UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

 

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number: 001-15169

PERFICIENT, INC.

(Exact name of registrant as specified in its charter)

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

1120 South Capital of Texas Highway, Building 3, Suite 220

Austin, Texas 78746

(Address of principal executive offices)

(512) 531-6000

(Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days.    þ   Yes o     No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

Large accelerated filero

Accelerated filer þ

Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No þ

 

Part I.	Financial Information	1
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	1
	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2007 and 2006	2
	Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2007	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II.	Other Information	24
Item 1A.	Risk Factors	24
Item 6.	Exhibits	24
	Signatures	25

 

 

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 Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets

		September 30, 2007				December 31, 2006
ASSETS		(In thousands)
Current assets:
Cash and cash equivalents		$	345			$	4,549
Accounts receivable, net			50,129				38,600
Prepaid expenses			1,072				1,171
Other current assets			4,901				2,799
Total current assets			56,447				47,119
Property and equipment, net			3,013				1,806
Goodwill			103,222				69,170
Intangible assets, net			18,058				11,886
Other non-current assets			1,134				1,019
Total assets		$	181,874			$	131,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	3,517			$	5,025
Current portion of long-term debt			-				1,201
Other current liabilities			20,126				16,034
Total current liabilities			23,643				22,260
Long-term borrowings, net of current portion			-				137
Deferred income taxes			2,360				1,251
Total liabilities		$	26,003			$	23,648
Stockholders' equity:
Common stock (par value $.001 per share; 50,000,000 shares authorized and
28,904,467 shares issued and outstanding as of September 30, 2007;
26,699,974 shares issued and outstanding as of December 31, 2006)		$	29			$	27
Additional paid-in capital			183,803				147,028
Accumulated other comprehensive loss			(98	)			(125	)
Accumulated deficit			(27,863	)			(39,578	)
Total stockholders' equity			155,871				107,352
Total liabilities and stockholders' equity		$	181,874			$	131,000

See accompanying notes to interim unaudited condensed consolidated financial statements.

 

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Perficient, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
		(In thousands, except per share data)
Revenues
Services		$	48,387			$	40,219			$	137,645			$	98,577
Software			1,582				1,532				9,469				6,800
Reimbursable expenses			3,115				2,543				8,614				6,071
Total revenues			53,084				44,294				155,728				111,448
Cost of revenues (exclusive of depreciation shown separately below)
Project personnel costs			28,954				24,190				82,659				59,911
Software costs			1,147				1,247				7,944				5,673
Reimbursable expenses			3,115				2,543				8,614				6,071
Other project related expenses			822				460				2,228				1,474
Total cost of revenues			34,038				28,440				101,445				73,129
Gross margin			19,046				15,854				54,283				38,319
Selling, general and administrative			9,829				9,539				30,065				23,414
Depreciation			371				264				1,069				647
Amortization of intangibles			1,277				1,211				3,103				2,335
Income from operations			7,569				4,840				20,046				11,923
Interest income			79				45				191				76
Interest expense			-				(217	)			(65	)			(463	)
Other			1				7				10				72
Income before income taxes			7,649				4,675				20,182				11,608
Provision for income taxes			3,108				1,841				8,467				4,815
Net income		$	4,541			$	2,834			$	11,715			$	6,793
Basic net income per share		$	0.16			$	0.11			$	0.42			$	0.28
Diluted net income per share		$	0.15			$	0.10			$	0.39			$	0.25
Shares used in computing basic net income per share			28,258				25,618				27,644				24,525
Shares used in computing diluted net income per share			30,324				28,056				29,869				27,156

 See accompanying notes to interim unaudited condensed consolidated financial statements.

 

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Perficient, Inc.

Condensed Consolidated Statement of Stockholders' Equity

Nine Months Ended September 30, 2007

(Unaudited)

(In thousands)

 

														Accumulated
		Common				Common				Additional				Other								Total
		Stock				Stock				Paid-in				Comprehensive				Accumulated				Stockholders'
		Shares				Amount				Capital				Loss				Deficit				Equity
Balance at December 31, 2006			26,700			$	27			$	147,028			$	(125	)		$	(39,578	)		$	107,352
E Tech, Tier1, and BoldTech  acquisitions			1,112				1				22,898				-				-				22,899
Stock options exercised			1,034				1				3,079				-				-				3,080
Purchases of stock from Employee Stock Purchase Plan			7				-				145				-				-				145
Tax benefit of stock option exercises			-				-				6,154				-				-				6,154
Stock compensation			51				-				4,499				-				-				4,499
Foreign currency translation adjustment			-				-				-				27				-				27
Net income			-				-				-				-				11,715				11,715
Total comprehensive income			-				-				-				-				-				11,742
Balance at September 30, 2007			28,904			$	29			$	183,803			$	(98	)		$	(27,863	)		$	155,871

See accompanying notes to interim unaudited condensed consolidated financial statements.

 

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Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine Months Ended September 30,
		2007				2006
						(As restated,
						see Note 2)
		(In thousands)
OPERATING ACTIVITIES
Net income		$	11,715			$	6,793
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation			1,069				647
Amortization of intangibles			3,103				2,335
Deferred income taxes			895				(617	)
Non-cash stock compensation			4,464				2,227
Non-cash interest expense			-				6
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(2,071	)			(4,993	)
Other assets			77				911
Accounts payable			(2,335	)			(1,804	)
Other liabilities			(6,759	)			(837	)
Net cash provided by operating activities			10,158				4,668
INVESTING ACTIVITIES
Purchase of property and equipment			(1,332	)			(995	)
Capitalization of software developed for internal use			(132	)			(59	)
Purchase of businesses, net of cash acquired			(20,912	)			(16,298	)
Payments on Javelin notes			-				(250	)
Net cash used in investing activities			(22,376	)			(17,602	)
FINANCING ACTIVITIES
Proceeds from short-term borrowings			11,900				28,600
Payments on short-term borrowings			(11,900	)			(27,400	)
Payments on long-term debt			(1,338	)			(994	)
Tax benefit on stock options			6,154				4,383
Proceeds from exercise of stock options and Employee Stock Purchase Plan			3,225				3,191
Proceeds from exercise of warrants			-				146
Net cash provided by financing activities			8,041				7,926
Effect of exchange rate on cash and cash equivalents			(27	)			(23	)
Change in cash and cash equivalents			(4,204	)			(5,031	)
Cash and cash equivalents at beginning of period			4,549				5,096
Cash and cash equivalents at end of period		$	345			$	65
Supplemental disclosures:
Cash paid for interest		$	40			$	465
Cash paid for income taxes		$	3,450			$	3,111
Non cash activities:
Stock issued for purchase of businesses		$	22,899			$	17,991
Change in goodwill		$	(270	)		$	533

See accompanying notes to interim unaudited condensed consolidated financial statements.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

 

   The accompanying unaudited interim condensed consolidated financial statements of Perficient, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States and are presented in accordance with the rules and regulations of the Securities and Exchange Commission applicable to interim financial information. Accordingly, certain footnote disclosures have been condensed or omitted. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the Company's Annual Report on Form 10-K for the year ended December 31, 2006, as amended. Operating results for the three months and nine months ended September 30, 2007 may not be indicative of the results for the full fiscal year ending December 31, 2007.

2. Restatement of Financial Information

In August of 2007, certain errors were identified in the previously reported Condensed Consolidated Statement of Cash Flows. Consequently, the Company has restated the presentation of the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2006. The errors relate to (i) certain cash payments for prior acquisitions of approximately $2.6 million for the nine months ended September 30, 2006 that were shown as cash used in operating activities, rather than investing activities, and (ii) excess tax benefits on stock option exercises of approximately $0.5 million for the nine months ended September 30, 2006, that were shown as cash provided by operating activities, rather than financing activities.  In addition, certain reclassifications were made to cash provided by operating activities in the prior year Condensed Consolidated Statement of Cash Flows to conform to current year presentation.  Such reclassifications generally related to presenting the change in deferred income taxes separately within cash provided by operating activities and appropriately reflecting the change in accounts payable due to acquisitions.  The errors and reclassifications do not change the total amount of cash and cash equivalents for any of the periods, or any previously reported income statement (including earnings per share), balance sheet or statement of stockholders’ equity amounts.

   The effect of the restatement on specific line items in the Condensed Consolidated Statement of Cash Flows is as follows:

		Nine Months Ended September 30, 2006
		As previously reported				As restated
		(In thousands)
Cash flows from operating activities:
Deferred income taxes		$	-			$	(617	)
Tax benefit on stock options			452				-
Other assets			(709	)			911
Accounts payable			(1,515	)			(1,804	)
Other liabilities			(2,744	)			(837	)
Net cash provided by operating activities			2,499				4,668
Cash flows from investing activities:
Purchase of businesses, net of cash acquired			(13,677	)			(16,298	)
Net cash used in investing activities			(14,981	)			(17,602	)
Cash flows from financing activities:
Tax benefit on stock options			3,931				4,383
Net cash provided by financing activities			7,474				7,926

3. Summary of Significant Accounting Policies

 

Stock-Based Compensation

 

Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R (As Amended), Share Based Payment (“SFAS 123R).  The Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period. In addition, pursuant to SFAS 123R the Company is required to estimate the amount of expected forfeitures when calculating share-based compensation instead of accounting for forfeitures as they occur, which was the Company's practice prior to the adoption of SFAS 123R.  Refer to Note 4, Stock-Based Compensation, for further discussion.

 

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Revenue Recognition

 

Revenues are primarily derived from professional services provided on a time and materials basis. For time and material contracts, revenues are recognized and billed by multiplying the number of hours expended in the performance of the contract by the established billing rates. For fixed fee projects, revenues are generally recognized using the proportionate performance method based on the ratio of hours expended to total estimated hours. Billings in excess of costs plus earnings are classified as deferred revenues. On many projects the Company is also reimbursed for out-of-pocket expenses such as airfare, lodging and meals.  These reimbursements are included as a component of revenues. Revenues from software sales are recorded on a gross basis based on the Company's role as principal in the transaction.

Revenues are recognized when the following criteria are met: (1) persuasive evidence of the customer arrangement exists, (2) fees are fixed and determinable, (3) delivery and acceptance have occurred, and (4) collectibility is deemed probable. The Company's policy for revenue recognition in instances where multiple deliverables are sold contemporaneously to the same counterparty is in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, Software Revenue Recognition, Emerging Issues Task Force ("EITF") Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition. Specifically, if the Company enters into contracts for the sale of services and software, then the Company evaluates whether the services are essential to the functionality of the software and whether it has objective fair value evidence for each deliverable in the transaction. If the Company has concluded that the services to be provided are not essential to the functionality of the software and it can determine objective fair value evidence for each deliverable of the transaction, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition policies. Generally, all deliverables of the Company's multiple element arrangements meet these criteria. The Company follows the guidelines discussed above in determining revenues; however, certain judgments and estimates are made and used to determine revenues recognized in any accounting period. Material differences may result in the amount and timing of revenues recognized for any period if different conditions were to prevail.  

 

Revenues are presented net of taxes assessed by governmental authorities.  Sales taxes are generally collected and subsequently remitted on all software sales and certain services transactions as appropriate.

Intangible Assets

 

Goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed, in a business combination. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), the Company performs an annual impairment test of goodwill. The Company evaluates goodwill as of October 1 each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired. As required by SFAS 142, the impairment test is accomplished using a two-step approach. The first step screens for impairment and, when impairment is indicated, a second step is employed to measure the impairment. The Company also reviews other factors to determine the likelihood of impairment. During the nine months ended September 30, 2007, there were no triggering events that may indicate an impairment of goodwill has occurred.

 

Other intangible assets include customer relationships, customer backlog, non-compete arrangements and internally developed software, which are being amortized over the assets' estimated useful lives using the straight-line method. Estimated useful lives range from three months to eight years. Amortization of customer relationships, customer backlog, non-compete arrangements and internally developed software are considered operating expenses and are included in “Amortization of intangibles” in the accompanying  Condensed Consolidated Statements of Operations. The Company periodically reviews the estimated useful lives of its identifiable intangible assets, taking into consideration any events or circumstances that might result in a lack of recoverability or revised useful life.

Use of Estimates

 

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

 

 

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4. Stock-Based Compensation

 

Stock Option Plans

 

In May 1999, the Company's Board of Directors and stockholders approved the 1999 Stock Option/Stock Issuance Plan (the “1999 Plan”). The 1999 Plan contains programs for (i) the discretionary granting of stock options to employees, non-employee board members and consultants for the purchase of shares of the Company's common stock, (ii) the discretionary issuance of common stock directly to eligible individuals, and (iii) the automatic issuance of stock options to non-employee board members. The Compensation Committee of the Board of Directors administers the 1999 Plan, and determines the exercise price and vesting period for each grant. Options granted under the 1999 Plan have a maximum term of 10 years. In the event that the Company is acquired, whether by merger or asset sale or board-approved sale by the stockholders of more than 50% of the Company's outstanding voting stock, each outstanding option under the discretionary option grant program which is not to be assumed by the successor corporation or otherwise continued will automatically accelerate vesting in full, and all unvested shares under the discretionary option grant and stock issuance programs will immediately vest, except to the extent the Company's repurchase rights with respect to those shares are to be assigned to the successor corporation or otherwise continued in effect. The Compensation Committee may grant options under the discretionary option grant program that will accelerate vesting in the acquisition even if the options are assumed or that will accelerate if the optionee's service is subsequently terminated.

The Compensation Committee may grant options and issue shares that accelerate vesting in connection with a hostile change in control effected through a successful tender offer for more than 50% of the Company's outstanding voting stock or by proxy contest for the election of board members, or the options and shares may accelerate upon a subsequent termination of the individual's service.

Total share-based compensation cost recognized for the three months ended September 30, 2007 and 2006 was approximately $1.5 million and $0.8 million, respectively, and the associated current and future income tax benefits recognized for the three months ended September 30, 2007 and 2006 were approximately $0.6 million and $0.2 million, respectively.  For the nine months ended September 30, 2007 and 2006, total share-based compensation cost recognized was approximately $4.5 million and $2.2 million, respectively, and the associated current and future income tax benefits recognized were approximately $1.5 million and $0.6 million, respectively.  As of September 30, 2007, there was $16.4 million of total unrecognized compensation cost related to non-vested share-based awards. This cost is expected to be recognized over a weighted-average period of 3.8 years.

   

Stock option activity for the nine months ended September 30, 2007 was as follows (in thousands, except exercise price information):

  

						Range of				Weighted-Average
		Shares				Exercise Prices				Exercise Price
Options outstanding at January 1, 2007			3,552			$	0.02 - 16.94			$	4.03
Options granted			9				3.00 -  3.00				3.00
Options exercised			(1,033	)			0.02 - 16.94				2.97
Options canceled			(22	)			2.28 -  7.48				3.28
Options outstanding at September 30, 2007			2,506				0.02 - 16.94				4.47
Options vested at September 30, 2007			1,801			$	0.02 - 16.94			$	4.03

 

Restricted stock activity for the nine months ended September 30, 2007 was as follows (in thousands, except fair value information):

 

		Shares				Weighted-Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2007			1,429			$	12.74
Awards granted			28				20.34
Awards vested			(51	)			8.37
Awards canceled			(43	)			13.07
Restricted stock awards outstanding at September 30, 2007			1,363			$	13.05

  

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5. Net Income per Share

 

The following table presents the calculation of basic and diluted net income per share (in thousands, except per share information):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
Net income		$	4,541			$	2,834			$	11,715			$	6,793
Basic:
Weighted-average shares of common stock outstanding			28,258				25,618				27,644				24,525
Shares used in computing basic net income per share			28,258				25,618				27,644				24,525
Effect of dilutive securities:
Stock options			1,601				2,183				1,813				2,357
Warrants			7				46				8				96
Restricted stock subject to vesting			458				209				404				178
Shares used in computing diluted net income per share			30,324				28,056				29,869				27,156
Basic net income per share		$	0.16			$	0.11			$	0.42			$	0.28
Diluted net income per share		$	0.15			$	0.10			$	0.39			$	0.25

6. Commitments and Contingencies

 

The Company leases its office facilities and certain equipment under various operating lease agreements. The Company has the option to extend the term of certain of its office facilities leases. Future minimum commitments under these lease agreements are as follows (table in thousands):

 

		Operating Leases
2007 remaining		$	493
2008			2,112
2009			1,902
2010			1,476
2011			1,095
Thereafter			229
Total minimum lease payments		$	7,307

 

At September 30, 2007, the Company had one letter of credit outstanding for $150,000 to serve as collateral to secure an office lease.  This letter of credit expires in October 2009 and reduces the borrowings available under the Company's accounts receivable line of credit.

7. Balance Sheet Components

 

     The components of accounts receivable are as follows (in thousands):

 

		September 30, 2007				December 31, 2006
Accounts receivable		$	34,160			$	29,461
Unbilled revenue			16,615				9,846
Allowance for doubtful accounts			(646	)			(707	)
Total		$	50,129			$	38,600

 

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     The components of other current assets are as follows (in thousands):

 

		September 30,  2007				December 31, 2006
Income tax receivable		$	2,408			$	2,150
Deferred current tax assets			257				43
Other current assets			2,236				606
Total		$	4,901			$	2,799

The components of other current liabilities are as follows (in thousands):

 

		September 30, 2007				December 31, 2006
Accrued bonus		$	7,267			$	9,851
Accrued expenses related to the BoldTech acquisition			3,921				-
Payroll related costs			2,731				1,258
Accrued subcontractor fees			2,284				1,803
Accrued medical claims expense			1,112				-
Deferred revenue			899				1,318
Other accrued expenses			1,912				1,804
Total		$	20,126			$	16,034

Property and equipment consists of the following (in thousands):

 

		September 30, 2007				December 31, 2006
Computer hardware		$	5,377			$	3,933
Furniture & fixtures			1,182				980
Leasehold improvements			700				275
Software			899				702
Less: Accumulated depreciation			(5,145	)			(4,084	)
Total		$	3,013			$	1,806

 

 

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8. Business Combinations

 

Acquisition of Bay Street Solutions, Inc.

 

On April 7, 2006, the Company acquired Bay Street Solutions, Inc. (“Bay Street”), a national customer relationship management consulting firm, for approximately $9.8 million.  The purchase price consists of approximately $4.1 million in cash, transaction costs of $636,000, and 464,569 shares of the Company's common stock valued at approximately $12.18 per share (approximately $5.7 million worth of the Company's common stock) less the discount ascribed to those shares subject to a lapse acceleration right of approximately $630,000, as determined by a third party valuation firm.  The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. The purchase price was allocated to intangibles based on management's estimate and an independent valuation. The results of Bay Street's operations have been included in the Company's consolidated financial statements since April 7, 2006.

 

The purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	1.6
Customer backlog			0.2
Non-compete agreements			0.1
Goodwill			6.4
Tangible assets acquired:
Accounts receivable			2.4
Other assets			0.6
Property and equipment			0.1
Accrued expenses			(1.6	)
Net assets acquired		$	9.8

The Company estimates that the intangible assets acquired have useful lives of four months to six years.

Acquisition of Insolexen, Corp.

 

On May 31, 2006, the Company acquired Insolexen, Corp. (“Insolexen”), a business integration consulting firm, for approximately $15.0 million. The purchase price consists of approximately $7.7 million in cash, transaction costs of $657,000, and 522,944 shares of the Company's common stock valued at approximately $13.72 per share (approximately $7.2 million worth of the Company's common stock) less the discount ascribed to those shares subject to a lapse acceleration right of approximately $613,000, as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition. The purchase price was allocated to intangibles based on management's estimate and an independent valuation. The results of Insolexen's operations have been included in the Company's consolidated financial statements since May 31, 2006.

The purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	2.8
Customer backlog			0.4
Non-compete agreements			0.1
Goodwill			10.4
Tangible assets and liabilities acquired:
Accounts receivable			3.9
Other assets			2.1
Accrued expenses			(4.7	)
Net assets acquired		$	15.0

The Company estimates that the intangible assets acquired have useful lives of seven months to six years.

 

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 Acquisition of the Energy, Government and General Business (EGG) division of Digital Consulting & Software Services, Inc.

 

On July 21, 2006, the Company acquired the Energy, Government and General Business (“EGG”) division of Digital Consulting & Software Services, Inc., a systems integration consulting business, for approximately $13.1 million. The purchase price consists of approximately $6.4 million in cash, transaction costs of approximately $275,000, and 511,382 shares of the Company's common stock valued at approximately $12.71 per share (approximately $6.5 million worth of the Company's common stock) less the discount ascribed to those shares subject to a lapse acceleration right of approximately $92,000, as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition.  The purchase price was allocated to intangibles based on management's estimate and an independent valuation. The results of EGG's operations have been included in the Company's consolidated financial statements since July 21, 2006.

The purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	3.7
Customer backlog			0.5
Non-compete agreements			0.1
Goodwill			6.2
Tangible assets and liabilities acquired:
Accounts receivable			3.8
Other assets			0.4
Accrued expenses			(1.6	)
Net assets acquired		$	13.1

   The Company estimates that the intangible assets acquired have useful lives of five months to six years.

Acquisition of e tech solutions, Inc.

 

On February 20, 2007, the Company acquired e tech solutions, Inc. (“E Tech”), a solutions-oriented IT consulting firm, for approximately $12.3 million. The purchase price consists of approximately $5.9 million in cash, transaction costs of approximately $663,000, and 306,247 shares of the Company's common stock valued at approximately $20.34 per share (approximately $6.2 million worth of the Company's common stock) less the value of those shares subject to a lapse acceleration right of approximately $474,000, as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition.  The purchase price was allocated to intangibles based on management's estimate and an independent valuation. Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of E Tech's operations have been included in the Company's consolidated financial statements since February 20, 2007.

The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	3.0
Customer backlog			0.5
Non-compete agreements			0.1
Goodwill			9.5
Tangible assets and liabilities acquired:
Accounts receivable			1.9
Property and equipment			0.1
Other assets			0.1
Accrued expenses			(2.9	)
Net assets acquired		$	12.3

The Company estimates that the intangible assets acquired have useful lives of ten months to eight years.

 

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Acquisition of Tier1 Innovation, LLC

 

On June 25, 2007, the Company acquired Tier1 Innovation, LLC (“Tier1”), a national customer relationship management consulting firm, for approximately $15.1 million. The purchase price consists of approximately $7.1 million in cash, transaction costs of approximately $762,500, and 355,633 shares of the Company's common stock valued at approximately $20.69 per share (approximately $7.4 million worth of the Company's common stock) less the value of those shares subject to a lapse acceleration right of approximately $144,000 as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition.  The purchase price was allocated to intangibles based on management's estimate and an independent valuation.  Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of Tier1's operations have been included in the Company's consolidated financial statements since June 25, 2007.

The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	0.9
Customer backlog			0.4
Non-compete agreements			0.1
Internally developed software			0.2
Goodwill			11.9
Tangible assets and liabilities acquired:
Accounts receivable			2.3
Property and equipment			0.1
Accrued expenses			(0.8	)
Net assets acquired		$	15.1

The Company estimates that the intangible assets acquired have useful lives of six months to five years.

Acquisition of BoldTech Systems, Inc.

On September 20, 2007, the Company acquired BoldTech Systems, Inc. (“BoldTech”), an information technology consulting firm, for approximately $20.9 million. The purchase price consists of approximately $10.0 million in cash, transaction costs of approximately $1.0 million, and 449,683 shares of the Company's common stock valued at approximately $23.69 per share (approximately $10.6 million worth of the Company's common stock) less the value of those shares subject to a lapse acceleration right of approximately $723,000 as determined by a third party valuation firm. The total purchase price has been allocated to the assets acquired, including identifiable intangible assets, based on their respective fair values at the date of acquisition.  The purchase price was allocated to intangibles based on management's estimate and an independent valuation.  Management expects to finalize the purchase price allocation within twelve months of the acquisition date as certain initial accounting estimates are resolved. The results of BoldTech's operations have been included in the Company's consolidated financial statements since September 20, 2007.

The preliminary purchase price allocation is as follows (in millions):

 

Intangibles:
Customer relationships		$	3.8
Customer backlog			0.1
Non-compete agreements			0.1
Goodwill			13.0
Tangible assets and liabilities acquired:
Cash			4.3
Accounts receivable			5.2
Property and equipment			0.7
Other assets			2.4
Accrued expenses			(8.7	)
Net assets acquired		$	20.9

 

The Company estimates that the intangible assets acquired have useful lives of three months to four years.

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Pro Forma Results of Operations

 

The following presents the unaudited pro forma combined results of operations of the Company with the inclusion Bay Street, Insolexen, EGG, E Tech, Tier1, and BoldTech for the entire three months and nine months ended September 30, 2007 and 2006, after giving effect to certain pro forma adjustments related to the amortization of acquired intangible assets. These unaudited pro forma results are not necessarily indicative of the actual consolidated results of operations had the acquisitions actually occurred on January 1, 2007 and January 1, 2006 or of future results of operations of the consolidated entities (in thousands, except per share information):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2007				2006				2007				2006
Revenues		$	58,863			$	55,865			$	181,692			$	162,602
Net income		$	4,745			$	2,956			$	13,468			$	7,384
Basic net income per share		$	0.17			$	0.11			$	0.47			$	0.28
Diluted net income per share		$	0.15			$	0.10			$	0.44			$	0.25

 

9. Goodwill and Intangible Assets

 

     Goodwill

     The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows (in thousands):

 

Balance at December 31, 2006		$	69,170
BoldTech Acquisition			13,036
Tier1 Acquisition			11,883
E Tech Acquisition			9,518
Adjustments to preliminary purchase price allocations			(385	)
Balance at September 30, 2007		$	103,222

 

     Intangible Assets with Definite Lives

     Following is a summary of Company's intangible assets that are subject to amortization (in thousands):

		September 30, 2007												December 31, 2006
		Gross Carrying Amounts				Accumulated Amortization				Net Carrying  Amounts				Gross Carrying  Amounts				Accumulated Amortization				Net Carrying Amounts
Customer relationships		$	20,010			$	(4,312	)		$	15,698			$	12,860			$	(2,808	)		$	10,052
Non-compete agreements			2,599				(1,413	)			1,186				2,393				(1,094	)			1,299
Customer backlog			980				(554	)			426				-				-				-
Internally developed software			1,124				(376	)			748				755				(220	)			535
Total		$	24,713			$	(6,655	)		$	18,058			$	16,008			$	(4,122	)		$	11,886

The estimated useful lives of acquired identifiable intangible assets are as follows:

 

Customer relationships	3 - 8 years
Non-compete agreements	3 - 5 years
Customer backlog	3 months to 10 months
Internally developed software	3 - 5 years

10. Line of Credit and Long-Term Debt

 

In June 2006, the Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank and Key Bank National Association. The amended agreement increased the total size of the Company's senior bank credit facilities from $28.5 million to $50 million by increasing the accounts receivable line of credit from $15 million to $25 million and increasing the acquisition term line of credit from $13.5 million to $25 million.

 

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The accounts receivable line of credit, which expires in October 2009, provides for a borrowing capacity equal to all eligible accounts receivable, including 80% of unbilled revenues, subject to certain borrowing base calculations as defined in the agreement, but in no event more than $25 million. Borrowings under this line of credit bear interest at the bank's prime rate (7.75% on September 30, 2007). As of September 30, 2007, there were no amounts outstanding under the accounts receivable line of credit and $24.8 million of available borrowing capacity due to an outstanding letter of credit to secure an office lease.

 

The Company's $25 million term acquisition line of credit provides an additional source of financing for certain qualified acquisitions. As of September 30, 2007, there were no amounts outstanding under this acquisition line of credit. Borrowings under this acquisition line of credit bear interest equal to the four year U.S. Treasury note yield plus 3% based on the spot rate on the day the draw is processed (7.2% on September 30, 2007). Draws under this acquisition line may be made through June 29, 2008.  The Company currently has $25 million of available borrowing capacity under this acquisition line of credit.

The Company is required to comply with various financial covenants under the $50 million credit facility. Specifically, the Company is required to maintain a ratio of after tax earnings before interest, depreciation and amortization, and other non-cash charges, including but not limited to stock and stock option compensation expense on trailing three months annualized, to current maturities of long-term debt and capital leases plus interest of at least 1.50 to 1.00, a ratio of cash plus eligible accounts receivable including 80% of unbilled revenues less principal amount of all outstanding advances on the accounts receivable line of credit to advances under the term acquisition line of credit of at least 0.75 to 1.00, and a maximum ratio of all outstanding advances under the entire credit facility to earnings before taxes, interest, depreciation, amortization and other non-cash charges, including but not limited to, stock and stock option compensation expense including pro forma adjustments for acquisitions on a trailing twelve month basis of no more than 2.50 to 1.00. As of September 30, 2007, the Company was in compliance with all covenants under this facility. This credit facility is secured by substantially all of the assets of the Company.

11. Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  The Internal Revenue Service (IRS) has completed examinations of the Company's U.S. income tax returns for 2002, 2003 and 2004. The IRS proposed no significant adjustments to any of the Company's tax positions.

The Company adopted the provisions of the Financial Accounting Standards Board (the “FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”), on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized no increases or decreases in the total amount of previously unrecognized tax benefits.  The Company had no unrecognized tax benefits as of January 1, 2007 or September 30, 2007.

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in its provision for income tax. The Company had no amounts accrued for the payment of interest or penalties at January 1, 2007 or September 30, 2007.

The Company's effective tax rate was 40.6% and 41.9% for the three and nine months ended September 30, 2007 compared to 39.4% and 41.5% for the three and nine months ended September 30, 2006. The difference between the Company's federal statutory rate of 35% and effective tax rate relates primarily to state income taxes, net of the federal benefit, and non-deductible stock compensation partially offset by the tax benefits of certain dispositions of incentive stock options by holders.  The Company has deferred tax assets resulting from net operating losses and capital loss carry forwards of acquired companies amounting to approximately $2.3 million, for which a valuation allowance of $1.8 million is recorded. Additionally, the Company has deferred tax assets of $2.8 million related to stock compensation, reserves and accruals. At September 30, 2007, deferred tax assets net of the valuation allowance total $3.3 million and are offset by deferred tax liabilities of $5.4 million related to identifiable intangibles and cash to accrual adjustments from current and prior acquisitions.  Any reversal of the valuation allowance on the deferred tax assets will be adjusted against goodwill and will not have an impact on our statement of operations. All of the net operating losses and capital loss carry forwards relate to acquired entities, and as such are subject to annual limitations on usage under the “ownership change” provisions of the Internal Revenue Code.

12.  Recent Accounting Pronouncements

 

   In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an amendment of SFAS No. 115 (“SFAS 159”). SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect, if any, of SFAS 159 and does not expect that the pronouncement will have a material impact on its consolidated financial statements.

   In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements ("SFAS 157").  SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements.  SFAS 157 will be applied prospectively and will be effective for periods beginning after November 15, 2007.  The Company is currently evaluating the effect, if any, of SFAS 157 and does not expect that the pronouncement will have a material impact on its consolidated financial statements.

 

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In June 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, treatment of interest and penalties, and disclosure of such positions. The Company adopted the provisions of FIN 48 on January 1, 2007 as required and discussed in Note 11, Income Taxes.

   In June 2006, the EITF ratified EITF Issue No. 06-3, How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (“EITF 06-3”).  A consensus was reached that entities may adopt a policy of presenting taxes in the income statement on either a gross or net basis. An entity should disclose its policy of presenting taxes and the amount of any taxes presented on a gross basis should be disclosed, if significant. The Company adopted EITF 06-3 on January 1, 2007.  There was no effect of the adoption on the condensed consolidated financial statements as of September 30, 2007. The Company presents revenues net of taxes as disclosed in Note 3, Summary of Significant Accounting Policies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Exchange Rate Sensitivity

 

During the nine months ended September 30, 2007, $687,000 of our total revenues was attributable to our Canadian operations and $46,000 of our total revenues was attributable to our Chinese operations.  Our exposure to changes in foreign currency rates primarily arises from short-term intercompany transactions with our Canadian and Chinese subsidiary and from client receivables denominated in the Canadian Dollar.  Our foreign subsidiaries incur a significant portion of their expenses in their applicable currency as well, which helps minimize our risk of exchange rate fluctuations.  Based on the amount of revenues attributed to Canada and China during the nine months ended September 30, 2007, this exchange rate risk will not have a material impact on our financial position or results of operations.

Interest Rate Sensitivity

 

We had unrestricted cash and cash equivalents totaling $0.3 million and $4.5 million at September 30, 2007 and December 31, 2006, respectively.  These amounts were invested primarily in money market funds. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

 

Item 1A. Risk Factors

 

As of the date of this filing, there has been a material change from the risk factors previously disclosed as “Risk Factors” in Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2006, as amended, and the additional risk factor has been included below.

International operations subject us to additional political and economic risks that could have an adverse impact on our business.

 

   In connection with our acquisition of BoldTech Systems, Inc., we acquired a development center in Hangzhou, China.  We also have an agreement with a third party offshore facility in Eastern Europe that is operated for our benefit.  Because of our limited experience with facilities outside of the United States, we are subject to certain risks related to expanding our presence into non-U.S. regions, including risks related to complying with a wide variety of national and local laws, restrictions on the import and export of certain technologies and multiple and possibly overlapping tax structures. In addition, we may face competition from companies that may have more experience with operations in such countries or with international operations generally. We may also face difficulties integrating new facilities in different countries into our existing operations, as well as integrating employees that we hire in different countries into our existing corporate culture.

 

       Furthermore, there are risks inherent in expanding into non-U.S. regions, including, but not limited to:

 

·      political and economic instability;

·      global health conditions and potential natural disasters;

·      unexpected changes in regulatory requirements;

·      international currency controls and exchange rate fluctuations;

·      reduced protection for intellectual property rights in some countries; and

·      additional vulnerability from terrorist groups targeting American interests abroad.

 

Any one or more of the factors set forth above could have a material adverse effect on our international operations, and, consequently, on our business, financial condition and operating results.

Item 6. Exhibits

 

The exhibits filed as part of this Report on Form 10-Q are listed in the Exhibit Index immediately preceding the exhibits.

 

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 SIGNATURES

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

	PERFICIENT, INC.
Date: November 8, 2007	By:	/s/ John T. McDonald
		John T. McDonald
		Chief Executive Officer(Principal Executive Officer)

 

Date: November 8, 2007	By:	/s/ Paul E. Martin
		Paul E. Martin
		Chief Financial Officer(Principal Financial Officer)

 

Date: November 8, 2007	By:	/s/ Richard T. Kalbfleish
		Richard T. Kalbfleish
		Vice President of Finance and Administration(Principal Accounting Officer)

 

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