10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2014

or

¨ Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

for the transition period from                      to                     

Commission file number: 000-20971

EDGEWATER TECHNOLOGY, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	71-0788538
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

200 Harvard Mill Square, Suite 210 Wakefield, MA	01880-3209
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 246-3343

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of Common Stock of the Registrant, par value $.01 per share, outstanding at October 27, 2014 was 11,377,331.

EDGEWATER TECHNOLOGY, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December  31, 2013		3
Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013		4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September  30, 2014 and 2013		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item  2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview		15
Results for the Three and Nine Months Ended September 30, 2014, Compared to Results for the Three and Nine Months Ended September 30, 2013		20
Liquidity and Capital Resources		25
Acquisitions, Earnout Payments and Commitments		26
Off Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments		26
Critical Accounting Policies and Estimates		26
Recent Accounting Pronouncements		26
Risk Factors		27
Special Note Regarding Forward-Looking Statements		28
Item 3 - Quantitative and Qualitative Disclosures About Market Risk		29
Item 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures		29
Changes in Controls and Procedures		29
PART II - OTHER INFORMATION
Item 1     -     Legal Proceedings		29
Item 1A  -     Risk Factors		29
Item 2     -      Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3     -     Defaults upon Senior Securities		30
Item 4     -     Mine Safety Disclosures		30
Item 5     -     Other Information		30
Item 6     -     Exhibits		31
Signatures		32

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EDGEWATER TECHNOLOGY, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Data)

	September 30, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	25,816		$	20,321
Accounts receivable, net of allowance of $150		24,075			19,842
Deferred tax assets, net		1,148			1,175
Prepaid expenses and other current assets		1,449			936
Total current assets		52,488			42,274
Property and equipment, net		1,142			1,437
Intangible assets, net		570			956
Goodwill		12,049			12,049
Deferred tax assets, net		26,965			29,097
Other assets		212			254
Total assets	$	93,426		$	86,067
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	148		$	680
Accrued liabilities		17,366			14,326
Deferred revenue		1,672			1,715
Total current liabilities		19,186			16,721
Other liabilities		557			760
Total liabilities		19,743			17,481
Stockholders’ equity:
Preferred stock, $.01 par value; 2,000 shares authorized, no shares issued or outstanding		—			—
Common stock, $.01 par value; 48,000 shares authorized, 29,736 shares issued as of September 30, 2014 and December 31, 2013, 11,353 and 11,049 shares outstanding as of September 30, 2014 and December 31, 2013, respectively		297			297
Paid-in capital		210,944			211,852
Treasury stock, at cost, 18,383 and 18,687 shares at September 30, 2014 and December 31, 2013, respectively		(120,576	)		(123,186	)
Accumulated other comprehensive loss		(168	)		(154	)
Retained deficit		(16,814	)		(20,223	)
Total stockholders’ equity		73,683			68,586
Total liabilities and stockholders’ equity	$	93,426		$	86,067

See notes to the unaudited condensed consolidated financial statements.

3

EDGEWATER TECHNOLOGY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Except Per Share Data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue:
Service revenue	$	25,144		$	21,389		$	73,140		$	62,684
Software revenue		1,365			2,260			5,920			8,568
Reimbursable expenses		2,220			1,750			6,505			5,523
Total revenue		28,729			25,399			85,565			76,775
Cost of revenue:
Project and personnel costs		15,169			13,071			44,106			39,837
Software costs		924			921			3,545			4,577
Reimbursable expenses		2,220			1,750			6,505			5,523
Total cost of revenue		18,313			15,742			54,156			49,937
Gross profit		10,416			9,657			31,409			26,838
Operating expenses:
Selling, general and administrative		8,353			7,590			24,431			23,231
Depreciation and amortization		227			302			702			925
Total operating expenses		8,580			7,892			25,133			24,156
Operating income		1,836			1,765			6,276			2,682
Other expense (income), net		146			(81	)		147			92
Income before income taxes		1,690			1,846			6,129			2,590
Tax provision		714			74			2,721			293
Net income	$	976		$	1,772		$	3,408		$	2,297
Comprehensive income:
Currency translation adjustments		(35	)		(2	)		(14	)		(23	)
Total comprehensive income	$	941		$	1,770		$	3,394		$	2,274
Net income per share:
Basic net income per share of common stock	$	0.09		$	0.17		$	0.31		$	0.21
Diluted net income per share of common stock	$	0.08		$	0.14		$	0.26		$	0.19
Shares used in computing basic net income per share of common stock		11,197			10,732			11,092			10,800
Shares used in computing diluted net income per share of common stock		12,972			12,233			12,973			11,785

See notes to the unaudited condensed consolidated financial statements.

4

EDGEWATER TECHNOLOGY, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Nine Months Ended September 30,
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,408		$	2,297
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		862			1,183
Share-based compensation expense		1,181			1,174
Deferred income taxes		2,159			25
Lease abandonment		(400	)		—
Excess tax benefit from stock options		206			—
Changes in operating accounts:
Accounts receivable		(4,219	)		(749	)
Prepaid expenses and other current assets		(471	)		262
Accounts payable		(532	)		5
Accrued liabilities and other liabilities		3,237			(371	)
Deferred revenue		(43	)		(1,507	)
Net cash provided by operating activities		5,388			2,319
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intellectual property		—			(200	)
Capitalization of product development costs		—			(289	)
Purchases of property and equipment		(183	)		(280	)
Net cash used in investing activities		(183	)		(769	)
CASH FLOW FROM FINANCING ACTIVITIES:
Purchases of treasury stock		(962	)		(1,513	)
Excess tax benefit from stock options		(206	)		—
Proceeds from employee stock plans and stock option exercises		1,483			793
Net cash provided by (used in) financing activities		315			(720	)
Effects of exchange rates on cash		(25	)		6
Net increase in cash and cash equivalents		5,495			836
CASH AND CASH EQUIVALENTS, beginning of period		20,321			16,651
CASH AND CASH EQUIVALENTS, end of period	$	25,816		$	17,487
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes	$	539		$	184
Issuance of restricted stock awards	$	678		$	1,051

See notes to the unaudited condensed consolidated financial statements.

5

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION:

Edgewater Technology, Inc. (“Edgewater”, the “Company”, “we”, or “our”) is a strategic consulting firm that brings a synergistic blend of classic consulting and product-based consulting services to its customer base. Headquartered in Wakefield, Massachusetts, we typically go to market both vertically by industry and horizontally by product/technology specialties and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to reduce costs, improve process and increase revenue through the judicious use of technology.

In this Quarterly Report on Form 10-Q (the “Form 10-Q”), we use the terms “Edgewater,” “Edgewater Technology,” “we,” “our Company,” “the Company,” “our” and “us” to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries, which are described in our 2013 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2014 (the “2013 Form 10-K”).

2. BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements have been prepared by Edgewater pursuant to the rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to ensure the information presented is not misleading.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which were of a normal, recurring nature) that, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows as of and for the interim periods presented. All intercompany transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2013 Form 10-K.

The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for any future period or the full fiscal year. Our revenue and earnings may fluctuate from quarter-to-quarter based on factors within and outside our control, including variability in demand for information technology professional services, the length of the sales cycle associated with our service offerings, the number, size and scope of our projects and the efficiency with which we utilize our employees. Substantially all of our revenue is generated within North America.

Other comprehensive income consists of net income plus or minus any periodic currency translation adjustments.

3. 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 generate 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

6

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. REVENUE RECOGNITION: (Continued)

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 continuously 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.

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 continuously evaluated throughout the period. 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 losses were recognized on contracts during the three- or nine-month periods ended September 30, 2014 or 2013.

We also perform services on a periodic 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 on the condensed consolidated balance sheets) 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 is 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). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain Microsoft Dynamics AX software resale arrangements (primarily related to the risk of credit loss and ability to establish pricing), 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). We expect this trend to continue and also anticipate that the number of new software resale arrangements subject to these terms may increase in future periods. Additionally, the changes in the terms of the resale arrangements may, in certain situations, extend the timing of the recognition period (from full, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction over a three-year period) due to payment terms being spread over a multiple year period. This would reduce the amount of the software revenue and associated gross margin to be recognized by the Company in the initial period of the sale.

7

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3. REVENUE RECOGNITION: (Continued)

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 revenue for the Company’s 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 and maintenance provided based on the price charged when the services are sold separately and the stated renewal rate.

A significant amount of our 2013 software revenue is associated with the recognition of PI2 license revenue. In June 2012, Microsoft purchased the Company’s internally developed PI2 software and intellectual property (the “PI2 Solution”) for an aggregate purchase price of $3.25 million. The sale of the PI2 Solution was a significant multiple element contract. This contract included $3.25 million of license consideration and subsequent development and training services. At the time of the sale, we determined that the license did not have stand-alone value without the services, and accordingly we accounted for the license and related services as one unit. The Company recognized $614 thousand and $2.0 million in PI2 license revenue in the three- and nine-month periods ended September 30, 2013, respectively. No PI2-related revenue was recognized in the three or nine months ended September 30, 2014.

4. SHARE-BASED COMPENSATION:

Share-based compensation expense under all of the Company’s share-based plans was $369 thousand and $1.2 million for the three- and nine-month periods ended September 30, 2014, respectively. Share-based compensation expense under all of the Company’s share-based plans was $336 thousand and $1.2 million for the three- and nine-month periods ended September 30, 2013, respectively.

Cash received from the employee stock purchase plan (“ESPP”) and through stock option exercises was $656 thousand and $1.5 million during the three- and nine-month periods ended September 30, 2014, respectively. Cash received from ESPP and stock option exercises was $377 thousand and $793 thousand during the three- and nine-month periods ended September 30, 2013, respectively.

As of September 30, 2014, unrecognized compensation expense, net of estimated forfeitures, related to the unvested portion of all share-based compensation arrangements was approximately $1.9 million and is expected to be recognized over a weighted-average period of 1.3 years.

The Company intends to use previously purchased treasury shares for shares issued for options, restricted share awards and ESPP purchases. Shares may also be issued from authorized but unissued share reserves.

8

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. INCOME TAXES:

The Company recorded a tax provision of $714 thousand and $2.7 million for the three- and nine-month periods ended September 30, 2014, respectively. The reported tax expense for the three- and nine-month periods ended September 30, 2014 is based upon an estimated annual effective tax rate of 42.2% and 44.4%, respectively, related to our combined federal and state income tax rates, foreign income tax provisions, the recognition of U.S. deferred tax liabilities for differences between the book and tax basis of goodwill and other discrete items. The Company recorded a tax provision of $74 thousand and $293 thousand for the three- and nine-month periods ended September 30, 2013, respectively. The reported tax expense for the three- and nine-month periods ended September 30, 2013 is based upon an estimated annual effective tax rate of 4.0% and 11.3%, respectively.

The reported estimated annual effective tax rate for the three- and nine-month periods ended September 30, 2013 is lower than the statutory rate due to a full valuation allowance being provided against our deferred tax assets, which includes significant federal net operating loss carryforwards.

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 highly 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.

When assessing all available evidence, we consider the extent to which we have generated pre-tax income or losses over the most recent three-year period to be an important piece of objective evidence. During the year ended December 31, 2013, we emerged from a cumulative three year pre-tax loss position, which removed this important piece of negative evidence from our evaluation. As a result, we concluded the asset was realizable and we reversed $36.2 million of the previously established deferred tax asset valuation allowance.

Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense. This policy has been consistently applied in all periods. During the three- and nine-month periods ended September 30, 2014, we recognized, as a part of income tax expense, $20 thousand and $60 thousand, respectively, in interest and penalties related to our unrecognized tax benefits. During the three- and nine-month periods ended September 30, 2013, we reduced income tax expense by $(88) thousand and $(45) thousand, respectively, from the reversal of previously recorded unrecognized state income tax-related tax benefits (and associated penalties and interest) as a result of the expiration of certain statutes of limitations.

We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of September 30, 2014, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, was $108 thousand. We have identified no other uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the twelve months ending September 30, 2015. We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction.

6. FAIR VALUE MEASUREMENT:

We utilize the following valuation hierarchy 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.

Classification of financial assets and liabilities within the hierarchy is determined based upon the lowest level input that is significant to the fair value measurement.

9

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. FAIR VALUE MEASUREMENT: (Continued)

As of September 30, 2014 and December 31, 2013, our only financial assets and liabilities required to be measured on a recurring basis were our money market investments.

The following table represents the Company’s 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 September 30, 2014:
Financial assets:
Money market investment	$	4,084	$	4,084	$	—	$	—
Total financial assets	$	4,084	$	4,084	$	—	$	—
Balance at December 31, 2013:
Financial assets:
Money market investment	$	4,084	$	4,084	$	—	$	—
Total financial assets	$	4,084	$	4,084	$	—	$	—

No financial instruments were transferred into or out of Level 3 classification during the three-month period ended September 30, 2014.

As of September 30, 2014 and December 31, 2013, 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.

10

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7. GOODWILL AND INTANGIBLE ASSETS:

There has been no change in the Company’s recorded goodwill balance during the three- or nine-month periods ended September 30, 2014 or 2013. Our annual goodwill and intangible assets measurement date is December 2.

We amortize our intangible assets that have finite lives 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 expense was $75 thousand and $226 thousand during the three- and nine-month periods ended September 30, 2014, respectively. Amortization expense was $101 thousand and $310 thousand during the three- and nine-month periods ended September 30, 2013, respectively. This amortization expense relates to certain non-competition covenants, trade names and customer lists, which expire at various times through 2016.

The Company recorded amortization from capitalized internally developed software (intellectual property) (reported as part of Cost of Revenue - software cost) of $53 thousand and $160 thousand during the three- and nine-month periods ended September 30, 2014, respectively. The Company recorded amortization from capitalized internally developed software (intellectual property) (reported as part of Cost of Revenue - software cost) of $77 thousand and $258 thousand during the three- and nine-month periods ended September 30, 2013, respectively.

Estimated annual amortization expense (including amortization expense associated with capitalized software costs) for the current year and the following four years ending December 31, is as follows:

	Amortization Expense
	(In Thousands)
2014	$	514
2015	$	266
2016	$	176
2017	$	—
2018	$	—

11

EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8. ACCRUED EXPENSES AND OTHER LIABILITIES:

Accrued liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014		December 31, 2013
	(In Thousands)
Accrued bonuses	$	3,590	$	3,126
Accrued vacation		2,481		1,983
Accrued payroll related liabilities		2,534		1,682
Accrued commissions		2,884		2,765
Accrued software expense		685		1,093
Income tax related accruals		1,057		588
Deferred rent		458		513
Short-term portion of lease abandonment accrual		609		475
Accrued sales and use tax		290		275
Other accrued expenses		2,778		1,826
Total	$	17,366	$	14,326

Other long-term liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014		December 31, 2013
	(In Thousands)
Long-term portion of lease abandonment accrual	$	557	$	760
Total	$	557	$	760

9. NET INCOME PER SHARE:

A reconciliation of net income and weighted average shares used in computing basic and diluted net income per share is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In Thousands, Except Per Share Data)
Basic net income per share:
Net income applicable to common shares	$	976	$	1,772	$	3,408	$	2,297
Weighted average common shares outstanding		11,197		10,732		11,092		10,800
Basic net income per share of common stock	$	0.09	$	0.17	$	0.31	$	0.21
Diluted net income per share:
Net income applicable to common shares	$	976	$	1,772	$	3,408	$	2,297
Weighted average common shares outstanding		11,197		10,732		11,092		10,800
Dilutive effects of stock options and restricted stock		1,775		1,501		1,881		985
Weighted average common shares, assuming dilutive effect of stock options and restricted stock		12,972		12,233		12,973		11,785
Diluted net income per share of common stock	$	0.08	$	0.14	$	0.26	$	0.19

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EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9. NET INCOME PER SHARE: (Continued)

Share-based awards, inclusive of all grants made under the Company’s 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 303 thousand and 314 thousand in the three- and nine-month periods ended September 30, 2014, respectively. The diluted computation would have increased by approximately 478 thousand and 1.0 million in the three- and nine-month periods ended September 30, 2013, respectively. As of September 30, 2014 and 2013, there were approximately 4.0 million and 4.3 million share-based awards outstanding, respectively, under the Company’s equity plans.

10. STOCK REPURCHASE PROGRAM:

In December 2007, our Board of Directors (the “Board”) authorized a stock repurchase program for up to $5.0 million of common stock on the open market or through privately negotiated transactions from time-to-time through December 31, 2008 (the “Stock Repurchase Program”). The Board subsequently amended the Stock Repurchase Program, authorizing both an increase to and an extension of the Stock Repurchase Program. The Stock Repurchase Program, as amended, had a maximum purchase value of shares of $23.1 million (the “Purchase Authorization”) and was set to expire on September 19, 2014 (the “Repurchase Period”). On September 18, 2014, we announced that the Board had approved an extension of the Repurchase Period to September 25, 2015.

The timing and amount of the purchases will be based upon market conditions, securities law considerations and other factors. The Stock Repurchase Program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

The Company repurchased a total of 142 thousand shares of common stock during the three- and nine-month periods ended September 30, 2014 at an aggregate purchase price of $962 thousand. The Company made no common stock repurchases during the three-month period ended September 30, 2013. The Company repurchased a total of 365 thousand shares of common stock during the nine-month period ended September 30, 2013 at an aggregate purchase price of $1.5 million. As of September 30, 2014, there was $9.1 million of purchase authorization remaining under the Stock Purchase Program.

11. REVOLVING LINE OF CREDIT:

In September 2013, the Company entered into a three-year secured revolving credit facility (the “Credit Facility”). The Credit Facility allows the Company to borrow up to $10.0 million and includes an additional accordion feature that allows the Company to request an additional $5.0 million as needed, extending the total credit facility borrowing capacity to $15 million over its three-year term. The Credit Facility is secured by the personal property of the Company and its domestic subsidiaries, and is subject to normal covenants. The Company was in compliance with all covenants as of September 30, 2014. Under the terms of the Credit Facility, any advances will accrue interest at a variable per annum rate of interest equal to, as elected by the Company, (i) the Prime Rate, or (ii) the LIBOR Rate plus 1.5%. Interest is due and payable, in arrears, on a monthly basis. The Company will be obligated to pay an annual commitment fee of 0.15% on the daily undrawn balance of the facility. Any amounts outstanding under the Credit Facility will be due on September 23, 2016. No amounts were drawn under this facility as of September 30, 2014.

12. LEASE ABANDONMENT:

In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a non-cash operating charge of $2.2 million in the fourth quarter of 2011 and recorded a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long-term liabilities within the condensed consolidated balance sheets). The lease abandonment charge was calculated based on the net of future contractually obligated lease payments and an estimate of potential sub-lease income (which took into account current market rates and occupancy levels). This analysis is reviewed and updated each reporting period. During the second quarter of 2014 the Company determined that an elimination of the

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EDGEWATER TECHNOLOGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

12. LEASE ABANDONMENT: (Continued)

estimated sub-lease income was warranted and, as a result, the Company recorded a non-cash operating expense charge of $400 thousand which was recorded within selling, general and administrative expenses in the condensed consolidated statement of comprehensive income for the nine-month period ended September 30, 2014. No changes were made to any lease abandonment assumptions during the three-month period ended September 30, 2014. The lease abandonment accrual totaled $1.2 million as of both September 30, 2014 and December 31, 2013.

13. FULLSCOPE EMBEZZLEMENT:

During the second quarter of 2010, the Company discovered embezzlement activities at Fullscope, one of its wholly-owned subsidiaries, which was acquired by the Company in December 2009 (the “Fullscope Embezzlement Issue”). Based upon the results of forensic accounting procedures, we identified that the embezzlement activities occurred for an extended period prior to our acquisition of Fullscope and also during the first and second quarter of 2010.

Since 2010 we have incurred certain embezzlement-related expenses associated with non-routine professional services and sales and use tax obligations.

The Company incurred the majority of its embezzlement-related expenses during fiscal 2010 in connection with its identification and investigation of the embezzlement activity. Embezzlement-related expenses incurred in the three- and nine-month periods ended September 30, 2014 were not material.

During the second quarter of 2014, the Company reached an agreement with the former Fullscope stockholders settling the Company’s outstanding escrow claims associated with the Fullscope acquisition (the “Settlement Agreement”). In connection with the Settlement Agreement, the Company received approximately $1.9 million in cash to satisfy the Company’s escrow claims. The settlement and collection of the escrow has been recorded within selling, general and administrative expense within the condensed consolidated statement of comprehensive income. As of September 30, 2014, the escrow account had a remaining balance of $250 thousand. This balance will remain in the escrow account until the second quarter of 2015 and will be utilized to cover any potential future sales and use tax exposure that may arise from subsequent state inquiry or audit. If no exposure is identified, then the remaining balance will be remitted to the former Fullscope stockholders. Amounts recovered, if any, will be recorded during the period in which settlement is determined to be probable of recovery from escrow.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in conjunction with the information contained in the Unaudited Condensed Consolidated Financial Statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. See “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere herein. We use the terms “we,” “our,” “us,” “Edgewater” and “the Company” in this report to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries.

Business Overview

Edgewater is a strategic consulting firm that brings a synergistic blend of specialty services to drive transformational change that (1) improves process, (2) reduces costs and (3) increases revenue. Our solutions are tailored to the C-level executives in the upper mid-market and Global 2000.

We deliver our services across a broad range of industries. We work onsite with our clients, providing a full spectrum of services in the following areas: classic consulting and product-based consulting, primarily in enterprise performance management (“EPM”) and enterprise resource planning (“ERP”).

Our Services

Edgewater offers a full spectrum of services and expertise to ensure the success of our engagement. Our consulting services are consolidated into two major synergistic offerings: (1) Classic Consulting and (2) Product-Based Consulting.

The following diagram illustrates these offerings:

Edgewater has the proven expertise to plan, deliver and manage integration services that improve performance and maximize business results. We focus on deploying new systems and unlocking the value of the existing corporate assets. This proven expertise enables us to bring complex technologies and systems together while minimizing risk, leveraging our clients’ technology investments and delivering tailored solutions.

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The following are Edgewater’s service categories with sample services:

Classic consulting services

• CFO advisory services

• Business improvement roadmaps

• Organizational change management

• Program/project management

• Business process rejuvenation and integrated social media best practices

• Specialized operational, due diligence and technology management expertise to mergers and acquisitions, private equity and venture capital

• Strategic advice, costing, estimates to complete, failing or failed programs or project initiatives

• Independent package selection and Request for Information or Proposal process design and implementation

• Technical architecture and roadmaps

• CIO advisory services

• Strategic technology selections

• Technical evaluation and design

• Custom component design and implementation

• Customer intelligence solutions using web/mobile analytics combined with social intelligence

• Cloud architecture, integration and phasing solutions

• On-going support services

• Infrastructure optimization and redesign, disaster recovery and business continuity specialized design and assistance

Product-based consulting services

• Business transformation through the use of packaged software solutions

• Enterprise performance management with Oracle budgeting, planning, consolidation and strategic finance both on premise and in the cloud

• Enterprise resource planning with Microsoft Dynamics AX targeted in process and discrete manufacturing verticals such as CPG, IEM, Chemical, Pharmaceuticals and Food and Beverage

• Customer relationship management with Microsoft Dynamics CRM both on premise and in the cloud

• Industry specific platform and best practice solutions

• Blended solutions; Microsoft CRM/XRM and specialized custom solutions

• Business intelligence analytics

• Design, development and introduction of IP that helps “verticalize” channel product stacks

• Support and training services

In addition to the above services, the Company also provides synergistic services in the area of data management and analytics. Examples of such services include the following:

Enterprise information management services

• Provide for data related matters: master data management, data governance, logical and physical data base design, data warehouse strategies and design

• Provide practical data architectures and roadmaps to support transactional systems and enterprise performance management through advanced analytics

• Provide forms of data manipulation, transformation and quality services

Analytics services

• Advise on lead derivation of key financial and operational performance indicators and correlate their measurement, visualization and action for a given organization

• Advise on opportunities for the use of predictive techniques, external data and benchmarks to improve business performance measurement and forecasting

• Advise on the creation and adoption of analytics architectures, roadmaps and supporting organizations

• Advise, design and roadmap analytics-based near real-time to real-time alerting strategies and implementations

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Our consultants are expected to travel and to be onsite with the customer to provide the highest level of service and support in all of these endeavors. We provide varying degrees of customer project assistance and will incorporate customer resources for technology transfer or cost optimization purposes. Independent teams and proper project process and delineation provide conflict-free transition points among all key service offerings as well as independent entry points. Leads for all offerings are internally driven with assistance from the respective vendors for software product solutions.

Factors Influencing Our Results of Operations

Revenue. The Company derives its service revenue from time and materials-based contracts, fixed-price contracts and retainer-based arrangements. Time and materials-based contracts represented 89.6% and 91.6% of service revenue for the three- and nine-month periods ended September 30, 2014, respectively. Time and materials-based contracts represented 89.9% and 91.4% of service revenue for the three- and nine-month periods ended September 30, 2013, respectively. Revenue under time and materials contracts is recognized as services are rendered and performed at contractually agreed upon rates. Fixed-price contracts represented 6.3% and 4.2% of service revenue for the three- and nine-month periods ended September 30, 2014, respectively. Fixed-price contracts represented 7.4% and 5.6% of service revenue for the three- and nine-month periods ended September 30, 2013, respectively. Revenue pursuant to fixed-price contracts is recognized under the proportional performance method of accounting. Retainer-based contracts represented 4.1% and 4.2% of service revenue during the three- and nine-month periods ended September 30, 2014, respectively. Retainer-based contracts represented 2.7% and 3.0% of service revenue during the three- and nine-month periods ended September 30, 2013, respectively. Revenue under retainer-based contracts is recognized ratably over the contract period, as outlined within the respective contract.

Estimates of total project costs are continuously monitored during the term of an engagement. There are situations where the number of hours to complete projects may exceed (or be less than) our original estimate, as a result of an increase (or decrease) 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.

We anticipate that software revenue will continue to represent a meaningful portion of our revenues. Our reported software revenue represents the resale of certain third-party off-the-shelf software and related maintenance (primarily relates to the resale of Microsoft Dynamics AX product) and has historically been recorded on a gross basis provided we act as principal in the transaction, whereby 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 is recorded on a net basis.

Software revenue is recognized upon delivery, except in the infrequent situation where the Company provides maintenance services, in which case the related maintenance is recognized ratably over the maintenance period (while the software revenue is recognized upon delivery). Software revenue is expected to fluctuate between quarters, dependent on our customers’ demand for such third-party off-the-shelf software. Fluctuations in software revenue may have an impact upon our periodic operating performance, including gross margin.

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). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain Microsoft Dynamics AX software resale arrangements (primarily the risk of credit loss and ability to establish pricing), 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). We expect this trend to continue and also anticipate that the number of new software resale arrangements subject to these terms may increase in future periods. Additionally, the changes in the terms of the resale arrangements may, in certain situations, extend the timing of the recognition period (from full, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction over a three-year period) due to payment terms being spread over a multiple year period. This would reduce the amount of the software revenue and associated gross margin to be recognized by the Company in the initial period of the sale.

Operating Expenses. The largest portion of our operating expenses consists of cash and non-cash compensation and benefits associated with our project consulting personnel and related expenses. Non-cash compensation includes share-based compensation expense arising from restricted stock and option grants to employees. Project personnel expenses also consist of payroll costs and related benefits associated with our professional staff. Other related expenses include travel, subcontracting costs, third-party vendor payments and non-billable expenses associated with the delivery of services to our

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customers. We consider the relationship between project personnel expenses and service revenue to be an important measure of our operating performance. The relationship between project personnel expenses and service revenue is driven largely by the chargeability of our consultant base, the prices we charge our customers and the non-billable costs associated with securing new customer engagements and developing new service offerings. The remainder of our recurring operating expense is composed of expenses associated with the development of our business and the support of our customer-serving professionals, such as professional development and recruiting, marketing and sales, and management and administrative support. Professional development and recruiting expenses consist primarily of recruiting and training content development and delivery costs. Marketing and sales expenses consist primarily of the costs associated with the development and maintenance of our marketing materials and programs. Management and administrative support expenses consist primarily of the costs associated with operations, including finance, information systems, human resources, facilities (including the rent of office space) and other administrative support for project personnel.

We regularly review our fees for services, professional compensation and overhead costs to ensure that our services and compensation are competitive within the industry and that our overhead costs are balanced with our revenue levels. In addition, we monitor the progress of projects with customer senior management. We manage the activities of our professionals by closely monitoring engagement schedules and staffing requirements. However, a rapid decline in the demand for the professional services that we provide could result in lower utilization of our professionals than we planned. In addition, because most of our customer engagements are terminable by our customers without penalty, an unanticipated termination of a customer project could require us to maintain underutilized employees. While professional staff levels must be adjusted to reflect active engagements, we must also maintain a sufficient number of consulting professionals to oversee existing customer engagements and to participate in sales activities to secure new customer assignments.

Fullscope Embezzlement Expenses. Since fiscal 2010, we have incurred certain non-routine professional service-related expenses associated with our identification of embezzlement activities at Fullscope, one of our wholly-owned subsidiaries (the “Fullscope Embezzlement Issue”). We incurred a majority of our embezzlement-related expenses during fiscal 2010 in connection with our identification and investigation of the embezzlement activity.

During the fourth quarter of 2012, the Company began to file tax returns and pay sales and use tax liabilities related to the Fullscope Embezzlement (which were created by the methods employed by a former employee of Fullscope to conceal the discovered fraudulent activity). The Company has made payments totaling $1.4 million associated with the sales and use tax liabilities. As of March 31, 2014, we had completed the process of making initial payments to settle the identified pre-acquisition sales and use tax exposure.

During the second quarter of 2014, the Company reached an agreement with the former Fullscope stockholders settling the Company’s outstanding escrow claims associated with the Fullscope acquisition (the “Settlement Agreement”). In connection with the Settlement Agreement, the Company received approximately $1.9 million in cash to satisfy the Company’s escrow claims. As of September 30, 2014, the escrow account had a remaining balance of $250 thousand. This balance will remain in the escrow account until the second quarter of 2015 and will be utilized to cover any potential future sales and use tax exposure that may arise from subsequent state inquiry or audit. If no exposure is identified, then the remaining balance will be remitted to the former Fullscope stockholders. Amounts recovered, if any, will be recorded during the period in which settlement is determined to be probable of recovery from escrow.

Lease Abandonment. In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a non-cash operating charge of $2.2 million in the fourth quarter of 2011 and established a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long-term liabilities within the consolidated balance sheets). The lease abandonment charge was calculated based on the net of future contractually obligated lease payments and an estimate of potential sub-lease income (which took into account current market rates and occupancy levels). This analysis is reviewed and updated each reporting period. During the second quarter of 2014 the Company determined that a change in the estimated sub-lease income was warranted and, as a result, the Company recorded a non-cash operating expense charge of $400 thousand, directly associated with our initial sub-lease assumptions, which has been recorded within selling, general and administrative expenses in the condensed statement of comprehensive income for the nine-month period ended September 30, 2014. No changes were made to any lease abandonment assumptions during the three-month period ended September 30, 2014. The lease abandonment accrual totaled $1.2 million as of both September 30, 2014 and December 31, 2013.

Company Performance Measurement Systems and Metrics. The Company’s management monitors and assesses its operating performance by evaluating key metrics and indicators on an ongoing basis. For example, we regularly review performance information related to annualized revenue per billable consultant, periodic consultant utilization rates, gross

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profit margins, average bill rates and billable employee headcount. Edgewater has also developed internal Enterprise Performance Management systems which aid us in measuring our operating performance and consultant utilization rates. The matching of sales opportunities to available skill sets in our consultant base is one of our greatest challenges and therefore, we monitor consultant utilization closely. These metrics, along with other operating and financial performance metrics, are used in evaluating management’s overall performance. These metrics and indicators are discussed in more detail under “Results for the Three and Nine Months Ended September 30, 2014, Compared to Results for the Three and Nine Months Ended September 30, 2013,” included elsewhere in this Quarterly Report on Form 10-Q.

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Results for the Three and Nine Months Ended September 30, 2014, Compared to Results for the Three and Nine Months Ended September 30, 2013

The financial information that follows has been rounded in order to simplify its presentation. The amounts and percentages below have been calculated using the detailed financial information contained in the unaudited condensed consolidated financial statements, the notes thereto, and the other financial data included in this Quarterly Report on Form 10-Q.

The following table sets forth the percentage of total revenue of items included in our unaudited condensed consolidated statements of operations:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2014			2013			2014			2013
Revenue:
Service revenue		87.5	%		84.2	%		85.5	%		81.6	%
Software revenue		4.8	%		8.9	%		6.9	%		11.2	%
Reimbursable expenses		7.7	%		6.9	%		7.6	%		7.2	%
Total revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue:
Project and personnel costs		52.8	%		51.5	%		51.6	%		51.9	%
Software costs		3.2	%		3.6	%		4.1	%		5.9	%
Reimbursable expenses		7.7	%		6.9	%		7.6	%		7.2	%
Total cost of revenue		63.7	%		62.0	%		63.3	%		65.0	%
Gross profit		36.3	%		38.0	%		36.7	%		35.0	%
Operating expenses:
Selling, general and administrative		29.1	%		29.9	%		28.6	%		30.3	%
Depreciation and amortization		0.8	%		1.2	%		0.8	%		1.2	%
Total operating expenses		29.9	%		31.1	%		29.4	%		31.5	%
Operating income		6.4	%		6.9	%		7.3	%		3.5	%
Other expense (income), net		0.5	%		(0.4	)%		0.1	%		0.1	%
Income before income taxes		5.9	%		7.3	%		7.2	%		3.4	%
Income tax provision		2.5	%		0.3	%		3.2	%		0.4	%
Net income		3.4	%		7.0	%		4.0	%		3.0	%

Revenue. Total revenue increased by $3.3 million, or 13.1%, to $28.7 million during the three-month period ended September 30, 2014, compared to total revenue of $25.4 million in the three-month period ended September 30, 2013. Total revenue increased by $8.8 million, or 11.4%, to $85.6 million during the nine-month period ended September 30, 2014, compared to total revenue of $76.8 million in the nine-month period ended September 30, 2013. With respect to the comparative changes in year-over-year total revenue, service revenue during the third quarter of 2014 increased by $3.8 million, or 17.6%, to $25.1 million compared to $21.4 million during the comparative 2013 quarterly period, while service revenue during the nine-month period ended September 30, 2014 increased by $10.5 million, or 16.7%, to $73.1 million, compared to service revenue of $62.7 million during the nine-month period ended September 30, 2013. Software revenue represented $1.4 million, or 4.8% of total revenue, during the three-month period ended September 30, 2014, compared to $2.3 million, or 8.9% of total revenue, during the third quarter of 2013 and was $5.9 million, or 6.9% of total revenue, during the nine-month period ended September 30, 2014, compared to $8.6 million, or 11.2% of total revenue, during the first nine months of 2013.

On a year-over-year basis, the increase in quarterly and year-to-date service revenue is reflective of the comparative increase in billable consultant utilization, combined with an increase in billable consultant headcount. Billable consultant utilization was 77.3% and 77.6% during the three and nine months ended September 30, 2014, respectively, compared to 71.1% and 72.0% during the three- and nine-month periods ended September 30, 2013, respectively. Billable headcount, excluding contractors, increased by 20, to 325 as of September 30, 2014, compared to 305 as of September 30, 2013.

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The increase in utilization was driven by the improved pipeline activity and project signings in the fourth quarter of 2013 and the first half of 2014, which positioned the Company for a strong 2014. On a sequential quarterly basis, service revenue in the third quarter of 2014 increased by $631 thousand, or 2.6%, compared to the second quarter of 2014. The sequential quarterly increase in service revenue is the result of continued strength in billable consultant utilization, while increasing billable headcount through the use of contractors. The use of external contractors increased during the third quarter of 2014 in an effort to maintain an appropriately scaled workforce necessary to support the growth in delivery demands associated with the growth in our 2014 quarterly and year-to-date service revenue.

The existence of intellectual property (IP) design and build capabilities in our strategic offerings mix has had a positive impact on our lead generation and overall sales activity. We plan to continue to build out intellectual property in the healthcare, insurance and manufacturing verticals, as well as in our EPM service offering, in future periods.

As described above, utilization, which is a measure of our ability to generate revenue from our consultants, increased to 77.3% during the third quarter of 2014, compared to 71.1% during the third quarter of 2013. Billable headcount, excluding contractors, increased by 20 during the third quarter of 2014, compared to the third quarter of 2013. The Company proactively manages its reliance on external resources, while maintaining appropriate levels of staff to service existing customer demand and effectively respond to proposal activity. On a sequential quarterly basis utilization remained consistent while billable headcount (including contractors) increased.

Annualized service revenue per billable consultant, as adjusted for utilization, was $359 thousand and $370 thousand during the three-month periods ended September 30, 2014 and 2013, respectively. Annualized service revenue per billable consultant, as adjusted for utilization, was $363 thousand and $357 thousand during the nine-month periods ended September 30, 2014 and 2013, respectively. The periodic fluctuations in our annualized service revenue per billable consultant metric continue to reflect the changes in the mix of our service offering revenue generated by our current engagements.

During the three- and nine-month periods ended September 30, 2014, software revenue totaled $1.4 million and $5.9 million, or 4.8% and 6.9% of total revenue, respectively, compared to software revenue of $2.3 million and $8.6 million, or 8.9% and 11.2%, respectively, in the three- and nine-month periods ended September 30, 2013. Our software revenue is primarily related to our resale of Microsoft Dynamics AX ERP software and maintenance. Software revenue is expected to fluctuate on an annual period to period basis dependent upon our customers’ demand for such third-party off-the-shelf software. We anticipate that software revenue will continue to represent a meaningful portion of annual revenues in future years. Because of this, we believe that periodic fluctuations in the amount of software revenue recognized by the Company may have a material impact upon our gross margins.

In June 2012, Microsoft purchased the Company’s internally developed PI2 software and intellectual property (the “PI2 Solution”) for an aggregate purchase price of $3.25 million. The sale of the PI2 Solution was a significant multiple element contract. This contract included $3.25 million of license consideration and subsequent development and training services. At the time of the sale, we determined that the license did not have stand-alone value without the services, and accordingly we accounted for the license and related services as one unit. The Company recognized $614 thousand and $2.0 million in PI2 license revenue in the three- and nine-month periods ended September 30, 2013, respectively. The PI2 Solution arrangement was completed during the fourth quarter of 2013 and therefore no future revenue will be generated from the PI2 Solution.

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). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain Microsoft Dynamics AX software resale arrangements (primarily the risk of credit loss and ability to establish pricing), 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). We expect this trend to continue and also anticipate that the number of new software resale arrangements subject to these terms may increase in future periods. Additionally, the changes in the terms of the resale arrangements may, in certain situations, extend the timing of the recognition period (from full, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction over a three-year period) due to payment terms being spread over a multiple year period. This would reduce the amount of the software revenue and associated gross margin to be recognized by the Company in the initial period of the sale.

Generally, we are reimbursed for our out-of-pocket expenses incurred in connection with our customers’ consulting projects. Reimbursed expense revenue increased to $2.2 million compared to $1.8 million for the three-month periods ended September 30, 2014 and 2013, respectively. Reimbursed expense revenue increased to $6.5 million for the nine-month period ended September 30, 2014, as compared to $5.5 million in the comparative 2013 year-to-date period. The aggregate amount of reimbursed expenses will fluctuate from period-to-period depending on the number of billable consultants as well the location of our customers, the general fluctuation of travel costs, such as airfare, and the number of our projects that require travel.

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The number of customers the Company served during the nine-month period ended September 30, 2014 totaled 370, as compared to 354 customers during the nine-month period ended September 30, 2013. During the first nine months of 2014, we secured first-time engagements with a total of 67 new customers, compared to 74 new customer engagements during the first nine months of 2013.

Cost of Revenue. Cost of revenue primarily consists of project personnel costs principally related to salaries, payroll taxes, employee benefits, software costs and travel expenses for personnel dedicated to customer projects. These costs represent the most significant expense we incur in providing our services. In total, cost of revenue increased by $2.6 million, or 16.3%, to $18.3 million for the three-month period ended September 30, 2014, compared to $15.7 million in the comparative 2013 quarterly period. Cost of revenue increased by $4.2 million, or 8.4%, to $54.2 million during the nine-month period ended September 30, 2014 compared to $49.9 million in the comparative 2013 period.

The primary drivers of the 2014 year-over-year quarterly and year-to-date increase in total cost of revenue, on an absolute dollar basis, were related to an increase in salary- and fringe-related expenses (primarily associated with the increase in billable consultant headcount), an increase in expense associated with billable consultant revenue share programs (which is directly attributable to the growth in service revenue) and an increase in contractor expense (as the number of contractors utilized increased by 25 compared to the quarter ended September 30, 2013). During the third quarter 2014 we increased our reliance on external contractors as a direct result of increased project delivery demands associated with the growth in our quarterly and year-to-date service revenue. We have in the past (and will continue to do so in the future) utilized contractors as a means to support project delivery needs during periods of growth. The Company maintained 325 billable consultants (excluding contractors) as of the quarter ended September 30, 2014, compared to 305 billable consultants (excluding contractors) as of September 30, 2013.

Project and personnel costs represented 52.8% and 51.6% of total revenue during the three- and nine-month periods ended September 30, 2014 as compared to 51.5% and 51.9% of total revenue during the three- and nine-month periods ended September 30, 2013.

The increase in project and personnel costs for the three-month period ended September 30, 2014, as a percentage of total revenue, is the result of the increased salary and related expenses associated with the increase in billable consultant headcount combined with the increase in contractor related expense noted above. The decrease in project and personnel costs during the nine-month period ended September 30, 2014, as a percentage of total revenue, was driven primarily by the growth in service revenue resulting from the increased billable consultant utilization, partially offset by the compensation-related costs (inclusive of billable consultant revenue share programs) associated with the corresponding service revenue growth.

Software costs amounted to $924 thousand and $3.5 million during the three- and nine-month periods ended September 30, 2014. Software costs amounted to $921 thousand and $4.6 million during the three- and nine-month periods ended September 30, 2013. Software costs are expected to fluctuate between quarters depending on our customers’ demand for software. Reimbursable expenses were $2.2 million and $6.5 million for the three- and nine-month periods ended September 30, 2014, compared to $1.8 million and $5.5 million in the comparative quarterly periods of 2013.

Gross Profit. During the three-month period ended September 30, 2014, total gross profit increased $759 thousand, or 7.9%, to $10.4 million compared to gross profit of $9.7 million in the three-month period ended September 30, 2013. During the nine-month period ended September 30, 2014, total gross profit increased $4.6 million, or 17.0%, to $31.4 million compared to total gross profit of $26.8 million in the nine-month period ended September 30, 2013. For purposes of further analysis, we refer to gross profit as a percentage of revenue generally as gross margin.

Total gross margin, as a percentage of total revenue, was 36.3% in the third quarter of 2014, compared to 38.0% in the third quarter of 2013. The decrease in gross margin during the third quarter of 2014, compared to the third quarter of 2013, is primarily attributable to the decrease in software revenue (and the corresponding margin contribution), combined with the increase in contractor-related expense (as described above). Quarterly and year-to-date software revenue in 2013 included $614 thousand and $2.0 million, respectively, in high margin contribution PI2 software revenue. No PI2 software revenue was recorded by the Company during the applicable periods in 2014. Total gross margin increased to 36.7% in the nine-month period ended September 30, 2014, compared to 35.0% in the comparative 2013 year-to-date period. The year-to-date improvement in total gross margin is primarily the result of the growth in service revenue (driven by improvement in billable consultant utilization and growth in headcount), which was partially offset by the increased salary-related expenses (resulting from headcount growth) and the increase in billable consultant revenue share (directly related to service revenue growth).

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Service revenue gross margin was 39.7% in the third quarter of 2014, compared to 38.9% in the third quarter of 2013. Service revenue gross margin was 39.7% in the nine-month period ended September 30, 2014, compared to 36.4% in the comparative 2013 year-to-date period. The increase in service gross margin for the three- and nine-month periods ended September 30, 2014 are primarily related to service revenue growth and the improvement in billable consultant utilization, as described above.

We anticipate that software revenue will continue to represent a meaningful portion of our revenue in future periods. Our software revenue has historically influenced, and we anticipate that it will continue to influence in the future, our quarterly gross margins. We believe, in connection with changes in the nature of the terms of certain of our Microsoft Dynamics AX software resale arrangements as described in “Revenue” above, that anticipated changes in the terms of the resale arrangements will, in certain situations, extend the timing of the recognition period of the gross margin on software sales (from, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction spread over a three-year period) and result in a reduction in the amount of the software gross margin to be recognized by the Company.

Selling, General and Administrative (“SG&A”) Expenses. As a percentage of total revenue, SG&A expenses were 29.1% and 28.6% during the three- and nine-month periods ended September 30, 2014, respectively, compared to 29.9% and 30.3% in the three- and nine-month periods of 2013, respectively. On an absolute dollar-basis, SG&A expenses increased by $763 thousand, or 10.1%, and increased by $1.2 million, or 5.2%, to $8.4 million and $24.4 million in the three- and nine-month periods ended September 30, 2014, respectively, compared to SG&A expenses of $7.6 million and $23.2 million in the three- and nine-month periods ended September 30, 2013, respectively.

From a comparability perspective, the increases in SG&A expenses during the three- and nine-month periods ended September 30, 2014 are the result of increased salary-related expenses (inclusive of the incremental bonus and commission expense associated with the improvement in financial performance).

Further, the increase in SG&A expenses during the nine-month period ended September 30, 2014 was affected by two significant events. During the second quarter of 2014, in connection with the quarterly assessment of our lease abandonment charge assumptions (associated with the 2011 abandonment of certain excess corporate facilities), the Company determined that an elimination of the estimated sub-lease income was warranted and, as a result, the Company recorded a non-cash operating expense of $400 thousand.

Also, during the second quarter of 2014, the Company reached an agreement with the former Fullscope stockholders settling the Company’s outstanding escrow claims associated with the Fullscope acquisition (the “Settlement Agreement”). Approximately $1.5 million of the settlement proceeds have been recorded as a “loss recovery” gain and are included, as a reduction in operating expenses, within the selling, general and administrative expenses on our condensed consolidated statement of comprehensive income. As of September 30, 2014, the escrow account had a remaining balance of $250 thousand. This balance will remain in the escrow accounts until the second quarter of 2015 and will be utilized to cover any potential future sales and use tax exposure that may arise from subsequent state inquiry or audit.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased $(75) thousand, or (24.8)%, to $227 thousand in the quarter ended September 30, 2014 as compared to $302 thousand in the quarter ended September 30, 2013. Similarly, depreciation and amortization expense decreased $(223) thousand, or (24.1)%, to $702 thousand in the nine-month period ended September 30, 2014 compared to $925 thousand in the comparative 2013 year-to-date period.

Amortization expense was $75 thousand and $226 thousand during the three- and nine-month periods ended September 30, 2014 compared to amortization expense of $101 thousand and $310 thousand in the three- and nine-month periods ended September 30, 2013. The decrease in amortization expense during the third quarter of 2014 is primarily the result of a reduction in amortization expense associated with the intangible assets identified in connection with the Fullscope Acquisition. The Company recognizes amortization expense over the periods in which it expects to realize the economic benefit. A significant portion of the intangible asset amortization expense related to the Fullscope Acquisition was recorded during 2010 and 2011.

Depreciation expense was $152 thousand and $476 thousand in the three- and nine-month periods ended September 30, 2014, respectively, compared to depreciation expense of $201 thousand and $615 thousand in the three- and nine-months ended September 30, 2013, respectively.

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Operating Income. Operating income was $1.8 million in the third quarter of 2014, compared to operating income of $1.8 million in the comparative 2013 quarterly period. Operating income for the nine-month period ended September 30, 2014 was $6.3 million, compared to operating income of $2.7 million in the comparative 2013 year-to-date period.

The 2014 third quarter operating income includes improvement related to increased billable consultant utilization rate combined with an increase billable headcount (including contractors). This improvement was partially offset by the decrease in software revenue and the increased salary-related expenses. The 2014 year-to-date improvement in operating income was primarily attributable to the significant growth in service revenue and associated improvement in billable consultant utilization, combined with the recovery of $1.5 million in previously recorded Fullscope embezzlement-related expenses. These improvements were partially offset by the increase in billable consultant salary-related expenses (including billable consultant revenue share) and the non-cash lease abandonment charge in connection with the change in future sublease assumptions, as described above.

Other (Income) Expense, Net. Other (income) expense, net, totaled $146 thousand and $147 thousand during the three- and nine-month periods ended September 30, 2014, respectively, while other expense, net, totaled $(81) thousand and $92 thousand during the comparative 2013 periods. These amounts primarily represent the Company’s periodic foreign currency exchange gains and losses.

Income Tax Provision. We recorded a provision for income taxes of $714 thousand and $2.7 million during the three- and nine-month periods ended September 30, 2014, respectively. We recorded a provision for income taxes of $74 thousand and $293 thousand during the three- and nine-month periods ended September 30, 2013, respectively. Our periodic income tax provision amounts are derived based upon an estimated annual effective income tax rate, inclusive of federal and state income taxes, of 42.2% and 44.4% during the three- and nine-month periods ended September 30, 2014, respectively. Our periodic income tax provision amounts are derived based upon an estimated annual effective income tax rate, inclusive of federal and state income taxes, of 4.0% and 11.3% during the three- and nine-month periods ended September 30, 2013, respectively.

Reported income tax expense during the comparative 2014 and 2013 quarterly periods also includes expense amounts attributable to foreign income taxes, the recognition of U.S. deferred tax liabilities for differences between the book and tax basis of goodwill, interest and penalties and other discrete items. The reported estimated annual effective tax rate for the three- and nine-month periods ended September 30, 2013 is lower than an anticipated statutory rate due to a full valuation allowance being provided against our deferred tax assets, which includes significant federal net operating loss carryforwards. The Company reversed substantially all of the deferred tax asset valuation allowance during the fourth quarter of 2013.

We have deferred tax assets that have arisen primarily as a result of timing differences, net operating loss carryforwards and tax credits. Our ability to realize a deferred tax asset is based on our ability to generate sufficient future taxable income. We assess, on a routine periodic basis, the estimated future realizability of the gross carrying value of our deferred tax assets on a more likely than not basis. Our periodic assessments take into consideration both positive evidence (future profitability projections for example) and negative evidence (accumulated deficit) as it relates to evaluating the future recoverability of our deferred tax assets.

The Company considers scheduled reversals of deferred tax liabilities, projected future taxable income, ongoing tax planning strategies and other matters, including the period over which our deferred tax assets will be recoverable, in assessing the need for and the amount of the valuation allowance. In the event that actual results differ from these 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 in the period of the adjustment.

Net Income. We generated net income of $976 thousand and $3.4 million during the three- and nine-month periods ended September 30, 2014, respectively, compared to net income of $1.8 million and $2.3 million during the three- and nine-month periods ended September 30, 2013, respectively. The decrease in net income during the comparative quarterly periods is primarily attributable to the decrease in software revenue (and the associated margin contribution), the increase in contractor expense and the increase in the Company’s 2014 effective income tax rate (as described above), which were partially offset by the service revenue growth and improvement in billable consultant utilization rates.

The reported increase in 2014 year-to-date net income, compared to 2013 year-to-date net income is reflective of the significant growth in 2014 service revenue, improvement in billable consultant utilization and the second quarter 2014 settlement of the Fullscope acquisition-related escrow claims, which was partially offset by the increase in the 2014 effective income tax rate and the non-cash lease abandonment expense, both of which are discussed above.

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Liquidity and Capital Resources

The following table summarizes our cash flow activities for the periods indicated:

	Nine Months Ended September 30,
	2014			2013
	(In Thousands)
Cash flows provided by (used in):
Operating activities	$	5,388		$	2,319
Investing activities		(183	)		(769	)
Financing activities		315			(720	)
Effects of exchange rates on cash		(25	)		6
Total cash provided during the period	$	5,495		$	836

Working capital, which is defined as current assets less current liabilities, increased to $33.3 million as of September 30, 2014, as compared to $25.6 million as of December 31, 2013. As of September 30, 2014, we had cash and cash equivalents of $25.8 million, a $5.5 million increase from the December 31, 2013 balance of $20.3 million. The primary drivers of the increase in cash during the first nine months of 2014 are the increase in operating performance combined with the $1.9 million received by the Company in connection with the settlement of the outstanding Fullscope acquisition-related escrow claims.

Historically, we have used our operating cash flows, available cash and periodic sales of our common stock to finance ongoing operations and business combinations. We believe that our cash and cash equivalents will be sufficient to finance our working capital needs for at least the next twelve months. We periodically reassess the adequacy of our liquidity position, taking into consideration current and anticipated operating cash flow, anticipated capital expenditures, and possible business combinations. The pace at which we will either generate or consume cash will be dependent upon future operations and the level of demand for our services on an ongoing basis.

Cash flow from operating activities is driven by collections of fees for our consulting services and the reselling of software products. Cash used in operations predominantly relates to employee compensation and payments to third-party software providers. Accrued payroll and related liabilities fluctuate from period to period based on the timing of our normal payroll cycle and the timing of variable compensation payments. Annual components of our variable compensation plans are paid in the first quarter of the following year, causing fluctuations in cash flow from quarter to quarter.

Accounts payable and accrued expenses are most significantly impacted by the timing of payments required to be made to third-party software providers in connection with the resale of software products to our customers. Historically, a significant portion of our software sales has occurred at the end of the second quarter.

Net cash provided by operating activities was $5.4 million for the nine-month period ended September 30, 2014, as compared to net cash provided by operating activities of $2.3 million for the nine-month period ended September 30, 2013. The primary components of operating cash flows during the first nine months of 2014 were associated with improved operating performance and receipt of the $1.9 million settlement of the Fullscope acquisition-related escrow, partially offset by the payment of bonus and commissions under our 2013 performance-based bonus programs, and, to a lesser extent, the change in prepaid expenses and other current assets (primarily driven by the timing of insurance-related annual premium payments). Additionally, cash from operations was influenced by non-cash charges of $4.0 million (primarily changes in deferred income taxes, depreciation, amortization, stock-based compensation expense and changes in lease abandonment assumptions). The primary components of operating cash flows during the first nine months of 2013 were related the collection of accounts receivable, net income from operations of $2.3 million, and non-cash charges of $2.4 million (primarily depreciation, amortization and stock-based compensation expense). These changes were partially offset by the $1.5 million decrease in deferred revenue (primarily related to the recognition of PI2-related revenue).

Net cash used in investing activities was $(183) thousand during the nine-month period ended September 30, 2014, compared to net cash used in investing activities of $(769) thousand in the nine-month period ended September 30, 2013. Cash used in investing activities in the nine-month period ended September 30, 2014 consisted of purchases of property and equipment. Cash used in investing activities in the nine-month period ended September 30, 2013 consisted of capitalization of product development costs, acquisition of intellectual property and purchases of property and equipment.

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All capital expenditures are discretionary as the Company currently has no long-term commitments for capital expenditures.

Net cash provided by financing activities was $315 thousand in the nine-month period ended September 30, 2014, compared to net cash used in financing activities of $(720) thousand in the nine-month period ended September 30, 2013. The 2014 cash flow provided by financing activities is attributable to proceeds associated with our Employee Stock Purchase Plan and stock option exercises, partially offset by the repurchase of common stock in the amount of $962 thousand. The 2013 net cash used by financing activities was driven by the repurchase of common stock in the amount of $1.5 million which was partially offset by $793 thousand received from our employees related to our Employee Stock Purchase Plan and stock option exercises.

In September 2013, the Company entered into a three-year secured revolving credit facility (the “Credit Facility”). The Credit Facility allows the Company to borrow up to $10.0 million and includes an additional accordion feature that allows the Company to request an additional $5.0 million as needed, extending the total credit facility borrowing capacity to $15 million over its three-year term. The Credit Facility is secured by the personal property of the Company and its domestic subsidiaries, and is subject to normal covenants. Under the terms of the Credit Facility, any advances will accrue interest at a variable per annum rate of interest equal to, as elected by the Company, (i) the Prime Rate, or (ii) the LIBOR Rate plus 1.5%. Interest is due and payable, in arrears, on a monthly basis. The Company will be obligated to pay an annual commitment fee of 0.15% on the daily undrawn balance of the facility. Any amounts outstanding under the Credit Facility will be due on September 23, 2016. No amounts were drawn under this facility as of September 30, 2014.

Acquisitions, Earnout Payments and Commitments

We have entered into various contingent earnout agreements in connection with the acquisitions we have completed. Earnout periods, related performance measurements and the value of the contingent earnout consideration to be earned are specific to each acquisition. Contingent earnout consideration paid by the Company has historically been paid in either cash or a combination of cash and stock. As of September 30, 2014, there were no ongoing earnouts.

Off Balance Sheet Arrangements

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

Critical Accounting Policies and Estimates

We prepare our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. We reaffirm the critical accounting policies and estimates as reported in our 2013 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 10, 2014.

Recent Accounting Pronouncements

In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (ASU 2013-11). ASU 2013-11 clarifies guidance and eliminates diversity in practice on the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This new guidance is effective on a prospective basis for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 did not have a material impact on our financial position, results of operations or cash flows.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09). ASU 2014-09 outlines a single comprehensive

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model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016; early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.

Risk Factors

We operate in a rapidly changing environment that involves certain risks and uncertainties, some of which are beyond our control. You should carefully review and consider the information regarding certain risk factors that could materially affect our business, financial condition or future results set forth under “Part I - Item 1A - Risk Factors” in our Annual Report on Form 10-K, for the period ended December 31, 2013, which was filed with the Securities and Exchange Commission on March 10, 2014 and in this Quarterly Report on Form 10-Q under “Special Note Regarding Forward-Looking Statements.”

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements in this Quarterly Report on Form 10-Q and elsewhere constitute forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors that may cause results, levels of activity, growth, performance, tax consequences or achievements to be materially different from any future results, levels of activity, growth, performance, tax consequences or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, those listed below, as well as those further set forth under the heading “Risk Factors” in our 2013 Annual Report on Form 10-K as filed with the SEC on March 10, 2014.

The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance, including statements concerning our 2014 outlook, future revenue and growth, customer spending outlook, general economic trends, IT service demand, future revenue and revenue mix, utilization, new service offerings, significant customers, competitive and strategic initiatives, growth plans, potential stock repurchases, future results, tax consequences and liquidity needs. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “anticipated,” “expectation,” “continued,” “future,” “forward,” “potential,” “estimate,” “estimated,” “forecast,” “project,” “encourage,” “opportunity,” “goal,” “objective,” “could,” “expect,” “expected,” “intend,” “plan,” “planned,” or the negative of such terms or comparable terminology. These forward-looking statements inherently involve certain risks and uncertainties, although they are based on our current plans or assessments which are believed to be reasonable as of the date of this Form 10-Q. Factors that may cause actual results, goals, targets or objectives to differ materially from those contemplated, projected, forecasted, estimated, anticipated, planned or budgeted in such forward-looking statements include, among others, the following possibilities: (1) failure to obtain new customers or retain significant existing customers; (2) the loss of one or more key executives and/or employees; (3) changes in industry trends, such as a decline in the demand for Enterprise Resource Planning and Enterprise Performance Management solutions, custom development and system integration services and/or declines in industry-wide information technology spending, whether on a temporary or permanent basis and/or delays by customers in initiating new projects or existing project milestones; (4) inability to execute upon growth objectives, including new services and growth in entities acquired by our Company; (5) adverse developments and volatility involving geopolitical or technology market conditions; (6) unanticipated events or the occurrence of fluctuations or variability in the matters identified under “Critical Accounting Policies” in our 2013 Annual Report on Form 10-K; (7) delays in, or the failure of, our sales pipeline being converted to billable work and recorded as revenue; (8) termination by clients of their contracts with us or inability or unwillingness of clients to pay for our services, which may impact our accounting assumptions; (9) inability to recruit and retain professionals with the high level of information technology skills and experience needed to provide our services; (10) failure to expand outsourcing services to generate additional revenue; (11) any changes in ownership of the Company or otherwise that would result in a limitation of the net operating loss carry forward under applicable tax laws; (12) the failure of the marketplace to embrace advisory and product-based consulting services; (13) changes in our utilization levels; and/or (14) failure to make a successful claim against the Fullscope acquisition-related escrow account. In evaluating these statements, you should specifically consider various factors described above as well as the risks outlined under Part I - Item IA “Risk Factors” in our 2013 Annual Report on Form 10-K filed with the SEC on March 10, 2014. These factors may cause our actual results to differ materially from those contemplated, projected, anticipated, planned or budgeted in any such forward-looking statements.

Although we believe that the expectations in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, growth, earnings per share or achievements. However, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Except as otherwise required, we undertake no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary financial instruments include investments in money market funds that are sensitive to market risks and interest rates. The investment portfolio is used to preserve our capital until it is required to fund operations, strategic acquisitions or distributions to stockholders. None of our market-risk sensitive instruments are held for trading purposes. We did not purchase derivative financial instruments in the three- or nine-month periods ended September 30, 2014 or 2013. Should interest rates on the Company’s investments fluctuate by 10% the impact would not be material to the financial condition, results of operations or cash flows.

The impact of inflation and changing prices has not been material on revenue or income from continuing operations during the three-or nine-month periods ended September 30, 2014 and 2013.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, which we have designed to ensure that material information related to the Company, including our consolidated subsidiaries, is properly identified and evaluated on a regular basis and disclosed in accordance with all applicable laws and regulations. The Chairman, President and Chief Executive Officer and the Chief Financial Officer of Edgewater Technology, Inc. (its principal executive officer and principal financial officer, respectively) have concluded, based on their evaluations of the Company’s disclosure controls and procedures as of the end of the period covered by this report, that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management as appropriate to allow timely decisions regarding required disclosure.

Changes in Controls and Procedures

There were no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are sometimes a party to litigation incidental to our business. We are not involved in any active, pending, or (to the best of our knowledge) threatened legal proceedings which would be material to our consolidated financial statements. We maintain insurance in amounts, with coverages and deductibles, which we believe are reasonable.

ITEM 1A. RISK FACTORS

As discussed in “Part I - Item 1A - Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013 and herein under “Special Note Regarding Forward-Looking Statements,” investors should be aware of certain risks, uncertainties and assumptions in our business. We encourage you to refer to our Annual Report on Form 10-K to carefully consider these risks, uncertainties and assumptions.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In December 2007, our Board of Directors (the “Board”) authorized a stock repurchase program for up to $5.0 million of common stock on the open market or through privately negotiated transactions from time-to-time through December 31, 2008 (the “Stock Repurchase Program”). The Board subsequently amended the Stock Repurchase Program, authorizing both an increase to and an extension of the Stock Repurchase Program. The Stock Repurchase Program, as amended, had a maximum purchase value of shares of $23.1 million (the “Purchase Authorization”) and was set to expire on September 19, 2014 (the “Repurchase Period”). On September 18, 2014, we announced that the Board had approved an extension of the Repurchase Period to September 25, 2015.

The following table provides information with respect to purchases of our common stock during the quarter ended September 30, 2014:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans  or Programs		Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 – 31, 2014		—	$	—		—	$	10,032,351
August 1 – 31, 2014		124,190	$	6.75		124,190	$	9,194,194
September 1 – 30, 2014		17,908	$	6.90		17,908	$	9,070,554
Total		142,098	$	6.77		142,098	$	9,070,554

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

31.1	13a-14 Certification – Chairman, President and Chief Executive Officer*
31.2	13a-14 Certification – Chief Financial Officer*
32	Section 1350 Certification**
101	Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2014 and 2013, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2014 and 2013 and (iv) Notes to Unaudited Condensed Consolidated Financial Statements.*

* - Filed herewith.

** - Furnished herewith.

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SIGNATURES

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

	EDGEWATER TECHNOLOGY, INC.
Date: October 31, 2014	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: October 31, 2014	/s/ TIMOTHY R. OAKES
	Timothy R. Oakes
	Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-31.1

Exhibit 31.1

13a-14 CERTIFICATION

I, Shirley Singleton, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Edgewater Technology, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: October 31, 2014	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	Chairman, President and Chief Executive Officer (Principal Executive Officer)

EX-31.2

Exhibit 31.2

13a-14 CERTIFICATION

I, Timothy R. Oakes, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Edgewater Technology, Inc. (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the Audit Committee of the Company’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: October 31, 2014	/s/ TIMOTHY R. OAKES
	Timothy R. Oakes
	Chief Financial Officer (Principal Financial and Accounting Officer)

EX-32

Exhibit 32

1350 CERTIFICATION

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Shirley Singleton, the Chairman, President and Chief Executive Officer of Edgewater Technology, Inc. (the “Company”), and Timothy R. Oakes, the Chief Financial Officer of the Company, each hereby certifies that, to the best of her or his knowledge:

The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2014, to which this Certification is attached as Exhibit 32 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 31, 2014	/s/ SHIRLEY SINGLETON
	Shirley Singleton
	Chairman, President and Chief Executive Officer (Principal Executive Officer)
Date: October 31, 2014	/s/ TIMOTHY R. OAKES
	Timothy R. Oakes
	Chief Financial Officer (Principal Financial and Accounting Officer)

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Net Income Per Share - Additional Information (Detail)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Earnings Per Share [Abstract]
Diluted computation increased	303,000	478,000	314,000	1,000,000
Share-based awards outstanding	4,000,000	4,300,000	4,000,000	4,300,000

XML

Income Taxes - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2013
Income Tax Disclosure [Abstract]
Tax expense	$ 714,000	$ 74,000	$ 2,721,000	$ 293,000
Effective tax rate	42.20%	4.00%	44.40%	11.30%
Deferred tax asset valuation allowance					36,200,000
Pre-tax income or losses period					3 years
Unrecognized tax benefits, penalties and interest expense	20,000	(88,000)	60,000	(45,000)
Unrecognized tax benefits	108,000		108,000
Uncertain tax positions increase (decrease)			$ 0

XML

Fullscope Embezzlement - Additional Information (Detail) (USD $)	3 Months Ended	9 Months Ended
	Jun. 30, 2014	Sep. 30, 2014
Extraordinary and Unusual Items [Abstract]
Fullscope acquisition, escrow claims received in cash	$ 1,900,000
Escrow account balance		$ 250,000
Escrow accounts balance remaining period		Second quarter of 2015

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Share-Based Compensation

9 Months Ended

Sep. 30, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Share-Based Compensation

4. SHARE-BASED COMPENSATION:

Share-based compensation expense under all of the Company’s share-based plans was $369 thousand and $1.2 million for the three- and nine-month periods ended September 30, 2014, respectively. Share-based compensation expense under all of the Company’s share-based plans was $336 thousand and $1.2 million for the three- and nine-month periods ended September 30, 2013, respectively.

Cash received from the employee stock purchase plan (“ESPP”) and through stock option exercises was $656 thousand and $1.5 million during the three- and nine-month periods ended September 30, 2014, respectively. Cash received from ESPP and stock option exercises was $377 thousand and $793 thousand during the three- and nine-month periods ended September 30, 2013, respectively.

As of September 30, 2014, unrecognized compensation expense, net of estimated forfeitures, related to the unvested portion of all share-based compensation arrangements was approximately $1.9 million and is expected to be recognized over a weighted-average period of 1.3 years.

The Company intends to use previously purchased treasury shares for shares issued for options, restricted share awards and ESPP purchases. Shares may also be issued from authorized but unissued share reserves.

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Goodwill and Intangible Assets - Estimated Annual Amortization Expense (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014
Estimated annual amortization expense
2014	$ 514
2015	266
2016	176
2017	0
2018	$ 0

XML

Goodwill and Intangible Assets - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Intangible Liability Disclosure [Abstract]
Change in the Company's recorded goodwill	$ 0	$ 0	$ 0	$ 0
Amortization expense of intangible assets	75,000	101,000	226,000	310,000
Expiration of amortization			Through 2016
Amortization from capitalized internally developed software	$ 53,000	$ 77,000	$ 160,000	$ 258,000

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Accrued Expenses and Other Liabilities - Components of Accrued Liabilities (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Components of accrued liabilities
Accrued bonuses	$ 3,590	$ 3,126
Accrued vacation	2,481	1,983
Accrued payroll related liabilities	2,534	1,682
Accrued commissions	2,884	2,765
Accrued software expense	685	1,093
Income tax related accruals	1,057	588
Deferred rent	458	513
Short-term portion of lease abandonment accrual	609	475
Accrued sales and use tax	290	275
Other accrued expenses	2,778	1,826
Total	$ 17,366	$ 14,326

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Accrued Expenses and Other Liabilities - Components of Other Long-Term Liabilities (Detail) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Payables and Accruals [Abstract]
Long-term portion of lease abandonment accrual	$ 557	$ 760
Total	$ 557	$ 760

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Revenue Recognition

9 Months Ended

Sep. 30, 2014

Text Block [Abstract]

Revenue Recognition

3. 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 generate 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 continuously 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.

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 continuously evaluated throughout the period. 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 losses were recognized on contracts during the three- or nine-month periods ended September 30, 2014 or 2013.

We also perform services on a periodic 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 on the condensed consolidated balance sheets) 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 is 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). However, beginning in the second quarter of 2013, due to changes in the nature of the terms of certain Microsoft Dynamics AX software resale arrangements (primarily related to the risk of credit loss and ability to establish pricing), 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). We expect this trend to continue and also anticipate that the number of new software resale arrangements subject to these terms may increase in future periods. Additionally, the changes in the terms of the resale arrangements may, in certain situations, extend the timing of the recognition period (from full, immediate recognition of the gross margin on the transaction to recognition of the gross margin on the transaction over a three-year period) due to payment terms being spread over a multiple year period. This would reduce the amount of the software revenue and associated gross margin to be recognized by the Company in the initial period of the sale.

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 revenue for the Company’s 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 and maintenance provided based on the price charged when the services are sold separately and the stated renewal rate.

A significant amount of our 2013 software revenue is associated with the recognition of PI2 license revenue. In June 2012, Microsoft purchased the Company’s internally developed PI2 software and intellectual property (the “PI2 Solution”) for an aggregate purchase price of $3.25 million. The sale of the PI2 Solution was a significant multiple element contract. This contract included $3.25 million of license consideration and subsequent development and training services. At the time of the sale, we determined that the license did not have stand-alone value without the services, and accordingly we accounted for the license and related services as one unit. The Company recognized $614 thousand and $2.0 million in PI2 license revenue in the three- and nine-month periods ended September 30, 2013, respectively. No PI2-related revenue was recognized in the three or nine months ended September 30, 2014.

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Net Income Per Share - Reconciliation of Net Income and Weighted Average Shares used in Computing Basic and Diluted Net Income Per Share (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Basic net income per share:
Net income applicable to common shares	$ 976	$ 1,772	$ 3,408	$ 2,297
Weighted average common shares outstanding	11,197	10,732	11,092	10,800
Basic net income per share of common stock	$ 0.09	$ 0.17	$ 0.31	$ 0.21
Diluted net income per share:
Net income applicable to common shares	$ 976	$ 1,772	$ 3,408	$ 2,297
Weighted average common shares outstanding	11,197	10,732	11,092	10,800
Dilutive effects of stock options and restricted stock	1,775	1,501	1,881	985
Weighted average common shares, assuming dilutive effect of stock options and restricted stock	12,972	12,233	12,973	11,785
Diluted net income per share of common stock	$ 0.08	$ 0.14	$ 0.26	$ 0.19

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Unaudited Condensed Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 25,816	$ 20,321
Accounts receivable, net of allowance of $150	24,075	19,842
Deferred tax assets, net	1,148	1,175
Prepaid expenses and other current assets	1,449	936
Total current assets	52,488	42,274
Property and equipment, net	1,142	1,437
Intangible assets, net	570	956
Goodwill	12,049	12,049
Deferred tax assets, net	26,965	29,097
Other assets	212	254
Total assets	93,426	86,067
Current liabilities:
Accounts payable	148	680
Accrued liabilities	17,366	14,326
Deferred revenue	1,672	1,715
Total current liabilities	19,186	16,721
Other liabilities	557	760
Total liabilities	19,743	17,481
Stockholders' equity:
Preferred stock, $.01 par value; 2,000 shares authorized, no shares issued or outstanding
Common stock, $.01 par value; 48,000 shares authorized, 29,736 shares issued as of September 30, 2014 and December 31, 2013, 11,353 and 11,049 shares outstanding as of September 30, 2014 and December 31, 2013, respectively	297	297
Paid-in capital	210,944	211,852
Treasury stock, at cost, 18,383 and 18,687 shares at September 30, 2014 and December 31, 2013, respectively	(120,576)	(123,186)
Accumulated other comprehensive loss	(168)	(154)
Retained deficit	(16,814)	(20,223)
Total stockholders' equity	73,683	68,586
Total liabilities and stockholders' equity	$ 93,426	$ 86,067

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Organization

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Organization

1. ORGANIZATION:

Edgewater Technology, Inc. (“Edgewater”, the “Company”, “we”, or “our”) is a strategic consulting firm that brings a synergistic blend of classic consulting and product-based consulting services to its customer base. Headquartered in Wakefield, Massachusetts, we typically go to market both vertically by industry and horizontally by product/technology specialties and provide our customers with a wide range of business and technology offerings. We work with customers, primarily within North America, to reduce costs, improve process and increase revenue through the judicious use of technology.

In this Quarterly Report on Form 10-Q (the “Form 10-Q”), we use the terms “Edgewater,” “Edgewater Technology,” “we,” “our Company,” “the Company,” “our” and “us” to refer to Edgewater Technology, Inc. and its wholly-owned subsidiaries, which are described in our 2013 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on March 10, 2014 (the “2013 Form 10-K”).

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Revolving Line of Credit - Additional Information (Detail) (Revolving Credit Facility [Member], USD $)	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
Revolving Credit Facility [Member]
Line of Credit Facility [Line Items]
Revolving credit facility period	3 years
Borrowing credit facility		$ 10,000,000
Additional borrowing credit facility		5,000,000
Total credit facility borrowing capacity		15,000,000
Variable interest rate	The LIBOR Rate plus 1.5%
LIBOR Rate plus	1.50%
Annual commitment fee	0.15%
Due date of amounts outstanding under credit facility	Sep. 23, 2016
Amount drawn under credit facility	$ 0

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Net Income Per Share (Tables)

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Reconciliation of Net Income and Weighted Average Shares used in Computing Basic and Diluted Net Income Per Share

A reconciliation of net income and weighted average shares used in computing basic and diluted net income per share is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In Thousands, Except Per Share Data)
Basic net income per share:
Net income applicable to common shares	$	976	$	1,772	$	3,408	$	2,297
Weighted average common shares outstanding		11,197		10,732		11,092		10,800
Basic net income per share of common stock	$	0.09	$	0.17	$	0.31	$	0.21
Diluted net income per share:
Net income applicable to common shares	$	976	$	1,772	$	3,408	$	2,297
Weighted average common shares outstanding		11,197		10,732		11,092		10,800
Dilutive effects of stock options and restricted stock		1,775		1,501		1,881		985
Weighted average common shares, assuming dilutive effect of stock options and restricted stock		12,972		12,233		12,973		11,785
Diluted net income per share of common stock	$	0.08	$	0.14	$	0.26	$	0.19

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Lease Abandonment - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Dec. 31, 2011	Sep. 30, 2014	Dec. 31, 2013
Leases [Abstract]
Non-cash operating charge		$ 2,200,000
Non-cash operating expense charge	0		400,000
Lease abandonment accrual	$ 1,200,000		$ 1,200,000	$ 1,200,000

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Share-Based Compensation - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Share-based Compensation [Abstract]
Stock-based compensation expense under share based plans	$ 369,000	$ 336,000	$ 1,181,000	$ 1,174,000
Cash received from employee stock purchase plan	656,000	377,000	1,483,000	793,000
Unrecognized compensation expense	$ 1,900,000		$ 1,900,000
Expected weighted-average recognition period for unrecognized compensation expense			1 year 3 months 18 days

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Basis of Presentation

9 Months Ended

Sep. 30, 2014

Accounting Policies [Abstract]

Basis of Presentation

2. BASIS OF PRESENTATION:

The accompanying unaudited condensed consolidated financial statements have been prepared by Edgewater pursuant to the rules and regulations of the SEC regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to ensure the information presented is not misleading.

The accompanying unaudited condensed consolidated financial statements reflect all adjustments (which were of a normal, recurring nature) that, in the opinion of management, are necessary to present fairly our financial position, results of operations and cash flows as of and for the interim periods presented. All intercompany transactions have been eliminated in the accompanying unaudited condensed consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2013 Form 10-K.

The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for any future period or the full fiscal year. Our revenue and earnings may fluctuate from quarter-to-quarter based on factors within and outside our control, including variability in demand for information technology professional services, the length of the sales cycle associated with our service offerings, the number, size and scope of our projects and the efficiency with which we utilize our employees. Substantially all of our revenue is generated within North America.

Other comprehensive income consists of net income plus or minus any periodic currency translation adjustments.

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Unaudited Condensed Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Accounts receivable, allowance	$ 150	$ 150
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	48,000,000	48,000,000
Common stock, shares issued	29,736,000	29,736,000
Common stock, shares outstanding	11,353,000	11,049,000
Treasury stock, shares	18,383,000	18,687,000

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Lease Abandonment

9 Months Ended

Sep. 30, 2014

Leases [Abstract]

Lease Abandonment

12. LEASE ABANDONMENT:

In December 2011, the Company abandoned certain excess office space within its corporate headquarters in Wakefield, Massachusetts. As a result of the abandonment of such space, the Company incurred a non-cash operating charge of $2.2 million in the fourth quarter of 2011 and recorded a lease abandonment accrual (the short- and long-term portions of which are recorded within accrued expenses and other long-term liabilities within the condensed consolidated balance sheets). The lease abandonment charge was calculated based on the net of future contractually obligated lease payments and an estimate of potential sub-lease income (which took into account current market rates and occupancy levels). This analysis is reviewed and updated each reporting period. During the second quarter of 2014 the Company determined that an elimination of the estimated sub-lease income was warranted and, as a result, the Company recorded a non-cash operating expense charge of $400 thousand which was recorded within selling, general and administrative expenses in the condensed consolidated statement of comprehensive income for the nine-month period ended September 30, 2014. No changes were made to any lease abandonment assumptions during the three-month period ended September 30, 2014. The lease abandonment accrual totaled $1.2 million as of both September 30, 2014 and December 31, 2013.

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Document and Entity Information	9 Months Ended
	Sep. 30, 2014	Oct. 27, 2014
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q3
Trading Symbol	EDGW
Entity Registrant Name	EDGEWATER TECHNOLOGY INC/DE/
Entity Central Index Key	0001017968
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		11,377,331

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Fullscope Embezzlement

9 Months Ended

Sep. 30, 2014

Extraordinary and Unusual Items [Abstract]

Fullscope Embezzlement

13. FULLSCOPE EMBEZZLEMENT:

During the second quarter of 2010, the Company discovered embezzlement activities at Fullscope, one of its wholly-owned subsidiaries, which was acquired by the Company in December 2009 (the “Fullscope Embezzlement Issue”). Based upon the results of forensic accounting procedures, we identified that the embezzlement activities occurred for an extended period prior to our acquisition of Fullscope and also during the first and second quarter of 2010.

Since 2010 we have incurred certain embezzlement-related expenses associated with non-routine professional services and sales and use tax obligations.

The Company incurred the majority of its embezzlement-related expenses during fiscal 2010 in connection with its identification and investigation of the embezzlement activity. Embezzlement-related expenses incurred in the three- and nine-month periods ended September 30, 2014 were not material.

During the second quarter of 2014, the Company reached an agreement with the former Fullscope stockholders settling the Company’s outstanding escrow claims associated with the Fullscope acquisition (the “Settlement Agreement”). In connection with the Settlement Agreement, the Company received approximately $1.9 million in cash to satisfy the Company’s escrow claims. The settlement and collection of the escrow has been recorded within selling, general and administrative expense within the condensed consolidated statement of comprehensive income. As of September 30, 2014, the escrow account had a remaining balance of $250 thousand. This balance will remain in the escrow account until the second quarter of 2015 and will be utilized to cover any potential future sales and use tax exposure that may arise from subsequent state inquiry or audit. If no exposure is identified, then the remaining balance will be remitted to the former Fullscope stockholders. Amounts recovered, if any, will be recorded during the period in which settlement is determined to be probable of recovery from escrow.

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Unaudited Condensed Consolidated Statements of Comprehensive Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013
Revenue:
Service revenue	$ 25,144	$ 21,389	$ 73,140	$ 62,684
Software revenue	1,365	2,260	5,920	8,568
Reimbursable expenses	2,220	1,750	6,505	5,523
Total revenue	28,729	25,399	85,565	76,775
Cost of revenue:
Project and personnel costs	15,169	13,071	44,106	39,837
Software costs	924	921	3,545	4,577
Reimbursable expenses	2,220	1,750	6,505	5,523
Total cost of revenue	18,313	15,742	54,156	49,937
Gross profit	10,416	9,657	31,409	26,838
Operating expenses:
Selling, general and administrative	8,353	7,590	24,431	23,231
Depreciation and amortization	227	302	702	925
Total operating expenses	8,580	7,892	25,133	24,156
Operating income	1,836	1,765	6,276	2,682
Other expense (income), net	146	(81)	147	92
Income before income taxes	1,690	1,846	6,129	2,590
Tax provision	714	74	2,721	293
Net income	976	1,772	3,408	2,297
Comprehensive income:
Currency translation adjustments	(35)	(2)	(14)	(23)
Total comprehensive income	$ 941	$ 1,770	$ 3,394	$ 2,274
Net income per share:
Basic net income per share of common stock	$ 0.09	$ 0.17	$ 0.31	$ 0.21
Diluted net income per share of common stock	$ 0.08	$ 0.14	$ 0.26	$ 0.19
Shares used in computing basic net income per share of common stock	11,197	10,732	11,092	10,800
Shares used in computing diluted net income per share of common stock	12,972	12,233	12,973	11,785

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Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

7. GOODWILL AND INTANGIBLE ASSETS:

There has been no change in the Company’s recorded goodwill balance during the three- or nine-month periods ended September 30, 2014 or 2013. Our annual goodwill and intangible assets measurement date is December 2.

We amortize our intangible assets that have finite lives 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 expense was $75 thousand and $226 thousand during the three- and nine-month periods ended September 30, 2014, respectively. Amortization expense was $101 thousand and $310 thousand during the three- and nine-month periods ended September 30, 2013, respectively. This amortization expense relates to certain non-competition covenants, trade names and customer lists, which expire at various times through 2016.

The Company recorded amortization from capitalized internally developed software (intellectual property) (reported as part of Cost of Revenue – software cost) of $53 thousand and $160 thousand during the three- and nine-month periods ended September 30, 2014, respectively. The Company recorded amortization from capitalized internally developed software (intellectual property) (reported as part of Cost of Revenue – software cost) of $77 thousand and $258 thousand during the three- and nine-month periods ended September 30, 2013, respectively.

Estimated annual amortization expense (including amortization expense associated with capitalized software costs) for the current year and the following four years ending December 31, is as follows:

	Amortization Expense
	(In Thousands)
2014	$	514
2015	$	266
2016	$	176
2017	$	—
2018	$	—

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Fair Value Measurement

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurement

6. FAIR VALUE MEASUREMENT:

We utilize the following valuation hierarchy 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.      

Classification of financial assets and liabilities within the hierarchy is determined based upon the lowest level input that is significant to the fair value measurement.

As of September 30, 2014 and December 31, 2013, our only financial assets and liabilities required to be measured on a recurring basis were our money market investments.

The following table represents the Company’s 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 September 30, 2014:
Financial assets:
Money market investment	$	4,084	$	4,084	$	—	$	—
Total financial assets	$	4,084	$	4,084	$	—	$	—
Balance at December 31, 2013:
Financial assets:
Money market investment	$	4,084	$	4,084	$	—	$	—
Total financial assets	$	4,084	$	4,084	$	—	$	—

No financial instruments were transferred into or out of Level 3 classification during the three-month period ended September 30, 2014.

As of September 30, 2014 and December 31, 2013, 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.

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Revenue Recognition - Additional Information (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Jun. 30, 2012
Revenue Recognition, Multiple-deliverable Arrangements [Line Items]
Standard payment terms to customers			30 days
Losses recognized on fixed-price contracts	$ 0	$ 0	$ 0	$ 0
Recognition of the gross margin on the transaction, period			3 years
Maintenance fee revenue recognition period			1 year
Purchase of software and intellectual property					3,250,000
Amount of license consideration and subsequent development and training services					3,250,000
License related revenue	$ 0	$ 614,000	$ 0	$ 2,000,000
Minimum [Member]
Revenue Recognition, Multiple-deliverable Arrangements [Line Items]
Warranty period on fixed-price contracts			30 days
Maximum [Member]
Revenue Recognition, Multiple-deliverable Arrangements [Line Items]
Warranty period on fixed-price contracts			60 days

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Fair Value Measurement (Tables)

9 Months Ended

Sep. 30, 2014

Fair Value Disclosures [Abstract]

Company's Fair Value Hierarchy for its Financial Assets and Liabilities

The following table represents the Company’s 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 September 30, 2014:
Financial assets:
Money market investment	$	4,084	$	4,084	$	—	$	—
Total financial assets	$	4,084	$	4,084	$	—	$	—
Balance at December 31, 2013:
Financial assets:
Money market investment	$	4,084	$	4,084	$	—	$	—
Total financial assets	$	4,084	$	4,084	$	—	$	—

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Stock Repurchase Program

9 Months Ended

Sep. 30, 2014

Equity [Abstract]

Stock Repurchase Program

10. STOCK REPURCHASE PROGRAM:

In December 2007, our Board of Directors (the “Board”) authorized a stock repurchase program for up to $5.0 million of common stock on the open market or through privately negotiated transactions from time-to-time through December 31, 2008 (the “Stock Repurchase Program”). The Board subsequently amended the Stock Repurchase Program, authorizing both an increase to and an extension of the Stock Repurchase Program. The Stock Repurchase Program, as amended, had a maximum purchase value of shares of $23.1 million (the “Purchase Authorization”) and was set to expire on September 19, 2014 (the “Repurchase Period”). On September 18, 2014, we announced that the Board had approved an extension of the Repurchase Period to September 25, 2015.

The timing and amount of the purchases will be based upon market conditions, securities law considerations and other factors. The Stock Repurchase Program does not obligate the Company to acquire a specific number of shares in any period and may be modified, suspended, extended or discontinued at any time, without prior notice.

The Company repurchased a total of 142 thousand shares of common stock during the three- and nine-month periods ended September 30, 2014 at an aggregate purchase price of $962 thousand. The Company made no common stock repurchases during the three-month period ended September 30, 2013. The Company repurchased a total of 365 thousand shares of common stock during the nine-month period ended September 30, 2013 at an aggregate purchase price of $1.5 million. As of September 30, 2014, there was $9.1 million of purchase authorization remaining under the Stock Purchase Program.

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Accrued Expenses and Other Liabilities

9 Months Ended

Sep. 30, 2014

Payables and Accruals [Abstract]

Accrued Expenses and Other Liabilities

8. ACCRUED EXPENSES AND OTHER LIABILITIES:

Accrued liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014		December 31, 2013
	(In Thousands)
Accrued bonuses	$	3,590	$	3,126
Accrued vacation		2,481		1,983
Accrued payroll related liabilities		2,534		1,682
Accrued commissions		2,884		2,765
Accrued software expense		685		1,093
Income tax related accruals		1,057		588
Deferred rent		458		513
Short-term portion of lease abandonment accrual		609		475
Accrued sales and use tax		290		275
Other accrued expenses		2,778		1,826
Total	$	17,366	$	14,326

Other long-term liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014		December 31, 2013
	(In Thousands)
Long-term portion of lease abandonment accrual	$	557	$	760
Total	$	557	$	760

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Net Income Per Share

9 Months Ended

Sep. 30, 2014

Earnings Per Share [Abstract]

Net Income Per Share

9. NET INCOME PER SHARE:

A reconciliation of net income and weighted average shares used in computing basic and diluted net income per share is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In Thousands, Except Per Share Data)
Basic net income per share:
Net income applicable to common shares	$	976	$	1,772	$	3,408	$	2,297
Weighted average common shares outstanding		11,197		10,732		11,092		10,800
Basic net income per share of common stock	$	0.09	$	0.17	$	0.31	$	0.21
Diluted net income per share:
Net income applicable to common shares	$	976	$	1,772	$	3,408	$	2,297
Weighted average common shares outstanding		11,197		10,732		11,092		10,800
Dilutive effects of stock options and restricted stock		1,775		1,501		1,881		985
Weighted average common shares, assuming dilutive effect of stock options and restricted stock		12,972		12,233		12,973		11,785
Diluted net income per share of common stock	$	0.08	$	0.14	$	0.26	$	0.19

Share-based awards, inclusive of all grants made under the Company’s 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 303 thousand and 314 thousand in the three- and nine-month periods ended September 30, 2014, respectively. The diluted computation would have increased by approximately 478 thousand and 1.0 million in the three- and nine-month periods ended September 30, 2013, respectively. As of September 30, 2014 and 2013, there were approximately 4.0 million and 4.3 million share-based awards outstanding, respectively, under the Company’s equity plans.

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Revolving Line of Credit

9 Months Ended

Sep. 30, 2014

Debt Disclosure [Abstract]

Revolving Line of Credit

11. REVOLVING LINE OF CREDIT:

In September 2013, the Company entered into a three-year secured revolving credit facility (the “Credit Facility”). The Credit Facility allows the Company to borrow up to $10.0 million and includes an additional accordion feature that allows the Company to request an additional $5.0 million as needed, extending the total credit facility borrowing capacity to $15 million over its three-year term. The Credit Facility is secured by the personal property of the Company and its domestic subsidiaries, and is subject to normal covenants. The Company was in compliance with all covenants as of September 30, 2014. Under the terms of the Credit Facility, any advances will accrue interest at a variable per annum rate of interest equal to, as elected by the Company, (i) the Prime Rate, or (ii) the LIBOR Rate plus 1.5%. Interest is due and payable, in arrears, on a monthly basis. The Company will be obligated to pay an annual commitment fee of 0.15% on the daily undrawn balance of the facility. Any amounts outstanding under the Credit Facility will be due on September 23, 2016. No amounts were drawn under this facility as of September 30, 2014.

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Stock Repurchase Program - Additional Information (Detail) (USD $) Share data in Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013	Sep. 30, 2014	Sep. 30, 2013	Dec. 31, 2008	Dec. 31, 2007
Equity, Class of Treasury Stock [Line Items]
Stock repurchase program					$ 23,100,000	$ 5,000,000
Stock repurchase program expiration date			Sep. 25, 2015
Repurchase of common stock	142	0	142	365
Aggregate purchase price common stock	962,000		962,000	1,513,000
Remaining authorized repurchase amount	$ 9,100,000		$ 9,100,000
Prior Stock Repurchase Program [Member]
Equity, Class of Treasury Stock [Line Items]
Stock repurchase program expiration date			Sep. 19, 2014

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Accrued Expenses and Other Liabilities (Tables)

9 Months Ended

Sep. 30, 2014

Payables and Accruals [Abstract]

Components of Accrued Liabilities

Accrued liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014		December 31, 2013
	(In Thousands)
Accrued bonuses	$	3,590	$	3,126
Accrued vacation		2,481		1,983
Accrued payroll related liabilities		2,534		1,682
Accrued commissions		2,884		2,765
Accrued software expense		685		1,093
Income tax related accruals		1,057		588
Deferred rent		458		513
Short-term portion of lease abandonment accrual		609		475
Accrued sales and use tax		290		275
Other accrued expenses		2,778		1,826
Total	$	17,366	$	14,326

Components of Other Long-Term Liabilities

Other long-term liabilities as of September 30, 2014 and December 31, 2013 consisted of the following:

	September 30, 2014		December 31, 2013
	(In Thousands)
Long-term portion of lease abandonment accrual	$	557	$	760
Total	$	557	$	760

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Fair Value Measurement - Company's Fair Value Hierarchy for its Financial Assets and Liabilities (Detail) (Fair Value, Measurements, Recurring [Member], USD $) In Thousands, unless otherwise specified	Sep. 30, 2014	Dec. 31, 2013
Financial assets:
Total financial assets	$ 4,084	$ 4,084
Money Market Investment [Member]
Financial assets:
Total financial assets	4,084	4,084
Quoted Prices in Active Markets for Identical Items (Level1) [Member]
Financial assets:
Total financial assets	4,084	4,084
Quoted Prices in Active Markets for Identical Items (Level1) [Member] | Money Market Investment [Member]
Financial assets:
Total financial assets	$ 4,084	$ 4,084

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Unaudited Condensed Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2014	Sep. 30, 2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 3,408	$ 2,297
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	862	1,183
Share-based compensation expense	1,181	1,174
Deferred income taxes	2,159	25
Lease abandonment	(400)
Excess tax benefit from stock options	206
Changes in operating accounts:
Accounts receivable	(4,219)	(749)
Prepaid expenses and other current assets	(471)	262
Accounts payable	(532)	5
Accrued liabilities and other liabilities	3,237	(371)
Deferred revenue	(43)	(1,507)
Net cash provided by operating activities	5,388	2,319
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of intellectual property		(200)
Capitalization of product development costs		(289)
Purchases of property and equipment	(183)	(280)
Net cash used in investing activities	(183)	(769)
CASH FLOW FROM FINANCING ACTIVITIES:
Purchases of treasury stock	(962)	(1,513)
Excess tax benefit from stock options	(206)
Proceeds from employee stock plans and stock option exercises	1,483	793
Net cash provided by (used in) financing activities	315	(720)
Effects of exchange rates on cash	(25)	6
Net increase in cash and cash equivalents	5,495	836
CASH AND CASH EQUIVALENTS, beginning of period	20,321	16,651
CASH AND CASH EQUIVALENTS, end of period	25,816	17,487
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes	539	184
Issuance of restricted stock awards	$ 678	$ 1,051

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Income Taxes

9 Months Ended

Sep. 30, 2014

Income Tax Disclosure [Abstract]

Income Taxes

5. INCOME TAXES:

The Company recorded a tax provision of $714 thousand and $2.7 million for the three- and nine-month periods ended September 30, 2014, respectively. The reported tax expense for the three- and nine-month periods ended September 30, 2014 is based upon an estimated annual effective tax rate of 42.2% and 44.4%, respectively, related to our combined federal and state income tax rates, foreign income tax provisions, the recognition of U.S. deferred tax liabilities for differences between the book and tax basis of goodwill and other discrete items. The Company recorded a tax provision of $74 thousand and $293 thousand for the three- and nine-month periods ended September 30, 2013, respectively. The reported tax expense for the three- and nine-month periods ended September 30, 2013 is based upon an estimated annual effective tax rate of 4.0% and 11.3%, respectively.

The reported estimated annual effective tax rate for the three- and nine-month periods ended September 30, 2013 is lower than the statutory rate due to a full valuation allowance being provided against our deferred tax assets, which includes significant federal net operating loss carryforwards.

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 highly 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.

When assessing all available evidence, we consider the extent to which we have generated pre-tax income or losses over the most recent three-year period to be an important piece of objective evidence. During the year ended December 31, 2013, we emerged from a cumulative three year pre-tax loss position, which removed this important piece of negative evidence from our evaluation. As a result, we concluded the asset was realizable and we reversed $36.2 million of the previously established deferred tax asset valuation allowance.

Our policy is to classify interest and penalties related to unrecognized tax benefits as income tax expense. This policy has been consistently applied in all periods. During the three- and nine-month periods ended September 30, 2014, we recognized, as a part of income tax expense, $20 thousand and $60 thousand, respectively, in interest and penalties related to our unrecognized tax benefits. During the three- and nine-month periods ended September 30, 2013, we reduced income tax expense by $(88) thousand and $(45) thousand, respectively, from the reversal of previously recorded unrecognized state income tax-related tax benefits (and associated penalties and interest) as a result of the expiration of certain statutes of limitations.

We have reviewed the tax positions taken, or to be taken, in our tax returns for all tax years currently open to examination by a taxing authority. As of September 30, 2014, the gross amount of unrecognized tax benefits, exclusive of interest and penalties, was $108 thousand. We have identified no other uncertain tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly increase or decrease within the twelve months ending September 30, 2015. We remain subject to examination until the statute of limitations expires for each respective tax jurisdiction.

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Fair Value Measurement - Additional Information (Detail) (USD $)	3 Months Ended
	Sep. 30, 2014
Fair Value Disclosures [Abstract]
Financial instruments transferred into or out of Level 3 classification	$ 0

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Goodwill and Intangible Assets (Tables)

9 Months Ended

Sep. 30, 2014

Goodwill and Intangible Assets Disclosure [Abstract]

Estimated Annual Amortization Expense

Estimated annual amortization expense (including amortization expense associated with capitalized software costs) for the current year and the following four years ending December 31, is as follows:

	Amortization Expense
	(In Thousands)
2014	$	514
2015	$	266
2016	$	176
2017	$	—
2018	$	—