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EX-32.1 - EXHIBIT 32.1 - PRGX GLOBAL, INC.ex3212017q3.htm
EX-31.2 - EXHIBIT 31.2 - PRGX GLOBAL, INC.ex3122017q3.htm
EX-31.1 - EXHIBIT 31.1 - PRGX GLOBAL, INC.ex3112017q3.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 0-28000
 PRGX Global, Inc.
(Exact name of registrant as specified in its charter) 
Georgia
 
58-2213805
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
600 Galleria Parkway
 
30339-5986
Suite 100
 
(Zip Code)
Atlanta, Georgia
 
 
(Address of principal executive offices)
 
 
Registrants telephone number, including area code: (770) 779-3900
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check One): 
¨  Large accelerated filer
ý
Accelerated filer
¨  Non-accelerated filer     (Do not check if a smaller reporting company)
¨
Smaller reporting company
 
¨
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Common shares of the registrant outstanding at November 3, 2017 were 22,394,734.



PRGX GLOBAL, INC.
FORM 10-Q
For the Quarter Ended September 30, 2017
INDEX
 
 
Page No.
Part I. Financial Information
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2017
Part II. Other Information
 



PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
$
42,467

 
$
35,137

 
$
114,546

 
$
101,661

Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
26,675

 
22,367

 
75,306

 
67,444

Selling, general and administrative expenses
 
12,189

 
9,883

 
34,149

 
28,351

Depreciation of property and equipment
 
1,133

 
1,376

 
3,462

 
3,824

Amortization of intangible assets
 
722

 
393

 
2,166

 
1,182

Total operating expenses
 
40,719

 
34,019

 
115,083

 
100,801

Operating income (loss) from continuing operations
 
1,748

 
1,118

 
(537
)
 
860

Foreign currency transaction gains on short-term intercompany balances
 
(418
)
 
(165
)
 
(1,927
)
 
(976
)
Interest expense (income), net
 
142

 
(14
)
 
227

 
(55
)
Other loss (income)
 
17

 
(168
)
 
(177
)
 
(140
)
Income from continuing operations before income taxes
 
2,007

 
1,465

 
1,340

 
2,031

Income tax expense (benefit)
 
930

 
(685
)
 
2,436

 
(21
)
Net income (loss) from continuing operations
 
$
1,077

 
$
2,150

 
$
(1,096
)
 
$
2,052

 
 
 
 
 
 
 
 
 
Discontinued operations (Note D):
 
 
 
 
 
 
 
 
(Loss) income from discontinued operations
 
$
(344
)
 
$
133

 
$
(1,029
)
 
$
(914
)
Other loss (income)
 

 

 

 

Income tax expense (benefit)
 

 

 

 

Net (loss) income from discontinued operations
 
$
(344
)
 
$
133

 
$
(1,029
)
 
$
(914
)
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
733

 
$
2,283

 
$
(2,125
)
 
$
1,138

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share (Note B):
 
 
 
 
 
 
 
 
Basic earnings (loss) from continuing operations
 
$
0.05

 
$
0.10

 
$
(0.05
)
 
$
0.09

Basic earnings (loss) from discontinued operations
 
(0.02
)
 
0.01

 
(0.05
)
 
(0.04
)
Total basic earnings (loss) per common share
 
$
0.03

 
$
0.11

 
$
(0.10
)
 
$
0.05

 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share (Note B)
 
 
 
 
 
 
 
 
Diluted earnings (loss) from continuing operations
 
$
0.05

 
$
0.10

 
$
(0.05
)
 
$
0.09

Diluted earnings (loss) from discontinued operations
 
(0.02
)
 
0.01

 
(0.05
)
 
(0.04
)
Total diluted earnings (loss) per common share
 
$
0.03

 
$
0.11

 
$
(0.10
)
 
$
0.05

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding (Note B):
 
 
 
 
 
 
 
 
Basic
 
22,498

 
21,847

 
22,225

 
22,084

Diluted
 
22,761

 
21,874

 
22,225

 
22,114


1


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(In thousands)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
733

 
$
2,283

 
$
(2,125
)
 
$
1,138

Foreign currency translation adjustments
 
64

 
(242
)
 
(230
)
 
(729
)
Comprehensive income (loss)
 
$
797

 
$
2,041

 
$
(2,355
)
 
$
409


See accompanying Notes to Condensed Consolidated Financial Statements.

2


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
 
 
September 30, 2017
 
December 31, 2016
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
11,932

 
$
15,723

Restricted cash
 
109

 
47

Receivables:
 
 
 
 
Contract receivables, less allowances of $1,773 in 2017 and $799 in 2016:
 
 
 
 
Billed
 
33,467

 
29,186

Unbilled
 
1,548

 
2,278

 
 
35,015

 
31,464

Employee advances and miscellaneous receivables, less allowances of $314 in 2017 and $500 in 2016
 
2,263

 
2,184

Total receivables
 
37,278

 
33,648

Prepaid expenses and other current assets
 
4,837

 
3,363

Total current assets
 
54,156

 
52,781

Property and equipment
 
70,299

 
63,325

Less accumulated depreciation and amortization
 
(54,930
)
 
(51,089
)
Property and equipment, net
 
15,369

 
12,236

Goodwill
 
22,824

 
13,823

Intangible assets, less accumulated amortization of $38,921 in 2017 and $36,128 in 2016
 
8,840

 
10,998

Noncurrent portion of unbilled receivables
 
868

 
854

Deferred income taxes
 
2,212

 
2,269

Other assets
 
281

 
513

Total assets
 
$
104,550

 
$
93,474

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
7,669

 
$
7,299

Accrued payroll and related expenses
 
14,801

 
13,868

Refund liabilities
 
7,768

 
7,900

Deferred revenue
 
1,727

 
1,330

Current portion of debt (Note E)
 
48

 
3,600

Business acquisition obligations
 
2,078

 
2,078

Total current liabilities
 
34,091

 
36,075

Long-term debt (Note E)
 
13,677

 

Noncurrent refund liabilities
 
775

 
804

Other long-term liabilities
 
2,389

 
4,205

Total liabilities
 
50,932

 
41,084

Commitments and contingencies (Note G)
 


 


Shareholders’ equity (Note B):
 
 
 
 
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; 22,390,734 shares issued and outstanding at September 30, 2017 and 21,845,920 shares issued and outstanding at December 31, 2016
 
224

 
218

Additional paid-in capital
 
578,695

 
575,118

Accumulated deficit
 
(525,358
)
 
(523,233
)
Accumulated other comprehensive income
 
57

 
287

Total shareholders’ equity
 
53,618

 
52,390

Total liabilities and shareholders’ equity
 
$
104,550

 
$
93,474


3


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
 
 
Nine Months Ended September 30,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net (loss) income
 
$
(2,125
)
 
$
1,138

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
5,628

 
5,017

Amortization of deferred loan costs
 
76

 

Stock-based compensation expense
 
5,362

 
3,224

Deferred income taxes
 

 
(1,475
)
Foreign currency transaction gains on short-term intercompany balances
 
(1,927
)
 
(976
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
 
Restricted cash
 
(62
)
 
(51
)
Billed receivables
 
(1,437
)
 
(451
)
Unbilled receivables
 
724

 
(18
)
Prepaid expenses and other current assets
 
(1,258
)
 
(1,274
)
Other assets
 
342

 
(44
)
Accounts payable and accrued expenses
 
2,180

 
1,287

Accrued payroll and related expenses
 
(2,499
)
 
(35
)
Refund liabilities
 
(163
)
 
44

Deferred revenue
 
397

 
(161
)
Other long-term liabilities
 
(1,681
)
 
(51
)
Net cash provided by operating activities
 
3,557

 
6,174

Cash flows from investing activities:
 
 
 
 
Business acquisition, net of cash acquired
 
(10,128
)
 

Purchases of property and equipment, net of disposal proceeds
 
(6,433
)
 
(4,648
)
Net cash used in investing activities
 
(16,561
)
 
(4,648
)
Cash flows from financing activities:
 
 
 
 
Proceeds from revolving facility
 
12,500

 

Repayments of revolving facility
 
(2,500
)
 

Payment of deferred loan cost
 
(157
)
 

Restricted stock repurchased from employees for withholding taxes
 
(100
)
 
(218
)
Proceeds from option exercises
 
862

 
132

Repurchase of common stock
 

 
(3,762
)
Net cash provided by (used in) financing activities
 
10,605

 
(3,848
)
Effect of exchange rates on cash and cash equivalents
 
(1,392
)
 
370

Net (decrease) increase in cash and cash equivalents
 
(3,791
)
 
(1,952
)
Cash and cash equivalents at beginning of period
 
15,723

 
15,122

Cash and cash equivalents at end of period
 
$
11,932

 
$
13,170

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during the period for interest
 
$
146

 
$
40

Cash paid during the period for income taxes, net of refunds received
 
$
668

 
$
1,068


See accompanying Notes to Condensed Consolidated Financial Statements.

4

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note A – Basis of Presentation
The accompanying Condensed Consolidated Financial Statements (Unaudited) of PRGX Global, Inc. and its wholly owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
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. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016.
New Accounting Standards
A summary of the new accounting standards issued by the Financial Accounting Standards Board (“FASB”) and included in the Accounting Standards Codification (“ASC”) that apply to PRGX is set forth below:
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 will become effective for the Company beginning January 1, 2020. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.
FASB ASC Update No. 2016-02 - In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). The standard requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. The standard requires lessors to classify leases as either sales-type, finance or operating. A sales-type lease occurs if the lessor transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing lease. If the lessor does not convey risks and rewards or control, an operating lease results. The standard will become effective for the Company beginning January 1, 2019. The Company is currently assessing the impact adoption of this standard will have on its consolidated results of operations, financial condition, cash flows, and financial statement disclosures.

FASB ASC Update No. 2014-9 and additional updates - In May 2014, the FASB issued an accounting standards update with new guidance on recognizing revenue from contracts with customers.  The standards update outlines a single comprehensive model for an entity to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services.  Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In 2016, the FASB issued accounting standards updates to address implementation issues and to clarify the guidance for identifying performance obligations, licenses and determining if a company is the principal or agent in a revenue arrangement. The standard will become effective for the Company beginning January 1, 2018.  

We are continuing to work towards establishing policies, updating our processes and implementing necessary changes to data and processes to be able to comply with the new requirements. Based on the results of our assessment to date, we do not expect that the new standard will result in significant changes to our revenue recognition.  Our initial evaluation is that revenue from our Recovery Audit segments, which is a majority of our revenues, would not be materially impacted by the adoption of this standard. 

While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to additional disclosures related to qualitative and quantitative information concerning the nature, amount, timing, and any uncertainty of revenue and cash flows from contracts with customers, the capitalization of costs of commissions, upfront contract costs, and other contract acquisition-based and contract fulfillment costs on the consolidated balance sheets.
We will continue our evaluation of the standards update through the date of adoption.

5




Note B – Earnings (Loss) Per Common Share
The following table sets forth the computations of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2017 and 2016 (in thousands, except per share data):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 Basic earnings (loss) per common share:

 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
 
Net earnings (loss) from continuing operations
 
$
1,077

 
$
2,150

 
$
(1,096
)
 
$
2,052

Net (loss) earnings from discontinued operations
 
$
(344
)
 
$
133

 
$
(1,029
)
 
$
(914
)
 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
22,498

 
21,847

 
22,225

 
22,084

Effect of dilutive securities from stock-based compensation plans
 
263

 
27

 

 
30

Weighted-average diluted common shares outstanding
 
22,761

 
21,874

 
22,225

 
22,114

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share from continuing operations
 
$
0.05

 
$
0.10

 
$
(0.05
)
 
$
0.09

Basic earnings (loss) per common share from discontinued operations
 
(0.02
)
 
0.01

 
(0.05
)
 
(0.04
)
Total basic earnings (loss) per common share
 
$
0.03

 
$
0.11

 
$
(0.10
)
 
$
0.05

 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share from continuing operations
 
$
0.05

 
$
0.10

 
$
(0.05
)
 
$
0.09

Diluted earnings (loss) per common share from discontinued operations
 
(0.02
)
 
0.01

 
(0.05
)
 
(0.04
)
Total diluted earnings (loss) per common share
 
$
0.03

 
$
0.11

 
$
(0.10
)
 
$
0.05


For the periods presented that generated a net loss, basic and diluted net loss per share are the same, as any additional common stock equivalents would be anti-dilutive. For the three months ended September 30, 2017, there were 1.9 million of anti-dilutive stock options and 1.9 million of anti-dilutive shares underlying restricted stock units that were excluded from the calculation of weighted average diluted common shares outstanding. For the three months ended September 30, 2016, there were 2.8 million of anti-dilutive stock options and 2.7 million of anti-dilutive shares underlying restricted stock units that were excluded from the calculation of weighted average diluted shares outstanding. For the nine-month period ended September 30, 2016, there were 2.8 million of anti-dilutive shares underlying stock options and 2.0 million of anti-dilutive shares underlying restricted stock units that were excluded from the calculation of weighted average diluted common shares outstanding.

We repurchased no shares of our common stock under our stock repurchase program during the three and nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, we repurchased less than 0.1 million shares and 0.9 million shares of our common stock for $0.1 million and $3.8 million, respectively, under our stock repurchase program.

Pursuant to exercises of outstanding stock options, we issued 16,000 shares of our common stock having a value of approximately $0.1 million in the three months ended September 30, 2017 and 183,460 shares of our common stock having a value of approximately $0.9 million in the nine months ended September 30, 2017. In connection with stock option exercises, we issued no shares of our common stock in the three months ended September 30, 2016, and 46,896 shares of our common stock having a value of less than $0.1 million in the nine months ended September 30, 2016.
Note C – Stock-Based Compensation
The Company has two stock-based compensation plans, the 2008 Equity Incentive Plan ("2008 EIP") and the 2017 Equity Incentive Compensation Plan ("2017 EICP") of which only the 2008 EIP has awards that were outstanding in the relevant periods. We describe the 2008 EIP in the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2016. For all periods presented herein, awards granted outside any shareholder-approved plan are referred to as inducement awards.

6

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

At the 2017 annual meeting of the Company's shareholders, held on June 27, 2017, the shareholders approved the 2017 EICP. Under the 2017 EICP, the Company may grant awards that include stock options (both incentive stock options and nonqualified 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 awards under the 2017 EICP is 3,400,000 shares plus the 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 thereafter again become available for grant. However, the total number of shares of common stock that may be delivered pursuant to the exercise of incentive stock options granted under the 2017 EICP shall not exceed 3,400,000 shares.
No additional awards may be granted under the 2008 EIP after approval by the Company's shareholders of the 2017 EICP on June 27, 2017.

2008 EIP Awards and Inducement Awards
Stock options, including those granted under the 2008 EIP and inducement awards, generally have a term of seven years and vest in equal annual increments over the vesting period, which typically is three years for employees and one year for directors. The following table summarizes stock option activity for the nine months ended September 30, 2017.
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

 
4.3 years
 
$
1,204

Granted(1)
 
460,566

 
6.22

 
 
 
 
Exercised
 
(183,460
)
 
5.03

 
 
 
$
253

Forfeited
 
(438,004
)
 
6.09

 
 
 
 
Expired
 
(54,865
)
 
4.90

 
 
 
 
Outstanding at September 30, 2017
 
3,204,622

 
$
6.37

 
4.1 years
 
$
2,459

Exercisable at September 30, 2017
 
2,596,301

 
$
6.51

 
3.5 years
 
$
1,730

(1) During the nine months ended September 30, 2017, 335,000 options were granted to employees as inducements for employment and 125,566 options were granted to the members of our Board of Directors. The weighted-average grant date fair value of options granted was $3.04 per share for the nine months ended September 30, 2017.
Nonvested stock awards, (restricted stock and restricted stock units), including those granted under the 2008 EIP and inducement awards, 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 with time-based vesting criteria vest in equal annual increments over the vesting period, which typically is three years for employees and one year for directors. Nonvested stock awards with performance based vesting criteria vest in accordance with specific performance criteria associated with the awards.

7

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table summarizes nonvested stock award activity during the nine months ended September 30, 2017.
Nonvested stock
 
Shares
 
Weighted
Average Grant
Date Fair Value
(Per Share)
Nonvested at January 1, 2017
 
3,893,050

 
$
4.37

Granted(1)
 
792,930

 
6.32

Vested
 
(45,004
)
 
6.24

Forfeited
 
(2,391,422
)
 
4.05

Nonvested at September 30, 2017
 
2,249,554

 
$
5.35

(1) Includes grants to members of our board of directors of 29,920 shares of restricted stock and 21,259 restricted stock units, inducement grants of 41,000 shares of restricted stock and 59,000 performance-based restricted stock units, and grants to employees under the 2008 EIP of 310,139 shares of restricted stock, 56,812 restricted stock units, and 274,800 performance-based restricted stock units during the nine months ended September 30, 2017.
On March 30, 2017, six executive officers and six other senior leaders of the Company were granted 274,800 performance-based restricted stock units ("PBUs") under the 2008 EIP. Upon vesting, the PBUs will be settled by the issuance of Company common stock equal to 100% 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, 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 will become vested and payable will be based on straight-line interpolation between such stated performance levels (although the PBUs may not become vested and payable for more than 100% of the PBUs and no PBUs shall become vested and payable if performance does not equal or exceed the threshold performance level).

During May 2017, one executive officer and one senior leader of the Company were granted a total of 59,000 PBUs as inducement grants on substantially the same terms as the grant of PBUs made on March 30, 2017.

The PBUs granted during the nine months ended September 30, 2017 and during 2016 were expensed at the target performance level based upon management's estimates for the three and nine months ended September 30, 2017 and 2016.

Selling, general and administrative expenses for the nine months ended September 30, 2017 and 2016 include $5.4 million and $3.2 million, respectively, related to stock-based compensation charges. At September 30, 2017, there was $6.9 million of unrecognized stock-based compensation expense related to stock options, restricted stock awards and restricted stock unit awards which we expect to recognize over a weighted-average period of 1.7 years. The unrecognized stock-based compensation expense related to restricted stock unit awards with performance vesting criteria is based on our estimate of both the number of shares of the Company's common stock that will ultimately be issued and cash payments that will be made when the restricted stock units are settled.

Note D – Operating Segments and Related Information
We conduct our operations through the following three reportable segments:
Recovery Audit Services – Americas represents recovery audit services (other than Healthcare Claims Recovery Audit services) provided in the United States of America (“U.S.”), Canada and Latin America.
Recovery Audit Services – Europe/Asia-Pacific represents recovery audit services (other than Healthcare Claims Recovery Audit services) provided in Europe, Asia and the Pacific region.
Adjacent Services represents data transformation, spend analytics, PRGX OPTIXTM, SIM services and associated advisory services.

8

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Additionally, Corporate Support includes the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the three reportable segments.
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 a result, the Healthcare Claims Recovery Audit services business has been reported as Discontinued Operations in accordance with GAAP.
Discontinued operations information for the three and nine months ended September 30, 2017 and 2016 is as follows: 
Results of Discontinued Operations
Three Months Ended September 30,
 
Nine Months Ended September 30,
(in thousands)
2017
 
2016
 
2017
 
2016
Revenue
$

 
$
5

 
$

 
$
(11
)
Cost of sales
337

 
(128
)
 
1,013

 
712

Selling, general and administrative expense
5

 
(4
)
 
10

 
180

Depreciation and amortization
2

 
4

 
6

 
11

(Loss) income from discontinued operations before income taxes
$
(344
)
 
$
133

 
$
(1,029
)
 
$
(914
)
Income tax expense

 

 

 

Net (loss) income from discontinued operations
$
(344
)
 
$
133

 
$
(1,029
)
 
$
(914
)
We evaluate the performance of our reportable segments based upon revenue and measures of profit or loss referred to as EBITDA and Adjusted EBITDA. We define Adjusted EBITDA as earnings from continuing operations before interest and taxes (“EBIT”), adjusted for depreciation and amortization (“EBITDA”), and then further adjusted for unusual and other significant items that management views as distorting the operating results of the various segments from period to period. Such adjustments include restructuring charges, stock-based compensation, bargain purchase gains, acquisition-related charges and benefits (acquisition transaction costs, acquisition obligations classified as compensation, and fair value adjustments to acquisition-related contingent consideration), tangible and intangible asset impairment charges, certain litigation costs and litigation settlements, certain severance charges and foreign currency transaction gains and losses on short-term intercompany balances viewed by management as individually or collectively significant. We do not have any inter-segment revenue.

9

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Segment information for the three and nine months ended September 30, 2017 and 2016 (in thousands) is as follows:
 
 
 
Recovery
Audit
Services –
Americas
 
Recovery Audit
Services –
Europe/Asia-
Pacific
 
Adjacent
Services
 
Corporate
Support
 
Total
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
30,705

 
$
10,837

 
$
925

 
$

 
$
42,467

Net income from continuing operations
 
 
 
 
 
 
 
 
 
1,077

Income tax expense
 
 
 
 
 
 
 
 
 
930

Interest expense (income), net
 
 
 
 
 
 
 
 
 
142

EBIT
 
$
8,539

 
$
2,289

 
$
(2,026
)
 
$
(6,653
)
 
$
2,149

Depreciation of property and equipment
 
789

 
161

 
183

 

 
1,133

Amortization of intangible assets
 
329

 

 
393

 

 
722

EBITDA
 
$
9,657

 
$
2,450

 
$
(1,450
)
 
$
(6,653
)
 
$
4,004

Other (income) loss
 
(11
)
 

 
(2
)
 
30

 
17

Foreign currency transaction (gains) losses on short-term intercompany balances
 
(155
)
 
(377
)
 
(6
)
 
120

 
(418
)
Transformation severance and related expenses
 
49

 
360

 
260

 
23

 
692

Stock-based compensation
 

 

 

 
2,107

 
2,107

Adjusted EBITDA
 
$
9,540

 
$
2,433

 
$
(1,198
)
 
$
(4,373
)
 
$
6,402


 
 
Recovery
Audit
Services –
Americas
 
Recovery Audit
Services –
Europe/Asia-
Pacific
 
Adjacent
Services
 
Corporate
Support
 
Total
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
25,719

 
$
8,736

 
$
682

 
$

 
$
35,137

Net income from continuing operations
 
 
 
 
 
 
 
 
 
2,150

Income tax benefit
 
 
 
 
 
 
 
 
 
(685
)
Interest expense (income), net
 
 
 
 
 
 
 
 
 
(14
)
EBIT
 
$
7,371

 
$
1,274

 
$
(1,089
)
 
$
(6,105
)
 
$
1,451

Depreciation of property and equipment
 
935

 
141

 
300

 

 
1,376

Amortization of intangible assets
 
373

 

 
20

 

 
393

EBITDA
 
$
8,679

 
$
1,415

 
$
(769
)
 
$
(6,105
)
 
$
3,220

Other loss (income)
 

 

 
(168
)
 

 
(168
)
Foreign currency transaction losses (gains) on short-term intercompany balances
 
120

 
(227
)
 
1

 
(59
)
 
(165
)
Transformation severance and related expenses
 
95

 
188

 
139

 
(2
)
 
420

Stock-based compensation
 

 

 

 
1,424

 
1,424

Adjusted EBITDA
 
$
8,894

 
$
1,376

 
$
(797
)
 
$
(4,742
)
 
$
4,731



10

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 
 
Recovery
Audit
Services –
Americas
 
Recovery Audit
Services –
Europe/Asia-
Pacific
 
Adjacent
Services
 
Corporate
Support
 
Total
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
81,641

 
$
29,441

 
$
3,464

 
$

 
$
114,546

Net loss from continuing operations
 
 
 
 
 
 
 
 
 
(1,096
)
Income tax expense
 
 
 
 
 
 
 
 
 
2,436

Interest expense (income), net
 
 
 
 
 
 
 
 
 
227

EBIT
 
$
20,110

 
$
5,754

 
$
(5,681
)
 
$
(18,616
)
 
$
1,567

Depreciation of property and equipment
 
2,478

 
453

 
531

 

 
3,462

Amortization of intangible assets
 
986

 

 
1,180

 

 
2,166

EBITDA
 
$
23,574

 
$
6,207

 
$
(3,970
)
 
$
(18,616
)
 
$
7,195

Other loss (income)
 
(11
)
 
 
 
(195
)
 
29

 
(177
)
Foreign currency transaction (gains) losses on short-term intercompany balances
 
(396
)
 
(1,566
)
 
(10
)
 
45

 
(1,927
)
Transformation severance and related expenses
 
313

 
582

 
305

 
392

 
1,592

Stock-based compensation
 

 

 

 
5,362

 
5,362

Adjusted EBITDA
 
$
23,480

 
$
5,223

 
$
(3,870
)
 
$
(12,788
)
 
$
12,045


 
 
Recovery
Audit
Services –
Americas
 
Recovery Audit
Services –
Europe/Asia-
Pacific
 
Adjacent
Services
 
Corporate
Support
 
Total
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
Revenue
 
$
72,408

 
$
26,683

 
$
2,570

 
$

 
$
101,661

Net income from continuing operations
 
 
 
 
 
 
 
 
 
2,052

Income tax benefit
 
 
 
 
 
 
 
 
 
(21
)
Interest expense (income), net
 
 
 
 
 
 
 
 
 
(55
)
EBIT
 
$
17,364

 
$
4,032

 
$
(2,645
)
 
$
(16,775
)
 
$
1,976

Depreciation of property and equipment
 
2,863

 
379

 
582

 

 
3,824

Amortization of intangible assets
 
1,118

 

 
64

 

 
1,182

EBITDA
 
$
21,345

 
$
4,411

 
$
(1,999
)
 
$
(16,775
)
 
$
6,982

Other loss (income)
 

 

 
(140
)
 

 
(140
)
Foreign currency transaction gains on short-term intercompany balances
 
(108
)
 
(787
)
 
(7
)
 
(74
)
 
(976
)
Transformation severance and related expenses
 
516

 
284

 
138

 
241

 
1,179

Stock-based compensation
 

 

 

 
3,224

 
3,224

Adjusted EBITDA
 
$
21,753

 
$
3,908

 
$
(2,008
)
 
$
(13,384
)
 
$
10,269


11

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note E – Debt
On January 19, 2010, we entered into a four-year revolving credit and term loan agreement with SunTrust Bank (“SunTrust”). The SunTrust credit facility initially consisted of a $15.0 million committed revolving credit facility and a $15.0 million term loan. The SunTrust term loan required quarterly principal payments of $0.8 million beginning in March 2010, and a final principal payment of $3.0 million due in January 2014 that we paid in December 2013. The SunTrust credit facility is guaranteed by the Company and all of its material domestic subsidiaries and secured by substantially all of the assets of the Company.
Prior to the January 2014 amendment to the SunTrust credit facility described below, amounts available under the SunTrust revolver were based on eligible accounts receivable and other factors. Interest on both the revolver and term loan was payable monthly and accrued at an index rate using the one-month LIBOR rate, plus an applicable margin as determined by the loan agreement. The applicable interest rate margin varied from 2.25% per annum to 3.5% per annum, dependent on our consolidated leverage ratio, and was determined in accordance with a pricing grid under the SunTrust loan agreement. We also paid a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the $15.0 million SunTrust revolving credit facility.
On January 17, 2014, we entered into an amendment of the SunTrust credit facility that increased the committed revolving credit facility from $15.0 million to $25.0 million, lowered the applicable margin to a fixed rate of 1.75%, eliminated the provision limiting availability under the revolving credit facility based on eligible accounts receivable and extended the scheduled maturity of the revolving credit facility to January 16, 2015 (subject to earlier termination as provided therein). We also paid a commitment fee of 0.5% per annum, payable quarterly, on the unused portion of the SunTrust revolving credit facility through the next amendment date.
On December 23, 2014, we entered into an amendment of the SunTrust credit facility that reduced the committed revolving credit facility from $25.0 million to $20.0 million. The credit facility bears interest at a rate per annum comprised of a specified index rate based on one-month LIBOR, plus an applicable margin (which was set at 1.75% per annum pursuant to this amendment). The index rate is determined as of the first business day of each calendar month with the provision of a fixed applicable margin of 1.75% per the amendment of the SunTrust credit facility. The credit facility included two financial covenants (a maximum leverage ratio and a minimum fixed charge coverage ratio) that would apply only if we had borrowings under the credit facility that arose or remained outstanding during the final 30 calendar days of any fiscal quarter. These financial covenants also will be tested, on a modified pro forma basis, in connection with each new borrowing under the credit facility. This amendment also extended the scheduled maturity of the revolving credit facility to December 23, 2017 and lowered the commitment fee to 0.25% per annum, payable quarterly, on the unused portion of the revolving credit facility. The weighted-average interest rate for the commitment fee due on the revolving credit facility was 0.25% in 2016 and 2015.
On December 21, 2016, we entered into an amendment of the SunTrust credit facility in order to clarify certain definitions and other terms of the facility.
On October 31, 2016, the Company borrowed $3.6 million under its credit facility to finance the acquisition of Lavante, Inc. On February 27, 2017 the Company borrowed $10.0 million under its credit facility to finance the acquisition of substantially all of the assets of Cost & Compliance Associates, LLC and Cost & Compliance Associates Limited. Total borrowings outstanding as of September 30, 2017 were $13.6 million.
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.

12

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 September 30, 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 revolving SunTrust credit facility was $21.4 million as of September 30, 2017. Based on the terms of the credit facility, as amended, the applicable interest rate at September 30, 2017 was approximately 3.50%. As of September 30, 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 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 a minimum amount of consolidated EBITDA. In addition, the credit facility includes customary events of default. The Company was in compliance with the covenants in the SunTrust credit facility as of September 30, 2017.
Note F – 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 September 30, 2017, we had $13.6 million in bank debt outstanding, and we had no bank debt outstanding as of September 30, 2016. We believe the carrying value of the bank debt approximates its fair value. We considered the factors used in determining the fair value of this debt to be Level 3 inputs (significant unobservable inputs).
We had $4.0 million of business acquisition obligations as of September 30, 2017, and no such obligations as of September 30, 2016. Our business acquisition obligations represent the estimated fair value of the deferred consideration and projected earn-out payments due as of the end of the recording period. We determine the estimated fair value of business acquisition obligations based on our projections of future revenue and profits or other factors used in the calculation of the ultimate payment(s) 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 GAAP. Generally, these assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.
Note G – 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.

13

PRGX GLOBAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Note H – Income Taxes
Reported income tax expense in each period primarily results from taxes on the income of foreign subsidiaries. The effective tax rates generally differ from the expected tax rate due primarily to the Company’s deferred tax asset valuation allowance on the domestic earnings and taxes on income of foreign subsidiaries.
Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service in the U.S. and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.
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 jurisdiction.

Note I - Business Acquisitions

Cost & Compliance Associates
In February 2017, we completed the acquisition of substantially all of the assets 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. At the closing of the transaction, we paid approximately $10.0 million in cash. In addition, we may be required to pay earnout consideration in cash over a period of two years, based on the performance of the acquired business and our contract compliance business following closing. The aggregate consideration we may be required to pay in connection with this acquisition cannot exceed $18.0 million.
We have recorded C&CA’s assets and liabilities acquired based on our preliminary estimates of their fair values as of the acquisition date. The estimated fair value of C&CA assets acquired and resulting goodwill are subject to adjustment as we finalize our fair value analysis. We expect to complete our fair value determinations no later than the fourth quarter of 2017. There may be differences compared to those amounts reflected in our consolidated financial statements as of September 30, 2017 as we finalize our fair value analysis and such changes could be material.
Based on our preliminary estimates, the purchase price exceeded the aggregate estimated fair value of the acquired assets at the acquisition date by $8.8 million, which amount has been allocated and recognized as goodwill within our Recovery Audit Services - Americas business segment. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.
The preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed is presented below (in thousands):

Accounts receivable, net
 
$
1,611

Unbilled revenue
 
8

Commissions receivable
 
48

Prepaid expenses
 
78

Goodwill
 
8,801

Net fixed assets
 
323

Other current assets
 
12

Total assets
 
10,881

Accounts payable
 
342

Accrued commissions
 
507

Taxes payable
 
44

Total liabilities
 
893

Total purchase price
 
$
9,988


14


We are still reviewing the valuation of the C&CA acquisition, in particular the value of any potential earnout due to C&CA, the value and useful lives of any long-lived assets acquired from C&CA and any potential deferred tax assets or liabilities associated with the valuation.
The revenue and net income of C&CA from the acquisition date through September 30, 2017 are presented below (in thousands) and included in our consolidated statements of operations. These amounts are not necessarily indicative of the results of operations that C&CA would have realized if it had continued to operate as a stand-alone company during the period presented, primarily due to costs that are now reflected in our unallocated corporate costs and not allocated to C&CA.
Revenue
 
$
7,833

Net income from continuing operations
 
$
1,397

As required by ASC 805, the following unaudited pro forma statements of operations for the nine months ended September 30, 2017 and 2016 give effect to the C&CA acquisition as if it 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 financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma revenue and net (loss) income do not reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the C&CA acquisition. The information presented below is in thousands:
 
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
Revenue
 
$
115,385

 
$
113,403

Net (loss) income from continuing operations
 
$
(1,766
)
 
$
5,044


Lavante
In October 2016, we acquired Lavante, Inc. ("Lavante"), a SaaS-based supplier of SIM and recovery audit services firm, for a net purchase price of $3.8 million. Lavante’s assets consist primarily of its proprietary software applications.
We have recorded Lavante's assets acquired and liabilities assumed based on our preliminary estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of Lavante's assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as we finalize our fair value analysis. We expect to complete our fair value determinations no later than the fourth quarter of 2017. We do not currently expect our fair value determinations to change materially; however, there may be differences compared to those amounts reflected in our consolidated financial statements as of December 31, 2016 as we finalize our fair value analysis and such changes could be material.
Based on our preliminary estimates, the purchase price exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities by $2.3 million, which amount has been allocated and recognized as goodwill within our Adjacent Service business segment. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.

15


The preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed is presented below (in thousands):
 
 
 
Cash and cash equivalents
 
$
28

Account receivables
 
207

Other current assets
 
92

Goodwill
 
2,286

Intangible assets
 
6,178

Fixed assets
 
98

Total assets
 
8,889

Accounts payable
 
121

Deferred revenue
 
370

Other current liabilities
 
757

Total liabilities
 
1,248

Total purchase price
 
$
3,809

Our estimates of the fair values of identifiable intangible assets are presented below (in thousands):
 
 
Fair values at October 31, 2016
 
Remaining useful lives (in months)
Trademarks
 
$
163

 
48
Patents
 
114

 
12
Software
 
5,901

 
48
Total intangible assets
 
$
6,178

 
 

In general, intangible assets include trade names, trademarks, copyrights, patents, customer contacts and/or relationships, developed technology (computer software), technological know-how, and brand names. When estimating the value of such assets, we consider the future income stream associated with the specific asset, taking into account the asset's estimated remaining life, average annual anticipated rate of return, and market rates of return. Often, an income approach such as a multi-period excess earnings model or distributor model will be used.
We may also consider the market price of comparable assets recently sold or the asking prices for similar assets currently for sale. This methodology involves researching the industry to determine if comparable companies pay or receive royalties for rights associated with the use of the asset. The royalty rates charged or received are then used as valuation benchmarks. The relief from royalty method is often used in the valuation of assets involving fair royalty rates (e.g., trademarks, patents, etc.).
The cost approach analyzes the current cost to re-create or duplicate an asset minus the decrease in value due to the passage of time or obsolescence. For example, when valuing a trademark (when it is not the primary asset acquired), we calculate the costs that would have been incurred over the years in establishing consumer recognition and perception of quality, service and reliability. We also consider the legal costs incurred in registering the asset.

16


As required by ASC 805, the following unaudited pro forma statements of operations for the nine months ended September 30, 2016 give effect to the Lavante acquisition as if it 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 period presented had the Lavante acquisition been completed on January 1, 2016. In addition, the unaudited pro forma financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma revenue and net loss do not reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the Lavante acquisition. The information presented below is in thousands:
 
 
Nine Months Ended
September 30, 2016
Revenue
 
$
103,780

Net loss from continuing operations
 
$
(2,178
)
Note J – Subsequent Events
None

17


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
PRGX Global, Inc. is a global leader in recovery audit and spend analytics services, providing services to support and enhance our clients' Source-to-Pay ("S2P") business processes. At the heart of our client services portfolio is the core capability of mining client data to deliver "actionable insights." Actionable insights allow our clients to improve their financial performance by reducing costs, improving business processes, managing risks and increasing profitability.
Our services include recovery audit, spend advisory, spend analytics and supplier information management ("SIM") services. We serve clients in more than 30 countries and conduct our operations through three reportable segments: Recovery Audit Services - Americas, Recovery Audit Services - Europe/Asia-Pacific and Adjacent Services. The Recovery Audit Services - Americas segment represents recovery audit services we provide in the United States, Canada and Latin America. The Recovery Audit Services - Europe/Asia-Pacific segment represents recovery audit services we provide in Europe, Asia and the Pacific region. The Adjacent Services segment includes spend analytics and advisory services, SIM services, and our PRGX OPTIXTM suite of analytics tools. We include the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the three reportable segments in Corporate Support.
Recovery auditing is a business service focused on finding overpayments created by errors in payment transactions, such as missed or inaccurate discounts, allowances and rebates, vendor pricing errors, erroneous coding and duplicate payments. Recovery audit services are part of the broader S2P services market space, focused on the payment side of the S2P market.
Generally, we earn our recovery audit revenue on a contingent fee basis by identifying overpayments made by our clients, assisting our clients in recovering the overpayments from their vendors, and collecting a specified percentage of the recoveries from our clients as our fee. The fee percentage we earn is based on specific contracts with our clients that generally also specify: (a) time periods covered by the audit; (b) the nature and extent of services we are to provide; and (c) the client’s responsibilities to assist and cooperate with us. Clients generally recover claims by either taking credits against outstanding payables or future purchases from the relevant vendors, or receiving refund checks directly from those vendors. The manner in which a claim is recovered by a client is often dictated by industry practice. In addition, many clients establish client-specific procedural guidelines that we must satisfy prior to submitting claims for client approval. Our recovery audit business also includes contract compliance services which focus on auditing complex supplier billings against large services, construction and licensing contracts, and is relevant to a large portion of our client base. Such services include verification of the accuracy of third party reporting, appropriateness of allocations and other charges in cost or revenue sharing types of arrangements, adherence to contract covenants and other risk mitigation requirements and numerous other reviews and procedures to assist our clients with proper monitoring and enforcement of the obligations of their contractors. Services in our Adjacent Services segment can be project-based (advisory services), which are typically billed on a rates and hours basis, or subscription-based (software-as-a-service or "SaaS" offerings), which are billed on a monthly basis.
We earn the vast majority of our recovery audit revenue from clients in the retail industry due to many factors, including the high volume of transactions and the complicated pricing and allowance programs typical in this industry. Changes in consumer spending associated with economic fluctuations generally impact our recovery audit revenue to a lesser degree than they affect individual retailers due to several factors, including:

Diverse client base - our clients include a diverse mix of discounters, grocery, online, pharmacy, department and other stores that tend to be impacted to varying degrees by general economic fluctuations, and even in opposite directions from each other depending on their position in the market and their market segment;
Motivation - when our clients experience a downturn, they frequently are more motivated to use our services to recover prior overpayments to make up for relatively weaker financial performance in their own business operations;
Nature of claims - the relationship between the dollar amount of recovery audit claims identified and client purchases is non-linear. Claim volumes are generally impacted by purchase volumes, but a number of other factors may have an even more significant impact on claim volumes, including new items being purchased, changes in discount, rebate, marketing allowance and similar programs offered by vendors and changes in a client’s or a vendor’s information systems; and
Timing - the client purchase data on which we perform our recovery audit services is historical data that typically reflects transactions between our clients and their vendors that took place 3 to 15 months prior to the data being provided to us for audit. As a result, we generally experience a delayed impact from economic changes that varies by client and the impact may be positive or negative depending on the individual clients’ circumstances.


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We have processes in place to mitigate the financial impact arising from fluctuations in our businesses. These processes include reviewing and monitoring financial and operational results through our internal reporting, devoting substantial efforts to develop an improved service delivery model to enable us to more cost effectively serve our clients, and maintaining the flexibility to control the compensation-related portions of our cost structure.

While the net impact of the economic environment on our recovery audit revenue is difficult to determine or predict, we believe that for the foreseeable future, our revenue will remain at a level that will allow us to continue investing in our growth strategy. Included in our growth strategy are our investments in innovation through our audit strategy team, developing and enhancing our technology platforms and improved operational processes within our recovery audit business. In addition, we continue to pursue the expansion of our business beyond retail recovery audit services by growing the portion of our business that provides recovery audit services to enterprises other than retailers, which we refer to as our commercial business; growing our contract compliance service offerings; expanding into new industry verticals, such as telecommunications, pharmaceuticals and resources; and growing our Adjacent Services which includes our global PRGX OPTIXTM analytics solutions and our SIM services offering. We believe that our recovery audit business uniquely positions us to create value for clients and gives us a competitive advantage over other players in the broader S2P market for four fundamental reasons:

We already have the clients' spend data - we serve a large and impressive list of very large, multinational companies in our core recovery audit business, which requires access to and processing of these clients' detailed S2P data on a daily, weekly or at least periodic basis;
We know the clients' spend data and underlying processes - the work we do in recovery audit requires that we fully understand our clients’ systems, buying practices, receiving and payment procedures, as well as their suppliers’ contracting, performance and billing practices;
We take a different perspective in analyzing the clients' spend data - we look "horizontally" across our clients' processes and organizational structures versus "vertically", which is how most companies are organized and enterprise resource planning systems are designed; and
Our contingent fee recovery audit value proposition minimizes our clients' cost of entry and truly aligns us with our clients.

As our clients’ data volumes and complexity levels continue to grow, we are using our deep data management experience to develop new actionable insight solutions, as well as to develop custom analytics and data transformation services. Taken together, our in-depth understanding of our clients’ S2P data and our technology-based solutions provide multiple routes to help our clients achieve greater profitability. Our Adjacent Services business targets client functional and process areas where we have established expertise, enabling us to provide services to finance, merchandising and procurement executives to improve working capital, optimize purchasing leverage in vendor pricing negotiations, improve insight into product margin and true cost of goods for resale, identify and manage risks associated with vendor compliance, improve quality of vendor master data and improve visibility and diagnostics of direct and indirect spend.

In an effort to accelerate our growth and expand our technology offerings within Adjacent Services, during the fourth quarter of 2016, we acquired Lavante, Inc. ("Lavante"), a SaaS-based SIM and recovery audit services firm based in San Jose, California. We recently announced a multi-year SaaS technology and managed services contract based on our Lavante SIM platform. We believe this solution highlights our competitive advantage resulting from integrating recovery audit data and knowledge with market leading technology applications to deliver expanded client value.
In the first quarter of 2017 we completed the acquisition of substantially all of the assets of Cost & Compliance Associates, LLC and Cost & Compliance Associates Limited (collectively, "C&CA"), a commercial recovery audit and contract compliance firm with operations in the U.S. and the UK. The C&CA acquisition was immediately accretive to PRGX’s profitability, significantly increased our market share within the commercial industry and brings a rich set of global clients and a skilled and experienced workforce.
Earlier in the year we launched our PRGX OPTIX™ suite of analytics tools. The PRGX OPTIXTM suite facilitates S2P business decisions through actionable, data-enabled insights that are delivered through four primary modules - Product, Payment, Spend and Supplier. Each of these modules is powered by the core PRGX OPTIXTM platform that provides the ability to process and visualize S2P data delivered via a SaaS interface.
 
Discontinued Operations
As of December 31, 2015, the Company discontinued its Healthcare Claims Recovery Audit business. PRGX entered into agreements with third parties to fulfill its Medicare 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

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certain expenses while the current Medicare RAC contracts are still in effect. The discussions and financial results in this Report have been adjusted to reflect the discontinued business.

Non-GAAP Financial Measures

EBIT, EBITDA and Adjusted EBITDA are all “non-GAAP financial measures” presented as supplemental measures of the Company’s performance. They are not presented in accordance with accounting principles generally accepted in the United States, or GAAP. The Company believes these measures provide additional meaningful information in evaluating its performance over time, and that the rating agencies and a number of lenders use EBITDA and similar measures for similar purposes. In addition, a measure similar to Adjusted EBITDA is used in the restrictive covenants contained in the Company’s secured credit facility. However, EBIT, EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of the Company’s results as reported under GAAP. In addition, in evaluating EBIT, EBITDA and Adjusted EBITDA, you should be aware that, as described above, the adjustments may vary from period to period and in the future the Company will incur expenses such as those used in calculating these measures. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We include a reconciliation of net loss to each of EBIT, EBITDA and Adjusted EBITDA and a calculation of Adjusted EBITDA by segment below in “Adjusted EBITDA”.
Results of Operations from Continuing Operations
The following table sets forth the percentage of revenue represented by certain items in the Company’s Condensed Consolidated Statements of Operations from continuing operations (Unaudited) for the periods indicated:
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2017
 
2016
 
2017
 
2016
Revenue
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
62.8

 
63.7

 
65.7

 
66.3

Selling, general and administrative expenses
 
28.7

 
28.1

 
29.8

 
27.9

Depreciation of property and equipment
 
2.7

 
3.9

 
3.0

 
3.8

Amortization of intangible assets
 
1.7

 
1.1

 
1.9

 
1.2

Total operating expenses
 
95.9

 
96.8

 
100.4

 
99.2

Operating income (loss)
 
4.1

 
3.2

 
(0.4
)
 
0.8

Foreign currency transaction gains on short-term intercompany balances
 
(1.0
)
 
(0.5
)
 
(1.7
)
 
(1.0
)
Interest expense (income), net
 
0.3

 

 
0.2

 

Other loss (income)
 

 

 
(0.2
)
 
(0.1
)
Income (loss) before income taxes
 
4.8

 
3.7

 
1.3

 
1.9

Income tax expense (benefit)
 
2.2

 
(1.9
)
 
2.1

 

Net income (loss)
 
2.6
 %
 
5.6
 %
 
(0.8
)%
 
1.9
 %
Three and Nine Months Ended September 30, 2017 Compared to the Corresponding Period of the Prior Year from Continuing Operations
Revenue. Revenue was as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Recovery Audit Services – Americas
 
$
30,705

 
$
25,719

 
$
81,641

 
$
72,408

Recovery Audit Services – Europe/Asia-Pacific
 
10,837

 
8,736

 
29,441

 
26,683

Adjacent Services
 
925

 
682

 
3,464

 
2,570

Total
 
$
42,467

 
$
35,137

 
$
114,546

 
$
101,661


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Total revenue for the three months ended September 30, 2017 increased by $7.3 million, or 20.8%, compared to the same period in 2016. Total revenue for the nine months ended September 30, 2017 increased by $12.9 million, or 12.7%, compared to the same period in 2016. On a constant dollar basis adjusted for changes in foreign currency exchange rates, consolidated revenue from continuing operations for the three and nine months ended September 30, 2017 increased 19.2% and 13.0%, respectively, when compared to the same periods in 2016. The 2017 amounts include revenue from the C&CA and Lavante acquired businesses which were not in the prior year amounts. Excluding revenue from these acquired businesses, revenue from continuing operations for the three months ended September 30, 2017 increased 9.0% and for the nine months ended September 30, 2017 increased 4.0% on a year-over-year constant dollar basis.
Below is a discussion of our revenue for our three reportable segments.
Recovery Audit Services – Americas revenue, including revenue from the C&CA and Lavante acquired businesses, increased by $5.0 million, or 19.4%, for the three months ended September 30, 2017 compared to the same period in 2016. For the nine months ended September 30, 2017, revenue increased by $9.2 million, or 12.8% compared to the same period in 2016. Excluding revenue from the acquired businesses, revenue for this segment increased 6.7% for the three months ended September 30, 2017 and increased 4.9% for the nine months ended September 30, 2017 on a year-over-year constant dollar basis. Revenue from existing clients in the three months ended September 30, 2017 increased 7.6% compared to the same period in 2016. Revenue from new clients, including clients acquired as part of the C&CA and Lavante acquisitions, in the three months ended September 30, 2017 increased 10.5% compared to the same period in 2016. Revenue from existing clients in the nine months ended September 30, 2017 increased by 2.6% compared to the same period in 2016. Revenue from new clients, including clients acquired as part of the C&CA and Lavante acquisitions, in the nine months ended September 30, 2017 increased 10.1% compared to the same period in 2016.

Recovery Audit Services – Europe/Asia-Pacific revenue, including revenue from the C&CA and Lavante acquired businesses increased by $2.1 million, or 24.0%, for the three months ended September 30, 2017 compared to the same period in 2016. For the nine months ended September 30, 2017, revenue increased by $2.8 million or 10.3% compared to the same period in 2016. Excluding revenue from the C&CA acquired business, revenue for this segment was largely unchanged for the three months ended September 30, 2017 and increased 2.0% for the nine months ended September 30, 2017 on a year-over-year constant dollar basis. Revenue from our existing clients in the three months ended September 30, 2017 increased 9.2% compared to the same period in 2016. Revenue from new clients in the three months ended September 30, 2017 increased 9.6% compared to the same period in 2016, which was primarily due to the clients acquired as part of the C&CA acquisition. Revenue from existing clients in the nine months ended September 30, 2017 increased 7.6% compared to the same period in 2016. Revenue from new clients in the nine months ended September 30, 2017 increased 10.5% compared to the same period in 2016, which was primarily due to the clients acquired as part of the C&CA acquisition.
Adjacent Services revenue, including revenue from the Lavante SIM acquired business, increased by $0.2 million, or 35.7%, for the three months ended September 30, 2017 compared to the same period in 2016. For the nine months ended September 30, 2017, revenue increased by $0.9 million, or 34.8%. Excluding the 2017 Lavante SIM revenue, on a year-over-year constant dollar basis Adjacent Services revenue increased by 13.5% for the three months ended September 30, 2017 and increased 15.3% for the nine months ended September 30, 2017.
Cost of Revenue (“COR”). COR consists principally of commissions and other forms of variable compensation we pay to our auditors based primarily on the level of overpayment recoveries and/or profit margins derived therefrom, fixed auditor salaries, compensation paid to various types of hourly support staff and salaries for operational and client service managers for our recovery audit services and our Adjacent Services businesses. COR also includes other direct and indirect costs incurred by these personnel, including office rent, travel and entertainment, telephone, utilities, maintenance and supplies and clerical assistance. A significant portion of the components comprising COR is variable and will increase or decrease with increases or decreases in revenue.

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COR was as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Recovery Audit Services – Americas
 
$
18,552

 
$
14,787

 
$
51,154

 
$
44,737

Recovery Audit Services – Europe/Asia-Pacific
 
6,650

 
6,284

 
19,553

 
18,657

Adjacent Services
 
1,473

 
1,296

 
4,599

 
4,050

Total
 
$
26,675

 
$
22,367

 
$
75,306

 
$
67,444


On a consolidated basis, COR as a percentage of revenue was 62.8% and 63.7% for the three months ended September 30, 2017 and 2016, respectively, and 62.6% and 61.8% for the nine months ended September 30, 2017 and 2016, respectively. Excluding COR associated with the Lavante and C&CA acquired businesses, COR increased 5.3% for the three months ended September 30, 2017 and increased 1.4%, for the nine months ended September 30, 2017 on a constant dollar basis, compared to the prior year.
COR as a percentage of revenue for Recovery Audit Services – Americas was 60.3% and 57.5% for the three months ended September 30, 2017 and 2016, respectively, and 62.7% and 61.8% for the nine months ended September 30, 2017 and 2016, respectively. The increase in the 2017 third quarter compared to the prior year is due to the COR associated with the increased revenue in the quarter and the COR costs associated with the acquisition of C&CA not in the prior year.

COR as a percentage of revenue for Recovery Audit Services – Europe/Asia-Pacific was 61.4% and 71.9% for the three months ended September 30, 2017 and 2016, respectively, and 66.4%, and 69.9% for the nine months ended September 30, 2017 and 2016, respectively. The improvement in the 2017 third quarter compared to the same period in the prior year is primarily due to the revenue mix between Retail and Commercial, where our Commercial revenue increased in 2017 incurring a lower COR due to the structure of that service line.
COR as a percentage of revenue for Recovery Audit Services – Europe/Asia-Pacific is generally higher than COR as a percentage of revenue for Recovery Audit Services – Americas primarily due to differences in service delivery models, scale and geographic fragmentation. The Recovery Audit Services – Europe/Asia-Pacific segment generally serves fewer clients in each geographic market and on average generates lower revenue per client than those served by the Company’s Recovery Audit Services – Americas segment.
Adjacent Services COR relates primarily to our continued investments in service delivery, which consist mainly of fixed personnel costs. With increases in revenue, COR as a percentage of revenue improved to 159.2% for the three months ended September 30, 2017 from 190.0% for the same period in 2016, and improved to 132.8% for the nine months ended September 30, 2017 from 157.6% for the same period in 2016.
Selling, General and Administrative Expenses (“SG&A”). SG&A expenses for all segments other than Corporate Support include the expenses of sales and marketing activities, information technology services and allocated corporate data center costs, human resources, legal, accounting, administration, foreign currency transaction gains and losses other than those relating to short-term intercompany balances and gains and losses on asset disposals. Corporate Support SG&A represents the unallocated portion of SG&A expenses which are not specifically attributable to our segment activities and include the expenses of information technology services, the corporate data center, human resources, legal, accounting, treasury, administration and stock-based compensation charges.

22


SG&A expenses were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Recovery Audit Services – Americas
 
$
2,662

 
$
2,132

 
$
7,320

 
$
6,434

Recovery Audit Services – Europe/Asia-Pacific
 
2,114

 
1,265

 
5,247

 
4,402

Adjacent Services
 
910

 
321

 
3,040

 
666

Subtotal for reportable segments
 
5,686

 
3,718

 
15,607

 
11,502

Corporate Support
 
6,503

 
6,165

 
18,542

 
16,849

Total
 
$
12,189

 
$
9,883

 
$
34,149

 
$
28,351

Recovery Audit Services – Americas SG&A expenses increased by $0.5 million and $0.9 million for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increases are primarily the result of increased payroll and related costs not associated with the Lavante or C&CA acquired business.
Recovery Audit Services – Europe/Asia-Pacific SG&A increased by $0.8 million for the three months ended September 30, 2017 compared to the same period in 2016 and increased by $0.8 million for the nine months ended September 30, 2017 compared to the same period in 2016. The increase in the three-month period and nine-month periods were primarily driven by additional expenses associated with the Lavante and C&CA acquired businesses.
Adjacent Services SG&A increased approximately $0.6 million and $2.4 million in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. These increases are primarily due to the costs associated with the Lavante SIM business, which were not included in the prior year amounts.
Corporate Support SG&A increased $0.3 million and $1.7 million for the three and nine months ended September 30, 2017, respectively, compared to the same period in 2016. These increases are primarily due to increased stock-based compensation expense in the 2017 periods.
Depreciation of property and equipment. Depreciation of property and equipment was as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Recovery Audit Services – Americas
 
$
789

 
$
935

 
$
2,478

 
$
2,863

Recovery Audit Services – Europe/Asia-Pacific
 
161

 
141

 
453

 
379

Adjacent Services
 
183

 
300

 
531

 
582

Total
 
$
1,133

 
$
1,376

 
$
3,462

 
$
3,824

The overall decrease in depreciation relates primarily to the mix and timing of our capital expenditures and the associated useful lives for such purchases.
Amortization of intangible assets. Amortization of intangible assets was as follows (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Recovery Audit Services – Americas
 
$
329

 
$
373

 
$
986

 
$
1,118

Recovery Audit Services – Europe/Asia-Pacific
 

 

 

 

Adjacent Services
 
393

 
20

 
1,180

 
64

Total
 
$
722

 
$
393

 
$
2,166

 
$
1,182

The increase in amortization expense for the three and nine months ended September 30, 2017 compared to the same periods in 2016 is primarily due to the increase in intangible assets from the acquisition of Lavante partially offset by the end of the finite lives of certain intangible assets.

23


Foreign Currency Transaction (Gains) Losses on Short-Term Intercompany Balances. Foreign currency transaction gains and losses on short-term intercompany balances result from fluctuations in the exchange rates for foreign currencies and the U.S. dollar and the impact of these fluctuations, primarily on balances payable by our foreign subsidiaries to their U.S. parent. Substantial changes from period to period in foreign currency exchange rates may significantly impact the amount of such gains and losses. The strengthening of the U.S. dollar relative to other currencies results in recorded losses on short-term intercompany balances receivable from our foreign subsidiaries while the relative weakening of the U.S. dollar results in recorded gains. In the three and nine months ended September 30, 2017, we recorded foreign currency transaction gains of $0.4 million and $1.9 million, respectively, on short-term intercompany balances. In the three and nine months ended September 30, 2016, we recorded gains of $0.2 million and of $1.0 million, respectively, on short-term intercompany balances.
Net Interest Expense (Income) & Other Income. The change in net interest expense (income) for the three and nine months ended September 30, 2017 compared to the same periods in 2016 was due to increased borrowings under the Company's credit facility for the acquisitions of Lavante and C&CA.
Income Tax Expense. Our income tax expense amounts as reported in the accompanying Condensed Consolidated Financial Statements (Unaudited) do not reflect amounts that normally would be expected due to several factors. The most significant of these factors is that for U.S. tax reporting purposes we have net operating loss carryforwards and other tax attributes which created deferred tax assets on our balance sheet. 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. Generally, these factors result in our recording no net income tax expense or benefit relating to our operations in the United States. Reported income tax expense for the three and nine months ended September 30, 2017 and 2016 primarily results from taxes on the income of certain of our foreign subsidiaries.
Adjusted EBITDA. We evaluate the performance of our reportable segments based upon revenue and measures of profit or loss we refer to as EBITDA and Adjusted EBITDA. We define Adjusted EBITDA as earnings from continuing operations before interest and taxes (“EBIT”), adjusted for depreciation and amortization (“EBITDA”), and then further adjusted for unusual and other significant items that management views as distorting the operating results of the various segments from period to period. Such adjustments include restructuring charges, stock-based compensation, bargain purchase gains, acquisition-related charges and benefits (acquisition transaction costs, acquisition obligations classified as compensation, and fair value adjustments to acquisition-related contingent consideration), tangible and intangible asset impairment charges, certain litigation costs and litigation settlements, certain severance charges and foreign currency transaction gains and losses on short-term intercompany balances viewed by management as individually or collectively significant.
Reconciliations of net income (loss) to each of EBIT, EBITDA and Adjusted EBITDA for the periods included in this Report are as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income (loss)
 
$
1,077

 
$
2,150

 
$
(1,096
)
 
$
2,052

Income tax expense (benefit)
 
930

 
(685
)
 
2,436

 
(21
)
Interest expense (income), net
 
142

 
(14
)
 
227

 
(55
)
EBIT
 
2,149

 
1,451

 
1,567

 
1,976

Depreciation of property and equipment
 
1,133

 
1,376

 
3,462

 
3,824

Amortization of intangible assets
 
722

 
393

 
2,166

 
1,182

EBITDA
 
4,004

 
3,220

 
7,195

 
6,982

Foreign currency transaction gains on short-term intercompany balances
 
(418
)
 
(165
)
 
(1,927
)
 
(976
)
Transformation severance and related expenses
 
692

 
420

 
1,592

 
1,179

Other loss (income)
 
17

 
(168
)
 
(177
)
 
(139
)
Stock-based compensation
 
2,107

 
1,424

 
5,362

 
3,223

Adjusted EBITDA