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Part I.	Financial Information	3
Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2006 and 2005	4
	Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2006	5
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
Part II.	Other Information	28
Item 1A.	Risk Factors	28
Item 6.	Exhibits	28
Signatures		29

 

 

2

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Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets

 

			September 30, 2006			December 31, 2005
ASSETS			(In thousands)
Current assets:
Cash and cash equivalents		$	65		$	5,096
Accounts receivable, net			37,916			23,251
Other current assets:
Prepaid expenses			1,783			887
Other current assets			2,773			1,530
Total other current assets			4,556			2,417
Total current assets			42,537			30,764
Property and equipment, net			1,584			960
Goodwill			68,946			46,263
Intangible assets, net			12,973			5,768
Other non-current assets			1,016			1,180
Total assets		$	127,056		$	84,935
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	2,260		$	3,774
Current portion of long-term debt			1,410			1,337
Other current liabilities			16,286			8,331
Note payable to related parties			--			244
Total current liabilities			19,956			13,686
Long-term borrowings, net of current portion			5,472			5,338
Deferred taxes			1,004			--
Total liabilities			26,432			19,024
Stockholders' equity:
Common stock (par value $.001 per share; 50,000,000 shares authorized and
26,270,076 shares issued and outstanding as of September 30, 2006;
23,294,509 shares issued and outstanding as of December 31, 2005)			26			23
Additional paid-in capital			143,055			115,120
Accumulated other comprehensive loss			(105	)		(87	)
Accumulated deficit			(42,352	)		(49,145	)
Total stockholders' equity			100,624			65,911
Total liabilities and stockholders' equity		$	127,056		$	84,935

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,
			2006			2005			2006			2005
			(In thousands, except per share data)
Revenues
Services		$	40,219		$	23,157		$	98,577		$	60,049
Software			1,532			1,918			6,800			4,718
Reimbursable expenses			2,543			1,048			6,071			2,741
Total revenues			44,294			26,123			111,448			67,508

Cost of revenues (exclusive of depreciation and amortization, shown separately below)
Project personnel costs			24,190			13,771			59,911			36,319
Software costs			1,247			1,503			5,673			3,881
Reimbursable expenses			2,543			1,048			6,071			2,741
Other project related expenses			460			502			1,474			1,265
									73,073
Total cost of revenues			28,440			16,824			73,129			44,206
Gross margin			15,854			9,299			38,319			23,302
Selling, general and administrative			9,539			5,101			23,414			12,926
Depreciation			264			149			647			459
Amortization of intangible assets			1,211			494			2,335			1,074
Total operating expenses			11,014			5,744			26,396			14,459
Income from operations			4,840			3,555			11,923			8,843
Interest income			45			3			76			11
Interest expense			(217	)		(204	)		(463	)		(438	)
Other			7			5			72			13
Income before income taxes			4,675			3,359			11,608			8,429
Provision for income taxes			1,841			1,293			4,815			3,248
Net income		$	2,834		$	2,066		$	6,793		$	5,181
Basic net income per share		$	0.11		$	0.09		$	0.28		$	0.24
Diluted net income per share		$	0.10		$	0.08		$	0.25		$	0.21
Shares used in computing basic net income per share			25,618			22,418			24,525			21,703
Shares used in computing diluted net income per share			28,056			25,504			27,156			25,034

 

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, 2006

(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, 2005			23,295		$	23		$	115,120		$	(87	)	$	(49,145	)	$	65,911
Bay Street, Insolexen, and EGG acquisitions			1,499			2			17,989			--			--			17,991
Warrants exercised			145			--			146			--			--			146
Stock options exercised			1,324			1			3,133			--			--			3,134
Purchases of stock from Employee Stock Purchase Plan			4			--			57			--			--			57
Tax benefit of stock option exercises			--			--			4,383			--			--			4,383
Stock compensation			--			--			2,227			--			--			2,227
Vested stock compensation			3			--			--			--			--			--
Foreign currency translation adjustment			--			--			--			(18	)		--			(18	)
Net income			--			--			--			--			6,793			6,793
Total comprehensive income			--			--			--			--			--			6,775
Balance at September 30, 2006			26,270		$	26		$	143,055		$	(105	)	$	(42,352	)	$	100,624

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,
			2006			2005
		(In thousands)
OPERATING ACTIVITIES
Net income		$	6,793		$	5,181
Adjustments to reconcile net income to net cash provided by (used in) operations:
Depreciation			647			459
Amortization of intangibles			2,335			1,074
Non-cash stock compensation			2,227			191
Non-cash interest expense			6			19
Tax benefit on stock options			452			--
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			(4,993	)		(3,013	)
Other assets			(709	)		(1,102	)
Accounts payable			(1,515	)		(4,476	)
Other liabilities			(2,744	)		1,455
Net cash provided by (used in) operating activities			2,499			(212	)
INVESTING ACTIVITIES
Purchase of property and equipment			(995	)		(548	)
Capitalization of software developed for internal use			(59	)		(484	)
Purchase of businesses, net of cash acquired			(13,677	)		(9,704	)
Payments on Javelin Notes			(250	)		(250	)
Net cash used in investing activities			(14,981	)		(10,986	)
FINANCING ACTIVITIES
Proceeds from short-term borrowings			28,600			12,000
Payments on short-term borrowings			(27,400	)		(2,000	)
Payments on long-term debt			(994	)		(815	)
Deferred offering costs			--			(943	)
Tax benefit on stock options			3,931			946
Proceeds from exercise of stock options and Employee Stock Purchase Plan			3,191			1,290
Proceeds from exercise of warrants			146			107
Net cash provided by financing activities			7,474			10,585
Effect of exchange rate on cash and cash equivalents			(23	)		(36	)
Change in cash and cash equivalents			(5,031	)		(649	)
Cash and cash equivalents at beginning of period			5,096			3,906
Cash and cash equivalents at end of period		$	65		$	3,257
Supplemental disclosures:
Interest paid		$	465		$	394
Cash paid for income taxes		$	3,111		$	1,585
Non cash activities:
Stock issued for Purchase of Business		$	17,991		$	8,864
Change in goodwill		$	533		$	(493	)

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, 2005, as amended. Operating results for the three months and nine months ended September 30, 2006 may not be indicative of the results for the full fiscal year ending December 31, 2006. Certain prior year balances have been reclassified to conform to current period presentation.

 

2. Summary of Significant Accounting Policies

 

Stock-Based Compensation

 

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”). This Statement requires that effective January 1, 2006, the costs of employee share-based payments be measured at fair value on the awards' grant date and recognized in the financial statements over the requisite service period.

 

Prior to January 1, 2006, the Company accounted for share-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations and elected the disclosure option of SFAS No. 123 as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS No. 123 required that companies either recognize compensation expense for grants of stock, stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income and earnings per share in the notes to the financial statements. Accordingly, the Company measured compensation expense for stock options as the excess, if any, of the estimated fair market value of the Company's stock at the date of grant over the exercise price. The Company has elected to provide pro forma effects of this measurement in a footnote to its financial statements. Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective application transition method (see Note 3).

 

Revenue Recognition

 

Revenues are primarily derived from professional services provided on a time and materials basis. For time and material projects, revenue is recognized and billed by multiplying the number of hours expended in the performance of the project by the established billing rates. For fixed fee projects, revenue is generally recognized using the proportionate performance method based on the ratio of hours expended to total estimated hours. Provisions for estimated losses on incomplete projects are made on a project-by-project basis and are recognized in the period in which such losses are determined. 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. These reimbursements are included as a component of revenue. Revenue from software sales is recorded on a gross basis based on the Company's role as principal in the transaction. In the event the Company does not meet the requirements to be considered a principal in the software sale transaction, the revenue would be recorded on a net basis.

 

Revenue is recognized when the following criteria are met: (1) persuasive evidence of the customer arrangement exists, (2) fees are fixed and determinable, (3) acceptance has occurred, and (4) collectibility is deemed probable. We determine the fair value of each element in the arrangement based on vendor-specific objective evidence (“VSOE”) of fair value. VSOE of fair value is based upon the normal pricing and discounting practices for those products and services when sold separately. We follow very specific and detailed guidelines in determining revenues; however, certain judgments and estimates are made and used to determine revenue recognized in any accounting period. Material differences may result in the amount and timing of revenue recognized for any period if different conditions were to prevail.

 

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Revenue from internally developed software which is allocated to maintenance and support is recognized ratably over the maintenance term (typically one year).

 

Revenue allocated to training and consulting service elements is recognized as the services are performed. Our consulting services are not essential to the functionality of our products as such services are available from other vendors.

 

Intangible Assets

 

In a business combination, goodwill represents the excess purchase price over the fair value of net assets acquired, or net liabilities assumed. As required, the Company performs an annual impairment test of goodwill. The Company evaluates goodwill at the enterprise level as of October 1 each year or more frequently if events or changes in circumstances indicate that goodwill might be impaired. The impairment test utilizes a two-stepped 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. No impairment was indicated using data as of October 1, 2005, and as of September 30, 2006, there were no events or changes in circumstances which would indicate that goodwill might be impaired.

Other intangible assets, including amounts allocated to customer relationships, customer backlog, non-compete agreements, and internally developed software, are being amortized over the assets' estimated useful lives using the straight-line method. Estimated useful lives range from four months to eight years. Amortization of intangible assets is considered operating expense and is included in “Amortization of intangible assets” in the accompanying unaudited interim condensed consolidated statements of operations. The Company periodically reviews the estimated useful lives of its other intangible assets, taking into consideration any events or circumstances that might result in a lack of recoverability or revised useful life. The Company also assesses potential impairments to intangible assets on an annual basis or when there is evidence that events or changes in circumstances impacted the carrying amount of an asset. The Company’s judgments regarding the existence of impairment indicators and future cash flows related to intangible assets are based on operational performance of the businesses, market conditions and other factors.

Long-lived assets held and used are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be entirely recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the determination was made. Management has determined that no impairment exists as of September 30, 2006.

 

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.

 

3. Stock-Based Compensation

 

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective application transition method. Under this method, compensation cost for the portion of awards for which the requisite service has not yet been rendered that are outstanding as of the adoption date is recognized over the remaining service period. The compensation cost for that portion of awards is based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. All new awards and awards that are modified, repurchased, or cancelled after the adoption date are accounted for under the provisions of SFAS No. 123R. Prior periods are not restated under this transition method. The Company recognizes share-based compensation ratably using the straight-line attribution method over the requisite service period. In addition, pursuant to SFAS No. 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 No. 123R.

 

Total share-based compensation cost recognized for the three months ended September 30, 2006 and 2005 was approximately $758,000 and $73,000, and the associated current and future income tax benefits recognized for the three months ended September 30, 2006 and 2005 were approximately $238,000 and $28,000. For the nine months ended September 30, 2006 and 2005, total share-based compensation cost recognized was approximately $2.2 million and $191,000, and the associated current and future income tax benefits recognized were approximately $566,000 and $73,000. As of September 30, 2006, there was $8.6 million of total unrecognized compensation cost related to non-vested share-based awards. This cost is expected to be recognized over a weighted-average period of 2.4 years.

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Prior to the adoption of SFAS No. 123R, the Company accounted for employee stock-based compensation using the intrinsic value method prescribed by APB 25. As presented below, the Company applied the disclosure provisions of SFAS 123, as amended by SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, as if the fair value method had been applied. If this method had been used, the Company’s net income and net income per share for the three and nine months ended September 30, 2005 would have been adjusted to the pro forma amounts below (in thousands except per share data):

		Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income -- as reported		$	2,066		$	5,181
Total stock-based compensation costs, net of tax, included in the determination of net income as reported			45			118
The stock-based employee compensation cost, net of tax, that would have been included in the determination of net income if the fair value based method had been applied to all awards			(533	)		(1,588	)
Pro forma net income available to common stockholders		$	1,578		$	3,711
Earnings per share:
Basic -- as reported		$	0.09		$	0.24
Basic -- pro forma		$	0.07		$	0.18
Diluted -- as reported		$	0.08		$	0.21
Diluted -- pro forma		$	0.06		$	0.15

   

Equity Incentive Plans

The Company did not grant any stock option awards during the nine months ended September 30, 2006. The fair value of options granted during the nine months ended September 30, 2005 was calculated at the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions: risk free interest rate of 3.61%; dividend yield of 0%; weighted-average expected life of options of 5 years; and a volatility factor of 1.384.

 

Stock option activity for the nine months ended September 30, 2006 was as follows (in thousands, except exercise price information):

 

			Shares		Range of Exercise Prices				Weighted-Average Exercise Price
Options outstanding at January 1, 2006			5,268		$	0.02 - $16.94		$	3.53
Options granted			--			--			--
Options exercised			(1,324	)	$	0.02 - $12.13		$	2.43
Options canceled			(32	)	$	1.01 - $13.25		$	5.95
Options outstanding at September 30, 2006			3,912		$	0.02 - $16.94		$	3.88
Options vested at September 30, 2006			2,466		$	0.02 - $16.94		$	3.33

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Restricted stock activity for the nine months ended September 30, 2006 was as follows (in thousands, except fair value information):

 

			Shares			Weighted-Average Grant Date Fair Value
Restricted stock awards outstanding at January 1, 2006			614		$	7.69
Awards granted			59		$	12.98
Awards released			(2	)	$	6.83
Awards canceled			(13	)	$	8.01
Restricted stock awards outstanding at September 30, 2006			658		$	8.16

 

4. Warrants

 

The following table summarizes information regarding warrants outstanding and exercisable as of September 30, 2006 (in thousands, except exercise price information):

Warrants Outstanding and Exercisable
Exercise Price		Warrants
$1.98			9
$1.98			9

 

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,
			2006			2005			2006			2005
Net income		$	2,834		$	2,066		$	6,793		$	5,181
Basic:
Weighted-average shares of common stock outstanding			24,368			21,168			23,275			20,538
Weighted-average shares of common stock outstanding subject to contingency (i.e. restricted stock)			1,250			1,250			1,250			1,165
Shares used in computing basic net income per share			25,618			22,418			24,525			21,703
Effect of dilutive securities:
Stock options			2,183			2,933			2,357			3,181
Warrants			46			153			96			150
Restricted stock subject to vesting			209			--			178			--
Shares used in computing diluted net income per share			28,056			25,504			27,156			25,034
Basic net income per share		$	0.11		$	0.09		$	0.28		$	0.24
Diluted net income per share		$	0.10		$	0.08		$	0.25		$	0.21

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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 (in thousands):

   

			Operating Leases
2006 remaining		$	357
2007			1,258
2008			1,020
2009			912
2010			662
Thereafter			359
Total minimum lease payments		$	4,568

The Company is required to maintain a letter of credit for $200,000 with Silicon Valley Bank to serve as collateral for an office space lease. This letter of credit with Silicon Valley Bank reduces the borrowings available under the Company's line of credit with Silicon Valley Bank. This letter of credit will remain in effect through October 2009.

7. Balance Sheet Components

 

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

 

			September 30, 2006			December 31, 2005
Accounts receivable		$	25,333		$	17,013
Unbilled revenue			12,875			6,581
Allowance for doubtful accounts			(292	)		(343	)
Total		$	37,916		$	23,251

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

 

			September 30, 2006			December 31, 2005
Income tax receivable		$	282		$	1,367
Other current assets			2,491			163
Total		$	2,773		$	1,530

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

			September 30,			December 31,
			2006			2005
Accrued payroll related costs		$	9,084		$	4,028
Accrued subcontractor fees			1,944			1,842
Deferred revenue			1,709			1,084
Other accrued expenses			3,549			1,377
Total		$	16,286		$	8,331

 

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

			September 30, 2006			December 31, 2005
Computer Hardware & Software		$	4,257		$	3,182
Furniture & Fixtures			915			781
Leasehold Improvements			219			150
Gross Property & Equipment			5,391			4,113
Less: Accumulated Depreciation			(3,807	)		(3,153	)
Total		$	1,584		$	960

 

8. Comprehensive Income

 

The components of comprehensive income are as follows (in thousands):

 

			Three Months Ended September 30,						Nine Months Ended September 30,
			2006			2005			2006			2005
Net income		$	2,834		$	2,066		$	6,793		$	5,181
Foreign currency translation adjustments			(11	)		6			(18	)		(23	)
Total comprehensive net income		$	2,823		$	2,072		$	6,775		$	5,158

9. Business Combinations

 

Acquisition of iPath Solutions, Ltd.

 

On June 10, 2005, the Company acquired iPath Solutions, Ltd. (“iPath”), a privately held technology consulting company, for $9.9 million. The purchase price consists of $3.9 million in cash, $900,000 of liabilities repaid on behalf of iPath, transaction costs of $600,000, and 623,803 shares of the Company's common stock valued at approximately $7.24 per share (approximately $4.5 million worth of Company's common stock). 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. Goodwill is assigned at the enterprise level and is expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on management's estimate and an independent appraisal. The results of the iPath operations have been included in the Company's consolidated financial statements since June 10, 2005.

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

Intangibles:
Customer relationships		$	0.7
Customer backlog			0.2
Non-compete agreements			0.1
Goodwill			7.3
Tangible assets and liabilities acquired:
Accounts receivable			1.6
Property and equipment			0.1
Accrued expenses			(0.1	)
Net assets acquired		$	9.9

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

  

 

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Acquisition of Vivare, LP

 

On September 2, 2005, the Company acquired Vivare, LP (“Vivare”), a privately held technology consulting company, for $9.8 million. The purchase price consists of $4.9 million in cash, transaction costs of approximately $500,000, and 618,500 shares of the Company's common stock valued at approximately $7.03 per share (approximately $4.4 million worth of Company's common stock). 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. Goodwill is assigned at the enterprise level and is expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on management's estimate and an independent appraisal. The results of Vivare’s operations have been included in the Company's consolidated financial statements since September 2, 2005.

 

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

 

Intangibles:
Customer relationships		$	1.0
Customer backlog			0.1
Non-compete agreements			0.1
Goodwill			6.8
Tangible assets acquired:
Accounts receivable			1.7
Property and equipment			0.1
Net assets acquired		$	9.8

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

 

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 $9.7 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 value of 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. Goodwill is assigned at the enterprise level and is expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on management's estimate and an independent appraisal. 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 Bay Street's operations have been included in the Company's interim consolidated financial statements since April 7, 2006.

 

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

 

Intangibles:
Customer relationships		$	1.6
Customer backlog			0.2
Non-compete agreements			0.1
Goodwill			5.5
Tangible assets acquired:
Accounts receivable			2.4
Other assets			0.7
Property and equipment			0.1
Accrued expenses			(0.9	)
Net assets acquired		$	9.7

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

 

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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 $695,000, 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 value of 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. Goodwill is assigned at the enterprise level and is expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on management's estimate and an independent appraisal. 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 Insolexen's operations have been included in the Company's interim consolidated financial statements since May 31, 2006.

The preliminary 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			4.0
Other assets			2.1
Accrued expenses			(4.8	)
Net assets acquired		$	15.0

The Company believes 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 $13.2 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 value of 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. Goodwill is assigned at the enterprise level and is expected to be deductible for tax purposes. The purchase price was allocated to intangibles based on management's estimate and an independent appraisal. 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 EGG's operations have been included in the Company's interim consolidated financial statements since July 21, 2006.

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

 

Intangibles:
Customer relationships		$	3.8
Customer backlog			0.5
Non-compete agreements			0.1
Goodwill			6.2
Tangible assets and liabilities acquired:
Accounts receivable			3.7
Other assets			0.5
Accrued expenses			(1.6	)
Net assets acquired		$	13.2

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

Pro forma Results of Operations

 

The following presents the unaudited pro forma combined results of operations of the Company with iPath, Vivare, Bay Street, Insolexen, and EGG for the three months and nine months ended September 30, 2005 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, 2005 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,
			2006			2005			2006			2005
Revenues		$	45,415		$	39,551		$	132,474		$	108,594
Net income		$	2,978		$	2,631		$	6,051		$	6,826
Basic net income per share		$	0.12		$	0.11		$	0.24		$	0.28
Diluted net income per share		$	0.11		$	0.10		$	0.22		$	0.25

 

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10. Intangible Assets

 

     Intangible Assets with Indefinite Lives

 

          The changes in the carrying amount of goodwill for the nine months ended September 30, 2006 are as follows (in millions):

 

Balance at December 31, 2005		$	46.3
Bay Street Acquisition			5.5
Insolexen Acquisition			10.4
EGG Acquisition			6.2
Adjustment to goodwill related to deferred taxes associated with acquisitions			0.5
Balance at September 30, 2006		$	68.9

 

     Intangible Assets with Definite Lives

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

 

			September 30, 2006									December 31, 2005
			Gross Carrying Amounts			Accumulated Amortization			Net Carrying Amounts			Gross Carrying Amounts			Accumulated Amortization			Net Carrying Amounts
Customer relationships		$	12,900		$	(2,202	)	$	10,698		$	4,820		$	(1,122	)	$	3,698
Non-compete agreements			2,393			(1,072	)		1,321			2,073			(621	)		1,452
Customer backlog			920			(462	)		458			130			(57	)		73
Internally developed software			678			(182	)		496			599			(54	)		545
Total		$	16,891		$	(3,918	)	$	12,973		$	7,622		$	(1,854	)	$	5,768

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

 

Customer relationships	3 - 8 years
Non-compete agreements	2 - 5 years
Customer backlog	4 months to 1 year
Internally developed software	5 years

 

11. Line of Credit and Long-Term Debt

 

On June 29, 2006, the Company entered into an Amended and Restated Loan and Security Agreement with Silicon Valley Bank and KeyBank National Association. The amended agreement increased the total size of the Company's senior bank credit facilities from $28.5 million to $52 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 $27 million.

 

The accounts receivable line of credit, which expires in June 2009, provides for a borrowing capacity equal to all eligible accounts receivable, including 80% of unbilled revenue, 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 (8.25% at September 30, 2006). As of September 30, 2006, there was $5.2 million outstanding under the accounts receivable line of credit and $19.8 million of available borrowing capacity, excluding $200,000 reserved for an outstanding letter of credit to secure a facility lease.  

 

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The Company's $27 million term acquisition line of credit provides an additional source of financing for certain qualified acquisitions. As of September 30, 2006, the balance outstanding under this acquisition line of credit was approximately $1.7 million. 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 (7.58% at September 30, 2006). Borrowings under this acquisition line are repayable in thirty-six equal monthly installments after the initial interest only period which continues through June 29, 2007. Draws under this acquisition line may be made through June 29, 2008. As of September 30, 2006, the balance outstanding under this acquisition line of credit of $1.7 million had an average interest rate of 7.00%. The Company currently has approximately $25.3 million of available borrowing capacity under this acquisition line of credit.

The Company is required to comply with various financial covenants under the $52 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 revenue less principal amount of all outstanding advances on 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, 2006, the Company was in compliance with all covenants under this facility. This credit facility is secured by substantially all assets of the Company.

 

Notes payable to related party at December 31, 2005 consisted of non interest-bearing notes issued to the shareholders of Javelin Solutions, Inc. (“Javelin”) in April 2002 in connection with the Company's acquisition of Javelin. As of September 30, 2006, these notes have been fully paid.

12. Income Taxes

The Company’s effective tax rates were 39.4% and 41.5% for the three and nine months ended September 30, 2006, respectively, compared to 38.5% for the three and nine months ended September 30, 2005. The increase in the Company’s effective tax rate was due to non-deductible stock compensation related to incentive stock options included in our statement of operations for the first time as a result of our modified prospective application transition method for adoption of SFAS 123R on January 1, 2006. The Company has deferred tax assets resulting from net operating losses and capital loss carry forwards of acquired companies amounting to approximately $2.6 million, for which a valuation allowance of $2.2 million is recorded. Additionally, the Company has deferred tax assets of $3.7 million related to fixed assets, reserves and accruals. Deferred tax assets net of the valuation allowance total $4.1 million and are partially offset by deferred tax liabilities of $3.2 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 “change in control” provisions of the Internal Revenue Code.

The Company’s 2004 United States corporate income tax return is currently under audit by the IRS.  The ultimate outcome of the IRS audit and the impact of the final audit results on the consolidated financial statements of the Company cannot be determined at this time. The Company does not believe the audit will have a material affect on its financial condition or results of operations. 

13.  Recent Accounting Pronouncements

 

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (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 on the Company's condensed consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 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. FIN 48 will be applied prospectively and will be effective for fiscal years beginning after December 31, 2006. The Company is currently evaluating the effect, if any, of FIN 48 on the Company's condensed consolidated financial statements.

 

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In June 2006, the Emerging Issues Task Force ("EITF") ratified EITF Issue 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). 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 guidance is effective for periods beginning after December 15, 2006. We present revenues net of taxes. EITF 06-3 will not impact the method for recording these sales taxes in our condensed consolidated financial statements.

In May 2005, the FASB issued Statement No. 154, Accounting Changes and Error Corrections -- a replacement of APB Opinion No. 20 and FASB Statement No. 3 (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires restatement of prior period financial statements, unless impracticable, for changes in accounting principle. The retroactive application of a change in accounting principle should be limited to the direct effect of the change. Changes in depreciation, amortization or depletion methods should be accounted for as a change in accounting estimate. Corrections of accounting errors will be accounted for under the guidance contained in APB Opinion No. 20. The effective date of this new pronouncement is for fiscal years beginning after December 15, 2005 and prospective application is required. The adoption of SFAS 154 on January 1, 2006, did not have a material impact on our consolidated financial statements.

 

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R using the modified prospective application transition method (see Note 3).

 

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We have a $52 million credit facility with Silicon Valley Bank and KeyBank National Association comprising a $25 million accounts receivable line of credit and a $27 million acquisition term line of credit. Borrowings under the accounts receivable line of credit bear interest at the bank's prime rate, or 8.25%, as of September 30, 2006. As of September 30, 2006, there was $5.2 million outstanding under the accounts receivable line of credit and $19.8 million of available borrowing capacity, excluding $200,000 reserved for an outstanding letter of credit to secure a facility lease. Our interest expense will fluctuate as the interest rate for this accounts receivable line of credit floats based on the bank's prime rate. Based on the $5.2 million outstanding under the accounts receivable line of credit as of September 30, 2006, an increase in the interest rate of 100 basis points would add $52,000 of interest expense per year, which is not considered material to our financial position or results of operations.

We had unrestricted cash and cash equivalents totaling $65,000 and $5.1 million at September 30, 2006 and December 31, 2005, 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 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We have established disclosure controls and procedures to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the officers who certify the Company's financial reports and to other members of senior management and the Board of Directors.

 

We maintain 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 Report on Form 10-Q. As described in our Management's Annual Report on Internal Control Over Financial Reporting in our Annual Report on Form 10-K for the year ended December 31, 2005, the Company identified significant deficiencies related to inadequate staffing levels which aggregated to a material weakness in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) which continued to exist through September 30, 2006. The Company's Chief Executive Officer and Chief Financial Officer have therefore concluded that as a result of the material weakness, as of September 30, 2006, the Company's disclosure controls and procedures were not effective.

 

Changes in Internal Control Over Financial Reporting

 

As reported in our Annual Report on Form 10-K, as of December 31, 2005, certain significant deficiencies were identified, principally caused by inadequate staffing levels, as described below:

 

	·	Lack of segregation of duties, with certain accounting personnel being assigned inappropriate access to the automated general ledger system, such as in our procure to pay and order to cash processes;
	·	The design of our internal control structure emphasized significant reliance on manual detect controls, primarily performed by a single individual, and limited reliance on application and prevent controls;
	·	Lack of detail review of key financial spreadsheets, including spreadsheets supporting journal entries affecting revenue such as unbilled revenue and deferred revenue.

 

In our assessment, we determined that the aggregation of the significant deficiencies described above constituted a material weakness as of December 31, 2005 which results in a more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

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To address the identified significant deficiencies, we have performed the following during the three month period ended September 30, 2006:

	·	Verified employee security access to our automated general ledger system is appropriate related to the employee’s responsibilities and further strengthened our controls surrounding general ledger access granted to our new accounting personnel;
	·	Established certain spreadsheet controls including required detail review of key spreadsheets, limited access to key spreadsheets on a central server and assignment of appropriate rights, a controlled process for requesting changes to a spreadsheet, and a process to back up spreadsheets on a regular basis so that complete and accurate information is available for financial reporting; and
	·	Activated certain additional application and prevent controls with the assistance of our general ledger software provider and our internal technology personnel; and
	·	Engaged a third party to assist with project management and strategic oversight of our remediation of the 2005 significant deficiencies and the 2006 control review process.

In addition, during the nine month period ended September 30, 2006, we have hired several new employees to further diversify accounting responsibilities, most notably the addition of a new Chief Financial Officer, but also including various senior and staff accountants.

While our efforts to remediate this material weakness are ongoing, management believes that the consolidated financial statements included in this report are fairly stated in all material respects.

 

We will continue to monitor the effectiveness of our internal control over financial reporting, particularly as it relates to segregation of duties and manual controls, and will take further actions as deemed appropriate.

 

Other than the changes described above, there have been no changes in our internal control over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Item 1A. Risk Factors

 

In evaluating all forward-looking statements, you should specifically consider various risk factors that may cause actual results to vary from those contained in the forward-looking statements. Our risk factors are included in our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the U.S. Securities and Exchange Commission on March 31, 2006 and available at www.sec.gov. The only material change to the risk factors listed in Item 1A of the Form 10-K for the fiscal year ended December 31, 2005 is the elimination of the last risk factor discussed therein; see discussion of the resolution below.

We had previously disclosed in Item 1A of our Form 10-K for the fiscal year ended December 31, 2005 that the Public Company Accounting Oversight Board (“PCAOB”) conducted an annual inspection of BDO Seidman, LLP (BDO) and in doing so, inspected BDO's audit of our financial statements for the year ended December 31, 2004. We also disclosed that after the completion of their inspection, the PCAOB staff informed BDO they differ with our accounting for forfeitable shares of stock issued in connection with one of our acquisitions in 2004 and had referred the matter to its Board. In September 2006, BDO informed us that the PCAOB reached a final conclusion on this issue and continued to differ with our accounting for forfeitable shares for the acquisition described above. As a result, we consulted on this matter with the staff of the Securities and Exchange Commission (SEC) under the established guidelines for “Consulting with the Office of the Chief Accountant.” The SEC has concluded their review under this process and indicated that they will not require us to amend or restate our prior public filings for this specific issue described above. This matter is now closed and the Company is not anticipating further review of this matter by any regulatory authority.

 

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.
Dated: November 8, 2006		/s/ John T. McDonald
		John T. McDonald, Chief Executive Officer (Principal Executive Officer)

Dated: November 8, 2006		/s/ Paul E. Martin
		Paul E. Martin, Chief Financial Officer (Principal Financial Officer)

 

 

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