BGSF(BGSF) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements for BG Staffing, Inc. as of September 27, 2020, highlighting a year-to-date net loss of $764,840, a significant decrease from a net income of $10.5 million in the prior year, primarily driven by a $7.2 million impairment loss, with total assets growing to $129.1 million and operating cash flow increasing to $18.3 million Unaudited Consolidated Balance Sheets As of September 27, 2020, total assets increased to $129.1 million from $115.6 million at year-end 2019, driven by goodwill and intangible assets from acquisitions, while total liabilities rose to $65.1 million from $47.1 million due to increased long-term debt, and total stockholders' equity decreased to $64.0 million from $68.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 27, 2020 | Dec 29, 2019 | | :--- | :--- | :--- | | Total Assets | $129,102 | $115,586 | | Total current assets | $42,780 | $40,737 | | Goodwill | $31,350 | $25,195 | | Intangible assets, net | $35,437 | $33,808 | | Total Liabilities | $65,067 | $47,129 | | Total current liabilities | $17,840 | $13,707 | | Long-term debt, less current portion | $26,863 | $7,125 | | Total Stockholders' Equity | $64,035 | $68,457 | Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) For the third quarter of 2020, revenues decreased to $71.5 million from $79.4 million year-over-year, resulting in a net income of $2.6 million, down from $4.2 million, while for the thirty-nine weeks ended September 27, 2020, revenues fell to $208.2 million from $222.0 million, leading to a net loss of $764,840, a sharp contrast to the $10.5 million net income in the prior year, largely due to a $7.2 million impairment loss Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $71,519 | $79,364 | $208,192 | $221,998 | | Gross Profit | $19,712 | $22,177 | $56,893 | $61,478 | | Operating Income | $3,648 | $6,477 | $221 | $15,485 | | Impairment Losses | $0 | $0 | $7,240 | $0 | | Net Income (Loss) | $2,566 | $4,207 | ($765) | $10,505 | | Diluted EPS | $0.25 | $0.41 | ($0.07) | $1.01 | - Cash dividends declared per common share were $0.05 for Q3 2020 and $0.40 for YTD 2020, compared to $0.30 and $0.90 for the respective periods in 2019[14] Unaudited Consolidated Statement of Changes in Stockholders' Equity Stockholders' equity decreased from $68.5 million at the end of 2019 to $64.0 million as of September 27, 2020, primarily driven by $4.1 million in cash dividends declared and a net loss, partially offset by share-based compensation - For the thirty-nine weeks ended September 27, 2020, total stockholders' equity decreased by approximately $4.4 million, with key activities including a net loss of $765 thousand, cash dividends declared of $4.1 million, and share-based compensation of $0.6 million[19] Unaudited Consolidated Statements of Cash Flows For the thirty-nine weeks ended September 27, 2020, net cash provided by operating activities increased to $18.3 million from $14.0 million in the prior year, while net cash used in investing activities was $23.6 million, primarily for the EdgeRock acquisition, and net cash provided by financing activities was $5.3 million, reflecting debt proceeds offset by repayments and dividends Cash Flow Summary (YTD, in thousands) | Activity | Sep 27, 2020 | Sep 29, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $18,288 | $13,965 | | Net cash used in investing activities | ($23,618) | ($1,534) | | Net cash provided by (used in) financing activities | $5,330 | ($12,431) | - Investing activities in 2020 were dominated by $21.7 million used for a business acquisition (EdgeRock), compared to none in the 2019 period[21] - Financing activities in 2020 included $22.5 million in proceeds from long-term debt, while net payments on the line of credit were $12.3 million, contrasting with 2019 which saw net borrowings of $9.9 million on the line of credit and principal payments of $10.1 million on long-term debt[23] Notes to Unaudited Consolidated Financial Statements The notes detail the company's operations across three segments: Real Estate, Professional, and Light Industrial, highlighting the acquisition of EdgeRock Technology for $21.7 million, a $7.2 million impairment loss on intangible assets in the Professional segment, the deferral of $5.0 million in employer FICA taxes under the CARES Act, and a subsequent $0.10 per share dividend declaration in November 2020 - The company operates in three segments: Real Estate, Professional, and Light Industrial, with business being seasonal, typically increasing in Q2/Q3 for Real Estate and Q3/Q4 for Light Industrial, though COVID-19 has significantly affected normal seasonal demand[25][26][27] - On February 3, 2020, the company acquired 100% of EdgeRock Technology for $21.7 million in cash, funded by its credit facility, as part of the Professional segment[76][77] - During the second quarter of 2020, the company recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss within the Professional segment due to changes in long-term projections[87] - The company deferred $5.0 million of employer FICA taxes under the CARES Act, with payments due in 2021 and 2022[88] YTD 2020 Revenue and Operating Income by Segment (in thousands) | Segment | Revenue YTD 2020 | Revenue YTD 2019 | Operating Income (Loss) YTD 2020 | Operating Income YTD 2019 | | :--- | :--- | :--- | :--- | :--- | | Real Estate | $50,965 | $73,043 | $7,159 | $12,465 | | Professional | $107,035 | $93,421 | ($2,007) | $6,190 | | Light Industrial | $50,193 | $55,534 | $3,240 | $3,515 | - On November 4, 2020, the board declared a cash dividend of $0.10 per share, payable on November 23, 2020[116] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic, which has caused revenue declines across most business lines, partially offset by acquisitions in the Professional segment, leading to a 9.9% YoY revenue fall in Q3 2020 to $71.5 million and a 6.2% decrease for the first nine months to $208.2 million, resulting in a net loss of $0.8 million primarily due to a $7.2 million intangible asset impairment, while Adjusted EBITDA for the trailing twelve months was $20.3 million and liquidity remains sufficient Impact of COVID-19 The COVID-19 pandemic has materially and adversely impacted the business, leading to reduced demand, project terminations, and hiring freezes, prompting the company to implement cost containment and liquidity actions, with management expecting continued negative effects on revenue and financial results due to ongoing uncertainty - The company's business, operations, and financial condition have been and may continue to be materially and adversely impacted by COVID-19[126][195] - Impacts include reduced demand for services, early project terminations, hiring freezes, and a shift to remote work, all contributing to a decline in revenues[126][196] - The company took cost containment and liquidity actions starting in March 2020 to mitigate the financial impact[125] Results of Operations For Q3 2020, revenues decreased 9.9% year-over-year, driven by a 35.0% decline in the Real Estate segment due to COVID-19, partially offset by an 8.0% increase in the Professional segment from acquisitions, while for the nine months ended September 2020, revenues decreased 6.2% year-over-year, with the YTD period including a $7.2 million impairment loss in the Professional segment, leading to an operating income of only $0.2 million compared to $15.5 million in the prior year period Q3 2020 vs Q3 2019 Revenue by Segment (in thousands) | Segment | Q3 2020 Revenue | Q3 2019 Revenue | % Change | | :--- | :--- | :--- | :--- | | Real Estate | $19,156 | $29,470 | (35.0%) | | Professional | $34,042 | $31,506 | 8.0% | | Light Industrial | $18,321 | $18,388 | (0.4%) | | Total | $71,519 | $79,364 | (9.9%) | - The Professional segment's Q3 revenue increase was primarily driven by $9.5 million from the LJK and EdgeRock acquisitions[134] YTD 2020 vs YTD 2019 Revenue by Segment (in thousands) | Segment | YTD 2020 Revenue | YTD 2019 Revenue | % Change | | :--- | :--- | :--- | :--- | | Real Estate | $50,965 | $73,043 | (30.2%) | | Professional | $107,035 | $93,421 | 14.6% | | Light Industrial | $50,192 | $55,534 | (9.6%) | | Total | $208,192 | $221,998 | (6.2%) | - The Professional segment's YTD revenue increase was primarily driven by $26.2 million from the LJK and EdgeRock acquisitions[146] - A $7.2 million impairment loss was recognized in the Professional segment during the thirty-nine week period ended Sep 27, 2020, related to a trade name ($3.7 million) and a client partner list ($3.5 million)[156] Use of Non-GAAP Financial Measures The company uses Adjusted EBITDA, a non-GAAP measure, to evaluate operating performance, reporting $5.5 million for Q3 2020 (down from $8.3 million in Q3 2019), $14.0 million for the thirty-nine weeks ended September 27, 2020 (compared to $20.3 million in the prior-year period), and a trailing twelve-month Adjusted EBITDA of $20.3 million Reconciliation of Net Income (Loss) to Adjusted EBITDA (in thousands) | Metric | Q3 2020 | Q3 2019 | YTD 2020 | YTD 2019 | TTM Ended Sep 27, 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $2,566 | $4,207 | ($765) | $10,505 | $1,977 | | Interest expense, net | $360 | $395 | $1,245 | $1,245 | $1,569 | | Income tax expense (benefit) | $723 | $1,334 | ($260) | $3,194 | $851 | | Depreciation & amortization | $1,271 | $1,197 | $4,130 | $3,633 | $5,318 | | Impairment losses | $0 | $0 | $7,240 | $0 | $7,240 | | Other adjustments* | $585 | $622 | $2,452 | $1,204 | $3,345 | | Adjusted EBITDA | $5,505 | $8,296 | $14,042 | $20,332 | $20,300 | - *Other adjustments include contingent consideration, share-based compensation, transaction fees, and IT roadmap expenses[164] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and its revolving credit facility with BMO, with cash from operations strong at $18.3 million for the first nine months of 2020, and $21.7 million used for the EdgeRock acquisition funded by its Term Loan, leading management to believe liquidity is sufficient for at least the next twelve months while continuing to monitor the impact of COVID-19 - Primary liquidity sources are cash from operations and the BMO revolving credit facility, which matures in July 2024[167] - Net cash from operating activities increased to $18.3 million in YTD 2020 from $14.0 million in YTD 2019[172] - In February 2020, the company borrowed $18.5 million on its Term Loan to fund the EdgeRock acquisition and borrowed the remaining $4.0 million in April 2020[92] - In April 2020, the company entered into a $25.0 million notional interest rate swap to hedge against floating interest rate risk on its Term Loan[179] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate fluctuations, as a portion of its Revolving Facility and Term Loan carry variable interest rates, meaning an increase in interest rates could adversely affect future earnings and cash flows - The company's main market risk is interest rate risk due to variable-rate debt under its Revolving Facility and Term Loan[183] Item 4. Controls and Procedures Management concluded that as of September 27, 2020, the company's disclosure controls and procedures were not effective due to a previously identified material weakness in internal control over financial reporting related to the quantitative assessment of impairment for goodwill and intangible assets, with remediation steps underway including retaining external experts and enhancing management review controls - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 27, 2020[185] - The ineffectiveness is due to a material weakness in internal control related to the technical aspects of GAAP for testing goodwill and other intangible assets for impairment[186] - Remediation steps include retaining external experts, enhancing management review controls, and providing training, though the timeline for completion is not yet estimated[189] PART II OTHER INFORMATION Item 1. Legal Proceedings There have been no changes from the information provided in the company's Annual Report on Form 10-K for the fiscal year ended December 29, 2019 - No change from the information provided in the Annual Report on Form 10-K for the fiscal year ended December 29, 2019[193] Item 1A. Risk Factors The primary risk factor highlighted is the ongoing and unpredictable material adverse impact of the COVID-19 pandemic on the company's business, operations, and financial results, which has led to reduced demand, project reductions, and hiring freezes, contributing to a decline in revenues - The company's business, results of operations, and financial condition have been and may continue to be adversely impacted in material respects by the COVID-19 pandemic[195][196] - Specific impacts include reduced demand for workforce solutions, early terminations or reductions in projects, hiring freezes, and potential client inability to pay for services, all of which have contributed to a decline in revenues[196] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None - None[197] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including acquisition agreements, corporate governance documents, and CEO/CFO certifications as required by the Sarbanes-Oxley Act - Key exhibits filed include the Asset Purchase Agreement for L.J. Kushner & Associates and the Securities Purchase Agreement for EdgeRock Technology Holdings[201] - Certifications by the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act are included as exhibits[201]