BGSF, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our accompanying Unaudited Consolidated Financial Statements and related notes thereto and our Annual Report on Form 10-K for the fiscal year endedDecember 27, 2020 . Comparative segment revenues and related financial information are discussed herein and are presented in Note 13 to our Unaudited Consolidated Financial Statements. See "Forward Looking Statements" on page 3 of this report and "Risk Factors" included in our filings with theSEC , including our Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year endedDecember 27, 2020 , for a description of important factors that could cause actual results to differ from expected results. Our historical financial information may not be indicative of our future performance.
Overview
We are a leading national provider of professional workforce solutions and have completed a series of acquisitions including the acquisition ofBG Personnel, LP andB G Staff Services Inc. inJune 2010 , substantially all of the assets ofJNA Staffing, Inc. inDecember 2010 ,Extrinsic, LLC inDecember 2011 ,American Partners, Inc. inDecember 2012 ,InStaff Holding Corporation andInStaff Personnel, LLC inJune 2013 ,D&W Talent, LLC inMarch 2015 ,Vision Technology Services, Inc. ,Vision Technology Services, LLC , andVTS-VM, LLC inOctober 2015 ,Zycron, Inc. inApril 2017 ,Smart Resources, Inc. andAccountable Search, LLC inSeptember 2017 , and LJK inDecember 2019 , 100% of the equity of EdgeRock inFebruary 2020 , and substantially all of the assets of Momentum inFebruary 2021 . We operate within three industry segments: Real Estate, Professional, andLight Industrial . We provide workforce solutions to client partners primarily withinthe United States of America . We currently operate across 42 states and D.C., as well as 11 on-site locations. Our Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings currently out of 58 locations in 33 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Real Estate segment operates through two divisions, BG Multifamily and BG Talent. Our Professional segment provides skilled field talent on a nationwide basis for IT and finance, accounting, legal and human resource client partner projects. Our Professional segment operates through three divisions,IT Consulting , IT Infrastructure & Development, and Finance and Accounting under various trade names including Extrinsic,American Partners , Donovan & Watkins, Vision Technology Services,Zycron , Smart Resources,L.J. Kushner & Associates ,EdgeRock Technology Partners , and Momentum Solutionz. OurLight Industrial segment provides field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce currently out of 11 locations and 11 on-sites in 7 states. OurLight Industrial segment operates through one division under theInStaff trade name. Our business normally experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our client partners' businesses. Demand for our Real Estate workforce solutions increase in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for ourLight Industrial workforce solutions increases during the third quarter of the year and peaks in the fourth quarter due to increases in the demand for holiday help. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes. Normal seasonal demand has been significantly affected by COVID-19. 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 inMarch 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. 24 -------------------------------------------------------------------------------- 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 affected. Real Estate was strongly affected by COVID-19 when client partners immediately stopped non-emergency maintenance, which is our largest revenue source. Additionally, 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 unaudited consolidated financial statements. The Fiscal
2020 (as defined below) consolidated statement of operations and comprehensive
income includes eight weeks of EdgeRock operations.
Thirteen Weeks Ended
March 28, March 29,
2021 2020
(dollars in thousands)
Revenues $ 67,712 $ 74,067
Cost of services 48,897 53,792
Gross profit 18,815 20,275
Selling, general and administrative expenses 16,723 16,202
Depreciation and amortization 860 1,415
Operating income 1,232 2,658
Interest expense, net 377 456
Income before income tax 855 2,202
Income tax expense 143 703
Net income $ 712 $ 1,499
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Thirteen Weeks Ended
March 28, March 29,
2021 2020
Revenues 100.0 % 100.0 %
Cost of services 72.2 % 72.6 %
Gross profit 27.8 % 27.4 %
Selling, general and administrative expenses 24.7 % 21.9 %
Depreciation and amortization 1.3 % 1.9 %
Operating income 1.8 % 3.6 %
Interest expense, net 0.6 % 0.6 %
Income before income tax 1.3 % 3.0 %
Income tax expense 0.2 % 0.9 %
Net income 1.1 % 2.0 %
Thirteen Week Fiscal Period Ended
Revenues: Thirteen Weeks Ended
March 28 , March 29,
2021 2020
(dollars in thousands)
Revenues by segment:
Real Estate $ 18,613 27.5 % $ 20,028 27.0 %
Professional 31,137 46.0 % 36,344 49.1 %
Light Industrial 17,962 26.5 % 17,695 23.9 %
Total Revenues $ 67,712 100.0 % $ 74,067 100.0 %
Real Estate Revenues: Real Estate revenues decreased approximately $1.4 million
(7.1%) primarily due to the effects of COVID-19 pandemic discussed above. The
decrease was due to a 14.3% decrease in billed hours, which was offset by a 8.9%
increase in average bill rate.
Professional Revenues: Professional revenues decreased approximately $5.2
million (14.3%), primarily due to the effects of the COVID-19 pandemic with a
19.7% decrease in billed hours and a decrease in permanent placements of $0.2
million . These decreases were partially offset by the 2020 EdgeRock acquisition
which contributed thirteen weeks of revenue in Fiscal 2021 vs. eight weeks in
Fiscal 2020, or an additional $3.7 million , the 2021 Momentum acquisition
provided new revenues of $0.2 million , and an increase of 9.2% in average bill
rate.
Light Industrial Revenues: Light Industrial revenues increased approximately
$0.3 million (1.5%), primarily due to increased demand in the logistics market.
The increase was effected by a 8.5% increase in average bill rate that was
offset by a 6.6% decrease in billed hours.
26
--------------------------------------------------------------------------------Gross Profit:
Gross profit represents revenues from workforce solutions less cost of services
expenses, which consist of payroll, payroll taxes, payroll-related insurance,
field talent costs, and reimbursable costs.
Thirteen Weeks Ended
March 28, March 29,
2021 2020
(dollars in thousands)
Gross Profit by segment:
Real Estate $ 6,866 36.5 % $ 7,628 37.6 %
Professional 9,349 49.7 % 10,108 49.9 %
Light Industrial 2,600 13.8 % 2,539 12.5 %
Total Gross Profit $ 18,815 100.0 % $ 20,275 100.0 %
Thirteen Weeks Ended
March 28, March 29,
2021 2020Gross Profit Percentage by segment:
Real Estate 36.9 % 38.1 %
Professional 30.0 % 27.8 %
Light Industrial 14.5 % 14.3 %
Company Gross Profit 27.8 % 27.4 %
Overall, our gross profit decreased approximately
We determine spread as the difference between average bill rate and average pay rate.
Real Estate Gross Profit: Real Estate gross profit decreased approximately$0.8 million (10.0%) consistent with the decrease in revenue, which was partially offset by a 7.5% increase in average spread. Professional Gross Profit: Professional gross profit decreased approximately$0.8 million (7.5%) primarily from the decrease in revenue, which was partially offset by the 2020 EdgeRock acquisition which contributed an additional$1.0 million in 2021, the 2021 Momentum acquisition which provided gross profit of$0.2 million , and an 11.1% increase in average spread.
Light Industrial Gross Profit:
Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately$0.5 million (3.2%), primarily from the 2020 EdgeRock acquisition that contributed an additional$0.7 million and the 2021 Momentum acquisition that provided$0.1 million of new expense. These increases were partially offset by$0.4 million of reduced transaction fees. The components of selling, general and administrative expense are detailed in the following table: 27 --------------------------------------------------------------------------------
Thirteen Weeks Ended
March 28, March 29,
2021 2020
$ %
Amount % of Revenue Amount % of Revenue Change Change
(dollars in thousands)Compensation and related$ 12,712 19 %$ 11,698 16 %$ 1,014 9 % Advertising and recruitment 380 1 % 407 1 % (27) (7) % Occupancy and office operations 931 1 % 1,062 1 % (131) (12) % Client engagement 42 - % 273 - % (231) (85) % Software 715 1 % 480 1 % 235 49 % Professional fees 471 1 % 457 1 % 14 3 % Public company related costs 192 - % 132 - % 60 45 % Bad debt 35 - % 32 - % 3 9 % Share-based compensation 236 - % 193 - % 43 22 % Transaction fees 136 - % 541 1 % (405) (75) % IT roadmap 422 1 % 459 1 % (37) (8) % Other 451 1 % 468 1 % (18) (4) %$ 16,723 25 %$ 16,202 22 %$ 521 3 %
Depreciation and Amortization: Depreciation and amortization charges decreased
approximately
Interest Expense, net: Interest expense, decreased approximately$0.1 million (17.4%) primarily due to the lower average balance on the Revolving Facility and lower rates. Income Tax Expense: Income tax expense decreased approximately$0.6 million (79.7%) primarily due to lower pre-tax 2021 income, non-deductible transaction fees in 2020 related to the EdgeRock acquisition and lower effective rate in 2021.
Use of Non-GAAP Financial Measures
We present Adjusted EBITDA (defined below), a measure that is not in accordance with accounting principles generally accepted inthe United States of America ("GAAP"), in this Quarterly Report to provide investors with a supplemental measure of our operating performance. We believe that Adjusted EBITDA is a useful performance measure and is used by us to facilitate a comparison of our operating performance on a consistent basis from period-to-period and to provide for a more complete understanding of factors and trends affecting our business than measures under GAAP can provide alone. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for our management. In addition, the financial covenants in our credit agreement are based on EBITDA as defined in the credit agreement. We define "Adjusted EBITDA" as earnings before interest expense, income taxes, depreciation and amortization expense, intangible impairment losses, transaction fees, and the non-capital information technology project ("IT roadmap") and certain non-cash expenses such as share-based compensation expense. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors' ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. 28 -------------------------------------------------------------------------------- The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income. Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness. To properly and prudently evaluate our business, we encourage you to review our unaudited consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect ongoing operating performance. Trailing Twelve Months Thirteen Weeks Ended Ended March 28, March 29, March 28, 2021 2020 2021 (dollars in thousands) Net income$ 712 $ 1,499 $ 655 Interest expense, net 377 456 1,505 Income tax expense (benefit) 143 703 (46) Operating income 1,232 2,658 2,114 Depreciation and amortization 860 1,415 4,405 Impairment losses - - 7,240 Contingent consideration adjustment - - (76) Share-based compensation 236 193 893 Transaction fees 136 541 208 IT roadmap 422 459 1,527 Adjusted EBITDA$ 2,886 $ 5,266 $ 16,311
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 withBMO Harris Bank, N.A . ("BMO"), that provides for a revolving credit facility maturingJuly 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, 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 branches throughout the next year. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from 29 -------------------------------------------------------------------------------- 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:
Thirteen Weeks Ended
March 28, March 29,
2021 2020
(dollars in thousands)
Working capital $ 19,189 $ 25,385 Net cash provided by operating activities$ 1,911 $ 6,648 Net cash used in investing activities (4,328)
(22,730)
Net cash provided by financing activities 2,417 16,082
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 and accrued payroll
and expenses.
During Fiscal 2021, net cash provided by operating activities was $1.9 million ,
a decrease of $4.7 million compared with $6.6 million for Fiscal 2020. This
decrease is primarily attributable to payments on accounts receivable, less
amortization expense, reduced deferred income taxes, lower income taxes payable,
and less prepaid expenses and other current assets, which were partially offset
by increase in payments on accrued payroll, and more payments on accounts
payable.
Investing Activities
Cash used in investing activities consists primarily of cash paid for businesses acquired and capital expenditures.
In Fiscal 2021, we paid$3.8 million in connection with the Momentum acquisition and we made capital expenditures of$0.5 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap. In Fiscal 2020, we paid$21.7 million in connection with the EdgeRock acquisition and we made capital expenditures of$1.0 million mainly related to software and computer equipment purchased in the ordinary course of business and for the IT roadmap. Financing Activities
Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement and payment of dividends.
For Fiscal 2021, we borrowed$3.8 million on our Revolving Facility to fund the Momentum acquisition, paid$1.0 million in cash dividends on our common stock, and paid down$0.4 million on the Term Loan, as defined below. For Fiscal 2020, we borrowed$18.5 million on our Term Loan to fund the EdgeRock acquisition, we paid$3.1 million in cash dividends on our common stock, we borrowed on our Revolving Facility by$0.7 million . 30 --------------------------------------------------------------------------------
Credit Agreements
OnJuly 16, 2019 , we entered into a Credit Agreement (the "Credit Agreement"), maturingJuly 16, 2024 , with BMO, as administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for a Revolving Facility permitting us to borrow funds from time to time in an aggregate amount up to$35 million . The Credit Agreement also provided for a term loan commitment (the "Term Loan") permitting us to borrow funds from time to time in an aggregate amount not to exceed$30 million with principal paid 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 by$40 million , with minimum increases of$10 million . Our obligations under the Credit Agreement are secured by a first priority security interest in substantially all our tangible and intangible property. The Credit Agreement bears interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Credit Agreement). We also pay an unused commitment fee on the daily average unused amount of Revolving Facility and Term Loan. The Credit Agreement contains customary affirmative covenants and negative covenants, 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. InApril 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 onJune 3, 2020 and designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate that terminates onJune 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. OnFebruary 8, 2021 , the Company borrowed$3.8 million on the Revolving Facility in conjunction with the closing of the Momentum acquisition, as described in Note 3 in the Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
Letter of Credit
InMarch 2020 , in conjunction with the 2020 EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expiresDecember 31, 2024 , for purposes of protecting a lessor against default on lease payments. As ofMarch 28, 2021 , we had a maximum financial exposure from this standby letter of credit totaling$0.1 million , all of which is considered usage against our Revolving Facility.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Consolidated Financial Statements included in "Item 1. Financial Statements." Please also refer to our Annual Report on Form 10-K for the fiscal year endedDecember 27, 2020 for a more detailed discussion of our critical accounting policies. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 2 in the Notes to the Unaudited Consolidated Financial Statements in this Quarterly Report on Form 10-Q and Note 2 in the Notes to the Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year endedDecember 27, 2020 . 31
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