UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017March 31, 2018
 
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: 001-15169
PERFICIENT, INC.
(Exact name of registrant as specified in its charter)

Delaware No. 74-2853258
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

555 Maryville University Drive
Suite 600
Saint Louis, Missouri 63141
(Address of principal executive offices)
(314) 529-3600
(Registrant’sRegistrant's telephone number, including area code)

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 during the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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 definition of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company,”" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer☑Accelerated filer☐
Non-accelerated filer☐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
 
As of October 27, 2017,April 25, 2018, there were 34,908,05935,057,705 shares of Common Stock outstanding.

TABLE OF CONTENTS
 
   
 Part I.Financial Information1
   
 Item 1.Financial Statements2
   
 Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2018 (unaudited) and December 31, 201620172
   
 Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 20163
   
 Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 20164
   
 Unaudited Condensed Consolidated Statement of Stockholders’Stockholders' Equity for the NineThree Months Ended September 30, 2017March 31, 20185
   
 Unaudited Condensed Consolidated Statements of Cash Flows for the NineThree Months Ended September 30,March 31, 2018 and 2017 and 20166
   
 Notes to Interim Unaudited Condensed Consolidated Financial Statements7
   
 Item 2.Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations1719
   
 Item 3.Quantitative and Qualitative Disclosures about Market Risk2324
   
 Item 4.Controls and Procedures24
   
 Part II.Other Information25
   
 Item 1A.Risk Factors25
   
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds25
   
 Item 5.Other Information25
   
 Item 6.Exhibits26
   
 Exhibit Index2726
   
 Signatures2827

PART I. FINANCIAL INFORMATION
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
Some of the statements contained in this Quarterly Report on this Form 10-Q (“("Form 10-Q”10-Q") that are not purely historical statements discuss future expectations, contain projections of results of operations or financial condition, or state other forward-looking information. Those statements are subject to known and unknown risks, uncertainties, and other factors that could cause the actual results to differ materially from those contemplated by the statements. The “forward-looking”"forward-looking" information is based on various factors and was derived using numerous assumptions. In some cases, you can identify these so-called forward-looking statements by words like “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”"may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or “continue”"continue" or the negative of those words and other comparable words. You should be aware that those statements only reflect our predictions and are subject to risks and uncertainties. Actual events or results may differ substantially. Important factors that could cause our actual results to be materially different from the forward-looking statements include (but are not limited to) the following:
 
(1)the impact of the general economy and economic uncertainty on our business;
(2)risks associated with uncertainties resulting frompotential changes to policiesfederal, state, local and foreign laws, following the U.S. elections in November 2016;regulations, and policies;
(3)risks associated with the operation of our business generally, including:
 a. client demand for our services and solutions;
 b. maintaining a balance of our supply of skills and resources with client demand;
 c. effectively competing in a highly competitive market;
 d. protecting our clients’clients' and our data and information;
 e. risks from international operations including fluctuations in exchange rates;
 f. changes to immigration policies;
 g. obtaining favorable pricing to reflect services provided;
 h. adapting to changes in technologies and offerings;
 i. risk of loss of one or more significant software vendors;
j. making appropriate estimates and assumptions in connection with preparing our consolidated financial statements;
k. maintaining effective internal controls; and
l. changes to tax levels, audits, investigations, tax laws or their interpretation;
(4)legal liabilities, including intellectual property protection and infringement or the disclosure of personally identifiable information;
(5)risks associated with managing growth organically and through acquisitions; and
(6)the risks detailed from time to time within our filings with the Securities and Exchange Commission (the “SEC”"SEC").

This discussion is not exhaustive, but is designed to highlight important factors that may impact our forward-looking statements. Because the factors referred to above, as well as the statements included under the heading “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 20162017 and elsewhere in this Form 10-Q, including documents incorporated by reference therein and herein, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statement made by us or on our behalf, you should not place undue reliance on any forward-looking statements.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.
 
All forward-looking statements, express or implied, included in this report and the documents we incorporate by reference and that are attributable to Perficient, Inc. and its subsidiaries (collectively, “we,” “us,” “Perficient,”"we," "us," "Perficient," or the “Company”"Company") are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or any persons acting on our behalf may issue.

1
Item 1. Financial Statements
Perficient, Inc.
Condensed Consolidated Balance Sheets
 
 
September 30, 2017
(unaudited)
  December 31, 2016  
March 31, 2018
(unaudited)
  December 31, 2017 
ASSETS (In thousands, except share and per share information)  (In thousands, except share and per share information) 
Current assets:            
Cash and cash equivalents $2,448  $10,113  $5,484  $6,307 
Accounts receivable, net  108,090   103,702   108,358   112,194 
Prepaid expenses  4,550   3,353   4,845   4,470 
Other current assets  1,776   5,331   4,444   6,237 
Total current assets  116,864   122,499   123,131   129,208 
Property and equipment, net  7,425   8,888   6,981   7,145 
Goodwill  304,583   275,205   305,142   305,238 
Intangible assets, net  55,282   45,115   47,271   51,066 
Other non-current assets  6,435   4,869   6,196   6,403 
Total assets $490,589  $456,576  $488,721  $499,060 
                
LIABILITIES AND STOCKHOLDERS’ EQUITY        
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:                
Accounts payable $11,992  $18,416  $11,146  $23,196 
Other current liabilities  28,052   27,637   34,050   38,077 
Total current liabilities  40,044   46,053   45,196   61,273 
Long-term debt  65,000   32,000   56,000   55,000 
Other non-current liabilities  19,029   19,058   17,836   16,436 
Total liabilities $124,073  $97,111  $119,032  $132,709 
                
Stockholders’ equity:        
Common stock (par value $0.001 per share; 100,000,000 shares authorized, 47,023,531 shares issued and 33,445,194 shares outstanding as of September 30, 2017; 50,000,000 shares authorized, 45,895,086 shares issued and 33,865,688 shares outstanding as of December 31, 2016) $47  $46 
Stockholders' equity:        
Common stock (par value $.001 per share; 100,000,000 shares authorized; 47,729,655 shares issued and 33,374,011 shares outstanding as of March 31, 2018; 47,370,945 shares issued and 33,249,665 shares outstanding as of December 31, 2017) $48  $47 
Additional paid-in capital  400,405   379,094   407,707   403,906 
Accumulated other comprehensive loss  (2,023)  (2,743)  (1,920)   (1,822) 
Treasury stock, at cost (13,578,337 shares as of September 30, 2017; 12,029,398 shares as of December 31, 2016)  (153,569)  (126,442)
Treasury stock, at cost (14,355,644 shares as of March 31, 2018; 14,121,280 shares as of December 31, 2017)  (169,165)   (163,871) 
Retained earnings  121,656   109,510   133,019   128,091 
Total stockholders’ equity  366,516   359,465 
Total liabilities and stockholders’ equity $490,589  $456,576 
Total stockholders' equity  369,689   366,351 
Total liabilities and stockholders' equity $488,721  $499,060 
 
See accompanying notes to interim unaudited condensed consolidated financial statements.
 
2
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Operations

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
 2017  2016  2017  2016  2018  2017 
 (In thousands, except per share information)  (In thousands, except per share information) 
Revenues                  
Services $114,144  $102,958  $319,825  $320,587  $120,196  $104,021 
Software and hardware  6,323   11,184   22,591   31,907   746   6,998 
Reimbursable expenses  3,271   5,011   9,367   14,897 
Total revenues  123,738   119,153   351,783   367,391   120,942   111,019 
Cost of revenues (exclusive of depreciation and amortization, shown separately below)                        
Cost of services  72,700   67,536   205,491   210,190   79,227   68,979 
Software and hardware costs  5,168   10,194   18,860   27,348   -   5,965 
Reimbursable expenses  3,271   5,011   9,367   14,897 
Total cost of revenues  81,139   82,741   233,718   252,435   79,227   74,944 
                
Gross margin  42,599   36,412   118,065   114,956 
                        
Selling, general and administrative  27,072   24,475   78,884   76,780   28,740   25,684 
Depreciation  1,123   1,212   3,587   3,619   1,034   1,259 
Amortization  3,936   3,266   11,098   9,937   3,883   3,625 
Acquisition costs  (100)  310   1,283   715   298   490 
Adjustment to fair value of contingent consideration  (389)  (865)  (828)  (1,817)  969   158 
Income from operations  10,957   8,014   24,041   25,722   6,791   4,859 
                        
Net interest expense  440   335   1,444   1,322   374   347 
Net other (income) expense  (15)  89   (84)  94 
Net other income  (2)   (18) 
Income before income taxes  10,532   7,590   22,681   24,306   6,419   4,530 
Provision for income taxes  3,505   2,045   10,535   7,540   1,491   1,821 
                        
Net income $7,027  $5,545  $12,146  $16,766  $4,928  $2,709 
                        
Basic net income per share $0.22  $0.16  $0.37  $0.49  $0.15  $0.08 
Diluted net income per share $0.21  $0.16  $0.36  $0.48  $0.15  $0.08 
Shares used in computing basic net income per share  32,673   34,128   32,997   34,040   32,752   33,383 
Shares used in computing diluted net income per share  33,991   35,077   34,085   35,012   33,790   34,294 

See accompanying notes to interim unaudited condensed consolidated financial statements.

3
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Comprehensive Income

Three Months Ended Nine Months Ended  Three Months Ended 
September 30, September 30,  March 31, 
2017 2016 2017 2016  2018  2017 
(In thousands) (In thousands)  (In thousands) 
Net income $7,027  $5,545  $12,146  $16,766  $4,928  $2,709 
Other comprehensive income (loss):                
Other comprehensive income:        
Foreign currency translation adjustment  137   (67)  720   (247)  (98)   316 
Comprehensive income $7,164  $5,478  $12,866  $16,519  $4,830  $3,025 

See accompanying notes to interim unaudited condensed consolidated financial statements.

4
Perficient, Inc.
Unaudited Condensed Consolidated Statement of Stockholders’Stockholders' Equity
NineThree Months Ended September 30, 2017March 31, 2018
(In thousands)
 
 
Common Stock
Shares
  
Common Stock
Amount
  
Additional
Paid-in Capital
  
Accumulated Other
Comprehensive Loss
  Treasury Stock  Retained Earnings  
Total
Stockholders’ Equity
  
Common Stock
Shares
  
Common Stock
Amount
  
Additional
Paid-in Capital
  
Accumulated Other
Comprehensive Loss
  Treasury Stock  Retained Earnings  
Total
Stockholders' Equity
 
                                          
Balance at December 31, 2016  33,866  $46  $379,094  $(2,743) $(126,442) $109,510  $359,465 
Balance at December 31, 2017  33,250  $47  $403,906  $(1,822)  $(163,871)  $128,091  $366,351 
Proceeds from the sales of stock through the Employee Stock Purchase Plan  8   --   135   --   --   --   135   2   --   39   --   --   --   39 
Stock compensation related to restricted stock vesting and retirement savings plan contributions  436   --   10,595   --   --   --   10,595   356   1   3,762   --   --   --   3,763 
Purchases of treasury stock and buyback of shares for taxes  (1,515)  --   --   --   (26,495)  --   (26,495)  (220)   --   --   --   (4,991)   --   (4,991) 
Surrender of stock in conjunction with net working capital settlement  (34)  --   --   --   (632)  --   (632)  (14)   --   --   --   (303)   --   (303) 
Issuance of stock in conjunction with acquisitions including stock attributed to future compensation  684   1   10,581   --   --   --   10,582 
Net income  --   --   --   --   --   12,146   12,146   --   --   --   --   --   4,928   4,928 
Foreign currency translation adjustment  --   --   --   720   --   --   720   --   --   --   (98)   --   --   (98) 
Balance at September 30, 2017  33,445  $47  $400,405  $(2,023) $(153,569) $121,656  $366,516 
Balance at March 31, 2018  33,374  $48  $407,707  $(1,920)  $(169,165)  $133,019  $369,689 
 
See accompanying notes to interim unaudited condensed consolidated financial statements.
 
5
Perficient, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
 
 Nine Months Ended  Three Months Ended 
 September 30,  March 31, 
 2017  2016  2018  2017 
 (In thousands)  (In thousands) 
OPERATING ACTIVITIES            
Net income $12,146  $16,766  $4,928  $2,709 
Adjustments to reconcile net income to net cash provided by operations:                
Depreciation  3,587   3,619   1,034   1,259 
Amortization  11,098   9,937   3,883   3,625 
Deferred income taxes  918   481   950   1,502 
Non-cash stock compensation and retirement savings plan contributions  10,595   10,395   3,763   3,589 
Adjustment to fair value of contingent consideration for purchase of business  (828)  (1,817)  969   158 
Write-off of unamortized credit facility fees  246   - 
                
Changes in operating assets and liabilities, net of acquisitions:                
Accounts receivable  1,415   12,877   6,691   16,660 
Other assets  2,756   3,514   1,326   (1,441) 
Accounts payable  (6,423)  (5,308)  (12,050)   (8,432) 
Other liabilities  (5,386)  (10,565)  (7,354)   (6,175) 
Net cash provided by operating activities  30,124   39,899   4,140   13,454 
                
INVESTING ACTIVITIES                
Purchase of property and equipment  (2,521)  (3,575)  (873)   (461) 
Capitalization of internally developed software costs  (762)  (1,761)  (86)   (362) 
Purchase of short-term investments  -   (869)
Purchase of businesses, net of cash acquired  (37,886)  (277)  -   (7,144) 
Net cash used in investing activities  (41,169)  (6,482)  (959)   (7,967) 
                
FINANCING ACTIVITIES                
Proceeds from line of credit  223,500   153,000   57,500   66,000 
Payments on line of credit  (190,500)  (181,000)  (56,500)   (59,500) 
Payments for credit facility financing fees  (355)  (194)
Payment of contingent consideration for purchase of business  (3,258)  (2,144)  -   (978) 
Proceeds from the sales of stock through the Employee Stock Purchase Plan  135   154   39   47 
Purchases of treasury stock  (23,953)  -   (2,130)   (8,122) 
Remittance of taxes withheld as part of a net share settlement of restricted stock vesting  (2,542)  (2,530)  (2,861)   (2,295) 
Net cash provided by (used in) financing activities  3,027   (32,714)
Net cash used in financing activities  (3,952)   (4,848) 
Effect of exchange rate on cash and cash equivalents  353   (193)  (52)   135 
Change in cash and cash equivalents  (7,665)  510   (823)   774 
Cash and cash equivalents at beginning of period  10,113   8,811   6,307   10,113 
Cash and cash equivalents at end of period $2,448  $9,321  $5,484  $10,887 
                
Supplemental disclosures:                
Cash paid for income taxes $3,725  $2,587  $678  $237 
Cash paid for interest $922  $1,211  $293  $235 
                
Non-cash activity:                
Stock issued for purchase of business (including settlement of contingent consideration) $9,429  $96  $-  $2,286 
Stock surrendered by sellers in conjunction with net working capital settlement $572  $1,499  $303  $- 
Liability incurred for purchase of property and equipment $-  $1,671 

See accompanying notes to interim unaudited condensed consolidated financial statements.
 
6
PERFICIENT, INC.
NOTES TO INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2018
 
1. Basis of Presentation
 
The accompanying interim unaudited condensed consolidated financial statements of Perficient, Inc. and its subsidiaries (collectively, the “Company”"Company") have been prepared in accordance with U.S. generally accepted accounting principles (“("U.S. GAAP”GAAP") and are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”"SEC") applicable to interim financial information. Accordingly, certain note disclosures have been condensed or omitted. In the opinion of management, the interim unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company’sCompany's financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company’sCompany's consolidated financial statements and notes thereto filed with the SEC in the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016.2017. Operating results for the three and nine months ended September 30, 2017, respectively,March 31, 2018 may not be indicative of the results for the full fiscal year ending December 31, 2017.2018.

Certain prior period financial statement amounts have been reclassified to conform to current period presentation. This reclassification relates to reimbursable expenses, which have been combined with services revenues and cost of services within revenues and cost of revenues in the Unaudited Condensed Consolidated Statements of Operations.

2. Summary of Significant Accounting Policies
 
Use of Estimates
 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and such differences could be material to the financial statements.

Except for the accounting policies related to revenue recognition that were updated as a result of the adoption of the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, there have been no changes to significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018, that have had a material impact on the Company's condensed consolidated financial statements and related notes. See Note 4, Revenue, for updated policies related to revenue recognition.
3.  Recent Accounting Pronouncements
 
In May 2014, the FASB issued ASU No. 2014-09,Revenue Recognitionfrom Contracts with Customers (Accounting Standards Codification ("ASC") Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 replaced most existing revenue recognition guidance in U.S. GAAP. In 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year. In 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations, ASU No. 2016-10, Identifying Performance Obligations and Licensing, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, all of which further amended ASU No. 2014-09. The Company adopted the standard on January 1, 2018 using the modified retrospective method which requires a cumulative-effect adjustment to the opening balance of retained earnings within stockholders' equity. The Company has determined that the most significant impact upon adoption was to third-party software and hardware revenue, which was primarily recorded on a gross basis as the principal in the transaction through December 31, 2017 and presented on a net basis as the agent as of January 1, 2018. The adoption of the standard also resulted in minor changes to the timing of revenue recognition. As the agent, revenue from multi-year sales of third-party software and support is recognized upfront as the performance obligation is fulfilled, rather than annually as invoiced to the customer. Additionally, variable consideration related to service contracts, such as volume discounts and holdbacks, are recognized earlier under the new standard in certain instances. The impact from these timing changes were immaterial as of January 1, 2018, and therefore, did not result in a cumulative-effect adjustment to the opening balance of retained earnings.  The adoption of the standard also resulted in increases to accounts receivable, net and deferred revenue within other current liabilities for those contracts under which the Company's right to consideration is unconditional. Refer to Impacts of ASC Topic 606 Adoption on Current Period Results below for the impact of adopting ASC Topic 606 on the Unaudited Condensed Consolidated Balance Sheet as of March 31, 2018 and the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2018. There was no material impact on the Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2018. The adoption of ASU No. 2014-09 and its amendments also resulted in additional disclosures around the nature and timing of performance obligations, contract costs, and deferred revenue, as well as significant judgments and practical expedients used by the Company. See Note 4, Revenue, for these disclosures.

7
Impacts of ASC Topic 606 Adoption on Current Period Results

The impacts of ASC Topic 606 adoption on the Unaudited Condensed Consolidated Balance Sheet as of  March 31, 2018 are as follows (in thousands):

 As Reported ASC Topic 606 Impact Without ASC Topic 606 Adoption
Accounts receivable, net$108,358 $(1,379) $106,979
Total assets 488,721  (1,379)  487,342
         
Other current liabilities 34,050  (1,379)  32,671
Total liabilities 119,032  (1,379)  117,653

The impacts of ASC Topic 606 adoption on the Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2018 are as follows (in thousands):

 
As Reported
(Net Presentation)
 ASC Topic 606 Impact 
Without ASC Topic 606 Adoption
 (Gross Presentation)
Revenues        
     Services$120,196 $— $120,196
     Software and hardware 746  6,520  7,266
Total revenues 120,942  6,520  127,462
         
Cost of revenues        
     Cost of services 79,227  —  79,227
     Software and hardware costs —  6,520  6,520
Total cost of revenues 79,227  6,520  85,747
         
Income from operations 6,791  —  6,791
Net income 4,928  —  4,928

In February 2016, the FASB issued ASU No. 2016-02, Leases, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update requires lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is to become effective for the Company on January 1, 2019. Currently, ASU No. 2016-02 requires companies to adopt the requirements of the new standard by applying a modified retrospective approach to the beginning of the earliest period presented in the financial statements.  However, the FASB issued an exposure draft in January 2018, which would allow companies the option to instead apply the provisions of the new standard at the effective date without adjusting the comparative periods presented. While the Company is currently assessing the impact ASU No. 2016-02 will have on its consolidated financial statements, the Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancellable operating leases on its consolidated balance sheets resulting in the recording of right of use assets and lease obligations. Current minimum commitments under noncancellable operating leases are disclosed in Note 7, Commitments and Contingencies.

8
4. Revenue
 
ServiceThe Company's revenues consist of services and software and hardware sales. Revenues are recognized when control of these services or goods are transferred to clients, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or goods.

For a description of the Company's revenue recognition policy prior to January 1, 2018 under ASC Subtopic 985-605, Software – Revenue Recognition, ASC Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements, and ASC Section 605-10-S99 (Staff Accounting Bulletin Topic 13,  Revenue Recognition), refer to Note 2, Summary of Significant Accounting Policies, in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

The following discussion relates to the Company's revenue recognition policy, effective January 1, 2018, under ASC Topic 606.

Services Revenues

Services revenues are primarily derived fromcomprised of professional services providedthat include developing, implementing, automating and extending business processes, technology infrastructure, and software applications. The Company's professional services span multiple industries, platforms and solutions; however, the Company has remained relatively diversified and does not believe that it has significant revenue concentration within any single industry, platform or solution.

Professional services revenues are recognized over time as services are rendered. Most projects are performed on a time and materials basis, while a portion of revenues is derived from projects performed on a fixed fee or fixed fee percent complete basis. For time and material contracts, service revenues are generally recognized and billedinvoiced by multiplying the number of hours expended in the performance of the contract by the billing rates established billing rates.in the contract. For fixed fee projects, servicecontracts, revenues are generally recognized and invoiced by multiplying the fixed rate per time period established in the contract by the number of time periods elapsed. For fixed fee percent complete contracts, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoicedhours, and collected in excess of revenues recognized are classified as deferred revenues. In conjunction with services provided, the Company occasionally receives referral fees under partner programs. These referral fees are recognized when earned and recorded within service revenues. Revenues from software and hardware sales are generally recorded on a gross basis considering the Company’s role as a principal in the transaction.  Revenues from sales of third-party software-as-a-service arrangements where the Company is not the primary obligor are recorded on a net basis. On many projects the Company is also reimbursed for out-of-pocket expenses including travel and other project-related expenses.  These reimbursements are included as a component of revenues. The Company does not realize any profit on reimbursable expenses.

Unbilled revenues represent the project time and expenses that have been incurred, but not yet billed to the client, prior to the end of the fiscal period. For time and materials projects, the client is invoiced for the amount of hours worked multiplied by the billing rates as stated in the contract. For fixed fee arrangements, the client is invoiced according to the agreed-upon schedule detailing the amount and timing of payments in the contract. Clients are typically billed monthly for services provided during that month, but can be billed on a more or less frequent basis as determined by the contract. If the time and expenses are worked/incurredis worked and approved at the end of a fiscal period and the invoice has not yet been sent to the client, the amount is recorded as unbilled revenue once the Company verifies all other revenue recognition criteria have been met.

Revenuesmet, and the amount is classified as a receivable as the right to consideration is unconditional at that point. Amounts invoiced and collected in excess of revenues recognized are recognized when the following criteriacontract liabilities, which are met: (1) persuasive evidence of the customer arrangement exists; (2) fees are fixed and determinable; (3) delivery and acceptance have occurred; and (4) collectability is reasonably assured. The Company’s policy for revenue recognition in instances where multiple deliverables are sold contemporaneously to the same customer is in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 985-605, Software – Revenue Recognition, ASC Subtopic 605-25, Revenue Recognition – Multiple-Element Arrangements, and ASC Section 605-10-S99 (Staff Accounting Bulletin Topic 13,  Revenue Recognition). Specifically, if the Company enters into contracts for the sale of services and software or hardware, then the Company evaluates whether each element should be accounted for separately by considering the following criteria: (1) whether the deliverables have value to the client on a stand-alone basis; and (2) whether delivery or performance of the undelivered item or items is considered probable and substantiallyclassified as deferred revenues in the control of the Company (only if the arrangement includes a general right of return related to the delivered item). Further, for sales of softwareUnaudited Condensed Consolidated Balance Sheet. The term between invoicing and services, the Company also evaluates whether the services are essential to the functionality of the software and if it has fair value evidence for each deliverable. If the Company has concluded that the separation criteria are met, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of the Company’s multiple element arrangements meet these criteria and are accounted for separately, with the arrangement consideration allocated among the deliverables using vendor specific objective evidence of the selling price. As a result, the Company generally recognizes software and hardware sales upon delivery to the customer and services consistent with the policies described herein.
7

Further, delivery of software and hardware sales, when sold contemporaneously with services, can generally occur at varying times depending on the specific client project arrangement. Delivery of services generally occurs over a period of time consistent with the timeline as outlined in the client contract.

There are no significant cancellation or termination-type provisions for the Company’s software and hardware sales.payment due date is not significant. Contracts for professional services provide for a general right, to the client or the Company, to cancel or terminate the contract within a given period of time (generally 10 to 30 days’ noticedays' notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.
The Company Certain contracts may provide multiple services under the terms of an arrangement and is required to assess whether oneinclude volume discounts or more units of accountingholdbacks, which are present.  Service fees are typically accounted for as one unit of accounting.variable consideration under ASC Topic 606, but are not typically significant. The Company followsestimates variable consideration based on historical experience and forecasted sales and includes the guidelines discussed above in determining revenues; however, certain judgments and estimates are made and used to determine revenues recognized in any fiscal period. If estimates are revised, material differences may resultvariable consideration in the amounttransaction price.

Other services revenues are comprised of hosting fees, partner referral fees, maintenance agreements, training and timing of revenues recognized for a given period.
internally developed software-as-a-service ("SaaS") sales. Revenues are presented net of taxes assessed by governmental authorities.  Sales taxesfrom hosting fees, maintenance agreements, training and internally developed SaaS sales are generally collectedrecognized over time using a time-based measure of progress as services are rendered. Partner referral fees are recorded at a point in time upon meeting specified requirements set by each partner to earn the respective fee.

On many professional service projects, the Company is also reimbursed for out-of-pocket expenses including travel and subsequently remittedother project-related expenses.  These reimbursements are included as a component of the transaction price of the respective professional services contract and are invoiced as the expenses are incurred. The Company structures its professional services arrangements to recover the cost of reimbursable expenses without a markup.

Software and Hardware Revenues

Software and hardware revenues are comprised of third-party software and hardware resales, in which the Company is considered the agent, and sales of internally developed software, in which the Company is considered the principal. Third-party software and hardware revenues are recognized and invoiced when the Company fulfils its obligation to arrange the sale, which occurs when the purchase order with the vendor is executed and the customer has access to the software or the hardware has been shipped to the customer. Internally developed software revenues are recognized and invoiced when control is transferred to the customer, which occurs when the software has been made available to the customer and the license term has commenced. Revenues from third-party software and hardware sales are recorded on alla net basis, while revenues from internally developed software sales are recorded on a gross basis. There are no significant cancellation or termination-type provisions for the Company's software and hardware sales, and certain services transactions as appropriate.the term between invoicing and payment due date is not significant.

3.Arrangements with Multiple Performance Obligations

Arrangements with clients may contain multiple promises such as delivery of software, hardware, professional services or post-contract support services. These promises are accounted for as separate performance obligations if they are distinct.  For arrangements with clients that contain multiple performance obligations, the transaction price is allocated to the separate performance obligations based on estimated relative standalone selling price, which is estimated by the expected cost plus a margin approach, taking into consideration market conditions and competitive factors.

Contract Costs

In accordance with the terms of the Company's sales commission plan, commissions are not earned until the related revenue is recognized. Therefore, sales commissions are expensed as they are incurred. Certain sales incentives are accrued based on achievement of specified bookings goals. For these incentives, the Company applies the practical expedient that allows the Company to expense the incentives as incurred, since the amortization period would have been one year or less.

9
Deferred Revenue

During the three months ended March 31, 2018, $2.8 million was recognized in revenue that was included in the deferred revenue balance at the beginning of the period.  The changes in deferred revenue for the three months ended March 31, 2018 are as follows (in thousands):

Balance at December 31, 2017 $3,278
Impact of ASC Topic 606 adoption (offset to Accounts Receivable) 2,806
Opening balance at January 1, 2018 6,084
Deferral of revenue 3,328
Recognition of deferred revenue (4,124)
Other (398)
Balance as of March 31, 2018$4,890

Transaction Price Allocated to Remaining Performance Obligations
    Due to the ability of the client or the Company to cancel or terminate the contract within a given period of time (generally 10 to 30 days' notice is required), the majority of the Company's contracts have a term of less than one year. Perficient does not disclose the value of unsatisfied performance obligations for contracts with an original maturity date of one year or less or time and materials contracts for which the Company has the right to invoice for services performed. Revenue related to unsatisfied performance obligations for remaining contracts as of March 31, 2018 was immaterial.
Disaggregation of Revenue

The following table presents revenue disaggregated by revenue source and pattern of revenue recognition (in thousands):

 Three Months Ended March 31, 2018
 Over Time Point In Time Total Revenues
Time and materials contracts$82,149 $- $82,149
Fixed fee percent complete contracts 9,112  -  9,112
Fixed fee contracts 21,222  -  21,222
Reimbursable expenses 3,030  -  3,030
Total professional services fees 115,513  -  115,513
Other services revenue* 3,865  818  4,683
Total services 119,378  818  120,196
Software and hardware -  746  746
     Total revenues$119,378 $1,564 $120,942

*Other services revenue primarily consists of hosting fees, maintenance, training, internally developed SaaS and partner referral fees.

The following table presents revenue disaggregated by geographic area, as determined by the billing address of customers (in thousands):

 
Three Months Ended 
March 31, 2018
 
United States$117,529 
Canada 1,371 
Other countries 2,042 
     Total revenues$ 120,942 
10
5. Stock-Based Compensation
 
The fair value of restricted stock awards is based on the value of the Company’sCompany's common stock on the date of the grant. Stock-based compensation is accounted for in accordance with ASC Topic 718, Compensation – Stock Compensation. Under this guidance, the Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period, which is generally three years. In addition, pursuant to Accounting Standards Update (“ASU”)ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, the Company has continued to elect to estimate the amount of expected forfeitures when calculating share-based compensation, instead of accounting for forfeitures as they occur.

Stock Award Plans
 
The Company’sCompany's Second Amended and Restated Perficient, Inc. 2012 Long Term Incentive Plan (as amended, the “Incentive Plan”"Incentive Plan") allows for the granting of various types of stock awards, not to exceed a total of 7.0 million shares, to eligible individuals.  The Compensation Committee of the Board of Directors administers the Incentive Plan and determines the terms of all stock awards made under the Incentive Plan. The Incentive Plan was increased by 2.0 million shares on June 14, 2017 after the Company’s stockholders approved the increase at the Company’s 2017 annual meeting of stockholders. Following the increase, the Company may issue stock awards of up to 7.0 million shares of Common Stock pursuant to the Incentive Plan. As of September 30, 2017,March 31, 2018, there were 3.32.6 million shares of Common Stock available for issuance under the Incentive Plan.
 
Stock-based compensation cost recognized was approximately $3.9 million for the three and nine months ended September 30,March 31, 2018 and $3.7 million for the three months ended March 31, 2017, was approximately $3.6which included $0.7 million and $11.0 million, respectively, which included $0.6 million and $1.9 million, respectively, of expense for retirement savings plan contributions. The associated current and future income tax benefits recognized were $1.1were $0.8 million and $3.4 million for the three and nine months ended September 30, 2017, respectively. Stock-based compensation cost recognized for the three and nine months ended September 30, 2016 was approximately $3.2 million and $10.6$1.2 million, respectively, which included $0.6for each of the three-month periods ended March 31, 2018 and $1.9 million, respectively, of expense for retirement savings plan contributions. The associated current and future income tax benefits recognized were $1.2 million and $3.5 million for the three and nine months ended September 30, 2016, respectively. 2017. As of September 30, 2017,March 31, 2018, there was $15.0$23.6 million of total unrecognized compensation cost related to non-vested share-based awards. This cost is expected to be recognized over a weighted-average period of two years.

Restricted stock activity for the ninethree months ended September 30, 2017March 31, 2018 was as follows (shares in thousands):
 
 Shares  
Weighted-Average
Grant Date Fair Value
 Shares 
Weighted-Average
Grant Date Fair Value
Restricted stock awards outstanding at December 31, 2016  1,403  $17.52 
Restricted stock awards outstanding at December 31, 2017 1,436 $18.12
Awards granted  379   18.31  360  22.02
Awards vested  (334)  19.78  (323)  19.30
Awards forfeited  (119)  16.27  (35)  17.37
Restricted stock awards outstanding at September 30, 2017  1,329  $17.30 
Restricted stock awards outstanding at March 31, 2018 1,438 $18.83
 
8
4.6. Net Income per Share
 
The following table presents the calculation of basic and diluted net income per share (in thousands, except per share information):

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30,  September 30,  March 31, 
 2017  2016  2017  2016  2018  2017 
Net income $7,027  $5,545  $12,146  $16,766  $4,928  $2,709 
Basic:                        
Weighted-average shares of common stock outstanding  32,673   34,128   32,997   34,040   32,752   33,383 
Shares used in computing basic net income per share  32,673   34,128   32,997   34,040   32,752   33,383 
Effect of dilutive securities:                        
Restricted stock subject to vesting  459   479   450   468   491   402 
Contingently issuable shares (1)  -   -   -   2 
Shares issuable for acquisition consideration (2)  859   470   638   502 
Shares issuable for acquisition consideration (1)  547   509 
Shares used in computing diluted net income per share  33,991   35,077   34,085   35,012   33,790   34,294 
                        
Basic net income per share $0.22  $0.16  $0.37  $0.49  $0.15  $0.08 
Diluted net income per share $0.21  $0.16  $0.36  $0.48  $0.15  $0.08 
                        
Anti-dilutive options and restricted stock not included in the calculation of diluted net income per share  -   -   117   - 
Anti-dilutive restricted stock not included in the calculation of diluted net income per share  120   122 

(1)For the ninethree months ended September 30, 2016, this represents the shares issued to Zeon Solutions Incorporated and certain related entities (collectively, “Zeon”) pursuant to the Asset Purchase Agreement.

(2)For the three and nine months ended September 30, 2017,March 31, 2018, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with BioPharm Systems, Inc. (“BioPharm”("BioPharm"); (ii) the Asset Purchase Agreement with Zeon; (iii) the Asset Purchase Agreement with The Pup Group, Inc. d/b/a Enlighten (“Enlighten”Zeon Solutions Incorporated  and certain related entities (collectively, "Zeon"); (iv)(iii) the Asset Purchase Agreement with RAS & Associates, LLC (“RAS”("RAS"); and (v)(iv) the Asset Purchase Agreement with Clarity Consulting, Inc. and Truth Labs, LLC.LLC (together, “Clarity”"Clarity"), as part of the consideration.  For the three and nine months ended September 30, 2016,March 31, 2017, this represents the shares held in escrow pursuant to: (i) the Asset Purchase Agreement with BioPharm; (ii) the Asset Purchase Agreement with Zeon; (iii) the StockAsset Purchase Agreement for Market Street Solutions,with The Pup Group, Inc. (“Market Street”d/b/a Enlighten ("Enlighten"); and (iv) the Asset Purchase Agreement with Enlighten,RAS, as part of the consideration.

5.Prior to 2018, the Company's Board of Directors authorized the repurchase of up to $135.0 million of Company common stock. On February 20, 2018, the Board of Directors authorized the expansion of the stock repurchase program by authorizing the repurchase of up to an additional $25.0 million of Company common stock for a total repurchase program of $160.0 million and extended the expiration date of the program from December 31, 2018 to December 31, 2019. The program could be suspended or discontinued at any time, based on market, economic, or business conditions. The timing and amount of repurchase transactions will be determined by management based on its evaluation of market conditions, share price, and other factors. Since the program's inception on August 11, 2008, the Company has repurchased approximately $137.1 million (12.5 million shares) of outstanding common stock through March 31, 2018.

11
7. Commitments and Contingencies

From time to time the Company is involved in legal proceedings, claims and litigation related to employee claims, contractual disputes and taxes in the ordinary course of business. Although the Company cannot predict the outcome of such matters, currently the Company has no reason to believe the disposition of any current matter could reasonably be expected to have a material adverse impact on the Company’sCompany's financial position, results of operations or the ability to carry on any of its business activities.

In June 2016, the Company entered into an agreement to purchase software licenses for internal use payable over a two-year period. As a result, the Company has recorded $0.8 million in “Other"Other current liabilities”liabilities" in the Condensed Consolidated Balance Sheet as of September 30, 2017March 31, 2018 (unaudited).

Certain of the Company’sCompany's operating leases contain predetermined fixed escalations of minimum rentals during the original lease terms. For these leases, the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid as accrued rent expense.
9

The Company leases office space and certain equipment under various operating lease agreements. The Company has the option to extend the term of certain lease agreements. Future minimum commitments under these lease agreements as of September 30, 2017March 31, 2018 were as follows (in thousands):
 
 
Operating
Leases
  
Operating
Leases
 
2017 remaining $1,620 
2018  6,350 
2018 remaining $5,013 
2019  6,317   6,650 
2020  5,971   6,202 
2021  4,398   4,728 
2022  2,910 
Thereafter  5,413   3,160 
Total minimum lease payments $30,069  $28,663 
 
Rent expense for the three and nine months ended September 30,March 31, 2018 and 2017 was $2.1$2.0 million and $6.0 million, respectively. Rent expense for the three and nine months ended September 30, 2016 was $1.8 million and $5.5$1.9 million, respectively.

12
6.
8. Balance Sheet Components

September 30, 2017
(unaudited)
 December 31, 2016 
March 31, 2018
(unaudited)
   December 31, 2017 
(in thousands) (in thousands) 
Accounts receivable:       
Accounts receivable $72,251  $80,461 $65,393  $82,603 
Unbilled revenues  36,807   24,518  44,389  30,863 
Allowance for doubtful accounts  (968)  (1,277) (1,424)   (1,272) 
Total $108,090  $103,702 $108,358  $112,194 

Property and equipment:           
Computer hardware (useful life of 3 years) $13,160  $12,191 $13,268  $13,110 
Furniture and fixtures (useful life of 5 years)  3,548   3,306  4,092  3,772 
Leasehold improvements (useful life of 5 years)  2,295   1,958  3,038  2,836 
Software (useful life of 1 to 7 years)  5,159   9,186  5,161  5,159 
Less: Accumulated depreciation  (16,737)  (17,753) (18,578)   (17,732) 
Total $7,425  $8,888 $6,981  $7,145 

Other current liabilities:           
Accrued variable compensation $9,159  $10,979 $9,299  $16,842 
Deferred revenue  3,025   3,138  4,890  3,278 
Payroll related costs  3,188   2,607  3,035  2,971 
Accrued subcontractor fees  543   1,049  450  469 
Accrued medical claims expense  1,924   1,859  2,020  2,133 
Professional fees  332   420  964  357 
Estimated fair value of contingent consideration liability (1)  4,168   3,384  9,118  8,148 
Net working capital settlements  -   62 
Other current liabilities  5,713   4,139  4,274   3,879 
Total $28,052  $27,637 $34,050  $38,077 

Other non-current liabilities:           
Deferred compensation liability $4,173  $3,662 $4,667  $4,409 
Deferred income taxes  12,860   12,853  8,310  7,360 
Other non-current liabilities  1,996   2,543  4,859   4,667 
Total $19,029  $19,058 $17,836  $16,436 

(1)As of September 30,March 31, 2018 and December 31, 2017, represents the fair value estimate of additional earnings-based contingent consideration that may be realized by Clarity twelve months after the acquisition. As of December 31, 2016, represents the fair value estimate of additional earnings-based contingent consideration that may be realized by the Market Street selling shareholders, Enlighten and Bluetube twelve months after the applicable acquisition.

1013
7.9. Business Combinations

2016 Acquisition2017 Acquisitions

Acquisition of Bluetube

On October 12, 2016, the Company acquired substantially all of the assets of Bluetube pursuant to the terms of an Asset Purchase Agreement.  Bluetube was a digital marketing agency specializing in the development, implementation, integration and support of custom website and enterprise mobile solutions. The acquisition of Bluetube enhanced and expanded the Company’s digital strategy, creative services, mobile and marketing expertise.

The Company’s total allocable purchase price consideration was $9.1 million. The purchase price was comprised of $7.2 million in cash paid increased by $1.9 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration. Bluetube realized the maximum cash payout pursuant to the Asset Purchase Agreement and, as a result, the Company recorded a pre-tax adjustment of $0.8 million in “Adjustment to fair value of contingent consideration” on the Unaudited Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017 and paid $2.7 million in contingent consideration in August 2017. The Company incurred approximately $0.5 million in transaction costs, which were expensed when incurred.

The Company allocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):

Acquired tangible assets $0.9 
Acquired intangible assets  3.1 
Liabilities assumed  (0.6)
Goodwill  5.7 
Total purchase price $9.1 

The amount of goodwill expected to be deductible for tax purposes is $6.7 million.

The following table presents details of the intangible assets acquired during the year ended December 31, 2016 (dollars in millions):

 Weighted Average Useful Life Estimated Useful Life Aggregate Acquisitions 
Customer relationships5 years 5 years $2.5 
Customer backlog6 months 6 months  0.4 
Non-compete agreements5 years 5 years  0.2 
Trade name1 year 1 year  - 
Total acquired intangible assets       $3.1 

2017 Acquisition

Acquisition of RAS

On January 3, 2017, the Company acquired substantially all of the assets of RAS through a wholly-owned subsidiary of the Company, pursuant to the terms of an Asset Purchase Agreement. The acquisition of RAS expands the Company’sCompany's expertise in management consulting offerings with additional strategy, operations and business process optimization.

The Company’sCompany's total allocable purchase price consideration was $10.4 million. The purchase price was comprised of $7.1 million in cash paid and $2.1 million in Company common stock issued at closing reduced by $0.6 million as a result of a net working capital adjustment settled in Company common stock surrendered by RAS in September 2017. The purchase price also included $1.8 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, which may be realized by the seller twelve months after the closing date of the acquisition with a maximum cash payout of $3.8 million. As of September 30, 2017,March 31, 2018, the Company’sCompany's best estimate of the fair value of the contingent consideration is zero. As a result, the Company recorded a pre-tax adjustment in “Adjustment to fair value of contingent consideration” on the Unaudited Condensed Consolidated Statements of Operations of $0.5 million and $1.8 million during the three and nine months ended September 30, 2017. The Company incurred approximately $0.5 million in transaction costs, which were expensed when incurred.
11

The Company allocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):

Acquired tangible assets $0.9 $0.9
Acquired intangible assets  5.1  5.1
Liabilities assumed  (1.0) (1.0)
Goodwill  5.4  5.4
Total purchase price $10.4 $10.4

The amount of goodwill expected to be deductible for tax purposes, excluding contingent consideration, is $3.7 million.

Acquisition of Clarity

On June 22, 2017, the Company acquired substantially all of the assets of Clarity, pursuant to the terms of an Asset Purchase Agreement. The acquisition of Clarity builds the Company’sCompany's Microsoft offerings and qualifications and increases the Company’sCompany's presence in the North Central region and, specifically, the Chicago market.

The Company has initially estimated theCompany's total allocable purchase price consideration to be $41.6was $41.7 million. The purchase price was comprised of $30.7 million in cash paid and $7.3 million in Company common stock issued at closing reduced by $0.5$0.4 million for an estimatedas a result of the net working settlement due from the seller.capital adjustment settled in Company common stock surrendered by Clarity in February 2018. The purchase price also included $4.1 million representing the initial fair value estimate of additional revenue and earnings-based contingent consideration, which may be realized by the seller twelve months after the closing date of the acquisition with a maximum cash payout of $9.2 million. As of March 31, 2018, the Company's best estimate of the fair value of the contingent consideration is $9.0 million, of which $8.1 million was recorded in "Other current liabilities" within the Consolidated Balance Sheet as of December 31, 2017. As a result, the Company recorded a pre-tax adjustment in "Adjustment to fair value of contingent consideration" on the Unaudited Condensed Consolidated Statement of Operations of $0.9 million during the three months ended March 31, 2018. The Company incurred approximately $0.9 million in transaction costs, which were expensed when incurred.

14
As part of the consideration transferred for the acquisition of Clarity, the Company issued common stock to owners of Clarity who are continuing with the Company with restrictions that limit the ability to sell the common stock and that lapse over a certain period, or over an accelerated period upon meeting specified employment milestones. As such, an estimated $0.9 million of the common stock value was attributed to future compensation and recorded as an asset within “Other"Other current assets”assets" and “Other"Other non-current assets”assets" in the Unaudited Condensed Consolidated Balance Sheet as of September 30, 2017 (unaudited),March 31, 2018, to be amortized over the requisite service period.

The Company has estimated the allocation ofallocated the total purchase price consideration between tangible assets, identified intangible assets, liabilities, and goodwill as follows (in millions):

Acquired tangible assets $6.3 $6.0
Acquired intangible assets  15.4  15.0
Liabilities assumed  (3.9) (3.6)
Goodwill  23.8  24.3
Total purchase price $41.6 $41.7

The amount of goodwill expected to be deductible for tax purposes, excluding contingent consideration, is $21.3$22.1 million.

The above purchase accounting estimates are pending finalization of the intangible assets and contingent consideration valuation and a net working capital settlement that is subject to final adjustment as the Company obtains additional information during the measurement period.

The following table presents details of the intangible assets acquired during the nine monthsyear ended September 30,December 31, 2017 (dollars in millions):

 Weighted Average Useful Life Estimated Useful Life Aggregate Acquisitions 
Customer relationships6 years 6 years $17.3 
Customer backlog1 year 3 months - 1 year  1.8 
Non-compete agreements5 years 2 - 5 years  0.7 
Trade name1 year 1 year  0.1 
Internally developed software4 years 4 years  0.6 
Total acquired intangible assets       $20.5 

12
The results of the 2016 and 2017 acquisitions’ operations have been included in the Company’s interim unaudited condensed consolidated financial statements since the respective acquisition date.

The aggregate amounts of revenue and net income of the RAS and Clarity acquisitions in the Unaudited Condensed Consolidated Statements of Operations from the acquisition date to September 30, 2017 are as follows (in thousands):

 Acquisition Date to 
 September 30, 2017 
Revenues $15,799 
Net income $1,276 
  Weighted Average Useful Life Estimated Useful Life Aggregate Acquisitions
Customer relationships 6 years 6 years $16.8
Customer backlog 1 year 3 months - 1 year  1.9
Non-compete agreements 5 years 2 - 5 years  0.7
Trade name 1 year 1 year  0.1
Internally developed software 4 years 4 years  0.6
Total acquired intangible assets       $20.1

Pro-forma Results of Operations

The following presents the unaudited pro-forma combined results of operations of the Company with the 2017 acquisitions for the ninethree months ended September 30, 2017 and the 2016March 31, 2018 and 2017, acquisitions for the nine months ended September 30, 2016, after giving effect to certain pro-forma adjustments and assuming the 2017 acquisitions were acquired as of the beginning of 2016 and assuming the 2016 acquisition was acquired as of the beginning of 2015.2016.

These unaudited pro-forma results are presented in compliance with the adoption of ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations, and are not necessarily indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2016 or January 1, 2015 or of future results of operations of the consolidated entities (in thousands except per share data):

 Nine Months Ended September 30,  Three Months Ended March 31, 
 2017  2016  2018  2017 
Revenues $366,958  $396,907  $120,942  $118,663 
Net income $14,716  $17,365  $5,982  $3,864 
Basic net income per share $0.44  $0.51  $0.18  $0.11 
Diluted net income per share $0.43  $0.49  $0.18  $0.11 
Shares used in computing basic net income per share  33,466   34,288   33,087   33,720 
Shares used in computing diluted net income per share  34,395   35,696   33,784   34,601 

8.
15
10. Goodwill and Intangible Assets
 
Goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed, in a business combination. In accordance with ASC Topic 350, Intangibles – Goodwill and Other, the Company performs an annual impairment review in the fourth quarter and more frequently if events or changes in circumstances indicate that goodwill might be impaired. There was no indication that goodwill became impaired as of September 30, 2017.March 31, 2018.

Other intangible assets include customer relationships, non-compete arrangements, trade names, customer backlog, and internally developed software, which are being amortized over the assets’assets' estimated useful lives using the straight-line method. Estimated useful lives range from less than one year to ten years. Amortization of customer relationships, non-compete arrangements, trade names, customer backlog, and internally developed software is considered an operating expense and is included in “Amortization”"Amortization" in the accompanying Unaudited Condensed Consolidated Statements of Operations. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in a lack of recoverability or revised useful life.

Goodwill
 
The changes in the carrying amount of goodwill for the ninethree months ended September 30, 2017March 31, 2018 are as follows (in thousands):
 
Balance at December 31, 2016 $275,205 
Preliminary purchase price allocations for acquisitions  29,191 
Effect of foreign currency translation adjustments  187 
Balance at September 30, 2017 $304,583 
Balance at December 31, 2017 $305,238 
Effect of foreign currency translation adjustments  (96) 
Balance at March 31, 2018 $305,142 
 
13
Intangible Assets with Definite Lives
 
The following table presents a summary of the Company’sCompany's intangible assets that are subject to amortization (in thousands):
 
 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
 
Gross
Carrying
Amounts
  
Accumulated
Amortization
  
Net
Carrying
Amounts
  
Gross
Carrying
Amounts
  
Accumulated
Amortization
  
Net
Carrying
Amounts
  
Gross
Carrying
Amounts
  
Accumulated
Amortization
  
Net
Carrying
Amounts
  
Gross
Carrying
Amounts
  
Accumulated
Amortization
  
Net
Carrying
Amounts
 
Customer relationships $75,857  $(29,475) $46,382  $67,648  $(30,458) $37,190  $71,976  $(31,729)  $40,247  $75,407  $(32,307)  $43,100 
Non-compete agreements  1,586   (628)  958   1,018   (557)  461   1,556   (788)   768   1,556   (707)   849 
Customer backlog  1,640   (451)  1,189   390   (195)  195   1,650   (1,279)   371   1,650   (866)   784 
Trade name  140   (53)  87   30   (7)  23   100   (77)   23   100   (53)   47 
Internally developed software  11,463   (4,797)  6,666   11,342   (4,096)  7,246   11,235   (5,373)   5,862   11,325   (5,039)   6,286 
Total $90,686  $(35,404) $55,282  $80,428  $(35,313) $45,115  $86,517  $(39,246)  $47,271  $90,038  $(38,972)  $51,066 
 
The estimated useful lives of identifiable intangible assets are as follows:
 
Customer relationships5 – 10 years
Non-compete agreements2 – 5 years
Customer backlog6 months – 1  year
Trade name1  year
Internally developed software12 – 7 years
 
Estimated annual amortization expense for the next five years ended December 31 and thereafter is as follows (in thousands):

2017 remaining $4,030 
2018 $14,226 
2018 remaining $10,301 
2019 $12,362  $12,322 
2020 $9,279  $9,242 
2021 $7,217  $7,109 
2022 $5,764 
Thereafter $8,168  $2,533 

9.
16
11. Line of Credit
 
On June 9, 2017, the Company entered into a Credit Agreement as amended (the “Credit Agreement”"Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent and the other lenders parties thereto.  The Credit Agreement replaces the Second Amended and Restated Credit Agreement dated as of July 13,31, 2013 between the Company, Silicon Valley Bank and the other lenders and signatories thereto (the “Prior"Prior Credit Agreement”Agreement").  The new credit facility was used to repay amounts due under the Prior Credit Agreement and will be used for working capital and general corporate purposes. In connection with the new agreement, the Company wrote off $0.2 million in unamortized credit facility fees associated with the Prior Credit Agreement, which was included in “Net interest expense” on the Unaudited Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017. The Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $125.0 million, subject to a commitment increase of $75.0 million. All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of June 9, 2022.

The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $10.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. As of September 30, 2017,March 31, 2018, the Company had noone outstanding lettersletter of credit.credit for $0.3 million. Substantially all of the Company’sCompany's assets are pledged to secure the credit facility.

Borrowings under the Credit Agreement bear interest at the Company’sCompany's option of the prime rate (4.25%(4.75% on September 30, 2017)March 31, 2018) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (1.23%(1.88% on September 30, 2017)March 31, 2018) plus a margin ranging from 1.00% to 1.75%. The Company incurs an annual commitment fee of 0.15% to 0.20% on the unused portion of the line of credit. The additional margin amount and annual commitment fee are dependent on the level of outstanding borrowings. As of September 30, 2017,March 31, 2018, the Company had $60.0$68.7 million of unused borrowing capacity.

The Company is required to comply with various financial covenants under the Credit Agreement. Specifically, the Company is required to maintain a ratio of earnings before interest, taxes, depreciation, and amortization (“EBITDA”("EBITDA") plus stock compensation to interest expense for the previous four consecutive fiscal quarters of not less than 3.00 to 1.00 and a ratio of indebtedness to EBITDA plus stock compensation (“("Leverage Ratio”Ratio") of not more than 3.00 to 1.00. Additionally, the Credit Agreement currently restricts the payment of dividends that would result in a pro-forma Leverage Ratio of more than 2.00 to 1.00.

At September 30, 2017,March 31, 2018, the Company was in compliance with all covenants under the Credit Agreement.
14

10.12. Income Taxes
 
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Internal Revenue Service (the “IRS”"IRS") has completed examinations of the Company’sCompany's U.S. income tax returns or the statute of limitations has passed on returns for the years through 2010. The Company’sCompany's 2011 through 2015 U.S. income tax returns are currently under examination by the IRS. The IRS has sought to disallow research credits in the total amount of $2.5 million on the Company’sCompany's 2011, 2012 and 2013 U.S. income tax returns. The Company has exhausted all administrative appeals and formal mediation and has filed suit to resolve this dispute. The Company is awaiting a court date to be set by the U.S. Tax Court. The Company believes the research credits taken are appropriate and intends to vigorously defend its position. An amount of adjustment, if any, and the timing of such adjustment are not reasonably possible to estimate at this time. The total amount of research credits taken or expected to be taken in the Company’sCompany's income tax returns for 2011 through September 30, 2017March 31, 2018 is $8.4$9.1 million.
 
As of September 30, 2017, the Company’s net non-current deferred tax liability was $12.9 million. Deferred tax liabilities primarily relate to goodwill, intangibles, fixed asset depreciation, and prepaid expenses. Net non-current deferred tax liabilities are recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016. Under the provisions of the ASC Subtopic 740-10-25, Income Taxes - Recognition, the Company had an unrecognized tax benefit of $1.5$3.1 million (inclusive of $0.3 million of interest) as of September 30, 2017.March 31, 2018.
 
The Company’sCompany's effective tax rate was 33.3% and 46.4%23.2% for the three and nine months ended September 30, 2017, respectively,March 31, 2018 compared to 26.9% and 31.0%40.2% for the three and nine months ended September 30, 2016, respectively.March 31, 2017. The increasedecrease in the effective rate is primarily due to the Company’s determination that the foreign earningspassage of the Company’s Chinese subsidiary were no longer permanently reinvested.Tax Cuts and Jobs Act of 2017 (the "2017 Tax Act"). As of March 31, 2018, the Company's net non-current deferred tax liability was $8.3 million. Deferred tax liabilities relate to goodwill, intangibles, fixed asset depreciation, and prepaid expenses. Net non-current deferred tax liabilities are recorded in "Other non-current liabilities" on the Condensed Consolidated Balance Sheet as of March 31, 2018 (unaudited) and December 31, 2017.

In general, it is the Company’sCompany's practice and intention to reinvest the earnings of the Company’sCompany's foreign subsidiaries in those operations. However, during the second quarter of 2017, the Company determined that as a result of changes in the business and macroeconomic environment, the foreign earnings of the Company’sCompany's Chinese subsidiary were no longer permanently reinvested, and the Company repatriated $4.8 million in June 2017 and an additional $4.8 million in July 2017. A provision for the expected current and deferred taxes on repatriation of these earnings was recorded in the amount of $2.5 million during the second quarter of 2017. Approximately $1.6 million of this provision was reversed during the fourth quarter of 2017 due to the adoption of the 2017 Tax Act. Management intends to continue to permanently reinvest all other remaining current and prior earnings in its other foreign subsidiaries.

Excluding China, foreign unremitted earnings of entities not included in the United States tax return have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on distribution to the United States because it is not anticipated such earnings will be remitted to the United States. Under current applicable tax laws, if the Company elects to remit some or all of the funds it has designated as indefinitely reinvested outside the United States, the amount remitted would be subject to United States income taxes and applicable non-U.S. income and withholding taxes. Such earnings would also become taxable upon the sale or liquidation of these subsidiaries or upon remittance of dividends. As of September 30, 2017,March 31, 2018, the aggregate unremitted earnings of the Company’sCompany's foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $0.7$3.4 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.1$0.2 million.

11.
17
U.S. Tax Reform

On December 22, 2017, the U.S. government enacted the 2017 Tax Act.  The 2017 Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system.  The SEC has issued rules that would allow for a measurement period of up to one year after the enactment date of the 2017 Tax Act to finalize the recording of the related tax impacts.  Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period. However, there have been no changes in estimates or additional guidance during the current quarter which would change the Company's assessment of the tax impacts recorded as of the prior year end.  The Company currently anticipates finalizing and recording any resulting adjustments within a year of the enactment date.

13. Financial Instruments

In the normal course of business, the Company uses derivative financial instruments to manage foreign currency exchange rate risk. Currency exposure is monitored and managed by the Company as part of its risk management program which seeks to reduce the potentially adverse effects that market volatility could have on operating results. The Company’sCompany's derivative financial instruments consist of non-deliverable foreign currency forward contracts. Derivative financial instruments are neither held nor issued by the Company for trading purposes.

Derivatives Not Designated as Hedging Instruments

Both the gain or loss on the derivatives not designated as hedging instruments and the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. Realized gains or losses and changes in the estimated fair value of foreign currency forward contracts that have not been designated as hedges were an immaterial net gain during each of the three months ended September 30, 2017March 31, 2018 and a $0.1 million net gain for the nine months ended September 30, 2017. A net loss of $0.1 million and $0.2 million was recognized during the three and nine months ended September 30, 2016, respectively. Gains and losses on these contracts are recorded in net other expense (income) and net interest expense in the Unaudited Condensed Consolidated Statements of Operations and are offset by losses and gains on the related hedged items.  The fair value of the Company’sCompany's derivative instruments outstanding as of September 30, 2017March 31, 2018 was immaterial.
15

The notional amounts of the Company’sCompany's derivative instruments outstanding were as follows (in thousands):

 September 30, 2017  December 31, 2016  March 31, 2018  December 31, 2017 
Derivatives not designated as hedges          
Foreign exchange contracts $5,169  $4,541  $3,160  $3,979 
Total derivatives not designated as hedges $5,169  $4,541  $3,160  $3,979 

12.  Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In 2015, the FASB deferred the effective date of ASU No. 2014-09 by one year. In 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations, ASU No. 2016-10, Identifying Performance Obligations and Licensing, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, all of which further amended ASU No. 2014-09. These new updates are to become effective for the Company on January 1, 2018.  The updates permit the use of either the retrospective or modified retrospective transition method. The Company will adopt the standard on January 1, 2018 using the modified retrospective method and will apply the guidance only to the most current period presented in the consolidated financial statements and only on contracts that are not completed as of the date of initial application. The cumulative effect of initially applying the standard will be recognized as an adjustment to the opening balance of retained earnings within stockholders’ equity. The Company continues to evaluate the effect that ASU No. 2014-09 and its amendments will have on its consolidated financial statements and disclosures. Specifically, the Company is evaluating provisions which could have a meaningful impact to the Company in relation to distinguishing performance obligations, variable consideration, timing of software and hardware revenue recognition and principal versus agent considerations, among others. Due to the complexity of the new standard and the nature of the Company’s contracts, the actual revenue recognition treatment required under the new standard may vary and will depend on contract-specific terms. The Company expects to complete its assessment of the impact of adoption during 2017.14. Subsequent Events

In February 2016,Acquisition of Southport Services Group

On April 2, 2018, the FASBCompany acquired substantially all of the assets of Southport Services Group, LLC, a Virginia limited liability company ("Southport"), pursuant to the terms of an Asset Purchase Agreement.  The Asset Purchase Agreement provided for approximately $11.3 million of cash to be paid at closing, subject to a net working capital adjustment, approximately 153,000 shares of Company common stock to be issued ASU No. 2016-02, Leases, which supersedes ASC Topic 840, Leases, and creates a new topic, ASC Topic 842, Leases. This update requires lessees to recognize a lease liabilityat closing and a lease assetmaximum potential payout for all leases, including operating leases, with a term greater than 12additional revenue and earnings-based contingent consideration of $6.6 million, which may be realized by Southport twelve months on its balance sheet.after the closing date of the acquisition. The update alsoacquisition of Southport expands the required quantitativeCompany's expertise in business intelligence and qualitative disclosures surrounding leases. This update isdata warehousing services.

Goodwill and intangible assets are expected to become effectivebe recorded on the Consolidated Balance Sheet from the acquisition of Southport. As of May 1, 2018, the initial accounting for the Company on January 1, 2019, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after,business combination has not been completed, including the beginningmeasurement of the earliest comparative period presented in the financial statements. While the Company is currently assessing the impact ASU No. 2016-02 will have on its consolidated financial statements, the Company expects the primary impact upon adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancellable operating leases on its consolidated balance sheets resulting in the recording of right of usecertain intangible assets and lease obligations. Current minimum commitments under noncancellable operating leases are disclosed in Note 5, Commitments and Contingencies.goodwill. Acquisition costs for the three months ended March 31, 2018  were $0.3 million.

In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. This update eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU No. 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. This update is to become effective for the Company on January 1, 2018 and requires using a retrospective approach. The Company elected to early adopt this update retrospectively on January 1, 2017 since the Company was already in compliance with the new standard.  The adoption of ASU No. 2016-15 did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. This update eliminates Step 2 from the goodwill impairment test which compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. ASU No. 2017-04 does not make any changes to the impairment indicators or aspects of the qualitative assessment. This update is to become effective for the Company on January 1, 2020 and requires using a prospective approach. Early adoption is permitted beginning with interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017. The Company elected to early adopt this update prospectively on January 1, 2017. The adoption of ASU No. 2017-04 did not have an impact on the Company’s consolidated financial statements.
1618

Item 2. Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations

Statements made in this Form 10-Q, including without limitation this Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations, other than statements of historical information, are forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"). These forward-looking statements may sometimes be identified by such words as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”"may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or “continue”"continue" or the negative of those words and other comparable words. We believe that it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K previously filed with the SEC and elsewhere in this Form 10-Q. We are under no duty to update any of the forward-looking statements after the date of this Form 10-Q to conform these statements to actual results. For additional information, see the “Special"Special Note Regarding Forward-Looking Statements”Statements" contained in this Form 10-Q.

Overview

We are an information technology and management consulting firm serving Forbes Global 2000® and other large enterprise companies with a primary focus on the United States. We help clients gain competitive advantage by using technology to: make their businesses more responsive to market opportunities; strengthen relationships with customers, suppliers, and partners; improve productivity; and reduce information technology costs. Our digital experience, business optimization and industry solutions enable these benefits by developing, integrating, automating, and extending business processes, technology infrastructure and software applications end-to-end within an organization and with key partners, suppliers, and customers. Our solutions include business intelligence andcustom applications, management consulting, commerce, analytics, commerce, content management, custom applications, platform implementations,business integration, portals and collaboration, business integration and APIs,customer relationship management, consulting, business process management, platform implementations, enterprise data and customer relationshipbusiness intelligence, enterprise performance management, enterprise mobile, cloud services, digital marketing, and DevOps, among others. Our solutions enable our clients to operate a real-time enterprise that dynamically adapts business processes and the systems that support them to meet the changing demands of an increasingly global, Internet-driven, and competitive marketplace.

Adoption of ASC Topic 606

As further detailed in Note 3, Recent Accounting Pronouncements, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606), on January 1, 2018 using the modified retrospective method. The most significant impact upon adoption was to third-party software and hardware revenue, which was primarily recorded on a gross basis as the principal in the transaction through December 31, 2017 and presented on a net basis as the agent beginning on January 1, 2018. Since the change in presentation was applied prospectively and prior period results were not restated, the adoption of the new standard resulted in significantly lower software and hardware revenues and costs for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The impact of adopting ASC Topic 606 to services revenues and costs was immaterial.

Services Revenues

Services revenues are derived from professional services that include developing, implementing, integrating, automating and extending business processes, technology infrastructure, and software applications. Professional services revenues are recognized over time as services are rendered. Most of our projects are performed on a time and materials basis, while a portion of our revenues is derived from projects performed on a fixed fee basis. Fixed fee engagements represented approximately 24% and 25% for the three and nine months ended September 30, 2017 compared to 23% and 21% for the three and nine months ended September 30, 2016, respectively. The increase in fixed fee revenues is primarily attributable to an organic increase in fixed fee engagements overall.  For time and material projects, revenues are recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the established billing rates. For fixed fee contracts, revenues are recognized and billed by multiplying the established fixed rate per time period by the number of time periods elapsed. For fixed fee percent complete projects, revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours. Amounts invoicedFixed fee percent complete engagements represented approximately 8% of our services revenues for each of the three months ended March 31, 2018 and collected in excess of revenues recognized are classified as deferred revenues. In conjunction with services provided, we occasionally receive referral fees under partner programs. These referral fees are recognized when earned and recorded within services revenues. 2017. On most projects, we are also reimbursed for out-of-pocket expenses including travel and other project-related expenses. These reimbursements are included as a component of revenues.the transaction price of the respective professional services contract. The aggregate amount of reimbursed expenses will fluctuate depending on the location of our clients, the total number of our projects that require travel, and whether our arrangements with our clients provide for the reimbursement of such expenses. In conjunction with services provided, we occasionally receive referral fees under partner programs. These referral fees are recognized at a point in time when earned and recorded within services revenues.

Software and Hardware Revenues

Software and hardware revenues are derived from sales of third-party software and hardware resales, in which we are considered the agent, and sales of internally developed software, and hardware.in which we are considered the principal. Revenues from sales of third-party software and hardware are generallyrecorded on a net basis, while revenues from internally developed software sales are recorded on a gross basis provided that we act as a principal in the transaction. Revenues from sales of third-party software-as-a-service arrangements where we are not the primary obligor are recorded on a net basis. Software and hardware revenues are expected to fluctuate depending on our clients’clients' demand for these products.

If we enter into contracts for the sale of services and software or hardware, management evaluates whether each element should be accounted for separately by considering the following criteria: (1) whether the deliverables have value to the client on a stand-alone basis; and (2) whether delivery or performance of the undelivered item or items is considered probable and substantially in our control (only if the arrangement includes a general right of return related to the delivered item). Further, for sales of software and services, management also evaluates whether the services are essential to the functionality of the software and whether there is fair value evidence for each deliverable. If management concludes that the separation criteria are met, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of our multiple element arrangements meet these criteria and are accounted for separately, with the arrangement consideration allocated among the deliverables using vendor specific objective evidence of the selling price. As a result, we generally recognize software and hardware sales upon delivery to the customer and services consistent with the policies described herein.
17

Further, delivery of software and hardware sales, when sold contemporaneously with services, can generally occur at varying times depending on the specific client project arrangement. Delivery of services generally occurs over a period of time consistent with the timeline as outlined in the client contract.
 
There are no significant cancellation or termination-type provisions for our software and hardware sales. Contracts for our professional services provide for a general right, to the client or us, to cancel or terminate the contract within a given period of time (generally 10 to 30 days’days' notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.

19
Cost of RevenuesRevenue

Cost of revenues consists of costs of services and software and hardware costs, and reimbursable expenses.costs.  Costs of services consists primarily of cash and non-cash compensation and benefits (including bonuses and non-cash compensation related to equity awards), costs associated with subcontractors, reimbursable expenses and other unreimbursed project-related expenses. Cost of revenues does not include depreciation of assets used in the production of revenues which are primarily personal computers, servers, and other information technology related equipment. Upon adoption of ASU No. 2014-09 on January 1, 2018, sales of third party software and hardware were presented on a net basis, and as such, third-party software and hardware costs are no longer presented within cost of revenue.

Gross Margins

Our gross margins forcost of services areas a percentage of services revenues is affected by the utilization rates of our professionals (defined as the percentage of our professionals’professionals' time billed to clients divided by the total available hours in the respective period), the salaries we pay our professionals, and the average billing rate we receive from our clients. If a project ends earlier than scheduled, we retain professionals in advance of receiving project assignments, or if demand for our services declines, our utilization rate will decline and adversely affect our gross margins. Gross margin percentages of third-party software and hardware sales (excluding internally developed software) are typically lower than gross margin percentages for services, and the mixcost of services and software and hardware foras a particular period can significantly impact our total combined gross margin percentage for such period. In addition, gross margin for software and hardware sales can fluctuate due to pricing and other competitive pressures.
of services revenues.

Selling, General, and Administrative Expenses

Selling, general and administrative (“("SG&A”&A") expenses are primarily composed of sales-related costs, general and administrative salaries, stock compensation expense, office costs, recruiting expense, variable compensation costs, marketing costs and other miscellaneous expenses. We have access to sales leads generated by our software vendors, most notably IBM, Oracle and Microsoft, whose products we use to design and implement solutions for our clients. These relationships enable us to optimize our selling costs and sales cycle times and increase win rates through leveraging our partners’partners' marketing efforts and endorsements.

Plans for Growth and Acquisitions

Our goal is to continue to build one of the leading information technology consulting firms by expanding our relationships with existing and new clients and through the continuation of our disciplined acquisition strategy. Our future growth plan includes expanding our business with a primary focus on customers in the United States, both organically and through acquisitions. We also intend to further leverage our existing offshore capabilities to support our future growth and provide our clients flexible options for project delivery.

When analyzing revenue growth by base business compared to acquired companies in the Results of Operations section below, revenue attributable to base business includes revenue from an acquired company that has been owned for a full four quarters after the date of acquisition.

18
Results of Operations

Three months ended September 30, 2017March 31, 2018 compared to three months ended September 30, 2016March 31, 2017

Revenues. Total revenues increased 4%9% to $123.7$120.9 million for the three months ended September 30, 2017March 31, 2018 from $119.2$111.0 million for the three months ended September 30, 2016.March 31, 2017.

 
Financial Results
(in thousands)
 
Explanation for Increases (Decreases) Over Prior Year Period
(in thousands)
  
Financial Results
(in thousands)
  
Explanation for Increases (Decreases) Over Prior Year Period
(in thousands)
 
 Three Months Ended September 30, 
Total
Increase (Decrease) Over
Prior Year Period
 
Increase Attributable to
Acquired Companies
 
Decrease
Attributable to
Base Business
  Three Months Ended March 31,  
Total Increase/ (Decrease) Over
Prior Year Period
  
Increase Attributable to
Acquired Companies
  
Increase/ (Decrease)
Attributable to
Base Business
 
 2017  2016  2018  2017 
Services revenues $114,144  $102,958  $11,186  $12,432  $(1,246) $120,196  $104,021  $16,175  $9,021  $7,154 
Software and hardware revenues  6,323   11,184   (4,861)  -   (4,861)  746   6,998   (6,252)   -   (6,252) 
Reimbursable expenses  3,271   5,011   (1,740)  118   (1,858)
Total revenues $123,738  $119,153  $4,585  $12,550  $(7,965) $120,942  $111,019  $9,923  $9,021  $902 

Services revenues increased 11%16% to $114.1$120.2 million for the three months ended September 30, 2017March 31, 2018 from $103.0$104.0 million for the three months ended September 30, 2016March 31, 2017.. Services revenues attributable to our base business decreasedincreased by $1.2$7.2 million andwhile services revenues attributable to acquired companies increased by $12.4was $9.0 million, resulting in a total increase of $11.2$16.2 million.

Software and hardware revenues decreased 43%89% to $6.3$0.7 million for the three months ended September 30, 2017March 31, 2018 from $11.2$7.0 million for the three months ended September 30, 2016, primarily dueMarch 31, 2017, as a result of the net presentation of third party software and hardware sales upon adoption of ASU No. 2014-09.

20
Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost of revenues increased 6% to a decrease in initial and renewal software license sales in our base business. Our customers are increasingly converting to software-as-a-service arrangements, which are recorded on a net basis. Reimbursable expenses decreased 35% to $3.3$79.2 million for the three months ended September 30, 2017March 31, 2018 from $5.0$74.9 million for the three months ended September 30, 2016, primarily as a result of a higher mix of projects performed in our offices. We do not realize any profit on reimbursable expenses.

March 31, 2017.  Cost of Revenues. Cost of revenues decreased 2%services increased 15% to $81.1$79.2 million for the three months ended September 30, 2017March 31, 2018 from $82.7$69.0 million for the three months ended September 30, 2016. CostMarch 31, 2017 primarily due to higher headcount in response to higher services revenue. Services costs as a percent of services increased 8%revenues decreased to $72.7 million65.9% for the three months ended September 30, 2017March 31, 2018 from $67.5 million66.3% for the three months ended September 30, 2016,March 31, 2017 primarily asdriven by improved utilization, partially offset by a result of acquisitions.  Software and hardware costsdecline in the average bill rate. The average bill rate for our professionals decreased 49% to $5.2 million$125 per hour for the three months ended September 30, 2017March 31, 2018 from $10.2 million for the three months ended September 30, 2016, as a result of the decrease in software license sales.

Gross Margin. Gross margin increased 17% to $42.6 million for the three months ended September 30, 2017 from $36.4 million for the three months ended September 30, 2016. Gross margin as a percentage of revenues increased to 34.4% for the three months ended September 30, 2017 from 30.6% for the three months ended September 30, 2016, primarily due to an increase in services gross margin and higher software and hardware gross margins. Services gross margin, excluding reimbursable expenses, increased to $41.4 million for the three months ended September 30, 2017 from $35.4 million for the three months ended September 30, 2016. Services gross margin, excluding reimbursable expenses, as a percentage of revenues increased to 36.3% for the three months ended September 30, 2017 from 34.4% for the three months ended September 30, 2016, primarily driven by improved average bill rates and a favorable impact from recent acquisitions. The average bill rate of our professionals was $127 per hour for the three months ended September 30,March 31, 2017 comparedprimarily due to $123 per houra decrease in the average bill rate of subcontractors and offshore employees. Software and hardware costs decreased to zero for the three months ended September 30, 2016.March 31, 2018 from $6.0 million for the three months ended March 31, 2017, as a result of the net presentation of third party software and hardware sales upon adoption of ASU No. 2014-09.

Selling, General and Administrative. SG&A expenses increased 11%12% to $27.1$28.7 million for the three months ended September 30, 2017March 31, 2018 from $24.5$25.7 million for the three months ended September 30, 2016,March 31, 2017, primarily due to acquisitions completed during the fourth quarter of 2016increases in bonus costs, salaries, recruiting and the first half of 2017.training costs.  SG&A expenses, as a percentage of revenues, increased to in21.9%creased to 23.8% for the three months ended September 30, 2017March 31, 2018 from 20.5%23.1% for the three months ended September 30, 2016.March 31, 2017, primarily due to lower revenues as a result of the net presentation of third party software and hardware sales upon adoption of ASU No. 2014-09.

Depreciation. Depreciation expense decreased 18% to $1.1$1.0 million for the three months ended September 30, 2017March 31, 2018 from $1.2$1.3 million for  the three months ended September 30, 2016.March 31, 2017. Depreciation expense as a percentage of revenues was 0.9% for the three months ended September 30, 2017March 31, 2018 and 1.0%1.1% for the three months ended September 30, 2016.March 31, 2017.

Amortization. Amortization expense increased 21%7% to $3.9 million for the three months ended September 30, 2017March 31, 2018 from $3.3$3.6 million for the three months ended September 30, 2016.March 31, 2017. The increase in amortization expense was due to the addition of intangible assets from the 2016 and 2017 acquisitions.Clarity acquisition in the second quarter of 2017.  Amortization expense as a percentage of revenues was 3.2% for the three months ended September 30, 2017March 31, 2018 and 2.7%3.3% for the three months ended September 30, 2016.March 31, 2017.

Acquisition Costs. Acquisition-related costs decreased to a negative $0.1 million for the three months ended September 30, 2017 fromwere $0.3 million for the three months ended September 30, 2016, as a result of adjustments to accruals related to recent acquisition activity.March 31, 2018 and $0.5 million for the three months ended March 31, 2017
. 19Costs were incurred for legal, accounting, tax, investment bank and advisor fees, and valuation services performed by third parties in connection with merger and acquisition-related activities.

Adjustment to Fair Value of Contingent Consideration. An adjustment of $0.4$1.0 million was recorded during the three months ended September 30, 2017,March 31, 2018 which represents the net impact of the fair market value adjustment to the RASClarity revenue and earnings-based contingent consideration liability partially offset bybased on favorable performance compared to the original estimates in addition to accretion. An adjustment of $0.2 million was recorded during the three months ended March 31, 2017 for the accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisition of Enlighten, Bluetube, LLC, a Georgia limited liability company, and Clarity. An adjustment of $0.9 million was recorded during the three months ended September 30, 2016 which represents the net impact of the fair market value adjustment to the Enlighten revenue and earnings-based contingent consideration liability partially offset by the accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisition of Market Street.RAS.

Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. Our effective tax rate increaseddecreased to 33.3%23.2% for the three months ended September 30, 2017March 31, 2018 from 26.9%40.2% for the three months ended September 30, 2016.March 31, 2017. The increase in the effective rate for the three months ended September 30, 2017 is primarily due to a favorable impact in the prior year quarter related to a true-up of the research and development tax credit.

Nine months ended September 30, 2017 compared to nine months ended September 30, 2016

Revenues. Total revenues decreased 4% to $351.8 million for the nine months ended September 30, 2017 from $367.4 million for the nine months ended September 30, 2016.

  
Financial Results
(in thousands)
 
Explanation for Increases (Decreases) Over Prior Year Period
(in thousands)
 
  Nine Months Ended September 30, 
Total Decrease Over
Prior Year Period
 
Increase Attributable to
Acquired Companies
 
Decrease Attributable to
Base Business
 
  2017  2016 
Services revenues $319,825  $320,587  $(762) $22,431  $(23,193)
Software and hardware revenues  22,591   31,907   (9,316)  -   (9,316)
Reimbursable expenses  9,367   14,897   (5,530)  331   (5,861)
Total revenues $351,783  $367,391  $(15,608) $22,762  $(38,370)

Services revenues decreased to $319.8 million for the nine months ended September 30, 2017 from $320.6 million for the nine months ended September 30, 2016. Services revenues attributable to our base business decreased by $23.2 million and services revenues attributable to acquired companies increased by $22.4 million, resulting in a total decrease of $0.8 million.

Software and hardware revenues decreased 29% to $22.6 million for the nine months ended September 30, 2017 from $31.9 million for the nine months ended September 30, 2016, primarily due to a decrease in initial and renewal software license sales in our base business. Our customers are increasingly converting to software-as-a-service arrangements, which are recorded on a net basis. Reimbursable expenses decreased 37% to $9.4 million for the nine months ended September 30, 2017 from $14.9 million for the nine months ended September 30, 2016, primarily as a result of a higher mix of projects performed in our offices. We do not realize any profit on reimbursable expenses.

Cost of Revenues. Cost of revenues decreased 7% to $233.7 million for the nine months ended September 30, 2017 from $252.4 million for the nine months ended September 30, 2016. The decrease in cost of revenues is primarily related to software and hardware costs which decreased 31% to $18.9 million for the nine months ended September 30, 2017 from $27.3 million for the nine months ended September 30, 2016, as a result of the decrease in software license sales. Cost of services decreased 2% to $205.5 million for the nine months ended September 30, 2017 from $210.2 million for the nine months ended September 30, 2016, primarily due to lower headcount in our base business, partially offset by acquisitions.  

Gross Margin. Gross margin increased 3% to $118.1 million for the nine months ended September 30, 2017 from $115.0 million for the nine months ended September 30, 2016. Gross margin as a percentage of revenues increased to 33.6% for the nine months ended September 30, 2017 from 31.3% for the nine months ended September 30, 2016, primarily due to an increase in services gross margin and slightly higher software and hardware gross margins. Services gross margin, excluding reimbursable expenses, increased to $114.3 million for the nine months ended September 30, 2017 from $110.4 million for the nine months ended September 30, 2016. Services gross margin, excluding reimbursable expenses, as a percentage of revenues increased to 35.7% for the nine months ended September 30, 2017 from 34.4% for the nine months ended September 30, 2016, primarily due to cost reductions from lower headcount and higher offshore mix from base business and a favorable impact from recent acquisitions. The average bill rate of our professionals was $126 per hour for the nine months ended September 30, 2017 compared to $129 per hour for the nine months ended September 30, 2016.
20

Selling, General and Administrative. SG&A expenses increased 3% to $78.9 million for the nine months ended September 30, 2017 from $76.8 million for the nine months ended September 30, 2016, primarily due to acquisitions completed during the fourth quarter of 2016 and the first half of 2017.  SG&A expenses as a percentage of revenues increased to 22.4% for the nine months ended September 30, 2017 from 20.9% for the nine months ended September 30, 2016, primarily as a result of lower software revenues.

Depreciation. Depreciation expense was $3.6 million for each of the nine months ended September 30, 2017 and 2016. Depreciation expense as a percentage of revenues was 1.0% for each of the nine months ended September 30, 2017 and 2016.

Amortization. Amortization expense increased 12% to $11.1 million for the nine months ended September 30, 2017 from $9.9 million for the nine months ended September 30, 2016. The increase in amortization expense was due to the addition of intangible assets from the 2016 and 2017 acquisitions. Amortization expense as a percentage of revenues was 3.2% for the nine months ended September 30, 2017 and 2.7% for the nine months ended September 30, 2016.

Acquisition Costs. Acquisition-related costs increased to $1.3 million for the nine months ended September 30, 2017 from $0.7 million for the nine months ended September 30, 2016, primarily as a result of the acquisitions of RAS and Clarity. Costs were incurred for legal, accounting, tax, investment bank and advisor fees, and valuation services performed by third parties in connection with merger and acquisition-related activities.

Adjustment to Fair Value of Contingent Consideration. An adjustment of $0.8 million was recorded during the nine months ended September 30, 2017, which represents the net impact of the fair market value adjustments to the RAS and Bluetube revenue and  earnings-based contingent consideration liabilities in addition to the accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisition of Bluetube and Clarity. An adjustment of $1.8 million was recorded during the nine months ended September 30, 2016 which represents the net impact of the fair market value adjustments to the Enlighten revenue and earnings-based contingent consideration liability partially offset by the accretion of the fair value estimate for the revenue and earnings-based contingent consideration related to the acquisitions of Zeon and Market Street.

Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses. Our effective tax rate increased to 46.4% for the nine months ended September 30, 2017 from 31.0% for the nine months ended September 30, 2016. The increase in the effective rate is primarily due to the Company’s determination in the current year that the foreign earningspassage of the Company’s Chinese subsidiary were no longer permanently reinvested.2017 Tax Act, which lowered the U.S. corporate income tax rate beginning in 2018.

21
Liquidity and Capital Resources

Selected measures of liquidity and capital resources are as follows (in millions):

 
As of
September 30, 2017
  
As of
December 31, 2016
  
As of
March 31, 2018
  
As of
December 31, 2017
 
Cash, cash equivalents and investments (1) $2.4  $10.1 
Cash and cash equivalents (1) $5.5  $6.3 
Working capital (including cash and cash equivalents) (2) $76.8  $76.4  $77.9  $67.9 
Amounts available under credit facilities $60.0  $93.0  $68.7  $69.7 

(1) The balance at September 30, 2017March 31, 2018 includes $1.5$3.4 million held by our Canadian, Indian and United Kingdom subsidiaries which is not available to fund domestic operations unless the funds were repatriated.  We currently do not plan or foresee a need to repatriate such funds. The balance also includes $0.8 million in cash held in our Chinese subsidiary. During the second quarter ofyear ended December 31, 2017, the Company determined that the Chinese subsidiary’ssubsidiary's earnings were no longer permanently reinvested and repatriated additionala total of approximately $9.6 million in cash to the U.S. parent in the second and third quarters of 2017.  We may repatriate additional fundsSee Note 12, Income Taxes, in the Notes to Interim Unaudited Condensed Consolidated Financial Statements for a discussion of the Company's repatriation of earnings from the Company's Chinese subsidiary over time.

subsidiary.
(2) Working capital is total current assets less total current liabilities.

Net Cash Provided By Operating Activities

Net cash provided by operating activities for the ninethree months ended September 30, 2017March 31, 2018 was $30.1$4.1 million compared to $39.9$13.5 million for the ninethree months ended September 30, 2016.March 31, 2017.  For the ninethree months ended September 30,March 31, 2018, the primary components of operating cash flows were net income of $4.9 million, non-cash charges of $10.6 million and net operating asset investments of $11.4 million. For the three months ended March 31, 2017, the primary components of operating cash flows were net income of $12.1$2.7 million, plus net non-cash charges of $25.6$10.1 million and investments in net operating assetsasset reductions of $7.6$0.6 million. The primary components of operating cash flows for the nine months ended September 30, 2016 were net income of $16.8 million plus net non-cash charges of $22.6 million and reductions in net operating assets of $0.5 million.
21

Net Cash Used In Investing Activities

During the ninethree months ended September 30,March 31, 2018, we used $1.0 million to purchase property and equipment and to develop certain software. During the three months ended March 31, 2017, we used $3.3$0.8 million to purchase property and equipment and to develop certain software and $37.9$7.1 million for the acquisition of RAS and Clarity. RAS.During the nine months ended September 30, 2016, we used $5.3 million to purchase property and equipment and develop certain software.  We also used $0.9 million to purchase short-term investments and $0.3 million for a net working capital settlement related to a 2015 acquisition.

Net Cash Provided By (Used In)Used In Financing Activities

During the ninethree months ended September 30, 2017, March 31, 2018, we drew down $223.5$57.5 million from our line of credit and we received proceeds from sales of stock through the Employee Stock Purchase Plan of $0.1 million.credit. We repaid $190.5$56.5 million on our line of credit, used $24.0$2.1 million to repurchase shares of our common stock through the stock repurchase program and used $2.5$2.9 million to remit taxes withheld as part of a net share settlement of restricted stock vesting. During the three months ended March 31, 2017, we drew down$66.0 million from our line of credit.  We repaid $59.5 million on our line of credit, used $8.1 million to repurchase shares of our common stock through the stock repurchase program and used $2.3 million to remit taxes withheld as part of a net share settlement of restricted stock vesting.  We also paid $3.3$1.0 million to settle the contingent consideration for the purchase of Market Street, Enlighten and Bluetube and made Street.$0.4 million in payments for credit facility financing fees. During the nine months ended September 30, 2016, we drew down $153.0 million from our line of credit and we received proceeds from sales of stock through the Employee Stock Purchase Plan of $0.2 million. We repaid $181.0 million on our line of credit, used $2.1 million to settle the contingent consideration for the purchase of Zeon, used $2.5 million to remit taxes withheld as part of a net share settlement of restricted stock vesting and made $0.2 million in payments for credit facility financing fees.

Availability of Funds from Bank Line of Credit Facility

On June 9, 2017, the Companywe entered into a Credit Agreement, as amended (the “Credit Agreement”"Credit Agreement"), with Wells Fargo Bank, National Association, as administrative agent and the other lenders parties thereto. The Credit Agreement replaces the Second Amended and Restated Credit Agreement dated as of July 13,31, 2013 between the Company, Silicon Valley Bank and the other lenders and signatories thereto (the “Prior"Prior Credit Agreement”Agreement"). The new credit facility was used to repay amounts due under the Prior Credit Agreement and will be used for working capital and general corporate purposes.  In connection with the new agreement, the Company wrote off $0.2 million in unamortized credit facility fees associated with the Prior Credit Agreement, which was included in “Net interest expense” on the Unaudited Condensed Consolidated Statements of Operations during the nine months ended September 30, 2017. TheThe Credit Agreement provides for revolving credit borrowings up to a maximum principal amount of $125.0 million, subject to a commitment increase of $75.0 million. All outstanding amounts owed under the Credit Agreement become due and payable no later than the final maturity date of June 9, 2022.

The Credit Agreement also allows for the issuance of letters of credit in the aggregate amount of up to $10.0 million at any one time; outstanding letters of credit reduce the credit available for revolving credit borrowings. As of September 30, 2017,March 31, 2018, the Company had noone outstanding lettersletter of credit.credit for $0.3 million. Substantially all of the Company’sour assets are pledged to secure the credit facility.

Borrowings under the Credit Agreement bear interest at the Company’sour option of the prime rate (4.25%(4.75% on September 30, 2017)March 31, 2018) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (1.23%(1.88% on September 30, 2017)March 31, 2018) plus a margin ranging from 1.00% to 1.75%.  The Company incursWe incur an annual commitment fee of  0.15% to 0.20% on the unused portion of the line of credit. The additional margin amount and annual commitment fee areis dependent on the level of outstanding borrowings. As of September 30, 2017, the CompanyMarch 31, 2018, we had $60.0$68.7 million of unusedmaximum borrowing capacity.

At September 30, 2017,March 31, 2018, the Company was in compliance with all covenants under the Credit Agreement.


22
Stock Repurchase Program

Prior to 2017,2018, our Board of Directors authorized the repurchase of up to $110.0$135.0 million of our common stock. On February 21, 2017,20, 2018, our Board of Directors authorized the expansion of our stock repurchase program by authorizing the repurchase of up to an additional $25.0 million of our common stock for a total repurchase program of $135.0$160.0 million and extended the expiration date of the program from December 31, 20172018 to December 31, 2018.2019. The program could be suspended or discontinued at any time, based on market, economic, or business conditions. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, and other factors.

From time to time, we establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which we make a portion of our stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors.

Since the program’sprogram's inception on August 11, 2008, we have repurchased approximately $126.3$137.1 million (11.9(12.5 million shares) of our outstanding common stock through September 30, 2017.
22
March 31, 2018.

Contractual Obligations

There were no material changes outside the ordinary course of our business in lease obligations in the first ninethree months of 2017. 2018. See Note 5, 7, Commitments and Contingencies for further description of our contractual obligations.

As of September 30, 2017,March 31, 2018, there was $65.0$56.0 million outstanding under the Credit Agreement as compared to $32.0$55.0 million outstanding under the Prior Credit Agreement as of  December 31, 2016.2017. The amounts are classified as “Long-term debt”"Long-term debt" within the Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2018 (unaudited) and December 31, 20162017 and will become due and payable no later than the final maturity date of June 9, 2022.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Conclusion

Of the total cash and cash equivalents reported on the Condensed Consolidated Balance Sheet as of September 30, 2017March 31, 2018 (unaudited) of $2.4$5.5 million, approximately $1.5$3.4 million was held by the Company’sCompany's Canadian, Indian and United Kingdom subsidiaries and is considered to be indefinitely reinvested in those operations. The Company is able to fund its liquidity needs outside of these subsidiaries, primarily through cash flows generated by domestic operations and our credit facility. Therefore, the Company has no current plans to repatriate cash from these foreign subsidiaries in the foreseeable future. However, if these funds were repatriated, the amount remitted would be subject to U.S. income taxes and income and withholding taxes applicable under each foreign country’s laws. As of September 30, 2017,March 31, 2018, the estimatedaggregate unremitted earnings of the Company's foreign subsidiaries for which a deferred income tax impact of repatriation would haveliability has not been recorded was approximately $0.1$3.4 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.2 million.  See Note 10,12, Income Taxes, in the Notes to Interim Unaudited Condensed Consolidated Financial Statements for a discussion of the Company’sCompany's repatriation of earnings from the Company’sCompany's Chinese subsidiary.

We believe that the currently available funds, access to capital from our credit facility, and cash flows generated from operations will be sufficient to meet our working capital requirements and other capital needs for the next 12 months.

Critical Accounting Policies

Our accounting policies are fully described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2, Summary of Significant Accounting Policies, to our Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016.2017 and Note 4, Revenue, to our Interim Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the three months ended March 31, 2018. We believe our most critical accounting policies include revenue recognition, accounting for goodwill and intangible assets, purchase accounting accounting for stock-based compensation,and related fair value measurements and accounting for income taxes.

23
Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks related to changes in foreign currency exchange rates and interest rates. We believe our exposure to market risks is immaterial.

Exchange Rate Sensitivity

We are exposed to market risks associated with changes in foreign currency exchange rates because we generate a portion of our revenues and incur a portion of our expenses in currencies other than the U.S. dollar.  As of September 30, 2017, March 31, 2018, we were exposed to changes in exchange rates between the U.S. dollar and the Canadian dollar, Chinese Yuan, Indian Rupee, British Pound, and Euro. We hedge material foreign currency exchange rate exposures when feasible using forward contracts. These instruments are subject to fluctuations in foreign currency exchange rates and credit risk. Credit risk is managed through careful selection and ongoing evaluation of the financial institutions utilized as counter parties. Refer to Note 11,13, Financial Instruments, in the Notes to Interim Unaudited Condensed Consolidated Financial Statements for further discussion.

Interest Rate Sensitivity

As of September 30, 2017,March 31, 2018, there was $65.0$56.0 million outstanding and $60.0$68.7 million of available borrowing capacity under our credit facility. Our interest expense will fluctuate as the interest rate for the line of credit floats based, at our option, on the prime rate plus a margin or the one-month LIBOR rate plus a margin. Based on the $65.0$56.0 million outstanding on the line of credit as of September 30, 2017,March 31, 2018, an increase in the interest rate of 100 basis points would add $650,000$560,000 of interest expense per year, which is not considered material to our financial position or results of operations.
23

We had unrestricted cash and cash equivalents totaling $2.4$5.5 million at September 30, 2017March 31, 2018 and $10.1$6.3 million at December 31, 2016.2017. The unrestricted cash and cash equivalents are primarily held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future interest income.

Item 4.  Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’sCompany's reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’sSEC's rules and forms, and that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer of the Company, as appropriate, to allow timely decisions regarding required disclosure. The Company’sCompany's management, with the participation of the Company’sCompany's principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’sCompany's disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company’sCompany's principal executive and principal financial officers have determined that the Company’sCompany's disclosure controls and procedures were effective.

As part of the adoption of ASC Topic 606, the Company implemented changes to our control activities related to revenue recognition to ensure adequate evaluation of our contracts and proper assessment of the impact of the new accounting standard.  There waswere no changesignificant changes in the Company’sCompany's internal control over financial reporting due to the adoption of the new standard, and no other changes in our internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the three months ended September 30, 2017,March 31, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.

24

PART II. OTHER INFORMATION

Item 1A.  Risk Factors

In evaluating all forward-looking statements, you should specifically consider various risk factors that may cause actual results to vary from those contained in the forward-looking statements. Our risk factors are included in our Annual Report on Form 10-K for the year ended December 31, 2016,2017, as filed with the SEC on  February 28, 2017March 1, 2018 and available at www.sec.gov. There has been no material change to our risk factors since the filing of such report.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Securities

Stock Repurchase Program

Prior to 2017,2018, our Board of Directors authorized the repurchase of up to $110.0$135.0 million of our common stock. On February 21, 2017,20, 2018, our Board of Directors authorized the expansion of our stock repurchase program by authorizing the repurchase of up to an additional $25.0 million of our common stock for a total repurchase program of $135.0$160.0 million and extended the expiration date of the program from December 31, 2017 to December 31, 2018.2019. The program could be suspended or discontinued at any time, based on market, economic, or business conditions. The timing and amount of repurchase transactions will be determined by our management based on its evaluation of market conditions, share price, and other factors.

From time to time, we establish a written trading plan in accordance with Rule 10b5-1 of the Exchange Act, pursuant to which we make a portion of our stock repurchases. Additional repurchases will be at times and in amounts as the Company deems appropriate and will be made through open market transactions in compliance with Rule 10b-18 of the Exchange Act, subject to market conditions, applicable legal requirements, and other factors.

Since the program’sprogram's inception on August 11, 2008, we have repurchased approximately $126.3$137.1 million (11.9(12.5 million shares) of our outstanding common stock through September 30, 2017.March 31, 2018.

Period 
Total Number of
Shares Purchased
  
Average Price
Paid Per Share (1)
  
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
  
Approximate Dollar Value
of Shares that May Yet
Be Purchased Under
the Plans or Programs
 
Beginning balance as of June 30, 2017  11,753,798  $10.49   11,753,798  $11,707,528 
July 1-31, 2017  -   -   -  $11,707,528 
August 1-31, 2017  172,740   17.60   172,740  $8,666,467 
September 1-30, 2017  -   -   -  $8,666,467 
Ending balance as of September 30, 2017  11,926,538  $10.59   11,926,538     
Period 
Total Number of
Shares Purchased
  
Average Price
Paid Per Share (1)
  
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
  
Approximate Dollar Value
of Shares that May Yet
Be Purchased Under
the Plans or Programs
 
Beginning balance as of December 31, 2017  12,382,569  $10.90   12,382,569  $17,691 
January 1-31, 2018  -   -   -  $17,691 
February 1-28, 2018  -   -   -  $25,017,691 
March 1-31, 2018  90,000   23.66   90,000  $22,888,420 
Ending balance as of March 31, 2018  12,472,569  $10.99   12,472,569     

(1)Average price paid per share includes commission.

Item 5. Other Information

Davis Employment Agreement.None.

On October 31, 2017, we entered into an amended and restated employment agreement with Jeffrey S. Davis, our Chairman, President and Chief Executive Officer (the “Davis Employment Agreement”), which amended and restated his previous employment agreement with certain changes. The Davis Employment Agreement is effective as of January 1, 2018 and will expire on December 31, 2020.  Our previous employment agreement with Mr. Davis was effective January 1, 2015 and was set to expire on December 31, 2017. The Davis Employment Agreement has the following terms:

·an annual salary of $600,000 that may be increased by the Board of Directors or its Compensation Committee from time to time;
·an annual performance bonus of up to 300% of Mr. Davis’s annual salary in the event we achieve certain performance targets;
·entitlement to participate in such insurance, disability, health, and medical benefits and retirement plans or programs as are from time to time generally made available to our executive employees, pursuant to our policies and subject to the conditions and terms applicable to such benefits, plans or programs;
· death, disability, severance, and change of control benefits upon Mr. Davis’s termination of employment or change of control of the Company, including a severance payment of two years’ base salary, one year’s target bonus, and one year of benefits (and vesting of all unvested options and restricted shares)  if Mr. Davis is terminated without cause or under a constructive termination, as defined in the Davis Employment Agreement; and
·100% of all unvested options and restricted shares vest upon a change in control.

25
    Mr. Davis has agreed to refrain from competing with the Company for a period of three years following the termination of his employment. Mr. Davis’s compensation is subject to review and adjustment on an annual basis in accordance with our compensation policies as in effect from time to time.

The foregoing is a summary of the material terms of the Davis Employment Agreement only, and is qualified in its entirety by the complete terms of the Davis Employment Agreement, filed as an exhibit to this Report on Form 10-Q.

Martin Employment Agreement.

On October 31, 2017, we entered into an amended and restated employment agreement with Paul E. Martin, our Chief Financial Officer (the “Martin Employment Agreement”), which amended and restated his previous employment agreement with certain changes. The Martin Employment Agreement is effective as of January 1, 2018 and will expire on December 31, 2020.  Our previous employment agreement with Mr. Martin was effective January 1, 2015 and was set to expire on December 31, 2017. The Martin Employment Agreement has the following terms:

·an annual salary of $350,000 that may be increased by the Chief Executive Officer, with approval by the Board of Directors or its Compensation Committee, from time to time;
·an annual performance bonus of up to 120% of Mr. Martin’s annual salary in the event we achieve certain performance targets;
·entitlement to participate in such insurance, disability, health, and medical benefits and retirement plans or programs as are from time to time generally made available to our executive employees, pursuant to our policies and subject to the conditions and terms applicable to such benefits, plans or programs;
·death, disability, severance, and change of control benefits upon Mr. Martin’s termination of employment or change of control of the Company, including a severance payment of one year’s base salary, one year of benefits and one year of vesting of options and restricted stock if Mr. Martin is terminated without cause or under a constructive termination, as defined in the Martin Employment Agreement; and
·50% of all unvested options and restricted shares vest upon a change in control.

    Mr. Martin has agreed to refrain from competing with the Company for a period of three years following the termination of his employment. Mr. Martin’s compensation is subject to review and adjustment on an annual basis in accordance with our compensation policies as in effect from time to time.

The foregoing is a summary of the material terms of the Martin Employment Agreement only, and is qualified in its entirety by the complete terms of the Martin Employment Agreement, filed as an exhibit to this Report on Form 10-Q.

Item 6.  Exhibits
The exhibits filed as part of this Report on Form 10-Q are listed in the following Exhibit Index.
26

EXHIBITS INDEX

Exhibit NumberDescription
3.1
Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Registration Statement on Form SB-2 (File No. 333-78337) declared effective on July 28, 1999 by the Securities and Exchange Commission and incorporated herein by reference
3.2
Certificate of Amendment to Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Form 8-A (File No. 000-51167) filed with the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 on February 15, 2005 and incorporated herein by reference
3.3
Certificate of Amendment to Certificate of Incorporation of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Registration Statement on Form S-8 (File No. 333-130624) filed on December 22, 2005 and incorporated herein by reference
3.4
Certificate of Amendment to Certificate of Incorporation of Perficient, Inc.., previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on Form 10-Q (File No. 001-15169) filed August 3, 2017 and incorporated herein by reference
3.5
Amended and Restated Bylaws of Perficient, Inc., previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 001-15169) filed March 7, 2013 and incorporated herein by reference
4.1
Specimen Certificate for shares of Perficient, Inc. common stock, previously filed with the Securities and Exchange Commission as an Exhibit to our Quarterly Report on Form 10-Q (File No. 001-15169) filed May 7, 2009 and incorporated herein by reference
10.1
10.1First Amendment to Credit Agreement*†, by and among Perficient, Inc. the Subsidiary Guarantors, the Lenders, and Wells Fargo Bank, National Association, previously filed with the Securities and Exchange Commission as an Exhibit to our Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 001-15169) filed March 1, 2018 and incorporated herein by reference
Form of Restricted Stock Award Agreement (Non-Employee Director Award)
10.2*†
10.2†		Form of Restricted Stock Award and Non-Competition Agreement (Employee Grant)
10.3*†
Form of Restricted Stock Unit Award and Non-Competition Agreement (Employee Grant)
10.4*†
Second Amended and Restated Employment Agreement with Chief Executive Officer of Perficient, Inc., effectivepreviously filed with the Securities and Exchange Commission as of January 1, 2018an Exhibit to our Quarterly Report on Form 10-Q (File No. 001-15169) filed November 2, 2017 and incorporated herein by reference
10.3†
10.5*†
Second Amended and Restated Employment Agreement with Chief Financial Officer of Perficient, Inc., effectivepreviously filed with the Securities and Exchange Commission as of January 1, 2018an Exhibit to our Quarterly Report on Form 10-Q (File No. 001-15169) filed November 2, 2017 and incorporated herein by reference
31.1*
Certification by the Chief Executive Officer of Perficient, Inc. as required by Section 302 of the Sarbanes-Oxley Act of 2002
31.2*
Certification by the Chief Financial Officer of Perficient, Inc. as required by Section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Certification by the Chief Executive Officer and Chief Financial Officer of Perficient, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*
The following financial information from Perficient, Inc.’s's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017,March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2018 (Unaudited) and December 31, 2016,2017, (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, (iv) Unaudited Condensed Consolidated Statement of Shareholders’Shareholders' Equity for the ninethree months ended September 30, 2017,March 31, 2018, (v) Unaudited Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, and (vi) the Notes to Interim Unaudited Condensed Consolidated Financial Statements
†Identifies an Exhibit that consists of or includes a management contract or compensatory plan or arrangement. 
*Filed herewith.
**Included but not to be considered “filed”"filed" for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section.

2726
SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 PERFICIENT, INC.
   
Date: November 2, 2017May 1, 2018By:
/s/ Jeffrey S. Davis
 Jeffrey S. Davis
 
Chief Executive Officer (Principal Executive Officer)

Date: November 2, 2017May 1, 2018By:
/s/ Paul E. Martin
 Paul E. Martin
 
Chief Financial Officer (Principal Financial Officer)

2827