PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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Years Ended December 31,
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2017
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2016
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|
2015
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Cash flows from operating activities:
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Net income (loss)
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$
|
3,184
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$
|
905
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$
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(3,226
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)
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Adjustments to reconcile net earnings to net cash provided by operating activities:
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|
|
|
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Depreciation and amortization
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8,203
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|
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6,879
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7,810
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Amortization of deferred loan costs
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85
|
|
|
60
|
|
|
20
|
|
Noncash interest expense
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1,215
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|
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—
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|
|
—
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Stock-based compensation expense
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7,052
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|
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5,123
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|
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3,926
|
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Other loss from sale of assets
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—
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|
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22
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|
|
1,191
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
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|
(2,190
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)
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|
84
|
|
|
2,165
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|
Deferred income taxes
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|
731
|
|
|
(861
|
)
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|
(1,112
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)
|
Change in fair value of contingent consideration
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(2,283
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)
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—
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|
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—
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Changes in operating assets and liabilities, net of business acquisitions:
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Restricted cash
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(4
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)
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|
1
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|
|
5
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|
Billed receivables
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(3,949
|
)
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|
(3,339
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)
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|
4,331
|
|
Unbilled receivables
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|
(469
|
)
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|
(509
|
)
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|
1,305
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|
Prepaid expenses and other current assets
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|
(417
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)
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(1,506
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)
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|
705
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|
Other assets
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(57
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)
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(65
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)
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—
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Accounts payable and accrued expenses
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|
815
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1,218
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(1,949
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)
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Accrued payroll and related expenses
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975
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2,606
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(3,595
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)
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Refund liabilities
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|
115
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|
|
67
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|
|
2,389
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Deferred revenue
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101
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|
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(5
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)
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(784
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)
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Other long-term liabilities
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353
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(562
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)
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272
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Net cash provided by operating activities
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13,460
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10,118
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13,453
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Cash flows from investing activities:
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|
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Business acquisition, net of cash acquired
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(10,128
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)
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(3,669
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)
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(520
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)
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Business divestiture
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—
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—
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783
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Purchases of property and equipment, net of disposal proceeds
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(9,355
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)
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(5,887
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)
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(4,482
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)
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Net cash used in investing activities
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(19,483
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)
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(9,556
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)
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|
(4,219
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)
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Cash flows from financing activities:
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|
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Repayments of long-term debt
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66
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|
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—
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|
|
—
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|
Payments for deferred loan costs
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(155
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)
|
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—
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|
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(100
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)
|
Proceeds from term loan
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10,000
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|
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3,600
|
|
|
—
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Repurchases of common stock
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—
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(3,772
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)
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(18,071
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)
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Restricted stock repurchased from employees for withholding taxes
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|
(100
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)
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|
(218
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)
|
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(312
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)
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Proceeds from option exercises
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1,172
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|
326
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|
|
91
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|
Net cash provided by (used in) financing activities
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10,983
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|
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(64
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)
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(18,392
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)
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Effect of exchange rates on cash and cash equivalents
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(1,860
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)
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103
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|
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(1,455
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)
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Net increase (decrease) in cash and cash equivalents
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3,100
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|
601
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|
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(10,613
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)
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Cash and cash equivalents at beginning of period
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15,723
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|
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15,122
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|
25,735
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Cash and cash equivalents at end of period
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$
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18,823
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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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Supplemental disclosure of cash flow information:
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|
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|
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Cash paid during the period for interest
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$
|
434
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$
|
60
|
|
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$
|
63
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|
Cash paid during the period for income taxes, net of refunds received
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|
$
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2,929
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|
|
$
|
1,407
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|
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$
|
1,085
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|
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|
|
|
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Noncash investing activities:
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|
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|
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Fair value of contingent consideration liabilities at the date of acquisition
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|
$
|
5,954
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|
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$
|
3,834
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$
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—
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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, 2017
,
2016
and
2015
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
$18.8 million
in cash and cash equivalents as of
December 31, 2017
includes
$5.0 million
held in the U.S.,
$1.8 million
held in Canada, and
$12.0 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
$1.9 million
as of
December 31, 2017
and
$2.2 million
as of
December 31, 2016
, of which approximately
$1.9 million
and
$2.2 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, 2017
, we had
$13.6 million
in bank debt outstanding. As of
December 31, 2016
, we had
$3.6 million
in bank debt outstanding. 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
$8.9 million
of business acquisition obligations as of
December 31, 2017
, and
$4.0 million
as of
December 31, 2016
. 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
$4.6 million
in
2017
,
$5.0 million
in
2016
and
$5.3 million
in
2015
.
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, 2017
.
(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
$2.2 million
in
2017
,
$3.5 million
in
2016
and
$3.0 million
in
2015
.
(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, 2017
.
(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) Loss Contingencies
Certain conditions may exist as of the date the financial statements are issued that may result in a loss to the Company, but which will only be determined and resolved when one or more future events occur or fail to occur. The Company’s management and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss is likely to occur and the amount of the liability can be estimated, then the estimated liability is accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Loss contingencies considered remote are generally not accrued or disclosed unless they involve guarantees, in which case the nature of the guarantee would be disclosed. Legal costs relating to loss contingencies are expensed as incurred.
(p) Reclassification of Prior Year Balance Sheet
Certain reclassifications have been made in the prior year in order to conform to the current year presentation.
(q) Impact of Recently Issued Accounting Standards
A summary of the recently issued 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.
Adopted by the Company in 2017
FASB ASC Update No. 2017-04
- In January 2017, the FASB issued Accounting Standards Update 2017-04,
Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
The standard removes the second step of the two step test used to determine an impairment of goodwill. Under the new standard, an entity only compares the fair value of the reporting unit to the carrying amount, including goodwill, and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The standard became effective for the Company beginning January 1, 2017. The Company has concluded that the early adoption of this standard, which is permitted, had no material impact on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
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 has concluded that the adoption of this standard had no material impact 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 became effective for the Company beginning January 1, 2017. The Company has concluded that the early adoption of this standard, which is permitted, had no material impact on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
Accounting Standards Not Yet Adopted
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.
FASB ASC Update No. 2014-09 -
In May 2014, the FASB issued Accounting Standards Update 2014-09,
Revenue from Contracts with Customers (Topic 606),
as later amended, which resulted in a new accounting standard
Revenue from Contracts with Customers (Topic 606)
, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. The new revenue recognition standard requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. Accounting Standards Update 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective on January 1, 2018. We have elected to adopt the revenue recognition standard in the first quarter of 2018 with a cumulative adjustment to retained earnings. We have completed our assessment of the new revenue recognition guidance. We do not anticipate the adoption of this standard to have a material impact on our financial statements, aside from adding expanded required disclosures.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(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 has an accrual for outstanding Medicare RAC appeals of approximately
$2.9 million
as of December 31, 2017. The HCRA services business has been reported as Discontinued Operations in accordance with US GAAP.
Discontinued operations information for the years ended
December 31, 2017
,
2016
and
2015
(in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
Results of Discontinued Operations
(in thousands)
|
Years Ended December 31,
|
|
2017
|
2016
|
2015
|
Revenue, net
|
$
|
—
|
|
$
|
(14
|
)
|
$
|
1,266
|
|
Cost of sales
|
1,350
|
|
1,112
|
|
4,743
|
|
Selling, general and administrative expense
|
14
|
|
184
|
|
1,253
|
|
Depreciation and amortization
|
8
|
|
14
|
|
35
|
|
Pretax loss from discontinued operations
|
(1,372
|
)
|
(1,324
|
)
|
(4,765
|
)
|
Income tax expense
|
—
|
|
—
|
|
—
|
|
Net loss from discontinued operations
|
$
|
(1,372
|
)
|
$
|
(1,324
|
)
|
$
|
(4,765
|
)
|
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 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, 2017
,
2016
and
2015
(in thousands) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
Audit
Services –
Americas
|
|
Recovery Audit
Services –
Europe/Asia-
Pacific
|
|
Adjacent
Services
|
|
Corporate
Support
|
|
Total
|
2017
|
|
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
113,122
|
|
|
$
|
44,372
|
|
|
$
|
4,126
|
|
|
$
|
—
|
|
|
$
|
161,620
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
|
|
|
|
|
|
|
$
|
4,556
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
2,962
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
1,539
|
|
EBIT
|
|
$
|
29,163
|
|
|
$
|
11,700
|
|
|
$
|
(7,942
|
)
|
|
$
|
(23,864
|
)
|
|
9,057
|
|
Depreciation of property and equipment
|
|
3,165
|
|
|
599
|
|
|
805
|
|
|
—
|
|
|
4,569
|
|
Amortization of intangible assets
|
|
1,919
|
|
|
142
|
|
|
1,573
|
|
|
—
|
|
|
3,634
|
|
EBITDA
|
|
34,247
|
|
|
12,441
|
|
|
(5,564
|
)
|
|
(23,864
|
)
|
|
17,260
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
|
|
(249
|
)
|
|
(1,769
|
)
|
|
(9
|
)
|
|
(163
|
)
|
|
(2,190
|
)
|
Acquisition-related adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,283
|
)
|
|
(2,283
|
)
|
Transformation severance and related expenses
|
|
313
|
|
|
655
|
|
|
320
|
|
|
378
|
|
|
1,666
|
|
Other (income) loss
|
|
751
|
|
|
184
|
|
|
(195
|
)
|
|
(900
|
)
|
|
(160
|
)
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,052
|
|
|
7,052
|
|
Adjusted EBITDA
|
|
$
|
35,062
|
|
|
$
|
11,511
|
|
|
$
|
(5,448
|
)
|
|
$
|
(19,780
|
)
|
|
$
|
21,345
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,389
|
|
|
$
|
2,383
|
|
|
$
|
1,335
|
|
|
$
|
3,248
|
|
|
$
|
9,355
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated assets
|
|
$
|
65,397
|
|
|
$
|
22,474
|
|
|
$
|
9,486
|
|
|
$
|
—
|
|
|
$
|
97,357
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18,823
|
|
|
18,823
|
|
Restricted cash
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51
|
|
|
51
|
|
Deferred income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,538
|
|
|
1,538
|
|
Prepaid expenses and other assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
910
|
|
|
910
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,539
|
|
|
1,539
|
|
Total assets
|
|
$
|
65,397
|
|
|
$
|
22,474
|
|
|
$
|
9,486
|
|
|
$
|
22,861
|
|
|
$
|
120,218
|
|
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
|
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 losses (gains) on short-term intercompany balances
|
|
31
|
|
|
107
|
|
|
17
|
|
|
(71
|
)
|
|
84
|
|
Transformation severance and related expenses
|
|
517
|
|
|
312
|
|
|
258
|
|
|
242
|
|
|
1,329
|
|
Other loss
|
|
—
|
|
|
—
|
|
|
(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 loss 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)
The following table presents revenue by country based on the location of clients served (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
93,447
|
|
|
$
|
80,857
|
|
|
$
|
80,484
|
|
United Kingdom
|
|
23,408
|
|
|
17,501
|
|
|
19,540
|
|
Canada
|
|
14,375
|
|
|
14,531
|
|
|
12,388
|
|
Australia
|
|
8,732
|
|
|
7,354
|
|
|
6,111
|
|
France
|
|
5,987
|
|
|
6,934
|
|
|
6,186
|
|
Mexico
|
|
5,385
|
|
|
4,900
|
|
|
4,340
|
|
Brazil
|
|
2,053
|
|
|
1,169
|
|
|
1,223
|
|
Spain
|
|
1,127
|
|
|
964
|
|
|
1,019
|
|
Ireland
|
|
929
|
|
|
337
|
|
|
513
|
|
New Zealand
|
|
899
|
|
|
979
|
|
|
596
|
|
Hong Kong
|
|
889
|
|
|
824
|
|
|
864
|
|
Colombia
|
|
709
|
|
|
583
|
|
|
610
|
|
Thailand
|
|
699
|
|
|
654
|
|
|
933
|
|
Other
|
|
2,981
|
|
|
3,257
|
|
|
3,495
|
|
|
|
$
|
161,620
|
|
|
$
|
140,844
|
|
|
$
|
138,302
|
|
The following table presents long-lived assets by country based on the location of the asset (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
United States
|
|
$
|
47,371
|
|
|
$
|
34,429
|
|
UK
|
|
5,510
|
|
|
2,047
|
|
All Other
|
|
1,125
|
|
|
1,074
|
|
|
|
$
|
54,006
|
|
|
$
|
37,550
|
|
One
client, The Kroger Co., accounted for approximately
12%
of revenue from continuing operations in
2017
and approximately
11%
of revenue from continuing operations in 2016, while no one client accounted for 10% or more of revenue from continuing operations in
2015
.
(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:
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
4,556
|
|
2
|
|
$
|
2,229
|
|
|
$
|
1,539
|
|
Net loss from discontinued operations
|
|
$
|
(1,372
|
)
|
|
$
|
(1,324
|
)
|
|
$
|
(4,765
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
21,937
|
|
|
21,969
|
|
|
25,868
|
|
|
|
|
|
|
|
|
Basic earnings per common share from continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
Basic loss per common share from discontinued operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.18
|
)
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
Diluted earnings (loss) per common share:
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
4,556
|
|
|
$
|
2,229
|
|
|
$
|
1,539
|
|
Net loss from discontinued operations
|
|
$
|
(1,372
|
)
|
|
$
|
(1,324
|
)
|
|
$
|
(4,765
|
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
21,937
|
|
|
21,969
|
|
|
25,868
|
|
Effect of dilutive securities from stock-based compensation plans
|
|
174
|
|
|
47
|
|
|
36
|
|
Denominator for diluted earnings per common share
|
|
22,111
|
|
|
22,016
|
|
|
25,904
|
|
|
|
|
|
|
|
|
Diluted earnings per common share from continuing operations
|
|
$
|
0.21
|
|
|
$
|
0.10
|
|
|
$
|
0.06
|
|
Diluted loss per common share from discontinued operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.18
|
)
|
Weighted-average shares outstanding excludes antidilutive shares underlying options that totaled
2.3 million
,
2.9 million
, and
3.3 million
shares, respectively, from the computation of diluted earnings per common share for the years ended
December 31, 2017
,
2016
, and
2015
.
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
2017
and
2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recovery
Audit
Services –
Americas
|
|
Recovery Audit
Services –
Europe/Asia-
Pacific
|
|
Adjacent
Services
|
|
Total
|
Balance, January 1, 2016
|
|
$
|
10,755
|
|
|
$
|
813
|
|
|
$
|
242
|
|
|
$
|
11,810
|
|
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
|
|
Goodwill recorded in connection with business combinations
|
|
2,685
|
|
|
869
|
|
|
140
|
|
|
3,694
|
|
Foreign currency translation
|
|
—
|
|
|
131
|
|
|
—
|
|
|
131
|
|
Balance, December 31, 2017
|
|
$
|
13,440
|
|
|
$
|
1,680
|
|
|
$
|
2,528
|
|
|
$
|
17,648
|
|
During 2017, we recorded goodwill of
$3.6 million
in our Recovery Audit Services - Americas and Recovery Audit Services - Europe/Asia-Pacific segments in conjunction with the acquisition of Cost & Compliance Associates, LLC and Cost & Compliance Associates Limited respectively, (collectively "C&CA") on February 23, 2017. C&CA is a commercial recovery audit and contract compliance firm with operations in the U.S. and the UK (refer to
Note 12
below).
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.
(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").
Note 12 – Business Acquisitions and Divestitures
below includes a more detailed description of the divestiture in 2015 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
$3.6 million
in
2017
,
$1.8 million
in
2016
and
$2.5 million
in
2015
. As of
December 31, 2017
and based on our current amortization methods, we project amortization expense relating to intangible assets for the next five years will be
$3.4 million
in
2018
,
$3.5 million
in
2019
,
$3.3 million
in
2020
,
$1.7 million
in
2021
and
$0.9 million
in
2022
. We use accelerated amortization methods for customer relationships and trade names, and straight-line amortization for non-compete agreements and trademarks.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Changes in noncurrent intangible assets during
2017
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Relationships
|
|
Trademarks
|
|
Non-
compete
Agreements
|
|
Software
|
|
Trade
Names
|
|
Total
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
$
|
37,784
|
|
|
$
|
931
|
|
|
$
|
1,477
|
|
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
42,392
|
|
Acquisition of Lavante Assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,178
|
|
|
—
|
|
|
6,178
|
|
FX adjustments and other
|
|
(1,211
|
)
|
|
(78
|
)
|
|
(155
|
)
|
|
—
|
|
|
—
|
|
|
(1,444
|
)
|
Balance, December 31, 2016
|
|
36,573
|
|
|
853
|
|
|
1,322
|
|
|
6,178
|
|
|
2,200
|
|
|
47,126
|
|
Acquisition of C&CA Assets
|
|
9,556
|
|
|
135
|
|
|
1,232
|
|
|
—
|
|
|
—
|
|
|
10,923
|
|
FX adjustments and other
|
|
777
|
|
|
38
|
|
|
75
|
|
|
—
|
|
|
—
|
|
|
890
|
|
Balance, December 31, 2017
|
|
$
|
46,906
|
|
|
$
|
1,026
|
|
|
$
|
2,629
|
|
|
$
|
6,178
|
|
|
$
|
2,200
|
|
|
$
|
58,939
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
$
|
(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
|
)
|
Amortization expense
|
|
(1,796
|
)
|
|
(22
|
)
|
|
(204
|
)
|
|
(1,612
|
)
|
|
—
|
|
|
(3,634
|
)
|
FX adjustments and other
|
|
(585
|
)
|
|
(38
|
)
|
|
(76
|
)
|
|
—
|
|
|
—
|
|
|
(699
|
)
|
Balance, December 31, 2017
|
|
$
|
(33,862
|
)
|
|
$
|
(913
|
)
|
|
$
|
(1,602
|
)
|
|
$
|
(1,884
|
)
|
|
$
|
(2,200
|
)
|
|
$
|
(40,461
|
)
|
Net carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
5,092
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,906
|
|
|
$
|
—
|
|
|
$
|
10,998
|
|
Balance, December 31, 2017
|
|
$
|
13,044
|
|
|
$
|
113
|
|
|
$
|
1,027
|
|
|
$
|
4,294
|
|
|
$
|
—
|
|
|
$
|
18,478
|
|
Estimated useful life (years)
|
|
6-15 years
|
|
|
5 years
|
|
|
1-5 years
|
|
|
4 years
|
|
|
4-5 years
|
|
|
|
(5) DEBT
In May of 2016, the Company adopted ASU 2015-03,
Interest - Simplifying the Presentation of Debt Issuance Costs
. ASU 2015-03 changed the presentation of debt issuance costs on the balance sheet by requiring that they be presented as a direct deduction from the related debt liability, rather than represented as a separate asset. As a result, the Company’s deferred financing costs are now reflected in
Long-term debt, excluding current portion
on the Company’s Consolidated Balance Sheets for all periods presented. Long-term debt as of
December 31, 2017
and
2016
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
2017
|
|
2016
|
|
Gross
|
|
DFC
(1)
|
|
Net
|
|
Gross
|
|
DFC
|
|
Net
|
Revolving Facility
|
$
|
13,600
|
|
|
$
|
(131
|
)
|
|
$
|
13,469
|
|
|
$
|
3,600
|
|
|
$
|
—
|
|
|
$
|
3,600
|
|
Capital lease obligations
|
105
|
|
|
—
|
|
|
105
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total long term debt
|
13,705
|
|
|
(131
|
)
|
|
13,574
|
|
|
3,600
|
|
|
—
|
|
|
3,600
|
|
Less: Current portion of long-term debt
|
48
|
|
|
—
|
|
|
48
|
|
|
3,600
|
|
|
—
|
|
|
3,600
|
|
Long-term debt, excluding current portion
|
$
|
13,657
|
|
|
$
|
(131
|
)
|
|
$
|
13,526
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
(1)
|
DFC refers to deferred financing costs related to the Company's long-term 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
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
million
term loan. The SunTrust credit facility is guaranteed by the Company and its domestic subsidiaries and is secured by substantially all of our assets.
The Company modified the existing credit facility agreement through various amendments during fiscal years 2014 and 2016. Included in these amendments was the refinancing of the committed credit facility in 2014, and clarification of certain definitions and other terms of the facility in 2016. The refinancing resulted in an extended maturity date of December 23, 2017, as well as lower interest rate. Pursuant to the December 2014 amendment, the credit facility would bear 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 was determined as of the first business day of each calendar month. We must pay a commitment fee, payable quarterly, on the unused portion of the credit facility.
On May 4, 2017, we entered into an amendment of the SunTrust credit facility, that, among other things, (i) increased the aggregate principal amount of the committed revolving credit facility from
$20.0 million
to
$35.0 million
through December 31, 2018, which will be reduced to
$30.0 million
thereafter, (ii) extended the maturity date of the credit facility to December 31, 2019, (iii) added customary provisions to reflect European Union “bail-in” directive compliance language, and (iv) modified the financial covenants applicable to the Company during the remaining term of the credit facility by (A) revising the maximum leverage ratio and minimum fixed charge coverage ratio and (B) adding an additional financial covenant requiring the Company to maintain a minimum amount of consolidated adjusted EBITDA. In addition, the applicable margin used to determine the interest rate per annum on outstanding borrowings under the credit facility, and the ongoing commitment fee payable on the unused portion of the revolving credit facility commitment, both of which previously had been fixed percentages per annum, have been amended and both now will vary based upon our quarterly leverage ratio calculation under the SunTrust credit facility. The applicable margin per annum on interest accruing on all borrowings under the credit facility outstanding on or after May 4, 2017, and the applicable percentage per annum commitment fee accruing on and after that date, respectively will be determined as follows:
|
|
|
|
|
|
Pricing Level
|
Leverage Ratio
|
Applicable Margin for LIBOR Index Rate Loans
|
Applicable Margin for Base Rate Loans
|
Applicable Percentage for Commitment Fee
|
I
|
Less than 1.25:1.00
|
2.25% per annum
|
1.25% per annum
|
0.250% per annum
|
II
|
Greater than or equal to 1.25:1.00 but less than 1.75:1.00
|
2.50% per annum
|
1.50% per annum
|
0.375% per annum
|
III
|
Greater than or equal to 1.75:1.00
|
2.75% per annum
|
1.75% per annum
|
0.375% per annum
|
As of December 31, 2017 there was
$13.6 million
in debt outstanding under the revolving SunTrust facility that will be due December 31, 2019. The amount available for additional borrowing under the SunTrust credit facility was
$21.4 million
as of December 31, 2017. Based on the terms of the credit facility, as amended, the applicable interest rate at December 31, 2017 was approximately
3.60%
. As of December 31, 2017 we were required to pay a commitment fee of
0.25%
per annum, payable quarterly, on the unused portion of the revolving SunTrust credit facility.
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. The Company was in compliance with the covenants in its SunTrust credit facility as of December 31, 2017.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Future Commitments
The following is a summary of the combined principal maturities of all long-term debt and principal payments to be made under the Company’s capital lease agreements for each of the fiscal years presented in the table below (in thousands):
|
|
|
|
|
|
Year Ended December 31
|
|
|
2018
|
|
$
|
73
|
|
2019
|
|
13,625
|
|
2020
|
|
7
|
|
Total
|
|
$
|
13,705
|
|
(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
$5.1 million
in
2017
,
$3.9 million
in
2016
and
$4.6 million
in
2015
.
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.
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
|
2018
|
$
|
3,363
|
|
$
|
(69
|
)
|
$
|
3,294
|
|
2019
|
2,981
|
|
(72
|
)
|
2,909
|
|
2020
|
2,527
|
|
(74
|
)
|
2,453
|
|
2021
|
2,116
|
|
(77
|
)
|
2,039
|
|
2022
|
440
|
|
—
|
|
440
|
|
Total payments
|
$
|
11,427
|
|
$
|
(292
|
)
|
$
|
11,135
|
|
(7) INCOME TAXES
Income (loss) before income taxes from continuing operations relate to the following jurisdictions (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
United States
|
|
$
|
(6,502
|
)
|
|
$
|
(5,306
|
)
|
|
$
|
(244
|
)
|
Foreign
|
|
14,020
|
|
|
8,777
|
|
|
2,152
|
|
|
|
$
|
7,518
|
|
|
$
|
3,471
|
|
|
$
|
1,908
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The provision for income taxes for continuing operations consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
1
|
|
|
—
|
|
|
(13
|
)
|
Foreign
|
|
2,230
|
|
|
2,103
|
|
|
1,494
|
|
|
|
2,231
|
|
|
2,103
|
|
|
1,481
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(155
|
)
|
|
—
|
|
|
—
|
|
State
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign
|
|
886
|
|
|
(861
|
)
|
|
(1,112
|
)
|
|
|
731
|
|
|
(861
|
)
|
|
(1,112
|
)
|
Total
|
|
$
|
2,962
|
|
|
$
|
1,242
|
|
|
$
|
369
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The significant differences between the U.S. federal statutory tax rate and the Company’s effective income tax expense for earnings (in thousands) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal income tax rate
|
|
$
|
2,631
|
|
|
$
|
1,180
|
|
|
$
|
649
|
|
State income taxes, net of federal effect
|
|
(62
|
)
|
|
(173
|
)
|
|
(240
|
)
|
Net operating loss limitation
|
|
2,975
|
|
|
—
|
|
|
—
|
|
Deferred tax true-up
|
|
—
|
|
|
(4,103
|
)
|
|
8,078
|
|
Change in deferred tax asset valuation allowance
|
|
(15,338
|
)
|
|
4,877
|
|
|
(6,729
|
)
|
Statutory rate change
|
|
13,850
|
|
|
—
|
|
|
—
|
|
Foreign tax rate differential
|
|
(899
|
)
|
|
(712
|
)
|
|
(223
|
)
|
Compensation deduction limitation
|
|
—
|
|
|
113
|
|
|
(1,201
|
)
|
Other, net
|
|
(195
|
)
|
|
60
|
|
|
35
|
|
Total
|
|
$
|
2,962
|
|
|
$
|
1,242
|
|
|
$
|
369
|
|
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,
|
|
|
2017
|
|
2016
|
Deferred income tax assets:
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,215
|
|
|
$
|
737
|
|
Accrued payroll and related expenses
|
|
1,691
|
|
|
3,062
|
|
Stock-based compensation expense
|
|
3,508
|
|
|
3,531
|
|
Depreciation of property and equipment
|
|
1,711
|
|
|
2,579
|
|
Capitalized Software
|
|
—
|
|
|
—
|
|
Non-compete agreements
|
|
—
|
|
|
—
|
|
Unbilled receivables and refund liabilities
|
|
1,811
|
|
|
2,216
|
|
Operating loss carry-forwards of foreign subsidiary
|
|
11,000
|
|
|
10,907
|
|
Federal operating loss carry-forwards
|
|
17,161
|
|
|
33,087
|
|
State operating loss carry-forwards
|
|
3,591
|
|
|
3,919
|
|
Other
|
|
376
|
|
|
1,181
|
|
Gross deferred tax assets
|
|
42,064
|
|
|
61,219
|
|
Less valuation allowance
|
|
34,776
|
|
|
50,114
|
|
Gross deferred tax assets net of valuation allowance
|
|
7,288
|
|
|
11,105
|
|
Deferred income tax liabilities:
|
|
|
|
|
Intangible assets
|
|
1,987
|
|
|
2,299
|
|
Capitalized software
|
|
29
|
|
|
1,928
|
|
Other
|
|
3,734
|
|
|
4,609
|
|
Gross deferred tax liabilities
|
|
5,750
|
|
|
8,836
|
|
Net deferred tax assets
|
|
$
|
1,538
|
|
|
$
|
2,269
|
|
Our reported effective tax rates on income approximated
39.4%
in 2017,
35.8%
in 2016, and
19.3%
in 2015. 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.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act"), was signed into law making significant changes to the Internal Revenue Code. The new legislation contains several key provisions that impact the consolidated financial statements for the year ended December 31, 2017. Additionally, in December 2017, the SEC staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118)
, which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation are expected over the next 12 months, we consider the accounting of the transition tax, deferred tax re-measurements, and other items to be incomplete though we have recorded provisional amounts in the consolidated financial statements. We expect to complete our analysis within the measurement period in accordance with SAB 118.
The new legislation contains several key provisions that affect us. The lowering of the corporate tax rate from 35% to 21% resulted in our deferred tax balances and related valuation allowances being re-measured to reflect the future tax benefit at the new enacted rate. The U.S. deferred tax assets were reduced by
$13.9 million
and the valuation allowance was also reduced by
$13.9 million
. This remeasurement results in no net impact to the effective tax rate for the year ended December 31, 2017. In addition the Alternative Minimum Tax (“AMT”) has been repealed for tax years beginning after December 31, 2017 and the AMT credit will be refundable in future years. The Company has an AMT credit balance of approximately
$155,000
recorded as a deferred tax asset and has now released the valuation allowance related to this balance, resulting in a
$155,000
income tax benefit. The Tax Act requires the payment of a transition tax on the mandatory deemed repatriation of cumulative unremitted foreign earnings, the larger amount measured on November 2, 2017 and December 31, 2017. Based upon all available evidence and the Company’s analysis, there is no transition tax liability due to a net earnings and profits deficit in our controlled foreign corporations and no impact to the effective tax rate for the year ended December 31, 2017. The Global Intangible Low Tax Income Tax (“GILTI”) is a U.S. minimum tax on the foreign earnings on intangible assets. The Company has elected to account for the impact of the minimum tax in the period realized. GILTI results in no impact to the effective tax rate for the year ended December 31, 2017.
We undertook a detailed review of our deferred taxes and it was determined with the exception of the deferred tax assets associated with the AMT credit described above, a valuation allowance was required for all other U.S. deferred tax assets. We continue to maintain a valuation allowance on our U.K. deferred tax assets. 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 carryback and carryforward 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. The balance of our valuation allowance was
$34.8 million
as of December 31, 2017, representing a change of
$15.3 million
from the valuation allowance of
$50.1 million
recorded as of December 31, 2016. The primary driver of the valuation allowance movement was determined by the re-measurement of deferred tax assets and corresponding valuation allowance due to the reduction in the U.S. corporate tax rate under The Act as discussed above.
In 2015, management determined that a valuation allowance was no longer required against the deferred tax assets of one of its U.S. branches in Australia. 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
$0.5 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 its U.S. branches in New Zealand and Singapore. 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.
In 2017, management determined that a valuation allowance was no longer required against the deferred tax assets of certain of its U.S. branches in Spain, Taiwan, Thailand and Mexico. As of December 31, 2017, we had gross deferred tax assets of
$0.9 million
relating to those foreign subsidiaries. The benefit of these deferred tax assets is reflected as a credit of
$0.2 million
to tax expense during the year ended December 31, 2017.
As of December 31, 2017, we had approximately
$81.7 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 between 2025 and 2035. As of December 31, 2017, we had approximately
$65.0 million
of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire between 2018 and 2037 and are subject to certain limitations. The U.S. federal and state loss carry-forwards at December 31, 2017, reflect adjustments for current period write-downs associated with ownership changes for state tax purposes.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 Brazilian subsidiary, we assert that we are not permanently reinvested. We did not provide additional incremental U.S. income tax expense on these amounts as our Brazilian subsidiary did not have undistributed earnings during the year.
On December 30, 2016, 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 2017. The Company has performed its assessment and has determined that $
87.3M
million of the gross federal net operating losses outstanding as of December 30, 2016 will be available for use going-forward.
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, 2015
|
|
$
|
677
|
|
|
$
|
220
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
Additions based on tax positions related to the prior years
|
|
—
|
|
|
24
|
|
Decrease 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
|
|
Additions based on tax positions related to the current year
|
|
—
|
|
|
—
|
|
Additions based on tax positions related to the prior years
|
|
116
|
|
|
19
|
|
Decreases based on payments made during the year
|
|
—
|
|
|
—
|
|
Decreases based on tax positions related to the prior years
|
|
(420
|
)
|
|
(145
|
)
|
Balance at December 31, 2017
|
|
$
|
193
|
|
|
$
|
28
|
|
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, 2017
, the
2014
through
2016
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
2014
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 a portion 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
2017
,
$0.8 million
in
2016
, and
$0.8 million
in
2015
.
(9) CAPITAL STRUCTURE
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. In December 2017, our Board of Directors extended the duration of the program to December 31, 2018. We repurchased
0.9
million shares of our common stock during the year ended
December 31, 2016
for
$3.8 million
and
no
shares in the year ended December 31, 2017.
Pursuant to exercises of outstanding stock options, we issued
225,043
shares of our common stock having a value of
$1.5 million
in the year ended
December 31, 2017
and
90,496
shares of our common stock having a value of
$0.3 million
in the year ended
December 31, 2016
.
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
Plan Summary
During 2017, the Company had
two
shareholder-approved stock-based compensation plans under which equity awards have been granted: (1) the 2008 Equity Incentive Plan (“2008 EIP”); and (2) the 2017 Equity Incentive Compensation Plan (“2017 EICP”) (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.
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 authorized the grant of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other incentive awards. Pursuant to amendments to the 2008 EIP that were approved by the Board of Directors and the Company's shareholders,
10,600,000
shares were reserved for issuance under the 2008 EIP to award grants to key employees, directors and service providers. The options granted pursuant to the 2008 EIP generally had
seven
year terms and vested in equal annual increments over the vesting period, which typically was
three
years for employees and
one
year for directors. No further awards can be granted from the 2008 EIP following the approval of the 2017 EICP by shareholders on June 27, 2017.
2017 EICP Awards
In April 2017, the Board of Directors adopted the 2017 EICP, which was approved by the shareholders at the annual meeting of the shareholders on June 27, 2017. The 2017 EICP applies to awards granted on or after June 27, 2017. Under the 2017 EICP, the Company may grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, deferred stock, restricted stock units, performance units, performance shares, dividend equivalents, bonus shares, and other stock-based or cash-based awards. The maximum number of shares of common stock that may be issued pursuant to the awards under the 2017 EICP is
3.4
million shares plus that number of shares of common stock subject to awards granted under the 2008 EIP that were outstanding when the 2017 EICP became effective and that subsequently terminate without deleting of the shares, whether by lapse, forfeiture, cancellation, or otherwise. The options granted to date pursuant to the 2017 EICP have a term of
seven
years. As of December 31, 2017, there were approximately
3.1 million
shares available for future grants under the 2017 EICP.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Grants
Option Awards
The following table summarizes stock option awards granted during the years ended
December 31, 2017
,
2016
, and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grantee
Type
|
|
# of
Options
Granted
|
|
Vesting Period
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
2017
|
|
|
|
|
|
|
|
|
Director group
|
|
90,566
|
|
|
1 year or less
|
|
$
|
6.34
|
|
|
$
|
3.49
|
|
Director group
(1)
|
|
35,000
|
|
|
3 years
|
|
$
|
6.25
|
|
|
$
|
3.50
|
|
CEO grant
|
|
500,000
|
|
|
4 years
|
|
$
|
7.35
|
|
|
$
|
2.36
|
|
Employee group
|
|
30,000
|
|
|
3 years
|
|
$
|
7.25
|
|
|
$
|
3.99
|
|
Employee inducement
(2)
|
|
335,000
|
|
|
3 years
|
|
$
|
6.19
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
Director group
(3)
|
|
195,417
|
|
|
1 year or less
|
|
$
|
5.01
|
|
|
$
|
2.71
|
|
Director group
(1)
|
|
35,000
|
|
|
3 years
|
|
$
|
4.80
|
|
|
$
|
2.66
|
|
Employee inducement
(4)(5)
|
|
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
(6)
|
|
135,000
|
|
|
3 years
|
|
$
|
5.51
|
|
|
$
|
1.42
|
|
|
|
(1)
|
The Company granted non-qualified stock options to
one
director in connection with the director joining the Company's board of directors.
|
|
|
(2)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans to certain employees.
|
|
|
(3)
|
Includes
20,417
non-qualified stock options granted to
one
director in connection with the director joining the Company's board of directors.
|
|
|
(4)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in 2016 in connection with an employee joining the Company.
|
|
|
(5)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in connection with the closing of the Lavante acquisition.
|
|
|
(6)
|
The Company granted non-qualified stock options outside its existing stock-based compensation plans in 2015 to
three
employees in connection with the employees joining the Company.
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Nonvested Stock Awards
The following table summarizes nonvested stock awards granted during the years ended
December 31, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
Grantee
Type
|
|
# of Stock Awards
Granted
|
|
Vesting Period
|
|
Weighted
Average Grant
Date Fair Value
|
2017
|
|
|
|
|
|
|
Director group
|
|
51,179
|
|
|
1 year or less
|
|
$
|
6.35
|
|
Employee group
(1)
|
|
641,751
|
|
|
3 years or less
|
|
$
|
6.31
|
|
Employee inducement
(2)
|
|
100,000
|
|
|
3 years or less
|
|
$
|
6.33
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
Employee group
(3)
|
|
1,250,750
|
|
|
2 years
|
|
$
|
4.88
|
|
Employee inducement
(4)
|
|
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
(5)
|
|
2,493,333
|
|
|
3 years
|
|
$
|
3.99
|
|
Employee inducement
(6)
|
|
10,000
|
|
|
3 years
|
|
$
|
5.29
|
|
|
|
(1)
|
The Company granted nonvested performance-based stock awards (restricted stock units), restricted stock units and restricted stock awards in the first quarter of 2017 to
twelve
executive officers totaling
458,000
units. During the second quarter of 2017, the Company issued
183,751
restricted stock awards and restricted stock units to key employees.
|
|
|
(2)
|
The Company granted nonvested performance-based stock awards (restricted stock units) and restricted stock awards in 2017 to
two
executive officers in connection with the employees joining the Company.
|
|
|
(3)
|
The Company granted nonvested performance-based stock awards (restricted stock units) in 2016 to
five
executive officers, and certain other key employees.
|
|
|
(4)
|
The Company granted nonvested performance-based stock awards (restricted stock units) outside its existing stock-based compensation plans in 2016 to
three
employees in connection with the employees joining the Company.
|
|
|
(5)
|
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.
|
|
|
(6)
|
The Company granted nonvested stock awards (restricted stock) outside its existing stock-based compensation plans in 2015 to
two
employees in connection with the employees 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.
Performance-Based Restricted Stock Units
In March 2017,
six
executive officers and
six
other senior leaders were granted
274,800
performance-based restricted stock units ("PBUs") under the 2008 EIP. If vested,
100%
of the vested PBUs will be paid in whole shares of common stock.
65%
of the PBUs vest and become payable based on the cumulative revenue from continuing operations and
35%
of the PBUs vest and become payable on the cumulative adjusted EBITDA from continuing operations that the Company achieves, in each case, for the
two
-year performance period ending December 31, 2018. 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 a 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 applicable threshold performance level).
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In May 2017,
one
executive officer and
one
senior leader were granted
59,000
PBUs outside of the existing stock-based compensation plan as an inducement for employment. If vested,
100%
of the vested PBUs will be paid in whole shares of common stock.
65%
of the PBUs vest and become payable based on the cumulative revenue from continuing operations and
35%
of the PBUs vest and become payable on the cumulative adjusted EBITDA from continuing operations that the Company achieves, in each case, for the
two
-year performance period ending December 31, 2018. 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 a straight line interpolation between such stated performance levels (although the Units 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 applicable threshold performance level).
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. This employee terminated his employment in the second quarter of 2017. The PBUs were forfeited upon termination.
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).
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).
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. The specified performance goals for these PBUs were not achieved and the PBUs were forfeited in the first quarter of 2017.
On March 30, 2015,
eight
executive officers of the Company were granted
1,325,000
PBUs under the 2008 EIP. The specified performance goals for these PBUs were not achieved and the PBUs were forfeited in the first quarter of 2017.
The following table summarizes the PBUs granted during the years ended December 31, 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
Total PBUs Granted
|
PBUs to be Settled in Common Stock
(1)
|
PBUs to be Settled in Cash
(2)
|
2017
|
333,800
|
|
333,800
|
|
—
|
|
2016
|
1,350,750
|
|
560,670
|
|
790,080
|
|
2015
(3)
|
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 2017 and 2016, the PBUs that were granted in 2017 and 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 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
$4.71
, the fair market value (closing price) of the Company's common stock on April 27, 2016.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Summary of Activity
A summary of option activity as of
December 31, 2017
, and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
|
|
Weighted-
Average
Exercise
Price
(Per Share)
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
($ 000’s)
|
Outstanding at January 1, 2017
|
|
3,420,385
|
|
|
$
|
6.26
|
|
|
4.30 years
|
|
$
|
1,204
|
|
Granted
|
|
990,566
|
|
|
6.82
|
|
|
|
|
|
Exercised
|
|
(225,043
|
)
|
|
5.23
|
|
|
|
|
$
|
299
|
|
Forfeited
|
|
(475,504
|
)
|
|
6.01
|
|
|
|
|
|
Expired
|
|
(311,111
|
)
|
|
6.18
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
3,399,293
|
|
|
$
|
6.54
|
|
|
4.05 years
|
|
$
|
2,367
|
|
Exercisable at December 31, 2017
|
|
2,290,967
|
|
|
$
|
6.52
|
|
|
3.20 years
|
|
$
|
1,654
|
|
The weighted-average grant date fair value of options granted was
$2.91
per share in
2017
,
$2.66
per share in
2016
and
$2.32
per share in
2015
. The total intrinsic value of options exercised was
$0.3 million
in
2017
,
$0.1 million
in
2016
and less than
$0.1 million
in
2015
.
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,
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rates
(1)
|
|
1.38% - 1.96%
|
|
0.58% - 1.20%
|
|
0.80% - 1.59%
|
Dividend yields
(2)
|
|
—%
|
|
—%
|
|
—%
|
Volatility factor of expected market price
(3)
|
|
.540 - .749
|
|
.391 - .779
|
|
.323 - .733
|
Weighted-average expected term of options
(4)
|
|
2.2 - 4 years
|
|
1.3 - 4.5 years
|
|
3.1 - 5 years
|
Forfeiture rate
(5)
|
|
—%
|
|
—%
|
|
—%
|
|
|
(1)
|
The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for periods corresponding to the expected term of the options.
|
|
|
(2)
|
The Company has not historically declared dividends.
|
|
|
(3)
|
The expected volatility is based on the historical volatility of the Company's stock.
|
|
|
(4)
|
The expected term represents the weighted average period of time that the stock options are expected to be outstanding, giving consideration to the vesting schedules.
|
The Company accounts for forfeitures as they occur rather than estimating expected forfeitures.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A summary of nonvested stock awards (including restricted stock, restricted stock units and performance-based restricted stock units) activity as of
December 31, 2017
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, 2017
|
|
3,893,050
|
|
|
$
|
4.37
|
|
Granted
|
|
792,930
|
|
|
6.32
|
|
Vested
|
|
(45,002
|
)
|
|
6.24
|
|
Forfeited
|
|
(2,524,282
|
)
|
|
4.09
|
|
Nonvested at December 31, 2017
|
|
2,116,696
|
|
|
$
|
5.36
|
|
The weighted-average grant date fair value of nonvested stock awards (restricted stock and restricted stock units) granted was
$6.32
per share in
2017
,
$4.86
per share in
2016
and
$4.00
per share in
2015
. The total vest date fair value of stock awards vested during the year was
$0.3 million
in
2017
,
$0.7 million
in
2016
and
$1.2 million
in
2015
.
Stock-based compensation expense was
$7.1 million
in
2017
,
$5.1 million
in
2016
, and
$3.9 million
in
2015
. We include these charges in
Selling, general and administrative expenses
in the accompanying Consolidated Statements of Operations.
Total unrecognized compensation expense related to nonvested stock-based compensation as of December 31, 2017 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Restricted
|
Restricted
|
|
|
Options
|
SAR
|
Stock Awards
|
Stock Units
|
Total
|
|
|
|
|
|
|
Unrecognized compensation expense
|
$
|
2,565
|
|
$
|
77
|
|
$
|
1,752
|
|
$
|
1,628
|
|
$
|
6,022
|
|
Weighted-average remaining recognition period (in years)
|
2.9
|
0.3
|
2.3
|
1.4
|
2.3
|
(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. We divest assets or businesses that we no longer find strategically aligned with our service offerings.
Cost & Compliance Associates Acquisition
In February 2017, we completed the acquisition of Cost & Compliance Associates, LLC and Cost & Compliance Associates Limited (collectively "C&CA"). C&CA is a commercial recovery audit and contract compliance firm with operations in the U.S. and the UK. We acquired substantially all of the assets of C&CA for approximately
$10.0 million
in cash plus potential earnout consideration of up to
$8.0 million
.
The actual payment of the earnout consideration will be based on achieving certain financial targets over a two year period that commenced on March 1, 2017 and will conclude on February 28, 2019. Management estimated that the fair value of the earnout consideration was approximately
$5.9 million
at the date of acquisition. During 2017, the Company recognized accretion of
$0.9 million
on the fair value of the earnout amount which was included in
Interest expense
in the Consolidated Statements of Operations, and increased the related contingent consideration liability. As of December 31, 2017, the contingent consideration liability related to the C&CA acquisition was
$6.8 million
, of which
$3.7 million
was included in current
Business acquisition obligations
and
$3.1 million
was included in long-term
Business acquisition obligations
in our Consolidated Balance Sheet. We funded the purchase price and acquisition costs from borrowings under our credit facility, further described in
Note 5
.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Purchase Price Allocation
We allocated the aggregate purchase price for C&CA to the net tangible and intangible assets acquired based on their fair values as of February 23, 2017. We based the allocation of the purchase price on a valuation for intangible assets and the carrying value for the remaining assets and liabilities, as the carrying value approximates their fair value. The fair value of C&CA's identifiable intangible assets were measured using the income approach which includes a projection of estimated future discounted cash flows using a discount rate that is specific to the business risk, cost of capital and other factors. We recorded the excess of the purchase price over the net tangible and intangible assets as goodwill, which has been allocated and recognized as goodwill within our Recovery Audit Services-Americas and Recovery Audit Services-Europe/Asia-Pacific business segments. Factors that contributed to the recognition of goodwill included expected synergies and the trained workforce.
Our purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
1,621
|
|
Commissions receivable
|
|
48
|
|
Prepaid expenses
|
|
109
|
|
Other current assets, net
|
|
6
|
|
Intangible assets
|
|
10,923
|
|
Goodwill
|
|
3,554
|
|
Fixed assets, net
|
|
323
|
|
Accounts payable
|
|
(125
|
)
|
Accrued commissions
|
|
(537
|
)
|
Total consideration paid
|
|
$
|
15,922
|
|
Contingent consideration
|
|
(5,954
|
)
|
Total cash paid
|
|
$
|
9,968
|
|
The intangible assets acquired were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fair Value
|
Remaining useful life
|
Customer relationships
|
|
$
|
9,556
|
|
14 years
|
Non-compete
|
|
1,232
|
|
4 years
|
Trademarks
|
|
135
|
|
4 years
|
|
|
$
|
10,923
|
|
|
We have included the results of C&CA from the date of acquisition through December 31, 2017 in our Consolidated Statement of Operations. In fiscal year 2017, we included revenue of
$7.8 million
and income before income tax of
$0.8 million
in our Recovery Audit Services - Americas business segment, and revenue of
$3.3 million
and income before income tax of
$1.0 million
in our Recovery Audit Services - Europe/Asia- Pacific business segment.
Unaudited Supplemental Financial Information
Our unaudited pro forma results presented below, including C&CA, for the years ended December 31, 2017 and 2016 are presented as if the acquisition had been completed on January 1, 2016. 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 C&CA acquisition been completed on January 1, 2016. In addition, the unaudited pro forma information does not purport to project future operating results.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
|
2017
|
2016
|
Unaudited pro forma revenue
|
|
162,459
|
|
155,626
|
|
Unaudited pro forma net income from continuing operations
|
|
3,886
|
|
5,365
|
|
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Lavante Acquisition
In October 2016, we completed the acquisition of Lavante, Inc. ("Lavante"). Lavante is a SaaS-based procure-to-pay supplier information management (SIM) and recovery audit services firm, based in San Jose, California. We acquired substantially all of the assets of Lavante, which primarily consisted of its proprietary software applications, for
$3.8 million
in cash, plus potential earnout consideration of up to
$4.5 million
.
The actual payment of the earnout consideration will be based on achieving certain financial targets over a two year period that commenced on October 31, 2016 and will conclude on December 31, 2018. Management estimated that the fair value of the earnout consideration was approximately
$3.8 million
at the date of acquisition, of which
$2.0 million
was included in
Other current liabilities
and
$1.8 million
was included in
Other long-term liabilities
in our Consolidated Balance Sheet as of December 31, 2016. During 2017, the Company recognized accretion of
$0.3 million
on the fair value of the earnout amount which was included in
Interest expense
in the Consolidated Statements of Operations, and increased the related contingent consideration liability. In the fourth quarter of 2017, it was determined that a portion of the earnout consideration would not be achieved and we reduced the related contingent consideration liability by
$2.1 million
. This adjustment was included in
Acquisition-related adjustments
in the Consolidated Statements of Operations for the year ended December 31, 2017. As of December 31, 2017, the contingent consideration liability related to the Lavante acquisition was
$2.0 million
, of which
$0.1 million
was included in current
Business acquisition obligations
and
$1.9 million
was included in long-term
Business acquisition obligations
in our Consolidated Balance Sheet. We funded the purchase price and acquisition costs from borrowings on our credit facility, further described in
Note 5
.
Purchase Price Allocation
We allocated the aggregate purchase price for Lavante to the net tangible and intangible assets acquired based on their fair values as of October 31, 2016. We based the allocation of the purchase price on a valuation of intangible assets, and the carrying value for the remaining assets and liabilities as the carrying value approximated their fair value. The fair value of Lavante's identifiable intangible assets were measured using a form of the income approach, and a cost approach. The income approach includes a projection of estimated future discounted cash flows using a discount rate that is specific to the business risk, cost of capital and other factors. We recorded the excess of the purchase price over the net tangible and intangible assets as goodwill within our Adjacent Services business segment. Factors that contributed to the recognition of goodwill included expected synergies and the trained workforce.
Our purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28
|
|
Accounts receivable, net
|
|
207
|
|
Other current assets
|
|
92
|
|
Intangible assets
|
|
6,178
|
|
Goodwill
|
|
2,286
|
|
Fixed assets, net
|
|
98
|
|
Accounts payable
|
|
(121
|
)
|
Deferred revenue
|
|
(370
|
)
|
Other current liabilities
|
|
(757
|
)
|
Total consideration paid
|
|
$
|
7,641
|
|
Contingent consideration
(1)
|
|
(3,832
|
)
|
Total cash paid
|
|
$
|
3,809
|
|
(1)
In the fourth quarter of 2017, we reduced the earnout liability by
$2.1 million
. At December 31, 2017, the balance was
$2.0 million
.
PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The intangible assets acquired were as follows (in thousands):
|
|
|
|
|
|
|
|
|
Fair Value
|
Remaining useful life
|
Trademarks
|
|
$
|
163
|
|
4 years
|
Patents
|
|
114
|
|
1 year
|
Software
|
|
5,901
|
|
4 years
|
Total intangible assets
|
|
$
|
6,178
|
|
|
We have included the results of Lavante from its date of acquisition through December 31, 2017 in our Consolidated Statement of Operations, which consisted of revenue of
$0.4 million
and a loss before income tax of
$0.9 million
in the year ended December 31, 2016, and revenue of
$1.9 million
and a loss before income tax of
$4.8 million
in the year ended December 31, 2017. The results from Lavante are included in our Adjacent Services business segment.
Unaudited Supplemental Financial Information
Our unaudited pro forma results presented below, including Lavante, for the years ended December 31, 2016 and 2015 are presented as if the acquisition 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 on January 1, 2015. In addition, the unaudited pro forma information does not purport to project future operating results.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in thousands)
|
|
2016
|
2015
|
Unaudited pro forma revenue
|
|
143,198
|
|
140,994
|
|
Unaudited pro forma net (loss) income from continuing operations
|
|
(3,418
|
)
|
(5,516
|
)
|
Global Edge Acquisition
In December 2015, we acquired the SIM business of Global Edge for a purchase price of
$0.7 million
. The purchase price included an initial cash payment of
$0.5 million
and additional 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
. In the fourth quarter of 2017, we determined that the performance targets for the additional cash consideration would not be achieved, and reduced the related contingent consideration liability by
$0.2 million
. This adjustment was included in
Acquisition-related adjustments
in the Consolidated Statements of Operations for the year ended December 31, 2017.
Divestitures
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, 2017
and
2016
. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 Quarter Ended
|
|
2016 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
|
|
$
|
33,569
|
|
|
$
|
38,510
|
|
|
$
|
42,467
|
|
|
$
|
47,074
|
|
|
$
|
31,233
|
|
|
$
|
35,291
|
|
|
$
|
35,137
|
|
|
$
|
39,183
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
23,026
|
|
|
25,605
|
|
|
26,675
|
|
|
26,746
|
|
|
21,646
|
|
|
23,431
|
|
|
22,367
|
|
|
23,855
|
|
Selling, general and administrative expenses
|
|
10,536
|
|
|
11,424
|
|
|
12,189
|
|
|
12,792
|
|
|
8,848
|
|
|
9,620
|
|
|
9,883
|
|
|
11,048
|
|
Depreciation of property and equipment
|
|
1,220
|
|
|
1,109
|
|
|
1,133
|
|
|
1,107
|
|
|
1,232
|
|
|
1,216
|
|
|
1,376
|
|
|
1,209
|
|
Amortization of intangible assets
|
|
722
|
|
|
722
|
|
|
722
|
|
|
1,468
|
|
|
394
|
|
|
395
|
|
|
393
|
|
|
650
|
|
Acquisition-related adjustments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,283
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total operating expenses
|
|
35,504
|
|
|
38,860
|
|
|
40,719
|
|
|
39,830
|
|
|
32,120
|
|
|
34,662
|
|
|
34,019
|
|
|
36,762
|
|
Operating (loss) income from continuing operations
|
|
(1,935
|
)
|
|
(350
|
)
|
|
1,748
|
|
|
7,244
|
|
|
(887
|
)
|
|
629
|
|
|
1,118
|
|
|
2,421
|
|
Foreign currency transaction (gains) losses on short-term intercompany balances
|
|
(552
|
)
|
|
(957
|
)
|
|
(418
|
)
|
|
(263
|
)
|
|
(1,007
|
)
|
|
196
|
|
|
(165
|
)
|
|
1,060
|
|
Interest expense (income), net
|
|
37
|
|
|
48
|
|
|
142
|
|
|
1,312
|
|
|
(29
|
)
|
|
(12
|
)
|
|
(14
|
)
|
|
(98
|
)
|
Other (income) loss
|
|
(199
|
)
|
|
5
|
|
|
17
|
|
|
17
|
|
|
10
|
|
|
18
|
|
|
(168
|
)
|
|
19
|
|
(Loss) income from continuing operations before income taxes
|
|
(1,221
|
)
|
|
554
|
|
|
2,007
|
|
|
6,178
|
|
|
139
|
|
|
427
|
|
|
1,465
|
|
|
1,440
|
|
Income tax expense (benefit)
|
|
627
|
|
|
879
|
|
|
930
|
|
|
526
|
|
|
204
|
|
|
460
|
|
|
(685
|
)
|
|
1,263
|
|
Net (loss) income from continuing operations
|
|
(1,848
|
)
|
|
(325
|
)
|
|
1,077
|
|
|
5,652
|
|
|
(65
|
)
|
|
(33
|
)
|
|
2,150
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share from continuing operations
(1)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
|
$
|
0.26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share from continuing operations
(1)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
|
$
|
0.26
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
|
(1)
|
We calculate each quarter as a discrete period; the sum of the four quarters may not equal the calculated full-year amount.
|