BGSF, INC. - FORM 10-Q - July 27, 2017

BGSF, INC. - FORM 10-Q - July 27, 2017

Attached files

Attached files

BGSF, INC. Reports

file	filename
EX-32.1 - EXHIBIT 32.1 - BGSF, INC.	q22017-ex321.htm
EX-31.2 - EXHIBIT 31.2 - BGSF, INC.	q22017-ex312.htm
EX-31.1 - EXHIBIT 31.1 - BGSF, INC.	q22017-ex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 25, 2017



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

For the transition period from to .

Commission File Number: 001-36704

BG STAFFING, INC.

(exact name of registrant as specified in its charter)



Delaware	26-0656684
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5850 Granite Parkway, Suite 730

Plano, Texas 75024

(972) 692-2400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	¨		Accelerated filer	þ
Non-accelerated filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨
			Emerging growth company	þ

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

The number of shares outstanding of the registrant’s common stock as of July 27, 2017 was 8,759,376.

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Unaudited Consolidated Balance Sheets	4
	Unaudited Consolidated Statements of Income	5
	Unaudited Consolidated Statement of Changes in Stockholders' Equity	6
	Unaudited Consolidated Statements of Cash Flows	7
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II	OTHER INFORMATION	33
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Mine Safety Disclosures	33
Item 5.	Other Information	33
Item 6.	Exhibits	34

Forward-Looking Statements

This Quarterly Report on Form-10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to our expectations for future events and time periods. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including, but not limited to, statements regarding:


•	future financial performance and growth targets or expectations;


•	market and industry trends and developments; and


•	the benefits of our completed and future merger, acquisition and disposition transactions.

You can identify these and other forward-looking statements by the use of words such as "aim," "potential," “may,” “could,” “would,” “might,” “will,” “expect,” “intend,” “plan,” “budget,” “scheduled,” “estimate,” “anticipate,” “believe,” “forecast,” “future” or “continue” or the negative thereof or similar variations.

These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and our current expectations, forecasts and assumptions and involve a number of risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause actual results to differ include:


•	the availability of workers’ compensation insurance coverage at commercially reasonable terms;


•	the availability of qualified temporary workers;


•	compliance with federal, state and local labor and employment laws and regulations and changes in such laws and regulations;


•	the ability to compete with new competitors and competitors with superior marketing and financial resources;


•	management team changes;


•	the favorable resolution of current or future litigation;


•	the impact of outstanding indebtedness on the ability to fund operations or obtain additional financing;


•	the ability to leverage the benefits of recent acquisitions and successfully integrate newly acquired operations;


•	adverse changes in the economic conditions of the industries or markets that we serve;


•	disturbances in world financial, credit, and stock markets;


•	unanticipated changes in regulations affecting the company’s business;


•	a decline in consumer confidence and discretionary spending;


•	the general performance of the U.S. and global economies;


•	continued or escalated conflict in the Middle East; and


•	other risks referenced from time to time in our past and future filings with the Securities and Exchange Commission (“SEC”), including in our Annual Report on Form 10-K for the fiscal year ended December 25, 2016.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we do not undertake any obligation to update or release any revisions to these forward-looking statements to reflect any events or circumstances, whether as a result of new information, future events, changes in assumptions or otherwise, after the date hereof.

Where You Can Find Other Information

Our website is www.bgstaffing.com. Information contained on our website is not part of this Quarterly Report on Form 10-Q. Information that we file with or furnish to the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to or exhibits included in these reports are available for download, free of charge, on our website soon after such reports are filed with or furnished to the SEC. These reports and other information, including exhibits filed or furnished therewith, are also available at the SEC’s website at www.sec.gov. You may also obtain and copy any document we file with or furnish to the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s public reference facilities by calling the SEC at 1-800-SEC-0330. You may request copies of these documents, upon payment of a duplicating fee, by writing to the SEC at its principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

BG Staffing, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED BALANCE SHEETS



			June 25, 2017		December 25, 2016
ASSETS
Current assets
	Accounts receivable (net of allowance for doubtful accounts of $473,573 at 2017 and 2016)		$	39,874,287	$	33,328,900
	Prepaid expenses		712,966		950,696
	Other current assets		257,020		154,673
		Total current assets	40,844,273		34,434,269

Property and equipment, net			1,751,342		1,910,858

Other assets
	Deposits		2,736,096		2,657,517
	Deferred income taxes, net		9,911,956		9,512,455
	Intangible assets, net		35,162,650		23,514,376
	Goodwill		16,085,760		9,184,659
		Total other assets	63,896,462		44,869,007
	Total assets		$	106,492,077	$	81,214,134

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
	Long-term debt, current portion (net of deferred finance fees of $110,441 and $-0- for 2017 and 2016, respectively)		$	1,889,559	$	—
	Accrued interest		333,412		100,868
	Accounts payable		1,976,788		951,672
	Accrued payroll and expenses		12,591,682		9,668,475
	Accrued workers’ compensation		162,426		754,556
	Contingent consideration, current portion		5,320,990		3,580,561
	Other current liabilities		398,793		—
	Income taxes payable		832,691		193,264
		Total current liabilities	23,506,341		15,249,396

Line of credit (net of deferred finance fees of $835,684 and $264,520 for 2017 and 2016, respectively)			20,882,947		23,618,194
Long-term debt, less current portion (net of deferred finance fees of $228,245 and $-0- for 2017 and 2016, respectively)			17,771,755		—
Contingent consideration, less current portion			3,016,103		1,586,324
Other long-term liabilities			245,211		271,766
	Total liabilities		65,422,357		40,725,680

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,8,759,376 and 8,668,485 shares issued and outstanding for 2017 and 2016, respectively			87,594		86,685
Additional paid in capital			37,492,759		36,142,688
Retained earnings			3,489,367		4,259,081
	Total stockholders’ equity		41,069,720		40,488,454
	Total liabilities and stockholders’ equity		$	106,492,077	$	81,214,134

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

BG Staffing, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

For the Thirteen and Twenty-six Week Periods Ended June 25, 2017 and June 26, 2016



		Thirteen Weeks Ended						Twenty-six Weeks Ended
		2017			2016			2017			2016
Revenues		$	68,773,862		$	62,615,014		$	125,617,550		$	122,166,000
Cost of services		51,546,583			47,430,489			94,719,035			93,634,845
	Gross profit	17,227,279			15,184,525			30,898,515			28,531,155
Selling, general and administrative expenses		10,780,335			9,473,723			20,386,781			18,376,722
Depreciation and amortization		1,865,042			1,726,438			3,236,476			3,507,908
	Operating income	4,581,902			3,984,364			7,275,258			6,646,525
Loss on extinguishment of debt		—			(404,119		)	—			(404,119		)
Interest expense, net		(837,365		)	(1,296,557		)	(1,395,984		)	(2,576,214		)
	Income before income taxes	3,744,537			2,283,688			5,879,274			3,666,192
Income tax expense		1,460,011			886,207			2,292,917			1,435,573
	Net income	$	2,284,526		$	1,397,481		$	3,586,357		$	2,230,619

Net income per share:
	Basic	$	0.26		$	0.18		$	0.41		$	0.30
	Diluted	$	0.25		$	0.17		$	0.40		$	0.28

Weighted-average shares outstanding:
	Basic	8,746,100			7,711,050			8,707,528			7,548,931
	Diluted	9,050,596			8,052,996			8,986,136			7,851,860

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

BG Staffing, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Twenty-six Week Period Ended June 25, 2017



			Common Stock
	Preferred Stock		Shares	Par Value		Additional Paid in Capital		Retained Earnings			Total
Stockholders’ equity, December 25, 2016	$	—	8,668,485	$	86,685	$	36,142,688	$	4,259,081		$	40,488,454
Share-based compensation	—		—	—		264,731		—			264,731
Issuance of shares, net of offering costs	—		70,670	707		991,793		—			992,500
Exercise of common stock options	—		20,221	202		93,547		—			93,749
Cash dividend declared ($0.25 per share)	—		—	—		—		(4,356,071		)	(4,356,071		)
Net income	—		—	—		—		3,586,357			3,586,357
Stockholders’ equity, June 25, 2017	$	—	8,759,376	$	87,594	$	37,492,759	$	3,489,367		$	41,069,720

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

BG Staffing, Inc. and Subsidiaries

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Twenty-six Week Periods Ended June 25, 2017 and June 26, 2016



				2017			2016
Cash flows from operating activities
	Net income			$	3,586,357		$	2,230,619
		Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation		283,801			231,200
		Amortization		2,952,675			3,276,708
		Loss (Gain) on disposal of property and equipment		17,904			(7,576		)
		Loss on extinguishment of debt, net		—			404,119
		Contingent consideration adjustment		—			24,642
		Amortization of deferred financing fees		95,777			63,914
		Amortization of debt discounts		—			21,570
		Interest expense on contingent consideration payable		578,155			1,003,867
		Paid-in-kind interest		—			192,696
		Provision for doubtful accounts		12,227			46,916
		Share-based compensation		264,731			141,838
		Deferred income taxes		(399,501		)	(759,702		)
		Net changes in operating assets and liabilities, net of effects of acquisitions:
			Accounts receivable	(2,212,302		)	719,730
			Prepaid expenses	315,284			213,044
			Other current assets	(102,347		)	12,499
			Deposits	(74,010		)	(217,352		)
			Accrued interest	232,544			(464,032		)
			Accounts payable	(488,795		)	(331,445		)
			Accrued payroll and expenses	1,494,254			383,380
			Accrued workers’ compensation	(592,130		)	(31,596		)
			Other current liabilities	198,628			(921,131		)
			Income taxes payable	639,426			(110,306		)
			Other long-term liabilities	(26,554		)	(28,291		)
		Net cash provided by operating activities		6,776,124			6,095,311

Cash flows from investing activities
	Business acquired, net of cash received			(18,500,000		)	—
	Capital expenditures			(836,592		)	(430,703		)
	Proceeds from the sale of property and equipment			—			7,576
		Net cash used in investing activities		(19,336,592		)	(423,127		)



			2017			2016

Cash flows from financing activities
	Net (payments) borrowings under line of credit		(2,164,083		)	1,598,000
	Proceeds from issuance of long-term debt		20,000,000			—
	Principal payments on long-term debt		—			(15,281,657		)
	Payments of dividends		(4,356,071		)	(3,696,680		)
	Net proceeds from issuance of common stock		86,249			15,206,350
	Contingent consideration paid		—			(3,498,197		)
	Deferred financing costs		(1,005,627		)	—
		Net cash provided by (used in) financing activities	12,560,468			(5,672,184		)
Net change in cash and cash equivalents			—			—
Cash and cash equivalents, beginning of period			—			—
Cash and cash equivalents, end of period			$	—		$	—

Supplemental cash flow information:
	Cash paid for interest		$	470,956		$	1,780,665
	Cash paid for taxes, net of refunds		$	2,048,010		$	2,305,600

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

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - NATURE OF OPERATIONS

BG Staffing, Inc. is a provider of temporary staffing services that operates, along with its wholly owned subsidiaries BG Staffing, LLC, B G Staff Services Inc., BG Personnel, LP and BG Finance and Accounting, Inc. (“BGFA”) (collectively, the “Company”), primarily within the United States of America in three industry segments: Multifamily, Professional, and Commercial. We now have 62 branch offices and 20 on-site locations located across 26 states.

The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 24 states, via property management companies responsible for the apartment communities' day to day operations.

The Professional segment provides skilled temporary workers on a nationwide basis for information technology ("IT") and finance and accounting customer projects.

The Commercial segment provides temporary workers primarily to logistics, distribution, and call center customers needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.

Our business experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our customers’ business. Demand for our Multifamily staffing services increase in the second and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Demand for our Commercial staffing services increases during the third quarter of the year and peaks in the fourth quarter. Demand for our Commercial staffing services is lower during the first quarter, in part due to customer shutdowns and 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.

The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States (“GAAP”), pursuant to the applicable rules and regulations of the SEC. The information furnished herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to present a fair statement of the financial position and operating results of the Company as of and for the respective periods. However, these operating results are not necessarily indicative of the results expected for a full fiscal year or any other future period. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, management of the Company believes, to the best of their knowledge, that the disclosures herein are adequate to make the information presented not misleading. The Company has determined that there were no subsequent events that would require disclosure or adjustments to the accompanying consolidated financial statements through the date the financial statements were issued. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended December 25, 2016, included in its Annual Report on Form 10-K.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company. All significant intercompany transactions and balances have been eliminated in consolidation.

Fiscal Periods

The Company has a 52/53 week fiscal year. Fiscal periods for the consolidated financial statements included herein are as of June 25, 2017 and December 25, 2016, and include the thirteen and twenty-six week periods ended June 25, 2017 and June 26, 2016.

Reclassifications

Certain reclassifications have been made to the 2016 financial statements to conform with the 2017 presentation.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Management Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates affecting the financial statements include goodwill, intangible assets and contingent consideration obligations related to acquisitions. Additionally, the valuation of share based compensation option expense uses a model based upon interest rates, stock prices, maturity estimates, volatility and other factors. The Company believes these estimates and assumptions are reliable. However, these estimates and assumptions may change in the future based on actual experience as well as market conditions.

Financial Instruments

The Company uses fair value measurements in areas that include, but are not limited to: the allocation of purchase price consideration to tangible and identifiable intangible assets and contingent consideration. The carrying values of cash and cash equivalents, accounts receivables, prepaid expenses, accounts payable, accrued liabilities, and other current assets and liabilities approximate their fair values because of the short-term nature of these instruments. The carrying value of the bank debt approximates fair value due to the variable nature of the interest rates under the credit agreement with Texas Capital Bank, National Association (“TCB”) that provides for a revolving credit facility and term loan and current rates available to the Company for debt with similar terms and risk.

Cash and Cash Equivalents

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

Concentration of Credit Risk

Concentration of credit risk is limited due to the Company's diverse customer base and their dispersion across many different industries and geographic locations nationwide. No single customer accounted for more than 10% of the Company’s accounts receivable as of June 25, 2017 and December 25, 2016 or revenue for the twenty-six week periods ended June 25, 2017 and June 26, 2016. Geographic revenue in excess of 10% of the Company's consolidated revenue in Fiscal 2017 and the related percentage for Fiscal 2016 was generated in the following areas:

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 customers in the normal course of business. Accounts receivable represents unpaid balances due from customers. The Company maintains an allowance for doubtful accounts for expected losses resulting from customers’ 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 customers 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.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Changes in the allowance for doubtful accounts are as follows:



	Thirteen Weeks Ended						Twenty-six Weeks Ended
	June 25, 2017			June 26, 2016			June 25, 2017			June 26, 2016
Beginning balance	$	473,573		$	449,823		$	473,573		$	446,548
Provision for doubtful accounts	7,973			35,986			12,227			46,916
Amounts written off, net	(7,973		)	(35,986		)	(12,227		)	(43,641		)
Ending balance	$	473,573		$	449,823		$	473,573		$	449,823

Property and Equipment

Property and equipment are stated net of accumulated depreciation and amortization of $1,085,485 and $1,301,295 at June 25, 2017 and December 25, 2016, respectively. During the thirteen week periods ended June 25, 2017, the Company disposed of fully depreciated assets primarily not in use with an original cost of $426,066.

Deposits

The Company maintains guaranteed costs policies for workers' compensation coverage in the states in which it operates, with minimal loss retention for employees in the commercial segment. Under these policies, the Company is required to maintain refundable deposits of $2,535,945 and $2,476,201, which are included in Deposits the accompanying consolidated balance sheets as of June 25, 2017 and December 25, 2016, respectively.

Long-Lived Assets

The Company reviews its long-lived assets, primarily fixed assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company looks primarily to the undiscounted future cash flows in its assessment of whether or not long-lived assets have been impaired. There were no impairments during Fiscal 2017 and Fiscal 2016.

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

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 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.

Goodwill

Goodwill is not amortized, but instead is evaluated at the reporting unit level for impairment annually at the end of each fiscal year, or more frequently, if conditions indicate an earlier review is necessary. If the Company has determined that it is more likely than not that the fair value for one or more reporting units is greater than their carrying value, the Company may use a qualitative assessment for the annual impairment test.

Deferred Rent

The Company recognizes rental expense on a straight-line basis over the life of the agreement. Deferred rent is recognized as the difference between cash payments and rent expense, including any landlord incentives.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Paid-in-kind Interest

The Company recorded paid-in-kind interest on a monthly basis to accrued interest. The first month following a quarter, the paid-in-kind accrued interest was reclassified to the related debt principal if not paid.

Deferred Financing Fees

Deferred financing fees are amortized on 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. Prior to fiscal 2017, the calculation of the fair value of the expected future payments uses a discount rate that approximates the Company's weighted average cost of capital. For acquisitions beginning in fiscal 2017, based on new valuation methodology, the fair value calculation of the expected future payments which uses a discount rate that is commensurate with the risks of the expected cash flow. The resulting discount is amortized as interest expense over the outstanding period using the effective interest method.

Revenue Recognition

The Company derives its revenues from three segments: Multifamily, Professional, and Commercial. The Company provides temporary staffing and permanent placement services. Revenues as presented on the consolidated statements of operations represent services rendered to customers less sales adjustments and allowances. Reimbursements, including those related to out-of-pocket expenses, are also included in revenues, and equivalent amounts of reimbursable expenses are included in cost of services.

The Company and its customers enter into agreements that outline the general terms and conditions of the staffing arrangement. Revenue is recognized as services are performed and associated costs have been incurred. The Company records revenue from services and the related direct costs on a gross basis in accordance with the accounting guidance on reporting revenue gross as a principal versus net as an agent.

Temporary staffing revenues - Our revenues are generated based on negotiated rates and invoiced on a per-hour basis. Accordingly, temporary staffing revenues are recognized on the hours worked when the services are rendered by the Company’s temporary workers.

Permanent placement staffing revenues - Permanent placement staffing revenues are recognized when employment candidates start their permanent employment. The Company estimates the effect of permanent placement candidates who do not remain with its customers through the guarantee period (generally 90 days) based on historical experience. Allowances are established to estimate these losses. Fees to customers are generally calculated as a percentage of the new worker’s annual compensation. No fees for permanent placement services are charged to employment candidates.

Share-Based Compensation

The Company recognizes compensation expense in selling, general and administrative expenses over the service period for options 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.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share

Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period adjusted to reflect potentially dilutive securities. Antidilutive shares are excluded from the calculation of diluted earnings per share.

The following is a reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the respective periods:



		Thirteen Weeks Ended		Twenty-six Weeks Ended
		June 25, 2017	June 26, 2016	June 25, 2017	June 26, 2016
Weighted-average number of common shares outstanding:		8,746,100	7,711,050	8,707,528	7,548,931
Effect of dilutive securities:
	Stock options	267,905	298,784	245,828	267,872
	Warrants	36,591	43,162	32,780	35,057
Weighted-average number of diluted common shares outstanding		9,050,596	8,052,996	8,986,136	7,851,860

	Stock options	50,000	—	50,000	—
	Warrants	32,250	32,250	32,250	32,250
Antidilutive shares		82,250	32,250	82,250	32,250

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. Goodwill is 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 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.

When appropriate, we 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.

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.

Income tax expense attributable to income from operations for 2017 differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes primarily as a result of state taxes.

Income tax expense attributable to income from operations for 2016 differed from the amount computed by applying the U.S. federal income tax rate of 34% to income before income taxes primarily as a result of state taxes and permanent differences related to share-based compensation.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") ASU 2014-09, Revenue from Contracts with Customers. Since May 2014, the FASB has issued additional and amended authoritative guidance regarding revenue from contracts with customers in order to clarify and improve the understanding of the implementation guidance. As amended, the new guidance requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration a company expects to receive in exchange for those goods or services. The new standard is effective for annual and interim periods beginning after December 15, 2017. The Company is in the process of evaluating the impact of adoption. Based on the progress to date, the Company does not believe the adoption of this accounting guidance will have a material impact on the Company's financial condition or results of operations.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” which provides more specific guidance related to how companies account for cloud computing costs. In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements” to clarify guidance, correct errors and make minor improvements to the Accounting Standards Codification (“ASC”) which amends ASC 350-40 to clarify that after ASU 2015-05 is adopted, companies are required to record an intangible asset for the license acquired in a software licensing arrangement. The asset for the software license is required to be recognized and measured at cost. The Company adopted both ASUs on a prospective basis in the second quarter of fiscal 2017 which did not have a material impact on the consolidated financial statements.

In March 2016, the FASB issued ASU issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The new standard was effective for the Company beginning with the first quarter of 2017. The Company adopted this ASU on a prospective basis which had no impact on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating the Step 2 procedure from the goodwill impairment test. The new standard is effective for the Company beginning with the fourth quarter of 2020. The Company does not anticipate the adoption of ASU 2017-04 will have a material impact on the Company's financial condition or results of operations.

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. The new standard is effective for the Company beginning with the first quarter 2018. The Company does not anticipate the adoption of ASU 2017-09 will have a material impact on the Company's financial condition or results of operations.

NOTE 3 - ACQUISITIONS

Zycron, Inc.

On April 3, 2017, the Company acquired substantially all of the assets and assumed certain liabilities of Zycron, Inc. (“Zycron”) for an initial cash consideration paid of $18.5 million and issued $1.0 million (70,670 shares privately placed) of the Company's common stock at closing. An additional $0.5 million was held back as partial security for post-closing purchase price adjustments and indemnification obligations. The purchase agreement further provides for contingent consideration of up to $3.0 million based on the performance of the acquired business for the two years following the date of acquisition. The purchase agreement contained a provision for a “true up” of acquired working capital under a process that will begin approximately 120 days after the closing date.

The net assets acquired were assigned to the Professional segment. The acquisition of Zycron allows the Company to strengthen and expand its IT operations throughout the southeastern U.S. region and selected markets across the country with talent and project management services.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The 2016 consolidated statement of operations does not include any operating results of Zycron. Twelve (12) weeks of Zycron operations are included in the thirteen and twenty-six week periods ended June 25, 2017, which is approximately $8.7 million of revenue and $0.7 million of operating income. The preliminary purchase price has been allocated to the assets acquired and liabilities assumed as of the date of acquisition as follows:



Accounts receivable	$	4,345,312
Prepaid expenses and other assets	82,122
Property and equipment	128,431
Intangible assets	13,818,474
Goodwill	6,901,101
Liabilities assumed	(2,983,222		)
Total net assets acquired	$	22,292,218

Cash	$	18,500,000
Hold back	500,000
Common stock	1,000,000
Working capital adjustment	(299,835		)
Fair value of contingent consideration	2,592,053
Total fair value of consideration transferred for acquired business	$	22,292,218



	Estimated Fair Value		Estimated Useful Lives
Covenants not to compete	$	475,000	5 years
Trade name	5,006,000		Indefinite
Customer list	8,337,474		5 years
Total	$	13,818,474

Supplemental Unaudited Pro Forma Information

The Company estimates that the revenues and net income for the periods below that would have been reported if the Zycron acquisition had taken place on the first day of the Company's 2016 fiscal year would be as follows (dollars in thousands, except per share amounts):



	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 25, 2017		June 26, 2016		June 25, 2017		June 26, 2016
Revenues	$	68,774	$	72,431	$	134,985	$	142,016
Gross profit	$	17,227	$	16,999	$	32,844	$	32,237
Net income	$	2,285	$	1,043	$	3,449	$	1,676
Income per share:
Basic	$	0.26	$	0.14	$	0.40	$	0.22
Diluted	$	0.25	$	0.13	$	0.38	$	0.21

Pro forma net income includes amortization of identifiable intangible assets, interest expense on additional borrowings on the Revolving Facility at a rate of 4.5% and tax expense of the pro forma adjustments at an effective tax rate of approximately 39.0%. The pro forma information presented does not include any adjustments that management considers non-recurring in assessing Zycron's historical performance.

Amounts set forth above are not necessarily indicative of the results that would have been attained had the Zycron acquisition taken place on the first day of the Company’s 2016 fiscal year or of the results that may be achieved by the combined enterprise in the future.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - INTANGIBLE ASSETS

Intangible assets are stated net of accumulated amortization of $33,209,489 and $30,205,434 at June 25, 2017 and December 25, 2016, respectively. During the thirteen week periods ended June 25, 2017, the Company added $435,096 and reclassified $347,379 of software assets from property and equipment. Total amortization expense for the thirteen week periods ended June 25, 2017 and June 26, 2016 was $1,720,832 and $1,605,899, respectively. Total amortization expense for the twenty-six week periods ended June 25, 2017 and June 26, 2016 was $2,952,675 and $3,276,708, respectively.

NOTE 5 - ACCRUED PAYROLL AND EXPENSES AND CONTINGENT CONSIDERATION

Accrued payroll and expenses consist of the following at:



	June 25, 2017		December 25, 2016
Temporary worker payroll	$	6,888,543	$	5,547,161
Temporary worker payroll related	2,564,888		2,033,602
Accrued bonuses and commissions	1,036,394		892,742
Other	2,101,857		1,194,970
	$	12,591,682	$	9,668,475

The following is a schedule of future estimated contingent consideration payments to various parties as of June 25, 2017:



	Estimated Cash Payment		Discount			Net
Due in:
Less than one year	$	5,750,000	$	(429,010	)	$	5,320,990
One to two years	2,250,000		(555,879		)	1,694,121
Two to three years	1,500,000		(178,018		)	1,321,982
Contingent consideration	$	9,500,000	$	(1,162,907	)	$	8,337,093

As of June 25, 2017, the Zycron hold back balance of $398,793, included in other current liabilities, was a partial security for post-closing purchase price adjustments and indemnification obligations and also contained the working capital adjustment and other amounts paid or received on behalf of the either party.

NOTE 6 - DEBT

The Company had a credit agreement (the “Credit Agreement”) with TCB providing for a Revolving Facility, maturing August 21, 2019, permitting the Company to borrow funds from time to time in an aggregate amount equal to the lesser of the borrowing base amount, which is 85% of eligible accounts, and TCB’s commitment of $35.0 million.

In connection with the acquisition of the assets of Zycron described above, on April 3, 2017, the Company entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with TCB with an aggregate commitment of $55.0 million. The Amended Credit Agreement provides for a revolving credit facility maturing April 3, 2022 (the “Revolving Facility”), permitting the Company to borrow funds from time to time in an aggregate amount equal to the lesser of the borrowing base amount, which is 85% of eligible accounts, and TCB’s commitment of $35.0 million and also provides for a term loan maturing April 3, 2022 (the “Term Loan”) in the amount of $20.0 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Amended Credit Agreement. TCB may also make loans (“Swing Line Loans”) not to exceed the lesser of $7.5 million or the aggregate commitment. Additionally, the Amended Credit Agreement provides for the Company to increase the commitment with a $20.0 million accordion feature.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Revolving Facility and Term Loan bear interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Amended Credit Agreement). Swing Line Loans bear interest at the Base Rate plus the Applicable Margin. All interest and commitment fees are generally paid quarterly. The Company’s obligations under the Amended Credit Agreement are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries.

The Amended Credit Agreement's customary affirmative and negative covenants remain substantially the same as those in effect under the Credit Agreement including restricting the ability of the Company and its subsidiaries to, among other things (with certain exceptions): (i) incur indebtedness; (ii) incur liens; (iii) enter into mergers, consolidations, or similar transactions; (iv) pay dividends or make distributions (except for permitted distributions as defined in the agreements); (v) make loans; (vi) dispose of assets; (vii) enter into transactions with affiliates; or (viii) change the nature of their business and the Company must comply with certain financial covenants. The Company may not permit the Leverage Ratio (as defined in the Amended Credit Agreement) to be greater than the following: 2.50 to 1.0 (April 3, 2017 to end of fiscal March 2018), 2.00 to 1.0 (March 31, 2018 to end of fiscal March 2019), 1.50 to 1.0 (March 31, 2019 to end of fiscal March 2020), 1.0 to 1.0 (From and after end of fiscal March, 2020). Moreover, the Company may not permit, for any four fiscal quarter period, the Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than 1.50 to 1.00, and may not permit the Dividend Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than (a) 1.10 to 1.00 for any four fiscal quarter period ending on or before September 30, 2017 or (b) 1.20 to 1.00 for any four fiscal quarter period thereafter. As of June 25, 2017, the Company was in compliance with these covenants.

The Company borrowed $20.0 million on the Term Loan in conjunction with the closing of the Zycron acquistion on April 3, 2017. Proceeds from the foregoing loan arrangements were used to pay off existing indebtedness of the Company on the revolving credit facility under the Credit Agreement, dated as of August 21, 2015, as amended, with TCB.

Line of Credit

At June 25, 2017 and December 25, 2016, $21.7 million and $23.9 million, respectively, was outstanding on the Revolving Facility with TCB. Borrowings under the Revolving Facility bore interest equal to Base Rate or LIBOR plus the Applicable Margin (as such terms are defined in the Amended Credit Agreement or Credit Amendment, respectively). Additionally, the Company pays an unused commitment fee on the unfunded portion of the Revolving Facility.

Borrowings under the Revolving Facility bore interest at:



	June 25, 2017				December 25, 2016
Base Rate	$	6,718,631	5.25	%	$	8,882,714	4.25	%
LIBOR	5,000,000		3.90	%	5,000,000		3.95	%
LIBOR	5,000,000		3.92	%	5,000,000		3.99	%
LIBOR	5,000,000		3.97	%	5,000,000		4.16	%
Total	$	21,718,631			$	23,882,714

Long-Term Debt

Long-term debt consists of and bore interest at:



	June 25, 2017					December 25, 2016
Base Rate	$	500,000		5.25	%	$	—	—	%
LIBOR	6,500,000			4.15	%	—		—	%
LIBOR	6,500,000			4.17	%	—		—	%
LIBOR	6,500,000			4.22	%	—		—	%
Less current portion on long-term debt	(2,000,000		)			—
Long-term debt, less current portion	$	18,000,000				$	—

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - FAIR VALUE MEASUREMENTS

The accounting standard for fair value measurements defines fair value, and establishes a market-based framework or hierarchy for measuring fair value. The standard is applicable whenever assets and liabilities are measured at fair value. The fair value hierarchy established in the standard prioritizes the inputs used in valuation techniques into three levels as follows:

Level 1 - Observable inputs - quoted prices in active markets for identical assets and liabilities;

Level 2 - Observable inputs other than the quoted prices in active markets for identical assets and liabilities - includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets, for substantially the full term of the financial instrument; and

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

June 25,
2017

December 25,
2016

Contingent consideration, net

Contingent consideration, net - current and long-term

Level 3

8,337,093

5,166,885

The changes in the Level 3 fair value measurements from December 25, 2016 to June 25, 2017 relate to $2.6 million in the Zycron acquisition and $0.6 million in accretion. The key inputs in determining the fair value of the contingent consideration as of June 25, 2017 and December 25, 2016 included discount rates of approximately 9% and 22% as well as management's estimates of future sales volumes and EBITDA.

NOTE 8 - CONTINGENCIES

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

The Company is not currently a party to any material litigation; however, in the ordinary course of our business the Company is periodically threatened with or named as a defendant in various lawsuits or actions. The principal risks that the Company insures against, subject to and upon the terms and conditions of various insurance policies, are workers’ compensation, general liability, automobile liability, property damage, professional liability, employment practices, fiduciary liability, fidelity losses and director and officer liability.

Under the Company's bylaws, the Company’s directors and officers are indemnified against certain liabilities arising out of the performance of their duties to the Company. The Company also has an insurance policy for our directors and officers to insure them against liabilities arising from the performance of their positions with the Company or its subsidiaries. The Company has also entered into indemnification agreements with its directors and certain officers.

NOTE 9 – 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 April 3, 2017, the Company issued 70,670 shares of common stock, $0.01 par value per share, in a private placement for a value of $1 million at the closing of the Zycron acquisition. The Company incurred $7,500 in offering costs.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 10 – SHARE-BASED COMPENSATION

Stock Options

On May 16, 2017, the stockholders of the Company approved and made effective an amendment to the BG Staffing, Inc. 2013 Long-Term Incentive Plan to add an additional 250,000 shares of common stock available for issuance. The board of directors of the Company had previously approved the amendment subject to stockholder approval. A total of 900,000 shares of common stock were originally reserved for issuance, which brings the new total available for issuance to 1,150,000 shares of common stock.

For the thirteen week periods ended June 25, 2017 and June 26, 2016, the Company recognized $187,168 and $70,937 of compensation cost related to stock option awards, respectively. For the twenty-six week periods ended June 25, 2017 and June 26, 2016, the Company recognized $264,731 and $141,838 of compensation cost related to stock option awards, respectively. Unamortized stock compensation expense as of June 25, 2017 amounted to $772,618, which is expected to be recognized over the next 2.7 years.

A summary of stock option activity is presented as follows:



	Number of Shares		Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Total Intrinsic Value of Options (in thousands)
Options outstanding at December 25, 2016	678,411		$	8.95	7.8	$	4,511
Granted	128,000		$	16.76
Exercised	(28,800	)	$	7.71
Forfeited / Canceled	(12,200	)	$	11.00
Options outstanding at June 25, 2017	765,411		$	10.27	7.8	$	5,971

Options exercisable at December 25, 2016	395,911		$	8.01	7.6	$	2,965
Options exercisable at June 25, 2017	462,111		$	8.49	7.2	$	4,429



	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested outstanding at December 25, 2016	282,500	$	2.57
Nonvested outstanding at June 25, 2017	303,300	$	3.05

For the twenty-six week periods ended June 25, 2017, the Company issued 5,221 shares of common stock upon the cashless exercise of 9,402 stock options.

Warrant Activity

For the thirteen and twenty-six week periods ended June 25, 2017 and June 26, 2016, the Company did not recognize compensation cost related to warrants. There was no unamortized stock compensation expense to be recognized as of June 25, 2017.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

A summary of warrant activity is presented as follows:



	Number of Shares	Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Life	Total Intrinsic Value of Options (in thousands)
Warrants outstanding at December 25, 2016	123,984	$	11.51	2.8	$	532
Warrants outstanding at June 25, 2017	123,984	$	11.51	2.3	$	813

Warrants exercisable at December 25, 2016	91,734	$	9.65	2.2	$	532
Warrants exercisable at June 25, 2017	123,984	$	9.65	2.3	$	813



	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested outstanding at December 25, 2016	32,250	$	—
Nonvested outstanding at June 25, 2017	—	$	—

The intrinsic value in the tables above is the amount by which the market value of the underlying stock exceeded the exercise price of outstanding options or warrants, before applicable income taxes and represents the amount holders would have realized if all in-the-money options or warrants had been exercised on the last business day of the period indicated.

NOTE 11 - EMPLOYEE BENEFIT PLAN

The Company provides a defined contribution plan (the “401(k) Plan”) for the benefit of its eligible full-time employees. The 401(k) Plan allows employees to make contributions subject to applicable statutory limitations. The Company matches employee contributions 100% up to the first 3% and 50% of the next 2% of an employee’s compensation. The Company contributed $222,339 and $227,031 to the 401(k) Plan for the thirteen week periods ended June 25, 2017 and June 26, 2016, respectively. The Company contributed $424,760 and $405,669 to the 401(k) Plan for the twenty-six week periods ended June 25, 2017 and June 26, 2016, respectively.

NOTE 12 - BUSINESS SEGMENTS

The Company operates within three industry segments: Multifamily, Professional, and Commercial. The Multifamily segment provides front office and maintenance temporary workers to various apartment communities, in 24 states, via property management companies responsible for the apartment communities' day to day operations. The Professional segment provides skilled temporary workers on a nationwide basis for IT and finance and accounting customer projects. The Commercial segment provides temporary workers primarily to logistics, distribution, and call center customers needing a flexible workforce in Illinois, Wisconsin, New Mexico, Texas, Tennessee and Mississippi.

Segment operating income includes all revenue and cost of services, direct selling expenses, depreciation and amortization expense and excludes all general and administrative (corporate) expenses. Assets of corporate include cash, unallocated prepaid expenses, fixed assets, deferred tax assets, and other assets.

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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



	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 25, 2017		June 26, 2016		June 25, 2017		June 26, 2016
Revenue:
Multifamily	$	16,586,105	$	13,930,268	$	29,677,750	$	24,667,032
Professional	34,197,438		27,364,482		60,030,062		55,007,111
Commercial	17,990,319		21,320,264		35,909,738		42,491,857
Total	$	68,773,862	$	62,615,014	$	125,617,550	$	122,166,000

Depreciation:
Multifamily	$	23,594	$	13,711	$	46,904	$	23,455
Professional	44,545		37,263		85,706		74,411
Commercial	26,373		23,489		52,542		45,429
Corporate	49,698		46,076		98,649		87,905
Total	$	144,210	$	120,539	$	283,801	$	231,200



Amortization:
Multifamily	$	—		$	25,139		$	—		$	62,848
Professional	1,633,851			1,454,293			2,771,072			2,945,002
Commercial	85,131			126,467			179,753			268,858
Corporate	1,850			—			1,850			—
Total	$	1,720,832		$	1,605,899		$	2,952,675		$	3,276,708

Operating income:
Multifamily	$	2,802,023		$	2,062,347		$	4,503,540		$	3,527,337
Professional	2,412,693			1,981,898			4,224,674			3,573,936
Commercial	1,037,955			1,425,598			1,891,600			2,705,684
Corporate - selling	(125,889		)	—			(252,809		)	—
Corporate - general and administrative	(1,544,880		)	(1,485,479		)	(3,091,747		)	(3,160,432		)
Total	$	4,581,902		$	3,984,364		$	7,275,258		$	6,646,525

Capital expenditures:
Multifamily	$	16,448		$	77,458		$	59,735		$	96,407
Professional	328,784			9,168			446,603			9,168
Commercial	30,673			7,000			64,830			40,321
Corporate	133,575			100,772			265,424			284,807
Total	$	509,480		$	194,398		$	836,592		$	430,703

BG Staffing, Inc. and Subsidiaries

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



	June 25, 2017		December 25, 2016
Total Assets:
Multifamily	$	10,488,711	$	9,320,335
Professional	67,589,931		39,548,308
Commercial	17,284,213		21,574,855
Corporate	11,129,222		10,770,636
Total	$	106,492,077	$	81,214,134

NOTE 13 - SUBSEQUENT EVENTS

On July 19, 2017, the Company's board of directors declared a cash dividend in the amount of $0.25 per share of common stock to be paid on August 7, 2017 to all shareholders of record as of the close of business on July 31, 2017.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our accompanying Unaudited Consolidated Financial Statements and related notes thereto. Comparative segment revenues and related financial information are discussed herein and are presented in Note 12 to our Unaudited Consolidated Financial Statements. See “Forward Looking Statements” on page 3 of this report and “Risk Factors” included in our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 25, 2016, for a description of important factors that could cause actual results to differ from expected results.

Overview

We are a leading national provider of professional temporary staffing services and have completed a series of acquisitions including the acquisition of BG Personnel, LP and B G Staff Services Inc. in June 2010, and substantially all of the assets of JNA Staffing, Inc. in December 2010, Extrinsic, LLC in December 2011, American Partners, Inc. in December 2012, InStaff Holding Corporation and InStaff Personnel, LLC in June 2013, D&W Talent, LLC ("D&W") in March 2015, Vision Technology Services, Inc., Vision Technology Services, LLC, and VTS-VM, LLC (collectively, “VTS”) in October 2015, and Zycron, Inc. in April 2017. We operate within three industry segments: Multifamily, Professional, and Commercial. We provide services to customers primarily within the United States of America. We now have 62 branch offices and 20 on-site locations located across 26 states.

The Professional segment provides skilled temporary workers on a nationwide basis for information technology ("IT") and finance and accounting customer projects.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our unaudited consolidated financial statements.



		Thirteen Weeks Ended						Twenty-six Weeks Ended
		June 25, 2017			June 26, 2016			June 25, 2017			June 26, 2016
		(dollars in thousands)
Revenues		$	68,774		$	62,615		$	125,618		$	122,166
Cost of services		51,547			47,430			94,719			93,635
	Gross profit	17,227			15,185			30,899			28,531
Selling, general and administrative expenses		10,780			9,475			20,388			18,376
Depreciation and amortization		1,865			1,726			3,236			3,508
	Operating income	4,582			3,984			7,275			6,647
Loss on extinguishment of debt		—			(404		)	—			(404		)
Interest expense, net		(837		)	(1,297		)	(1,396		)	(2,576		)
	Income before income tax	3,745			2,283			5,879			3,667
Income tax expense		1,460			886			2,293			1,436
	Net income	$	2,285		$	1,397		$	3,586		$	2,231

Revenues		100.0		%	100.0		%	100.0		%	100.0		%
Cost of services		75.0		%	75.7		%	75.4		%	76.6		%
	Gross profit	25.0		%	24.3		%	24.6		%	23.4		%
Selling, general and administrative expenses		15.7		%	15.1		%	16.2		%	15.0		%
Depreciation and amortization		2.7		%	2.8		%	2.6		%	2.9		%
	Operating income	6.7		%	6.4		%	5.8		%	5.4		%
Loss on extinguishment of debt		—		%	(0.6		)%	—		%	(0.3		)%
Interest expense, net		(1.2		)%	(2.1		)%	(1.1		)%	(2.1		)%
	Income before income tax	5.4		%	3.6		%	4.7		%	3.0		%
Income tax expense		2.1		%	1.4		%	1.8		%	1.2		%
	Net income	3.3		%	2.2		%	2.9		%	1.8		%

Thirteen Week Fiscal Period Ended June 25, 2017 (Fiscal Quarter 2017) Compared with Thirteen Week Fiscal Period Ended June 26, 2016 (Fiscal Quarter 2016)



Revenues:		Thirteen Weeks Ended
		June 25, 2017				June 26, 2016
		(dollars in thousands)
Revenues by segment:
	Multifamily	$	16,586	24.1	%	$	13,930	22.3	%
	Professional	34,198		49.7	%	27,365		43.7	%
	Commercial	17,990		26.2	%	21,320		34.0	%
	Total Revenues	$	68,774	100.0	%	$	62,615	100.0	%

Multifamily Revenues: Multifamily revenues increased approximately $2.7 million (19.1%), due to our continued geographic expansion plan. Revenue from branches outside of Texas accounted for approximately $1.9 million of the increase and revenue from branches in Texas increased approximately $0.8 million. The increase was due to a 12.0% increase in billed hours and a 6.1% increase in average bill rate. Revenue from existing offices accounted for approximately $1.7 million of the increase and revenue from new offices provided approximately $1.0 million.

Professional Revenues: Professional revenues increased approximately $6.8 million (25.0%), primarily from Zycron, which contributed approximately $8.7 million of new revenues. The remaining IT group decreased $1.5 million and the finance and accounting group decreased $0.4 million. The overall increase was due to a 25.5% increase in billed hours and increased permanent placements of $0.1 million, offset by a slight decrease in average bill rate.

Commercial Revenues: Commercial revenues decreased approximately $3.3 million (15.6%). Texas branches decreased $1.8 million, other branches outside of the Midwest decreased $1.7 million, while the Illinois and Wisconsin locations increased $0.2 million. The overall revenue decrease was due to a 20.3% decrease in billed hours, offset by a 5.7% increase in average bill rate.

Gross Profit:

Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, temporary worker costs, and reimbursable costs.



		Thirteen Weeks Ended
		June 25, 2017				June 26, 2016
		(dollars in thousands)
Gross Profit by segment:
	Multifamily	$	6,324	36.7	%	$	5,212	34.3	%
	Professional	8,287		48.1	%	6,866		45.2	%
	Commercial	2,616		15.2	%	3,107		20.5	%
	Total Gross Profit	$	17,227	100.0	%	$	15,185	100.0	%



		Thirteen Weeks Ended
		June 25, 2017		June 26, 2016
Gross Profit Percentage by segment:
	Multifamily	38.1	%	37.4	%
	Professional	24.2	%	25.1	%
	Commercial	14.5	%	14.6	%
	Company Gross Profit	25.0	%	24.3	%

Overall, our gross profit has increased approximately $2.0 million (13.4%) due primarily to Zycron ($2.0 million) and growth in our Multifamily segment, offset by decreased revenues in our Commercial segment. As a percentage of revenue, gross profit has increased to 25.0% from 24.3% primarily due to a greater percentage of revenues coming from our Multifamily and Professional segments.

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

Multifamily Gross Profit: Multifamily gross profit increased approximately $1.1 million (21.3%) in line with the increase in revenue. The increase in gross profit percentage of 0.7% was due primarily to 6.5% increase in average spread.

Professional Gross Profit: Professional gross profit increased approximately $1.4 million (20.7%), due to Zycron of $2.0 million, a 7.0% increase in average spread, offset by a $0.6 million decrease in the remaining IT group.

Commercial Gross Profit: Commercial gross profit decreased approximately $0.5 million (15.8%) due to a decrease in the corresponding revenue. The average spread increased 5.1%.

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $1.3 million (13.8%) related to an increase in Professional of $0.9 million from Zycron and an increase in Multifamily of $0.4 million from growth and new office expansion.

Depreciation and Amortization: Depreciation and amortization charges increased approximately $0.1 million (8.0%). The increase in depreciation and amortization is primarily due to Professional segment intangible assets acquired in the Zycron acquisition of $0.4 million that was partially offset by a decrease of $0.3 million in the Professional segment intangible amortization of the 2011 Extrinsic, LLC acquisition.

Interest Expense, net: Interest expense, net decreased approximately $0.5 million (35.5%) primarily due to a decrease in the interest of $0.7 million related to the payoff of the 13% subordinated debt, partially offset by an increase in the interest of $0.2 million related to the new term note.

Income Taxes: Income tax expense increased approximately $0.6 million primarily due to higher pre-tax income and an increase in the effective rate.

Twenty-six Week Fiscal Period Ended June 25, 2017 ("Fiscal 2017") Compared with Twenty-six Week Fiscal Period Ended June 26, 2016 ("Fiscal 2016")



Revenues:		Twenty-six Weeks Ended
		June 25, 2017				June 26, 2016
		(dollars in thousands)
Revenues by segment:
	Multifamily	$	29,678	23.6	%	$	24,667	20.2	%
	Professional	60,030		47.8	%	55,007		45.0	%
	Commercial	35,910		28.6	%	42,492		34.8	%
	Total Revenues	$	125,618	100.0	%	$	122,166	100.0	%

Multifamily Revenues: Multifamily revenues increased approximately $5.0 million (20.3%) due to our continued geographic expansion plan. Revenue from branches outside of Texas accounted for approximately $4.0 million of the increase and revenue from branches in Texas increased approximately $1.0 million. The increase was due to a 13.4% increase in billed hours and a 5.9% increase in average bill rate. Revenue from existing offices accounted for approximately $3.6 million of the increase and revenue from new offices provided approximately $1.4 million.

Professional Revenues: Professional revenues increased approximately $5.0 million (9.1%), primarily from Zycron, which contributed approximately $8.7 million of new revenues. The remaining IT group decreased $3.0 million and the finance and accounting group decreased $0.7 million. The overall increase was due to a 5% increase in billed hours, an increase of 2.4% in average bill rate, and increased permanent placements of $0.3 million.

Commercial Revenues: Commercial revenues decreased approximately $6.6 million (15.5%). Texas branches decreased $3.6 million, other branches outside of the Midwest decreased $3.0 million, while the Illinois and Wisconsin locations were flat. The overall revenue decrease was due to a 20.6% decrease in billed hours that was offset by a 6.2% increase in average bill rate.

Gross Profit:

Gross profit represents revenues from services less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, temporary worker costs, and reimbursable costs.



		Twenty-six Weeks Ended
		June 25, 2017				June 26, 2016
		(dollars in thousands)
Gross Profit by segment:
	Multifamily	$	11,309	36.6	%	$	9,164	32.1	%
	Professional	14,498		46.9	%	13,251		46.4	%
	Commercial	5,092		16.5	%	6,116		21.5	%
	Total Gross Profit	$	30,899	100.0	%	$	28,531	100.0	%



		Twenty-six Weeks Ended
		June 25, 2017		June 26, 2016
Gross Profit Percentage by segment:
	Multifamily	38.1	%	37.2	%
	Professional	24.2	%	24.1	%
	Commercial	14.2	%	14.4	%
	Company Gross Profit	24.6	%	23.4	%

Overall, our gross profit has increased approximately $2.4 million (8.3%) due primarily to Zycron ($2.0 million) and increased revenues in our Multifamily segment, offset by decreased revenues in our Commercial segment. As a percentage of revenue, gross profit has increased to 24.6% from 23.4% primarily due to a higher percentage of our revenues from our Multifamily and Professional segments.

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

Multifamily Gross Profit: Multifamily gross profit increased approximately $2.1 million (23.4%) consistent with the increase in revenue. The increase in gross profit percentage of 0.9% was due primarily to 6.9% increase in average spread.

Professional Gross Profit: Professional gross profit increased approximately $1.3 million (9.4%), due to Zycron of $2.0 million, a 7.0% increase in average spread, offset by a $0.6 million decrease in the remaining IT group.

Commercial Gross Profit: Commercial gross profit decreased approximately $1.0 million (16.7%) due to the corresponding decreased revenue. The average spread increased 5.9%.

Selling, General and Administrative Expenses: Selling, general and administrative expenses increased approximately $2.0 million (10.9%) related to an increase in Multifamily of $1.2 million from growth, including $0.3 million of new office expansion, and an increase in Professional of $0.9 million from Zycron.

Depreciation and Amortization: Depreciation and amortization charges decreased approximately $0.3 million (7.8%). The decrease in depreciation and amortization is primarily due to Professional segment intangible amortization of the 2011 Extrinsic, LLC acquisition of $0.6 million that was partially offset by an increase in the Professional segment intangible assets acquired in the Zycron acquisition of $0.4 million.

Interest Expense, net: Interest expense, net decreased approximately $1.2 million (45.8%) primarily due to the decrease in the interest of $1.2 million related to the payoff of the 13% subordinated debt.

Income Taxes: Income tax expense increased approximately $0.9 million primarily due to higher pre-tax income offset by a decrease in the effective rate.

Use of Non-GAAP Financial Measures

We present Adjusted EBITDA (defined below), a measure that is not in accordance with generally accepted accounting principles (non-GAAP), 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 company management. In addition, certain financial covenants in our Amended Credit Agreement (as defined below) are based on this measure.

We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, and other non-cash expenses such as the loss on extinguishment of debt and share-based compensation expense. Omitting interest, taxes and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation

and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income for the periods indicated as a measure of our performance. Other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider this performance measure in isolation from, or as an alternative to, GAAP measures such as net income (loss). Adjusted EBITDA is not a measure of liquidity under GAAP or otherwise, and is not an alternative to cash flow from continuing operating activities. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by the expenses that are excluded from that term or by unusual or non-recurring items. The limitations of Adjusted EBITDA include: (i) it does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments; (ii) it does not reflect changes in, or cash requirements for, our working capital needs; (iii) it does not reflect income tax payments we may be required to make; and (iv) it does not reflect the cash requirements necessary to service interest or principal payments associated with indebtedness.

To properly and prudently evaluate our business, we encourage you to review our unaudited consolidated financial statements included elsewhere in this report and the reconciliation to Adjusted EBITDA from net income, the most directly comparable financial measure presented in accordance with GAAP, set forth in the following table. All of the items included in the reconciliation from net income to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect on-going operating performance.



	Thirteen Weeks Ended				Twenty-six Weeks Ended
	June 25, 2017		June 26, 2016		June 25, 2017		June 26, 2016
	(dollars in thousands)
Net income	$	2,285	$	1,397	$	3,586	$	2,231
Interest expense, net	837		1,297		1,396		2,576
Income tax expense	1,460		886		2,293		1,436
Loss on extinguishment of debt	—		404		—		404
Operating income	4,582		3,984		7,275		6,647
Depreciation and amortization	1,865		1,726		3,236		3,508
Share-based compensation	187		71		265		142
Adjusted EBITDA	$	6,634	$	5,781	$	10,776	$	10,297

Liquidity and Capital Resources

Our working capital requirements are primarily driven by temporary worker payments and customer accounts receivable receipts. Since receipts from customers lag payments to temporary workers, 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 (the “Amended Credit Agreement”) with Texas Capital Bank, National Association (“TCB”) as amended and restated that provides for a revolving credit facility maturing April 3, 2022 (the “Revolving Facility”). Our primary uses of cash are payments to temporary workers, employees, related payroll liabilities, operating expenses, capital expenditures, cash interest, cash taxes, dividends and contingent consideration 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 operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to obtain additional debt or equity capital or refinance all or a portion of our debt.

While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional growth opportunities within the next year that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected.

The Company has an effective Form S-3 shelf registration statement allowing for the offer and sale of up to approximately $34 million of common stock. There is no guarantee that we will be able to consummate any offering on terms we consider acceptable or at all.

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



	Twenty-six Weeks Ended
	June 25, 2017			June 26, 2016
	(dollars in thousands)
Net cash provided by operating activities	$	6,776		$	6,095
Net cash used in investing activities	(19,337		)	(423		)
Net cash provided by (used in) financing activities	12,561			(5,672		)
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, interest expense on contingent consideration payable, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable and accrued payroll and expenses.

During Fiscal 2017, net cash provided by operating activities was $6.8 million an increase of $0.7 million compared with $6.1 million for Fiscal 2016. This increase is primarily attributable to the timing of payments on accounts receivable, accrued payroll and related expenses, other current liabilities, interest, and taxes.

Investing Activities

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

In Fiscal 2017, we paid $18.5 million in connection with the Zycron acquisition and we made capital expenditures of $0.8 million mainly related to computer equipment and software purchased in the ordinary course of business. In Fiscal 2016, we made capital expenditures of approximately $0.4 million mainly related to computer equipment purchased in the ordinary course of business.

Financing Activities

Cash flows from financing activities consisted principally of borrowings and payments under our Amended Credit Agreement, payment of dividends and contingent consideration paid.

For Fiscal 2017, we received proceeds from issuance of the $20.0 million term loan mainly to fund the Zycron acquisition. We reduced our revolving line of credit by $2.2 million, paid $4.3 million in cash dividends on our common stock, and paid $1.0 million in deferred financing costs related to the Amended Credit Agreement.

For Fiscal 2016, we borrowed $1.6 million under our revolving line of credit and received net proceeds from issuance of common stock of $15.2 million mainly to pay off the Senior Subordinated Credit Agreement of $15.3 million. We paid $3.7 million in cash dividends on our common stock and we paid $3.5 million of contingent consideration related to the March 2015 D&W acquisition.

Credit Agreements

We had a Credit Agreement with TCB. The Credit Agreement provided for a Revolving Facility, maturing August 21, 2019, permitting us to borrow funds from time to time in an aggregate amount equal to the lesser of the borrowing base amount, which was 85% of eligible accounts, and TCB’s commitment of $35.0 million.

In connection with the acquisition of the assets of Zycron described above, on April 3, 2017, we entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with TCB with an aggregate commitment of $55.0 million. The Amended Credit Agreement provides for a revolving credit facility maturing April 3, 2022 (the “Revolving Facility”), permitting us to borrow funds from time to time in an aggregate amount equal to the lesser of the borrowing base amount, which is 85% of eligible accounts, and TCB’s commitment of $35.0 million and also provides for a term loan maturing April 3, 2022 (the “Term Loan”) in the amount of $20.0 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Amended Credit Agreement. TCB may also make loans (“Swing Line Loans”) not to exceed the lesser of $7.5 million or the aggregate commitment. Additionally, the Amended Credit Agreement provides for us to increase the commitment with a $20.0 million accordion feature.

The Revolving Facility and Term Loan bear interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin (as such terms are defined in the Amended Credit Agreement). Swing Line Loans bear interest at the Base Rate plus the Applicable Margin. All interest and commitment fees are generally paid quarterly. Our obligations under the Amended Credit Agreement are secured by a first priority security interest in substantially all of our tangible and intangible property and our subsidiaries.

The Amended Credit Agreement's customary affirmative and negative covenants remain substantially the same as those in effect under the Credit Agreement including restricting the ability of us to, among other things (with certain exceptions): (i) incur indebtedness; (ii) incur liens; (iii) enter into mergers, consolidations, or similar transactions; (iv) pay dividends or make distributions (except for permitted distributions as defined in the agreements); (v) make loans; (vi) dispose of assets; (vii) enter into transactions with affiliates; or (viii) change the nature of our business and we must comply with certain financial covenants. We may not permit the Leverage Ratio (as defined in the Amended Credit Agreement) to be greater than the following: 2.50 to 1.0 (April 3, 2017 to end of fiscal March 2018), 2.00 to 1.0 (March 31, 2018 to end of fiscal March 2019), 1.50 to 1.0 (March 31, 2019 to end of fiscal March 2020), 1.0 to 1.0 (From and after end of fiscal March, 2020). Moreover, we may not permit, for any four fiscal quarter period, the Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than 1.50 to 1.00, and may not permit the Dividend Fixed Charge Coverage Ratio (as defined in the Amended Credit Agreement) to be less than (a) 1.10 to 1.00 for any four fiscal quarter period ending on or before September 30, 2017 or (b) 1.20 to 1.00 for any four fiscal quarter period thereafter. As of June 25, 2017, we were in compliance with these covenants.

We borrowed $20.0 million on the Term Loan in conjunction with the closing of the Zycron acquistion on April 3, 2017. Proceeds from the foregoing loan arrangements were used to pay off our existing indebtedness on the revolving credit facility under the Credit Agreement, dated as of August 21, 2015, as amended, with TCB.

Off-Balance Sheet Arrangements

We are not party to any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amount of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends, and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, estimates, assumptions and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Unaudited Consolidated Financial Statements included in “Item 1. Financial Statements”. Please also refer to our Annual Report on Form 10-K for the fiscal year ended December 25, 2016 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 ended December 25, 2016.

JOBS Act

The Jumpstart Our Business Startups Act of 2012 provides that an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We may elect to delay the adoption of new or revised accounting pronouncements applicable to public and private companies until such pronouncements become mandatory for private companies. As a result, our financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public and private companies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks from transactions we enter into in the normal course of business. Our primary market risk exposure relates to interest rate risk.

Interest Rates

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls Over Financial Reporting

For the fiscal quarter ended June 25, 2017, there have been no changes in our internal control over financial reporting identified in connection with the evaluations required by Rule 13a-15(d) or Rule 15d-15(d) under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our CEO and our CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

No change from the information provided in ITEM 3. LEGAL PROCEEDINGS included in our Annual Report on Form 10-K for the year ended December 25, 2016.

ITEM 1A. RISK FACTORS

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, as well as the risk factors disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the year ended December 25, 2016 (our “2016 Form 10-K”), and filed with the SEC on March 6, 2017. There have been no material changes from the risk factors as previously disclosed in our 2016 Form 10-K. Any of the risks discussed in this Quarterly Report on Form 10-Q or any of the risks disclosed in Item 1A. of Part I of our 2016 Form 10-K, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations or financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

Item 6. Exhibits

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



Exhibit Number		Description

2.1		ASSET PURCHASE AGREEMENT dated, as of April 3, 2017, by and between BG Staffing, Inc., BG Staffing, LLC, Zycron Inc., and Darrell S. Freeman (incorporated by reference to the Company’s Current Report on Form 8-K filed on April 6, 2017).
3.1		Certificate of Incorporation of BG Staffing, Inc. (incorporated by reference from Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-191683) filed on November 4, 2013)
3.2		Bylaws of BG Staffing, Inc. (incorporated by reference from Amendment No. 2 to the registrant’s registration statement on Form S-1 (File No. 333-191683) filed on November 4, 2013)
4.1		Form of Common Stock Certificate (incorporated by reference from Amendment No. 1 to the registrant’s registration statement on Form S-1 (File No. 333-191683) filed on October 28, 2013)
10.1		Amended and Restated Credit Agreement, dated as of April 3, 2017, among BG Staffing, Inc., as borrower, the Lenders from time to time party hereto, and Texas Capital Bank, National Association, as administrative agent, swing line lender, sole lead arranger, and sole book runner (incorporated by reference to the Company’s Current Report on Form 8-K filed April 6, 2017).
10.2		2013 Long-Term Incentive Plan (filed as Annex A to the Company's definitive proxy statement on Schedule 14A filed with the Commission on March 28, 2017 and incorporated herein by reference).
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 implementing Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS *		XBRL Instance Document.
101.SCH *		XBRL Taxonomy Extension Schema Document.
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB *		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document.



	*	Filed herewith.
	†	This certification is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	BG STAFFING, INC.

		/s/ L. Allen Baker, Jr.
	Name:	L. Allen Baker, Jr.
	Title:	President and Chief Executive Officer
		(Principal Executive Officer)

		/s/ Dan Hollenbach
	Name:	Dan Hollenbach
	Title:	Chief Financial Officer and Secretary
		(Principal Financial Officer)

Date: July 27, 2017

Twenty-six Weeks Ended

June 25,
2017

June 26,
2016