NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
NATURE OF BUSINESS AND BASIS OF PRESENTATION:
|
Edgewater Technology, Inc. helps the
C-suite
drive transformational change through its unique selection of business and technology services and channel-based solutions.
Classic consulting disciplines (such as business advisory, process improvement, organizational change management, M&A due diligence, and
domain expertise) are blended with technical services (such as digital transformation, technical roadmaps, data and analytics services, custom development and system integration) to help organizations leverage investments in legacy IT assets to
create new digital business models.
The Company delivers product based consulting in both the Enterprise Performance Management
(EPM) and Enterprise Resource Planning (ERP) areas both on premise and in the cloud. Within the EPM offering, our Oracle channel, Edgewater Ranzal provides Business Analytics solutions leveraging Oracle EPM, BI and Big Data
technologies. Within the ERP offering, our Microsoft channel, Edgewater Fullscope delivers Dynamics AX ERP, Business Intelligence and CRM solutions primarily in the manufacturing space.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described in this note
and elsewhere in the accompanying consolidated financial statements and notes.
Basis of Presentation
The consolidated financial statements include the accounts of Edgewater and its wholly-owned subsidiaries. All intercompany transactions have
been eliminated in consolidation.
The Company considers events or transactions that occur after the balance sheet date but before the
financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company did not identify any recognizable events during this period.
Use of Estimates
Our consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. These accounting principles require management to make certain estimates, judgments and assumptions that affect the
reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates, judgments and
assumptions used in preparing the accompanying consolidated financial statements are based upon managements evaluation of the relevant facts and circumstances as of the date of the consolidated financial statements. Although the Company
regularly assesses these estimates, judgments and assumptions used in preparing these consolidated financial statements, actual results could differ from those estimates. Changes in estimates are recorded in the period in which they become known.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets, which range from three to ten years. Additions that extend the lives of the assets are capitalized, while repairs and maintenance costs are expensed as incurred.
- 55 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
Product Development Costs
The Company periodically develops software modules to be used within the Microsoft Dynamics AX environment. Capitalization of qualified
software development costs begins upon the establishment of technological feasibility. Amortization of capitalized software development costs, which is recorded as a component of cost of revenue, is provided on a
product-by-product
basis, beginning upon commercial release of the product, and continuing over the remaining estimated economic life of the product, not to exceed three years. At each balance sheet date, the
Company evaluates the unamortized capitalized software development costs for potential impairment by comparing the net unamortized balance to the net realizable value of the products. No software development costs were capitalized during the years
ended December 31, 2016 or 2015. Amortization expense of $188 thousand, $191 thousand and $214 thousand has been recorded (within software costs on the consolidated statements of comprehensive income (loss)) during the years
ended December 31, 2016, 2015 and 2014, respectively.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. Impairment is generally assessed by a comparison of cash flows expected to be generated by an asset to its carrying value. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill and Intangible Assets
Goodwill has an indefinite useful life and is not amortized but is evaluated for impairment annually (the Annual Impairment Test)
or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets consist primarily of
non-compete
arrangements, customer relationships and trade names
and trademarks. Intangible assets that have finite lives are amortized using either the straight-line method or based on estimated future cash flows to approximate the pattern in which the economic benefit of the asset will be utilized. Amortization
is recorded over the estimated useful lives ranging from three to six years and is further described in Note 7.
The Company engages in
business activities in three operating segments, which also represent reporting units. The Company determined that it has three operating segments (Enterprise Performance Management (EPM), Enterprise Resource Planning (ERP)
and Classic Consulting). The Company has further determined that these operating segments constitute three reporting units. The Company has three reporting units (which also constitute our operating segments) for purposes of its allocation of
goodwill and performance of its impairment evaluation.
Goodwill is tested for impairment annually at the reporting unit level utilizing
the fair value methodology. The annual measurement date is December 2. Factors the Company considers important that could trigger an interim review for impairment include, but are not limited to, the following:
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◾
|
|
Significant under-performance relative to historical or projected future operating results;
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◾
|
|
Significant changes in the manner of its use of acquired assets or the strategy for its overall business;
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|
◾
|
|
Significant negative industry or economic trends;
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|
◾
|
|
Significant decline in its stock price for a sustained period; and
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|
◾
|
|
Its market capitalization relative to net book value.
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- 56 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
Goodwill is evaluated for impairment using a
two-step
process. The first step is to compare the fair value of the reporting unit to the carrying amount of the reporting unit (the First Step). If the carrying amount exceeds the fair value, a second step must be followed to calculate
potential impairment (the Second Step). Otherwise, if the fair value of the reporting unit exceeds the carrying amount, the goodwill is not considered to be impaired as of the measurement date. In its review of the carrying value of the
goodwill, the Company determines fair values for the reporting unit using the Income Approach, or more specifically the Discounted Cash Flow Method, and the Market Approach, utilizing the Guideline Company Method. These valuation methods require
management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multi-year period, as well as determine the weighted average cost of capital to be used as a discount rate.
The 2016 analysis confirmed that fair values exceeded carrying values, and therefore no impairment existed, and accordingly, a second step analysis was not deemed necessary.
Revenue Recognition
Our Company
recognizes revenue primarily through the provision of consulting services and the resale of third-party,
off-the-shelf
software and maintenance.
We recognize revenue by providing consulting services under written service contracts with our customers. The service contracts we enter into
generally fall into three specific categories: time and materials, fixed-price and retainer.
We consider amounts to be earned once
evidence of an arrangement has been obtained, services are delivered, fees are fixed or determinable and collectability is reasonably assured. We establish billing terms at the time at which the project deliverables and milestones are agreed. Our
standard payment terms are 30 days from invoice date.
Out-of-pocket
reimbursable expenses charged to customers are reflected as revenue.
When a customer enters into a time and materials, fixed-price or a periodic retainer-based contract, the Company recognizes revenue in
accordance with its evaluation of the deliverables in each contract. If the deliverables represent separate units of accounting, the Company then measures and allocates the consideration from the arrangement to the separate units, based on vendor
specific objective evidence (VSOE) of the value for each deliverable.
The revenue under time and materials contracts is
recognized as services are rendered and performed at contractually agreed upon rates. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. We routinely evaluate whether revenue and
profitability should be recognized in the current period. We estimate the proportional performance on our fixed-price contracts on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project.
This method is used because reasonably dependable estimates of costs and revenue earned can be made, based on historical experience and milestones identified in any particular contract. If we do not have a sufficient basis to measure progress toward
completion, revenue is recognized upon completion of performance, subject to any warranty provisions or other project management assessments as to the status of work performed.
Estimates of total project costs are continually monitored during the term of an engagement. There are situations where the number of hours to
complete projects may exceed our original estimate, as a result of an increase in project scope, unforeseen events that arise, or the inability of the client or the delivery team to fulfill their responsibilities. Accordingly, recorded revenues and
costs are subject to revision throughout the life of a project based on current information and historical trends. Such revisions may result in increases or decreases to revenue and income and are reflected in the consolidated financial statements
in the periods in which they are first identified.
- 57 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
If our initial estimates of the resources required or the scope of work to be performed on a
contract are inaccurate, or we do not manage the project properly within the planned time period, a provision for estimated losses on incomplete projects is made. Any known or probable losses on projects are charged to operations in the period in
which such losses are determined. A formal project review process takes place quarterly, although projects are evaluated on an ongoing basis. Management reviews the estimated total direct costs on each contract to determine if the estimated amounts
are accurate, and estimates are adjusted as needed in the period identified. No material losses were recognized on contracts during the years ended December 31, 2016, 2015 or 2014.
We also perform services on a monthly retainer basis under infrastructure service contracts, which include monthly hosting and support
services. Revenue under periodic retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract. In the event additional services are required, above the minimum retained or contracted amount,
then such services are billed on a time and materials basis.
Typically, the Company provides warranty services on its fixed-price
contracts related to providing customers with the ability to have any design flaws remedied and/or have our Company fix routine defects. The warranty services, as outlined in the respective contracts, are provided for a
specific period of time after a project is complete. The Company values the warranty services based upon historical labor hours incurred for similar services at standard billing rates. Revenue related to the warranty provisions within our
fixed-price contracts is recognized as the services are performed or the revenue is earned. The warranty period is typically for a
30-60
day period after the project is complete.
Customer prepayments, even if nonrefundable, are deferred (classified as deferred revenue) and recognized over future periods as services are
performed.
Software revenue represents the resale of certain third-party
off-the-shelf
software and maintenance and is recorded on a gross basis provided we act as a principal in the transaction, which we have determined based upon several
factors including, but not limited to, the fact that we have credit risk and we set the price to the end user. In the event we do not meet the requirements to be considered a principal in the software sale transaction and act as an agent, software
revenue will be recorded on a net basis.
Prior to the second quarter of 2013, we recorded substantially all of our software resale
revenue on a gross basis (reporting the revenue and cost from the transaction in our consolidated statement of comprehensive income (loss)). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain of
our Microsoft Dynamics AX software resale arrangements, we began to recognize a portion of our software resale revenue on a net basis (reporting only the net profit from the transaction as revenue in our consolidated statement of comprehensive
income (loss)). It is expected that the mix of software revenue we report on a gross verses net basis will continue to fluctuate in future periods.
The majority of the software sold by the Company is delivered electronically. For software that is delivered electronically, we consider
delivery to have occurred when the customer either (a) takes possession of the software via a download (that is, when the customer takes possession of the electronic data on its hardware), or (b) has been provided with access codes that
allow the customer to take immediate possession of the software on its hardware pursuant to an agreement or purchase order for the software.
The Company enters into multiple element arrangements which typically include software, post-contract support (or maintenance), and consulting
services. Consistent with the software described above, maintenance that is in the form of a pass through transaction is recognized upon delivery of the software, as all related warranty and maintenance is performed by the primary software vendor
and not the Company. Maintenance fee
- 58 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
revenue for the Companys software products, which is inconsequential in all years presented, is recognized ratably over the term of the arrangements, which are generally for a
one-year
period. The Company has established VSOE with respect to the services provided based on the price charged when the services are sold separately. The Company has established VSOE for maintenance based upon
the stated renewal rate.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of
uncollectability. Management reviews its accounts receivable balances on a monthly basis to determine if any receivables are potentially uncollectible. Management further analyzes historical collection trends and changes in its customer payment
patterns, customer concentration and credit worthiness when evaluating the adequacy of its allowance for doubtful accounts. The Company includes any accounts receivable balances that are deemed to be potentially uncollectible, along with a general
reserve, in its overall allowance for doubtful accounts.
Billed and unbilled receivables that are specifically identified as being at
risk are provided for with a charge to revenue or bad debts as appropriate in the period the risk is identified.
Based on the information
available, management believes the allowance for doubtful accounts is adequate; however, future write-offs could exceed the recorded allowance.
Cost
of Services
Our cost of services is composed primarily of project personnel costs, including direct salaries, payroll taxes,
employee benefits, contractor costs and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services.
Consent Solicitation Expense
During the years ended December 31, 2016 and 2015, the Company incurred $187 thousand and $495 thousand, respectively, of legal
and advisory expenses in connection with its defense against consent solicitations. No such expenses were incurred in the year ended December 31, 2014.
Other Expense, Net
The following
table represents the components of other expense, net:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
Interest expense, net
|
|
$
|
100
|
|
|
$
|
18
|
|
|
$
|
15
|
|
Accretion of contingent earnout consideration
|
|
$
|
2,182
|
|
|
$
|
1,710
|
|
|
$
|
-
|
|
Loss on foreign exchange transactions
|
|
$
|
45
|
|
|
$
|
285
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense, net
|
|
$
|
2,327
|
|
|
$
|
2,013
|
|
|
$
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
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- 59 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
Provision for Taxes
In determining our current income tax provision, we assess temporary differences resulting from different treatments of items for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded in our consolidated balance sheets. We evaluate the realizability of our deferred tax assets and assess the need for a valuation allowance on an
ongoing basis. In evaluating our deferred tax assets, we consider whether it is more likely than not that the deferred income tax assets will be realized. The ultimate realization of our deferred tax assets depends upon generating sufficient future
taxable income during the periods in which our temporary differences either become deductible or expire. This assessment requires significant judgment.
Any future changes in the valuation allowance could result in additional income tax expense (benefit) and reduce or increase
stockholders equity, and such changes could have a significant impact upon our earnings in the future.
Income tax reserves are
based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not realized based on the technical merits of the position. Potential interest and penalties associated with
such uncertain tax position is recorded as a component of the income tax provision.
Earnings Per Share
A reconciliation of net income (loss) and weighted average shares used in computing basic and diluted net income per share is as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands, Except Per
Share Data)
|
|
Basic net (loss) income per share:
|
|
|
|
|
Net (loss) income applicable to common shares
|
|
$
|
(2,834
|
)
|
|
$
|
(4,060
|
)
|
|
$
|
4,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,150
|
|
|
|
11,505
|
|
|
|
11,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share of common stock
|
|
$
|
(0.23
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share:
|
|
|
|
|
Net (loss) income applicable to common shares
|
|
$
|
(2,834
|
)
|
|
$
|
(4,060
|
)
|
|
$
|
4,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
12,150
|
|
|
|
11,505
|
|
|
|
11,131
|
|
Dilutive effects of stock options and restricted stock awards
|
|
|
-
|
|
|
|
-
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares, assuming dilutive effect of stock options
|
|
|
12,150
|
|
|
|
11,505
|
|
|
|
13,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share of common stock
|
|
$
|
(0.23
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based awards, inclusive of all grants made under the Companys equity plans, for which either the
stock option exercise price, or the fair value of the restricted share award, exceeds the average market price over the period, have an anti-dilutive effect on earnings per share, and accordingly, are excluded from the diluted computations for all
periods presented. Had such shares been included, shares for the diluted computation would have increased by approximately 63 thousand and 47 thousand in the years ended December 31, 2015 and 2014,
- 60 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
respectively. No such shares were excluded in the year ended December 31, 2016. As of December 31, 2016 and 2015, there were approximately 2.9 million and 3.9 million
share-based awards outstanding under the Companys equity plans, respectively. The Company excluded 2.0 million and 1.9 million shares from the dilutive calculations during the years ended December 31, 2016 and 2015,
respectively, as a result of the net loss position.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentration of market or credit risk consist principally of cash
equivalent instruments and accounts receivable. The Company places its cash balances with reputable financial institutions. Trade receivables potentially subject the Company to credit risk. The Company extends credit to its customers based upon an
evaluation of the customers financial condition and credit history and generally does not require collateral.
Cash and cash
equivalents are maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances.
The Company has historically incurred minimal credit losses. No customer balances were in excess of 10% of the Companys total
receivables balance as of December 31, 2016 or 2015.
For the years ended December 31, 2016, 2015 and 2014, no customer
represented 10% or more of the Companys total revenue or total service revenue. For the years ended December 31, 2016, 2015 and 2014, our five largest customers represented 15.2%, 11.8% and 17.8% of our service revenue in the aggregate,
respectively.
Comprehensive Income (Loss)
Other comprehensive income (loss) consists of periodic currency translation adjustments.
Share-Based Compensation
The
Company recognizes the total fair value of share-based awards as compensation expense, over the requisite employee service period (generally the vesting period of the grant). The Company has used the Black-Scholes option-pricing model to compute the
estimated fair value of stock option grants on the date of the award. The Black-Scholes option-pricing model includes assumptions regarding dividend yields, expected volatility, expected option term and risk-free interest rates. The Company
estimates expected volatility based upon historical volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Restricted stock awards are valued at the price of our common stock on the date of
the award.
The assumptions used in computing the fair value of share-based awards reflect managements best estimates but involve
uncertainties relating to market and other conditions, many of which are outside of the Companys control. As a result, if other assumptions or estimates had been used, the share-based compensation expense that was recorded for the years ended
December 31, 2016, 2015, and 2014 could have been materially different. Furthermore, if different assumptions are used in future periods, share-based compensation expense could be materially impacted in the future.
- 61 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
Foreign Currency Translation
The financial statements for Edgewaters
non-U.S.
operations use the local currency as the
functional currency and are translated to U.S. dollars. For assets and liabilities, the
year-end
rate is used. For revenues, expenses, gains and losses, the average rate for the period is used. Unrealized
currency adjustments in our financial statements are accumulated in equity as a component of accumulated other comprehensive income (loss). Realized net gains (losses) on foreign currency transactions are immaterial and are reflected in earnings.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), (the
New Revenue Standard) requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Additional disclosures will also be required to enable users to
understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The New Revenue Standard will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the
use of either the retrospective or modified retrospective method upon adoption. Adoption of the New Revenue Standard is permitted as early as the first quarter of 2017 and is required by the first quarter of 2018. The Company currently expects to
adopt the standard on January 1, 2018 using the modified retrospective method and will apply the guidance only to the most current period presented in the financial statements and only on contracts that are not completed as of the date of
initial application. The cumulative effect of initially applying the standard will be recognized as an adjustment to the opening balance of retained earnings within stockholders equity. The Company has begun to evaluate the effect that ASU
No. 2014-09 and its related amendments will have on its consolidated financial statements and related disclosures. In particular, we are currently evaluating the potential impact of the new standard as it relates to distinguishing performance
obligations, client acceptance and cancellation provisions, variable consideration, principal vs. agent consideration, warranties and post-contract support services among others. Due to the complexity of the new standard and the nature of our
contracts, the actual revenue recognition treatment required under the new standard may vary and will be dependent on contract-specific terms. The Company expects to complete its assessment of the impact of adoption during 2017.
In April 2015, the FASB issued ASU
No. 2015-03,
Simplifying the Presentation of Debt Issuance
Costs
,
which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August
2015, the FASB issued ASU
No. 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with
Line-of-Credit
Arrangements
, which allows an entity to present debt issuance costs associated with a revolving line of credit arrangement as an asset, regardless of
whether a balance is outstanding. The recognition and measurement guidance for debt issuance costs are not affected by these updates. The Company adopted these updates retrospectively on January 1, 2016. The adoption of ASU
No. 2015-03
and ASU
No. 2015-15
did not have an impact on the Companys consolidated financial statements.
In September 2015, the FASB issued ASU
No. 2015-16,
Simplifying the Accounting for
Measurement-Period Adjustments
, which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after the acquisition date. The Company adopted
this update prospectively on January 1, 2016. The adoption of ASU
No. 2015-16
did not have a material impact on the Companys consolidated financial statements.
- 62 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
|
In February 2016, the FASB issued ASU
No. 2016-02,
Leases
, which supersedes ASC Topic 840,
Leases,
and creates a new topic, ASC Topic 842,
Leases
. This update requires lessees to recognize a lease liability and a lease
asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. The update also expands the required quantitative and qualitative disclosures surrounding leases. This update is to become effective for the
Company on January 1, 2019, with earlier application permitted. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements. While the Company is currently assessing the impact ASU
No. 2016-02
will have on its consolidated financial statements, the Company expects the primary impact upon
adoption will be the recognition, on a discounted basis, of its minimum commitments under noncancellable operating leases on its consolidated balance sheets resulting in the recording of right of use assets and lease obligations. Current minimum
commitments under noncancellable operating leases are disclosed in Note 13,
Commitments and Contingencies
.
In March 2016, the FASB
issued ASU
No. 2016-09,
Improvements to Employee Share-Based Payment Accounting.
This update was issued as part of the FASBs simplification initiative and affects all entities that issue
share-based payment awards to their employees. The amendments in this update address, among other things, the recognition of excess tax benefits and deficiencies associated with share-based payments, the classification of those excess tax benefits
on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash
flows. The guidance in this update may be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update and is effective on January 1, 2017, with earlier
application permitted. The Company does not expect the adoption of ASU
No. 2016-19
to have a material impact on the Companys consolidated financial statements.
In January 2017, the FASB issued ASU
No. 2017-04,
Simplifying the Test for Goodwill
Impairment.
This update eliminates Step 2 from the goodwill impairment test which compares the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. ASU
2017-04
does not make any changes to the impairment indicators or aspects of the qualitative assessment. This update is to become effective for the Company on January 1, 2020 and requires using a prospective approach. Early adoption is permitted
beginning with interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company intends to adopt ASU
2017-04
early and does not expect its adoption to have a
material impact on the Companys consolidated financial statements.
3. BUSINESS COMBINATIONS:
M2 Dynamics Inc. (M2 Dynamics):
On December 21, 2015, the Company acquired substantially
all of the assets and certain liabilities of M2 Dynamics Inc., pursuant to the terms of an Asset Purchase Agreement (the M2 Dynamics Acquisition). Headquartered in Irvine, California, M2 Dynamics is an Oracle Platinum Partner providing
Oracle Enterprise Performance Management (EPM) and Business Intelligence (BI) solutions and services, primarily to the West Coast and southern regions of the United States. M2 Dynamics has joined the Companys Edgewater
Ranzal business in providing clients with information technology consultancy services specializing in Business Analytics and encompassing EPM, BI and Big Data solutions.
The Company initially estimated total fair value of the purchase price consideration to be $19.8 million. The initial cash consideration
paid at close consisted of the $16.1 million base purchase price plus $596 thousand attributable to a net working capital adjustment. The initial cash consideration paid by the Company was increased by $3.0 million, representing the
adjusted fair value estimate of additional contingent earnout consideration that may be earned by M2 Dynamics, which is described in more detail below.
- 63 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3.
|
BUSINESS COMBINATIONS (Continued):
|
During the quarter ended March 31, 2016, the Company increased total purchase price
consideration of the M2 Dynamics Acquisition, resulting in an increase to the carrying value of goodwill, by $93 thousand. The increase is attributable to the final
true-up
of excess net working capital
delivered by M2 Dynamics at the closing of the transaction.
An earnout agreement was entered into in connection with the M2 Dynamics
Acquisition under which M2 Dynamics is eligible to receive additional contingent consideration. Contingent earnout consideration to be paid, if any, to M2 Dynamics will be based upon the achievement of certain performance measures (and is not
impacted by continued employment status of M2 Dynamics owners) over a
one-year
earnout period, concluding on December 21, 2016. The maximum amount of contingent earnout consideration that can be earned by
M2 Dynamics is capped at $6.6 million. The Company continually examines actual results in comparison to financial metrics utilized in the earnout calculation and assesses the carrying value of the contingent earnout consideration. During the
three-month period ended December 31, 2016, the Company recorded a change in fair value of the estimated earnout consideration to be achieved (as a result of better than forecasted financial performance). This change in estimate resulted
in an expense of $662 thousand (which was recorded as a component of change in fair value of contingent earnout consideration in the accompanying condensed consolidated statements of comprehensive income). As of December 31, 2016, the
Company had recorded an accrual of $4.5 million related to M2 Dynamics contingent earnout consideration.
In addition to the above
payments, the Company incurred approximately $430 thousand and $801 thousand in direct transaction costs, which were expensed (within direct acquisition costs on the consolidated statement of comprehensive income (loss)) in the years ended
December 31, 2016 and 2015, respectively.
In connection with the M2 Dynamics Acquisition, the Company made certain preliminary
estimates related to the fair value of assets acquired, liabilities assumed, contingent earnout consideration, identified intangibles and goodwill.
The Company performed a fair value allocation of the purchase price among assets, liabilities and identified intangible assets. The final
allocation of the purchase price was as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Life (In Years)
|
|
|
|
(In Thousands)
|
|
|
|
|
Accounts receivable
|
|
$
|
2,878
|
|
|
|
|
|
Other assets
|
|
|
21
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(866
|
)
|
|
|
|
|
Customer relationships
|
|
|
7,700
|
|
|
|
6 Years
|
|
Goodwill (deductible for tax purposes)
|
|
|
10,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
19,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The M2 Dynamics Acquisition was accounted for as a purchase transaction, and accordingly, the results of
comprehensive income (loss), commencing December 21, 2015, are included in the Companys accompanying consolidated statement of comprehensive income (loss).
The Company recorded total revenues of $247 thousand and a net loss of $(118) thousand in its statement of comprehensive income (loss)
for the year ended December 31, 2015 related to the M2 Dynamics business.
The following table sets forth supplemental pro forma
financial information that assumes the acquisition of M2 Dynamics was completed at the beginning of 2015. The information for the year ended December 31, 2015
includes the historical results of Edgewater and M2 Dynamics. The pro forma results include estimates and
- 64 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3.
|
BUSINESS COMBINATIONS (Continued):
|
assumptions regarding the amortization of intangible assets recognized as part of the acquisition and income taxes. The pro forma results, as presented, are not necessarily indicative of the
results that would have occurred if the acquisition had occurred on the date indicated, or that may result in the future.
|
|
|
|
|
|
|
|
|
|
|
Unaudited
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
Pro forma revenue
|
|
$
|
129,522
|
|
|
$
|
122,956
|
|
|
|
|
|
|
|
|
|
|
Pro forma net (loss) income
|
|
|
(2,679
|
)
|
|
|
3,565
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic net (loss) income per share
|
|
$
|
(0.23
|
)
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted net (loss) income per share
|
|
$
|
(0.23
|
)
|
|
$
|
0.27
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Branchbird LLC (Branchbird):
On
August 17, 2015, the Company acquired substantially all of the assets and liabilities of Branchbird, pursuant to the terms of an Asset Purchase Agreement (the Branchbird Acquisition). Headquartered in Chicago, Illinois, Branchbird
delivers Big Data solutions to their clients utilizing the Oracle Endeca and Big Data Discovery (BDD) products. The Branchbird Acquisition extends Ranzals presence in the Midwest.
The Company determined the total allocable purchase price consideration to be $4.2 million. The initial cash consideration paid at
closing was $2.7 million, net of $19 thousand attributable to a net working capital adjustment. The initial consideration paid by the Company was increased by $1.4 million, representing our initial estimate of the fair value of
additional contingent earnout consideration that may be earned by Branchbird, which is described in more detail below. In addition to the above payments, the Company incurred approximately $340 thousand in direct transaction costs, which were
expensed (within direct acquisition costs on the consolidated statement of comprehensive income (loss)) during the year ended December 31, 2015.
An earnout agreement was entered into in connection with the Branchbird Acquisition under which Branchbird is eligible to receive additional
contingent consideration. Contingent earnout consideration to be paid, if any, to Branchbird will be based upon the achievement of certain performance measures (and is not impacted by continued employment status of Branchbird owners) over two
consecutive
one-year
earnout periods, concluding on August 16, 2017. The maximum amount of contingent earnout consideration that can be earned by Branchbird is capped at $2.4 million. The Company
continually examines actual results in comparison to financial metrics utilized in the earnout calculation and assesses the carrying value of the contingent earnout consideration. During the three-month period ended December 31, 2016, the
Company recorded a change in fair value of the estimated earnout consideration to be achieved (as a result of lower than forecasted revenue performance). This change in estimate resulted in a reversal of $221 thousand (which was recorded
as a component of change in fair value of contingent earnout consideration in the accompanying condensed consolidated statements of comprehensive income). During the three-month period ended June 30, 2016, the Company recorded a change in fair
value of the estimated earnout consideration to be achieved (as a result of lower than forecasted revenue performance). This change in estimate resulted in a reversal of $798 thousand (which was recorded as a component of change in fair
value of contingent earnout consideration in the accompanying condensed consolidated statements of comprehensive income). As of December 31, 2016, the Company had recorded an accrual of $757 thousand related to Branchbird contingent
earnout consideration.
In connection with the Branchbird Acquisition, the Company made certain estimates related to the fair value of
assets acquired, liabilities assumed, contingent earnout consideration, identified intangibles and goodwill.
- 65 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3.
|
BUSINESS COMBINATIONS (Continued):
|
The Company performed a fair value allocation of the purchase price among assets, liabilities
and identified intangible assets. The final allocation of the purchase price was as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Life (In Years)
|
|
|
|
(In Thousands)
|
|
|
|
|
Accounts receivable
|
|
$
|
540
|
|
|
|
|
|
Other assets
|
|
|
16
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(86
|
)
|
|
|
|
|
Customer relationships
|
|
|
2,100
|
|
|
|
5
|
|
Goodwill (deductible for tax purposes)
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
4,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Branchbird Acquisition was accounted for as a purchase transaction, and accordingly, the results of
operations, commencing August 17, 2015, are included in the Companys accompanying consolidated statement of comprehensive income (loss). Pro forma financial information related to the Branchbird Acquisition is not presented as the effect
of this acquisition was not material to the Company.
Acquisition of Zero2Ten, Inc.
(Zero2Ten):
On March 13, 2015, the Company acquired substantially all of the assets and liabilities of Zero2Ten, pursuant to the terms of an Asset Purchase Agreement (the Zero2Ten
Acquisition). Headquartered in Alpharetta, Georgia, Zero2Ten is a specialty solution provider of Microsofts CRM Cloud product. Zero2Ten has delivered its services to organizations across various vertical markets with an emphasis on
manufacturing. The acquisition of Zero2Ten continues our investment in service offerings that complement the Microsoft Dynamics product suite.
The Company determined the total allocable purchase price consideration to be $9.0 million. The initial cash consideration paid at
closing was $4.5 million. The cash paid at closing consisted of the $5.0 million purchase price less $457 thousand attributable to a net working capital adjustment. The initial consideration paid by the Company was increased by
$4.4 million, representing its initial estimate of the fair value estimate of additional contingent earnout consideration that may be earned by Zero2Ten, which is described in more detail below. In addition to the above payments, the Company
incurred approximately $613 thousand in direct transaction costs, which were expensed (within direct acquisition costs on the consolidated statement of comprehensive income (loss)) during the year ended December 31, 2015.
An earnout agreement was entered into in connection with the Zero2Ten Acquisition under which Zero2Ten is eligible to receive additional
contingent consideration. Contingent earnout consideration to be paid, if any, to Zero2Ten will be based upon the achievement of certain performance measures (and is not impacted by continued employment status of Zero2Ten shareholders) over two
consecutive
one-year
earnout periods, concluding on March 13, 2017.
In March 2016, Zero2Ten
completed its first twelve-month earnout period, during which the required performance measurements were achieved. Accordingly, Zero2Ten received additional contingent consideration related to the first earnout period in the amount of
$3.9 million.
The Company continually examines actual results in comparison to financial metrics utilized in the earnout calculation
and assesses the carrying value of the contingent earnout consideration. During the three-month periods ended December 31, 2016 and June 30, 2016, we reversed $238 thousand and $130 thousand, respectively, of accrued contingent
earnout consideration (reported as a part of change in fair value of contingent earnout consideration in our condensed consolidated statements of comprehensive income) associated with the
- 66 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
3.
|
BUSINESS COMBINATIONS (Continued):
|
completion of the first earnout period and the projected completion of the second earnout period, as it was
determined that current forecasts are slightly below those originally utilized in determining the fair value of the contingent earnout consideration.
The Company, as of December 31, 2016, had accrued $2.9 million in potential future contingent earnout consideration payable to
Zero2Ten in connection with the second twelve-month earnout period. The maximum amount of contingent earnout consideration that can be earned by Zero2Ten during the remaining earnout period is capped at $4.3 million.
In connection with the Zero2Ten Acquisition, the Company made certain estimates related to the fair value of assets acquired, liabilities
assumed, contingent earnout consideration, identified intangibles and goodwill.
The Company performed a fair value allocation of the
purchase price among assets, liabilities and identified intangible assets. The final allocation of the purchase price was as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Life (In Years)
|
|
|
|
(In Thousands)
|
|
|
|
|
Accounts receivable
|
|
$
|
1,596
|
|
|
|
|
|
Other assets
|
|
|
142
|
|
|
|
|
|
Deferred revenue
|
|
|
(1,158
|
)
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(580
|
)
|
|
|
|
|
Customer relationships
|
|
|
2,800
|
|
|
|
5
|
|
Goodwill (deductible for tax purposes)
|
|
|
6,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Zero2Ten Acquisition was accounted for as a purchase transaction, and accordingly, the results of
operations, commencing March 13, 2015, are included in the Companys accompanying consolidated statement of comprehensive income (loss). Pro forma financial information related to the Zero2Ten Acquisition is not presented as the effect of
this acquisition was not material to the Company.
4. FAIR VALUE MEASUREMENTS:
The following valuation hierarchy is used for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the
inputs into three broad levels as follows:
|
◾
|
|
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
◾
|
|
Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument.
|
|
◾
|
|
Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
|
A financial assets or liabilitys classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
As of December 31, 2016 and 2015, the Companys only financial assets and
liabilities required to be measured on a recurring basis were its contingent earnout obligations.
- 67 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4.
|
FAIR VALUE MEASUREMENTS (Continued):
|
The following table represents the Companys fair value hierarchy for its financial
assets and liabilities required to be measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis of Fair Value Measurements
|
|
|
|
Balance
|
|
|
Quoted Prices
in Active Markets
for Identical Items
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(In Thousands)
|
|
Balance at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earnout consideration
|
|
$
|
8,089
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
8,089
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
8,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent earnout consideration
|
|
$
|
10,540
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
10,540
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No financial instruments were transferred into or out of Level 3 classification during the year ended
December 31, 2016.
The Company has classified its net liability for contingent earnout considerations relating to its Zero2Ten,
Branchbird and M2 Dynamics Acquisitions within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which included probability weighted cash flows. A description of these acquisitions
is included within Note 3. The contingent earnout payments for each acquisition are based on the achievement of certain revenue and earnings before interest, taxes, depreciation and amortization targets.
- 68 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4.
|
FAIR VALUE MEASUREMENTS (Continued):
|
A reconciliation of the beginning and ending Level 3 net liabilities for the years ended
December 31, 2016 and 2015 is as follows:
|
|
|
|
|
|
|
Fair Value
Measurements
Using Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
(In Thousands)
|
|
Balance at January 1, 2015
|
|
$
|
-
|
|
Initial estimate of fair value related to Zero2Ten contingent earnout consideration
|
|
|
4,367
|
|
Initial estimate of fair value related to Branchbird contingent earnout consideration
|
|
|
1,428
|
|
Initial estimate of fair value related to M2 Dynamics contingent earnout consideration
|
|
|
3,035
|
|
Accretion of contingent earnout consideration (included within other expense, net)
|
|
|
1,710
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
10,540
|
|
Payment of contingent earnout consideration
|
|
|
(3,906
|
)
|
Adjustment to estimated fair value of contingent earnout consideration (included within Selling,
general and administrative expense)
|
|
|
(725
|
)
|
Accretion of contingent earnout consideration (included within other expense, net)
|
|
|
2,182
|
|
|
|
|
|
|
Ending balance at December 31, 2016
|
|
$
|
8,089
|
|
|
|
|
|
|
As of December 31, 2016 and December 31, 2015, the fair values of our other financial instruments,
which include cash and cash equivalents, accounts receivable and accounts payable, approximate the carrying amounts of the respective asset and/or liability due to the short-term nature of these financial instruments. Borrowings under the
Companys revolving credit facility approximate fair value due to their market rate of interest.
5. ACCOUNTS RECEIVABLE:
Included in accounts receivable are unbilled amounts totaling approximately $2.7 million and $4.8 million at
December 31, 2016 and 2015, respectively, which relate to services performed during the year and billed in the subsequent year. The Company maintains allowances for potential losses which management believes are adequate to absorb any probable
losses to be incurred in realizing the accounts receivable amounts recorded in the accompanying consolidated financial statements.
The
following are the changes in the allowance for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
Balance at beginning of year
|
|
$
|
150
|
|
|
$
|
150
|
|
|
$
|
150
|
|
Provisions for doubtful accounts
|
|
|
104
|
|
|
|
67
|
|
|
|
|
|
Charge-offs, net of recoveries
|
|
|
(104
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
150
|
|
|
$
|
150
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 69 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6.
|
|
PROPERTY AND EQUIPMENT:
|
Components of property and equipment consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Furniture, fixtures and equipment
|
|
$
|
1,000
|
|
|
$
|
1,683
|
|
Computer equipment and software
|
|
|
1,411
|
|
|
|
1,365
|
|
Leasehold improvements
|
|
|
3,014
|
|
|
|
3,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,425
|
|
|
|
6,072
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(4,802
|
)
|
|
|
(5,248
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
623
|
|
|
$
|
824
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense related to property and equipment for the years ended December 31, 2016, 2015 and
2014 totaled approximately $590 thousand, $618 thousand and $626 thousand, respectively. The Company disposed of $1.0 million, $238 thousand and $378 thousand of equipment that was no longer in use during 2016, 2015 and
2014, respectively. A gain on disposal of property and equipment of $13 and $10 thousand was recognized in the years ended December 31, 2016 and 2015. No gain or loss on disposal was recognized during the year ended December 31, 2014.
7.
|
|
GOODWILL AND INTANGIBLE ASSETS:
|
The changes in the carrying amount of goodwill are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classic
Consulting
|
|
|
EPM
|
|
|
ERP
|
|
|
Consolidated
|
|
|
|
(In Thousands)
|
|
Balance at January 1, 2015
|
|
$
|
140
|
|
|
$
|
2,079
|
|
|
$
|
9,830
|
|
|
$
|
12,049
|
|
Increase to goodwill related to Zero2Ten, Branchbird, and M2 Dynamics Acquisitions
|
|
|
|
|
|
|
11,651
|
|
|
|
6,210
|
|
|
|
17,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
140
|
|
|
|
13,730
|
|
|
|
16,040
|
|
|
|
29,910
|
|
Increase to goodwill in 2016 related to the M2 Dynamics Acquisition
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
140
|
|
|
$
|
13,803
|
|
|
$
|
16,040
|
|
|
$
|
29,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative goodwill impairment charges of $54.6 million (related to impairments recognized in 2002 and
2008 within the Classic Consulting operating segment) are reflected in the ending goodwill balance at December 31, 2016.
As of
December 31, 2016, the net carrying amount of intangible assets consists of amounts related to business combination transactions consummated by the Company in 2015 and capitalized internally developed software costs.
- 70 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7.
|
|
GOODWILL AND INTANGIBLE ASSETS (Continued):
|
Other net intangibles amounted to $8.4 million and $12.0 million as of
December 31, 2016 and 2015, respectively. Below is a summary of the Companys identifiable intangible assets that are subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
Gross
Carrying
Amount
|
|
|
Impairment
Charges
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
(In Thousands)
|
|
Identifiable intangibles:
|
|
|
|
|
Non-compete
agreements
|
|
$
|
3,860
|
|
|
$
|
-
|
|
|
$
|
3,860
|
|
|
$
|
-
|
|
Customer relationships
|
|
|
22,978
|
|
|
|
-
|
|
|
|
14,611
|
|
|
|
8,367
|
|
Capitalized product development costs
|
|
|
1,139
|
|
|
|
-
|
|
|
|
1,128
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,977
|
|
|
$
|
-
|
|
|
$
|
19,599
|
|
|
$
|
8,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Impairment
Charges
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
(In Thousands)
|
|
Identifiable intangibles:
|
|
|
|
|
Non-compete
agreements
|
|
$
|
3,860
|
|
|
$
|
-
|
|
|
$
|
3,860
|
|
|
$
|
-
|
|
Customer relationships
|
|
|
22,978
|
|
|
|
-
|
|
|
|
11,187
|
|
|
|
11,791
|
|
Capitalized product development costs
|
|
|
1,139
|
|
|
|
-
|
|
|
|
940
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,977
|
|
|
$
|
-
|
|
|
$
|
15,987
|
|
|
$
|
11,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The intangible assets were identified and valued by the Company. The original estimated useful lives of the
acquired identifiable intangible assets are as follows:
|
|
|
Non-compete
agreements
|
|
4 to 5 years
|
Customer relationships
|
|
4 to 6 years
|
Capitalized product development costs
|
|
3 years
|
Intangible assets are amortized assuming no expected residual value over the periods in which the economic
benefit of these assets is consumed. Customer relationships are amortized on an accelerated method based on the proportional relationship of projected future discounted cash flows. The weighted average amortization period for all intangible assets
subject to amortization was 4.4 years, 5.4 years and 0.5 years as of December 31, 2016, 2015 and 2014, respectively. Amortization expense related to all intangible assets was $3.4 million, $899 thousand and $302 thousand in 2016,
2015 and 2014, respectively.
Amortization of $188 thousand, $191 thousand and $214 thousand related to capitalized
software development costs were included within cost of revenue (specifically within software expense) on the consolidated statements of comprehensive income (loss) for the years ended December 31, 2016, 2015 and 2014, respectively.
- 71 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
7.
|
|
GOODWILL AND INTANGIBLE ASSETS (Continued):
|
Estimated annual amortization expense for the next five years ending December 31, which
encompasses the remaining useful life of the intangible assets, is as follows:
|
|
|
|
|
|
|
Amortization
Expense
|
|
|
|
(In Thousands)
|
|
2017
|
|
$
|
2,804
|
|
2018
|
|
|
2,240
|
|
2019
|
|
|
1,712
|
|
2020
|
|
|
1,057
|
|
2021 and thereafter
|
|
|
565
|
|
|
|
|
|
|
Total
|
|
$
|
8,378
|
|
|
|
|
|
|
8. ACCRUED EXPENSES AND OTHER LIABILITIES:
Components of accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Accrued bonuses
|
|
|
3,053
|
|
|
|
2,939
|
|
Accrued payroll related liabilities
|
|
|
2,614
|
|
|
|
2,423
|
|
Accrued vacation
|
|
|
2,243
|
|
|
|
2,272
|
|
Accrued commissions
|
|
|
2,537
|
|
|
|
1,496
|
|
Accrued software expense
|
|
|
844
|
|
|
|
1,284
|
|
Accrued contractor fees
|
|
|
455
|
|
|
|
1,132
|
|
Accrued professional service fees
|
|
|
344
|
|
|
|
1,016
|
|
Short-term portion of lease abandonment accrual
|
|
|
-
|
|
|
|
437
|
|
Deferred rent
|
|
|
74
|
|
|
|
220
|
|
Income tax related accruals
|
|
|
166
|
|
|
|
318
|
|
Other accrued expenses
|
|
|
1,167
|
|
|
|
1,949
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,497
|
|
|
$
|
15,486
|
|
|
|
|
|
|
|
|
|
|
9. INCOME TAXES:
General overview:
The
Company is subject to U.S. federal tax as well as income tax in multiple states and local and foreign jurisdictions. The Companys 2004 through 2015 tax years are open and may be subject to examination by these taxing authorities. Such
examinations, if any, could result in challenges to tax positions taken and, accordingly, we may record adjustments to our tax provision based on the outcome of such matters.
The Company has elected to recognize interest and penalties related to income tax matters as a part of the income tax provision.
For the year ended December 31, 2016, we recorded an income tax provision of $5.0 million compared to an income tax provision of
$3.5 million and $3.2 million in the years ended December 31, 2015 and 2014, respectively. The income tax provision recorded during 2016 includes a
non-cash
charge of $3.7 million
- 72 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9.
|
INCOME TAXES (Continued):
|
associated with an increase to the valuation allowance provided against the carrying value of our deferred tax attributes. Similarly, our 2015 income tax provision includes
non-cash
charges associated with the impairment of a certain state income net operating loss carryforward and a $3.0 million increase to the valuation allowance provided against the carrying value of our
deferred tax attributes.
Deferred tax asset valuation allowance:
As of December 31, 2016, we had gross deferred tax assets of $27.2 million. Our deferred tax assets have arisen as a result of timing
differences (primarily generated in connection with historical goodwill and intangible asset impairment charges), net operating loss carryforwards and tax credits. These assets represent amounts that we are able to use to reduce our future taxable
income.
We maintained a valuation allowance of $8.2 million and $4.5 million against the carrying value of our gross deferred
tax attributes as of December 31, 2016 and 2015, respectively.
We assess the realizability of our deferred tax assets and assess the
need for a valuation allowance on an ongoing basis. The periodic assessment of the net carrying value of our deferred tax assets under the applicable accounting rules is judgmental. We are required to consider all available positive and negative
evidence in evaluating the likelihood that we will be able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning
strategies and the results of recent operations. Since this evaluation requires consideration of events that may occur some years into the future, there is significant judgment involved, and our conclusion could be materially different should
certain of our expectations not transpire.
During our 2016 periodic assessment of the need for a valuation allowance against the carrying
value of our deferred tax assets, we noted a continued shift in objectively verifiable trends which lessened the strength of our previously identified positive evidence. Specifically, during our assessment, we noted the following positive and
negative evidence:
Positive Evidence:
|
◾
|
|
We had generated U.S.-based
pre-tax
income of more than $8.9 million over the previous three years and had utilized some of our available tax assets to reduce tax liabilities
that would have otherwise arisen in those periods.
|
|
◾
|
|
Our forecasts of future taxable income indicated that our
pre-tax
income and taxable income would increase in the future.
|
Negative Evidence:
|
◾
|
|
While we generated U.S.-based profit before income taxes during 2016, we did not utilize a significant amount of our federal and state net operating loss carryforwards in 2016 as originally expected.
|
|
◾
|
|
Foreign operations are generating a larger portion of our consolidated profit before income taxes.
|
|
◾
|
|
The majority of our federal net operating loss carryforwards expire in 2020, reducing the time period over which the Company has to generate sufficient income to realize future benefit from the loss carryforward
amounts.
|
|
◾
|
|
The Company did not achieve 100% of its plans and/or projections in 2016.
|
|
◾
|
|
Our forecasts have increased risk associated with operations due to current disruption in our sales pipeline attributable to our channel partners pushing customers toward cloud-based service offerings and away from
on-premise
applications.
|
- 73 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9.
|
INCOME TAXES (Continued):
|
The Company, in connection with its determination of the future utilization of deferred tax
assets, considered various future profitability scenarios. This analysis noted that there existed risk and uncertainty that the Company would be able to fully realize future economic benefit from all of the gross carrying value of its deferred tax
attributes based upon the forecasted profitability. Accordingly, the Company recorded an increase of $3.7 million in the valuation allowance applied against the carrying value of its deferred tax assets, reducing the net carrying value to the
more likely than not anticipated future economic benefit to be realized from the assets.
During our 2015 periodic assessment of the need
for a valuation allowance against the carrying value of our deferred tax assets, we noted a shift in objectively verifiable trends which lessened the strength of our previously identified positive evidence. Specifically, during our assessment, we
noted the following positive and negative evidence:
Positive Evidence:
|
◾
|
|
We had generated U.S.-based
pre-tax
income of more than $8.8 million over the previous three years and had utilized some of our available tax assets to reduce tax liabilities
that would have otherwise arisen in those periods.
|
|
◾
|
|
Our forecasts of future taxable income indicated that our
pre-tax
income and taxable income would increase in the future.
|
Negative Evidence:
|
◾
|
|
We are reporting a loss in U.S.-based profit before income taxes during 2015 as a result we did not utilize a significant amount of our federal and state net operating loss carryforwards in 2015 as originally expected.
|
|
◾
|
|
The majority of our federal net operating loss carryforwards expire in 2020, reducing the time period over which the Company has to generate sufficient income to realize future benefit from the loss carryforward
amounts.
|
|
◾
|
|
The Company did not achieve 100% of its plans and/or projections in 2015.
|
|
◾
|
|
Our forecasts have increased risk associated with operations of newly acquired businesses.
|
The Company, in connection with its determination of the future utilization of deferred tax assets, considered various future profitability
scenarios. This analysis noted that there existed risk and uncertainty that the Company would be able to fully realize future economic benefit from all of the gross carrying value of its deferred tax attributes based upon the forecasted
profitability. Accordingly, the Company recorded an increase of $3.0 million in the valuation allowance applied against the carrying value of its deferred tax assets, reducing the net carrying value to the more likely than not anticipated
future economic benefit to be realized from the assets.
Realization of our deferred tax assets is dependent on our generating sufficient
taxable income in future periods. Although we believe it is more likely than not that future taxable income would be sufficient to allow us to recover substantially all of the value of our deferred tax assets, realization is not assured and future
events could cause us to change our judgment. In the event that actual results differ from our estimates, or we adjust these estimates in the future periods, further adjustments to our valuation allowance may be recorded, which could materially
impact our financial position and net income (loss) in the period of the adjustment.
- 74 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9.
|
INCOME TAXES (Continued):
|
Income tax provision:
Significant components of the Companys income tax provision (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
185
|
|
|
|
161
|
|
|
|
377
|
|
Foreign
|
|
|
(9
|
)
|
|
|
264
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
425
|
|
|
|
445
|
|
Deferred tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
801
|
|
|
|
(544
|
)
|
|
|
2,092
|
|
State
|
|
|
344
|
|
|
|
476
|
|
|
|
709
|
|
Foreign
|
|
|
9
|
|
|
|
205
|
|
|
|
301
|
|
Change in valuation allowance
|
|
|
3,700
|
|
|
|
3,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,854
|
|
|
|
3,137
|
|
|
|
3,102
|
|
Unrecognized tax benefit
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
5,030
|
|
|
$
|
3,529
|
|
|
$
|
3,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of income (loss) before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Domestic
|
|
$
|
1,568
|
|
|
$
|
(1,875
|
)
|
|
$
|
6,259
|
|
Foreign
|
|
|
628
|
|
|
|
1,344
|
|
|
|
982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
2,196
|
|
|
$
|
(531
|
)
|
|
$
|
7,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In general, it is the practice and intention of the Company to reinvest the earnings of its foreign subsidiary in those
operations. However, as of December 31, 2016 the Companys foreign subsidiary is in a cumulative loss position which results in the tax basis of the subsidiary exceeding its book basis. As a result, no deferred tax asset is necessary to
record in the financial statements as this temporary difference is not expected to reverse in the foreseeable future.
- 75 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9.
|
INCOME TAXES (Continued):
|
The differences in income taxes determined by applying the statutory federal tax rate of 34%
to income from continuing operations before income taxes and the amounts recorded in the accompanying consolidated statements of comprehensive income (loss) result from the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollar Amounts In Thousands)
|
|
Income tax at statutory rate
|
|
$
|
747
|
|
|
|
34.0
|
%
|
|
$
|
(195
|
)
|
|
|
34.0
|
%
|
|
$
|
2,468
|
|
|
|
34.0
|
%
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
429
|
|
|
|
19.6
|
|
|
|
484
|
|
|
|
(84.4
|
)
|
|
|
556
|
|
|
|
7.7
|
|
Tax rate difference on foreign income taxes
|
|
|
17
|
|
|
|
0.8
|
|
|
|
(36
|
)
|
|
|
6.2
|
|
|
|
26
|
|
|
|
0.4
|
|
Tax effect of rate change on deferred tax assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0
|
|
|
|
252
|
|
|
|
3.5
|
|
Non-deductible
items
|
|
|
126
|
|
|
|
5.7
|
|
|
|
155
|
|
|
|
(27.1
|
)
|
|
|
112
|
|
|
|
1.6
|
|
Net decrease in deferred tax attributes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
183
|
|
|
|
2.5
|
|
Increase in valuation allowance against certain deferred tax assets
|
|
|
3,700
|
|
|
|
168.5
|
|
|
|
3,000
|
|
|
|
(523.8
|
)
|
|
|
-
|
|
|
|
-
|
|
Unrecognized tax benefits
|
|
|
-
|
|
|
|
-
|
|
|
|
(33
|
)
|
|
|
5.8
|
|
|
|
(370
|
)
|
|
|
(5.1
|
)
|
Other, net
|
|
|
11
|
|
|
|
0.5
|
|
|
|
154
|
|
|
|
(27.0
|
)
|
|
|
(50
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5,030
|
|
|
|
229.1
|
%
|
|
$
|
3,529
|
|
|
|
(616.3
|
)%
|
|
$
|
3,177
|
|
|
|
43.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred tax assets and liabilities as of December 31, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(In Thousands)
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and credits
|
|
$
|
16,090
|
|
|
$
|
16,753
|
|
Acquired intangible assets
|
|
|
6,561
|
|
|
|
6,517
|
|
Reserves and accruals
|
|
|
2,209
|
|
|
|
2,115
|
|
Share-based compensation
|
|
|
2,837
|
|
|
|
3,092
|
|
Depreciation
|
|
|
395
|
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
28,092
|
|
|
|
28,874
|
|
Deferred income tax liabilities:
|
|
|
|
|
Acquired intangible assets
|
|
|
(549
|
)
|
|
|
(180
|
)
|
Other
|
|
|
(312
|
)
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred income tax liabilities
|
|
|
(861
|
)
|
|
|
(342
|
)
|
Valuation allowance
|
|
|
(8,200
|
)
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax asset, net
|
|
$
|
19,031
|
|
|
$
|
24,032
|
|
|
|
|
|
|
|
|
|
|
- 76 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9.
|
INCOME TAXES (Continued):
|
As of December 31, 2015, the Company elected to early adopt the provisions of FASB
Accounting Standards Update
No. 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes
(ASU
2015-17).
The adoption of ASU
2015-17
resulted in the reclassification of $2.0 million of current deferred tax assets to noncurrent deferred tax assets as of December 31, 2015. Adoption of this standard did not impact results of
operations, retained earnings, or cash flows in the current or previous interim and annual reporting periods.
Significant deferred tax
attributes and current activity within the Companys deferred tax accounts included the following:
Net Operating Loss
Carryforwards and Credits
: As of December 31, 2016, we had net operating loss carryforwards for both federal and state income tax purposes of approximately $48.0 million and alternative minimum and workers
opportunity credits of approximately $2.1 million, which expire at various intervals through 2030. However, $35.8 million of the Companys federal net operating loss carryforwards and $1.0 million of workers opportunity tax
credits are set to expire in 2020.
Not included in the federal net operating loss carryforwards are $4.0 million of excess tax
deductions from stock option exercises during fiscal 2016, 2015 and 2014. Pursuant to the guidance on accounting for stock-based compensation, the deferred tax asset relating to excess tax benefits from these exercises was not recognized for
financial statement purposes. The future benefit from these deductions will be recorded as a credit to additional
paid-in
capital when taxes payable are reduced on the income tax return.
Additionally, the Internal Revenue Code contains provisions that limit the amount of net operating loss and tax credit carryforwards available
to be used in any given year in the event of certain circumstances, including significant changes in ownership interests. These limitations may result in the expiration of our historical net operating loss carryforwards and tax credits prior to
their utilization. The Company has various
tax-effected
net operating loss carryforwards for state income tax purposes of approximately $442 thousand which expire at various intervals through 2036.
Annual changes to the deferred tax valuation allowance are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
Balance, beginning of year
|
|
$
|
4,500
|
|
|
$
|
1,500
|
|
|
$
|
1,500
|
|
Additions
|
|
|
3,700
|
|
|
|
3,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
8,200
|
|
|
$
|
4,500
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 77 -
EDGEWATER TECHNOLOGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
9.
|
INCOME TAXES (Continued):
|
Unrecognized tax benefits:
In accordance with our evaluation of unrecognized tax benefits, we have established a liability representing our estimated amount of
unrecognized tax benefits, plus an additional provision for penalties and interest. A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
(In Thousands)
|
|
Gross unrecognized tax benefits, beginning of year
|
|
$
|
-
|
|
|
$
|
9
|
|
|
$
|
108
|
|
Increase in tax position in current year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Settlement/Expiration of statute
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
De-recognition
through administrative policy
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits, end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to recognize accrued interest and penalties related to unrecognized tax benefits
and income tax liabilities, when applicable, as part of income tax expense in its consolidated statements of comprehensive income (loss). There was no accrual for interest and penalties as of December 31, 2016 and 2015. Accrued interest and
penalties totaled $49 thousand as of December 31, 2014.
As of December 31, 2015, we no longer maintain an accrual
associated with unrecognized tax benefits. We do not expect our unrecognized tax benefits to change significantly over the next twelve months.
10.
EMPLOYEE BENEFIT PLANS:
The Company has a 401(k) tax deferred savings plan that is available to all employees
who satisfy certain minimum hour requirements each year (the Plan). The Company matches 30% of each participants annual contribution under the Plan, up to 6% of each participants annual base salary. Contributions by the
Company to the Plan were approximately $776 thousand, $684 thousand and $592 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.