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EX-32.1 - EXHIBIT 32.1 - PRGX GLOBAL, INC.ex321201910k.htm
EX-31.2 - EXHIBIT 31.2 - PRGX GLOBAL, INC.ex312201910k.htm
EX-31.1 - EXHIBIT 31.1 - PRGX GLOBAL, INC.ex311201910k.htm
EX-23.1 - EXHIBIT 23.1 - PRGX GLOBAL, INC.ex231201910k.htm
EX-21.1 - EXHIBIT 21.1 - PRGX GLOBAL, INC.ex211201910k.htm
EX-4.1 - EXHIBIT 4.1 - PRGX GLOBAL, INC.exhibit41.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________
FORM 10-K 
________________________________________
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
PRGX
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.   Yes  ¨    No  ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  ¨    No  ý
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



¨  Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
ý
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 Exchange Act).    Yes  ¨    No  ý
The aggregate market value, as of June 30, 2019, of common shares of the registrant held by non-affiliates of the registrant was approximately $137.7 million, based upon the last sales price reported that date on The Nasdaq Global Select Market of $6.72 per share. (Aggregate market value is estimated solely for the purposes of this report and shall not be construed as an admission for the purposes of determining affiliate status.)

Common shares of the registrant outstanding at February 28, 2020 were 23,761,345.
Documents Incorporated by Reference
Part III: Portions of Registrant’s Proxy Statement relating to the Company’s 2020 Annual Meeting of Shareholders.
 
 
 
 
 



PRGX GLOBAL, INC.
FORM 10-K
December 31, 2019
INDEX
 
 
Page No.
Part I
 
 
 
Part II
 
Part III
 
Part IV
 



Cautionary Statement Regarding Forward-Looking Statements
The following discussion includes “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are at times identified by words such as “plans,” “intends,” “expects,” or “anticipates” and words of similar effect and include statements regarding the Company’s financial and operating plans and goals. These forward-looking statements include any statements that cannot be assessed until the occurrence of a future event or events. 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.
These forward-looking statements are subject to risks, uncertainties and other factors, including but not limited to those discussed herein and below under Item 1A “Risk Factors.” Many of these risks are outside of our control and could cause actual results to differ materially from the results discussed in the forward-looking statements. Factors that could lead to material changes in our performance may include, but are not limited to:
our ability to successfully execute our recovery audit growth strategy;
our continued dependence on our largest clients for significant revenue;
the use of internal recovery audit groups by our clients, reducing the amount of recoveries available to us;
commoditization of our services and the effects of rate reductions;
the significant control that our clients have over assertion or acceptance of recovery audit claims against their suppliers and the corresponding impact on our revenue;
revenue that does not meet expectations or justify costs incurred;
our ability to develop material sources of new revenue in addition to revenue from our core accounts payable recovery audit services;
changes in the market for our services;
client and vendor bankruptcies and financial difficulties;
our ability to retain and attract qualified personnel and effectively manage our global workforce;
our ability to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights;
our reliance on operations outside the U.S. for a significant portion of our revenue;
our ability to effectively manage foreign currency fluctuations;
the highly competitive environments in which our recovery audit services and Adjacent Services businesses operate and the resulting pricing pressure on those businesses;
our ability to integrate acquisitions;
our ability to realize operational cost savings and the transformation severance and related expenses we may incur to generate these savings;
uncertainty in the global credit markets;
our ability to maintain compliance with the financial and non-financial covenants in our financing arrangements;
our tax positions and other factors, that could affect our effective income tax rate or our ability to use our existing deferred tax assets;
our ability to operate in compliance with changing data privacy requirements;
our ability to comply with a variety of foreign laws and regulations, such as those relating to data protection and employment, as well as U.S. laws affecting operations outside of the United States;
a cyber-security or other incident involving the misappropriation, loss or unauthorized disclosure or use of client data or other confidential information;
effects of changes in accounting policies, standards, guidelines or principles;
terrorist acts, acts of war, geopolitical disruptions disease epidemics and pandemics and other factors over which we have little or no control;
our ability to effectively develop, maintain, operate and improve our proprietary technology platforms and applications; or
uncertainties and effects of the implementation of the United Kingdom's withdrawal from membership in the European Union (referred to as "Brexit"), including financial, legal, trade and tax implications.

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Any forward-looking statement speaks only as of the date on which such statement is made, and, except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all such factors.

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PART I
ITEM 1. Business
PRGX Global, Inc., together with its subsidiaries, is a global leader in recovery audit and spend analytics, services designed to improve our clients' source-to-pay ("S2P") business processes. We are based in the United States of America (“U.S.”) and serve clients in more than 30 countries. PRGX Global, Inc. was incorporated in the State of Georgia in 1996. At the heart of our 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 and managing risks.
The vast majority of our revenue comes from recovery audit, a business service based on the mining of tremendous amounts of our clients’ purchasing-related data, looking for billing errors and overpayments made to their third-party suppliers. PRGX is one of the world's leading providers of recovery audit services principally to large businesses with high volumes of transactions and complex pricing arrangements with suppliers.
We provide services to 75% of top global retailers and a third of the largest companies in the Fortune 500. We earn the largest portion of our revenue from our retail clients. Retailers’ purchases of merchandise for resale are extremely complex due to the high volume of promotions, allowances and rebates provided by suppliers. Recovery audit in the retail industry is a mature service offering and we have been serving many of our retail clients for decades.
The second largest portion of our business is referred to within the recovery audit industry as “commercial” recovery audit. Commercial recovery auditing is the delivery of recovery audit services to clients in industries other than retail, such as telecommunications, automotive and industrial manufacturing, pharmaceuticals, natural resources, financial services, and transportation. A commercial recovery audit is typically less complex in terms of supplier pricing arrangements, scope of purchase transactions made available for audit and depth of audit programs within individual companies.
Another type of recovery audit focuses on auditing complex supplier billings against large services, construction and licensing contracts and is referred to as a “contract compliance” audit. Although relevant to a large portion of our client base, contract compliance audits are more heavily utilized by commercial clients and are a growing part of our business.
We continue to innovate by (a) expanding the breadth of our services, such as introducing new recovery audit claim concepts, (b) improving our audit methodologies, including the acceleration of the audit itself, such that audits increasingly move closer in time to the original transaction with the ultimate goal of real-time and preventative audits, and (c) continued technological advancements, such as the development and enhancement of our proprietary technology platforms and tools that enable our auditors and clients to work more efficiently and deliver greater returns.
Additionally, we provide advanced S2P analytics, leveraging our established expertise to provide insights and solutions to finance, merchandising and procurement functions to improve working capital, optimize purchasing leverage in vendor pricing negotiations, improve insight into product margin and cost of goods, identify and manage risks associated with vendor compliance, improve quality of vendor master data and improve visibility and diagnostics of direct and indirect spend. These capabilities differentiate our business and are applicable to clients in both the retail and commercial markets.
PRGX is unique in that we are a global recovery audit services provider, serving clients in over 30 countries across a multitude of industries. We 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 U.S., Canada and Latin America and is our largest segment in terms of clients served and revenue generated. The Recovery Audit Services - Europe/Asia-Pacific segment represents recovery audit services we provide in Europe, Asia and the Pacific region and is responsible for a significant portion of our revenue. The Adjacent Services segment includes our software-as-a-service (SaaS) and advisory advanced analytics solutions provided to clients in any country. We report the unallocated portion of corporate selling, general and administrative expenses not specifically attributable to the three reportable segments in Corporate Support. For additional financial information relating to our reporting segments, see Note 2 - Operating Segments and Related Information of our Consolidated Financial Statements included in Item 8 of this Form 10-K.
As of December 31, 2015, the Company discontinued its HCRA services business. The Company has settled with two of the three Medicare RAC-related third-parties. The Company believes the likelihood of further claims related to the final Medicare RAC contract is remote and does not expect to incur additional charges in future periods related to its HCRA services business. As a result, the associated liability and receivable balances that relate to the final contract were reduced to zero in the third quarter of 2019. The HCRA services business is reported as Discontinued Operations in accordance with GAAP.


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The Recovery Audit Industry and PRGX
Many businesses generate substantial volumes of payment transactions involving multiple vendors, numerous discounts and allowances, fluctuating prices and complex pricing arrangements or rate structures. Although these businesses correctly process the vast majority of payment transactions, errors occur in a small percentage of transactions. These errors include, but are not limited to, missed or inaccurate discounts, allowances and rebates, vendor pricing errors, erroneous coding, unapplied credits and duplicate payments. Many factors contribute to the errors, including communication failures between the purchasing and accounts payable departments, complex pricing arrangements or rate structures, personnel turnover and changes in information and accounting systems. Recovery auditing is a business service focused on finding overpayments created by these errors. These audits are either accounts payable audits or contract compliance audits and entail comprehensive and customized data acquisition from the client, frequently including purchasing, receiving, point-of-sale, pricing, deal and contract documentation, emails, and payment data.
PRGX, like most companies in the recovery audit services industry, generates the majority of its revenue through contingent fee arrangements, sharing a pre-determined percentage of successful claims or “recoveries” generated from an audit. There are certain recovery audit services or types of audits that are billed as a fixed fee or on a time and materials basis, but the majority of our revenue is generated through contingent fee contracts.
Recovery audit clients generally recover claims by either (a) taking credits against outstanding payables or future purchases from the involved vendors or service providers, or (b) receiving refund checks directly from those vendors or service providers. Industry practice generally dictates the manner in which a client receives the benefit for a recovery audit claim. In many cases, we must satisfy client-specific procedural guidelines before we can submit recovery audit claims for client approval.
Contracts with recovery audit clients generally vary in length from one year to three years, with some being evergreen. Most of our recovery audit contracts provide that the client may terminate the contract without cause prior to the completion of the term of the agreement by providing relatively short prior written notice of termination.
As business practices have evolved, PRGX and the recovery audit industry has evolved with them, innovating processes, error identification tools, and claim types to maximize recoveries. The following are a number of factors impacting recovery auditing:
Source to Pay Proliferation & Data Complexity. Businesses increasingly are using many different forms of proprietary and third-party technology to manage complex procurement and accounts payable systems in an effort to realize greater operating efficiencies. Many businesses worldwide communicate with vendors electronically, including the use of email, Electronic Data Interchange (“EDI”) and the Internet or third-party platforms to exchange inventory and sales data, transmit purchase orders, submit invoices, forward shipping and receiving information and remit payments. Though the complexity of capturing the data has increased significantly, these systems capture more detailed data, which should further inform transactional reviews by recovery auditors.
Globalization & Global Supply Chain Complexity. As the operations of business enterprises become increasingly multi-national, they often seek service providers with a global reach. Sophistication in systems and processes varies markedly across the global network of suppliers which further drives the need for our services. Companies are sourcing from all parts of the world, at times with minimal understanding of the associated risks. Companies have created vast networks of potential transaction partners that will continue to create complexity and risk throughout the supply chain. PRGX serves clients in more than 30 countries and we believe we are the recovery audit service provider best suited to deliver multi-national audits.
Increased Role of Email Documentation in Client Transaction Data. Clients and vendors increasingly document transaction terms in email correspondence that is not integrated into their financial or merchant deal systems, which increases opportunities for errors. To efficiently identify these errors, recovery audit firms must use sophisticated technology-based tools that are able to ingest and search through massive volumes of emails to identify potential errors that then are investigated by the auditors. A comprehensive recovery audit requires the effective use of technology-based email search tools and techniques.
Increasing Claim Categories and Accelerating Audits. Traditionally, the focus of a recovery audit was on a simple, or “disbursement,” claim type, such as the duplicate payment of invoices. Enhancements to accounts payable software, particularly large enterprise software solutions used by many large companies, have reduced the extent to which companies make simple disbursement errors. However, the introduction of creative vendor discount programs, complex pricing arrangements and activity-based incentives has led to an increase in auditable transactions and potential sources of error. These transactions are complicated to audit, as the underlying transaction data is difficult to access and recognizing mistakes can be complex. Recovery audit firms such as PRGX with significant industry-specific expertise and sophisticated technology are best equipped to audit these complicated claim categories. Historically these claims were audited months and in some cases years after the original transaction. PRGX is working to bring the timing of auditing closer to the original

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transaction. Audit acceleration has multiple benefits, including reduced vendor abrasion for clients, and greater accuracy of claims.
Significant Promotional Activity. Trade promotion spending is substantial within the retail trade and significant sums are being spent in categories with numerous transactions and a high potential for errors, such as scan downs, or discounts at the point of sale. Because of the high volume of trade promotion within retail, there are significant opportunities for mistakes and, therefore, auditable claims.
Technology Platform. The ability to efficiently and cost-effectively ingest large volumes of structured and unstructured data is critical to providing best-in-class recovery audit services. We believe we have developed the most sophisticated and highest performing large data processing infrastructure in our industry, including the following components of our proprietary Verigon™ Solution Suite, which enable our recovery audit services:
the Epiphany Data Foundation™ , which allows us to effectively process and manage our clients’ data in large scale volumes and at superior speeds, accelerating our data processing speeds for both structured and unstructured data sets and supporting our efforts to accelerate audit results and transform our core audit processes; and

the Panoptic™ Compliance Audit Platform, which provides a configurable toolkit for tailoring the audit, project, and claims management processes to each of the industry and audit types we serve.
We expect the evolution of the recovery audit industry to continue. In particular, we expect that the industry will continue to move towards the electronic capture and presentation of data, more automated, centralized processing and auditing closer to the time of the payment transaction.
Adjacent Services
Our Adjacent Services business leverages our significant S2P knowledge, expertise and capabilities, and enables us to provide additional insights and solutions to finance, merchandising and procurement executives, many of whom we have a long history with because of our recovery audit services. Typical Adjacent Services involve applying data science to our clients' structured and unstructured data to solve challenging business problems, such as improving working capital, optimizing purchasing leverage in vendor pricing negotiations, improving insight into product margin and cost of goods for resale, identifying and managing risks associated with vendor compliance, improving the quality of vendor master data and improving visibility and diagnostics of direct and indirect spend.
Our Adjacent Services business includes our supplier information management (“SIM”) and deduction management solutions as well as S2P analytics tools offered as part of our Lumen™ Advanced Analytics, a combination of technology and applied data science methodologies used to derive actionable insights from the S2P data now explorable within the Epiphany Data Foundation. As our clients’ supplier base, data volumes and complexity levels continue to grow, we are using our deep data management experience to develop new actionable insight solutions, compliance-related tools, analytics solutions and data transformation services. Taken together, our deep understanding of our clients’ S2P data and our Adjacent Services solutions provide multiple routes to help our clients achieve greater profitability.
Clients
PRGX provides its services principally to large businesses having a high volume of payment transactions and complex procurement environments. Retailers continue to constitute the largest part of our client and revenue base. Our five largest clients contributed to our revenue from continuing operations by approximately 36.6% in 2019, 35.4% in 2018 and 36.6% in 2017. We have one client, The Kroger Co., that accounted for approximately 10% of our revenue from continuing operations in 2019, and 12% of our revenue from continuing operations in 2018 and 2017.
Some organizations (primarily large retailers) maintain internal recovery audit departments to recover certain types of payment errors and identify opportunities to reduce costs. Despite having such internal resources, many companies also retain independent recovery audit firms, such as PRGX, due to their specialized knowledge, capabilities and focused technologies. In the U.S., Canada, the United Kingdom, France, Mexico, Brazil, and Australia, large retailers routinely engage independent recovery audit firms as a standard business practice. It is typical in the retail industry for large firms to engage a primary audit firm at one contingency fee rate and a secondary firm to audit behind the primary at a higher rate. Our commercial recovery audit clients are typically Fortune 1000 companies in industries other than retail and with multi-billion dollars of purchase transactions to be audited. These clients range from large multi-national manufacturing and resource companies, to large regional or national telecommunications and financial services institutions to global high-tech software organizations. The contract compliance audit practice is a specific type of recovery auditing which is more heavily utilized by commercial clients and is expected to be a growing part of our business. This service offering focuses on auditing complex supplier billings against large services, construction and licensing contracts, and is relevant to a large portion of our client base.

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The PRGX Strategy
PRGX is a global leader in recovery audit and spend analytics, services designed to improve our clients' S2P business processes. Our solutions include services and technologies for recovery audit, contract compliance, and advanced analytics. We principally offer our solutions to large businesses with a high volume of payment transactions and complex procurement environments.
We plan to achieve revenue growth and higher profitability through the following strategy:
1.Grow our core recovery audit business through continued process and technology innovation;
2.Differentiate our service offerings and capabilities;
3.Increase the global adoption of contract compliance auditing, which has demonstrated value across many industries and
regions; and
4.Expand our clients' use of advanced analytics to improve their S2P business processes
Grow our core recovery audit business through continued process and technology innovation
We continue to be the industry leader by introducing innovative audit concepts and processes. In addition, we are deploying global best practices and rolling out world-class proprietary technology platforms and audit tools to drive deeper recoveries and enable next generation audit concepts. We expect to achieve our growth objectives through process redesign coupled with investments in our technology infrastructure and implementing our new technologies across our global audits.
Differentiate our service offerings and capabilities
We plan to differentiate our service offerings and capabilities by enhancing our current services and implementing innovations such as:
Audit acceleration. Our clients are constantly seeking to accelerate the recovery audit process to deliver audit results closer to the time of the transaction to increase recovery yields, provide a greater opportunity to address process errors, and reduce supplier abrasion. We believe that our deep and broad business process experience across thousands of audits, together with our enhanced and new technology initiatives will uniquely position us to achieve superior results for our clients.
Global audit best-practice programs. Our global programs take advantage of our best-practice audit operations that serve clients in over 30 countries to provide true global audit capabilities to multi-national companies. We believe this unique perspective gives our clients visibility to their business practice variations around the world and creates value for our clients by allowing them to see their data in new ways.
Increase the global adoption of contract compliance auditing, which has demonstrated value across many industries and regions
Contract compliance auditing, a specific type of recovery auditing that is more heavily utilized by commercial clients, continues to be a growing part of our business. This service offering focuses on auditing complex supplier billings against large complex contracts and is relevant to a large portion of our client base. In additional to reviewing supplier contracts to ensure compliance and identify opportunities for cash recovery, a contract compliance audit identifies the source of issues, such as ambiguity in contract language, to identify improvements for future contract negotiations and contract quality. This type of audit is important to global corporations not only because any monies recovered increase profits, but also because these audits improve the discipline of future contracting and reduce future lost profits. Conducting contract compliance audits also deters fraud.
Many of the same types of companies we work with for our accounts payable recovery audits are ideal fits for contract compliance audits - those with highly complex procurement processes, involvement with many suppliers, and complex supply chains. We believe contract compliance audits are a logical extension of the services we provide to our accounts payable recovery audit clients, have the potential to provide enormous value to our clients, both retail and commercial, and are an attractive market opportunity for us.
Expand our clients’ use of advanced analytics to improve their S2P business processes
We will continue to offer additional services that complement our recovery audit services and provide increased value to our customers.
Our advanced analytics offerings target client functional and process areas where we have established expertise, enabling us to provide services to support our clients' finance, merchandising and procurement functions. These services can be project-based (advisory services), which are typically billed on a rates and hours basis, or subscription-based (typically SaaS offerings), which are billed on a monthly basis. The advanced analytics offerings assist our clients in improving many aspects of their

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businesses, including increased working capital, optimization of purchasing leverage in vendor pricing negotiations, improved insight into product margin and cost of goods for resale, identification and management of risks associated with vendor compliance, improved quality of vendor master data and improved visibility and diagnostics of direct and indirect spend.

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Technology
The PRGX Verigon™ Solution Suite is an ecosystem of foundational technology infrastructure, platforms and solutions focused on our recovery audit and advanced analytics service offerings. The suite includes advanced and proprietary solutions, systems and processes and incorporates a large-scale technology infrastructure to support our broad range of audit and advanced analytics solutions.
Foundational to the Verigon Solution Suite is the Epiphany™ Data Foundation, which provides the ability to efficiently and cost effectively ingest, prepare, and transform large volumes of structured and unstructured data. We believe we have developed the most sophisticated and highest performing large data processing infrastructure system in the recovery audit industry. This system is critical to providing best-in-class recovery audit and advanced S2P analytics services. This system utilizes queue-driven data pipelines and in-memory processing to manage our clients' data in large scale volumes at superior speeds. We are continuing to accelerate data processing speeds for both structured and unstructured data sets. This allows us to support our efforts to accelerate audit results, deliver preventative and pre-payment audit capabilities, and transform our core audit processes.
We believe that our proprietary technology and processes serve as important competitive advantages over both our principal competitors and our clients’ internal recovery audit functions. To sustain these competitive advantages, we continually invest in technology initiatives to deliver innovative solutions that improve both the effectiveness and efficiency of our services.
We design our data acquisition, data processing and data management solutions to maximize efficiencies and productivity - all while maintaining the highest standards of transaction auditing and spend analytics accuracy. Further, we uphold highly reliable security standards utilizing the most sophisticated and effective tools to protect all data under our control.
Our technology professionals clean and map massive volumes of structured and unstructured client data into standardized layouts and formats, and generate statistical reports to verify the completeness and accuracy of the data. We utilize high performance database and storage technologies to maintain the data at one of our secure data processing facilities.
The Panoptic™ Compliance Audit Platform provides our auditors with a configurable toolkit for tailoring the audit, project and claims management processes for all clients and audit types we serve. The platform processes the data using proprietary algorithms (business rules) leveraging our experience to help uncover patterns or potential issues in our clients’ various transactional streams. We deliver this processed data to our auditors who, using our proprietary audit software, sort, filter and search the data to validate and identify actual transaction errors. We maintain a secure database of audit information with the ability to query on multiple variables, including claim categories, industry codes, vendors and audit years. This allows us to identify additional recovery opportunities and provide recommendations for process improvements to our clients.
Once we identify and validate transaction errors, we present the information to our clients for approval and submission to vendors as “claims.” We offer a proprietary web-based claim presentation and collaboration solution to help our clients view, approve, and submit claims to vendors.
The third layer of our Verigon Solution Suite is Lumen™ Advanced Analytics, a combination of technology and applied data science methodologies used to derive actionable insights from the S2P data now explorable within the Epiphany Data Foundation. Our advanced analytics include our supplier information management (“SIM”) and deduction management solutions.


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Competition
Accounts Payable Recovery Audit Services
We believe that the principal providers of domestic and international accounts payable recovery audit services in major markets worldwide consist of PRGX, two substantial competitors, and numerous other smaller competitors. The smaller recovery audit firms generally do not possess multi-country service capabilities and advanced technology infrastructure necessary to support our clients' large and complex purchasing and accounts payable operations. In addition, many of these firms have limited resources and may lack the experience and knowledge of complex promotions, seasonal allowances and current recovery audit practices. As a result, we believe that compared to most other firms providing accounts payable recovery audit services, PRGX has competitive advantages based on its domestic and international presence, well-trained and experienced professionals, and advanced technology.
While we believe that PRGX has the greatest depth and breadth of audit expertise, data and technology capabilities, scale and global presence in the industry, we face competition from the following:
Client Internal Recovery Audit Departments. A number of large retailers (particularly those in the discount, grocery and pharmacy sectors) have developed an internal recovery audit process to review transactions prior to turning them over to external recovery audit firms. The scale and scope of these client internal organizations varies by client based on their level of in-house expertise and investment in required tools and technologies. Regardless of the level of recoveries made by internal recovery audit departments, virtually all large retail clients retain at least one (primary), and frequently two (primary and secondary), external recovery audit firms to capture errors not identified by their internal recovery audit departments.
Other Accounts Payable Recovery Audit Firms. The competitive landscape in the recovery audit industry is comprised of:
Full-service accounts payable recovery audit firms. We believe that only two companies other than PRGX offer a full suite of U.S. and international recovery audit services;
A large number of smaller accounts payable recovery audit firms which have a limited client base, and which use less sophisticated tools to mine disbursement claim categories at low contingency rates. These firms are most common in the U.S. and UK markets. Competition in most international markets, if any, typically comes from small niche providers;
Firms, including one of our two substantial competitors, that offer a hybrid of audit software tools and training for use by internal audit departments, or general accounts payable process improvement enablers; and
Firms with specialized skills focused on recovery audit services for discrete sectors such as sales and use tax, telecom, freight or real estate.
Other Providers of Recovery Audit Services. The major international accounting firms provide recovery audit services; however, we believe their practices tend to be primarily focused on tax-related services.
Adjacent Services
Our Adjacent Services business faces competition from global and regional consulting firms, as well as some software vendors, including ERP and point-solution providers, such as procurement-specific software and specialized SaaS analytics providers. These competitors generally compete on the basis of the breadth of services, market reputations and integration with other services. Since we provide our Adjacent Services to our recovery audit clients, we believe that we differentiate ourselves from our competitors through our in-depth knowledge of our clients’ data, systems, and purchasing processes, along with advanced and specialized technology tools.
Hiring, Training and Compensation of Personnel
Many of our auditors and other professionals formerly held finance-related management positions in the industries we serve. Training primarily is provided in the field by our experienced professionals enabling newly hired personnel to develop and refine their skills and improve productivity. We also use various other training materials such as process manuals and documented policies and procedures to supplement the field training provided by our experienced professionals. We periodically upgrade our training programs based on feedback from auditors and changing industry protocols. Many of our professionals participate in one of our incentive compensation plans that link their compensation to the financial performance of their service offering(s).

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Proprietary Rights
From time to time, we develop new software and methodologies that replace or enhance existing proprietary software and methodologies. We rely primarily on trade secret and copyright protection for our proprietary software and other proprietary information. 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. We consider the costs associated with developing or replacing methodologies to be development costs.
We own or have rights to various trademarks, trade names and copyrights, including U.S. and foreign registered trademarks and trade names and U.S. registered copyrights, that are valuable assets and important to our business. We monitor the status of our copyright and trademark registrations to maintain them in force and renew them as appropriate. The duration of our active trademark registrations varies based upon the relevant statutes in the applicable jurisdiction, but generally endure for as long as they are used. The duration of our active copyright registrations similarly varies based on the relevant statutes in the applicable jurisdiction, but generally endure for the full statutory period. Our trademarks and trade names are of significant importance and include, but are not limited to, the following: PRGX®, Epiphany Data Foundation™, GET™, Lavante®, Lavante SIM™, Lumen™, Panoptic™, PRGX OPTIX®, PRGX MailTrax™, PRGX APTrax™, PRGX AuditTrax™, PRGX ClaimTrax™, and Verigon™.
Regulation
Various aspects of our business, including, without limitation, our data flows and our data acquisition, processing and reporting protocols, are subject to extensive and frequently changing governmental regulation in the U.S. and the numerous other countries around the world where we operate. These regulations include extensive data protection and privacy requirements. In the U.S., we are subject to the provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) with respect to information regarding our employees, as well as our discontinued HCRA business, and subject to the California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020, with respect to personal data of California consumers, households, and employees. Internationally, we must comply with the European data protection requirements, including the General Data Protection Regulation ("GDPR"), which went into effect in May 2018, and as a result of Brexit, the Data Protection Act of 2018 and The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019, which substantially implements GDPR in U.K. domestic legislation. We must also comply with data protection laws that exist in many of the other countries where we serve clients. Failure to comply with such regulations may, depending on the nature of the noncompliance, result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, and damage to our reputation or in certain circumstances, criminal penalties.
Employees
As of December 31, 2019, PRGX had approximately 1,500 employees, of whom approximately 600 were in the U.S. The majority of our employees are involved in our recovery audit business.
Website
PRGX makes available free of charge on its website, www.prgx.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports. PRGX makes all filings with the Securities and Exchange Commission ("SEC") available on its website no later than the close of business on the date the filing was made. In addition, investors can access our filings with the Securities and Exchange Commission at www.sec.gov.
We also post certain corporate governance materials, including our Board of Directors committee charters and our Code of Conduct and Code of Ethics For Senior Financial Officers, on our website under the heading “Corporate Governance” on the “Investors” page. From time to time, we may update the corporate governance materials on our website as necessary to comply with rules issued by the SEC or NASDAQ, or as desirable to further the continued effective and efficient governance of our Company.

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ITEM 1A. Risk Factors
We must successfully execute our growth strategy in order to increase our revenue, and must control our costs in order to maintain profitability.
Over time, our clients tend to resolve recurring transaction processing deficiencies. In addition, many of our clients have an internal staff that audits the transactions before we do. As the skills, experience and resources of our clients' internal recovery audit staffs improve, they will identify many overpayments themselves and reduce some of our audit recovery opportunities. In addition, our revenues are potentially impacted by competitive rate pressures, our dependency on clients to approve our claims on a timely basis, changes in audit scope by our clients and occasional loss of clients or movement from primary to secondary position. We must continually innovate new audit concepts, improve audit execution, develop new clients and successfully execute our own growth strategy in order to increase our revenue and avoid losses in our business.
We depend on our largest clients for significant revenue, so losing a major client could adversely affect our revenue and liquidity.
We generate a significant portion of our revenue from our largest clients. Our five largest clients collectively accounted for 36.6% of our revenue from continuing operations in 2019, 35.4% of our revenue from continuing operations in 2018 and 36.6% of our revenue from continuing operations in 2017. We have one client, The Kroger Co., that accounted for approximately 10% of our revenue from continuing operations in 2019, and 12% of our revenue from continuing operations in 2018 and 2017. If we lose any of our major clients, our results of operations and liquidity could be materially and adversely affected.
Although we continually seek to diversify our client base, we may be unable to offset the effects of an adverse change in one of our key client relationships. For example, if our existing clients elect not to renew their contracts with us at the expiration of the current terms of those contracts, or reduce the services they purchase thereunder, our recurring revenue base will be reduced, which could have a material adverse effect on our business, financial position, results of operations, and cash flows. In addition, we could lose clients if: (i) they cancel their agreements with us; (ii) we fail to win a competitive bid at the time of contract renewal; (iii) the financial condition of any of our clients deteriorates; or (iv) our clients are acquired by, or acquire, companies with which we do not have contracts. Any of these could materially and adversely affect our business, financial position, results of operations, and cash flows.
Our strategy may not be successful.
As discussed in Item 1 “The PRGX Strategy,” our objectives are to achieve revenue growth and higher profitability by growing and improving our core recovery audit business, differentiating our service offerings and capabilities, creating adjacent service offerings (including SaaS solutions) and expanding into new high-potential industries and geographies. These efforts are ongoing, and the results of our efforts will not be known until sometime in the future. Successful execution of our strategy requires sustained management focus, innovation, organization and coordination over time, as well as success in building relationships with third parties. If we are unable to execute our strategy successfully, our business, financial position, results of operations and cash flows could be adversely affected. In addition, execution of our strategy will require material investments and additional costs that may not yield incremental revenue and improved financial performance as planned.
Our acquisitions, investments, partnerships and strategic alliances may require significant resources and/or result in significant unanticipated losses, costs or liabilities.
Acquisitions have contributed and are expected to continue to contribute to our revenue. Although we cannot predict our rate of growth as the result of acquisitions with complete accuracy, we believe that additional acquisitions, investments and strategic alliances will be important to our growth strategy.
We may finance future acquisitions by issuing additional equity and/or incurring additional debt. Issuing additional equity in connection with any such transaction could be substantially dilutive to existing shareholders. In addition, the announcement or implementation of future transactions by us or others could have a material effect on the price of our common stock. Incurring additional debt in connection with any such transaction could increase our leverage substantially and we could face financial risks associated with incurring significant debt. Additional debt may reduce our liquidity, curtail our access to financing markets, impact our standing with credit agencies and increase the cash flow required for debt service. Any incremental debt incurred to finance an acquisition could also place significant constraints on the operation of our business.
Furthermore, any future acquisitions of businesses or facilities could entail a number of additional risks, including:
problems with effective integration of acquired operations;
the inability to maintain key pre-acquisition business relationships;
increased operating costs;
the diversion of our management team from our other operations;
problems with regulatory agencies;

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exposure to unanticipated liabilities;
difficulties in realizing projected efficiencies, synergies and cost savings; and
changes in our credit rating and financing costs.
The terms of our credit facility place restrictions on us, which create risks of default and reduce our flexibility.
Our current credit facility contains a number of affirmative, negative, and financial covenants that may limit our ability to take certain actions and require us to comply with specified financial ratios and other performance covenants. No assurance can be provided that we will not violate the covenants of our secured credit facility in the future. If we are unable to comply with our covenants in the future, our lenders could pursue their contractual remedies under the credit facility, including requiring the immediate repayment in full of all amounts outstanding, if any. Additionally, we cannot be certain that, if the lenders demanded immediate repayment of any amounts outstanding, we would be able to secure adequate or timely replacement financing on acceptable terms or at all.
Our ability to make payments due on debt we may have outstanding will depend upon our future operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which we cannot control. If the cash flow from our operating activities is insufficient to make these payments, we may take actions such as delaying or reducing capital expenditures, attempting to restructure or refinance our debt, selling assets or operations or seeking additional equity capital. Some or all of these actions may not be sufficient to allow us to service our debt obligations and we could be required to file for bankruptcy. Further, we may be unable to take any of these actions on satisfactory terms, in a timely manner or at all. In addition, our credit agreement may limit our ability to take several of these actions. Our failure to generate sufficient funds to pay our debts or to undertake any of these actions successfully could materially and adversely affect our business, financial position, results of operations and cash flows.
The phase-out of the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with a different reference rate or modification of the method used to calculate LIBOR, may adversely affect interest rates which may have an adverse impact on us.
LIBOR is an interest rate benchmark used as a reference rate for a wide range of financial transactions, including our BOA Credit Facility (as discussed in Item 7 “Secured Credit Facility”). In July 2017, the U.K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop compelling banks to submit LIBOR rates after 2021. It is unclear whether or not LIBOR will cease to exist at that time (and if so, what reference rate will replace it) or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The Alternative Reference Rates Committee (the “ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in contracts that are currently indexed to United States dollar LIBOR. The ARRC has proposed a paced market transition plan to SOFR from LIBOR. Uncertainty exists as to the transition process and broad acceptance of SOFR as the primary alternative to LIBOR. The consequences of these developments cannot be predicted, but could adversely affect the cost of our variable rate indebtedness.
We may be unable to protect and maintain the competitive advantage of our proprietary technology and intellectual property rights.
Our business is dependent on proprietary software and other technology and intellectual property that we own or license from third parties, including trademarks, service marks, trade names, trade secrets, copyrights and patents. The steps that we have taken or will take in the future may not prevent misappropriation of and otherwise protect our proprietary technology and intellectual property. Our operations could be materially and adversely affected if we are not able to protect our proprietary technology, including our software, audit techniques and methodologies, and our intellectual property from potential theft, unauthorized use or compromise.
We generally rely on a combination of trade secret and copyright laws, nondisclosure and other contractual arrangements and technical measures to protect our proprietary rights. Although we presently hold U.S. registered copyrights on certain of our proprietary technology and certain U.S. and foreign registered trademarks, we may be unable to obtain similar protection on our other intellectual property. In addition, our foreign registered trademarks may not receive the same enforcement protection as our U.S. registered trademarks.
Additionally, to protect our confidential information and trade secrets, we generally enter into nondisclosure agreements with our employees, consultants, contractors, clients and potential clients. We also limit access to, and distribution of, our proprietary information. Nevertheless, we may be unable to deter or detect the misappropriation, or unauthorized use or dissemination, of our proprietary technology and intellectual property. Our failure to adequately protect our proprietary technology and intellectual property could harm our reputation and affect our ability to compete effectively. There is no guarantee that our data, proprietary technology and intellectual property will not be improperly accessed, or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology, despite the level of care we take. We may utilize litigation to protect our intellectual property rights, which could require significant financial and managerial resources, or we may

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elect not to enforce our infringed intellectual property rights, depending on our determination of the best use of our resources, the relative strength of our intellectual property portfolio and the recourse available to us.
We could be subjected to claims of intellectual property infringement.
Although we are not aware of any infringement of our services and products on the intellectual property rights of others, the potential for intellectual property infringement claims continually increases as the universe of intellectual property continues to rapidly expand, and we are subject to the risk that someone else will assert a claim against us for violating their intellectual property rights. Any claim for intellectual property infringement, even if not meritorious, could be expensive to defend. If we were held liable for infringing third-party intellectual property rights, we could incur substantial damage awards, and potentially be required to cease using the technology, produce non-infringing technology or obtain a license to use such technology. Such potential liabilities or increased costs could be material to us.
Cyber-security incidents, including data security breaches or computer viruses, could harm our business by disrupting our delivery of services, damaging our reputation or exposing us to liability.
We receive, process, store and transmit, often electronically, the confidential data of our clients and others. Unauthorized access to our computer systems or stored data could result in the theft or improper disclosure of confidential information, the deletion or modification of records or could cause interruptions in our operations. These cyber-security risks increase when we transmit information from one location to another, including transmissions over the Internet or other electronic networks. Despite implemented security measures, our facilities, systems and procedures, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, software viruses, misplaced or lost data, programming and/or human errors or other similar events which may disrupt our delivery of services or expose the confidential information of our clients and others. Any security breach involving the misappropriation, loss or other unauthorized disclosure or use of confidential information of our clients or others, whether by us or a third-party, could (i) subject us to civil and criminal penalties; (ii) have a negative impact on our reputation; (iii) expose us to litigation and liability to our clients, third parties or governmental authorities; (iv) cause our present and potential clients to choose another service provider or otherwise cause us to suffer lost revenue; (v) cause us to incur significant remediation costs; (vi) cause us to incur increased cyber-security protection costs, including those related to organizational changes, addition of personnel and protection technologies, training employees, and engaging third party experts and consultants; and (vii) negatively impact the Company’s competitiveness, stock price and long-term shareholder value. Any of these developments could have a material adverse effect on our business, results of operations, financial position, and cash flows.
Our ability to deliver our services is dependent on the development and maintenance of the infrastructure of the Internet by third parties.
The infrastructure of the Internet consists of multiple fragmented networks. Multiple third-party organizations run this infrastructure together under the governance of the Internet Corporation for Assigned Numbers and Names (ICANN) and the Internet Assigned Numbers Authority under the stewardship of ICANN. The Internet has experienced outages and other delays resulting from damage to portions of infrastructure, denial-of-service attacks or related cyber incidents, and the Internet could face outages and delays in the future. These outages and delays could reduce the level of Internet usage or result in fragmentation of the Internet, resulting in multiple separate networks lacking interconnection. These scenarios are outside of our control and could adversely affect the delivery of our services by (i) impairing the delivery of SaaS solutions and other hosted software to our clients; (ii) limiting our ability to utilize cloud-based hosting of data and technology; and (iii) impeding the transfer of data from and to our clients. Resulting interruptions in our delivery of services could result in a loss of potential or existing clients and harm our business.
In addition, legal or technological restrictions may exist in certain countries that may regulate access to the Internet, including the ability of Internet Service Providers to restrict access to specific websites or content. This could potentially limit or interrupt access to our services from certain countries or Internet Service Providers, impede our growth, result in the loss of potential or existing customers and harm our business.
Our software and SaaS solutions may not be error-free and could result in claims of breach of contract and liabilities.
Our software and SaaS solutions are very complex and may not be error-free, especially when first released. Although we perform extensive testing, the failure of any solution to operate in accordance with its specifications, documentation or applicable license agreement could require us to correct the deficiency. If such deficiency cannot be corrected in accordance with the relevant contract for services, the deficiency could constitute a material breach of the contract allowing for the contract’s termination and possibly subjecting us to liability. Also, we sometimes indemnify our clients against third-party infringement claims and certain other losses. If such claims for indemnification are made, even if they are without merit, they could be expensive to resolve. A significant judgment against us could have a material adverse impact on us.
Operational failures in our data processing facilities could harm our business and reputation.

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An interruption of our hosting facilities or other data processing services, including an interruption caused by damage or destruction of communication lines or physical facilities or a failure of data processing equipment, could result in a loss of clients, difficulties in obtaining new clients and a reduction in revenue. In addition, we also may be liable to third parties or our clients because of such interruption. These risks would increase with longer service interruptions. Despite any disaster recovery and business continuity plans and precautions we have implemented (including insurance) to protect against the effects of service delivery interruptions, such interruptions could result in a material adverse effect on our business, results of operations, financial position, and cash flows.
Our investment of substantial capital in information technology systems, and a failure to successfully implement such systems could adversely affect our business.
We have invested and continue to invest substantial amounts in the development and implementation of information technology systems. Although investments are carefully planned, there can be no assurance that such systems will justify the related investments. If we fail to realize the benefits expected from our information technology system investments, or if we fail to do so within the envisioned time frame, it could have an adverse effect on our results of operations, financial position, and cash flows.
Client and vendor bankruptcies and financial difficulties could reduce our earnings.
Our clients generally operate in intensely competitive environments and, accordingly, bankruptcy filings by our clients are not uncommon. Bankruptcy filings by our large clients or the significant vendors who supply them or unexpectedly large vendor claim chargebacks lodged against one or more of our larger clients could have a materially adverse effect on our financial condition, results of operations, and cash flows. Similarly, our inability to collect our accounts receivable due to other financial difficulties of one or more of our large clients could adversely affect our financial position, results of operations, and cash flows.
Economic conditions which adversely impact our clients and their vendors in the retail industry in the UK and Europe may continue to have a negative impact on our revenue. Specifically, client liquidity and the liquidity of client vendors can have a significant impact on claim production, the claim approval process, and the ability of clients to offset or otherwise make recoveries from their vendors.
If a client files for bankruptcy, we could be subject to an action to recover certain payments received in the 90 days prior to the bankruptcy filing known as “preference payments.” If we are unsuccessful in defending against such claims, we would be required to make unbudgeted cash payments which could strain our financial liquidity, and our earnings would be reduced.
Our failure to retain the services of key members of our management team and highly skilled personnel could adversely impact our operations and financial performance.
Our future success depends largely on the efforts and skills of our management team, including our executive officers and other key employees. As such, we have entered into employment agreements with key members of our management team. While these employment agreements include limits on the ability of key employees to directly compete with us in the future, nothing prevents them from leaving our Company. We also do not maintain “key person” life insurance policies on any of our executive officers or other key employees. Thus, we may have to incur costs to replace such employees if we were to lose their services, and our ability to execute our business strategy could be impaired if we are unable to replace such employees in a timely manner.
In addition, it is especially challenging to attract and retain highly qualified skilled auditors and other professionals in an industry where competition for skilled personnel is intense. Accordingly, our future performance also depends, in part, on the ability of our management team to work together effectively, manage our workforce, and retain highly qualified personnel.
We rely on operations outside the U.S. for a significant portion of our revenue and are increasingly dependent on operations outside the U.S. for supporting our operations globally.
Operations outside the U.S. generated 40.0% of our annual revenue from continuing operations in 2019, 41.5% in 2018 and 42.2% in 2017. These international operations are subject to numerous risks, including:
greater exposure to the possibility of economic instability, the disruption of operations from labor and political disturbances, expropriation or war in the international markets we serve;
difficulties in staffing and managing foreign operations and in collecting accounts receivable;
fluctuations in currency exchange rates, particularly weaknesses in the British pound, the euro, the Canadian dollar, the Mexican peso, the Brazilian real, the Australian dollar, the Indian rupee and other currencies of countries in which we transact business, which could result in currency translations that materially reduce our revenue and earnings;
costs associated with adapting our services to our foreign clients’ needs;
unexpected changes in regulatory requirements and laws;
expenses and legal restrictions associated with transferring earnings from our foreign subsidiaries to us;

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difficulties in complying with a variety of foreign laws and regulations, such as those relating to data protection and employment, as well as U.S. laws affecting operations outside of the United States;
business interruptions due to widespread disease, actual or potential terrorist activities, or other catastrophes;
reduced or limited protection of our intellectual property rights;
longer accounts receivable cycles; and
competition with large or state-owned enterprises or regulations that effectively limit our operations and favor local competitors.
Because we expect a significant portion of our revenue to continue to come from operations outside the U.S., and expect to continue transitioning certain of our operations to locations outside the U.S., the occurrence of any of these events could materially and adversely affect our business, financial position, results of operations, and cash flows.
In 2019, our European operations, which include our U.K. operations, accounted for 21.2% of our consolidated revenue from continuing operations. There have been continuing concerns and uncertainties regarding the stability of certain European economies. A continued decline in the economic conditions in Europe may materially and adversely affect our operations both in Europe and on a consolidated basis.
Furthermore, certain of our core data processing and other functions are located outside the U.S., including India, where approximately 20% of our employees were located on December 31, 2019. While our operations in India have been key to serving clients more efficiently and cost-effectively under our improved service delivery model, India has from time to time experienced instances of civil unrest and hostilities with neighboring countries. Geopolitical conflicts, military activity, terrorist attacks, or other political uncertainties in the future could adversely affect the Indian economy by disrupting communications and making business operations and travel more difficult, which may have a material adverse effect on our ability to deliver services from India. Disruption of our Indian operations could materially and adversely affect our profitability and our ability to execute our growth strategy.
The uncertainty surrounding the implementation and effect of the U.K. exiting the European Union (the “EU”), and related negative developments in the EU could adversely affect our business, results of operations and financial condition.
The results of a June 2016 referendum vote in the U.K. were in favor of the U.K. exiting the EU (commonly referred to as “Brexit”). Following the referendum and a lengthy withdrawal process, the U.K. ceased to be a member state of the EU on January 31, 2020. The future relationship between the U.K. and the EU remains uncertain as the U.K. and the EU work through a transition period that provides time for both parties to negotiate the details of their future relationship. The transition period is currently expected to end on December 31, 2020 and, if no agreement is reached, the default scenario would be a “no-deal” Brexit. In the event of a no-deal Brexit, the U.K. would no longer be subject to EU law and would leave the EU’s customs union and single market with no agreements in place governing trade and other aspects of the U.K.-EU relationship, or governing U.K. trade with numerous other countries. In such event, applicable trade rules would default to those promulgated by the World Trade Organization or set forth in individual agreements put in place between the U.K. and individual EU member states and other countries outside the EU.
Brexit has created political and economic uncertainty and instability in the global markets (including currency and credit markets), particularly in the U.K. and the EU. Brexit has had a detrimental effect, and could have further detrimental effects, on the value of either or both of the euro and the British pound sterling, which could negatively impact our business (principally from the translation of sales and earnings in those foreign currencies into our reporting currency).
In addition, political and economic uncertainty surrounding the terms of Brexit has in the past led to, and the outcome of Brexit may lead to, certain macroeconomic conditions that could adversely affect our business. These macroeconomic conditions, such as deterioration in economic climate, legal uncertainty, and the implementation of potentially divergent or prohibitive laws and regulations as the U.K. shifts to a U.K.-specific regulatory framework, may negatively impact demand for our services and our ability to deliver our services into the EU, the U.K. and elsewhere. Brexit could adversely affect European or worldwide political, regulatory, economic or market conditions and could contribute to instability in political institutions and regulatory agencies. Brexit could also have the effect of disrupting the free movement of goods, services, and people between the U.K., the EU and elsewhere. The long-term effects of Brexit will depend, in part, on any agreements the U.K. makes or does not make to retain access to EU and other markets following the transition period.
Given the lack of comparable precedent, it is unclear what financial, trade and legal implications a no-deal Brexit would have and how such withdrawal would affect us. A significant portion of our operations are conducted in the U.K. As a result, a no-deal Brexit could restrict access to our services by persons located in the EU or make access more expensive, which could adversely affect our operations and profitability.
Our business may be adversely affected by the recent coronavirus outbreak.

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In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. In early 2020, this coronavirus spread to other countries, including the U.S., and efforts to contain the spread of this coronavirus intensified. The outbreak and any preventative or protective actions that we, our clients, our respective suppliers, or governments may take in respect of this coronavirus may disrupt our business and the business of our clients. Any resulting financial impact cannot be reasonably estimated at this time but may materially affect our business, financial condition and results of operations despite the fact that such impacts may not be felt for a significant period of time. Although we are diligently working to ensure that we can operate with minimal disruption, and to mitigate the impact of the outbreak on our employees’ health and safety, the full extent to which the coronavirus could affect the global economy and our results will depend on future developments and factors that cannot be predicted.
Our business operates in highly competitive environments and is subject to pricing pressure.
The environments in which our business operates are highly competitive, with numerous other recovery audit firms and other service providers. In addition, many of our recovery audit clients have developed their own internal recovery audit capabilities. As a result of competition among the providers of these services and the availability of certain recovery audit services from clients’ internal audit departments, our business is subject to intense rate pressure. Our Adjacent Services business also has numerous competitors varying in size, market strength and specialization, many of whom have established and well-known franchises and brands. Intense price competition faced by all of our service lines could negatively impact our profit margins and have a potential adverse effect on our business, financial position, results of operations, and cash flows.
Our client contracts generally contain provisions under which the client may terminate our services prior to the completion of the agreement.
Many of our client contracts provide that the client may terminate the contract without cause prior to the end of the term of the agreement by providing us with relatively short prior written notice of the termination. As a result, the existence of contractual relationships with our clients is not an assurance that we will continue to provide services for our clients through the entire term of their respective agreements. If clients representing a significant portion of our revenue terminated their agreements unexpectedly, we may not, in the short-term, be able to replace the revenue and income from such contracts and this would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, client contract terminations also could harm our reputation within the industry which could negatively impact our ability to obtain new clients.
Our charges to earnings resulting from acquisition, restructuring and integration costs may materially adversely affect the market value of our common stock.
We account for the completion of our acquisitions using the purchase method of accounting. We allocate the total estimated purchase prices to net tangible assets, amortizable intangible assets and indefinite-lived intangible assets, and based on their fair values as of the date of completion of the acquisitions, record the excess of the purchase price over those fair values as goodwill. Our financial results, including earnings per share, could be adversely affected by a number of financial adjustments required in purchase accounting including the following:
we will incur additional amortization expense over the estimated useful lives of certain of the intangible assets acquired in connection with acquisitions during such estimated useful lives;
we will incur additional depreciation expense as a result of recording purchased tangible assets; and
to the extent the value of goodwill or intangible assets becomes impaired, we may be required to incur material charges relating to the impairment of those assets.
Our failure to comply with applicable governmental privacy laws and regulations in the U.S. and internationally could substantially impact our business, operations, financial position, and cash flows. Additionally, compliance with the laws and regulations relating to the handing of personal data may impede our ability to provide services in certain jurisdictions and may result in increased costs.
We are subject to extensive and evolving federal, state and foreign privacy laws and regulations. Changes in privacy laws or regulations or new interpretations of existing laws or regulations could have a substantial effect on our business, financial condition and results of operations. Failure to comply with such regulations could result in the termination or loss of contracts, the imposition of contractual damages, civil sanctions, damage to the Company’s reputation, or in certain circumstances, criminal penalties, any of which could have a material adverse effect on our results of operations, financial position, cash flows, business and prospects. Determining compliance with such regulations is complicated by the fact that the interpretations of these laws and regulations by governing regulatory authorities and the courts evolve over time, and many of the provisions of such laws and regulations are open to a wide range of interpretations. There can be no assurance that we are or have been in compliance with all applicable existing laws and regulations or that we will be able to comply with new laws or regulations.
With respect to trans-border personal data flows from the EU and the European Economic Area (“EEA”), PRGX USA, Inc. is certified under the EU-U.S. Privacy Shield Framework, as agreed to by the U.S. Department of Commerce and the European Commission, as a valid mechanism to legally transfer EU and EEA personal data from the EU and EEA to the U.S.; however, it is possible that the EU-U.S. Privacy Shield Framework may be challenged in EU/EEA courts, and there is some uncertainty

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regarding its future validity and our ability to rely on it for EU/EEA to U.S. data transfers. In addition, despite our Privacy Shield certification and extensive efforts to maintain the privacy, integrity and controlled use of confidential information, including personally identifiable information, through a combination of hardware, software, and physical security, coupled with strong internal data security processes, procedures and controls that we believe meet or exceed relevant laws, regulations and industry best practices, we may experience hesitancy, reluctance, or refusal by European or multi-national clients to use our services due to the potential risk exposure they may face as a result of their data being transferred outside of the EU/EEA.
Further, in 2016, the EU adopted a new law governing data protection practices and privacy called the General Data Protection Regulation (“GDPR”), which became effective in May 2018. GDPR is a redesign of the European Data Protection Directive 95/46/EC and is intended to boost the online and offline privacy rights of individuals. GDPR places more stringent operational requirements on processors and controllers of personal data, including, for example, expanded disclosures about how personal information is to be used, limitations on retention of information, increased requirements to correct or erase an individual’s information upon request, mandatory data breach notification requirements and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. The GDPR also significantly increases penalties for non-compliance.
Brexit has created uncertainty with regard to the regulation of data protection in the U.K. In the immediate term, the U.K. will remain directly bound by GDPR. The U.K. government implemented the Data Protection Act of 2018 and issued a statutory instrument, The Data Protection, Privacy and Electronic Communications (Amendments etc) (EU Exit) Regulations 2019, which substantially implements GDPR in U.K. domestic legislation. While the U.K. Information Commissioner’s Office has announced that there are no plans to dilute U.K. data protection laws, it is less certain how data protection laws or regulations will develop in the future, and how data transfers to and from the U.K. will be regulated. The EU Commission has announced that the U.K. will become a “third country” once it has exited the EU, notwithstanding the U.K.’s stated intention to transpose all existing EU law into its domestic law.
Laws are also increasingly aimed at the use of personal information for marketing purposes, such as the EU’s e-Privacy Directive, and the country-specific regulations that implement that directive. Such laws and regulations are also subject to new and differing interpretations and may be inconsistent among jurisdictions.
In the United States, there are numerous federal and state laws governing the privacy and security of personal information. The California Consumer Privacy Act (“CCPA”) went into effect on January 1, 2020. The CCPA has been dubbed the first “GDPR-like” law in the United States since it creates new individual privacy rights for California “consumers” (as that term is broadly defined in the law) and places increased privacy and security obligations on entities handling personal data of California consumers or households. The CCPA requires covered companies to provide new disclosures to such California consumers, provides such consumers new ways to opt-out of certain sales of personal information, and allows for a new cause of action for data breaches. It remains unclear how the CCPA will be interpreted, but as currently written, it will likely impact our business activities and exemplifies the vulnerability of our business to not only cyber-threats but also the evolving regulatory environment related to data protection. The CCPA may increase our compliance costs and potential liability. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States. Other states are beginning to pass similar laws.
The EU-U.S. Privacy Shield Framework, the GDPR, the EU’s e-Privacy Directive, the CCPA and other applicable laws and regulations could reduce demand for our services or restrict our ability to store and process data or, in some cases, impact our ability to provide our services in certain locations or our clients’ ability to deploy our solutions globally. Failure to provide adequate privacy protections and maintain compliance with these data privacy laws and regulations could have a material adverse effect on our financial condition and results of operations. We have invested, and continue to invest, human and technology resources in our data privacy compliance efforts. These compliance efforts may be time-intensive and costly. Despite those efforts, there is a risk that we may be subject to fines and penalties, litigation and reputational harm if we fail to protect the privacy of third party data or to comply with the EU-U.S. Privacy Shield Framework, GDPR, the EU’s e-Privacy Directive, the CCPA or other applicable regimes.
We are subject to legislative, regulatory, and legal developments involving taxes.
We are subject to U.S. federal and state income, payroll, property, sales and use, fuel, and other types of taxes. The Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017, significantly changed the U.S. corporate income tax system. Given our U.S. valuation allowance, the Tax Act does not materially impact our income tax provision or balance sheet, however further changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the Tax Act), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, higher tax rates, claims, audits, investigations or legal proceedings involving taxing authorities, could have a material adverse effect on our results of operations, financial condition, and cash flows.


15


Certain ownership changes may limit our ability to use our net operating losses.
We have substantial tax loss and credit carry-forwards for U.S. federal income tax purposes. 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. If a future ownership change occurs and limits our ability to use our historical net operating loss carryforwards, it could have a material adverse impact on our business, financial position and results of operations by increasing our future tax obligations.
Certain of our tax positions may be subject to challenge by the Internal Revenue Service and other tax authorities, and if successful, these challenges could increase our future tax liabilities and expense.
For U.S. federal income tax purposes, as well as local country tax purposes in the jurisdictions where we operate, from time to time we take positions under provisions of applicable tax law that are subject to varying interpretations. Certain of our tax positions may be subject to challenge by the applicable taxing authorities, including, in the U.S., the Internal Revenue Service. If our tax positions are successfully challenged, our future tax liabilities and expense could significantly increase.
While we believe that our tax positions are proper based on applicable law and we believe that it is more likely than not that we would prevail with respect to challenges to these positions, we can make no assurances that we would prevail if our positions are challenged or that business economics would justify the mounting of a legal defense against such challenges. If our tax positions are successfully challenged by the U.S. or non-U.S. taxing authorities, it could increase our future tax liabilities and expense and have a material adverse impact on our financial position, results of operations and cash flows.
We may have exposure to additional income tax liabilities or additional costs if the U.S. government changes certain U.S. tax rules or other tax laws applicable to U.S. corporations doing business in foreign jurisdictions.
We are a U.S. corporation that conducts business both in the U.S. and in foreign jurisdictions. From time to time, proposals for changes to tax and other laws are made that may negatively impact U.S. corporations doing business in foreign jurisdictions, including proposals for tax reform. While the scope of future changes remains unclear, proposed changes might include limiting the ability of U.S. corporations to deduct certain expenses attributable to offshore earnings, modifying the foreign tax credit rules and taxing currently certain transfers of intangible assets offshore or imposing other economic disincentives to doing business outside of the U.S. The enactment of some or all of these proposals could increase the Company’s effective tax rate or otherwise adversely affect our profitability.
Future impairment of goodwill, other intangible assets and long-lived assets would reduce our future earnings.
As of December 31, 2019, the Company’s goodwill and other intangible assets totaled $26.6 million. We must perform a periodic assessment to determine whether some portion, or all, of our goodwill, intangible assets and other long-lived assets are impaired. Our most recent assessment resulted in an impairment of goodwill and other long-lived assets. Our intangible assets showed no impairment. Future impairment testing could result in an additional determination that our goodwill, other intangible assets or our other long-lived assets have been impaired. Future adverse changes in the business environment or in our ability to perform audits successfully and compete effectively in our markets or the discontinuation of our use of certain of our intangible or other long-lived assets could result in impairment which could materially adversely impact future earnings.
Our articles of incorporation, bylaws and Georgia law may inhibit a change of control that shareholders may favor.
Our articles of incorporation, bylaws and Georgia law contain provisions that may delay, deter or inhibit a future acquisition of PRGX that is not approved by our Board of Directors. This could occur even if our shareholders receive attractive offers for their shares or if a substantial number, or even a majority, of our shareholders believe the takeover is in their best interest. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors in connection with the transaction. Provisions that could delay, deter or inhibit a future acquisition include the following:
a classified Board of Directors;
the requirement that our shareholders may only remove directors for cause;
specified requirements for calling special meetings of shareholders;
the ability of the Board of Directors to consider the interests of various constituencies, including our employees, clients and creditors and the local community, in making decisions; and
the ability of the Board of Directors to issue shares of preferred stock with such designations, powers, preferences and rights as it determines, without any further vote or action by our shareholders.

16


Our stock price has been and may continue to be volatile.
Our common stock is currently traded on The Nasdaq Global Select Market. The trading price of our common stock has been and may continue to be subject to large fluctuations. For example, for the year ended December 31, 2019, our stock traded as high as $9.68 per share and as low as $3.95 per share. Our stock price may increase or decrease in response to a number of events and factors, including:
future announcements concerning us, key clients or competitors;
variations in operating results and liquidity;
changes in financial estimates and recommendations by securities analysts;
developments with respect to technology or litigation;
changes in applicable laws and regulations;
the operating and stock price performance of other companies that investors may deem comparable to our
Company;
acquisitions and financings; and
sales and purchases of our stock by insiders.
Fluctuations in the stock market, generally, also impact the volatility of our stock price. Finally, general economic conditions and stock market movements may adversely affect the price of our common stock, regardless of our operating performance.
ITEM 1B. Unresolved Staff Comments
None.
ITEM 2. Properties
Our principal executive offices are located in Atlanta, Georgia and occupy approximately 58,000 square feet of office space. The term of our lease expires December 31, 2021. This space is used by our Recovery Audit Services - Americas and Adjacent Services segments and is the primary location of our Corporate Support personnel. Our various operating units lease numerous other parcels of operating space elsewhere in the U.S. and in the various other countries in which we currently conduct our business.
The majority of our real property leases are individually less than five years in duration. See Note 6 of “Notes to Consolidated Financial Statements” included in Part II, Item 8 of this Form 10-K for a discussion of costs we may incur in the future to the extent we (i) reduce our office space capacity or (ii) commit to, or occupy, new properties in the locations in which we operate.
ITEM 3. 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.
ITEM 4. Mine Safety Disclosures
Not applicable.

17


PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded under the symbol “PRGX” on The Nasdaq Global Select Market (Nasdaq). The Company has not paid cash dividends on its common stock since it became a public company in 1996 and does not intend to pay cash dividends in the foreseeable future. Moreover, restrictive covenants included in our secured credit facility specifically prohibit payment of cash dividends. As of February 28, 2020, there were 100 holders of record of our common stock and management believes there are approximately 2,038 beneficial holders of our common stock. Refer to Item 12 for shares issuable under our equity compensation plans.
Issuer Purchases of Equity Securities
The following table sets forth information regarding the purchases of the Company’s equity securities made by or on behalf of the Company or any affiliated purchaser (as defined in Exchange Act Rule 10b-18) during the three months ended December 31, 2019.
2019
 
Total Number
of Shares
Purchased (a)
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (b)
 
Maximum Approximate
Dollar Value of Shares
that May Yet Be
Purchased Under the
Plans or Programs
 
 
 
 
 
 
 
 
(millions of dollars)
October 1 - October 31
 
83,273

 
$
5.37

 
82,420

 
$

November 1 - November 30
 
5,242

 
$
4.81

 

 
$

December 1 - December 31
 
3,066

 
$
4.22

 

 
$

 
 
91,581

 
$
5.30

 
82,420

 
$

(a) Shares purchased during the quarter include shares surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock and shares from the Company's stock repurchase program.
(b) 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. Since 2014, the original authorization of the stock repurchase program, the Board of Directors modified the program from time to time to increase the repurchase limit to $75 million. From the February 2014 announcement of the Company’s stock repurchase program through December 31, 2019, the Company repurchased 9.8 million shares of its common stock for an aggregate cost of $53.2 million. The program expired on December 31, 2019.



18


ITEM 6. Selected Financial Data

We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information required under this item.

19


ITEM 7. 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, providing a suite of services targeted at our clients' Source-to-Pay ("S2P") business processes. At the heart of our services suite is the core capability of mining client data to deliver "actionable insights." Actionable insights allow our clients to improve their cash flow and profitability by reducing costs, improving business processes and managing risks.
Our solutions include services and technologies for recovery audit, contract compliance, and advanced analytics. We deliver services to hundreds of clients and serve clients in more than 30 countries. We 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 U.S., 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. Our Adjacent Services line of business includes our supplier information management (“SIM”) and deduction management solutions as well as S2P analytics tools offered as part of our Lumen™ Advanced Analytics suite. 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 (typically SaaS offerings), which are typically 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, 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 processing 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.


20


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 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; growing our contract compliance service offerings; expanding into new industry verticals, such as telecommunications, manufacturing and resources; and, in the longer term, growing our Adjacent Services which includes our advanced analytics solutions. 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.Taken together, our deep 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, reduce supplier discrepancies, 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.
Looking ahead, we expect to continue the evolution of our business from its historical auditor-led recovery audit operation, to today’s data-driven, technology-led recovery audit and advanced analytics solutions, to tomorrow’s next generation payment assurance solutions, which will provide access to software and enable services closer in time to or contemporaneous with the transaction. We believe this evolution will allow us to provide incremental value to our clients and ultimately transform our business from one primarily focused on post-transaction analysis, error identification and recovery, to one with its major emphasis on error prevention and S2P process efficiency.
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, including developing and enhancing our technology platforms and improved operational processes within our recovery audit business. 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.
We expect to continue our information technology and product development efforts to improve our services and solutions. We expect to continue investing in sales and marketing and will continue to assess the success and effectiveness of our sales and marketing efforts and the optimal level of sales and marketing investment for future periods. We also expect to adjust headcount in product development, data services, advisory services and recovery audit to support our services and client contracts. We believe that our investments in next generation recovery audit technology will further increase the operating leverage in our recovery audit platform in future years.
Discontinued Operations
As of December 31, 2015, the Company discontinued its HCRA services business. The Company has settled two of the three Medicare RAC-related third-parties. The Company believes the likelihood of further claims related to the final Medicare RAC contract is remote and does not expect to incur additional charges in future periods related to its HCRA services business. As a

21


result, the associated liability and receivable balances that relate to the final contract were reduced to zero in the third quarter of 2019. The HCRA services business is reported as Discontinued Operations in accordance with GAAP.

Results from Continuing Operations
The discussions and financial results in this Item 7 reflect our continuing operations.
The following table sets forth the percentage of revenue represented by certain items in our Consolidated Statements of Operations for the periods indicated: 
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Revenue, net
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
 
Cost of revenue
 
59.0

 
61.0

 
63.1

Selling, general and administrative expenses
 
33.9

 
29.4

 
29.0

Depreciation of property, equipment and software assets
 
5.9

 
4.3

 
2.8

Amortization of intangible assets
 
2.0

 
2.0

 
2.3

Acquisition-related adjustments (income)
 
(0.1
)
 
(0.9
)
 
(1.4
)
Impairment charges
 
5.9

 

 

Total operating expenses
 
106.6

 
95.8

 
95.8

Operating (loss) income from continuing operations
 
(6.6
)
 
4.2

 
4.2

 
 
 
 
 
 
 
Foreign currency transaction losses (gains) on short-term intercompany balances
 
0.2

 
0.6

 
(1.3
)
Interest expense, net
 
1.1

 
1.0

 
1.0

Other (income) loss
 

 

 
(0.1
)
Net (loss) income from continuing operations before income tax
 
(7.9
)
 
2.6

 
4.6

 
 
 
 
 
 
 
Income tax expense
 
0.5

 
0.8

 
1.8

 
 
 
 
 
 
 
Net (loss) income from continuing operations
 
(8.4
)%
 
1.8
 %
 
2.8
 %

Year Ended December 31, 2019 Compared to Prior Years from Continuing Operations
Revenue, net. Revenue, net was as follows (in thousands): 
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Recovery Audit Services – Americas
 
$
116,708

 
$
115,920

 
$
113,122

Recovery Audit Services – Europe/Asia-Pacific
 
47,283

 
49,526

 
44,372

Adjacent Services
 
5,767

 
6,330

 
4,126

Total
 
$
169,758

 
$
171,776

 
$
161,620

Consolidated revenue from continuing operations decreased by $2.0 million, or 1.2%, in 2019 compared to 2018, and increased by $10.2 million, or 6.3%, in 2018 compared to 2017. The 2019 consolidated year-over-year decrease in revenue resulted largely from our retail recovery audit business in Europe. Our 2018 consolidated year-over-year growth was led by our global retail and commercial recovery audit operations. We experienced some changes in our reported revenue based on the strength of the U.S. dollar relative to foreign currencies. On a constant dollar basis, adjusted for changes in foreign exchange ("FX") rates, consolidated revenue increased by 0.1% in 2019 compared to 2018 and increased 6.5% in 2018 compared to 2017. Below is a discussion of our revenue for our three reportable segments.

22


Recovery Audit Services - Americas revenue increased $0.8 million, or 0.7%, in 2019 compared to 2018 and increased $2.8 million, or 2.5%, in 2018 compared to 2017. The modest 2019 year-over-year growth was primarily attributable to our commercial recovery audit operations. The 2018 year-over-year growth was led by our retail recovery audit business. Changes in the value of the U.S. dollar relative to currencies in Canada and Latin America negatively impacted reported revenue in 2019 and 2018. On a constant dollar basis, adjusted for changes in FX rates, 2019 revenue increased 1.1% compared to 2018 and increased 2.8% in 2018 compared to 2017. The growth in our Recovery Audit Services - Americas revenue in 2019 and 2018 was due to a number of factors including stronger claims conversion, the implementation of acceleration and maturity model programs, increased staffing at certain audits, and enhancements to our proprietary audit technologies. This growth was partially offset by continued rate pressures.
Recovery Audit Services - Europe/Asia-Pacific revenue decreased $2.2 million, or 4.5%, in 2019 compared to 2018 and increased $5.2 million, or 11.6%, in 2018 compared to 2017. The year-over-year revenue decline in 2019 was primarily due to the performance of our retail recovery audit business in Europe. The year-over-year revenue growth in 2018 was led by our business in Europe. Changes in the value of the U.S. dollar relative to currencies in Europe, Asia, and the Pacific negatively impacted reported revenue in 2019 and 2018. On a constant dollar basis, adjusted for changes in FX rates, 2019 revenue decreased by 1.2% compared to 2018, and 2018 revenue increased by 11.7% compared to 2017.
Adjacent Services revenue decreased by $0.6 million, or 8.9%, in 2019 compared to 2018 and increased $2.2 million, or 53.4%, in 2018 compared to 2017. The year-over-year decrease in revenue in 2019 was due primarily to revenue from two particularly large, non-recurring advisory projects in the third quarter of 2018. The 2018 year-over-year growth in revenue was both in advisory services and SaaS subscriptions.
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 number of the components comprising COR are variable and will increase or decrease with increases or decreases in revenue.
COR was as follows (in thousands): 
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Recovery Audit Services – Americas
 
$
64,864

 
$
69,897

 
$
68,963

Recovery Audit Services – Europe/Asia-Pacific
 
27,618

 
27,767

 
26,930

Adjacent Services
 
7,694

 
7,161

 
6,159

Total
 
$
100,176

 
$
104,825

 
$
102,052

COR as a percentage of revenue for Recovery Audit Services - Americas was 55.6% in 2019, 60.3% in 2018 and 61.0% in 2017. We continue to invest in our various growth and other strategic initiatives, and include portions of these costs in Recovery Audit Services - Americas COR. COR for Recovery Audit Services - Americas decreased by 7.2% in 2019 compared to 2018 and increased by 1.4% in 2018 compared to 2017. The year-over-year improvement in COR as a percentage of revenue for Recovery Audit Services - Americas is primarily due to decreases in payroll, maintenance and contractor expenses. COR as a percentage of revenue for Recovery Audit Services - Europe/Asia-Pacific was 58.4% in 2019, 56.1% in 2018 and 60.7% in 2017. COR for Recovery Audit Services - Europe/Asia-Pacific decreased by 0.5% in 2019 compared to 2018 and increased by 3.1% in 2018 compared to 2017. The year-over-year increase in COR for Recovery Audit Services - Europe/Asia-Pacific in 2019 is a result of lower revenues in 2019. Adjacent Services COR is primarily related to personnel whom we have hired to either sell or assist with service delivery. COR as a percentage of revenue for Adjacent Services was 133.4% in 2019, 113.1% in 2018 and 149.3% in 2017. The increase in Adjacent Services COR as a percentage of revenue in 2019 was a result of lower revenues compared to 2018.
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. SG&A expenses were as follows (in thousands):

23


 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Recovery Audit Services – Americas
 
$
13,751

 
$
11,849

 
$
9,410

Recovery Audit Services – Europe/Asia-Pacific
 
7,600

 
7,439

 
6,586

Adjacent Services
 
1,147

 
1,685

 
3,735

Subtotal for reportable segments
 
22,498

 
20,973

 
19,731

Corporate Support
 
35,101

 
29,483

 
27,210

Total
 
$
57,599

 
$
50,456

 
$
46,941

Recovery Audit Services - Americas SG&A expenses increased 16.1% in 2019 compared to 2018 and increased 25.9% in 2018 compared to 2017. The 2019 and 2018 increases resulted primarily from our investment in sales and marketing.
Recovery Audit Services - Europe/Asia-Pacific SG&A expenses increased 2.2% in 2019 compared to 2018 after increasing 13.0% in 2018 compared to 2017. The 2019 increase resulted primarily from an increase in bad debt expense. The 2018 increase resulted primarily from an increase in equity-based compensation expense.
Adjacent Services SG&A expenses decreased $0.5 million in 2019 compared to 2018. Adjacent Services SG&A expenses decreased $2.1 million in 2018 compared to 2017 as a result of the integration of information technology resources into Corporate.
Corporate Support SG&A expenses include stock-based compensation charges of $4.9 million in 2019, $5.1 million in 2018 and $7.1 million in 2017. Excluding stock-based compensation charges, Corporate Support SG&A expenses increased 23.5% in 2019 compared to 2018 and increased 21.2% in 2018 compared to 2017. The increase in 2019 compared to 2018 was due primarily to increased personnel and associated costs. The increase in 2018 compared to 2017 was due primarily to increased sales and marketing personnel.
Acquisition-Related Adjustments included adjustments to the earnout consideration of acquired businesses of $0.3 million in 2019, $1.6 million in 2018 and $2.3 million in 2017.
Depreciation of Property, Equipment and Software Assets. Depreciation of property, equipment and software assets was as follows (in thousands):
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Recovery Audit Services – Americas
 
$
8,184

 
$
5,545

 
$
3,165

Recovery Audit Services – Europe/Asia-Pacific
 
706

 
683

 
599

Adjacent Services
 
1,091

 
1,142

 
805

Total
 
$
9,981


$
7,370

 
$
4,569


24


Depreciation expense increased in 2019 and 2018 primarily as a result of an increased level of capital expenditures and assets placed into service.
Impairment Charges included a $7.5 million impairment of previously capitalized internally developed software and a $2.5 million goodwill impairment charge related to the Adjacent Services reporting segment.
During the fourth quarter of 2019, we adjusted our product strategy and made several changes to the IT organization. In addition, we completed loading our client data onto our Epiphany Data Foundation platform. We subsequently reviewed our capitalized software use and expected lives. As a result, we determined that previously capitalized internally developed software was impaired and was no longer expected to provide future value. Accordingly, the Company recorded an impairment charge of $7.5 million in the fourth quarter of 2019.
During the fourth quarter of 2019, the Company performed its annual impairment test using data as of October 1, 2019. For the test, the Company implemented FASB's ASC Update No. 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, an impairment charge is recorded based on the excess of a reporting unit’s carrying amount over its fair value, limited to the total amount of goodwill allocated to that reporting unit. Based on the results of the annual impairment test, management determined the carrying value of the Adjacent Services reporting segment exceeded its fair value and goodwill was impaired. This was due to the Adjacent Services segment not achieving target revenue in 2019, with reduced forecasts in the future. In addition, the Company changed direction with respect to product innovation and did not proceed to utilize the technology platform developed by Lavante, leading to a reduction in fair value. The Company recognized an impairment charge of $2.5 million associated with the goodwill that arose from the Company's acquisition of Lavante, Inc. ("Lavante") in October 2016.
Amortization of Intangible Assets. Amortization of intangible assets was as follows (in thousands): 
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Recovery Audit Services – Americas
 
$
1,750

 
$
1,664

 
$
1,919

Recovery Audit Services – Europe/Asia-Pacific
 
169

 
172

 
142

Adjacent Services
 
1,546

 
1,559

 
1,573

Total
 
$
3,465

 
$
3,395

 
$
3,634

Generally, we amortize the customer relationship and trademark intangible assets we record in connection with an acquisition on an accelerated basis over six years or longer, and we amortize non-compete agreements and trade names on a straight-line basis over five years or less. This methodology results in higher amortization immediately following an acquisition, and declining expense in subsequent periods.
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 between 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.
The U.S. dollar generally strengthened relative to the local currencies of certain of our foreign subsidiaries in 2019 and 2018 and weakened relative to the local currencies of certain of our foreign subsidiaries in 2017, resulting in our recording on short-term intercompany balances net foreign currency losses of $0.3 million and $1.0 million in 2019 and 2018, respectively, and net foreign currency gains in 2017 of $2.2 million.
Interest Expense, net. Net interest expense was $1.8 million in 2019, $1.7 million in 2018 and $1.5 million in 2017.
Income Tax Expense. Our reported effective tax rates on earnings approximated (6.9)% in 2019, 28.3% in 2018, and 39.4% in 2017. Reported income tax expense in each year primarily results from taxes on the income of foreign subsidiaries. We have recorded a deferred tax asset valuation allowance that effectively eliminates income tax expense or benefit relating to our U.S. operations. The tax rate for 2019 reflects the impact of the release of the valuation allowance for various jurisdictions, the impact of which was not material to the financials. The tax rate for 2018 reflects the impact of the release of the valuation allowance

25


offsetting certain deferred tax assets in France and the UK. The tax rate for 2017 reflects the impact of the release of the valuation allowance for various jurisdictions, the impact of which was not material to the financials.

As of the end of each of the past three years, management determined that based on all available evidence, deferred tax asset valuation allowances of $32.0 million in 2019, $31.6 million in 2018, and $34.8 million in 2017 were appropriate.

As of December 31, 2019, we had approximately $85.9 million of U.S. federal loss carry-forwards available to reduce future U.S. federal taxable income. Approximately $81.3 million of the U.S. federal loss carry-forwards expire between 2026 and 2035. The remaining $4.6 million of U.S. federal loss carry-forwards do not expire. As of December 31, 2019, we had approximately $61.9 million of state loss carry-forwards available to reduce future state taxable income. The state loss carry-forwards expire between 2022 and 2037 and are subject to certain limitations. The U.S. federal and state loss carry-forwards at December 31, 2019, reflect adjustments for prior period write-downs associated with ownership changes.

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 performed its assessment and determined that $87.3 million of the gross federal net operating losses outstanding as of December 30, 2016 would be available for use going-forward. The Company utilized $6.0 million of these losses on the 2017 U.S. federal tax return and the remaining $81.3 million remains available.
Non-GAAP Financial Measures
We evaluate the performance of our operating 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 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, transformation, severance charges and foreign currency transaction gains and losses on short-term intercompany balances viewed by management as individually or collectively significant.
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 ("GAAP"). We believe 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 our secured credit facility. However, EBIT, EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as substitutes for analysis of our results as reported under GAAP. In addition, in evaluating EBIT, EBITDA and Adjusted EBITDA, the adjustments may vary from period to period and in the future we will incur expenses such as those used in calculating these measures. Our presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items.
A reconciliation of consolidated net income to each of EBIT, EBITDA and Adjusted EBITDA for the periods presented in this report are as follows (in thousands):

26


EBIT, EBITDA, and Adjusted EBITDA
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Net (loss) income
 
$
(13,720
)
 
$
4,593

 
$
3,184

Income tax expense
 
930

 
1,321

 
2,962

Interest expense, net
 
1,817

 
1,663

 
1,539

EBIT
 
(10,973
)
 
7,577

 
7,685

Depreciation of property, equipment and software assets
 
9,981

 
7,371

 
4,577

Amortization of intangible assets
 
3,465

 
3,395

 
3,634

EBITDA
 
2,473

 
18,343

 
15,896

Impairment charges
 
10,073

 

 

Foreign currency transaction losses (gains) on short-term intercompany balances
 
298

 
1,002

 
(2,190
)
Acquisition-related adjustment
 
(250
)
 
(1,628
)
 
(2,283
)
Transformation, severance, and other expenses
 
5,157

 
3,122

 
1,666

Other (income) loss
 
(3
)
 
21

 
(160
)
Stock-based compensation
 
4,930

 
5,056

 
7,052

Adjusted EBITDA
 
$
22,678

 
$
25,916

 
$
19,981

Adjusted EBITDA from continuing operations
 
$
22,070

 
$
24,673

 
$
21,345

Adjusted EBITDA from discontinued operations
 
$
608

 
$
1,243

 
$
(1,364
)
Impairment charges in 2019 included a $7.5 million impairment of previously capitalized internally developed software and a $2.5 million goodwill impairment charge related to the Adjacent Services reporting segment.
Acquisition-related adjustments reflect a decrease to the earnout consideration for two business acquisitions in 2017 and 2016, with earnout consideration decreased by $1.4 million in 2019 compared to 2018. The earnout payment obligations associated with both of these acquisitions were settled in 2019.
Transformation and severance expenses increased $2.0 million in 2019 compared to 2018 and increased $1.5 million in 2018 compared to 2017. The increases in 2019 and 2018 were primarily the result of certain positions in the Company that were permanently eliminated. Transformation, severance, and other expenses fluctuate as we transform our business or adjust our cost structure.
Stock-based compensation decreased $0.1 million in 2019 compared to 2018 due to the issuance of performance-based restricted stock units whose value fluctuates with our stock price, and the decline in our stock price during the year. Stock-based compensation decreased $2.0 million 2018 compared to 2017 primarily due to lower compensation expense associated with our performance-based restricted stock units than in the prior year.
Adjusted EBITDA by Segment
We include a detailed calculation of Adjusted EBITDA by segment in Note 2 of “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K. A summary of Adjusted EBITDA by segment for the years ended December 31, 2019, 2018, and 2017 is as follows (in thousands):
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Recovery Audit Services – Americas
 
$
40,217

 
$
35,118

 
$
35,062

Recovery Audit Services – Europe/Asia-Pacific
 
12,732

 
15,514

 
11,511

Adjacent Services
 
(2,213
)
 
(2,450
)
 
(5,448
)
Subtotal for reportable segments
 
50,736

 
48,182

 
41,125

Corporate Support
 
(28,666
)
 
(23,509
)
 
(19,780
)
Total for continuing operations
 
$
22,070

 
$
24,673

 
$
21,345


27


Adjusted EBITDA in 2019 was $22.1 million, a decrease of $2.6 million compared to 2018 Adjusted EBITDA of $24.7 million. Adjusted EBITDA in 2018 increased by $3.3 million, compared to $21.3 million in 2017.
Recovery Audit Services - Americas Adjusted EBITDA increased $5.1 million in 2019 compared to 2018 and was essentially unchanged in 2018 compared to 2017. The increase in 2019 was primarily due to decreases in cost of revenue.
Recovery Audit Services - Europe/Asia-Pacific Adjusted EBITDA decreased $2.8 million in 2019 compared to 2018 and increased $4.0 million in 2018 compared to 2017. The decrease in 2019 was primarily due to increased bad debt expense and changes in foreign currency exchange rates. The increase in 2018 was primarily a result of increased revenue and continued operational improvements.
Adjacent Services Adjusted EBITDA increased $0.2 million in 2019 compared to 2018 and increased $3.0 million in 2018 compared to 2017. The increase in 2019 was primarily due to decreases in cost of revenue. The increase in 2018 primarily resulted from increased revenue and operational improvements in the segment.
Corporate Support Adjusted EBITDA decreased $5.2 million in 2019 compared to 2018 and decreased $3.7 million in 2018 compared to 2017. The decrease in 2019 is primarily due to increases in our investment in product innovation. The decrease in 2018 was primarily due to investments in software and technology and the addition of sales and marketing personnel.
Liquidity and Capital Resources
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less from the 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 material to our consolidated net assets.
As of December 31, 2019, we had $15.0 million in cash and cash equivalents and $37.0 million of borrowings under our revolving credit facility with Bank of America, N.A. ("BOA"). As of December 31, 2019, the limit on our revolving credit facility was $60.0 million and we had $23.0 million of availability for borrowings. As of December 31, 2019, the Company was in compliance with the covenants in its BOA credit facility.
The $15.0 million in cash and cash equivalents includes $2.9 million held at banks in the U.S. and the remainder held at banks in other jurisdictions, primarily in Australia, the United Kingdom, Canada and India. Certain foreign jurisdictions restrict the amount of cash that can be transferred to the U.S. or impose taxes and penalties on such transfers of cash. To the extent we have excess cash in foreign locations that could be used in, or is needed by, our operations in the U.S., we may incur significant penalties and/or taxes to repatriate these funds. Generally, we have not provided for deferred taxes on the undistributed earnings of international subsidiaries as we consider these earnings to be permanently reinvested. However, we do not consider the earnings of our Canadian subsidiary to be permanently invested, and have established a withholding tax liability relating to the potential repatriation of the funds held in Canada.
Our cash and cash equivalents as of December 31, 2019 included short-term investments of approximately $0.9 million, the majority of which was held at banks outside of the United States, primarily in Canada and Brazil.
Operating Activities. Net cash provided by operating activities was $10.5 million in 2019, $2.4 million in 2018 and $13.5 million in 2017. These amounts consist of two components, specifically, net income adjusted for certain non-cash items (such as depreciation, amortization, stock-based compensation expense, impairment charges, and deferred income taxes) and changes in assets and liabilities, primarily working capital, as follows (in thousands):
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Net income
 
$
(13,720
)
 
$
4,593

 
$
3,184

Adjustments for certain non-cash items
 
32,831

 
14,889

 
12,813

 
 
19,111

 
19,482

 
15,997

Changes in operating assets and liabilities
 
(8,611
)
 
(17,051
)
 
(2,537
)
Net cash provided by operating activities
 
$
10,500

 
$
2,431

 
$
13,460



28


We have one client, The Kroger Co., that accounted for approximately 10% of our revenue in 2019 and approximately 12% of our revenue in both 2018 and 2017. The loss of any one of our major clients would negatively impact our operating cash flows and would potentially have a material adverse impact on our liquidity.
Investing Activities. Net cash used for capital expenditures was $15.0 million in 2019, $10.4 million in 2018 and $9.4 million in 2017. These capital expenditures primarily related to acquisitions and investments we made to upgrade our information technology infrastructure and develop our proprietary audit technologies.
Capital expenditures are discretionary and we currently expect to continue to make capital expenditures to develop our proprietary audit technologies and enhance our information technology infrastructure. Should we experience changes in our operating results, we may alter our capital expenditure plans.
Financing Activities. Net cash provided by financing activities was $5.5 million in 2019, primarily due to proceeds from our credit facility (net of repayments) of $15.4 million, partially offset by $4.7 million of payments for repurchases of common stock under our stock repurchase program and $4.2 million of payments for an acquisition earnout liability. Net cash provided by financing activities was $3.0 million in 2018 and $11.0 million in 2017.
Secured Credit Facility
On March 14, 2019, the Company, as co-borrower with PRGX USA, Inc. (“PRGX-USA”), a wholly-owned subsidiary that is the Company’s principal domestic operating subsidiary, entered into a five-year Credit Agreement (the “BOA Credit Facility”) with Bank of America, N.A. (“BOA”), and Synovus Bank as the initial lenders thereunder, and with BOA as the letter-of-credit issuer thereunder, as the swingline lender thereunder, and as the administrative agent (the “Administrative Agent”) for the lenders from time to time party thereto. The BOA Credit Facility consists of a $60.0 million senior revolving credit facility (the “Revolver”), with a $5.0 million subfacility for the issuance of letters of credit, and a $5.0 million swingline loan subfacility (the “Swingline Loan”). The BOA Credit Facility is guaranteed by each of PRGX’s direct and indirect domestic wholly-owned subsidiaries (other than PRGX-USA), except for certain immaterial domestic subsidiaries. None of PRGX’s direct or indirect foreign subsidiaries have guaranteed the BOA Credit Facility. The BOA Credit Facility is secured by substantially all of the assets of PRGX, PRGX-USA and each guarantor (including the equity interests in substantially all of the Company’s domestic subsidiaries and up to sixty-five percent (65%) of the equity interests of certain of the Company’s first-tier material foreign subsidiaries).
In connection with the closing of the BOA Credit Facility, PRGX borrowed $30.0 million under the Revolver, substantially all of which was used to prepay in full the approximately $29.0 million in outstanding indebtedness owed to the lenders under PRGX’s pre-existing Amended & Restated Revolving Credit Agreement, dated December 23, 2014, as amended from time to time, by and among PRGX, PRGX-USA, the several banks and other financial institutions and lenders from time to time party thereto and SunTrust Bank, in its capacity as administrative agent for the lenders (the "SunTrust Credit Facility"), and to terminate that prior credit facility in its entirety. There were no early termination penalties associated with the termination of the SunTrust Credit Facility.
The BOA Credit Facility will mature on March 14, 2024. Interest is payable quarterly in arrears. There are no prepayment penalties in the event the Company elects to prepay and terminate the BOA Credit Facility prior to its scheduled maturity date, subject to breakage and redeployment costs in certain limited circumstances.
The Revolver bears interest at a rate per annum comprised of a specified index rate based on LIBOR plus an applicable interest rate margin determined under the BOA Credit Facility. For U.S. Dollar-denominated loans under the Revolver, at the option of the Borrowers, such loans shall bear interest at a rate per annum equal to (x) the LIBOR daily floating rate plus an applicable interest rate margin determined under the BOA Credit Facility or (y) the base rate plus the applicable interest rate margin, each as determined under the BOA Credit Facility. Although the Company does not anticipate the need for Swingline Loans, were any Swingline Loans to be made they would bear interest at the base rate plus the applicable interest rate margin for base rate loans, each as determined under the BOA Credit Facility. The applicable interest rate margin varies from 1.50% per annum to 2.25% per annum, for LIBOR daily floating rate loans, and from 0.50% per annum to 1.25% per annum, for loans based on the base rate, and in either case depending on the Company’s consolidated leverage ratio, and is determined in accordance with a pricing grid under the BOA Credit Facility.
The BOA Credit Facility includes customary affirmative, negative, and financial covenants binding on the Company, including delivery of financial statements and other reports and maintenance of existence. The negative covenants limit the ability of the Company, among other things, to incur debt, incur liens, make investments and sell assets, but does provide for certain permitted repurchases of shares of its capital stock and the declaration and payment of certain dividends on its capital stock. The financial covenants included in the BOA Credit Facility set forth a maximum consolidated leverage ratio and a minimum consolidated fixed charge coverage ratio for the Company, each which will be tested on a quarterly basis; and with the Company having the ability to increase the maximum leverage ratio for a limited time when needed in connection with permitted acquisitions. In addition, the BOA Credit Facility includes customary events of default.

29


As of December 31, 2019, there was $37.0 million in debt outstanding under the BOA Credit Facility that will be due March 14, 2024. The amount available for additional borrowing under the BOA Credit Facility was $23.0 million as of December 31, 2019. Based on the terms of the BOA Credit Facility, on December 31, 2019 the applicable interest rate (inclusive of the applicable interest rate margin) for LIBOR daily floating rate loans (the only type outstanding on December 31, 2019) was approximately 3.55%. As of December 31, 2019, the Company was required to pay a commitment fee of 0.25% per annum, payable quarterly, on the unused portion of the BOA Credit Facility.
We believe that we will have sufficient borrowing capacity and cash generated from operations to fund our capital and operational needs for at least the next twelve months.
Stock Repurchase Program
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. Since the original 2014 authorization of the stock repurchase program, the Board of Directors modified the program from time to time to increase the repurchase limit to $75 million and extend the expiration date to December 31, 2019. The stock repurchase program expired on December 31, 2019. From the February 2014 announcement of the Company’s stock repurchase program through December 31, 2019, the Company repurchased 9.8 million shares of its common stock for an aggregate cost of $53.2 million. These shares were retired and accounted for as a reduction to Shareholders' equity in the Consolidated Balance Sheet. Direct costs incurred to acquire the shares are included in the total cost of the shares.
Off-Balance Sheet Arrangements
As of December 31, 2019, the Company did not have any material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of the SEC’s Regulation S-K.
Critical Accounting Policies
We describe our significant accounting policies in Note 1 of “Notes to Consolidated Financial Statements” included in Item 8 of this Form 10-K. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by management. As a result, they are subject to an inherent degree of uncertainty. We consider accounting policies that involve the use of estimates that meet both of the following criteria to be “critical” accounting policies. First, the accounting estimate requires us to make assumptions about matters that are highly uncertain at the time that the accounting estimate is made. Second, alternative estimates in the current period, or changes in the estimate that are reasonably likely in future periods, would have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.
In addition to estimates that meet the “critical” estimate criteria, we also make many other accounting estimates in preparing our consolidated financial statements and related disclosures. All estimates, whether or not deemed critical, affect reported amounts of assets, liabilities, revenue and expenses, as well as disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, refund liabilities, accounts receivable allowance for doubtful accounts, goodwill and other intangible assets and income taxes. We base our estimates and judgments on historical experience, information available prior to the issuance of the consolidated financial statements and on various other factors that we believe to be reasonable under the circumstances. This information forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Materially different results can occur as circumstances change and additional information becomes known, including changes in those estimates not deemed “critical”.
We believe the following critical accounting policies, among others, involve our more significant estimates and judgments we used in the preparation of our consolidated financial statements. We have discussed the development and selection of accounting estimates, including those deemed “critical,” and the associated disclosures in this Form 10-K with the audit committee of the Board of Directors.

30


Revenue Recognition. The Company's policy is to recognize revenue in a way that depicts the transfer of promised goods or services to customers in a manner and amount that reflects the consideration to which the Company expects to be entitled in exchange for the transfer of goods or services promised to customers. To adhere to this core principle, the Company applies the following five steps: (a) identify contract(s) with a customer; (b) identify the performance obligations in a contract; (c) determine the transaction price; (d) allocate the transaction price to the performance obligations in a contract; and (e) recognize revenue when (or as) performance obligations are satisfied. The Company determines that the performance obligations have been satisfied when its customers obtain control of the goods or services as evidenced by the customer’s ability to direct the use, or the ability to receive substantially all of the remaining economic benefit, of the contract assets. Additionally, for purposes of determining the appropriate timing of recognition, revenue will be recognized over time or at a point in time based on an evaluation of the specific criteria that is to be achieved to meet the performance obligations of each contract.
The determination that the core principle for revenue recognition has been met, and the five steps have been applied appropriately, requires significant judgment. Management considers the application of this judgment to be critical in determining the appropriate amount of revenue to be recognized. The most critical judgments are required in the determination of the transaction price, the identification of the performance obligations within a contract, and the determination as to whether or not and to what extent such performance obligations have been satisfied. A misapplication of this judgment could result in inappropriate recognition of revenue.
Goodwill and Impairment Charges. Goodwill represents the excess of the purchase price over the estimated fair market value of net identifiable assets of acquired businesses. Intangible assets are assets that lack physical substance. 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. Significant judgment is required in determining fair value of our reporting units. In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, an impairment charge is recorded based on the excess of a reporting unit’s carrying amount over its fair value, limited to the total amount of goodwill allocated to that reporting unit. We applied ASU 2017-04 to determine the impairment recorded during the fourth quarter of 2019. No impairment charges were necessary for the two years ended December 31, 2018 and 2017.
Income Taxes. Our effective tax rate is based on historical and anticipated future taxable income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required in determining the effective tax rate and in evaluating our tax positions. Tax regulations require items to be included in the tax returns at different times than the items are reflected in the financial statements. As a result, our effective tax rate reflected in our Consolidated Financial Statements included in Item 8 of this Form 10-K is different than that reported in our tax returns. Some of these differences are permanent, such as expenses that are not deductible on our tax returns, and some are temporary differences, such as depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years for which we have already recorded the tax benefit in our Consolidated Statements of Operations. We establish valuation allowances to reduce net deferred tax assets to the amounts that we believe are more likely than not to be realized. We adjust these valuation allowances in light of changing facts and circumstances. Deferred tax liabilities generally represent tax expense recognized in our consolidated financial statements for which payment has been deferred, or expense for which a deduction has already been taken on our tax returns but has not yet been recognized as an expense in our consolidated financial statements.
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 tax 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 U.S. generally accepted accounting principles (“GAAP”) for guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Our policy for recording interest and penalties associated with tax positions is to record

31


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 before a tax assessment is raised. The number of years subject to tax assessments varies by tax jurisdictions.
New Accounting Standards
For information related to new and recently adopted accounting standards, see Note 1 – Summary of Significant Accounting Policies and Basis of Presentation, in “Notes to Consolidated Financial Statements” in Item 8 of this Form 10-K.


32


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, and are not required to provide the information required under this item.


33


ITEM 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


 
Page No.
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements


34


Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors
PRGX Global, Inc. and Subsidiaries
Atlanta, Georgia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of PRGX Global, Inc. and Subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 12, 2020 expressed an unqualified opinion thereon.
Adoption of New Accounting Standard
As discussed in Notes 1 and 6 to the consolidated financial statements, the Company adopted Accounting Standards Codification Update No. 2016-02, Leases (Topic 842).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2006.
/s/ BDO USA, LLP
Atlanta, Georgia
March 12, 2020


35


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Revenue, net
 
$
169,758

 
$
171,776

 
$
161,620

Operating expenses:
 
 
 
 
 
 
Cost of revenue
 
100,176

 
104,825

 
102,052

Selling, general and administrative expenses
 
57,599

 
50,456

 
46,941

Depreciation of property, equipment and software assets
 
9,981

 
7,370

 
4,569

Amortization of intangible assets
 
3,465

 
3,395

 
3,634

Acquisition-related adjustment income
 
(250
)
 
(1,628
)
 
(2,283
)
Impairment charges
 
10,073

 

 

Total operating expenses
 
181,044

 
164,418

 
154,913

Operating (loss) income from continuing operations
 
(11,286
)
 
7,358

 
6,707

 
 
 
 
 
 
 
Foreign currency transaction losses (gains) on short-term intercompany balances
 
298

 
1,002

 
(2,190
)
Interest expense
 
(1,945
)
 
(1,824
)
 
(1,785
)
Interest income
 
128

 
161

 
246

Other (income) loss
 
(3
)
 
21

 
(160
)
Net (loss) income from continuing operations before income tax
 
(13,398
)
 
4,672

 
7,518

Income tax expense
 
930

 
1,321

 
2,962

Net (loss) income from continuing operations
 
$
(14,328
)
 
$
3,351

 
$
4,556

 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
Income (loss) from discontinued operations
 
608

 
1,242

 
(1,372
)
Income tax expense
 

 

 

Net income (loss) from discontinued operations
 
608

 
1,242

 
(1,372
)
 
 
 
 
 
 
 
Net (loss) income
 
$
(13,720
)
 
$
4,593

 
$
3,184

 
 
 
 
 
 
 
Basic (loss) earnings per common share (Note 3):
 
 
 
 
 
 
Basic (loss) earnings from continuing operations
 
$
(0.63
)
 
$
0.14

 
$
0.21

Basic earnings (loss) from discontinued operations
 
0.03

 
0.06

 
(0.06
)
Total basic (loss) earnings per common share
 
$
(0.60
)
 
$
0.20

 
$
0.15

 
 
 
 
 
 
 
Diluted (loss) earnings per common share (Note 3):
 
 
 
 
 
 
Diluted (loss) earnings from continuing operations
 
$
(0.63
)
 
$
0.14

 
$
0.21

Diluted earnings (loss) from discontinued operations
 
0.03

 
0.06

 
(0.06
)
Total diluted (loss) earnings per common share
 
$
(0.60
)
 
$
0.20

 
$
0.15

 
 
 
 
 
 
 
Weighted-average common shares outstanding (Note 3):
 
 
 
 
 
 
Basic
 
22,651

 
22,811

 
21,937

Diluted
 
22,651

 
23,434

 
22,111

See accompanying Notes to Consolidated Financial Statements.


36


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)

 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Net (loss) income
 
$
(13,720
)
 
$
4,593

 
$
3,184

Foreign currency translation adjustments, net of tax
 
609

 
(1,128
)
 
(180
)
Comprehensive (loss) income
 
$
(13,111
)
 
$
3,465

 
$
3,004





See accompanying Notes to Consolidated Financial Statements.

37


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
 
December 31,
 
 
2019
 
2018
ASSETS
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
14,982

 
$
13,973

Restricted cash
 
46

 
46

Receivables:
 
 
 
 
Contract receivables, less allowances of $1,781 in 2019 and $1,024 in 2018
 
 
 
 
Billed
 
38,201

 
43,878

Unbilled
 
4,911

 
2,987

 
 
43,112

 
46,865

Employee advances and miscellaneous receivables, less allowances of $80 in 2019 and $176 in 2018
 
704

 
567

Total receivables
 
43,816

 
47,432

Prepaid expenses and other current assets
 
5,582

 
3,144

Total current assets
 
64,426

 
64,595

 
 
 
 
 
Property, equipment and software:
 
 
 
 
Computer and other equipment
 
23,848

 
20,517

Furniture and fixtures
 
2,243

 
1,694

Leasehold improvements
 
3,550

 
3,463

Software
 
33,916

 
39,578

 
 
63,557

 
65,252

Less accumulated depreciation and amortization
 
(45,811
)
 
(43,224
)
Property and equipment, net
 
17,746

 
22,028

 
 
 
 
 
Operating lease right-of-use assets (Note 6)
 
10,969

 

Goodwill (Note 4)
 
15,070

 
17,531

Intangible assets, less accumulated amortization of $47,097 in 2019 and $43,370 in 2018
 
11,506

 
14,945

Unbilled receivables
 
1,282

 
1,608

Deferred income taxes (Note 7)
 
3,921

 
3,561

Other assets
 
546

 
561

Total assets
 
$
125,466

 
$
124,829

 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
Accounts payable and accrued expenses
 
$
4,326

 
$
7,515

Accrued payroll and related expenses
 
12,951

 
15,073

Current portion of operating lease liabilities
 
3,717

 

Refund liabilities
 
4,513

 
6,497

Deferred revenue
 
2,217

 
2,428

Current portion of debt (Note 5)
 
17

 
48

Business acquisition obligations (Note 1)
 

 
4,162

Total current liabilities
 
27,741

 
35,723

 
 
 
 
 
Long-term debt (Note 5)
 
36,603

 
21,553

Long-term operating lease liabilities
 
7,435

 
 
Refund liabilities
 
9

 
100

Deferred income taxes (Note 7)
 
628

 
666

Other long-term liabilities
 

 
458

Total liabilities
 
72,416

 
58,500

 
 
 
 
 
Commitments and contingencies (Notes 2, 5, 6, 9 and 10)
 


 


 
 
 
 
 
Shareholders’ equity (Notes 9 and 11):
 
 
 
 
Common stock, no par value; $.01 stated value per share. Authorized 50,000,000 shares; 23,369,433 shares issued and outstanding at December 31, 2019 and 23,186,258 shares issued and outstanding at December 31, 2018
 
234

 
232

Additional paid-in capital
 
582,404

 
582,574

Accumulated deficit
 
(529,176
)
 
(515,456
)
Accumulated other comprehensive loss
 
(412
)
 
(1,021
)
Total shareholders’ equity
 
53,050

 
66,329

Total liabilities and shareholders’ equity
 
$
125,466

 
$
124,829

See accompanying Notes to Consolidated Financial Statements.

38


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2019, 2018 and 2017
(In thousands, except share data)
 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2016
 
21,845,920

 
$
218

 
$
575,118

 
$
(523,233
)
 
$
287

 
$
52,390

Net income
 

 

 

 
3,184

 

 
3,184

Foreign currency translation adjustments
 

 

 

 

 
(180
)
 
(180
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share awards
 
381,059

 
4

 
(4
)
 

 

 

Restricted shares remitted by employees for taxes
 
(15,006
)
 

 
(100
)
 

 

 
(100
)
Stock option exercises
 
225,043

 
2

 
1,170

 

 

 
1,172

Restricted stock unit settlement
 
10,000

 

 

 

 

 

Forfeited restricted share awards
 
(27,599
)
 

 

 

 

 

Stock-based compensation expense
 

 

 
3,848

 

 

 
3,848

Balance at December 31, 2017
 
22,419,417

 
224

 
580,032

 
(520,049
)
 
107

 
60,314

Net income
 

 

 

 
4,593

 

 
4,593

Foreign currency translation adjustments
 

 

 

 

 
(1,128
)
 
(1,128
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share awards
 
331,333

 
3

 
(3
)
 
 
 
 
 

Restricted shares remitted by employees for taxes
 
(155,329
)
 
(2
)
 
(1,279
)
 

 

 
(1,281
)
Stock option exercises
 
676,649

 
7

 
4,415

 

 

 
4,422

Performance-based restricted stock unit settlement
 
483,623

 
5

 
(5
)
 

 

 

Restricted stock unit settlement
 
18,934

 

 

 

 

 

Forfeited restricted share awards
 
(148,083
)
 
(1
)
 
1

 

 

 

Repurchase of common stock
 
(440,286
)
 
(4
)
 
(4,065
)
 

 

 
(4,069
)
Stock-based compensation expense
 

 

 
3,592

 

 

 
3,592

Other activities
 

 

 
(114
)
 

 

 
(114
)
Balance at December 31, 2018
 
23,186,258

 
232

 
582,574

 
(515,456
)
 
(1,021
)
 
66,329

Net loss
 

 

 

 
(13,720
)
 

 
(13,720
)
Foreign currency translation adjustments
 

 

 

 

 
609

 
609

Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
 
Restricted share awards
 
878,455

 
9

 
(9
)
 

 

 

Restricted shares remitted by employees for taxes
 
(110,863
)
 
(1
)
 
(801
)
 

 

 
(802
)
Stock option exercises
 
45,380

 

 
219

 

 

 
219

Performance-based restricted stock unit settlement
 
203,524

 
2

 
(2
)
 

 

 

Restricted stock unit settlement
 
29,142

 

 

 

 

 

Forfeited restricted share awards
 
(167,200
)
 
(2
)
 
2

 

 

 

Repurchase of common stock
 
(695,263
)
 
(6
)
 
(4,647
)
 

 

 
(4,653
)
Stock-based compensation expense
 

 

 
5,068

 

 

 
5,068

Balance at December 31, 2019
 
23,369,433

 
$
234

 
$
582,404

 
$
(529,176
)
 
$
(412
)
 
$
53,050

See accompanying Notes to Consolidated Financial Statements.

39


PRGX GLOBAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Years Ended December 31,
 
 
2019
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
 
 
Net (loss) income
 
$
(13,720
)
 
$
4,593

 
$
3,184

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
Impairment charges
 
10,073

 

 

Depreciation and amortization
 
13,446

 
10,766

 
8,203

Operating lease right-of-use asset
 
4,347

 

 

Amortization of deferred loan costs
 
126

 
53

 
85

Noncash interest expense

286


961


1,215

Stock-based compensation expense
 
4,930

 
5,056

 
7,052

Foreign currency transaction losses (gains) on short-term intercompany balances
 
298

 
1,002

 
(2,190
)
Income taxes
 
(425
)
 
(1,321
)
 
731

 Changes in fair value of contingent consideration
 
(250
)
 
(1,628
)
 
(2,283
)
Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
 
 
 
Billed receivables
 
5,705

 
(8,639
)
 
(3,949
)
Unbilled receivables
 
(1,598
)
 
(992
)
 
(469
)
Prepaid expenses and other current assets
 
(2,563
)
 
2,404

 
(417
)
Operating lease liabilities
 
(4,484
)
 
(229
)
 
(57
)
Accounts payable and accrued expenses
 
(1,239
)
 
(3,275
)
 
815

Accrued payroll and related expenses
 
(2,147
)
 
778

 
975

Refund liabilities
 
(2,075
)
 
(2,112
)
 
115

Deferred revenue
 
(210
)
 
1,036

 
101

Long-term incentive compensation payout
 

 
(6,378
)
 

Other long-term liabilities
 

 
351

 
353

Net cash provided by operating activities
 
10,500

 
2,426

 
13,464

Cash flows from investing activities:
 
 
 
 
 
 
Business acquisition, net of cash acquired
 

 
19

 
(10,128
)
Capital expenditures for property, equipment and software, net of disposal proceeds
 
(15,027
)
 
(10,398
)
 
(9,355
)
Net cash used in investing activities
 
(15,027
)
 
(10,379
)
 
(19,483
)
Cash flows from financing activities:
 
 
 
 
 
 
Repayments of long-term debt
 
(11,000
)
 
(13,500
)
 
66

Payment of deferred loan costs
 
(472
)
 
(38
)
 
(155
)
Proceeds from credit facility
 
26,400

 
21,500

 
10,000

Payment of earnout liability related to business acquisitions
 
(4,229
)
 
(4,000
)
 

Repurchases of common stock
 
(4,653
)
 
(4,069
)
 

Restricted stock repurchased from employees for withholding taxes
 
(802
)
 
(1,281
)
 
(100
)
Proceeds from option exercises
 
219

 
4,422

 
1,172

Net cash provided by financing activities
 
5,463

 
3,034

 
10,983

Effect of exchange rates on cash and cash equivalents
 
73

 
64

 
(1,860
)
Net increase (decrease) in cash and cash equivalents
 
1,009

 
(4,855
)
 
3,104

Cash, cash equivalents and restricted cash at beginning of period
 
14,019

 
18,874

 
15,770

Cash and cash equivalents at end of period
 
$
15,028

 
$
14,019

 
$
18,874

 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid during the period for interest
 
$
1,117

 
$
681

 
$
434

Cash paid during the period for income taxes, net of refunds received
 
$
2,440

 
$
3,255

 
$
2,929

 
 
 
 
 
 
 
Noncash investing activities:
 
 
 
 
 
 
Fair value of contingent consideration liabilities at the date of acquisition
 
$

 
$

 
$
5,954

Capital expenditures for property, equipment, and software not paid by year-end
 
$
17

 
$
1,954

 
$
365

See accompanying Notes to Consolidated Financial Statements.

40



(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 and spend analytics services designed to improve our clients' source-to-pay ("S2P") business processes. PRGX also provides services adjacent to recovery audit services, including supplier information management ("SIM"), data transformation and associated advisory services to a similar client base. These businesses include, but are not limited to:
retailers such as discount, department, specialty, pharmacy and grocery stores, and wholesalers who sell to these retailers; and
business enterprises other than retailers such as manufacturers, financial services firms, pharmaceutical companies, and resource companies such as oil and gas companies.
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, 2019, 2018 and 2017 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. GAAP. Actual results could differ from those estimates.