BGSF, INC. 10-Q

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 and our Annual Report on Form 10-K for the fiscal year ended January 1, 2023. Comparative segment revenues and related financial information are discussed herein and are presented in Note 15 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 Quarterly Reports on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended January 1, 2023, for a description of important factors that could cause actual results to differ from expected results. Please also refer to Note 4- Discontinued Operations, to our Unaudited Consolidated Financial Statements. Our historical financial information may not be indicative of our future performance. Overview We provide consulting, managed services, and professional workforce solutions to a variety of industries through our various divisions in information technology (“IT”) , Finance & Accounting, Managed Services, and Real Estate (apartment communities and commercial buildings). On March 21, 2022, we sold substantially all of the assets and certain liabilities of InStaff to Sentech Engineering Services, Inc. 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. See “Note 4 — Discontinued Operations” of our unaudited consolidated financial statements. On December 12, 2022, we acquired substantially all of the assets, and assumed certain of the liabilities of Horn Solutions, Inc. and Horn Solutions Dallas, LLC (collectively “Horn Solutions”), which offers consulting, project loan staff, interim staff, direct hire, and managed services. At closing, we exercised the option to borrow $40 million in a second amendment to the Credit Agreement with BMO Harris Bank, N.A. (“BMO”) . See “Note 3 — Acquisitions” of our our unaudited consolidated financial statements. On April 24, 2023, we acquired substantially all of the assets and assumed certain of the liabilities of Arroyo Consulting, LLC (“Arroyo Consulting ” ), which is a nearshore and offshore workforce solutions firm that specializes in IT and software development with operations in the United States, Colombia, and India. At closing, $6.8 million of the closing price was paid with proceeds from our Credit Agreement with BMO. See “Note 3 — Acquisitions” of our our unaudited consolidated financial statements. We currently operate primarily within the United States of America in our Real Estate and Professional segments. Our Real Estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 37 states and D.C., via property management companies responsible for the apartment communities' and commercial buildings' day-to-day operations. Our Professional segment provides specialized talent and business consultants on a nationwide basis for IT, managed services, finance, accounting, legal, and human resources. The Professional segment operates through three divisions, IT, Managed Services, and Finance & Accounting. Our business normally experiences seasonal fluctuations. Our quarterly operating results are affected by the number of billing days in a quarter, as well as the seasonality of our client partners’ business. Demand for our Real Estate workforce solutions typically increase in the second quarter and is highest during the third quarter of the year due to the increased turns in multifamily units during the summer months when schools are not in session. Overall first quarter demand can be affected by adverse weather conditions in the winter months. In addition, our cost of services typically increases in the first quarter primarily due to the reset of payroll taxes. 26 Results of Operations The following tables summarize key components of our results 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 July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 (dollars in thousands) Revenues $ 80,800 $ 74,089 $ 156,116 $ 142,631 Cost of services 51,226 49,030 99,758 94,141 Gross profit 29,574 25,059 56,358 48,490 Selling, general and administrative expenses 22,584 19,898 45,796 39,614 Impairment losses — — 22,545 — Depreciation and amortization 1,940 922 3,696 1,821 Operating income (loss) 5,050 4,239 (15,679) 7,055 Interest expense, net (1,502) (69) (2,703) (343) Income (loss) from continuing operations before income taxes 3,548 4,170 (18,382) 6,712 Income tax (expense) benefit from continuing operations (944) (986) 4,520 (1,521) Income (loss) from continuing operations 2,604 3,184 (13,862) 5,191 Income from discontinued operations: Income — — — 1,235 (Loss) gain on sale — (8) — 17,266 Income tax expense — — — (4,716) Net income (loss) $ 2,604 $ 3,176 $ (13,862) $ 18,976 Thirteen Weeks Ended Twenty-six Weeks Ended July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Cost of services 63.4 % 66.2 % 63.9 % 66.0 % Gross profit 36.6 % 33.8 % 36.1 % 34.0 % Selling, general and administrative expenses 28.0 % 26.9 % 29.3 % 27.8 % Impairment losses — % — % 14.4 % — % Depreciation and amortization 2.4 % 1.2 % 2.4 % 1.3 % Operating income (loss) 6.3 % 5.7 % (10.0) % 4.9 % Interest expense, net (1.9) % (0.1) % (1.7) % (0.2) % Income (loss) from continuing operations before income taxes 4.4 % 5.6 % (11.8) % 4.7 % Income tax (expense) benefit from continuing operations (1.2) % (1.3) % 2.9 % (1.1) % Income (loss) from continuing operations 3.2 % 4.3 % (8.9) % 3.6 % 27 Thirteen Week Fiscal Period Ended July 2, 2023 (“Fiscal 2023”) Compared with Thirteen Week Fiscal Period Ended June 26, 2022 (“Fiscal 2022”) Revenues: Thirteen Weeks Ended July 2, 2023 June 26, 2022 (dollars in thousands) Revenues by segment: Real Estate $ 31,071 38.5 % $ 29,980 40.5 % Professional 49,729 61.5 % 44,109 59.5 % Total Revenues $ 80,800 100.0 % $ 74,089 100.0 % Real Estate Revenues : Real Estate revenues increased approximately $1.1 million (3.6%). The increase was primarily driven by an increase in average billing rates. Professional Revenues : Professional revenues were up $5.6 million (12.7%). Horn Solutions and Arroyo Consulting contributed a total of $10.5 million, while the remaining Professional business declined $4.9 million (11.0%) versus the prior year. Gross Profit: Gross profit represents revenues from workforce solutions less cost of services expenses, which consist of payroll, payroll taxes, payroll-related insurance, field talent costs, and reimbursable costs. Thirteen Weeks Ended July 2, 2023 June 26, 2022 (dollars in thousands) Gross Profit by segment: Real Estate $ 12,652 42.8 % $ 11,574 46.2 % Professional 16,922 57.2 % 13,485 53.8 % Total Gross Profit $ 29,574 100.0 % $ 25,059 100.0 % Thirteen Weeks Ended July 2, 2023 June 26, 2022 Gross Profit Percentage by segment: Real Estate 40.7 % 38.6 % Professional 34.0 % 30.6 % Company Gross Profit 36.6 % 33.8 % Total company gross profit increased approximately $4.5 million (18.0%). As a percentage of revenue, gross profit increased to 36.6% from 33.8%, with both segments contributing to the increase. We determine spread as the difference between bill rate and pay rate. Real Estate Gross Profit: Real Estate gross profit increased approximately $1.1 million (9.3%) driven by a 3.6% increase in revenue and gross profit margin expansion of 210 bps. Professional Gross Profit: Professional gross profit increased approximately $3.4 million (25.5%). Horn Solutions and Arroyo Consulting contributed a total of $4.5 million in gross profit, while the remaining Professional business decreased approximately $1.0 million (7.5%). 28 Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $2.7 million versus the prior year. While selling expenses are not separated from general and administrative expenses in the expense categories below, total selling expenses increased $2.6 million (approximately 96% of the $2.7 million increase) versus the prior year. Total selling expenses included $2.6 million related to Horn Solutions and Arroyo Consulting. Acquisition transaction fees increased $0.4 million and workers’ compensation loss retention return increased $0.4 million over the prior year quarter. Thirteen Weeks Ended July 2, 2023 June 26, 2022 Amount % of Revenue Amount % of Revenue $ Change % Change (dollars in thousands) Compensation and related $ 17,741 22 % $ 15,435 21 % $ 2,306 15 % Advertising and recruitment 605 1 % 488 1 % 117 1 % Occupancy and office operations 790 1 % 589 1 % 201 34 % Travel, meals and entertainment 398 1 % 238 — % 160 67 % Software 1,233 2 % 1,521 2 % (288) (19) % Liability insurance 272 — % 246 — % 26 11 % Professional fees 440 1 % 366 — % 74 20 % Public company related costs 223 — % 186 — % 37 20 % Bad debt 242 — % 82 — % 160 195 % Share-based compensation 75 — % 243 — % (168) (69) % Transaction fees 435 1 % 10 — % 425 — % Workers' compensation loss retention return (491) (1) % (117) — % (374) — % Other 619 1 % 611 1 % 8 1 % Total $ 22,582 28 % $ 19,898 27 % $ 2,684 13 % Depreciation and Amortization: Depreciation and amortization charges increased $1.0 million primarily due to amortization of intangible assets created by the Horn Solutions and Arroyo Consulting acquisitions. Interest Expense, net: Interest expense, net increased $1.4 million primarily due to higher debt related to the Horn Solutions and Arroyo Consulting acquisitions and higher interest rates. Income Tax: Income tax was consistent with prior year quarter primarily due to higher effective tax rates from greater state taxes which were offset by lower pre-tax income in Fiscal 2023. 29 Twenty-six Week Fiscal Period Ended July 2, 2023 (“Fiscal 2023”) Compared with Twenty-six Week Fiscal Period Ended June 26, 2022 (“Fiscal 2022”) Revenues: Twenty-six Weeks Ended July 2, 2023 June 26, 2022 (dollars in thousands) Revenues by segment: Real Estate $ 59,477 38.1 % $ 55,896 39.2 % Professional 96,639 61.9 % 86,735 60.8 % Total Revenues $ 156,116 100.0 % $ 142,631 100.0 % Real Estate Revenues : Real Estate revenues increased approximately $3.6 million (6.4%). The increase was primarily driven by an increase in average billing rates. Professional Revenues : Professional revenues increased approximately $9.9 million (11.4%), as new revenue from Horn Solutions and Arroyo Consulting contributed $17.3 million of new revenues offset by a $7.4 million decline in the core Professional segment. 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. Twenty-six Weeks Ended July 2, 2023 June 26, 2022 (dollars in thousands) Gross Profit by segment: Real Estate $ 23,999 42.6 % $ 21,545 44.4 % Professional 32,359 57.4 % 26,945 55.6 % Total Gross Profit $ 56,358 100.0 % $ 48,490 100.0 % Twenty-six Weeks Ended July 2, 2023 June 26, 2022 Gross Profit Percentage by segment: Real Estate 40.3 % 38.5 % Professional 33.5 % 31.1 % Company Gross Profit 36.1 % 34.0 % Overall, our gross profit increased approximately $7.9 million (16.2%). As a percentage of revenue, gross profit has increased to 36.1% from 34.0%, with both segments contributing to the increase. We determine spread as the difference between bill rate and pay rate. Real Estate Gross Profit: Real Estate gross profit increased approximately $2.5 million (11.4%) driven by 6.4% increase in revenue and gross profit margin expansion of 190 bps. Professional Gross Profit: Professional gross profit increased approximately $5.4 million (20.1%). Horn Solutions and Arroyo Consulting contributed a total of $7.4 million in gross profit offset by a $2.0 million (7.5%) decline in the core Professional segment. 30 Selling, General and Administrative Expenses: Selling, general and administrative expenses increased $6.2 million versus the prior year. While selling expenses are not separated from general and administrative expenses in the expense categories below, total selling expenses increased $5.4 million (approximately 87% of the $6.2 million increase) versus the prior year. Total selling expense increase included $4.9 million related to Horn Solutions and Arroyo Consulting. Acquisition transaction fees increased $0.8 million and workers’ compensation loss retention return increased $0.4 million over the prior year quarter. Twenty-six Weeks Ended July 2, 2023 June 26, 2022 Amount % of Revenue Amount % of Revenue $ Change % Change (dollars in thousands) Compensation and related $ 35,692 23 % $ 30,839 22 % $ 4,853 16 % Advertising and recruitment 1,198 1 % 971 1 % 228 23 % Occupancy and office operations 1,582 1 % 1,387 1 % 196 14 % Travel, meals and entertainment 729 1 % 427 — % 302 71 % Software 2,718 2 % 2,636 2 % 82 3 % Liability insurance 538 — % 486 — % 52 11 % Professional fees 898 1 % 979 1 % (82) (8) % Public company related costs 408 — % 360 — % 48 13 % Bad debt 321 — % 133 — % 188 141 % Share-based compensation 436 — % 454 — % (18) (4) % Transaction Fees 753 1 % — — % 753 — % Workers’ compensation loss retention return (491) — % (117) — % (374) 320 % Other 1,014 1 % 1,059 1 % (46) (4) % Total $ 45,796 29 % $ 39,614 28 % $ 6,182 16 % Impairment losses: At the February 2023 Board of Directors meeting, managements's plan to rebrand as BGSF was approved, which eliminated the use of various trade names. The decision to rebrand created an impairment of $22.5 million in trade names, which were written-off during Fiscal 2023. Depreciation and Amortization: Depreciation and amortization charges increased approximately $1.9 million (103.0%). The increase in depreciation and amortization is primarily due to the amortization of intangible assets related to the Horn Solutions and Arroyo Consulting acquisitions. Interest Expense, net: Interest expense, net increased approximately $2.4 million primarily due to the increased debt balances related to the Horn Solutions and Arroyo Consulting acquisitions and higher interest rates. Income Tax Expense: We recorded a tax benefit of approximately $4.5 million primarily due to impairments losses on the trade names in the first quarter versus a tax expense of $1.5 million in 2022. 31 Use of Non-GAAP Financial Measures We present Adjusted EBITDA (defined below), a measure that is not in accordance with accounting principles generally accepted in the United States of America (“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 accounting principles generally accepted in the United States of America (“GAAP”) can provide alone. Our board and management also use Adjusted EBITDA as one of the primary methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis actual results against such expectations, and as a performance evaluation metric in determining achievement of certain compensation programs and plans for our management. In addition, the financial covenants in our credit agreement are based on EBITDA, as defined in the credit agreement. We define “Adjusted EBITDA” as earnings before interest expense, income taxes, depreciation and amortization expense, impairment losses, transaction fees, and certain non-cash expenses such as share-based compensation expense. Omitting interest, taxes, and the other items provides a financial measure that facilitates comparisons of our results of operations with those of companies having different capital structures. Since the levels of indebtedness and tax structures that other companies have are different from ours, we omit these amounts to facilitate investors’ ability to make these comparisons. Similarly, we omit depreciation and amortization because other companies may employ a greater or lesser amount of property and intangible assets. We also believe that investors, analysts and other interested parties view our ability to generate Adjusted EBITDA as an important measure of our operating performance and that of other companies in our industry. Adjusted EBITDA should not be considered as an alternative to net income (loss) from continuing operations 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 (loss) from continuing operations 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 (loss) from continuing operations to Adjusted EBITDA are either (i) non-cash items or (ii) items that management does not consider in assessing our on-going operating performance. In the case of the non-cash items, management believes that investors may find it useful to assess our comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation, amortization and other non-cash charges and more reflective of other factors that affect operating performance. In the case of the other items that management does not consider in assessing our on-going operating performance, management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact may not reflect ongoing operating performance. 32 Thirteen Weeks Ended Twenty-six Weeks Ended Trailing Twelve Months Ended July 2, 2023 June 26, 2022 July 2, 2023 June 26, 2022 July 2, 2023 (dollars in thousands) Income (loss) from continuing operations $ 2,604 $ 3,184 $ (13,862) $ 5,191 $ (7,481) Income tax expense (benefit) from continuing operations 944 986 (4,520) 1,521 (2,286) Interest expense, net 1,502 69 2,703 343 3,772 Operating income (loss) 5,050 4,239 (15,679) 7,055 (5,995) Depreciation and amortization 1,940 922 3,696 1,821 5,929 Impairment losses — — 22,545 — 22,545 Share-based compensation 75 243 436 454 1,067 Transaction fees 435 — 753 — 1,025 Adjusted EBITDA from continuing operations $ 7,500 $ 5,404 $ 11,751 $ 9,330 $ 24,571 Adjusted EBITDA % of revenue 9.3 % 7.3 % 7.5 % 6.5 % 7.9 % 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 amended credit agreement with 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. 33 A summary of our working capital, operating, investing and financing activities are shown in the following table: July 2, 2023 January 1, 2023 (dollars in thousands) Working capital $ 40,753 $ 47,955 Twenty-six Weeks Ended July 2, 2023 June 26, 2022 (dollars in thousands) Net cash provided by (used in) continuing operations: Operating activities $ 12,549 $ 1,217 Investing activities (8,230) 26,775 Financing activities (3,659) (25,760) Net change in cash and cash equivalents discontinued operations — (2,299) Net change in cash and cash equivalents $ 660 $ (67) Operating Activities Cash provided by operating activities consists of net income (loss)adjusted for non-cash items, including depreciation and amortization, share-based compensation expense, interest expense, impairment losses, and the effect of working capital changes. The primary drivers of cash inflows and outflows are accounts receivable, accrued payroll and expenses, and other current assets. During Fiscal 2023, net cash provided by continuing operating activities was $12.5 million, an increase of $11.3 million compared with net cash provided by continuing operating activities of $1.2 million for Fiscal 2022. This increase is primarily attributable to payments received on account receivable, Sentech deferred consideration received on other current assets, partially offset by decreased payments in accrued payroll and expenses. 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 2023, we paid $6.8 million for the acquisition of Arroyo Consulting and we made capital expenditures of $1.5 million primarily related to continued information technology improvements. In Fiscal 2022, we received $30.3 million in connection to the sale of InStaff and we made capital expenditures of $3.5 million mainly related to the information technology improvement project. Financing Activities Cash flows from financing activities consisted principally of borrowings and payments under our credit agreement and payment of dividends. For Fiscal 2023, we disbursed $3.2 million in cash dividends on our common stock, we paid down $2.0 million on the Term Loan, we made payments of $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed our Revolving Facility $2.4 million for increased operating needs. For Fiscal 2022, we paid down $26.9 million on the Term Loan, we disbursed $3.1 million in cash dividends on our common stock, we made payments of $1.1 million of contingent consideration related to the Momentum acquisition, and borrowed $4.9 million on our Revolving Facility for increased working capital needs. 34 Credit Agreements On July 16, 2019, we entered into a Credit Agreement, as amended (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 $35.0 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 $30.0 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 and repaid. We also had the option to request an increase in the aggregate Term Loan by $40.0 million, which was done in connection with the Horn Solutions acquisition. Our obligations under the Second Credit Amendment are secured by a first priority security interest in substantially all our tangible and intangible property. 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 August 18, 2022, we entered into an amendment to the Credit Agreement with BMO, which changed the interest rate component from LIBOR to the Secured Overnight Financing Rate (“SOFR”), plus the Applicable Margin (as such terms are defined in the amended credit agreement). In connection with the Horn Solutions acquisition on December 12, 2022 (See “Note 3 - Acquisitions”), we exercised the option to borrow $40.0 million, as noted above, pursuant to a second amendment to the Credit Agreement (“Second Credit Amendment”). The Second Credit Amendment requires 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. We are subject to a maximum Leverage Ratio and a minimum Fixed Charge Coverage Ratio (as such terms are defined in the amended Second Credit Amendment). On April 24, 2023, in connection with the acquisition of Arroyo Consulting, we entered into a Third Amendment to the Credit Agreement (“Third Credit Amendment”) with BMO. The Third Credit Amendment revised language to permit an acquisition of a foreign entity under certain circumstances and modified the terms of permitted distributions and guarantors. On May 19, 2023, we entered into a Fourth Amendment to the Credit Agreement (“Fourth Credit Amendment”) and increased the Revolving Facility by $6.0 million to an aggregate amount up to $41.0 million. We were in compliance with the customary affirmative and negative covenants as of July 2, 2023. Off-Balance Sheet Arrangements Letter of Credit In March 2020, in conjunction with the 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 July 2, 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. 35 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 January 1, 2023 for a more detailed discussion of our critical accounting policies. As a result of the economic uncertainty, we may need to make necessary changes to accounting policy judgments and estimates over time, which could result in meaningful impacts to our financial statements in future periods. Actual results and outcomes may differ from our estimates and assumptions. The current inflationary environment and related interest rate impacts continue to have significant adverse impact on the economy and market conditions. These factors may impact labor markets by reducing demand for our workforce solutions, increase early terminations, or diminish projects. As a result, our business, financial condition and results of operations may be negatively affected, and could increase our cost of borrowing. Revenue Recognition We derive our revenues from continuing operations in Real Estate and Professional segments. We provide workforce solutions, placement services, and managed 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. 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. 36 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 January 1, 2023.