PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Years Ended December 31,
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2016
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2015
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2014
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Cash flows from operating activities:
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Net income (loss)
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$
|
905
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$
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(3,226
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)
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$
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(7,526
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)
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Adjustments to reconcile net income (loss) to net cash provided by operating activities:
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Depreciation and amortization
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6,879
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|
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7,810
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9,747
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Amortization of deferred loan costs
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60
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|
|
20
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|
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104
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|
Stock-based compensation expense
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|
5,123
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|
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3,926
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|
|
4,532
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|
Foreign currency transaction losses on short-term intercompany balances
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84
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|
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2,165
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|
|
2,003
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Deferred income taxes
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|
(861
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)
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|
(1,112
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)
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|
1,566
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|
Other loss from sale of assets
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|
22
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|
|
1,191
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|
|
57
|
|
Changes in operating assets and liabilities, net of business acquisitions:
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Restricted cash
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|
1
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|
|
5
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|
|
4
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Billed receivables
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(3,339
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)
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4,331
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(6,351
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)
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Unbilled receivables
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(509
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)
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1,305
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|
|
7,278
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|
Prepaid expenses and other current assets
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(1,506
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)
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|
705
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|
|
1,575
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Other assets
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(65
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)
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—
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|
|
5
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|
Accounts payable and accrued expenses
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1,218
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|
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(1,949
|
)
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(3,432
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)
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Accrued payroll and related expenses
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2,606
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(3,595
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)
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|
536
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Refund liabilities
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|
67
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|
|
2,389
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(1,297
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)
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Deferred revenue
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(5
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)
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|
(784
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)
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|
720
|
|
Noncurrent compensation obligations
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—
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|
|
—
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|
414
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Other long-term liabilities
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(562
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)
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|
272
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|
|
112
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Net cash provided by operating activities
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10,118
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13,453
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10,047
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Cash flows from investing activities:
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Business acquisition, net of cash acquired
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(3,669
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)
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(520
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)
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—
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Business divestiture
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—
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783
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1,100
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Purchases of property and equipment, net of disposal proceeds
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(5,887
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)
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(4,482
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)
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(4,709
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)
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Net cash used in investing activities
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(9,556
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)
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(4,219
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)
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(3,609
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)
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Cash flows from financing activities:
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Payments for deferred loan costs
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—
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(100
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)
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(104
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)
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Payments of deferred acquisition consideration
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—
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|
|
—
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|
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(2,208
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)
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Proceeds from term loan
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3,600
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|
|
—
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|
|
—
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Repurchase of common stock
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(3,772
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)
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(18,071
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)
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(22,685
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)
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Restricted stock repurchased from employees for withholding taxes
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(218
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)
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(312
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)
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(568
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)
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Proceeds from option exercises
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326
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|
|
91
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|
|
2,823
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Net cash used in financing activities
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(64
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)
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(18,392
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)
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(22,742
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)
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Effect of exchange rates on cash and cash equivalents
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103
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(1,455
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)
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(1,661
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)
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Net increase (decrease) in cash and cash equivalents
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601
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(10,613
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)
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(17,965
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)
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Cash and cash equivalents at beginning of period
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15,122
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25,735
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43,700
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Cash and cash equivalents at end of period
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$
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15,723
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|
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$
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15,122
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|
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$
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25,735
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|
|
|
|
|
|
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Supplemental disclosure of cash flow information:
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|
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Cash paid during the period for interest
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$
|
60
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|
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$
|
63
|
|
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$
|
132
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|
Cash paid during the period for income taxes, net of refunds received
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$
|
1,407
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$
|
1,085
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|
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$
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3,892
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See accompanying Notes to Consolidated Financial Statements.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
(a) Description of Business and Basis of Presentation
Description of Business
The principal business of PRGX Global, Inc. and subsidiaries is providing recovery audit services to large businesses and government agencies having numerous payment transactions. PRGX also provides services adjacent to recovery audit services, including supplier information management ("SIM"), data transformation, spend analytics and associated advisory services, to a similar client base. These businesses include, but are not limited to:
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•
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retailers such as discount, department, specialty, grocery and drug stores, and wholesalers who sell to these retailers;
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•
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business enterprises other than retailers such as manufacturers, financial services firms, pharmaceutical companies, and resource companies such as oil and gas companies; and
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•
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federal and state government agencies.
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Except as otherwise indicated or unless the context otherwise requires, “PRGX,” “we,” “us,” “our” and the “Company” refer to PRGX Global, Inc. and its subsidiaries. PRGX currently provides services to clients in over
30
countries across a multitude of industries.
Basis of Presentation
During the fourth quarter of 2015 we discontinued the Healthcare Claims Recovery Audit ("HCRA") business. The results of our continuing and discontinued operations for the years ended December 31, 2016, 2015 and 2014 are presented in accordance with ASC 205-20,
Presentation of Financial Statements - Discontinued Operations
.
The consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). Actual results could differ from those estimates.
(b) Revenue Recognition, Billed and Unbilled Receivables, and Refund Liabilities
We base our revenue on specific contracts with our clients. These contracts generally specify: (a) time periods covered by the audit; (b) nature and extent of audit services we are to provide; (c) the client’s duties in assisting and cooperating with us; and (d) fees payable to us, generally expressed as a specified percentage of the amounts recovered by the client resulting from overpayment claims identified. Clients generally recover claims either by taking credits against outstanding payables or future purchases from the involved vendors, or receiving refund checks directly from those vendors. The manner in which a claim is recovered by a client often is dictated by industry practice. In addition, many clients establish specific procedural guidelines that we must satisfy prior to submitting claims for client approval, and these guidelines are unique to each client. For some services we provide, we earn our compensation in the form of a fixed fee, a fee per hour, or a fee per other unit of service.
We generally recognize revenue for a contractually specified percentage of amounts recovered when we have determined that our clients have received economic value (generally through credits taken against existing accounts payable due to the involved vendors or refund checks received from those vendors) and when we have met the following criteria: (a) persuasive evidence of an arrangement exists; (b) services have been rendered; (c) the fee billed to the client is fixed or determinable; and (d) collectability is reasonably assured. In certain limited circumstances, we will invoice a client prior to meeting all four of these criteria; in such cases, we defer the revenue until we meet all of the criteria. Additionally, for purposes of determining appropriate timing of recognition and for internal control purposes, we rely on customary business practices and processes for documenting that we have met the criteria described in (a) through (d) above. Such customary business practices and processes may vary significantly by client. On occasion, it is possible that a transaction has met all of the revenue recognition criteria described above but we do not recognize revenue, unless we can otherwise determine that criteria (a) through (d) above have been met, because our customary business practices and processes specific to that client have not been completed.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Historically, there has been a certain amount of revenue with respect to which, even though we had met the requirements of our revenue recognition policy, our clients’ vendors ultimately have rejected the claims underlying the revenue. In that case, our clients may request a refund or offset of such amount even though we may have collected fees. We record any such refunds as a reduction of revenue. We provide refund liabilities for these reductions in the economic value previously received by our clients with respect to vendor claims we identified and for which we previously have recognized revenue. We compute an estimate of our refund liabilities at any given time based on actual historical refund data.
Billed receivables are stated at the amount we plan to collect and do not bear interest. We make ongoing estimates relating to the collectibility of our billed receivables and maintain a reserve for estimated losses resulting from the inability of our clients to meet their financial obligations to us. This reserve is primarily based on the level of past-due accounts based on the contractual terms of the receivables, our history of write-offs, and our relationships with, and the economic status of, our clients.
Unbilled receivables relate to claims for which clients have received economic value but for which we contractually have agreed not to submit an invoice to the clients at such time. Unbilled receivables arise when a portion of our fee is deferred at the time of the initial invoice. At a later date (which can be up to a year after original invoice, and at other times a year after completion of the audit period), we invoice the unbilled receivable amount. Notwithstanding the deferred due date, our clients acknowledge that we have earned this unbilled receivable at the time of the original invoice, but have agreed to defer billing the client for the related services.
We record periodic changes in unbilled receivables and refund liabilities as adjustments to revenue.
We derive a relatively small portion of revenue on a “fee-for-service” basis whereby billing is based upon a fixed fee, a fee per hour, or a fee per other unit of service. We recognize revenue for these types of services as we provide and invoice for them, and when criteria (a) through (d) as set forth above are met.
(c) Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less from date of purchase. We place our temporary cash investments with high credit quality financial institutions. At times, certain investments may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit or otherwise may not be covered by FDIC insurance. Some of our cash and cash equivalents are held at banks in jurisdictions outside the U.S. that have restrictions on transferring such assets outside of these countries on a temporary or permanent basis. Such restricted net assets are not significant in comparison to our consolidated net assets.
The
$15.7 million
in cash and cash equivalents as of December 31, 2016 includes
$4.1 million
held in the U.S.,
$1.9 million
held in Canada, and
$9.7 million
held in other foreign jurisdictions, primarily in the United Kingdom, Australia, New Zealand, Mexico and Brazil. Our cash and cash equivalents included short-term investments of approximately
$2.2 million
as of
December 31, 2016
and
$4.5 million
as of
December 31, 2015
, of which approximately
$2.2 million
and
$3.2 million
, respectively, were held at banks outside of the United States, primarily in Brazil and Canada.
(d) Fair Value of Financial Instruments
We state cash equivalents at cost, which approximates fair market value. The carrying values for receivables from clients, unbilled receivables, accounts payable, deferred revenue and other accrued liabilities reasonably approximate fair market value due to the nature of the financial instrument and the short term maturity of these items.
We record bank debt, if any, as of the period end date based on the effective borrowing rate and repayment terms when originated. As of December 31, 2016, we had
$3.6 million
in bank debt outstanding, and we had
no
bank debt outstanding as of December 31, 2015. We believe the carrying value of the bank debt approximates its fair value. We considered the factors used in determining the fair value of this debt to be Level 3 inputs (significant unobservable inputs).
We had
$4.0 million
of business acquisition obligations as of December 31, 2016, and
no
such obligation as of December 31, 2015. Our business acquisition obligations represent the fair value of deferred consideration and earn-out payments estimated to be due as of the date for which we recorded these amounts. We determine the preliminary estimated fair values based on our projections of future revenue and profits or other factors used in the calculation of the ultimate payment to be made. The discount rate that we use to value the liability is based on specific business risk, cost of capital, and other factors. We consider these factors to be Level 3 inputs (significant unobservable inputs).
We state certain assets at fair value on a nonrecurring basis as required by accounting principles generally accepted in the United States of America. Generally, these assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(e) Property and Equipment
We report property and equipment at cost or estimated fair value at acquisition date and depreciate them over their estimated useful lives using the straight-line method. Our useful lives for fixed assets are
three
years for computer laptops,
four
years for desktops,
five
years for IT server, storage and network equipment,
five
years for furniture and fixtures and
three
years for purchased software. We amortize leasehold improvements using the straight-line method over the shorter of the lease term or
ten
years. Depreciation expense from continuing operations was
$5.0 million
in
2016
,
$5.3 million
in
2015
and
$6.0 million
in
2014
.
We review the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, we will recognize an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset.
No
impairment charges were necessary in the three years ended
December 31, 2016
.
(f) Software Development Costs
We capitalize a portion of the costs we incur related to our internal development of software that we use in our operations and amortize these costs using the straight-line method over the expected useful lives of
three
to
seven
years.
We also capitalize a portion of the costs we incur related to our internal development of software that we intend to market to others. We amortize these costs over the products’ estimated economic lives, which typically are
three
years, beginning when the underlying products are available for general release to clients. We review the carrying value of capitalized software development costs for impairment whenever events and circumstances indicate that the carrying value of the asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, we will recognize an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset.
We consider software development activities to be research and development costs and expense them as incurred. However, we capitalize the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed or that will be used in our operations beginning when technological feasibility has been established. Research and development costs from continuing operations, including the amortization of amounts previously capitalized, were
$3.5 million
in
2016
,
$3.0 million
in
2015
and
$3.1 million
in
2014
.
(g) Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair market value of net identifiable assets of acquired businesses. We evaluate the recoverability of goodwill and other intangible assets in accordance with ASC 350,
Intangibles—Goodwill and Other
, in the fourth quarter of each year or sooner if events or changes in circumstances indicate that the carrying amount may exceed its fair value. This evaluation includes a preliminary assessment of qualitative factors to determine if it is necessary to perform a two-step impairment testing process. The first step identifies potential impairments by comparing the fair value of the reporting unit with its carrying value, including goodwill. If the calculated fair value of a reporting unit exceeds the carrying value, goodwill is not impaired, and the second step is not necessary. If the carrying value of a reporting unit exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying value. If the fair value is less than the carrying value, we would record an impairment charge.
We are not required to calculate the fair value of our reporting units that hold goodwill unless we determine that it is more likely than not that the fair value of these reporting units is less than their carrying values. In this analysis, we consider a number of factors, including changes in our legal, business and regulatory climates, changes in competition or key personnel, macroeconomic factors impacting our company or our clients, our recent financial performance and expectations of future performance and other pertinent factors. Based on these analyses, we determined that it was not necessary for us to perform the two-step process. We last used independent business valuation professionals to estimate fair value in the fourth quarter of 2010 and determined that fair value exceeded carrying value for all relevant reporting units.
No
impairment charges were necessary based on our internal assessments in the three years ended
December 31, 2016
.
(h) Direct Expenses and Deferred Costs
We typically expense direct expenses that we incur during the course of recovery audit and delivery of Adjacent Services offerings as incurred. For certain implementation and set-up costs associated with our “fee for service” revenue that we earn over an extended period of time, we defer the related direct and incremental costs and recognize them as expenses over the life of the underlying contract.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(i) Income Taxes
We account for income taxes under the asset and liability method. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. We measure deferred tax assets and liabilities using enacted tax rates we expect to apply to taxable income in the years in which we expect to recover or settle those temporary differences. We recognize the effect on the deferred tax assets and liabilities of a change in tax rates in income in the period that includes the enactment date.
We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In determining the amount of valuation allowance to record, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods and the implementation of tax planning strategies. Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative losses in recent years are the most compelling form of negative evidence we considered in this determination.
We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. In accordance with FASB ASC 740, our policy for recording interest and penalties associated with tax positions is to record such items as a component of income before income taxes. A number of years may elapse before a particular tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments also varies by tax jurisdictions.
(j) Foreign Currency
We use the local currency as the functional currency in the majority of the countries in which we conduct business outside of the United States. We translate the assets and liabilities denominated in foreign currencies into U.S. dollars at the current rates of exchange at the balance sheet date. We include the translation gains and losses as a separate component of shareholders’ equity and in the determination of comprehensive income (loss). We translate revenue and expenses in foreign currencies at the weighted average exchange rates for the period. We separately state the foreign currency transaction gains and losses on short-term intercompany balances in the Consolidated Statements of Operations. We include all other realized and unrealized foreign currency transaction gains (losses) in “Selling, general and administrative expenses.”
(k) Earnings (Loss) Per Common Share
We compute basic earnings (loss) per common share by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. We compute diluted earnings (loss) per common share by dividing net income (loss) available to common shareholders by the sum of (1) the weighted-average number of shares of common stock outstanding during the period, (2) the dilutive effect of the assumed exercise of stock options using the treasury stock method, and (3) the dilutive effect of other potentially dilutive securities. We exclude the potential dilutive effect of stock options and convertible instruments from the determination of diluted earnings (loss) per common share if the effect of including them would be antidilutive.
(l) Stock-Based Compensation
We account for awards of equity instruments issued to employees and directors under the fair value method of accounting and recognize such amounts in our Consolidated Statements of Operations. We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our Consolidated Statements of Operations using the straight-line method over the service period over which we expect the awards to vest. We recognize compensation costs for awards with performance conditions based on the probable outcome of the performance conditions. We accrue compensation cost if we believe it is probable that the performance condition(s) will be achieved and do not accrue compensation cost if we believe it is not probable that the performance condition(s) will be achieved. In the event that it becomes probable that performance condition(s) will no longer be achieved, we reverse all of the previously recognized compensation expense in the period such a determination is made.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We estimate the fair value of all time-vested options as of the date of grant using the Black-Scholes option valuation model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility, which we calculate based on the historical volatility of our common stock. We use a risk-free interest rate, based on the U.S. Treasury instruments in effect at the time of the grant, for the period comparable to the expected term of the option. We use the “simplified” method in estimating the expected term of options as we have concluded that our historical share option exercise experience is a less than reasonable basis upon which to estimate the expected term for our grants.
We estimate the fair value of nonvested stock awards (restricted stock and restricted stock units) as being equal to the market value of the common stock on the date of the award. We classify our share-based payments as either liability-classified awards or as equity-classified awards. We remeasure liability-classified awards to fair value at each balance sheet date until the award is settled. We measure equity-classified awards at their grant date fair value and do not subsequently remeasure them. We have classified our share-based payments which are settled in our common stock as equity-classified awards and our share-based payments that are settled in cash as liability-classified awards. Compensation costs related to equity-classified awards generally are equal to the fair value of the award at grant-date amortized over the vesting period of the award. The liability for liability-classified awards generally is equal to the fair value of the award as of the balance sheet date multiplied by the percentage vested at the time. We record the change in the liability amount from one balance sheet date to another to compensation expense.
(m) Comprehensive Income (Loss) and Accumulated Other Comprehensive Income
Consolidated comprehensive income (loss) consists of consolidated net income (loss) and foreign currency translation adjustments. We present the calculation of consolidated comprehensive income (loss) in the accompanying Consolidated Statements of Comprehensive Income (Loss). No amounts have been reclassified out of Accumulated Other Comprehensive Income during the periods presented in our consolidated financial statements.
(n) Segment Reporting
We report our operating segment information in
three
segments: Recovery Audit Services – Americas; Recovery Audit Services – Europe/Asia-Pacific and Adjacent Services. We include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to our
three
operating segments in Corporate Support. Our business segments reflect the internal reporting that our Chief Executive Officer, who is our chief operating decision maker, uses for the purpose of making decisions about allocating resources and assessing performance. Our management, including our Chief Executive Officer, uses what we internally refer to as “Adjusted EBITDA” as the primary measure of profit or loss for purposes of assessing the operating performance of all operating segments. We define Adjusted EBITDA as earnings from continuing operations before interest, taxes, depreciation and amortization (“EBITDA”) as adjusted for unusual and other significant items that management views as distorting the operating results of the various segments from period to period.
EBITDA and Adjusted EBITDA are not financial measures determined in accordance with GAAP. Such non-GAAP financial measures do not measure the profit or loss of the reportable segments in accordance with GAAP. Given that we use Adjusted EBITDA as our primary measure of segment performance, GAAP rules on segment reporting require that we include this non-GAAP measure in our discussion of our operating segments. We also must reconcile Adjusted EBITDA to our operating results presented on a GAAP basis. We provide this reconciliation in
Note 2
to these consolidated financial statements along with other information about our reportable segments. We do not intend the reconciling items to be, nor should they be, interpreted as non-recurring or extraordinary, or in any manner be deemed as adjustments made in accordance with GAAP. Because Adjusted EBITDA is not a financial measure determined in accordance with GAAP, it may not be comparable to other similarly titled measures of other companies.
(o) Reclassification of Prior Year Balance Sheet
Certain reclassifications have been made in the prior year in order to conform to the current year presentation.
(p) New Accounting Standards
A summary of the new accounting standards issued by the Financial Accounting Standards Board (“FASB”) and included in the Accounting Standards Codification (“ASC”) that apply to us is set forth below.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
FASB ASC Update No. 2016-09
- In March 2016, the FASB issued Accounting Standards Update 2016-09, Stock Compensation (Topic 718). The standard requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The standard also allows for the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the standard allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. The standard became effective for the Company beginning January 1, 2017. The Company does not believe that the adoption of this standard will have a material effect on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
FASB ASC Update No. 2016-05
- In March 2016, the FASB issued Accounting Standards Update 2016-05, Derivatives and Hedging (Topic 815). The standard clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The standard will become effective for the Company beginning January 1, 2018. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
FASB ASC Update No. 2016-02
- In February 2016, the FASB issued Accounting Standards Update 2016-02,
Leases (Topic 842).
The standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. The standard requires lessors to classify leases as either sales-type, finance or operating. A sales-type lease occurs if the lessor transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. The standard will become effective for the Company beginning January 1, 2019. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
In May 2014, the FASB issued an accounting standards update with new guidance on recognizing revenue from contracts with customers. The standards update outlines a single comprehensive model for entities to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses and determining if a company is the principal or agent in a revenue arrangement. In August 2015, the FASB deferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. We have substantially completed our evaluation of significant contracts and are currently assessing the impact of adopting the standards update on our consolidated financial statements. We will continue our evaluation of the standards update through the date of adoption.
(2) OPERATING SEGMENTS AND RELATED INFORMATION
We conduct our operations through
three
reportable segments:
Recovery Audit Services – Americas
represents recovery audit services (other than HCRA services) provided in the United States of America (“U.S.”), Canada and Latin America.
Recovery Audit Services – Europe/Asia-Pacific
represents recovery audit services provided in Europe, Asia and the Pacific region.
Adjacent Services
represents data transformation, spend analytics, PRGX OPTIX and SIM services, and associated advisory services.
We include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the
three
reportable segments in
Corporate Support
.
During the fourth quarter of 2015, PRGX entered into agreements with third parties to fulfill its Medicare recovery audit contractor ("RAC") program subcontract obligations to audit Medicare payments and provide support for claims appeals and assigned its remaining Medicaid contract to another party. The Company will continue to incur certain expenses while the current Medicare RAC contracts are still in effect. As part of discontinuing the HCRA business, the Company increased its accrual for outstanding Medicare RAC appeals liability by approximately
$2.1 million
. The HCRA services business has been reported as Discontinued Operations in accordance with US GAAP.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Discontinued operations information for the years ended
December 31, 2016
,
2015
and
2014
(in thousands) is as follows:
|
|
|
|
|
|
|
|
Results of Discontinued Operations
(in thousands)
|
Years Ended December 31,
|
|
2016
|
2015
|
2014
|
Revenue, net
|
(14
|
)
|
1,266
|
|
2,640
|
|
Cost of sales
|
1,112
|
|
4,743
|
|
5,069
|
|
Selling, general and administrative expense
|
184
|
|
1,253
|
|
2,207
|
|
Depreciation and amortization
|
14
|
|
35
|
|
191
|
|
Pretax loss from discontinued operations
|
(1,324
|
)
|
(4,765
|
)
|
(4,827
|
)
|
Income tax expense
|
—
|
|
—
|
|
—
|
|
Net loss from discontinued operations
|
(1,324
|
)
|
(4,765
|
)
|
(4,827
|
)
|
We evaluate the performance of our reportable segments based upon revenue and measures of profit or loss we refer to as EBITDA and Adjusted EBITDA. We define Adjusted EBITDA as earnings from continuing operations before interest and taxes (“EBIT”), adjusted for depreciation and amortization (“EBITDA”), and then further adjusted for unusual and other significant items that management views as distorting the operating results of the various segments from period to period. Such adjustments include restructuring charges, stock-based compensation, bargain purchase gains, acquisition-related charges and benefits (acquisition transaction costs, acquisition obligations classified as compensation, and fair value adjustments to acquisition-related contingent consideration), tangible and intangible asset impairment charges, certain litigation costs and litigation settlements, certain severance charges and foreign currency transaction gains and losses on short-term intercompany balances viewed by management as individually or collectively significant. We do not have any inter-segment revenue.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Segment information for the years ended
December 31, 2016
,
2015
and
2014
(in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
Audit
Services –
Americas
|
|
Recovery Audit
Services –
Europe/Asia-
Pacific
|
|
Adjacent
Services
|
|
Corporate
Support
|
|
Total
|
2016
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
99,861
|
|
|
$
|
37,335
|
|
|
$
|
3,648
|
|
|
$
|
—
|
|
|
$
|
140,844
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
$
|
2,229
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
1,242
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
EBIT
|
|
$
|
25,476
|
|
|
$
|
6,455
|
|
|
$
|
(4,617
|
)
|
|
$
|
(23,996
|
)
|
|
3,318
|
|
Depreciation of property and equipment
|
|
3,750
|
|
|
529
|
|
|
754
|
|
|
—
|
|
|
5,033
|
|
Amortization of intangible assets
|
|
1,477
|
|
|
—
|
|
|
355
|
|
|
—
|
|
|
1,832
|
|
EBITDA
|
|
30,703
|
|
|
6,984
|
|
|
(3,508
|
)
|
|
(23,996
|
)
|
|
10,183
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
|
|
31
|
|
|
107
|
|
|
17
|
|
|
(71
|
)
|
|
84
|
|
Transformation severance and related expenses
|
|
517
|
|
|
312
|
|
|
258
|
|
|
242
|
|
|
1,329
|
|
Other income
|
|
—
|
|
|
—
|
|
|
(121
|
)
|
|
—
|
|
|
(121
|
)
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,123
|
|
|
5,123
|
|
Adjusted EBITDA
|
|
$
|
31,251
|
|
|
$
|
7,403
|
|
|
$
|
(3,354
|
)
|
|
$
|
(18,702
|
)
|
|
$
|
16,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
4,393
|
|
|
$
|
600
|
|
|
$
|
894
|
|
|
$
|
—
|
|
|
5,887
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated assets
|
|
$
|
47,690
|
|
|
$
|
14,813
|
|
|
$
|
10,532
|
|
|
$
|
—
|
|
|
$
|
73,035
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,723
|
|
|
15,723
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
47
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,269
|
|
|
2,269
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
800
|
|
|
800
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,600
|
|
|
1,600
|
|
Total assets
|
|
$
|
47,690
|
|
|
$
|
14,813
|
|
|
$
|
10,532
|
|
|
$
|
20,439
|
|
|
$
|
93,474
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
Audit
Services –
Americas
|
|
Recovery Audit
Services –
Europe/Asia-
Pacific
|
|
Adjacent
Services
|
|
Corporate
Support
|
|
Total
|
2015
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
97,009
|
|
|
$
|
36,264
|
|
|
$
|
5,029
|
|
|
$
|
—
|
|
|
$
|
138,302
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
$
|
1,539
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
369
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
(190
|
)
|
EBIT
|
|
$
|
22,539
|
|
|
$
|
2,573
|
|
|
$
|
(5,131
|
)
|
|
$
|
(18,263
|
)
|
|
1,718
|
|
Depreciation of property and equipment
|
|
4,036
|
|
|
647
|
|
|
634
|
|
|
—
|
|
|
5,317
|
|
Amortization of intangible assets
|
|
1,728
|
|
|
600
|
|
|
130
|
|
|
—
|
|
|
2,458
|
|
EBITDA
|
|
28,303
|
|
|
3,820
|
|
|
(4,367
|
)
|
|
(18,263
|
)
|
|
9,493
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
|
|
807
|
|
|
1,533
|
|
|
12
|
|
|
(187
|
)
|
|
2,165
|
|
Transformation severance and related expenses
|
|
322
|
|
|
589
|
|
|
30
|
|
|
308
|
|
|
1,249
|
|
Other loss
|
|
—
|
|
|
—
|
|
|
1,191
|
|
|
—
|
|
|
1,191
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,926
|
|
|
3,926
|
|
Adjusted EBITDA
|
|
$
|
29,432
|
|
|
$
|
5,942
|
|
|
$
|
(3,134
|
)
|
|
$
|
(14,216
|
)
|
|
$
|
18,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,669
|
|
|
$
|
543
|
|
|
$
|
270
|
|
|
$
|
—
|
|
|
$
|
4,482
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated assets
|
|
$
|
44,588
|
|
|
$
|
13,922
|
|
|
$
|
1,030
|
|
|
$
|
—
|
|
|
$
|
59,540
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,122
|
|
|
15,122
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
48
|
|
Deferred loan cost
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
80
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,361
|
|
|
1,361
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,465
|
|
|
2,465
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,775
|
|
|
1,775
|
|
Total assets
|
|
$
|
44,588
|
|
|
$
|
13,922
|
|
|
$
|
1,030
|
|
|
$
|
20,851
|
|
|
$
|
80,391
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
Audit
Services –
Americas
|
|
Recovery Audit
Services –
Europe/Asia-
Pacific
|
|
Adjacent
Services
|
|
Corporate
Support
|
|
Total
|
2014
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
106,533
|
|
|
$
|
44,319
|
|
|
$
|
10,700
|
|
|
$
|
—
|
|
|
$
|
161,552
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
|
|
|
|
|
|
|
$
|
(2,699
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
3,241
|
|
Interest income, net
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
EBIT
|
|
$
|
21,066
|
|
|
$
|
2,772
|
|
|
$
|
(4,161
|
)
|
|
$
|
(19,212
|
)
|
|
465
|
|
Depreciation of property and equipment
|
|
4,711
|
|
|
592
|
|
|
722
|
|
|
—
|
|
|
6,025
|
|
Amortization of intangible assets
|
|
2,002
|
|
|
1,195
|
|
|
334
|
|
|
—
|
|
|
3,531
|
|
EBITDA
|
|
27,779
|
|
|
4,559
|
|
|
(3,105
|
)
|
|
(19,212
|
)
|
|
10,021
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
|
|
380
|
|
|
1,828
|
|
|
—
|
|
|
(205
|
)
|
|
2,003
|
|
Acquisition-related charges
|
|
—
|
|
|
—
|
|
|
249
|
|
|
—
|
|
|
249
|
|
Transformation severance and related expenses
|
|
1,348
|
|
|
1,285
|
|
|
418
|
|
|
589
|
|
|
3,640
|
|
Other loss
|
|
—
|
|
|
—
|
|
|
57
|
|
|
|
|
|
57
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,532
|
|
|
4,532
|
|
Adjusted EBITDA
|
|
$
|
29,507
|
|
|
$
|
7,672
|
|
|
$
|
(2,381
|
)
|
|
$
|
(14,296
|
)
|
|
$
|
20,502
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
3,930
|
|
|
$
|
651
|
|
|
$
|
123
|
|
|
$
|
—
|
|
|
$
|
4,704
|
|
Allocated assets
|
|
$
|
50,252
|
|
|
$
|
18,556
|
|
|
$
|
4,596
|
|
|
$
|
—
|
|
|
$
|
73,404
|
|
Unallocated assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,735
|
|
|
25,735
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
53
|
|
|
53
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
|
41
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,729
|
|
|
2,729
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
820
|
|
|
820
|
|
Total assets
|
|
$
|
50,252
|
|
|
$
|
18,556
|
|
|
$
|
4,596
|
|
|
$
|
29,378
|
|
|
$
|
102,782
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents revenue by country based on the location of clients served (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
80,857
|
|
|
$
|
80,484
|
|
|
$
|
88,859
|
|
United Kingdom
|
|
17,501
|
|
|
19,540
|
|
|
23,817
|
|
Canada
|
|
14,531
|
|
|
12,388
|
|
|
15,851
|
|
France
|
|
6,934
|
|
|
6,186
|
|
|
8,508
|
|
Australia
|
|
7,354
|
|
|
6,111
|
|
|
5,762
|
|
Mexico
|
|
4,900
|
|
|
4,340
|
|
|
4,653
|
|
Brazil
|
|
1,169
|
|
|
1,223
|
|
|
3,050
|
|
New Zealand
|
|
979
|
|
|
596
|
|
|
1,353
|
|
Spain
|
|
964
|
|
|
1,019
|
|
|
1,275
|
|
Thailand
|
|
654
|
|
|
933
|
|
|
986
|
|
Hong Kong
|
|
824
|
|
|
864
|
|
|
903
|
|
Colombia
|
|
583
|
|
|
610
|
|
|
841
|
|
Other
|
|
3,594
|
|
|
4,008
|
|
|
5,694
|
|
|
|
$
|
140,844
|
|
|
$
|
138,302
|
|
|
$
|
161,552
|
|
The following table presents long-lived assets by country based on the location of the asset (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2016
|
|
2015
|
|
United States
|
|
$
|
34,429
|
|
|
$
|
26,281
|
|
|
United Kingdom
|
|
2,047
|
|
|
2,939
|
|
|
All Other
|
|
1,074
|
|
|
1,297
|
|
|
|
|
$
|
37,550
|
|
|
$
|
30,517
|
|
|
One
client, The Kroger Co., accounted for approximately 11% of revenue from continuing operations in
2016
, and
no
client accounted for 10% or more of revenue from continuing operations in
2015
or
2014
.
(3) EARNINGS (LOSS) PER COMMON SHARE
The following tables set forth the computations of basic and diluted earnings (loss) per common share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Basic earnings (loss) per common share:
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
2,229
|
|
|
$
|
1,539
|
|
|
$
|
(2,699
|
)
|
Net loss from discontinued operations
|
|
(1,324
|
)
|
|
(4,765
|
)
|
|
(4,827
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
21,969
|
|
|
25,868
|
|
|
28,707
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share from continuing operations
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
(0.09
|
)
|
Basic loss per common share from discontinued operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.17
|
)
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Diluted earnings (loss) per common share:
|
|
2016
|
|
2015
|
|
2014
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
2,229
|
|
|
$
|
1,539
|
|
|
$
|
(2,699
|
)
|
Net loss from discontinued operations
|
|
(1,324
|
)
|
|
(4,765
|
)
|
|
(4,827
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
21,969
|
|
|
25,868
|
|
|
28,707
|
|
Incremental shares from stock-based compensation plans
|
|
47
|
|
|
36
|
|
|
—
|
|
Denominator for diluted earnings per common share
|
|
22,016
|
|
|
25,904
|
|
|
28,707
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share from continuing operations
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
|
$
|
(0.09
|
)
|
Diluted loss per common share from discontinued operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.17
|
)
|
Weighted-average shares outstanding excludes antidilutive shares underlying options that totaled
2.9 million
,
3.3 million
, and
3.3 million
shares, respectively, from the computation of diluted earnings (loss) per common share for the years ended
December 31, 2016
,
2015
, and
2014
. Weighted-average shares outstanding excludes antidilutive Performance Units issuable under the Company's 2006 Management Incentive Plan that totaled less than
0.1 million
shares from the computation of diluted earnings (loss) per common share for the year ended December 31, 2014. The number of common shares we used in the basic and diluted earnings (loss) per common share computations include nonvested restricted shares of less than
0.1 million
,
2.7 million
, and
0.5 million
for the years ended
December 31, 2016
,
2015
, and
2014
, respectively, and nonvested restricted share units that we consider to be participating securities of less than
0.1 million
for the years ended
December 31, 2016
,
2015
and
2014
.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(4) GOODWILL AND INTANGIBLE ASSETS
(a) Goodwill
We evaluate the recoverability of goodwill in the fourth quarter of each year or sooner if events or changes in circumstances indicate that the carrying amount may exceed its fair value. These analyses did not result in an impairment charge during the periods presented.
Goodwill by reportable segments during
2016
and
2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
Audit
Services –
Americas
|
|
Recovery Audit
Services –
Europe/Asia-
Pacific
|
|
Adjacent
Services
|
|
Total
|
Balance, January 1, 2015
|
|
$
|
12,177
|
|
|
$
|
859
|
|
|
$
|
—
|
|
|
$
|
13,036
|
|
Goodwill disposed in connection with business divestiture
|
|
(1,422
|
)
|
|
—
|
|
|
—
|
|
|
(1,422
|
)
|
Goodwill recorded in connection with business combinations
|
|
—
|
|
|
—
|
|
|
242
|
|
|
242
|
|
Foreign currency translation
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
|
(46
|
)
|
Balance, December 31, 2015
|
|
10,755
|
|
|
813
|
|
|
242
|
|
|
11,810
|
|
Goodwill disposed in connection with business divestiture
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill recorded in connection with business combinations
|
|
—
|
|
|
—
|
|
|
2,146
|
|
|
2,146
|
|
Foreign currency translation
|
|
—
|
|
|
(133
|
)
|
|
—
|
|
|
(133
|
)
|
Balance, December 31, 2016
|
|
$
|
10,755
|
|
|
$
|
680
|
|
|
$
|
2,388
|
|
|
$
|
13,823
|
|
During 2016, we recorded goodwill of
$2.1 million
in our Adjacent Services segment in conjunction with our October 31, 2016 acquisition of Lavante. Lavante is a SaaS-based SIM and recovery audit services firm, based in San Jose, California. Lavante’s assets consist primarily of its proprietary software applications and customer contracts.
During 2015, we recorded goodwill of
$0.2 million
in our Adjacent Services segment relating to the acquisition of the SIM business from Global Edge.
In October 2014, we divested certain previously acquired assets within our Adjacent Services segment that were related to our Chicago, Illinois-based consulting business (see
Note 12
below). The goodwill from the 2010 purchase of TJG Holdings LLC was disposed of as a result of this divestiture. During August 2015, we divested certain assets from a document service offering within our Recovery Audit Services - Americas segment and disposed of
$(1.4) million
of associated goodwill.
(b) Intangible Assets
Intangible assets consist principally of amounts we assigned to customer relationships, trademarks, non-compete agreements and trade names in conjunction with business acquisitions. Changes in gross carrying amounts for intangible assets in 2015 related primarily to the divestiture of certain assets from a document service offering ("SDS assets"). Changes in gross carrying amounts for intangible assets in 2014 related primarily to the divestiture of certain previously acquired assets within our Adjacent Services segment that were related to our Chicago, Illinois-based consulting business ("TJG assets").
Note 12 – Business Acquisitions and Divestitures
below includes a more detailed description of the divestiture in 2014 and recent acquisitions. Certain of our intangible assets associated with acquisitions of assets or businesses by our foreign subsidiaries are denominated in the local currency of such subsidiary and therefore are subject to foreign currency ("FX") adjustments. We present the amounts for these transactions in United States dollars utilizing foreign currency exchange rates as of the respective balance sheet dates.
Amortization expense relating to intangible assets was
$1.8 million
in
2016
,
$2.5 million
in
2015
and
$3.5 million
in
2014
. As of
December 31, 2016
and based on our current amortization methods, we project amortization expense relating to intangible assets for the next five years will be
$2.8 million
in
2017
,
$2.6 million
in
2018
,
$2.5 million
in
2019
,
$2.2 million
in
2020
and
$0.8 million
in
2021
. We generally use accelerated amortization methods for customer relationships and trade names, and straight-line amortization for non-compete agreements and trademarks.
Changes in noncurrent intangible assets during
2016
and
2015
were as follows (in thousands):
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Relationships
|
|
Trademarks
|
|
Non-
compete
Agreements
|
|
Software
|
|
Trade
Names
|
|
Total
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
$
|
38,496
|
|
|
$
|
1,059
|
|
|
$
|
1,657
|
|
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
43,412
|
|
Disposition of SDS assets
|
|
(291
|
)
|
|
(101
|
)
|
|
(126
|
)
|
|
—
|
|
|
—
|
|
|
(518
|
)
|
FX adjustments and other
|
|
(421
|
)
|
|
(27
|
)
|
|
(54
|
)
|
|
—
|
|
|
—
|
|
|
(502
|
)
|
Balance, December 31, 2015
|
|
37,784
|
|
|
931
|
|
|
1,477
|
|
|
—
|
|
|
2,200
|
|
|
42,392
|
|
Acquisition of Lavante assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,901
|
|
|
277
|
|
|
6,178
|
|
FX adjustments and other
|
|
(1,211
|
)
|
|
(78
|
)
|
|
(155
|
)
|
|
—
|
|
|
—
|
|
|
(1,444
|
)
|
Balance, December 31, 2016
|
|
$
|
36,573
|
|
|
$
|
853
|
|
|
$
|
1,322
|
|
|
$
|
5,901
|
|
|
$
|
2,477
|
|
|
$
|
47,126
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2015
|
|
$
|
(29,496
|
)
|
|
$
|
(869
|
)
|
|
$
|
(1,408
|
)
|
|
$
|
—
|
|
|
$
|
(2,200
|
)
|
|
$
|
(33,973
|
)
|
Amortization expense
|
|
(2,211
|
)
|
|
(125
|
)
|
|
(122
|
)
|
|
—
|
|
|
—
|
|
|
(2,458
|
)
|
Disposition of SDS assets
|
|
64
|
|
|
87
|
|
|
95
|
|
|
—
|
|
|
—
|
|
|
246
|
|
FX adjustments and other
|
|
397
|
|
|
26
|
|
|
54
|
|
|
—
|
|
|
—
|
|
|
477
|
|
Balance, December 31, 2015
|
|
(31,246
|
)
|
|
(881
|
)
|
|
(1,381
|
)
|
|
—
|
|
|
(2,200
|
)
|
|
(35,708
|
)
|
Amortization expense
|
|
(1,414
|
)
|
|
(50
|
)
|
|
(96
|
)
|
|
(272
|
)
|
|
—
|
|
|
(1,832
|
)
|
FX adjustments and other
|
|
1,179
|
|
|
78
|
|
|
155
|
|
|
—
|
|
|
—
|
|
|
1,412
|
|
Balance, December 31, 2016
|
|
$
|
(31,481
|
)
|
|
$
|
(853
|
)
|
|
$
|
(1,322
|
)
|
|
$
|
(272
|
)
|
|
$
|
(2,200
|
)
|
|
$
|
(36,128
|
)
|
Net carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
6,538
|
|
|
$
|
50
|
|
|
$
|
96
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,684
|
|
Balance, December 31, 2016
|
|
$
|
5,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,629
|
|
|
$
|
277
|
|
|
$
|
10,998
|
|
Estimated useful life (years)
|
|
6-20 years
|
|
|
6 years
|
|
|
1-5 years
|
|
|
4 years
|
|
|
4-5 years
|
|
|
|
(5) DEBT
On January 19, 2010, we entered into a
four
-year revolving credit and term loan agreement with SunTrust Bank (“SunTrust”). The SunTrust credit facility initially consisted of a
$15.0 million
committed revolving credit facility and a
$15.0 million
term loan. The SunTrust term loan required quarterly principal payments of
$0.8 million
beginning in March 2010, and a final principal payment of
$3.0 million
due in January 2014 that we paid in December 2013. The SunTrust credit facility is guaranteed by the Company and all of its material domestic subsidiaries and secured by substantially all of the assets of the Company.
Prior to the January 2014 amendment to the SunTrust credit facility described below, amounts available under the SunTrust revolver were based on eligible accounts receivable and other factors. Interest on both the revolver and term loan was payable monthly and accrued at an index rate using the
one
-month LIBOR rate, plus an applicable margin as determined by the loan agreement. The applicable interest rate margin varied from
2.25%
per annum to
3.5%
per annum, dependent on our consolidated leverage ratio, and was determined in accordance with a pricing grid under the SunTrust loan agreement. The applicable margin was
2.25%
and the interest rate was approximately
2.43%
at December 31, 2013. We also paid a commitment fee of
0.5%
per annum, payable quarterly, on the unused portion of the
$15.0 million
SunTrust revolving credit facility. The weighted-average interest rate on term loan balances outstanding under the SunTrust credit facility during 2013, including fees, was
4.1%
. We made mandatory principal payments on the SunTrust term loan totaling
$3.0 million
and the final principal payment of
$3.0 million
during the year ended December 31, 2013.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The SunTrust credit facility includes customary affirmative, negative, and financial covenants binding on the Company, including delivery of financial statements and other reports, maintenance of existence, and transactions with affiliates. The negative covenants limit the ability of the Company, among other things, to incur debt, incur liens, make investments, sell assets or declare or pay dividends on its capital stock. The financial covenants included in the SunTrust credit facility, among other things, limit the amount of capital expenditures the Company can make, set forth maximum leverage and net funded debt ratios for the Company and a minimum fixed charge coverage ratio, and also require the Company to maintain minimum consolidated earnings before interest, taxes, depreciation and amortization. In addition, the SunTrust credit facility includes customary events of default.
On January 17, 2014, we entered into an amendment of the SunTrust credit facility that increased the committed revolving credit facility from
$15.0 million
to
$25.0 million
, lowered the applicable margin to a fixed rate of
1.75%
, eliminated the provision limiting availability under the revolving credit facility based on eligible accounts receivable and extended the scheduled maturity of the revolving credit facility to January 16, 2015 (subject to earlier termination as provided therein). We also paid a commitment fee of
0.5%
per annum, payable quarterly, on the unused portion of the SunTrust revolving credit facility through the amendment date below.
On December 23, 2014, we entered into an amendment of the SunTrust credit facility that reduced the committed revolving credit facility from
$25.0 million
to
$20.0 million
. The credit facility bears interest at a rate per annum comprised of a specified index rate based on one-month LIBOR, plus an applicable margin (
1.75%
per annum). The index rate is determined as of the first business day of each calendar month with the provision of a fixed applicable margin of
1.75%
per the amendment of the SunTrust credit facility. The credit facility includes
two
financial covenants (a maximum leverage ratio and a minimum fixed charge coverage ratio) that apply only if we have borrowings under the credit facility that arise or remain outstanding during the final
30
calendar days of any fiscal quarter. These financial covenants also will be tested, on a modified pro forma basis, in connection with each new borrowing under the credit facility. This amendment also extended the scheduled maturity of the revolving credit facility to December 23, 2017 and lowered the commitment fee to
0.25%
per annum, payable quarterly, on the unused portion of the revolving credit facility. The weighted-average interest rate for the commitment fee due on the revolving credit facility was
0.25%
in 2016 and 2015.
On December 21, 2016, we entered into an amendment of the SunTrust credit facility in order to clarify certain definitions and other terms of the facility.
On October 31, 2016 the Company borrowed
$3.6 million
from its credit facility to finance the acquisition of Lavante, Inc. On February 27, 2017 the Company borrowed
$10.0 million
from its credit facility to finance the acquisition of substantially all of the assets of Cost &
Compliance Associates, LLC and Cost & Compliance Associates Limited. Total borrowings for the Company as of March 15, 2017 are
$13.6 million
.
The Company was in compliance with the covenants in its SunTrust credit facility as of
December 31, 2016
.
Future Minimum Payments
As of December 31, 2016, there was
$3.6 million
in debt that will come due in 2017. There were
no
future minimum principal payments of debt as of December 31,
2015
.
(6) LEASE COMMITMENTS
PRGX is committed under noncancelable lease arrangements for facilities and equipment. Rent expense, excluding costs associated with the termination of noncancelable lease arrangements, was
$3.9 million
in
2016
,
$4.6 million
in
2015
and
$6.0 million
in
2014
.
In January 2014, we amended the lease for our principal executive offices to extend the term through December 31, 2021, reduce the lease payment for 2014, and reduce the space under lease from approximately
132,000
square feet to approximately
58,000
square feet effective January 1, 2015. As of December 31, 2015, we had
no
subleased property. Starting in February 2016 we subleased approximately
3,000
square feet.
We have entered into several operating lease agreements that contain provisions for future rent increases, free rent periods or periods in which rent payments are reduced (abated). We charge the total amount of rental payments due over the lease term to rent expense on the straight-line, undiscounted method over the lease terms.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future minimum lease payments under noncancelable operating leases including the amended lease for our principal executive offices, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
Gross
|
Sublease Income
|
Amount
|
2017
|
$
|
3,333
|
|
$
|
(67
|
)
|
$
|
3,266
|
|
2018
|
2,456
|
|
(69
|
)
|
2,387
|
|
2019
|
2,046
|
|
(72
|
)
|
1,974
|
|
2020
|
1,788
|
|
(74
|
)
|
1,714
|
|
2021
|
1,442
|
|
(77
|
)
|
1,365
|
|
Thereafter
|
12
|
|
—
|
|
12
|
|
Total payments
|
$
|
11,077
|
|
$
|
(359
|
)
|
$
|
10,718
|
|
(7) INCOME TAXES
Income (loss) before income taxes from continuing operations relate to the following jurisdictions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
United States
|
|
$
|
(5,306
|
)
|
|
$
|
(244
|
)
|
|
$
|
(3,369
|
)
|
Foreign
|
|
8,777
|
|
|
2,152
|
|
|
3,911
|
|
|
|
$
|
3,471
|
|
|
$
|
1,908
|
|
|
$
|
542
|
|
The provision for income taxes for continuing operations consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
—
|
|
|
(13
|
)
|
|
(11
|
)
|
Foreign
|
|
2,103
|
|
|
1,494
|
|
|
1,686
|
|
|
|
2,103
|
|
|
1,481
|
|
|
1,675
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
—
|
|
|
—
|
|
|
—
|
|
State
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
|
(861
|
)
|
|
(1,112
|
)
|
|
1,566
|
|
|
|
(861
|
)
|
|
(1,112
|
)
|
|
1,566
|
|
Total
|
|
$
|
1,242
|
|
|
$
|
369
|
|
|
$
|
3,241
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The significant differences between the U.S. federal statutory tax rate of
34%
and the Company’s effective income tax expense for earnings (in thousands) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Statutory federal income tax rate
|
|
$
|
1,180
|
|
|
$
|
649
|
|
|
$
|
184
|
|
State income taxes, net of federal effect
|
|
(173
|
)
|
|
(240
|
)
|
|
(189
|
)
|
Deferred tax true-up
|
|
(4,103
|
)
|
|
8,078
|
|
|
—
|
|
Change in deferred tax asset valuation allowance
|
|
4,877
|
|
|
(6,729
|
)
|
|
2,094
|
|
Foreign taxes in excess of U.S. statutory rate
|
|
(712
|
)
|
|
(223
|
)
|
|
714
|
|
Compensation deduction limitation
|
|
113
|
|
|
(1,201
|
)
|
|
381
|
|
Other, net
|
|
60
|
|
|
35
|
|
|
57
|
|
Total
|
|
$
|
1,242
|
|
|
$
|
369
|
|
|
$
|
3,241
|
|
The reconciliations shown above reflect changes to prior period schedules as a result of the reporting of discontinued operations for those periods. Additionally, it has been determined that permanent adjustments for compensation deduction limitations were inappropriately applied in 2014. This correction is reflected as a credit in the rate reconciliation for 2015. There was an offsetting increase in the valuation allowance for the 2015 deduction recorded.
The tax effects of temporary differences and carry-forwards that give rise to deferred tax assets and liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
737
|
|
|
$
|
954
|
|
Accrued payroll and related expenses
|
|
3,062
|
|
|
1,713
|
|
Stock-based compensation expense
|
|
3,531
|
|
|
2,668
|
|
Depreciation of property and equipment
|
|
2,579
|
|
|
3,061
|
|
Capitalized software
|
|
—
|
|
|
94
|
|
Non-compete agreements
|
|
—
|
|
|
—
|
|
Unbilled receivables and refund liabilities
|
|
2,216
|
|
|
2,029
|
|
Operating loss carry-forwards of foreign subsidiary
|
|
10,907
|
|
|
3,275
|
|
Federal operating loss carry-forwards
|
|
33,087
|
|
|
31,884
|
|
State operating loss carry-forwards
|
|
3,919
|
|
|
4,038
|
|
Other
|
|
1,181
|
|
|
883
|
|
Gross deferred tax assets
|
|
61,219
|
|
|
50,599
|
|
Less valuation allowance
|
|
50,114
|
|
|
45,565
|
|
Gross deferred tax assets net of valuation allowance
|
|
11,105
|
|
|
5,034
|
|
Deferred income tax liabilities:
|
|
|
|
|
Intangible assets
|
|
2,299
|
|
|
2,775
|
|
Capitalized software
|
|
1,928
|
|
|
—
|
|
Other
|
|
4,609
|
|
|
898
|
|
Gross deferred tax liabilities
|
|
8,836
|
|
|
3,673
|
|
Net deferred tax assets
|
|
$
|
2,269
|
|
|
$
|
1,361
|
|
During 2016, the Company recorded deferred tax assets and liabilities associated with foreign jurisdictions where branch operations are conducted. The deferred tax impacts were generally offset by changes to the Company's valuation allowance and have been reflected in the 2016 year end balances noted above.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During 2015, the Company undertook a detailed review of the Company's deferred taxes and it was determined that some reclassifications and adjustments were needed. All adjustments were offset by changes to the Company's valuation allowance and have been reflected in the 2015 year end balances noted above.
Our reported effective tax rates on income approximated
35.8%
in
2016
,
19.3%
in
2015
, and
598.0%
in
2014
. Reported income tax expense in each year primarily results from taxes on the income of foreign subsidiaries. The effective tax rates generally differ from the expected tax rate primarily due to the Company’s deferred tax asset valuation allowance on the domestic earnings and taxes on income of foreign subsidiaries.
We reduce our deferred tax assets by a valuation allowance if it is more likely than not that some portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. In making this determination, we consider all available positive and negative evidence affecting specific deferred tax assets, including our past and anticipated future performance, the reversal of deferred tax liabilities, the length of carry-back and carry-forward periods and the implementation of tax planning strategies. Since this evaluation requires consideration of future events, significant judgment is required in making the evaluation, and our conclusion could be materially different should certain of our expectations not be met.
Objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of deferred tax assets when significant negative evidence exists. Cumulative tax losses in recent years are the most compelling form of negative evidence considered by management in this determination. As of December 31, 2015, management determined that based on all available evidence, a valuation allowance was required for all U.S. deferred tax assets due to losses incurred for income tax reporting purposes for the past several years. We recorded a valuation allowance of
$50.1 million
as of December 31, 2016, representing a change of
$4.5 million
from the valuation allowance of
$45.6 million
recorded as of December 31, 2015.
In 2015, management determined that a valuation allowance was no longer required against the deferred tax assets of one of its foreign subsidiaries. As of December 31, 2015, we had gross deferred tax assets of
$1.5 million
relating to this subsidiary. The benefit of these deferred tax assets is reflected as a credit to tax expense of
$1.5 million
during the year ended December 31, 2015.
In 2016, management determined that a valuation allowance was no longer required against the deferred tax assets of certain of its foreign subsidiaries. As of December 31, 2016, we had gross deferred tax assets of
$8.4 million
relating to those foreign subsidiaries. The benefit of these deferred tax assets is reflected as a credit of
$1.7 million
to tax expense during the year ended December 31, 2016.
As of December 31, 2016, we had approximately
$94.5 million
of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income. The U.S. federal loss carry-forwards expire through 2035. As of December 31, 2016, we had approximately
$135.1 million
of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire to varying degrees between 2021 and 2036 and are subject to certain limitations. The state loss carry-forwards at December 31, 2016, reflect adjustments for prior period write-downs associated with ownership changes for state tax purposes.
Generally, we have not provided deferred taxes on the undistributed earnings of international subsidiaries as we consider these earnings to be permanently reinvested. As it relates to the earnings of our Canadian and Brazilian subsidiaries, we assert that we are not permanently reinvested. We provided additional deferred taxes of
$0.2 million
in 2016,
$0.3 million
in 2015, and
$0.2 million
in 2014 representing the estimated withholding tax liability due if such amounts are repatriated. We did not provide additional incremental U.S. income tax expense on these amounts as the Canadian subsidiary is classified as a branch for U.S. income tax purposes and our Brazilian subsidiary did not have undistributed earnings during the year.
On March 17, 2006, the Company experienced an ownership change as defined under Section 382 of the Internal Revenue Code (“IRC”). This ownership change resulted in an annual IRC Section 382 limitation that limits the use of certain tax attribute carry-forwards and also resulted in the write-off of certain deferred tax assets and the related valuation allowances that the Company recorded in 2006. Of the
$94.5 million
of U.S. federal loss carry-forwards available to the Company,
$13.5 million
of the loss carry-forwards are subject to an annual usage limitation of
$1.4 million
. The Company has reviewed subsequent potential ownership changes as defined under IRC Section 382 and has determined that on August 4, 2008, the Company experienced an additional ownership change. This subsequent ownership change did not decrease the original limitation nor did it impact the Company’s financial position, results of operations, or cash flows. The Company believes that there has been an ownership change as defined under IRC Section 382 in the fourth quarter of 2016. The Company is currently assessing what impact this ownership change may have on our ability to utilize the reported net operating losses and related deferred tax assets in future periods.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We apply a “more-likely-than-not” recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We refer to GAAP for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording potential interest and penalties associated with uncertain tax positions is to record such items as a component of income before income taxes. A number of years may elapse before a particular tax position is audited and finally resolved or when a tax assessment is raised. The number of years subject to tax assessments also varies by tax jurisdictions. As a part of an ongoing Canadian tax audit, we continue to defend our tax position related to the valuation of an intercompany transaction. While we have established accruals for this matter, an assessment by the Canadian Revenue Authority may exceed such amounts.
A reconciliation of our beginning and ending amount of unrecognized tax benefits and related accrued interest thereon is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized Tax Benefits
|
|
Accrued Interest and Penalties
|
Balance at January 1, 2014
|
|
$
|
724
|
|
|
$
|
260
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
Additions based on tax positions related to the prior years
|
|
—
|
|
|
33
|
|
Decrease based on payments made during the year
|
|
—
|
|
|
—
|
|
Decreases based on tax positions related to the prior years
|
|
$
|
(47
|
)
|
|
$
|
(73
|
)
|
Balance at December 31, 2014
|
|
$
|
677
|
|
|
$
|
220
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
Additions based on tax positions related to the prior years
|
|
—
|
|
|
24
|
|
Decreases based on payments made during the year
|
|
—
|
|
|
—
|
|
Decreases based on tax positions related to the prior years
|
|
(142
|
)
|
|
(42
|
)
|
Balance at December 31, 2015
|
|
$
|
535
|
|
|
$
|
202
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
Additions based on tax positions related to the prior years
|
|
—
|
|
|
11
|
|
Decreases based on payments made during the year
|
|
—
|
|
|
—
|
|
Decreases based on tax positions related to the prior years
|
|
(38
|
)
|
|
(59
|
)
|
Balance at December 31, 2016
|
|
$
|
497
|
|
|
$
|
154
|
|
Due to the complexity of the tax rules underlying these unrecognized tax benefits, and the unclear timing of tax audits, tax agency determinations, and other events, we cannot establish reasonably reliable estimates for the periods in which the cash settlement of these liabilities will occur.
We file U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. As of
December 31, 2016
, the
2013
through
2015
tax years generally remain subject to examination by federal and most state and foreign tax authorities. The use of net operating losses generated in tax years prior to
2013
may also subject returns for those years to examination.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(8) EMPLOYEE BENEFIT PLANS
We maintain a defined contribution retirement plan (the "Plan") in accordance with Section 401(k) of the Internal Revenue Code, which allows eligible participating employees to defer receipt of up to
50%
of their annual compensation and contribute such amount to one or more investment funds. We match employee contributions in a discretionary amount to be determined by management and approved by the Board of Directors each plan year up to the lesser of
6%
of an employee’s annual compensation or
$3,000
per participant. We also may make additional discretionary contributions to the Plan as determined by management and approved by the Board of Directors each plan year. Company matching funds and discretionary contributions vest
100%
after
three
years of service for participants who either had attained
three
or more years of service or were hired on or after January 1, 2012. For all other participants, company matching funds and discretionary contributions vest at the rate of
20%
after
two
years of service and
100%
after
three
years of service. We amended the Plan in 2013 to add Roth 401(k) plan features that allow participating employees to make post-tax contributions in addition to, or in lieu of, the pre-tax contributions allowed under the Plan. Company matching funds are made on a pre-tax basis for both pre-tax and post-tax employee contributions, and are subject to the above limitations based on the aggregate pre-tax and post-tax contribution by the participant. The Company contributed to the Plan approximately
$0.8 million
in 2016,
$0.8 million
in 2015, and
$1.0 million
in
2014
.
(9) CAPITAL STRUCTURE
Effective July 31, 2000, the Board of Directors amended the Company’s Articles of Incorporation to establish a new series of stock, which is designated as participating preferred stock. The Company’s remaining, undesignated preferred stock may be issued at any time or from time to time in one or more series with such designations, powers, preferences, rights, qualifications, limitations and restrictions (including dividend, conversion and voting rights) as may be determined by the Board of Directors, without any further votes or action by the shareholders. As of
December 31, 2016
and
2015
, the Company had
no
preferred stock outstanding.
On December 11, 2012, we closed a public offering of
6,249,234
shares of our common stock, which consisted of
2,500,000
shares sold by us and
3,749,234
shares sold by certain selling shareholders, at a price to the public of
$6.39
per share. The net proceeds to us from the public offering, after deducting underwriting discounts and commissions and offering expenses, were
$14.7 million
. We did not receive any proceeds from the sale of shares by the selling shareholders. In addition, the underwriters elected to exercise an overallotment option for an additional
687,385
shares, and completed the additional sale on January 8, 2013. The net proceeds to us from the overallotment, after deducting underwriting discounts and commission and offering expenses, were
$4.1 million
.
In partial satisfaction of a business acquisition obligation, we issued
187,620
shares of our common stock having a value of
$1.3 million
in the year ended December 31, 2014 and
217,155
shares of our common stock having a value of
$1.5 million
in the year ended December 31, 2013.
On February 21, 2014, our Board of Directors authorized a stock repurchase program under which we could repurchase up to
$10.0 million
of our common stock from time to time through March 31, 2015. On March 25, 2014, our Board of Directors authorized a
$10.0 million
increase to the stock repurchase program, bringing the total amount of its common stock that the Company could repurchase under the program to
$20.0 million
. On October 24, 2014, our Board of Directors authorized a
$20.0 million
increase to the stock repurchase program, increasing the total share repurchase program to
$40.0 million
, and extended the duration of the program to December 31, 2015. In October 2015, our Board of Directors authorized an additional
$10.0
million increase to the stock repurchase program, increasing the total share repurchase program to
$50.0
million, and extended the duration of the program to December 31, 2016. In December 2016, our Board of Directors authorized an additional
$10.0 million
increase to the stock repurchase program, increasing the total share repurchase program to
$60.0
million, and extended the duration of the program to December 31, 2017. We repurchased
0.9
million shares of our common stock during the year ended
December 31, 2016
for
$3.8 million
. We repurchased
4.1
million shares of our common stock during the year ended
December 31, 2015
for
$18.1 million
.
Pursuant to exercises of outstanding stock options, we issued
90,496
shares of our common stock having a value of
$0.3 million
in the year ended
December 31, 2016
and
29,128
shares of our common stock having a value of less than
$0.1 million
in the year ended
December 31, 2015
.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(10) COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We are party to a variety of legal proceedings arising in the normal course of business. While the results of these proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.
(11) STOCK-BASED COMPENSATION
During 2016, the Company currently had
two
shareholder-approved stock-based compensation plans under which equity awards have been granted: (1) the 2006 Management Incentive Plan (“2006 MIP”); and (2) the 2008 Equity Incentive Plan (“2008 EIP”) (collectively, the “Plans”). The Company generally issues authorized but previously unissued shares to satisfy stock option exercises, grants of restricted stock awards and vesting of restricted stock units and settlements of 2006 MIP Performance Units.
2008 EIP Awards
During the first quarter of 2008, the Board of Directors of the Company adopted the 2008 EIP, which was approved by the shareholders at the annual meeting of the shareholders on May 29, 2008. The 2008 EIP authorizes the grant of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other incentive awards.
Two million
shares of the Company’s common stock initially were reserved for issuance under the 2008 EIP pursuant to award grants to key employees, directors and service providers. The options granted pursuant to the 2008 EIP generally have
seven
year terms.
An amendment to the 2008 EIP was adopted by the Company’s Board of Directors in April 2010 and approved at the Company’s annual meeting of shareholders held on June 15, 2010. This amendment, among other things, increased the number of shares reserved for issuance under the 2008 EIP by
3,400,000
shares to a total of
5,400,000
shares and provides that restricted stock awards and other full value awards will count as
1.41
shares against the available pool of shares under the plan.
An amendment to the 2008 EIP was adopted by the Company’s Board of Directors in April 2012 and approved at the Company’s annual meeting of shareholders held on June 19, 2012. This amendment increased the number of shares reserved for issuance under the 2008 EIP by
2,200,000
shares to a total of
7,600,000
shares.
An amendment to the 2008 EIP was adopted by the Company's Board of Directors in April 2014 and approved at the Company’s annual meeting of shareholders held on June 24, 2014. This amendment increased the number of shares reserved for issuance under the 2008 EIP by
3,000,000
shares to a total of
10,600,000
shares. Any shares issued in connection with an award against this
3,000,000
share pool will count against the available pool of shares on a one-to-one basis. As of
December 31, 2016
, there were approximately
0.6
million shares available for future grants under the 2008 EIP.
Stock options granted under the 2008 EIP generally vest in equal annual increments over the vesting period, which typically is
three
years for employees and
one
year for directors. The following table summarizes stock option grants during the years ended
December 31, 2016
,
2015
, and
2014
:
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grantee
Type
|
|
# of
Options
Granted
|
|
Vesting Period
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
2016
|
|
|
|
|
|
|
|
|
Director group
(1)
|
|
195,417
|
|
|
1 year or less
|
|
$
|
5.01
|
|
|
$
|
2.71
|
|
Director group
(2)
|
|
35,000
|
|
|
3 years
|
|
$
|
4.80
|
|
|
$
|
2.66
|
|
Employee inducement
(3)(4)
|
|
232,500
|
|
|
3 years
|
|
$
|
4.61
|
|
|
$
|
2.60
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
Director group
|
|
249,273
|
|
|
1 year or less
|
|
$
|
4.49
|
|
|
$
|
2.44
|
|
Employee group
|
|
17,092
|
|
|
3 years
|
|
$
|
3.99
|
|
|
$
|
1.33
|
|
Employee inducement
(5)
|
|
135,000
|
|
|
3 years
|
|
$
|
5.51
|
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
Director group
|
|
51,276
|
|
|
1 year or less
|
|
$
|
6.45
|
|
|
$
|
1.89
|
|
Employee group
(6)
|
|
1,480,000
|
|
|
3 years
|
|
$
|
6.99
|
|
|
$
|
1.81
|
|
Employee inducement
(7)
|
|
270,000
|
|
|
3 years
|
|
$
|
6.64
|
|
|
$
|
1.71
|
|
|
|
(1)
|
Includes
20,417
non-qualified stock options granted to
one
director in connection with the director joining the Company's board of directors.
|
|
|
(2)
|
The Company granted non-qualified stock options to
one
director in connection with the director joining the Company's board of directors.
|
|
|
(3)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in the first nine months of 2016 in connection with an employee joining the Company.
|
|
|
(4)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in connection with the closing of the Lavante acquisition.
|
|
|
(5)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in the first nine months of 2015 to
three
employees in connection with the employees joining the Company.
|
|
|
(6)
|
The weighted average exercise price for these options is calculated based on an exercise price of
$6.36
for the options that vest on June 27, 2015,
$6.99
for the options that vest on June 27, 2016 and
$7.63
for the options that vest on June 27, 2017.
|
|
|
(7)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in the third quarter of 2014 to
two
executives in connection with the executives joining the Company.
|
Nonvested stock awards, including both restricted stock and restricted stock units, generally are nontransferable until vesting and the holders are entitled to receive dividends with respect to the nonvested shares. Prior to vesting, the grantees of restricted stock are entitled to vote the shares, but the grantees of restricted stock units are not entitled to vote the shares. Generally, nonvested stock awards vest in equal annual increments over the vesting period, which typically is
three
years for employees and
one
year for directors.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes nonvested stock awards granted during the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
Grantee
Type
|
|
# of Stock Awards
Granted
|
|
Vesting Period
|
|
Weighted
Average Grant
Date Fair Value
|
2016
|
|
|
|
|
|
|
Employee group
(1)
|
|
1,250,750
|
|
|
2 years
|
|
$
|
4.88
|
|
Employee inducement
(2)
|
|
100,000
|
|
|
3 years
|
|
$
|
4.94
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
Director group
|
|
4,273
|
|
|
1 year or less
|
|
$
|
4.02
|
|
Director group
|
|
17,092
|
|
|
3 years
|
|
$
|
3.99
|
|
Employee group
(3)
|
|
2,493,333
|
|
|
2 years
|
|
$
|
3.99
|
|
Employee inducement
(4)
|
|
10,000
|
|
|
3 years
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
Director group
|
|
51,276
|
|
|
1 year or less
|
|
$
|
6.45
|
|
Employee group
|
|
120,000
|
|
|
3 years
|
|
$
|
6.36
|
|
Employee inducement
(5)
|
|
70,000
|
|
|
3 years
|
|
$
|
6.04
|
|
|
|
(1)
|
The Company granted nonvested performance-based stock awards (restricted stock units) in the first six months of 2016 to
five
executive officers, and certain other key employees.
|
|
|
(2)
|
The Company granted nonvested performance-based stock awards (restricted stock units) outside its existing stock-based compensation plans in the second and third quarters of 2016 to
three
employees in connection with the employees joining the Company.
|
|
|
(3)
|
The Company granted nonvested performance-based stock awards (restricted stock units) in the first quarter of 2015 to
eight
executive officers totaling
1,325,000
units. During the third and fourth quarters of 2015, the Company issued
1,168,333
units to key employees.
|
|
|
(4)
|
The Company granted nonvested stock awards (restricted stock) outside its existing stock-based compensation plans in the first quarter of 2015 to
two
employees in connection with the employees joining the Company.
|
|
|
(5)
|
The Company granted nonvested stock awards (restricted stock) outside its existing stock-based compensation plans in the third quarter of 2014 to
two
executives in connection with the executives joining the Company.
|
Performance-Based Restricted Stock Units
On August 3, 2016, a senior leader of the Company was granted
10,000
performance-based restricted stock units ("PBUs") outside of the existing stock-based compensation plan as an inducement for employment. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
43%
of the number of PBUs being settled and the payment of cash in an amount equal to the fair market value of that number of shares of common stock equal to
57%
of the number of PBUs being settled. The PBUs vest and become payable based on revenue and the cumulative adjusted EBITDA that the Company (excluding the HCRA business) achieves for the
two
-year performance period ending December 31, 2017. At the threshold performance level,
35%
of the PBUs will become vested and payable; at the target performance level,
100%
of the PBUs will become vested and payable; and at the maximum performance level,
150%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
150%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
On June 27, 2016, certain employees of the Company were granted
641,750
PBUs under the 2008 EIP. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
40%
of the number of PBUs being settled and the payment of cash in an amount equal to the fair market value of that number of shares of common stock equal to
60%
of the number of PBUs being settled. The PBUs vest and become payable based on revenue and the cumulative adjusted EBITDA that the Company (excluding the Healthcare Claims Recovery Audit business) achieves for the
two
-year performance period ending December 31, 2017. At the threshold performance level,
35%
of the PBUs will become vested and payable; at the target performance level,
100%
of the PBUs will become vested and payable; and at the maximum performance level,
150%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
150%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On June 20, 2016, a senior leader of the Company was granted
30,000
PBUs outside of the existing stock-based compensation plan as an inducement for employment. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
40%
of the number of PBUs being settled and the payment of cash in an amount equal to the fair market value of that number of shares of common stock equal to
60%
of the number of PBUs being settled. The PBUs vest and become payable based on revenue and the cumulative adjusted EBITDA that the Company (excluding the Healthcare Claims Recovery Audit business) achieves for the
two
-year performance period ending December 31, 2017. At the threshold performance level,
35%
of the PBUs will become vested and payable; at the target performance level,
100%
of the PBUs will become vested and payable; and at the maximum performance level,
150%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
150%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
On May 5, 2016, an executive officer of the Company was granted
60,000
PBUs outside of the existing stock-based compensation plan as an inducement for employment. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
43%
of the number of PBUs being settled and the payment of cash in an amount equal to the fair market value of that number of shares of common stock equal to
57%
of the number of PBUs being settled. The PBUs vest and become payable based on revenue and the cumulative adjusted EBITDA that the Company (excluding the Healthcare Claims Recovery Audit business) achieves for the
two
-year performance period ending December 31, 2017. At the threshold performance level,
35%
of the PBUs will become vested and payable; at the target performance level,
100%
of the PBUs will become vested and payable; and at the maximum performance level,
150%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
150%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
On March 31, 2016,
five
executive officers and three other senior leaders of the Company were granted
609,000
PBUs under the 2008 EIP. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
43%
of the number of PBUs being settled and the payment of cash in an amount equal to the fair market value of that number of shares of common stock equal to
57%
of the number of PBUs being settled. The PBUs vest and become payable based on revenue and the cumulative adjusted EBITDA that the Company (excluding the Healthcare Claims Recovery Audit business) achieves for the
two
-year performance period ending December 31, 2017. At the threshold performance level,
35%
of the PBUs will become vested and payable; at the target performance level,
100%
of the PBUs will become vested and payable; and at the maximum performance level,
150%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
150%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
On September 28, 2015, certain employees of the Company were granted
1,123,333
PBUs under the 2008 EIP. On December 14, 2015, certain employees of the Company were granted an additional
45,000
PBUs under the 2008 EIP. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
25%
of the number of PBUs being settled and the payment of cash in an amount equal to
75%
of the fair market value of that number of shares of common stock equal to the number of PBUs being settled. The PBUs vest and become payable based on the cumulative adjusted EBITDA that the Company (excluding the Healthcare Claims Recovery Audit business) achieves for the
two
-year performance period ending December 31, 2016. At the threshold performance level,
35%
of the PBUs will become vested and payable and at the target performance level,
100%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
100%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On March 30, 2015,
eight
executive officers of the Company were granted
1,325,000
PBUs under the 2008 EIP. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to
50%
of the number of PBUs being settled and the payment of cash in an amount equal to
50%
of the fair market value of that number of shares of common stock equal to the number of PBUs being settled. The PBUs vest and become payable based on the cumulative adjusted EBITDA that the Company (excluding the Healthcare Claims Recovery Audit business) achieves for the
two
-year performance period ending December 31, 2016. At the threshold performance level,
35%
of the PBUs will become vested and payable; at the target performance level,
100%
of the PBUs will become vested and payable; and at the maximum performance level,
200%
of the PBUs will become vested and payable. If performance falls between the stated performance levels, the percentage of PBUs that shall become vested and payable will be based on straight line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than
200%
of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).
The following table summarizes the PBUs granted during the years ended December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Total PBUs Granted
|
PBUs Settled in Common Stock
(1)
|
PBUs Settled in Cash
(2)
|
2016
|
1,350,750
|
|
560,670
|
|
790,080
|
|
2015
|
2,493,333
|
|
954,583
|
|
1,538,750
|
|
|
|
(1)
|
Represents the number of PBUs to be settled in common stock at the target performance level.
|
|
|
(2)
|
Represents the number of PBUs to be settled in cash at the target performance level.
|
During 2015, the PBUs were expensed at the target performance level based on management's estimates. During the fourth quarter of 2015, it was determined it was "not probable" that the threshold performance level would be achieved by the vesting period ending December 31, 2016 and the Company reversed approximately
$0.8 million
of expense incurred in the second quarter and
$0.6 million
of expense incurred in third quarter, a total of
$1.4 million
for the year ended December 31, 2015.
During 2016, the PBUs that were granted in 2016 were expensed at the target performance level based on management's estimates.
Stock Appreciation Rights
On April 27, 2016, the Company's Chief Executive Officer was granted stock appreciation rights (“SARs”) covering
200,000
shares of the Company’s common stock under the 2008 EIP. The SARs were issued with an initial value per share equal to
$4.71
. The SARs will vest and become payable in cash in a lump sum (net of applicable withholdings) on June 30, 2018, subject to the Chief Executive Officer’s continued employment through such date. Upon vesting, the Company will pay an amount equal to the excess of (i) the fair market value, as of June 30, 2018, of the shares of the Company’s common stock with respect to the SARs that have become vested and payable over (ii) the aggregate initial value of such SARs.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of option activity as of
December 31, 2016
, and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
(Per Share)
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
($ 000’s)
|
Outstanding at January 1, 2016
|
|
3,337,784
|
|
|
$
|
6.36
|
|
|
4.76 years
|
|
$
|
70
|
|
Granted
|
|
462,917
|
|
|
4.80
|
|
|
|
|
|
Exercised
|
|
(90,496
|
)
|
|
3.37
|
|
|
|
|
$
|
144
|
|
Forfeited
|
|
(271,537
|
)
|
|
6.15
|
|
|
|
|
|
Expired
|
|
(18,283
|
)
|
|
2.82
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
3,420,385
|
|
|
$
|
6.26
|
|
|
4.30 years
|
|
$
|
1,204
|
|
Exercisable at December 31, 2016
|
|
2,357,784
|
|
|
$
|
6.28
|
|
|
3.76 years
|
|
$
|
670
|
|
The weighted-average grant date fair value of options granted was
$2.66
per share in
2016
,
$2.32
per share in
2015
and
$1.80
per share in
2014
. The total intrinsic value of options exercised was
$144 thousand
in
2016
,
$40.0 thousand
in
2015
and
$1.7 million
in
2014
.
For time-vested option grants that resulted in compensation expense recognition, we used the following assumptions in our Black-Scholes valuation models:
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free interest rates
|
|
0.58% - 1.20%
|
|
0.80% - 1.59%
|
|
0.88% - 1.79%
|
Dividend yields
|
|
—%
|
|
—%
|
|
—%
|
Volatility factor of expected market price
|
|
.391 - .779
|
|
.323 - .733
|
|
.370 - .390
|
Weighted-average expected term of option
|
|
1.3 - 4.5 years
|
|
3.1 - 5 years
|
|
3.5 - 4.5 years
|
Forfeiture rate
|
|
—%
|
|
—%
|
|
—%
|
A summary of nonvested stock awards (restricted stock and restricted stock units) activity as of
December 31, 2016
and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
Nonvested Stock
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
(Per Share)
|
Nonvested at January 1, 2016
|
|
2,822,042
|
|
|
$
|
4.30
|
|
Granted
|
|
1,550,750
|
|
|
4.86
|
|
Vested
|
|
(305,572
|
)
|
|
6.26
|
|
Forfeited
|
|
(174,170
|
)
|
|
4.32
|
|
Nonvested at December 31, 2016
|
|
3,893,050
|
|
|
$
|
4.37
|
|
The weighted-average grant date fair value of nonvested stock awards (restricted stock and restricted stock units) granted was
$4.86
per share in
2016
,
$4.00
per share in
2015
and
$6.29
per share in
2014
. The total vest date fair value of stock awards vested during the year was
$0.7 million
in
2016
,
$1.2 million
in
2015
and
$2.3 million
in
2014
.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2006 MIP Performance Units
At the annual meeting of shareholders held on August 11, 2006, the shareholders of the Company approved a proposal granting authorization to issue up to
2.1 million
shares of the Company’s common stock under the 2006 MIP. At Performance Unit settlement dates, participants were issued that number of shares of Company common stock equal to
60%
of the number of Performance Units being settled, and were paid in cash an amount equal to
40%
of the fair market value of that number of shares of common stock equal to the number of Performance Units being settled. Prior to 2012, Performance Units were only granted in 2006 and 2007, and the last of such units were settled in May 2011.
On June 19, 2012,
seven
senior officers of the Company were granted
154,264
Performance Units under the 2006 MIP, comprising all remaining available awards under the 2006 MIP. The awards had an aggregate grant date fair value of
$1.2 million
and vest ratably over
three
years. Upon vesting, the Performance Units were settled by the issuance of Company common stock equal to
60%
of the number of Performance Units being settled and the payment of cash in an amount equal to
40%
of the fair market value of that number of shares of common stock equal to the number of Performance Units being settled.
During the year ended December 31, 2015, an aggregate of
16,530
Performance Units were settled, which resulted in the issuance of
9,918
shares of common stock and cash payments totaling less than
$0.1 million
. During the year ended December 31, 2014, an aggregate of
27,546
Performance Units were settled, which resulted in the issuance of
16,526
shares of common stock and cash payments totaling
$0.1 million
. Since the June 19, 2012 grant date to December 31, 2014, an aggregate of
137,740
Performance Units were settled by
three
current executive officers and
three
former executive officers, and
16,524
Performance Units were forfeited by
one
former executive officer. Such settlements resulted in the issuance of
79,356
shares of common stock and cash payments totaling
$0.3 million
. As of
December 31, 2016
,
no
Performance Units were outstanding. There was
no
settlement of Performance Units during 2016.
We recognized compensation expense of
$0.0
in
2016
, less than
$0.1 million
in
2015
and
$0.2 million
in
2014
related to these 2006 MIP Performance Unit awards. We determined the amount of compensation expense recognized on the assumption that none of the Performance Unit awards would be forfeited and recorded actual forfeitures as incurred. The 2006 MIP terminated in April 2016.
Stock-based compensation charges aggregated
$5.1 million
in
2016
,
$3.9 million
in
2015
, and
$4.5 million
in
2014
. We include these charges in “Selling, general and administrative expenses” in the accompanying Consolidated Statements of Operations. At
December 31, 2016
, there was
$5.8 million
of unrecognized stock-based compensation expense related to stock options, restricted stock awards, restricted stock unit awards, and Performance Unit awards which we expect to recognize over a weighted-average period of
1.2
years.
(12) BUSINESS ACQUISITIONS AND DIVESTITURES
We completed several acquisitions and divestitures in recent years that we describe below. Generally, we acquire businesses that we believe will provide a strategic fit for our existing operations, cost savings and revenue synergies, or enable us to expand our capabilities in our Adjacent Services segment. We divest assets or businesses that we no longer find strategically aligned with our service offerings.
We allocate the total purchase price in a business acquisition to the fair value of identified assets acquired and liabilities assumed based on the fair values at the acquisition date, and record amounts exceeding the fair values as goodwill. If the fair value of the assets acquired exceeds the purchase price, we record this excess as a gain on bargain purchase. We determine the estimated fair values of intangible assets acquired using our estimates of future discounted cash flows to be generated by the acquired business over the estimated duration of those cash flows. We base the estimated cash flows on our projections of future revenue, cost of revenue, capital expenditures, working capital needs and tax rates. We estimate the duration of the cash flows based on the projected useful life of the assets and business acquired. We determine the discount rate based on specific business risk, cost of capital and other factors.
Etesius Limited
In February 2010, the Company’s U.K. subsidiary acquired all the issued and outstanding capital stock of Etesius Limited (“Etesius”), a privately-held European provider of purchasing and payables technologies and spend analytics based in Chelmsford, United Kingdom. We have included the results of operations of Etesius in our Adjacent Services segment results of operations since the acquisition date as we acquired Etesius with the intention of expanding our capabilities in this segment.
The financial terms of the Etesius share purchase agreement (“SPA”) required an initial payment to the Etesius shareholders of
$2.8 million
and a
$0.3 million
payment for obligations on behalf of Etesius shareholders which resulted in a total estimated purchase price value of approximately
$3.1 million
.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The SPA required deferred payments of
$1.2 million
over
four
years from the date of the SPA to certain selling shareholders who are now our employees. The SPA also provided for potential additional variable payments (“earn-out”) to these selling shareholders/employees over the same
four
-year period based on the financial performance of certain of the Company’s services lines, up to a maximum of
$3.8 million
. Because we were not obligated to make the deferred and earn-out payments upon the termination of employment of these employees under certain circumstances, we recognized these payments as compensation expense as earned. From the acquisition date to December 31, 2014, we paid
$1.4 million
of deferred payments and variable consideration. This amount consisted of the final
$0.7 million
of deferred payments paid in February 2014 and
$0.2 million
of variable consideration paid in August 2014. We currently estimate that we will not pay any additional variable consideration relating to these provisions resulting in no remaining amounts payable relating to this acquisition as of December 31, 2016.
Business Strategy, Inc.
In December 2011, we acquired BSI, based in Grand Rapids, Michigan, for a purchase price valued at
$11.9 million
. BSI was a provider of recovery audit and related procure-to-pay process improvement services for commercial clients, and a provider of customized software solutions and outsourcing solutions to improve back office payment processes. We have included the results of operations of Business Strategy, Inc. in our Recovery Audit Services – Americas segment and the results of operations of the affiliated company in our Adjacent Services segment results of operations since the acquisition date. These amounts aggregated
$0.8 million
of revenue and
$0.1 million
of net income in 2011 and
$10.9 million
of revenue and
$1.5 million
of net income in 2012. We acquired BSI with the intention of expanding our commercial recovery audit capabilities and to expand the services we offer to our clients.
The purchase price included an initial cash payment of
$2.8 million
and
640,614
shares of our common stock having a value of
$3.7 million
. An additional payment of approximately
$0.7 million
was due and paid in the first half of 2012 for working capital received in excess of a specified minimum level. We were subject to additional variable consideration of up to
$5.5 million
, payable via a combination of cash and shares of our common stock, based on the performance of the acquired businesses over a
two
-year period from the date of acquisition. We were also subject to additional consideration of up to
$8.0 million
, payable in cash over a period of
two
years, based on certain net cash fee receipts from a particular recovery audit claim at a specific client. We recorded an additional
$4.9 million
payable as of the acquisition date based on management’s estimate of the fair value of the variable consideration payable. We adjusted the
$12.2 million
initial estimates of the fair value of the assets and liabilities in 2012, resulting in reductions to goodwill of
$0.2 million
, and the fair value of the purchase price of
$0.2 million
, and recorded this change retroactively to 2011. The final goodwill amount of
$7.6 million
includes
$1.5 million
that is deductible for income tax purposes.
The final allocation of the fair values of the assets acquired and purchase price is summarized as follows (in thousands):
|
|
|
|
|
|
Fair values of net assets acquired:
|
|
Final Allocation
|
Equipment
|
|
$
|
70
|
|
Intangible assets, primarily customer relationships
|
|
4,041
|
|
Working capital, including work in progress
|
|
1,967
|
|
Deferred tax liabilities
|
|
(1,736
|
)
|
Goodwill
|
|
7,577
|
|
Fair value of net assets acquired
|
|
$
|
11,919
|
|
Fair value of purchase price
|
|
$
|
11,919
|
|
From the acquisition date to December 31, 2014, we paid
$6.3 million
of the earn-out liability consisting of cash payments of
$3.6 million
and
404,775
shares of our common stock having a value of
$2.7 million
. We also recorded accretion and other adjustments of the earn-out liability of
$1.4 million
, resulting in
no
remaining earn-out payable as of December 31, 2014.
Global Edge
In December 2015, we acquired the SIM business of Global Edge for a purchase price valued at
$0.7 million
. The purchase price included an initial cash payment of
$0.5 million
and additional variable cash consideration based on the performance of the acquired businesses over a
two
year period from the date of acquisition valued at
$0.2 million
.
Lavante
In October 2016, we acquired Lavante, a SaaS-based supplier of SIM and recovery audit services firm for a net purchase price of
$3.7 million
. Lavante’s assets consist primarily of its proprietary software applications.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We have recorded Lavante's assets acquired and liabilities assumed based on our preliminary estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of Lavante's assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. We expect to complete our fair value determinations no later than the fourth quarter of 2017. We do not currently expect our fair value determinations to change materially; however, there may be differences compared to those amounts reflected in our consolidated financial statements as of December 31, 2016 as we finalize our fair value analysis and such changes could be material.
Based on our preliminary estimates, the purchase price exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities at the acquisition date by
$2.1 million
, which amount has been allocated and recognized as goodwill within our Adjacent Service business segment.
No
ne of the goodwill associated with the acquisition is deductible for income tax purposes and, as such,
no
deferred taxes have been recorded related to goodwill.
The preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed is presented below:
|
|
|
|
|
|
As of October 31, 2016
|
|
|
Cash and cash equivalents
|
|
$
|
28
|
|
Account receivables
|
|
207
|
|
Other Current Assets
|
|
92
|
|
Goodwill
|
|
2,146
|
|
Intangible Assets
|
|
6,178
|
|
Fixed Assets
|
|
98
|
|
Total Assets
|
|
8,749
|
|
Accounts payable
|
|
121
|
|
Deferred revenue
|
|
370
|
|
Other current liabilities
|
|
757
|
|
Total Liabilities
|
|
1,248
|
|
Total purchase price
|
|
$
|
3,669
|
|
Our estimates of the fair values of identifiable intangible assets are presented below:
|
|
|
|
|
|
|
|
|
Fair values at October 31, 2016
|
Remaining useful lives (in months)
|
Trademarks
|
|
$
|
163
|
|
48
|
Patents
|
|
114
|
|
12
|
Software
|
|
5,901
|
|
48
|
Total intangible assets
|
|
$
|
6,178
|
|
|
In general, intangible assets include trade names, trademarks, copyrights, patents, customer contacts and/or relationships, developed technology (computer software), technological know-how, and brand names. When estimating the value of such assets, we consider the future income stream associated with the specific asset, taking into account the asset's estimated remaining life, average annual anticipated rate of return, and market rates of return. Often, an income approach such as a multi-period excess earnings model or distributor model will be used.
We may also consider the market price of comparable assets recently sold or the asking prices for similar assets currently for sale. This methodology involves researching the industry to determine if comparable companies pay or receive royalties for rights associated with the use of the asset. The royalty rates charged or received are then used as valuation benchmarks. The relief from royalty method is often used in the valuation of assets involving fair royalty rates (e.g., trademarks, patents, etc.).
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The cost approach analyzes the current cost to re-create or duplicate an asset minus the decrease in value due to the passage of time or obsolescence. For example, when valuing a trademark (when it is not the primary asset acquired), we calculate the costs that would have been incurred over the years in establishing consumer recognition and perception of quality, service and reliability. We also consider the legal costs incurred in registering the asset.
We are still reviewing the valuation of the Lavante acquisition, in particular the value of any potential earnout due to Lavante, the useful lives of the long-lived assets acquired from Lavante and any potential deferred tax assets or liabilities associated with the valuation.
The revenue and loss from continuing operations of Lavante from the acquisition date through December 31, 2016 are presented below and included in our consolidated statements of operations. These amounts are not necessarily indicative of the results of operations that Lavante would have realized if it had continued to operate as a stand-alone company during the period presented, primarily due to costs that are now reflected in our unallocated corporate costs and not allocated to Lavante.
|
|
|
|
|
|
|
|
From October 31, 2016 to December 31, 2016
|
Revenue
|
|
$
|
383
|
|
Loss from continuing operations
|
|
$
|
(891
|
)
|
As required by ASC 805, the following unaudited pro forma statements of operations for the years ended December 31, 2016 and 2015 give effect to the Lavante acquisition as if it had been completed on January 1, 2015. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been during the periods presented had the Lavante acquisition been completed during the periods presented. In addition, the unaudited pro forma financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma statements of operations do not reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the Lavante acquisition.
|
|
|
|
|
|
|
|
|
December 31, 2016
|
December 31, 2015
|
Revenue from continuing operations (pro forma)
|
|
143,198
|
|
140,994
|
|
Loss from continuing operations (pro forma)
|
|
(3,418
|
)
|
(5,516
|
)
|
Divestitures
In October 2014, we divested certain assets within our Adjacent Services segment that were related to our Chicago, Illinois-based consulting business. These assets, previously acquired in November 2010 from TJG Holdings LLC, were sold to Salo, LLC, a Minnesota limited liability company. We received an initial cash payment of
$1.1 million
in connection with the closing of the transaction and recognized a loss on the sale of less than
$0.1 million
, which we recognized in
Other loss
in the Consolidated Statements of Operations. We have also received payment for working capital transferred to the buyer. In addition, we received
$0.8 million
in earn-out payments based on certain revenue recognized by the buyer in relation to the acquired business during the year following the closing date of the divestiture.
In August 2015, we divested certain assets from a document service offering purchased as part of the Business Strategy, Inc. acquisition in 2011.We did not receive any initial cash payments at closing of the transaction and recognized a loss on the sale of
$1.6 million
, which we recognized in
Other loss
in the Consolidated Statements of Operations.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(13) QUARTERLY RESULTS (UNAUDITED)
The following tables set forth certain unaudited condensed consolidated quarterly financial data for each of the last eight quarters during our fiscal years ended
December 31, 2016
and
2015
. We have derived the information from unaudited Condensed Consolidated Financial Statements that, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such quarterly information. The operating results for any quarter are not necessarily indicative of the results to be expected for any future period. The quarterly results are updated for continuing operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
2015 Quarter Ended
|
|
|
Mar. 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
|
Mar. 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
|
|
(In thousands, except per share data)
|
Revenue, net
|
|
$
|
31,233
|
|
|
$
|
35,291
|
|
|
$
|
35,137
|
|
|
$
|
39,183
|
|
|
$
|
32,985
|
|
|
$
|
36,995
|
|
|
$
|
33,365
|
|
|
$
|
34,957
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
21,646
|
|
|
23,431
|
|
|
22,367
|
|
|
23,855
|
|
|
23,167
|
|
|
24,111
|
|
|
23,507
|
|
|
22,384
|
|
Selling, general and administrative expenses
|
|
8,848
|
|
|
9,620
|
|
|
9,883
|
|
|
11,048
|
|
|
7,944
|
|
|
9,185
|
|
|
8,284
|
|
|
6,871
|
|
Depreciation of property and equipment
|
|
1,232
|
|
|
1,216
|
|
|
1,376
|
|
|
1,209
|
|
|
1,279
|
|
|
1,294
|
|
|
1,255
|
|
|
1,489
|
|
Amortization of intangible assets
|
|
394
|
|
|
395
|
|
|
393
|
|
|
650
|
|
|
746
|
|
|
754
|
|
|
517
|
|
|
441
|
|
Total operating expenses
|
|
32,120
|
|
|
34,662
|
|
|
34,019
|
|
|
36,762
|
|
|
33,136
|
|
|
35,344
|
|
|
33,563
|
|
|
31,185
|
|
Operating income (loss) from continuing operations
|
|
(887
|
)
|
|
629
|
|
|
1,118
|
|
|
2,421
|
|
|
(151
|
)
|
|
1,651
|
|
|
(198
|
)
|
|
3,772
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
|
|
(1,007
|
)
|
|
196
|
|
|
(165
|
)
|
|
1,060
|
|
|
1,692
|
|
|
(416
|
)
|
|
654
|
|
|
235
|
|
Interest expense (income), net
|
|
(29
|
)
|
|
(12
|
)
|
|
(14
|
)
|
|
(98
|
)
|
|
(42
|
)
|
|
(53
|
)
|
|
(8
|
)
|
|
(87
|
)
|
Other (income) loss
|
|
10
|
|
|
18
|
|
|
(168
|
)
|
|
19
|
|
|
—
|
|
|
—
|
|
|
1,612
|
|
|
(421
|
)
|
Income (loss) from continuing operations before income taxes
|
|
139
|
|
|
427
|
|
|
1,465
|
|
|
1,440
|
|
|
(1,801
|
)
|
|
2,120
|
|
|
(2,456
|
)
|
|
4,045
|
|
Income tax expense (benefit)
|
|
204
|
|
|
460
|
|
|
(685
|
)
|
|
1,263
|
|
|
455
|
|
|
296
|
|
|
421
|
|
|
(803
|
)
|
Net income (loss) from continuing operations
|
|
(65
|
)
|
|
(33
|
)
|
|
2,150
|
|
|
177
|
|
|
(2,256
|
)
|
|
1,824
|
|
|
(2,877
|
)
|
|
4,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share from continuing operations
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.07
|
|
|
$
|
(0.11
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share from continuing operations
(1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.07
|
|
|
$
|
0.11
|
|
|
$
|
0.19
|
|
|
|
(1)
|
We calculate each quarter as a discrete period; the sum of the four quarters may not equal the calculated full-year amount.
|
In the fourth quarter of 2016, we released a valuation allowance of
$1.1 million
against the net deferred tax assets of
certain
of our foreign subsidiaries, which reduced our income tax expense for the period.
In the fourth quarter of 2015, we released a valuation allowance of
$1.5 million
against the net deferred tax assets of
one
of our foreign subsidiaries, which reduced our income tax expense for the period.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(14) SUBSEQUENT EVENTS
In February 2017, we completed the acquisition of substantially all of the assets of Cost & Compliance Associates, LLC. and Cost & Compliance Associates Limited. At the closing of the transaction, we paid
$10.0 million
in cash, which amount is subject to a customary working capital adjustment. In addition, we may be required to pay earnout consideration in cash over a period of
two
years, based on the performance of the acquired businesses and our contract compliance business following closing. The aggregate consideration we may be required to pay in connection with this acquisition cannot exceed
$18.0 million
.