BGSF, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations from continuing operations, our expectations regarding the future performance of our business and the other non-historical statements in the discussion and analysis are forward-looking statements. See “Forward-Looking Statements” in this Annual Report on Form 10-K. These forward-looking statements are subject to risks, uncertainties and other factors including those described in “Item 1A. Risk Factors” of this Annual Report on Form 10-K. Our actual results of operations may differ materially from those contained in any forward-looking statements. You should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this Annual Report on Form 10-K. Financial information provided is based on the results of our continuing operations. Please refer to “Note 4 — Discontinued Operations” of our audited consolidated financial statements for information regarding our discontinued operations. Our historical financial information may not be indicative of our future performance. Company Overview We provide workforce solutions to our client partners in a variety of industries through our various divisions in IT, Cyber, Finance & Accounting, Managed Services, and Real Estate (apartment communities and commercial buildings) and have completed a series of acquisitions including the acquisition of BG Personnel, LP and B G Staff Services Inc. in June 2010, substantially all of the assets of JNA Staffing, Inc. in December 2010, Extrinsic, LLC in December 2011, American Partners, Inc. in December 2012, InStaff in June 2013, D&W in March 2015, VTS in October 2015, Zycron in April 2017, Smart in September 2017, and LJK in December 2019, 100% of the equity of EdgeRock in February 2020, Momentum Solutionz in February 2021, and substantially all of the assets of Horn Solutions in 2022. We have continuing operations in two industry segments Real Estate and Professional, and discontinued operations in the Light Industrial segment. We primarily operate within the United States of America across 46 states and D.C. On March 21, 2022, we sold substantially all of the assets and certain liabilities of InStaff to Sentech Engineering Services, Inc. (“Sentech”) for a sale price of approximately $30.3 million cash at closing and an additional $2 million one year following the date of the acquisition. The sale resulted in a pre-tax gain on sale of discontinued operations of $17.3 million. The Light Industrial segment provided field talent primarily to manufacturing, distribution, logistics, and call center client partners needing a flexible workforce out of 11 locations and 13 on-sites in 11 states. The InStaff financial results for periods prior to the sale have been reflected in our Consolidated Statements of Operations and Comprehensive Income and Consolidated Statements of Cash Flows as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations in the periods presented are classified as discontinued operations in our Consolidated Balance Sheets. See “Note 4 — Discontinued Operations” of our audited consolidated financial statements for information regarding our discontinued operations. The Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 36 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. The Real Estate segment currently operates through two divisions, BG Multifamily and BG Talent. The Professional segment provides specialized talent and business consultants on a nationwide basis for information technology (“IT”), managed services, finance, accounting, legal and human resource client partner projects. The Professional segment currently operates through three divisions, IT Consulting, Managed Services, and Finance and Accounting under various trade names including Extrinsic, American Partners, Donovan & Watkins, Vision Technology Services, Zycron, Smart Resources, L.J. Kushner & Associates, EdgeRock Technology Partners, Momentum Solutionz, and Horn Solutions. 28 Results of Operations The following tables summarize key components of our results from continuing operations for the periods indicated, both in dollars and as a percentage of revenues, and have been derived from our consolidated financial statements. We believe that the financial results of 2022 were not materially impacted by the additional week. Fiscal Year Ended January 1, 2023 December 26, 2021 December 27, 2020 (dollars in thousands) Revenues $ 298,422 $ 239,027 $ 207,125 Cost of services 194,874 158,086 141,085 Gross Profit 103,548 80,941 66,040 Selling, general and administrative expenses 83,211 65,115 55,244 Gain on contingent consideration — (2,403) (76) Impairment losses — — 7,240 Depreciation and amortization 4,054 3,698 4,861 Operating income (loss) 16,283 14,531 (1,229) Interest expense, net (1,363) (1,433) (1,584) Income (loss) from continuing operations before income taxes 14,920 13,098 (2,813) Income tax (expense) benefit from continuing operations (3,659) (2,640) 741 Income (loss) from continuing operations 11,261 10,458 (2,072) Income from discontinued operations: Income 1,235 4,570 4,767 Gain on sale 17,675 — — Income tax expense (4,810) (919) (1,254) Net income $ 25,361 $ 14,109 $ 1,441 Fiscal Year Ended January 1, 2023 December 26, 2021 December 27, 2020 Revenues 100.0 % 100.0 % 100.0 % Cost of services 65.3 66.1 68.1 Gross Profit 34.7 33.9 31.9 Selling, general and administrative expenses 27.8 27.2 26.7 Gain on contingent consideration — (1.0) — Impairment losses — — 3.5 Depreciation and amortization 1.4 1.5 2.3 Operating income (loss) 5.5 6.1 (0.6) Interest expense, net (0.5) (0.6) (0.8) Income (loss) from continuing operations before income taxes 5.0 5.5 (1.4) Income tax (expense) benefit from continuing operations (1.2) (1.1) 0.4 Income (loss) from continuing operations 3.8 % 4.4 % (1.0) % 29 Fifty-three Week Fiscal Year Ended January 1, 2023 (Fiscal 2022) Compared with Fifty-two Week Fiscal Year Ended December 26, 2021 (Fiscal 2021) Revenues: Fiscal Year Ended January 1, 2023 December 26, 2021 (dollars in thousands) Revenues by Segment: Real Estate $ 121,093 40.6 % $ 92,018 38.5 % Professional 177,329 59.4 % 147,009 61.5 % Total Revenues $ 298,422 100.0 % $ 239,027 100.0 % Real Estate Revenues : Real Estate revenues increased approximately $29.1 million (31.6%). The increase was due to a 18.6% increase in billed hours, and a 11.0% increase in average bill rate. Professional Revenues : Professional revenues increased approximately $30.3 million (20.6%), primarily due to growth in the IT division of $27.6 million, and the 2022 Horn Solutions acquisition which contributed $1.4 million of new revenues, while Managed Services increased $3.9 million or 110.1%. Billed hours increased 7.9% coupled with an 11.8% increase in average bill rate. Gross Profit: Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs. Fiscal Year Ended January 1, 2023 December 26, 2021 (dollars in thousands) Gross Profit by Segment: Real Estate $ 47,695 46.1 % $ 34,969 43.2 % Professional 55,853 53.9 % 45,972 56.8 % Total Gross Profit $ 103,548 100.0 % $ 80,941 100.0 % Fiscal Year Ended Gross Profit Percentage by Segment: January 1, 2023 December 26, 2021 Real Estate 39.4 % 38.0 % Professional 31.5 % 31.3 % Company Gross Profit Percentage 34.7 % 33.9 % Overall, our gross profit increased approximately $22.6 million (27.9%). As a percentage of revenue, gross profit has increased to 34.7% from 33.9%, primarily due to higher gross profits across all our segments. We determine spread as the difference between bill rate and pay rate. Real Estate Gross Profit: Real Estate gross profit increased approximately $12.7 million (36.4%) consistent with the increase in revenue, and an 15.0% increase in average spread. 30 Professional Gross Profit: Professional gross profit increased approximately $9.9 million (21.5%) consistent with an increase in revenue, the Horn Solutions acquisition which provided gross profit of $0.6 million, and an overall increase of 12.6% in average spread. Selling, General and Administrative Expenses: Selling, general and administrative expenses ("SGA") as a percent of revenue increased 70 basis points to 27.9%. Total SGA increased $18.1 million (27.8%), primarily due to additional compensation generated from increased overall gross profit and the Horn Solutions acquisition, which were partially offset by the CARES ACT credit in 2021. The components of SGA expense are detailed in the following table: Fiscal Year Ended January 1, 2023 December 26, 2021 Amount % of Revenue Amount % of Revenue $ Change % Change (dollars in thousands) Compensation and related $ 64,782 21.7 % $ 53,332 22.5 % $ 11,450 21.5 % Advertising and recruitment 1,987 0.7 % 1,379 0.6 % 608 44.1 % Occupancy and office operations 2,773 0.9 % 3,128 1.3 % (355) (11.3) % Travel, meals and entertainment 1,044 0.3 % 389 0.2 % 655 168.4 % Software 5,751 1.9 % 2,538 1.2 % 3,213 126.6 % Liability insurance 991 0.3 % 740 0.3 % 251 33.9 % Professional fees 1,647 0.6 % 1,111 0.8 % 536 48.2 % Public company related costs 734 0.2 % 727 0.3 % 7 1.0 % Bad debt 315 0.1 % 145 0.1 % 170 117.2 % Share-based compensation 1,085 0.4 % 1,058 0.4 % 27 2.6 % Transaction fees 271 0.1 % 170 0.1 % 101 59.4 % Workers' compensation loss retention return (117) — % (348) (0.1) % 231 (66.4) % CARES Act credit — — % (2,083) (0.9) % 2,083 — % Other 1,948 0.7 % 2,829 0.5 % (881) (31.1) % Total $ 83,211 27.9 % $ 65,115 27.2 % $ 18,096 27.8 % Gain on contingent consideration: There were no contingent gains in Fiscal 2022. As a result of the certain business developments in Fiscal 2021, the Company recognized a $2.4 million gain on contingent consideration related to the 2019 LJK acquisition. Depreciation and Amortization: Depreciation and amortization charges increased $0.4 million (9.6%) primarily due to increases from the information technology improvement project and the Horn Solutions acquisition, which were offset by lower amortization related to the 2020 Edgerock and the 2019 LJK acquisitions. Interest Expense, net: Interest expense, net decreased $0.1 million (4.9%) primarily due to the pay down of the balance on the Term Loan in March 2022, which was partially offset by the New Term Loan starting in December 2022 and the higher average balance on the Revolving Facility. Income Taxes: Income tax expense increased $1.0 million primarily due to higher pre-tax 2022 income and a higher effective tax rate in Fiscal 2022, offset by a higher Work Opportunity Tax Credit in 2021. 31 Fifty-two Week Fiscal Year Ended December 26, 2021 (Fiscal 2021) Compared with Fifty-two Week Fiscal Year Ended December 27, 2020 (Fiscal 2020) Revenues: Fiscal Year Ended December 26, 2021 December 27, 2020 (dollars in thousands) Revenues by Segment: Real Estate $ 92,018 38.5 % $ 68,755 33.2 % Professional 147,009 61.5 % 138,370 66.8 % Total Revenues $ 239,027 100.0 % $ 207,125 100.0 % Real Estate Revenues : Real Estate revenues increased approximately $23.3 million (33.8%). The increase was due to a 20.1% increase in billed hours and a 11.0% increase in average bill rate. Professional Revenues : Professional revenues increased approximately $8.6 million (6.2%), primarily due to the 2020 EdgeRock acquisition which contributed fifty-two weeks of revenue in Fiscal 2021 vs. forty-seven weeks in Fiscal 2020, the 2021 Momentum acquisition which contributed $3.5 million of new revenues, an increase in permanent placements revenue of $1.2 million, and billed hours increased 5.5%. These increases were partially offset by a decrease in the IT division of approximately $11.6 million in revenue and a decrease of 0.2% in average bill rate. Gross Profit: Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs. Fiscal Year Ended December 26, 2021 December 27, 2020 (dollars in thousands) Gross Profit by Segment: Real Estate $ 34,969 43.2 % $ 25,813 39.1 % Professional 45,972 56.8 % 40,227 60.9 % Total Gross Profit $ 80,941 100.0 % $ 66,040 100.0 % Fiscal Year Ended December 26, 2021 December 27, 2020 Gross Profit Percentage by Segment: Real Estate 38.0 % 37.5 % Professional 31.3 % 29.1 % Company Gross Profit Percentage 33.9 % 31.9 % Overall, our gross profit increased approximately $14.9 million (22.6%). As a percentage of revenue, gross profit has increased to 33.9% from 31.9%, primarily due to higher gross profits across all our segments. We determine spread as the difference between bill rate and pay rate. 32 Real Estate Gross Profit: Real Estate gross profit increased approximately $9.1 million (35.5%) consistent with the increase in revenue, and an 11.6% increase in average spread. Professional Gross Profit: Professional gross profit increased approximately $5.8 million (14.3%) from the 2020 EdgeRock acquisition which contributed fifty-two weeks of gross profit in Fiscal 2021 vs. forty-seven weeks in Fiscal 2020, the Momentum acquisition which provided gross profit of $1.7 million, and an overall increase of 1.4% in average spread. These increases were partially offset by a decrease in the IT division of approximately $2.4 million in gross profit. Selling, General and Administrative Expenses: SGA expenses increased approximately $9.9 million (17.9%), primarily due to additional compensation generated from increased overall gross profit, from the EdgeRock acquisition with fifty-two weeks in Fiscal 2021 vs. forty-seven weeks in Fiscal 2020, and the Momentum acquisition. The components of SGA expense are detailed in the following table: Fiscal Year Ended December 26, 2021 December 27, 2020 Amount % of Revenue Amount % of Revenue $ Change % Change (dollars in thousands) Compensation and related $ 53,332 22.5 % $ 41,563 20.0 % $ 11,769 28.3 % Advertising and recruitment 1,379 0.6 % 1,552 1.0 % (173) (11.1) % Occupancy and office operations 3,128 1.3 % 3,456 2.0 % (328) (9.5) % Travel, meals and entertainment 389 0.2 % 321 — % 68 21.2 % Software 2,538 1.2 % 2,044 1.0 % 494 24.2 % Liability insurance 740 0.3 % 584 — % 156 26.7 % Professional fees 1,111 0.8 % 1,143 1.0 % (32) (2.8) % Public company related costs 727 0.3 % 691 — % 36 5.2 % Bad debt 145 0.1 % 344 — % (199) (57.8) % Share-based compensation 1,058 0.4 % 786 — % 272 34.6 % Transaction fees 170 0.1 % 615 — % (445) (72.4) % Workers' compensation loss retention return (348) (0.1) % (464) — % 116 (25.0) % CARES Act credit (2,083) (0.9) % — — % (2,083) — % Other 2,829 0.5 % 2,609 1.0 % 220 8.4 % Total $ 65,115 27.2 % $ 55,244 27.0 % $ 9,871 17.9 % Gain on contingent consideration: As a result of the certain business developments in Fiscal 2021, the Company recognized a $2.4 million gain on contingent consideration related to the 2019 LJK acquisition. Depreciation and Amortization: Depreciation and amortization charges decreased approximately $1.2 million (23.9%). The decrease in depreciation and amortization is primarily due to the Professional segment with a decrease related to the 2015 Vision Technology Services acquisition, which was partially offset by an increase related to the information technology improvement project. Impairment loss: As a result of the certain business developments in Fiscal 2020 and changes in the Company's long-term projections, the Company calculated the quantitative impairment test of the finance and accounting group using the relief from royalty method for the indefinite-lived intangible assets and residual method for the definite-lived intangible assets by asset group. In the Professional segment, the Company recognized a $3.7 million trade name impairment loss and a $3.5 million client partner list impairment loss in Fiscal 2020. Interest Expense, net: Interest expense, net decreased approximately $0.2 million (10)% primarily due to the lower average balance on the Revolving Facility, offset by an increase in interest income from our workers compensation loss retention program. 33 Income Taxes: Income tax expense increased $3.4 million primarily due to higher pre-tax 2021 income, intangible impairment losses in 2020, non-deductible transaction fees in 2020 related to the EdgeRock acquisition, and a higher Work Opportunity Tax Credit in 2021. Liquidity and Capital Resources Our working capital requirements are primarily driven by field talent payments, tax payments and client partner accounts receivable receipts. Since receipts from client partners lag payments to field talent, working capital requirements increase substantially in periods of growth. Our primary sources of liquidity are cash generated from operations and borrowings under our credit agreement lead by BMO Harris Bank, N.A. (“BMO”), that provides for a revolving credit facility maturing July 16, 2024 (the “Revolving Facility”). Our primary uses of cash are payments to field talent, team members, related payroll liabilities, operating expenses, capital expenditures, cash interest, cash taxes, dividends and contingent consideration and debt payments. We believe that the cash generated from operations, together with the borrowing availability under our Revolving Facility, will be sufficient to meet our normal working capital needs for at least the next twelve months, including investments made, and expenses incurred, in connection with opening new markets throughout the next year. Our ability to continue to fund these items may be affected by general economic, competitive and other factors, many of which are outside of our control. If our future cash flow from operations and other capital resources are insufficient to fund our liquidity needs, we may be forced to obtain additional debt or equity capital or refinance all or a portion of our debt. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and expansion plans, we may elect to pursue additional growth opportunities within the next year that could require additional debt or equity financing. If we are unable to secure additional financing at favorable terms in order to pursue such additional growth opportunities, our ability to pursue such opportunities could be materially adversely affected. A summary of our working capital, operating, investing and financing activities are shown in the following table: Fiscal Year Ended January 1, 2023 December 26, 2021 December 27, 2020 (dollars in thousands) Working capital from continuing operations $ 47,955 $ 25,851 $ 17,960 Net cash provided by (used in) continuing operations: Operating activities $ (3,300) $ 1,358 $ 19,680 Investing activities (8,898) (6,990) (24,078) Financing activities 15,934 473 1,890 Net change in cash and cash equivalents discontinued operations (3,848) 5,271 2,508 Net change in cash and cash equivalents $ (112) $ 112 $ — Operating Activities Cash used in 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 2022, net cash used in continuing operating activities was $3.3 million, a decrease of $4.7 million compared with $1.4 million net cash provided by continuing operating activities for Fiscal 2021. This decrease is primarily attributable to field talent and team member compensation disbursements including bonuses, commissions, and related taxes for services rendered in accrued payroll and expenses, and payments of deferred employer FICA for the CARES Act in other current liabilities. 34 During Fiscal 2021, net cash provided by continuing operating activities was $1.4 million, a decrease of $18.3 million compared with $19.7 million for Fiscal 2020. This decrease is primarily attributable to increased accounts receivable and payments on accrued payroll and expenses, which were partially offset by an increase in the accrual in other long-term liabilities from deferred employer FICA for the CARES Act in Fiscal 2020. During Fiscal 2020, net cash provided by continuing operating activities was $19.7 million, primarily attributable to the non-cash impact of intangible impairment losses, additional other long-term liabilities that includes the deferred employer FICA, and payments on accounts receivable, additional income taxes payable. Investing Activities Cash used in investing activities consists primarily of cash paid for businesses acquired, cash received for businesses sold, and capital expenditures. In Fiscal 2022, we received $30.7 million in connection with the sale of InStaff, we paid $33.9 million in connection with the Horn Solutions acquisition, and we made capital expenditures of $5.7 million mainly related to the the information technology improvement project and for software and computer equipment purchased in the ordinary course of business. In Fiscal 2021, we paid $3.8 million in connection with the Momentum acquisition and we made capital expenditures of $3.2 million mainly related to the information technology improvement project and for software and computer equipment purchased in the ordinary course of business. In Fiscal 2020, we paid net $22.0 million in connection with the 2020 EdgeRock and 2019 LJK acquisitions and we made capital expenditures of $2.1 million mainly related to the the information technology improvement project and for software and computer equipment purchased in the ordinary course of business. Financing Activities Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement, payment of dividends, and contingent consideration paid. For Fiscal 2022, we received $40.0 million on the issuance of the New Term Loan, we paid down $26.9 million on the Term Loan, as discussed below, we paid $6.3 million in cash dividends on our common stock, we paid $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed $9.8 million on our Revolving Facility for increased working capital needs. For Fiscal 2021, we borrowed $6.8 million on our Revolving Facility for increased working capital needs and to fund the Momentum acquisition, paid $4.6 million in cash dividends on our common stock, and paid down $2.1 million on the Term Loan, as defined below. For Fiscal 2020, we borrowed $22.5 million on our Term Loan, as defined below, to fund the EdgeRock acquisition and pay down the Revolving Facility, we reduced $14.4 million on our Revolving Facility, paid $5.2 million in cash dividends on our common stock, and paid down $1.1 million on the Term Loan. Credit Agreements On July 16, 2019, we entered into a Credit Agreement (the “Credit Agreement”), maturing July 16, 2024, led by BMO, as lead administrative agent, lender, letters of credit issuer, and swing line lender. The Credit Agreement provides for the Revolving Facility permitting us to borrow funds from time to time in an aggregate amount up to $35 million. The Credit Agreement also provided for a term loan commitment (the “Term Loan”) permitting us to borrow funds from time to time in an aggregate amount not to exceed $30 million with principal payable quarterly, based on an annual percentage of the original principal amount as defined in the Credit Agreement, all of which has been funded. We also had the option to request an increase in in the aggregate Term Loan by $40 million, which was done in connection with the Horn Solutions acquisition. The Credit Agreement bore interest either at the Base Rate plus the Applicable Margin or LIBOR plus the Applicable Margin through August 17, 2022 (as such terms are defined in the Credit Agreement). We pay an unused commitment fee on the daily average unused amount of Revolving Facility. On February 8, 2021, the Company borrowed $3.8 million on the Revolving Facility in conjunction with the closing of the Momentum acquisition. On March 21, 2022, the Company paid down the balance on the existing Term Loan and a portion of the Revolving Facility using the proceeds from the sale of InStaff (See “Note 4 - Discontinued Operations”). 35 On August 18, 2022, the Company entered into an amendment to the Credit Agreement (as amended, the “Amended Credit Agreement”) with BMO to temporarily increase the Revolving Facility to $60 million for a period of ninety days and change the interest rate component from LIBOR to the Secured Overnight Financing Rate (“SOFR”). In connection with the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”), we borrowed $40 million, as noted above, pursuant to a second amendment to the credit agreement (“Second Credit Amendment”). Our obligations under the Second Credit Amendment are secured by a first priority security interest in substantially all tangible and intangible property of the Company and its subsidiaries. The Second Credit Amendment bears interest either at the Base Rate plus the Applicable Margin or Adjusted Term SOFR plus the Applicable Margin (as such terms are defined in the Second Credit Amendment), with 2.5% of the original principal balance of the New Term Loan payable on the last business day of each quarter, beginning on March 31, 2023. The Second Credit Amendment contains customary affirmative and negative covenants. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio as defined in the Second Credit Amendment. We were in compliance with these covenants as of January 1, 2023. Contractual Obligations The following table summarizes our cash contractual obligations as of January 1, 2023. Payments due by period Total Less than 1 year 1–3 years 3–5 years More than 5 years (dollars in thousands) Long-term debt obligations $ 62,562 $ 4,000 $ 58,562 $ — $ — Contingent consideration 1,110 1,110 — — — Convertible note 4,368 — 4,368 — — Operating lease obligations 5,336 2,043 2,344 781 168 Contractual cash obligations $ 73,376 $ 7,153 $ 65,274 $ 781 $ 168 Off-Balance Sheet Arrangements Letter of Credit In March 2020, in conjunction with the 2020 EdgeRock acquisition, we entered into a standby letter of credit arrangement, which expires December 31, 2024, for purposes of protecting a lessor against default on lease payments. As of January 1, 2023, we had a maximum financial exposure from this standby letter of credit totaling $0.1 million, all of which is considered usage against our Revolving Facility. Critical Accounting Policies and Estimates We have identified the policies listed below as critical to our business and the understanding of our results of operations. For a detailed discussion of the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. Revenue Recognition We derive our revenues from continuing operations in Real Estate and Professional segments. We provide workforce solutions and placement services. Revenues are recognized when promised workforce solutions are delivered to client partners, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. We recognize revenue through the following types of services: workforce solutions, contingent placements, retained search placements and managed services. 36 Intangible Assets We hold intangible assets with indefinite and finite lives. Intangible assets with indefinite useful lives are not amortized. Intangible assets with finite useful lives are amortized over their respective estimated useful lives, ranging from three to ten years , based on a pattern in which the economic benefit of the respective intangible asset is realized. We capitalize purchased software and internal payroll costs directly incurred in the modification of software for internal use. Software maintenance and training costs are expensed in the period incurred. Goodwill Goodwill represents the difference between the enterprise value/cash paid less the fair value of all recognized net asset fair values including identifiable intangible asset values in a business combination. We review goodwill for impairment annually during the fourth quarter or whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. Income Taxes The current provision for income taxes represents estimated amounts payable or refundable on tax returns filed or to be filed for the year. We recognizes any penalties when necessary as part of selling, general and administrative expenses. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts are classified net as noncurrent in the consolidated balance sheets. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. When appropriate, we will record a valuation allowance against net deferred tax assets to offset future tax benefits that may not be realized. We follow the guidance of Accounting Standards Codification (“ASC”) Topic 740, Accounting for Uncertainty in Income Taxes. Recent Accounting Pronouncements For a discussion of recent accounting pronouncements and their potential effect on our results of operations and financial condition, refer to Note 2 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K.