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 SeptemberJune 30, 2017,2020, the Company had notwo outstanding letters of credit.credit for $0.3 million. Substantially all of the Company’s assets are pledged to secure the credit facility.
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”) 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”) 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 SeptemberJune 30, 2017,2020, the Company was in compliance with all covenants under the Credit Agreement.
14
Convertible Senior Notes due 2023
On September 11, 2018, the Company issued $143.8 million aggregate principal amount of 2.375% Convertible Senior Notes Due 2023 (the “Notes”) in a private placement to qualified institutional purchasers pursuant to an exemption from registration provided by Section 4(a)(2) and Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The net proceeds from the offerings, after deducting the initial purchasers’ discount and issuance costs of $4.4 million, were $139.4 million. The Company used (i) $49.0 million of the net proceeds to pay down the Company’s revolving credit facility, (ii) $38.8 million of the net proceeds to repurchase 1.3 million shares of the Company’s common stock concurrently with the pricing of the Notes offering in privately negotiated transactions and (iii) $8.6 million of the net proceeds to fund the
cost of entering into the Notes Hedges (as defined below), after such cost was partially offset by the proceeds that the Company received from entering into the Notes Warrants (as defined below). The remaining proceeds were used for working capital or other general corporate purposes.
The Notes bear interest at a rate of 2.375% per year. Interest is payable in cash on March 15 and September 15 of each year, with the first payment made on March 15, 2019. The Notes mature on September 15, 2023, unless earlier converted, redeemed or repurchased in accordance with their terms prior to such date. The initial conversion rate is 26.5957 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $37.60 per share of common stock. After consideration of the Notes Hedges and Notes Warrants, the conversion rate is effectively hedged to a price of $46.62 per share of common stock. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the Notes (the “Indenture”). The Company may settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate(s). If a “make-whole fundamental change” (as defined in the Indenture) occurs, then the Company will in certain circumstances increase the conversion rate for a specified period of time. The Company’s intent is to settle the principal amount of the Notes in cash upon conversion.
A Note may be converted at the holder’s option prior to the close of business on the business day immediately preceding September 15, 2023, but only under the following circumstances:
•during any calendar quarter commencing after the calendar quarter ending on December 31, 2018, if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter;
•during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price per share of the Company’s common stock on such trading day and the conversion rate on such trading day;
•upon the occurrence of certain corporate events or distributions on the Company’s common stock described in the Indenture; and
•at any time from, and including, March 15, 2023 until the close of business on the second scheduled trading day immediately before the maturity date.
The Company may not redeem the Notes at its option before maturity. If a “fundamental change” (as defined in the Indenture) occurs, then, except as described in the Indenture, noteholders may require the Company to repurchase their notes at a cash repurchase price equal to the principal amount of the Notes to be repurchased, plus accrued and unpaid interest, if any.
As of June 30, 2020, none of the conditions permitting holders to convert their Notes had been satisfied and no shares of the Company’s common stock had been issued in connection with any conversions of the Notes. Based on the closing price of our common stock of $35.78 per share on June 30, 2020, the conversion value of the Notes was less than the principal amount of the Notes outstanding on a per Note basis.
In accordance with accounting for debt with conversions and other options, the Company bifurcated the principal amount of the Notes into liability and equity components. The initial liability component of the Notes was valued at $122.9 million based on the contractual cash flows discounted at an appropriate comparable market non-convertible debt borrowing rate at the date of issuance of 5.7%. The equity component representing the conversion option and calculated as the residual amount of the proceeds was recorded as an increase in additional paid-in capital within stockholders’ equity of $20.9 million, partially offset by the associated deferred tax effect of $5.4 million. The amount recorded within additional paid-in capital is not to be remeasured as long as it continues to meet the conditions for equity classification. The resulting debt discount of $20.9 million is being amortized to interest expense using the effective interest method with an effective interest rate of 5.7% over the period from the issuance date through the contractual maturity date of September 15, 2023. The Company utilizes the treasury stock method to calculate the effects of the Notes on diluted earnings per share.
Issuance costs totaling $4.8 million were allocated pro rata based on the relative fair values of the liability and equity components. Issuance costs of $4.1 million attributable to the liability component were recorded as a direct deduction from the carrying value of the Notes and are being amortized to interest expense using the effective interest method over the term of the Notes. Issuance costs of $0.7 million attributable to the equity component were recorded as a charge to additional paid-in capital within stockholders’ equity, partially offset by the associated deferred tax effect of $0.2 million.
The liability and equity components of the Notes consisted of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | | June 30, 2020 (unaudited) | | December 31, 2019 | | |
| Liability component: | | | | | | |
| Principal | | $ | 143,750 | | | $ | 143,750 | | | |
| Less: Unamortized debt discount | | (14,064) | | | (16,033) | | | |
| Unamortized debt issuance costs | | (2,642) | | | (3,053) | | | |
| Net carrying amount | | $ | 127,044 | | | $ | 124,664 | | | |
| | | | | | |
| Equity component: | | | | | | |
| Debt discount for conversion option, net of taxes | | $ | 15,547 | | | $ | 15,547 | | | |
| Less: Issuance costs, net of taxes | | (523) | | | (523) | | | |
| Net carrying amount | | $ | 15,024 | | | $ | 15,024 | | | |
Interest expense for the three and six months ended June 30, 2020 and 2019 related to the Notes consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | |
| 2020 | 2019 | | 2020 | 2019 |
| Coupon interest | $ | 853 | | $ | 853 | | | $ | 1,707 | | $ | 1,707 | |
| Amortization of debt discount | 992 | | 937 | | | 1,969 | | 1,860 | |
| Amortization of debt issuance costs | 206 | | 206 | | | 412 | | 412 | |
| Total interest expense recognized | $ | 2,051 | | $ | 1,996 | | | $ | 4,088 | | $ | 3,979 | |
2023 Convertible Notes Hedges
In connection with the issuance of the Notes, the Company entered into privately negotiated convertible note hedge transactions (the “Notes Hedges”) with certain of the initial purchasers or their respective affiliates and/or other financial institutions (the “Option Counterparties”). The Notes Hedges provide the Company with the option to acquire, on a net settlement basis, approximately 3.8 million shares of common stock at a strike price of $37.60, which is equal to the number of shares of common stock that notionally underlie the Notes and corresponds to the conversion price of the Notes. If the Company elects cash settlement and exercises the Notes Hedges, the aggregate amount of cash received from the Option Counterparties will cover the aggregate amount of cash that the Company would be required to pay to the holders of the Notes, less the principal amount thereof. The Notes Hedges do not meet the criteria for separate accounting as a derivative as they are indexed to the Company’s stock and are accounted for as freestanding financial instruments. The Notes Hedges were recorded as a reduction in additional paid-in capital within stockholders’ equity of $20.7 million, partially offset by the deferred tax effect of $5.3 million.
2023 Convertible Notes Warrants
In connection with the issuance of the Notes, the Company also sold net-share-settled warrants (the “Notes Warrants”) in privately negotiated transactions with the Option Counterparties. The strike price of the Notes Warrants was approximately $46.62 per share, and is subject to certain adjustments under the terms of the Notes Warrants. As a result of the Notes Warrants and related transactions, the Company is required to recognize incremental dilution of earnings per share to the extent the average share price is over $46.62 for any fiscal quarter. The Notes Warrants expire over a period of 100 trading days commencing on December 15, 2023 and may be settled in net shares of common stock or net cash at the Company’s election. The Notes Warrants were recorded as an increase in additional paid-in capital within stockholders’ equity of $12.1 million.
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”) has completed examinations of the Company’s U.S. income tax returns or the statute of limitations has passed on returns for the years through 2010.2015. The Company’s 2011 through 20152016 and 2017 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$5.7 million on the Company’s 2011 2012 and 2013through 2015 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.Court for the 2011 through 2013 returns. Office shutdowns and other disruptions caused by the COVID-19 pandemic have delayed resolution of this dispute. 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’s income tax returns for 2011 through SeptemberJune 30, 20172020 is $8.4approximately $18.3 million.
Under the provisions of the ASC Subtopic 740-10-25, Income Taxes - Recognition, the Company had an unrecognized tax benefit of $6.4 million (excluding $0.8 million of interest) as of June 30, 2020.
The Company’s effective tax rate was 31.8% and 22.8% for the three and six months ended June 30, 2020, respectively, compared to 26.0% and 23.4% for the three and six months ended June 30, 2019, respectively. The effective tax rate increased during the three months ended June 30, 2020 primarily due to non-deductible acquisition costs compared to the prior year. As of SeptemberJune 30, 2017,2020, the Company’s net non-current deferred tax liability was $12.9$20.5 million. Deferred tax liabilities primarily relate to goodwill, other intangibles, fixed asset depreciation,assets, prepaid expenses and prepaid expenses.issuance of the Notes. Net non-current deferred tax liabilities are recorded in “Other non-current liabilities” on the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172020 (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 million as of September 30, 2017.2019.
The Company’s effective tax rate was 33.3% and 46.4% for the three and nine months ended September 30, 2017, respectively, compared to 26.9% and 31.0% for the three and nine months ended September 30, 2016, respectively. The increase in the effective rate is primarily due to the Company’s determination that the foreign earnings of the Company’s Chinese subsidiary were no longer permanently reinvested.
In general, it is the Company’s practice and intention to reinvest the earnings of the Company’s foreign subsidiaries in those operations. However, during the second quarter of 2017, the Company has determined that as a result of changes in the business and macroeconomic environment, the foreign earnings of the Company’s Chinese subsidiary wereare 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 thesemay repatriate available earnings was recorded in the amount of $2.5 million during the second quarter of 2017.from time to time. Management currently 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 SeptemberJune 30, 2017,2020, the aggregate unremitted earnings of the Company’s foreign subsidiaries for which a deferred income tax liability has not been recorded was approximately $0.7$12.5 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.1$0.5 million.
11. Financial Instruments
13. Derivatives
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’s derivative financial instruments consist of non-deliverable and 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 the three months ended September 30, 2017 and a $0.1 million net gain for the nine months ended September 30, 2017. A net losseach of $0.1 million and $0.2 million was recognized during the three and ninesix months ended SeptemberJune 30, 2016, respectively. 2020 and 2019. 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’s derivative instruments outstanding as of September 30, 2017 was immaterial.
The notional amounts of the Company’s derivative instruments outstanding were as follows (in thousands):
| | | | September 30, 2017 | | | December 31, 2016 | | | June 30, 2020 (unaudited) | | December 31, 2019 |
| Derivatives not designated as hedges | | | | | Derivatives not designated as hedges | | | |
| Foreign exchange contracts | | $ | 5,169 | | | $ | 4,541 | | Foreign exchange contracts | $ | 9,425 | | | $ | 2,523 | |
| Total derivatives not designated as hedges | | $ | 5,169 | | | $ | 4,541 | | Total derivatives not designated as hedges | $ | 9,425 | | | $ | 2,523 | |
12. Recent Accounting Pronouncements
14. Fair Value Measurements
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions.
In May 2014,
The fair value hierarchy consists of the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requiresfollowing three levels:
•Level 1 – Inputs are quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs are quoted prices for similar assets or liabilities in an entity to recognize the amount of revenue to which it expects to be entitledactive market, quoted prices for the transfer of promised goodsidentical or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidancesimilar assets or liabilities 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 contractsmarkets that are not completedactive, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
•Level 3 – Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
All highly liquid investments with maturities at date of purchase of three months or less are considered to be cash equivalents. Based on their short-term nature, the carrying value of cash equivalents approximate their fair value. As of June 30, 2020, $2.5 million of the Company’s cash and cash equivalents balance related to money-market fund investments and $0.1 million related to fixed time deposits. As of December 31, 2019, $64.2 million of the Company’s cash and cash equivalents balance related to money-market fund investments and $3.0 million related to fixed time deposits. These short-term money-market funds and fixed time deposits are considered Level 1 investments.
The Company has a deferred compensation plan, which is funded through company-owned life insurance (“COLI”) policies. The COLI asset is carried at fair value derived from quoted market prices of investments within the COLI policies, which are considered Level 2 inputs. The fair value of the COLI asset was $6.2 million and $5.6 million as of June 30, 2020 and December 31, 2019, respectively.
The Company estimates the datefair value of initial application.each foreign exchange forward contract by using the present value of expected cash flows. The cumulative effectestimate takes into account the difference between the current market forward price and contracted forward price for each foreign exchange contract and applies the difference in the rates to each outstanding contract. Valuations for all derivatives fall within Level 2 of initially applying the standard willGAAP valuation hierarchy. The fair value of the Company’s derivative instruments outstanding as of June 30, 2020 was immaterial.
The Company has contingent consideration liabilities related to acquisitions which are measured on a recurring basis and recorded at fair value, determined using the discounted cash flow method. The inputs used to calculate the fair value of the contingent consideration liabilities are considered to be recognized as anLevel 3 inputs due to the lack of relevant market activity and significant management judgment. An increase in future cash flows may result in a higher estimated fair value while a decrease in future cash flows may result in a lower estimated fair value of the contingent consideration liabilities. Remeasurements to fair value are recorded in adjustment to fair value of contingent consideration in the opening balanceUnaudited Condensed Consolidated Statements of retained earnings within stockholders’ equity. Operations. Refer to Note 7, Balance Sheet Components, for the estimated fair value of the contingent consideration liabilities as of June 30, 2020.
The fair value of the Notes is measured using quoted price inputs. The Notes are not actively traded, and thus the price inputs represent a Level 2 measurement. As the quoted price inputs are highly variable from day to day, the fair value estimates could significantly increase or decrease.
The Notes are carried at their principal amount less unamortized debt discount and issuance costs, and are not carried at fair value at each period end. The original debt discount was calculated at a market interest rate for nonconvertible debt at the time of issuance, which represented a Level 3 fair value measurement. The approximate fair value of the Notes as of June 30, 2020 was $163.2 million, which is estimated on the basis of inputs that are observable in the market and is considered a Level 2 fair value measurement.
15. Leases
The Company continuesleases office space under various operating lease agreements, which have remaining lease terms of less than one year to evaluateeight years. Operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities on the effect that ASU No. 2014-09consolidated balance sheet. Operating lease expense for the three and its amendments will have on its consolidated financial statementssix months ended June 30, 2020 was $2.9 million and disclosures. Specifically,$5.7 million, respectively, and $2.5 million and $4.6 million for three and six months ended June 30, 2019, respectively.
Supplemental balance sheet information related to leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | June 30, 2020 (unaudited) | | December 31, 2019 |
| Other current liabilities | | | | | | | | | | $ | 11,207 | | | $ | 8,992 | |
| Operating lease liabilities | | | | | | | | | | 25,175 | | | 19,649 | |
| Total | | | | | | | | | | $ | 36,382 | | | $ | 28,641 | |
Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows (in thousands):
| | | | | |
| | June 30, 2020 (unaudited) |
| 2020 remaining | $ | 5,110 | |
| 2021 | 10,155 | |
| 2022 | 8,188 | |
| 2023 | 6,135 | |
| 2024 | 4,682 | |
| Thereafter | 5,488 | |
| Total future lease payments | 39,758 | |
| Less implied interest | (3,376) | |
| Total | $ | 36,382 | |
16. Commitments and Contingencies
From time to time the Company is evaluating provisions whichinvolved 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 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.
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, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning 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 use assets and lease obligations. Current minimum commitments under noncancellable operating leases are disclosed in Note 5, Commitments and Contingencies.
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 adverse impact on the Company’s consolidated financial statements.position, results of operations or the ability to carry on any of its business activities.
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.
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”). These forward-looking statements may sometimes be identified by such words as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “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” in our Annual Report on Form 10-K previously filed with the SEC, as updated by “Part II – Item 1A – Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 and in this Form 10-Q 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 Note Regarding Forward-Looking Statements” contained in this Form 10-Q.
Overview
We are an information technology and management consulting firma digital consultancy 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:designing, building and delivering digital solutions that: 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 optimizationunparalleled technology, management consulting, and industry solutionscreative capabilities, across industries, 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 and analytics, commerce, content management, custom applications, platform implementations,analytics, management consulting, commerce, portals and collaboration, content management, business integration, and APIs,customer relationship management, consulting, business process management, platform implementations and customer relationship management,artificial intelligence, among others. Our solutions enable our clients to operate a real-time enterprise that delivers exceptional front-end customer experiences and dynamically adapts business processes and the systems that support them, to meet the changing demands of an increasingly global Internet-driven, and competitive marketplace.
COVID-19 Pandemic
In March 2020, the World Health Organization recognized a novel strain of coronavirus (COVID-19) as a pandemic. In response to the pandemic, the United States and various foreign, state and local governments have, among other actions, imposed travel and business restrictions and required or advised communities in which we do business to adopt stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. While certain of these restrictions and guidelines have been lifted or relaxed, they may be reinstituted in response to continuing effects of the pandemic. The pandemic and the various governments’ response have caused, and continue to cause, significant and widespread uncertainty, volatility and disruptions in the U.S. and global economies, including in the regions in which we operate.
Through June 30, 2020, we have not experienced a material impact to our business, operations or financial results as a result of the pandemic. However, in the current and future periods, we may experience weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material.
We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company. We are able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. Among these steps, we have transitioned to primarily working remotely and ceasing travel, which has not resulted in a material disruption to the Company’s operations. We expect to maintain many of these steps for the near future. See Part II – Item 1A – Risk Factors” of this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.
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 inor fixed fee revenues is primarily attributable to an organic increase in fixed fee engagements overall.percent complete basis. 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 billinghourly 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 10% and collected in excess9% of our services 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 earnedfor the three and recorded within services revenues.six months ended June 30, 2020, respectively, and 7% and 8% for the three and six months ended June 30, 2019, respectively. 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, the impact of travel restrictions imposed as a result of the COVID-19 pandemic, 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.
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’ notice is required). The client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract.
Selling, general and administrative (“SG&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. WeWe 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’ marketing efforts and endorsements.
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.
18Acquisition of PSL
On June 17, 2020, a wholly-owned subsidiary of the Company acquired Productora de Software S.A.S. (“PSL”) pursuant to the terms of a Stock Purchase Agreement. PSL is based in Medellin, Colombia, with additional locations in Bogota and Cali, Colombia. The acquisition of PSL strengthens the Company’s global delivery capabilities, enhancing its nearshore systems and custom software application development, testing, and ongoing support for customers. PSL adds more than 600 skilled professionals and brings strategic client relationships with customers across several industries. Refer to Note 9, Business Combinations, for additional information on the acquisition.
Adoption of ASU No. 2016-13
As further detailed in Note 3, Recent Accounting Pronouncements, in the Notes to Interim Unaudited Condensed Consolidated Financial Statements, we adopted Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments using the modified retrospective method. ASU No. 2016-13 requires the immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including trade receivables. The Company adopted this ASU on January 1, 2020 using a modified retrospective approach, which allows the impact of adoption to be recorded through a cumulative effect adjustment to retained earnings without restating comparative periods. The cumulative effect adjustment for adoption of ASU No. 2016-13 resulted in a decrease of $0.4 million in Accounts receivable, net, and a decrease of $0.3 million in Retained earnings, net of tax, as of January 1, 2020. Refer to Note 8, Allowance for Credit Losses, for additional disclosures resulting from the adoption of ASU No. 2016-13.
Results of Operations
Three months ended SeptemberJune 30, 20172020 compared to three months ended SeptemberJune 30, 20162019
Revenues. Total revenues increased 4%3% to $123.7$146.3 million for the three months ended SeptemberJune 30, 20172020 from $119.2$141.9 million for the three months ended SeptemberJune 30, 2016.2019.
| | | | 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 June 30, | | | Total Increase (Decrease) Over Prior Year Period | | Increase Attributable to Revenue Delivered by Resources of Acquired Companies | | Decrease Attributable to Revenue Delivered by Base Business Resources |
| | | 2017 | | | 2016 | | | 2020 | | 2019 | | |
| Services revenues | | $ | 114,144 | | | $ | 102,958 | | | $ | 11,186 | | | $ | 12,432 | | | $ | (1,246 | ) | Services revenues | $ | 145,836 | | | $ | 141,234 | | | $ | 4,602 | | | $ | 8,784 | | | $ | (4,182) | |
| Software and hardware revenues | | | 6,323 | | | | 11,184 | | | | (4,861 | ) | | | - | | | | (4,861 | ) | Software and hardware revenues | 503 | | | 635 | | | (132) | | | — | | | (132) | |
| Reimbursable expenses | | | 3,271 | | | | 5,011 | | | | (1,740 | ) | | | 118 | | | | (1,858 | ) | |
| Total revenues | | $ | 123,738 | | | $ | 119,153 | | | $ | 4,585 | | | $ | 12,550 | | | $ | (7,965 | ) | Total revenues | $ | 146,339 | | | $ | 141,869 | | | $ | 4,470 | | | $ | 8,784 | | | $ | (4,314) | |
Services revenuesrevenues increased 11%3% to $114.1$145.8 million for the three months ended SeptemberJune 30, 20172020 from $103.0$141.2 million for the three months ended SeptemberJune 30, 2016.2019. Services revenues attributable to ourdelivered by base business resources decreased by $1.2$4.2 million andprimarily due to a decrease in reimbursable expenses resulting from travel reductions, while services revenues attributable todelivered by resources of acquired companies increased by $12.4was $8.8 million, resulting in a total net increase of $11.2$4.6 million.
Software and hardware revenues decreased 43%21% to $6.3$0.5 million for the three months ended SeptemberJune 30, 20172020 from $11.2$0.6 million for the three months ended SeptemberJune 30, 2016, primarily due2019.
Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost of revenues increased 2% 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$91.2 million for the three months ended SeptemberJune 30, 20172020 from $5.0$89.5 million for the three months ended SeptemberJune 30, 2016,2019 primarily due to higher offshore headcount and acquisitions. Services costs as a resultpercentage of a higher mix of projects performed in our offices. We do not realize any profit on reimbursable expenses.
Cost of Revenues. Cost ofservices revenues decreased to 62.5% for the three months ended June 30, 2020 from 63.4% for the three months ended June 30, 2019, due to lower
reimbursable expenses and increased average bill rate. The average bill rate for our professionals was $126 per hour for the three months ended June 30, 2020 and $125 per hour for the three months ended June 30, 2019.
Selling, General and Administrative. SG&A expenses increased 2% to $81.1$33.9 million for the three months ended SeptemberJune 30, 20172020 from $82.7$33.2 million for the three months ended SeptemberJune 30, 2016. Cost2019, primarily due to increased bonus costs and acquisitions, partially offset by lower travel costs. SG&A expenses as a percentage of servicesrevenues decreased to 23.1% for the three months ended June 30, 2020 from 23.4% for the three months ended June 30, 2019.
Depreciation. Depreciation expense increased 8%23% to $72.7$1.3 million for the three months ended SeptemberJune 30, 20172020 from $67.5$1.1 million for the three months ended SeptemberJune 30, 2016, primarily as a result of acquisitions. Software and hardware costs decreased 49% to $5.2 million for the three months ended September 30, 2017 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 margin2019. Depreciation expense as a percentage of revenues increased to 34.4%0.9% for the three months ended SeptemberJune 30, 20172020 from 30.6%0.8% for the three months ended SeptemberJune 30, 2016, primarily due2019.
Amortization. Amortization expense increased 10% to an increase in services gross margin and higher software and hardware gross margins. Services gross margin, excluding reimbursable expenses, increased to $41.4$4.4 million for the three months ended SeptemberJune 30, 20172020 from $35.4$4.0 million for the three months ended SeptemberJune 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, 2017 compared to $123 per hour for the three months ended September 30, 2016.
Selling, General and Administrative. SG&A expenses increased 11% to $27.1 million for the three months ended September 30, 2017 from $24.5 million for the three 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 21.9% for the three months ended September 30, 2017 from 20.5% for the three months ended September 30, 2016.
Depreciation. Depreciation expense decreased to $1.1 million for the three months ended September 30, 2017 from $1.2 million for the three months ended September 30, 2016. Depreciation expense as a percentage of revenues was 0.9% for the three months ended September 30, 2017 and 1.0% for the three months ended September 30, 2016.
Amortization. Amortization expense increased 21% to $3.9 million for the three months ended September 30, 2017 from $3.3 million for the three months ended September 30, 2016. The increase in amortization expense was due to the addition of intangible assets from the 2016 and 2017 acquisitions.2019. Amortization expense as a percentage of revenues was 3.2%3.0% for the three months ended SeptemberJune 30, 20172020 and 2.7%2.8% for the three months ended SeptemberJune 30, 2016.2019.
Acquisition Costs.Acquisition-related costs decreased to a negative $0.1were $1.8 million for the three months ended SeptemberJune 30, 2017 from $0.32020 and were $0.6 million for the three months ended SeptemberJune 30, 2016, as a result of adjustments to accruals related to recent acquisition activity.
Adjustment to Fair Value of Contingent Consideration. An adjustment of $0.4 million was recorded during the three months ended September 30, 2017, which represents the net impact of the fair market value adjustment to the RAS 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 Bluetube 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.
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 33.3% for the three months ended September 30, 2017 from 26.9% for the three months ended September 30, 2016. 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.
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.2019. 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$2.1 million was recorded during the ninethree months ended SeptemberJune 30, 2017,2020 which represents the net impact of the fair market value adjustmentsadjustment to the RAS and BluetubeMedTouch LLC (“MedTouch”) revenue and earnings-based contingent consideration liabilitiesliability, 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.accretion. An adjustment of $1.8$0.1 million was recorded during the ninethree months ended SeptemberJune 30, 20162019 which represents the net impact of the fair market value adjustmentsadjustment to the EnlightenSouthport Services Group, LLC (“Southport”) revenue and earnings-based contingent consideration liability, partially offset by the accretion of the fair value estimatein addition to accretion.
Net Interest Expense. Net interest expense increased to $2.1 million for the revenue and earnings-based contingent consideration related tothree months ended June 30, 2020 from $1.9 million for the acquisitions of Zeon and Market Street.three months ended June 30, 2019.
Provision for Income Taxes. We provide for federal, state and foreign income taxes at the applicable statutory rates adjusted for non-deductible expenses.expenses. Our effective tax rate increased to 46.4%31.8% for the ninethree months ended SeptemberJune 30, 20172020 from 31.0%26.0% for the ninethree months ended SeptemberJune 30, 2016.2019. The increase in the effective tax rate iswas primarily due to non-deductible acquisition costs incurred during the three months ended June 30, 2020.
Six months ended June 30, 2020 compared to six months ended June 30, 2019
Revenues. Total revenues increased 6% to $291.9 million for the six months ended June 30, 2020 from $275.7 million for the three months ended June 30, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Financial Results
(in thousands) | | | | | | Explanation for Increases (Decreases) Over Prior Year Period
(in thousands) | | |
| | Six Months Ended
June 30, | | | | Total Increase (Decrease) Over Prior Year Period | | Increase Attributable to Revenue Delivered by Resources of Acquired Companies | | Increase (Decrease) Attributable to Revenue Delivered by Base Business Resources |
| | 2020 | | 2019 | | | | | | |
| Services revenues | $ | 291,238 | | | $ | 274,100 | | | $ | 17,138 | | | $ | 16,543 | | | $ | 595 | |
| Software and hardware revenues | 663 | | | 1,584 | | | (921) | | | — | | | (921) | |
| Total revenues | $ | 291,901 | | | $ | 275,684 | | | $ | 16,217 | | | $ | 16,543 | | | $ | (326) | |
Services revenues increased 6% to $291.2 million for the six months ended June 30, 2020 from $274.1 million for the six months ended June 30, 2019. Services revenues delivered by base business resources increased by $0.6 million while services revenues delivered by resources of acquired companies was $16.5 million, resulting in a total increase of $17.1 million. Services revenues growth was negatively impacted by a decrease in reimbursable expenses resulting from travel reductions.
Software and hardware revenues decreased 58% to $0.7 million for the six months ended June 30, 2020 from $1.6 million for the six months ended June 30, 2019.
Cost of Revenues (exclusive of depreciation and amortization, discussed separately below). Cost of revenues increased 5% to $184.4 million for the six months ended June 30, 2020 from $175.6 million for the six months ended June 30, 2019 primarily due to higher headcount in response to higher services revenues and acquisitions. Services costs as a percentage of services revenues decreased to 63.3% for the six months ended June 30, 2020 from 64.1% for the six months ended June 30, 2019, due to lower reimbursable expenses and increased average bill rate. The average bill rate for our professionals was $126 per hour for the six months ended June 30, 2020 and $125 per hour for the six months ended June 30, 2019.
Selling, General and Administrative. SG&A expenses increased 2% to $67.1 million for the six months ended June 30, 2020 from $65.7 million for the six months ended June 30, 2019, primarily due to increased headcount to support our growth, increased office costs related to our office expansion in India, and acquisitions, partially offset by lower travel and marketing costs. SG&A expenses as a percentage of revenues decreased to 23.0% for the six months ended June 30, 2020 from 23.8% for the six months ended June 30, 2019.
Depreciation. Depreciation expense increased 25% to $2.6 million for the six months ended June 30, 2020 from $2.1 million for the six months ended June 30, 2019. Depreciation expense as a percentage of revenues increased to 0.9% for the six months ended June 30, 2020 from 0.8% for the six months ended June 30, 2019.
Amortization. Amortization expense increased 2% to $8.3 million for the six months ended June 30, 2020 from $8.1 million for the six months ended June 30, 2019. Amortization expense as a percentage of revenues was 2.9% for the six months ended June 30, 2020 and 3.0% for the six months ended June 30, 2019.
Acquisition Costs. Acquisition-related costs were $3.6 million for the six months ended June 30, 2020 and were $0.6 million for the six months ended June 30, 2019. 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 $1.7 million was recorded during the six months ended June 30, 2020 which represents the net impact of the fair market adjustments to the MedTouch and Sundog Interactive, Inc. (“Sundog”) revenue and earnings-based consideration liability, in addition to accretion. An adjustment of $0.3 million was recorded during the six months ended June 30, 2019 which represents the net impact of the fair market value adjustments to the Southport, Stone Temple Consulting Corporation (“Stone Temple”), and Elixiter, Inc. (“Elixiter”) revenue and earnings-based contingent consideration liability, partially offset by accretion.
Net Interest Expense. Net interest expense increased to $4.0 million for the six months ended June 30, 2020 from $3.7 million for the six months ended June 30, 2019.
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 decreased to 22.8% for the six months ended June 30, 2020 from 23.4% for the six months ended June 30, 2019. The decrease in the effective tax rate was primarily due to the Company’s determinationincrease in tax benefits recognized related to share-based compensation deductions during the current year thatsix months ended June 30, 2020 compared to the foreign earnings of the Company’s Chinese subsidiary were no longer permanently reinvested.prior-year period.
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 | |
| Cash, cash equivalents and investments (1) | | $ | 2.4 | | | $ | 10.1 | |
| Working capital (including cash and cash equivalents) (2) | | $ | 76.8 | | | $ | 76.4 | |
| Amounts available under credit facilities | | $ | 60.0 | | | $ | 93.0 | |
| | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| Cash and cash equivalents (1) | $ | 19.5 | | | $ | 70.7 | |
| Working capital (including cash and cash equivalents) (2) | $ | 62.2 | | | $ | 127.3 | |
| Amounts available under credit facility | $ | 112.7 | | | $ | 124.8 | |
(1) The balance at SeptemberJune 30, 20172020 includes $1.5$10.5 million held by our Canadian, Indian and United Kingdomcertain foreign subsidiaries which is not available to fund domestic operations unless the funds werewould be repatriated. We currently do not plan or foresee a need to repatriate such funds. The balance also includes $0.8$1.4 million in cash held inby our Chinese subsidiary. During the second quarter of 2017, the Company determined that the Chinese subsidiary’s earnings were no longer permanently reinvested and repatriated additional cash to the U.S. parent in the second and third quarters of 2017. We may repatriate additional funds from the Chinese subsidiary over time.
(2) Working capital is total current assets less total current liabilities.
Net Cash Provided Byby Operating Activities
Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172020 was $30.1$37.5 million compared to $39.9$23.8 million for the ninesix months ended SeptemberJune 30, 2016.2019. For the ninesix months ended SeptemberJune 30, 2017,2020, the primary components of operating cash flows were net income of $12.1$15.6 million, plus net non-cash charges of $25.6$24.8 million and investments in net operating assetsasset investments of $7.6$2.9 million. TheFor the six months ended June 30, 2019, the primary components of operating cash flows for the nine months ended September 30, 2016 were net income of $16.8$15.6 million, plus net non-cash charges of $22.6$22.7 million and reductions in net operating assetsasset investments of $0.5$14.4 million.
Net Cash Used Inin Investing Activities
During the ninesix months ended SeptemberJune 30, 2017,2020, we used $3.3$3.5 million to purchase property and equipment and to develop certain software and $37.9$91.2 million for the acquisition of RASPSL, Catalyst Networks, Inc. (“Brainjocks”), and Clarity. MedTouch, in addition to net working capital settlements related to acquisitions. During the ninesix months ended SeptemberJune 30, 2016,2019, we used $5.3$3.9 million to purchase property and equipment and to develop certain software. We also used $0.9 million to purchase short-term investmentssoftware and $0.3$10.7 million for athe Sundog acquisition and net working capital settlementsettlements related to a 2015 acquisition.acquisitions.
Net Cash Provided Byby (Used In)in) Financing Activities
During the ninesix months ended SeptemberJune 30, 2017, 2020, we drew down $223.5$20.0 million from our line of credit, and we received proceeds from sales of stock through the Employee Stock Purchase Plan of $0.1 million. We repaid $190.5$8.0 million on our line of credit, used $24.0 million to repurchase shares of our common stock through the stock repurchase program and used $2.5 million to remit taxes withheld as part of a net share settlement of restricted stock vesting. We also paid $3.3 million to settle the contingent consideration for the purchase of Market Street, Enlighten and Bluetube and made $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$4.9 million to remit taxes withheld as part of a net share settlement of restricted stock vesting, and made $0.2$0.9 million in paymentsto settle contingent consideration for credit facility financing fees.the purchase of Elixiter. During the six months ended June 30, 2019, used $16.3 million to repurchase shares of our common stock through the stock repurchase program and $4.0 million to remit taxes withheld as part of a net share settlement of restricted stock vesting.
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”), 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, 2013 between the Company, Silicon Valley Bank and the other lenders and signatories thereto (the “Prior Credit 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. As of June 30, 2020, the Company had $12.0 million outstanding under the Credit Agreement.
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 SeptemberJune 30, 2017,2020, the Company had notwo outstanding letters 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%(3.25% on SeptemberJune 30, 2017)2020) plus a margin ranging from 0.00% to 0.50% or one-month LIBOR (1.23%(0.16% on SeptemberJune 30, 2017)2020) 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 SeptemberJune 30, 2017,2020, the Company had $60.0$112.7 million of unused borrowing capacity.
At SeptemberJune 30, 2017,2020, the Company was in compliance with all covenants under the Credit Agreement.
Stock Repurchase Program
Prior to 2017, ourThe Company’s Board of Directors have authorized the repurchase of up to $110.0$265.0 million of ourCompany common stock. On February 21, 2017, our Board of Directors authorized the expansion of ourstock through a stock repurchase program through June 30, 2021. 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 authorizingmanagement based on its evaluation of market conditions, share price, and other factors. Since the repurchaseprogram’s inception on August 11, 2008, the Company has repurchased approximately $220.0 million (15.4 million shares) of up to an additional $25.0 million of ouroutstanding common stock for a total repurchase program of $135.0 million and extended the expiration date of the program from December 31, 2017 to December 31, 2018.through June 30, 2020.
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’s inception on August 11, 2008, we have repurchased approximately $126.3 million (11.9 million shares) of our outstanding common stock through September 30, 2017.
Contractual Obligations
There were no material changes outside the ordinary course of our business in lease obligations in the first ninesix months of 2017.2020. See Note 5, Commitments and Contingencies15, Leases, in the Notes to Interim Condensed Consolidated Financial Statements for further description of our contractuallease obligations.
As of SeptemberJune 30, 2017,2020 there was $65.0$12.0 million outstanding under the Credit Agreement, as compared to $32.0 millionand no balance outstanding under the Prior Credit Agreement as of December 31, 2016.2019. Balances outstanding under the Credit Agreement are classified as “Long-term debt” within the Condensed Consolidated Balance Sheet and become due and payable no later than the final maturity date of June 9, 2022. Additionally, there were $127.0 million of outstanding Notes, net of unamortized debt discount and issuance costs, as of June 30, 2020 compared to $124.7 million as of December 31, 2019. The amounts are classified as “Long-term debt” within the Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019 and will become due and payable no later than the final maturity date of June 9, 2022.September 15, 2023.
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 SeptemberJune 30, 20172020 (unaudited) of $2.4$19.5 million, approximately $1.5$10.5 million was held by the Company’s Canadian, Indian and United Kingdomcertain foreign 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.facility, as well as the proceeds from the Notes issuance in the third quarter of 2018. 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 SeptemberJune 30, 2017,2020, the estimated tax impact of repatriation would have been approximately $0.1 million. See Note 10, Income Taxes, for a discussionaggregate unremitted earnings of the Company’s repatriationforeign subsidiaries for which a deferred income tax liability has not been recorded was approximately $12.5 million, and the unrecognized deferred tax liability on unremitted earnings was approximately $0.5 million. As of earnings fromJune 30, 2020, $1.4 million of the total cash and cash equivalents was held by the Company’s Chinese subsidiary.subsidiary, the earnings of which are not considered to be permanently reinvested and may be repatriated from time to time.
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. However, while the Company did not experience a material impact on the business, operations or financial results from the COVID-19 pandemic during the six months ended June 30, 2020, the pandemic may materially and adversely affect our business, operations and financial results, including our cash flows, in the future as a result of, among other things, weaker customer demand, requests for discounts or extended payment terms, customer bankruptcies, supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors. For example, we have experienced certain of our customers requesting discounts or extended payment terms, pausing or slowing services, or declaring bankruptcy. Additionally, we have experienced some delays in obtaining new commitments from customers. Given the uncertain duration and scope of the pandemic and its impact on economic and financial markets, we cannot reliably predict or estimate the impact of the pandemic on our business, operations or financial results. See “Part II – Item 1A – Risk Factors” of this Form 10-Q for additional information regarding the potential impact of COVID-19 on the Company.
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, 2016.2019 and Note 8, Allowance for Credit Losses, to our Interim Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020. We believe our most critical accounting policies include revenue recognition, accounting for goodwill and intangible assets, purchase accounting accounting for stock-based compensation, and accounting forrelated fair value measurements and income taxes.
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 SeptemberJune 30, 2017,2020, we were exposed to changes in exchange rates between the U.S. dollar and the Canadian dollar, Indian rupee, Chinese Yuan, Indian Rupee,yuan, British Pound,pound, Euro, Colombian peso and Euro.Serbian dinar. 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, Financial Instruments13, Derivatives, in the Notes to Interim Unaudited Condensed Consolidated Financial Statements for further discussion.
Interest Rate Sensitivity
As of SeptemberJune 30, 2017,2020, there was $65.0$12.0 million outstanding and $60.0$112.7 million of available borrowing capacity under our credit facility. OurTo the extent we have outstanding borrowings under the 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
During the $65.0 million outstanding on the linethird quarter of credit as of September 30, 2017, an increase in the2018, we issued Notes which have a fixed interest rate of 100 basis points would add $650,0002.375%. The fair value of the Notes may increase or decrease for various reasons, including fluctuations in the market price of our common stock, fluctuations in market interest expense per year, which is not considered material to our financial position or resultsrates and fluctuations in general economic conditions. Based upon the quoted market price as of operations.June 30, 2020, the fair value of the Notes was approximately $163.2 million.
We had unrestricted cash and cash equivalents totaling $2.4$19.5 million at SeptemberJune 30, 20172020 and $10.1$70.7 million at December 31, 2016.2019. The unrestricted cash and cash equivalents are primarily held for working capital purposes.purposes and acquisitions. 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’s reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’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’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based on that evaluation, the Company’s principal executive and principal financial officers have determined that the Company’s disclosure controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting as defined in Exchange Act Rule 13a-15(f) during the three months ended SeptemberJune 30, 2017,2020, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s transition to primarily working remotely as a result of the COVID-19 pandemic has not resulted in a material impact to the Company’s internal controls over financial reporting.
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. OurIn addition to the following, our risk factors are includeddescribed in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, as filed with the SEC on February 28, 201725, 2020, as updated by our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, and available at www.sec.gov. There
The COVID-19 pandemic may materially and adversely affect the Company’s business, operations, financial results and/or stock price.
The COVID-19 pandemic has created significant and widespread volatility, uncertainty and disruptions in the U.S. and global economies, including in the regions in which we operate. Certain of our customers have requested discounts or extended payment terms, paused or slowed services, or declared bankruptcy. The extent to which the pandemic ultimately impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately
predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been no material changeand continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on our clients and client demand for our services and solutions; our ability to sell and provide our services and solutions, including as a result of travel restrictions and people working from home; the ability of our clients to pay for our services and solutions; any changes to our risk factors sinceclients’ payment terms; any closures of our offices and facilities as we transitioned to working remotely; and any closures of our clients’ offices and facilities because of government orders, recommendations or otherwise. Clients may also slow down decision making, delay planned work or seek to terminate or amend existing agreements in a manner adverse to the filingCompany. Any of such report.these events could cause or contribute to the other risks and uncertainties faced by the Company, as described in the Company’s Annual Report, and could materially adversely affect our business, operations, financial results and/or stock price.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Securities
Stock Repurchase Program
Prior to 2017, ourThe Company’s Board of Directors has authorized the repurchase of up to $110.0$265.0 million of ourCompany common stock. On February 21, 2017, our Board of Directors authorized the expansion of ourstock through a stock repurchase program through June 30, 2021. 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 authorizingmanagement based on its evaluation of market conditions, share price, and other factors. Since the repurchaseprogram’s inception on August 11, 2008, the Company has repurchased approximately $220.0 million (15.4 million shares) of up to an additional $25.0 million of ouroutstanding common stock for a total repurchase program of $135.0 million and extended the expiration date of the program from December 31, 2017 to December 31, 2018.through June 30, 2020.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 March 31, 2020 | | 15,390,569 | | | $ | 14.30 | | | 15,390,569 | | | $ | 44,964,924 | |
| April 1-30, 2020 | | — | | | $ | — | | | — | | | $ | 44,964,924 | |
| May 1-31, 2020 | | — | | | $ | — | | | — | | | $ | 44,964,924 | |
| June 1-30, 2020 | | — | | | $ | — | | | — | | | $ | 44,964,924 | |
| Ending balance as of June 30, 2020 | | 15,390,569 | | | $ | 14.30 | | | 15,390,569 | | | |
Since
(1)Average price paid per share includes commission.
Unregistered Sales of Equity Securities
On June 17, 2020, the program’s inception on August 11, 2008, we have repurchased approximately $126.3 million (11.9 million shares)Company acquired PSL, pursuant to the terms of our outstandinga Stock Purchase Agreement. The consideration paid in this transaction included 170,627 shares of Company common stock through Septemberissued at closing with an aggregate value of approximately $5.9 million based on the average closing sales price for the 30 2017.consecutive trading days ending on the date immediately before the acquisition’s closing date.
| 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 | | | | | |
(1) | Average price paid per share includes commission. |
We relied on Section 4(a)(2) of the Securities Act, as the basis for exemption from registration for each of these issuances. These shares were issued in privately negotiated transactions and not pursuant to a public solicitation.
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. |
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.
EXHIBITS INDEX
Exhibit Number | Description | | | | |
| Exhibit Number | Description |
| 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 | |
| 3.3 | |
| 3.4 | |
| 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 | |
| FormStock Purchase Agreement dated as of Restricted Stock Award Agreement (Non-Employee Director Award)June 17, 2020, by and among Perficient, Inc., Perficient UK Limited,
Productora de Software S.A.S., each of the Shareholders and the Representative |
| Form of Restricted Stock Award and Non-Competition Agreement (Employee Grant) |
| Form of Restricted Stock Unit Award and Non-Competition Agreement (Employee Grant) |
| Second Amended and Restated Employment Agreement with Chief Executive Officer of Perficient, Inc., effective as of January 1, 2018 |
| Second Amended and Restated Employment Agreement with Chief Financial Officer of Perficient, Inc., effective as of January 1, 2018 |
| Certification by the Chief Executive Officer of Perficient, Inc. as required by Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification by the Chief Financial Officer of Perficient, Inc. as required by Section 302 of the Sarbanes-Oxley Act of 2002 |
| 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 Quarterly Report on Form 10-Q for the quarterly period ended SeptemberJune 30, 2017,2020 formatted in XBRL (eXtensibleiXBRL (inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of SeptemberJune 30, 20172020 (Unaudited) and December 31, 2016,2019, (ii) Unaudited Condensed Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, (iv) Unaudited Condensed Consolidated StatementStatements of Shareholders’ Equity for the ninethree and six months ended SeptemberJune 30, 2017,2020 and 2019, (v) Unaudited Condensed Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, and (vi) the Notes to Interim Unaudited Condensed Consolidated Financial Statements |
| 104 | Cover Page Interactive Data File (formatted as iXBRL and contained in Exhibit 101) |
†* | Identifies an Exhibit that consists of or includes a management contract or compensatory plan or arrangement. Filed herewith. |
| ** | Filed herewith. |
** | Included but not to be considered “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. |
| † | Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Perficient, Inc. hereby
undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the SEC. |
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. | | | | | | | | | | |
| | PERFICIENT, INC. | |
Date: November 2, 2017 | By: |
| |
| Date: | July 30, 2020 | By: | /s/ Jeffrey S. Davis |
| | | Jeffrey S. Davis |
| | | Chief Executive Officer (Principal(Principal Executive Officer) |
Date: November 2, 2017 | By: |
| | | | | | | | | |
| Date: | July 30, 2020 | By: | /s/ Paul E. Martin |
| | | Paul E. Martin |
| | | Chief Financial Officer (Principal(Principal Financial Officer) |
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