,673
|
|
|
$
|
4,071,847
|
|
The income tax provision, reconciled to the tax computed at the statutory federal rate, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Tax expense at federal statutory rate
|
|
$
|
410,466
|
|
21.0
|
%
|
|
$
|
3,685,913
|
|
21.0
|
%
|
|
$
|
4,495,949
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
|
348,917
|
|
17.9
|
%
|
|
1,038,380
|
|
5.9
|
%
|
|
776,984
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Equity, permanent differences and other
|
|
239,020
|
|
12.2
|
%
|
|
218,025
|
|
1.2
|
%
|
|
(714,845)
|
|
(3.3)
|
%
|
Work Opportunity Tax Credit, net
|
|
(485,311)
|
|
(24.8)
|
%
|
|
(637,340)
|
|
(3.6)
|
%
|
|
(698,349)
|
|
(3.2)
|
%
|
Income tax expense
|
|
$
|
513,092
|
|
26.3
|
%
|
|
$
|
4,304,978
|
|
24.5
|
%
|
|
$
|
3,859,739
|
|
18.1
|
%
|
NOTE 10 - DEBT
On July 16, 2019, the Company entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for the Revolving Facility permitting the Company to borrow funds from time to time in an aggregate amount up to $35 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting the Company to borrow funds from time to time in an aggregate amount not to exceed $30 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded. The Company may from time to time, with a maximum of two, request an increase in the aggregate Term Loan by $40 million, with minimum increases of $10 million. The Company’s obligations under the Credit Agreement are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries. The Credit Agreement bears interest either at the Base Rate plus the Applicable Margin plus the Applicable Margin or LIBOR (as such terms are defined in the Credit Agreement). The Company also pays an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan.
The Credit Agreement contains customary affirmative and negative covenants. The Company is subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Credit Agreement. The Company was in compliance with these covenants as of December 27, 2020.
On December 13, 2019, the Company borrowed $7.5 million on the Term Loan in conjunction with the closing of the LJK acquisition. On February 3, 2020, the Company borrowed $18.5 million on the Term Loan in conjunction with the closing of the EdgeRock acquisition. On April 6, 2020, the Company borrowed the remaining $4.0 million on the Term Loan and the proceeds were used to pay down the Revolving Facility. The Company borrowed $20 million under the Revolving Facility to pay off existing indebtedness of the Company under an Amended and Restated Credit Agreement with Texas Capital Bank, National Association (“TCB”) and such agreement (and related ancillary documentation) was terminated on July 16, 2019 in connection with such repayment. The Company recognized a loss on extinguishment of debt of approximately $0.5 million related to the unamortized deferred finance fees. On February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility in conjunction with the closing of the Momentum Solutionz acquisition.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 27, 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 thereunder that might arise in the future would not materially affect the Company's consolidated financial statements. Accordingly, no liability has been recorded in respect to these arrangements as of December 27, 2020.
Line of Credit
At December 27, 2020 and December 29, 2019, $6.0 million and $20.3 million, respectively, was outstanding on the revolving facilities. Average daily balance for Fiscal 2020, 2019 and 2018 was $11.7 million, $16.5 million, and $15.6 million, respectively.
Borrowings under the revolving facilities consisted of and bore interest at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
Base Rate
|
$
|
1,977,342
|
|
|
4.25
|
%
|
|
$
|
2,844,957
|
|
|
5.25
|
%
|
LIBOR
|
4,000,000
|
|
|
2.15
|
%
|
|
17,500,000
|
|
|
3.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
5,977,342
|
|
|
|
|
$
|
20,344,957
|
|
|
|
Long Term Debt
Long-term debt consisted of and bore interest at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27,
2020
|
|
December 29,
2019
|
Base Rate
|
|
$
|
4,300,000
|
|
2.15
|
%
|
|
$
|
7,500,000
|
|
5.25
|
%
|
Fixed rate
|
|
24,625,000
|
|
2.39
|
%
|
|
—
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
28,925,000
|
|
|
|
$
|
7,500,000
|
|
|
Maturities on the Revolving Facility with BMO and long-term debt as of December 27, 2020, are as follows:
|
|
|
|
|
|
Fiscal:
|
|
2021
|
$
|
2,625,000
|
|
2022
|
3,000,000
|
|
2023
|
3,750,000
|
|
2024
|
25,527,342
|
|
2025
|
—
|
|
|
|
|
34,902,342
|
|
Less deferred finance fees
|
(268,076)
|
|
Total
|
$
|
34,634,266
|
|
Cash Flow Hedge
In April 2020, the Company entered into a pay-fixed/receive-floating interest rate swap agreement with our bank syndicate led by BMO that reduces the floating interest rate component on the Term Loan obligation. The $25.0 million notional amount was effective on June 3, 2020 and designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate that terminates on June 1, 2023. In accordance with cash flow hedge accounting treatment, the Company has determined that the hedge is perfectly effective using the change-in-variable-cash-flow method.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unrealized gains or losses associated with the change in the fair value of the effective portion of the hedging instrument is recorded in accumulated other comprehensive loss. The Company reclassifies the interest rate swap from accumulated other comprehensive gain or loss against interest expense in the same period in which the hedge transaction affects earnings. Hedge effectiveness is tested quarterly. As of December 27, 2020, the instrument was perfectly effective and no additional amounts were reclassed from accumulated other comprehensive loss into income for Fiscal 2020. See Note 11 for location on the balance sheet.
NOTE 11 - FAIR VALUE MEASUREMENTS
The accounting standard for fair value measurements defines fair value and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value. The fair value hierarchy established prioritizes the inputs used in valuation techniques into three levels as follows:
Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;
Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities - includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets, for substantially the full term of the financial instrument; and
Level 3 - Unobservable inputs - includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
The following table summarizes the financial assets and liabilities measured at fair value on a recurring basis and the level they fall within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Recorded at Fair Value
|
|
Financial Statement Classification
|
|
Fair Value Hierarchy
|
|
December 27,
2020
|
|
December 29,
2019
|
Interest rate swap
|
|
Other long-term liabilities
|
|
Level 2
|
|
$
|
122,874
|
|
|
$
|
—
|
|
Contingent consideration, net
|
|
Contingent consideration, net - current and long-term
|
|
Level 3
|
|
$
|
2,287,926
|
|
|
$
|
2,174,378
|
|
The changes in the Level 2 fair value measurements from December 29, 2019 to December 27, 2020 relates to entering into an interest rate swap agreement. Key inputs in determining the fair value of the interest rate swap as of December 27, 2020 are quoted prices from BMO (See Note 10).
The changes in the Level 3 fair value measurements from December 29, 2019 to December 27, 2020 relate to $0.2 million in accretion and gains included in earnings. Key inputs in determining the fair value of the contingent consideration as of December 27, 2020 and December 29, 2019 included the discount rate of 7.5% as well as management's estimates of future sales volumes and earning before interest, income taxes, depreciation, and amortization.
NOTE 12 - CONTINGENCIES
The Company is engaged from time to time in legal matters and proceedings arising out of its normal course of business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of the loss can be made.
The Company insures against, subject to and upon the terms and conditions of various insurance policies, claims or losses from workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses, crime and cyber risk, and director and officer liability. Under the Company's bylaws, the Company’s directors and officers are indemnified against certain liabilities arising out of the performance of their duties to the Company. The Company also has an insurance policy for our directors and officers to insure them against liabilities arising from the performance of their positions with the Company or its subsidiaries. The Company has also entered into indemnification agreements with its directors and certain officers.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impact of COVID-19
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, 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 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 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.
Employment Agreements
The CEO’s employment agreement was effective as of October 1, 2018 and shall continue through September 30, 2021. The agreement remains in effect under successive one-year extensions unless terminated pursuant to its terms. In the event that her employment is terminated by the Company without cause or by her for good reason, she will be entitled to (i) twelve months of base salary, (ii) accrued bonus, and (iii) eighteen months of COBRA premiums for her and her dependents, grossed-up for federal income taxes. Additionally, she will become 100% vested in any awards outstanding under the the Company's 2013 Long-Term Incentive Plan, as amended, (“2013 Plan”) or similar plan. Should there be a sale of the Company that results in the termination of her employment or a material adverse change in her duties and responsibilities, she will be entitled to all of the amounts listed above, however, base salary shall equal eighteen months.
The CFO’s employment agreement was effective as of October 1, 2018 and shall continue through September 30, 2021. The agreement remains in effect under successive one-year extensions unless terminated pursuant to its terms. In the event that his employment is terminated by the Company without cause or by him for good reason, he will be entitled to (i) twelve months of base salary, (ii) accrued bonus, and (iii) eighteen months of COBRA premiums for him and his dependents, grossed-up for federal income taxes. Additionally, he will become 100% vested in any awards outstanding under the 2013 Plan or similar plan. Should there be a sale of the Company that results in the termination of his employment or a material adverse change in his duties and responsibilities, he will be entitled to all of the amounts listed above, however, base salary shall equal eighteen months.
NOTE 13 - 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.
On December 13, 2019, the Company issued 47,403 shares of common stock, $0.01 par value per share, in a private placement for a value of $1.0 million at the closing of the LJK acquisition, with related issuance costs recorded in Fiscal 2020.
In May 2018, the Company issued and sold 1,293,750 shares of common stock, $0.01 par value per share, to various investors in a registered offering for an aggregate purchase price (before deducting underwriting discounts and commissions and other estimated offering expenses) of $23.3 million in cash. The public offering price was $18.00 per share. The newly issued shares constituted approximately 14.7% of the total of issued and outstanding shares of common stock immediately before the initial execution of the Underwriting Agreement. In connection with the closing, the Company incurred $1.9 million in offering costs, which included $0.8 million fees paid to Taglich Brothers, a related party, as described in Note 15 below. Proceeds were used to pay off existing indebtedness of the Company under the credit agreement with TCB and cancel outstanding in-the-money stock options held by L. Allen Baker, Jr., BGSF's former President and Chief Executive Officer, as described in Note 14 below.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock
The Company issued net restricted common stock of 19,143 shares to non-team member directors, in Fiscal 2020, and 41,172 shares to various team members and directors, in Fiscal 2018. The restricted shares of $0.01 par value per share were issued under the 2013 Plan and contain a three-year service condition. The restricted stock constitutes issued and outstanding shares of the Company’s common stock, except for the right of disposal, for all purposes during the period of restriction including voting rights and dividend distributions.
In connection with the vesting portions of the restricted stock, the Company repurchased 231, 176 and 828 shares of company stock, or treasury stock, to satisfy the withholding obligation in connection with the vesting of a portion of the restricted stock for Fiscal 2020, 2019, and 2018, respectively. Treasury stock is accounted for under the cost method whereby the entire cost of the acquired stock is recorded.
NOTE 14 - SHARE-BASED COMPENSATION
Stock Options
In December 2013, the board of directors adopted the original 2013 Plan. Under the original 2013 Plan team members, directors and consultants of the Company may receive incentive stock options and other awards. A total of 900,000 shares of common stock of BGSF, Inc. were initially reserved for issuance pursuant to the original 2013 Plan. On November 3, 2020 and May 16, 2017, stockholders of the Company approved and made effective amendments to the 2013 Plan, which each added an additional 250,000 shares of common stock reserved for issuance. To the extent any option or award expires unexercised or is canceled, terminated or forfeited in any manner without the issuance of common stock thereunder, such shares shall again be available for issuance under the original 2013 Plan. As of December 27, 2020, a total of 1,088,739 shares remain available for issuance under the 2013 Plan.
The term of each option is determined by the board of directors but cannot exceed 10 years. Unless otherwise specified in an option agreement, options vest and become exercisable on the following schedule: 20% immediately and 20% on each anniversary date of the grant date. Each option shall be designated as an incentive stock option (“ISO”) or a non-qualified option (“NQO”). The exercise price of an ISO shall not be less than the fair market value of the stock covered by the ISO at the grant date; provided, however, the exercise price of an ISO granted to any person who owns, directly or indirectly, stock of the Company constituting more than 10% of the total combined voting power of all classes of outstanding stock of the Company or of any affiliate of the Company, shall not be less than 110% of such fair market value.
The fair value of each option award was estimated on the date of grant using a Black-Scholes option pricing model and the assumptions in the following table. Because this option valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed below. The Company bases the estimate of expected volatility on the historical volatilities of the Company for a period equal to the expected life of the option.
The risk-free rate for periods within the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The Company expects to use historical data to estimate team member termination within the valuation model; separate groups of team members that have similar historical termination behavior are considered separately for valuation purposes. The Company believes these estimates and assumptions are reasonable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.
On May 31, 2018, the Company entered into a stock option cancellation agreement (the “Option Cancellation Agreement”) with L. Allen Baker, Jr., the Company's former President and Chief Executive Officer, pursuant to which the Company agreed to pay Mr. Baker $18.00 per share of common stock underlying his vested in-the-money stock options granted under the Company’s 2013 Plan, less the exercise price per share thereof, in exchange for the cancellation and termination of such stock options. Pursuant to the terms of the Option Cancellation Agreement, the Company paid $3.3 million to Mr. Baker in exchange for the cancellation of 284,888 stock options granted to him under the 2013 Plan.
For Fiscal 2020, 2019 and 2018, the Company recognized $0.5 million, $0.7 million and $0.6 million of compensation expense related to stock awards, respectively. Unamortized share-based compensation expense as of December 27, 2020 amounted to $0.9 million which is expected to be recognized over the next 2.5 years.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following assumptions were used to estimate the fair value of stock options for the years ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Weighted-average fair value of awards
|
$
|
4.60
|
|
|
$
|
5.08
|
|
|
$
|
4.68
|
|
|
Weighted-average risk-free interest rate
|
0.4
|
|
%
|
2.3
|
|
%
|
2.8
|
|
%
|
Weighted-average dividend yield
|
$
|
0.96
|
|
|
$
|
1.18
|
|
|
$
|
1.10
|
|
|
Weighted-average volatility factor
|
53.6
|
|
%
|
42.6
|
|
%
|
42.1
|
|
%
|
Weighted-average expected life
|
10.0
|
yrs
|
10.0
|
yrs
|
10.0
|
yrs
|
A summary of stock option activity is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Remaining Contractual Life
|
|
Total Intrinsic Value of Options
(in thousands)
|
Awards outstanding at December 31, 2017
|
|
765,411
|
|
|
$
|
10.27
|
|
|
7.3
|
|
$
|
4,521
|
|
Granted
|
|
175,000
|
|
|
$
|
25.71
|
|
|
|
|
|
Exercised
|
|
(152,838)
|
|
|
$
|
11.19
|
|
|
|
|
|
Forfeited / Canceled
|
|
(292,088)
|
|
|
$
|
6.71
|
|
|
|
|
|
Awards outstanding at December 30, 2018
|
|
495,485
|
|
|
$
|
17.53
|
|
|
8.0
|
|
$
|
2,295
|
|
Granted
|
|
138,750
|
|
|
$
|
21.49
|
|
|
|
|
|
Exercised
|
|
(39,190)
|
|
|
$
|
12.60
|
|
|
|
|
|
Forfeited / Canceled
|
|
(30,200)
|
|
|
$
|
16.53
|
|
|
|
|
|
Awards outstanding at December 29, 2019
|
|
564,845
|
|
|
$
|
18.90
|
|
|
7.7
|
|
$
|
2,412
|
|
Granted
|
|
93,610
|
|
|
$
|
10.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited / Canceled
|
|
(5,800)
|
|
|
$
|
22.22
|
|
|
|
|
|
Awards outstanding at December 27, 2020
|
|
652,655
|
|
|
$
|
17.63
|
|
|
7.1
|
|
$
|
665
|
|
|
|
|
|
|
|
|
|
|
Awards exercisable at December 29, 2019
|
|
313,645
|
|
|
$
|
16.05
|
|
|
6.8
|
|
$
|
1,991
|
|
Awards exercisable at December 27, 2020
|
|
416,717
|
|
|
$
|
16.96
|
|
|
6.3
|
|
$
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
|
Non-vested outstanding at December 29, 2019
|
|
251,200
|
|
|
$
|
22.46
|
|
Non-vested outstanding at December 27, 2020
|
|
235,938
|
|
|
$
|
18.83
|
|
There were no exercises of stock options in Fiscal 2020. During Fiscal 2019 and 2018, the Company issued 16,777, and 49,541 shares of common stock upon the cashless exercise of 39,014, and 86,053 stock options, respectively.
Restricted Stock
For Fiscal 2020, 2019 and 2018, the Company recognized $0.3 million, $0.2 million, and $0.4 million of compensation expense related to restricted stock, respectively. Unamortized share-based compensation expense as of September 27, 2020 amounted to $0.3 million which is expected to be recognized over the next 2.2 years.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of restricted stock activity is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
|
Restricted outstanding at December 31, 2017
|
|
—
|
|
|
$
|
—
|
|
Issued
|
|
42,000
|
|
|
$
|
28.61
|
|
Vested
|
|
(10,500)
|
|
|
$
|
28.61
|
|
|
|
|
|
|
Restricted outstanding at December 30, 2018
|
|
31,500
|
|
|
$
|
28.61
|
|
|
|
|
|
|
Vested
|
|
(9,000)
|
|
|
$
|
28.61
|
|
Forfeited / Canceled
|
|
(4,500)
|
|
|
$
|
28.61
|
|
Restricted outstanding at December 29, 2019
|
|
18,000
|
|
|
$
|
28.61
|
|
Issued
|
|
21,624
|
|
|
$
|
9.02
|
|
Vested
|
|
(14,406)
|
|
|
$
|
21.26
|
|
|
|
|
|
|
Restricted outstanding at December 27, 2020
|
|
25,218
|
|
|
$
|
16.01
|
|
|
|
|
|
|
Nonvested outstanding at December 29, 2019
|
|
18,000
|
|
|
$
|
28.61
|
|
Nonvested outstanding at December 27, 2020
|
|
25,218
|
|
|
$
|
16.01
|
|
Warrant Activity
For Fiscal 2020, 2019 and 2018, the Company did not recognize of compensation cost related to warrants. There was no unamortized stock compensation expense remaining to be recognized as of December 27, 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 Warrants
(in thousands)
|
Warrants outstanding at December 31, 2017
|
|
123,984
|
|
|
$
|
11.51
|
|
|
2.2
|
|
$
|
577
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(30,768)
|
|
|
$
|
11.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 30, 2018
|
|
93,216
|
|
|
$
|
11.59
|
|
|
1.3
|
|
$
|
805
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(28,734)
|
|
|
$
|
6.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at December 29, 2019
|
|
64,482
|
|
|
$
|
13.84
|
|
|
0.8
|
|
$
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(38,620)
|
|
|
$
|
11.85
|
|
|
|
|
|
Warrants outstanding at December 27, 2020
|
|
25,862
|
|
|
$
|
16.80
|
|
|
0.4
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable at December 29, 2019
|
|
64,482
|
|
|
$
|
13.84
|
|
|
0.8
|
|
$
|
473
|
|
Warrants exercisable at December 27, 2020
|
|
25,862
|
|
|
$
|
16.80
|
|
|
0.4
|
|
$
|
—
|
|
There were no non-vested warrants outstanding at December 27, 2020 and December 29, 2019.
There were no exercises of warrants in Fiscal 2020. During, Fiscal 2019 and 2018, the Company issued 20,059 and 16,623 shares of common stock upon the cashless exercise of 28,734 and 30,768 warrants, respectively.
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.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2020 Employee Stock Purchase Plan (“2020 ESPP”)
In November 2020, the board of directors adopted and the shareholders approved the 2020 ESPP. Under the 2020 ESPP, eligible team members of the Company may elect for payroll deductions to purchase shares on each purchase date during an offering period. A total of 250,000 shares of common stock of BGSF, Inc. were initially reserved for issuance pursuant to the 2020 ESPP. All shares remain available for issuance as of December 27, 2020 and the Company plans to begin the initial offering period during second quarter 2021.
NOTE 15 - RELATED PARTY TRANSACTIONS
Some of our equity owners are also principals of Taglich Brothers. The Company paid fees to Taglich Brothers related to one equity transaction in 2018 (see Note 13).
NOTE 16 - TEAM MEMBER BENEFIT PLAN
Defined Contribution Plan
The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible team members and field talent. The 401(k) Plan allows participants to make contributions subject to applicable statutory limitations. The Company matches participants contributions 100% up to the first 3% and 50% of the next 2% of a team member or field talent's compensation. The Company contributed $1.3 million, $1.1 million and $1.1 million to the 401(k) Plan for Fiscal 2020, 2019 and 2018, respectively.
NOTE 17 - BUSINESS SEGMENTS
The Company operates within three industry segments: Real Estate, Professional, and Light Industrial. The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 36 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent. The Professional segment provides skilled field talent on a nationwide basis for IT and finance, accounting, legal and human resource client partner projects on a national basis. Our Professional segment operates through various divisions including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, and beginning in 2021, Momentum Solutionz. The Light Industrial segment provides field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce in 7 states. Our Light Industrial segment operates through our InStaff division.
Segment operating income includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (home office) expenses. Assets of home office include cash, unallocated prepaid expenses, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
|
|
|
Real Estate
|
|
$
|
68,755,975
|
|
|
$
|
96,421,676
|
|
|
$
|
86,874,241
|
|
Professional
|
|
138,369,505
|
|
|
123,342,647
|
|
|
119,299,424
|
|
Light Industrial
|
|
70,765,400
|
|
|
74,549,225
|
|
|
80,689,261
|
|
Total
|
|
$
|
277,890,880
|
|
|
$
|
294,313,548
|
|
|
$
|
286,862,926
|
|
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Depreciation:
|
|
|
|
|
|
|
Real Estate
|
|
$
|
218,425
|
|
|
$
|
197,029
|
|
|
$
|
169,682
|
|
Professional
|
|
404,590
|
|
|
341,529
|
|
|
273,691
|
|
Light Industrial
|
|
98,917
|
|
|
101,889
|
|
|
101,124
|
|
Home office
|
|
134,023
|
|
|
189,852
|
|
|
201,946
|
|
Total
|
|
$
|
855,955
|
|
|
$
|
830,299
|
|
|
$
|
746,443
|
|
|
|
|
|
|
|
|
Amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
|
|
$
|
3,923,063
|
|
|
$
|
3,964,878
|
|
|
$
|
4,168,463
|
|
Light Industrial
|
|
—
|
|
|
—
|
|
|
110,251
|
|
Home office
|
|
180,687
|
|
|
25,079
|
|
|
19,330
|
|
Total
|
|
$
|
4,103,750
|
|
|
$
|
3,989,957
|
|
|
$
|
4,298,044
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
Real Estate
|
|
$
|
9,671,504
|
|
|
$
|
16,381,823
|
|
|
$
|
14,775,846
|
|
Professional - without impairment loss
|
|
7,514,924
|
|
|
7,702,175
|
|
|
7,967,368
|
|
Professional - impairment loss
|
|
(7,239,514)
|
|
|
—
|
|
|
—
|
|
Light Industrial
|
|
4,767,103
|
|
|
4,776,369
|
|
|
5,583,999
|
|
Home office - selling
|
|
(663,110)
|
|
|
(516,190)
|
|
|
(666,472)
|
|
Home office - general and administrative
|
|
(10,588,819)
|
|
|
(8,682,689)
|
|
|
(7,176,363)
|
|
Home office - gain on contingent consideration
|
|
76,102
|
|
|
—
|
|
|
3,775,307
|
|
Total
|
|
$
|
3,538,190
|
|
|
$
|
19,661,488
|
|
|
$
|
24,259,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
Real Estate
|
|
$
|
81,918
|
|
|
$
|
251,461
|
|
|
$
|
124,643
|
|
Professional
|
|
184,611
|
|
|
582,573
|
|
|
474,670
|
|
Light Industrial
|
|
68,730
|
|
|
152,632
|
|
|
119,886
|
|
Home office
|
|
1,809,687
|
|
|
1,242,843
|
|
|
204,795
|
|
Total
|
|
$
|
2,144,946
|
|
|
$
|
2,229,509
|
|
|
$
|
923,994
|
|
|
|
|
|
|
|
|
Total Assets:
|
|
|
|
|
|
|
Real Estate
|
|
$
|
15,598,575
|
|
|
$
|
16,785,163
|
|
|
|
Professional
|
|
81,671,193
|
|
|
72,623,242
|
|
|
|
Light Industrial
|
|
16,122,052
|
|
|
15,223,581
|
|
|
|
Home office
|
|
16,886,448
|
|
|
10,954,058
|
|
|
|
Total
|
|
$
|
130,278,268
|
|
|
$
|
115,586,044
|
|
|
|
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Revenues
|
$
|
74,067,429
|
|
|
$
|
62,606,334
|
|
|
$
|
71,518,691
|
|
|
$
|
69,698,426
|
|
|
$
|
277,890,880
|
|
Gross Profit
|
$
|
20,275,732
|
|
|
$
|
16,905,143
|
|
|
$
|
19,711,926
|
|
|
$
|
19,327,203
|
|
|
$
|
76,220,004
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income taxes
|
$
|
2,201,368
|
|
|
$
|
(6,514,422)
|
|
|
$
|
3,288,263
|
|
|
$
|
2,979,351
|
|
|
$
|
1,954,560
|
|
Net income (loss)
|
$
|
1,498,859
|
|
|
$
|
(4,829,262)
|
|
|
$
|
2,565,563
|
|
|
$
|
2,206,308
|
|
|
$
|
1,441,468
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.15
|
|
|
$
|
(0.47)
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
Diluted
|
$
|
0.14
|
|
|
$
|
(0.47)
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
10,308,445
|
|
|
10,306,986
|
|
|
10,312,939
|
|
|
10,318,053
|
|
|
10,311,606
|
|
Diluted
|
10,382,999
|
|
|
10,306,986
|
|
|
10,326,493
|
|
|
10,334,478
|
|
|
10,338,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Revenues
|
$
|
68,776,067
|
|
|
$
|
73,857,890
|
|
|
$
|
79,364,306
|
|
|
$
|
72,315,285
|
|
|
$
|
294,313,548
|
|
Gross Profit
|
$
|
18,438,640
|
|
|
$
|
20,862,834
|
|
|
$
|
22,176,622
|
|
|
$
|
19,203,169
|
|
|
$
|
80,681,265
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$
|
3,233,471
|
|
|
$
|
4,924,649
|
|
|
$
|
5,540,959
|
|
|
$
|
3,852,889
|
|
|
$
|
17,551,968
|
|
Net income
|
$
|
2,496,024
|
|
|
$
|
3,801,829
|
|
|
$
|
4,207,170
|
|
|
$
|
2,741,967
|
|
|
$
|
13,246,990
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.24
|
|
|
$
|
0.37
|
|
|
$
|
0.41
|
|
|
$
|
0.27
|
|
|
$
|
1.29
|
|
Diluted
|
$
|
0.24
|
|
|
$
|
0.37
|
|
|
$
|
0.41
|
|
|
$
|
0.26
|
|
|
$
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
10,229,462
|
|
|
10,232,588
|
|
|
10,239,126
|
|
|
10,253,085
|
|
|
10,238,565
|
|
Diluted
|
10,404,355
|
|
|
10,362,038
|
|
|
10,343,673
|
|
|
10,370,996
|
|
|
10,350,775
|
|
NOTE 19 - SUBSEQUENT EVENTS
Momentum Solutionz LLC
On February 8, 2021, the Company acquired substantially all of the assets and assumed certain liabilities of Momentum Solutionz for a purchase price of $3.8 million cash, subject to customary purchase price adjustments as specified in the purchase agreement. The purchase agreement further provides for contingent consideration of up to $2.2 million based on the performance of the acquired business for the two years following the date of acquisition. At closing, the purchase price was paid out of currently available funds under the Company’s credit agreement led by BMO. The acquired business was assigned to the Professional segment.
BGSF, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition of Momentum Solutionz allows the Company to strengthen its operations in IT consultants and technology professionals. Momentum Solutionz provides IT consulting and managed workforce solutions for organizations utilizing ERP systems. The IT consulting workforce solutions include strategic planning, software selection, road mapping, cloud migration, and implementation of ERP systems. The IT managed workforce solutions include optimization and maintenance of ERP systems. Momentum Solutionz provides workforce solutions to clients throughout the United States in a variety of industries, including but not limited to hospitals, retail, universities and mid-size businesses. As the transaction was recently completed, the initial accounting for the acquisition, including estimating the fair values of assets and liabilities acquired, has not been completed.
Debt
In connection with the acquisition of the assets of Momentum Solutionz described above, on February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility under the Company's credit agreement led by BMO, as described in Note 10 above.
Dividend
On February 3, 2021, the Company's board of directors declared a cash dividend in the amount of $0.10 per share of common stock to be paid on February 26, 2021 to all shareholders of record as of the close of business on February 18, 2021.