Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTER ENDED ~~SEPTEMBER 30~~MARCH 31, ~~2016~~2017

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

Commission File Number 000-51579

LOGO

NCI, Inc.

(Exact name of registrant as specified in its charter)

Delaware		20-3211574
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
11730 Plaza America Drive Reston, Virginia		20190-4764
(Address of principal executive offices)		(Zip Code)



11730 Plaza America Drive Reston, Virginia		20190-4764
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (703) 707-6900

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 ☐ 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 ☐ 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 definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

AsIndicate ofby ~~October 28,~~check ~~2016,~~mark ~~there~~whether ~~were~~the ~~9,034,823~~registrant ~~shares outstanding~~is ofan ~~the~~emerging ~~registrant’s~~growth ~~Class A~~company ~~common~~as ~~stock~~defined ~~and~~in ~~4,500,000~~Rule ~~shares~~405 ~~outstanding~~ of the ~~registrant’s~~Securities ~~Class B~~Act ~~common~~of ~~stock~~1933 (§230.405 ~~Shares~~ of ~~the~~this chapter) ~~registrants~~or ~~Class~~Rule B12b-2 ~~common~~of ~~stock~~the ~~are~~Securities ~~convertible~~Exchange onAct aof ~~one~~1934 (§240.12b-~~for-one~~2 ~~basis into shares~~ of ~~the~~ ~~registrants~~this ~~Class A common stock~~chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

As of May 3, 2017, there were 9,051,817 shares outstanding of the registrant’s Class A common stock. In addition, there were 4,500,000 shares outstanding of the registrant’s Class B common stock, which are convertible on a one-for-one basis into shares of Class A common stock.

NCI, INC.

		PAGE
PART I: UNAUDITED FINANCIAL INFORMATION			1
PART I:	UNAUDITED FINANCIAL INFORMATION		1
Item 1.	Condensed Consolidated Financial Statements		1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		1614
Item 4.	Controls and Procedures		1615
PART II: OTHER INFORMATION
PART II:	OTHER INFORMATION		16
Item 1.	Legal Proceedings		1716
Item 1A.	Risk Factors		1716
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		1716
Item 3.	Defaults Upon Senior Securities		1716
Item 4.	Mine Safety Disclosures		17
Item 5.	Other Information		17
Item 6.	Exhibits		18
	Signatures		19

PART 1

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

NCI, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

	Three months ended September 30,					Nine months ended September 30,
	Three months ended March 31,
	2016			2015		2016		2015
	2017			2016
Revenue	$	7978,~~753~~751		$	8283,~~310~~655	$	~~245,308~~	$	~~249,077~~
Operating expenses:
Cost of revenue		6664,~~305~~696			6869,~~677~~693		~~204,213~~		~~207,832~~
General and administrative expenses		6,~~434~~690			6,~~445~~107		~~19,375~~		~~19,941~~
Depreciation and amortization		1,~~737~~788			1,~~794~~792		~~5,213~~		~~5,774~~
Acquisition and integration related expenses		—			6		—		428
Misappropriation loss and related expenses		6,617			1,541
Total operating expenses		7479,~~476~~791			7679,~~922~~133		~~228,801~~		~~233,975~~
Operating income		5,277			5,388		16,507		15,102
Operating (loss) income		(1,040	)		4,522
Interest expense, net		~~134~~208			~~204~~190		~~477~~		~~662~~
Income before income taxes		5,143			5,184		16,030		14,440
(Loss) income before income taxes		(1,248	)		4,332
Provision for income taxes		1,882			2,013		6,206		5,818
(Benefit) provision for income taxes		(441	)		1,743
Net income	$	3,261		$	3,171	$	9,824	$	8,622
Net (loss) income	$	(807	)	$	2,589
Earnings per common and common equivalent share:
(Loss) earnings per common and common equivalent share:
Basic:
Weighted average shares outstanding		13,~~201~~277			13,~~029~~153		~~13,180~~		~~13,004~~
Net income per share	$	0.25		$	0.24	$	0.75	$	0.66
Net (loss) income per share	$	(0.06	)	$	0.20
Diluted:
Weighted average shares outstanding		13,~~857~~277			13,~~697~~867		~~13,863~~		~~13,659~~
Net income per share	$	0.24		$	0.23	$	0.71	$	0.63
Net (loss) income per share	$	(0.06	)	$	0.19
Cash dividend declared and paid per share	$	—		$	—0.15	$	~~0.15~~	$	~~0.12~~

The accompanying notes are an integral

part of these condensed consolidated financial statements

NCI, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except par value)

	As ofSeptember 30,2016			As ofDecember 31,2015
	As ofMarch 31,2017			As ofDecember 31,2016
Assets:
Current assets:
Cash and cash equivalents	$	~~244~~1,851		$	~~233~~1,014
Accounts receivable, net		53,~~332~~857			6051,~~044~~112
Prepaid expenses and other current assets		35,~~979~~915			34,~~447~~062
Total current assets		5761,~~555~~623			6356,~~724~~188
Property and equipment, net		65,~~338~~591			6,~~698~~332
Other assets		1,~~525~~520			1,~~548~~526
Deferred tax assets, net		3841,~~066~~833			3841,~~789~~912
Intangible assets, net		1614,~~498~~678			1915,~~231~~586
Goodwill		33,878			33,878
Total assets	$	~~153~~159,~~860~~123		$	~~163~~155,~~868~~422
Liabilities and stockholders’ equity:
Current liabilities:
Accounts payable		11,226			19,693
Current portion of long-term debt	$	2,000		$	—
Accrued salaries and benefits		17,613			18,977
Accounts payable		10,934			9,995
Deferred revenue		2,312			2,217
Accrued salaries and benefits		17,748			17,665
Other accrued expenses		4,563			3,843
Deferred revenue		4,689			4,571
Total current liabilities		35,714			44,730
Other accrued expenses		9,468			6,306
Long-term debt		—			10,000
Total current liabilities		44,839			38,537
Other long-term liabilities		2,~~622~~555			2,~~578~~545
Total liabilities		3847,~~336~~394			5741,~~308~~082
Stockholders’ equity:
Class A common stock, $0.019 par value—37,500 shares authorized; 9,952 shares issued and 9,035 shares outstanding as of September 30, 2016, and 9,843 shares issued and 8,961 shares outstanding as of December 31, 2015		189			187
Class A common stock, $0.019 par value—37,500 shares authorized; 9,944 shares issued and 9,027 shares outstanding as of March 31, 2017, and 10,002 shares issued and 9,085 shares outstanding as of December 31, 2016		189			189
Class B common stock, $0.019 par value—12,500 shares authorized; 4,500 shares issued and outstanding as of September 30, 2016 and December 31, 2015		86			86
Class B common stock, $0.019 par value—12,500 shares authorized; 4,500 shares issued and outstanding as of March 31, 2017 and December 31, 2016		86			86
Additional paid-in capital		7775,~~727~~082			76,~~569~~886
Treasury stock at cost—917 shares of Class A common stock as of September 30, 2016 and December 31, 2015		(8,331	)		(8,331	)
Treasury stock at cost—917 shares of Class A common stock as of March 31, 2017 and December 31, 2016		(8,331	)		(8,331	)
Retained earnings		4544,~~853~~703			3845,~~049~~510
Total stockholders’ equity		~~115~~111,~~524~~729			~~106~~114,~~560~~340
Total liabilities and stockholders’ equity	$	~~153~~159,~~860~~123		$	~~163~~155,~~868~~422

The accompanying notes are an integral

part of these condensed consolidated financial statements

NCI, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

	Nine months endedSeptember 30,
	Three months ended March 31,
	2016			2015
	2017			2016
Cash flows from operating activities:
Net income	$	9,824		$	8,622
Net (loss) income	$	(807	)	$	2,589
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		51,~~213~~788			51,~~774~~792
Share-based compensation		~~769~~361			~~1,036~~329
Deferred income taxes		~~723~~80			~~228~~67
Changes in operating assets and liabilities:
Accounts receivable, net		6(2,~~712~~745	)		5(8,~~421~~892	)
Prepaid expenses and other assets		(~~509~~1,847	)		3(1,~~893~~233	)
Accounts payable		~~(8,467~~939	)		(1,~~387~~738	)
Accrued expenses and other liabilities		~~(504~~3,372	)		(1,~~105~~072	)
Net cash provided by operating activities		13,761			22,482
Net cash provided by (used in) operating activities		1,141			(8,158	)
Cash flows from investing activities:
Purchases of property and equipment		(~~2,121~~140	)		(~~1,537~~339	)
Cash paid for acquisition, net of cash acquired		—			(56,657	)
Net cash used in investing activities		(140	)		(339	)
Net cash used in investing activities		(2,121	)		(58,194	)
Cash flows from financing activities:
Borrowings under credit facility		~~126~~23,~~303~~194			~~146~~47,~~395~~233
Repayments on credit facility		(~~136~~21,~~303~~194	)		(~~135~~36,~~099~~733	)
Proceeds from exercise of stock options		~~391~~127			~~235~~172
Repurchase of stock awards		—			(53	)
Purchase of equity awards		(2,291	)		—
Dividends paid		~~(2,020~~—	)		(12,~~561~~020	)
Net cash (used in) provided by financing activities		(~~11,629~~164	)		98,~~917~~652
Net change in cash and cash equivalents		11837			~~(25,795~~155	)
Cash and cash equivalents, beginning of period		~~233~~1,014			~~25,819~~233
Cash and cash equivalents, end of period	$	~~244~~1,851		$	24388
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	~~372~~190		$	~~588~~104
Income taxes	$	~~4,670~~—		$	~~2,871~~327

The accompanying notes are an integral

part of these condensed consolidated financial statements

NCI, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of NCI, Inc. and its subsidiaries (~~collectively~~ “NCI” or ~~the~~ “the Company”) have been prepared in accordance with generally accepted accounting principles in the U. S. (“GAAP”) for interim financial information and pursuant to the rules and regulations of the ~~U. S.~~ Securities and Exchange Commission (~~the~~ “SEC”). As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments necessary to fairly present the Company’s financial position as of ~~September~~March 3031, ~~2016~~2017 and its results of operations ~~for the three~~ and ~~nine months ended September 30, 2016 and 2015, and~~ cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~ 2016, which ~~consists~~consist of normal and recurring adjustments. The information disclosed in the notes to the financial statements for these periods is unaudited. The current period’s results of operations are not necessarily indicative of results that may be achieved for any future period. All numbers in tables are presented in thousands except share and per share numbers. For further information, refer to the financial statements and footnotes included in NCI’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016, as filed with the SEC.

Recently Issued Accounting Pronouncements

~~On November 20,~~In ~~2015~~March 2016, the FASB issued ASU ~~2015~~2016-1709, ~~Balance~~which ~~Sheet~~simplifies ~~Classification~~several aspects of ~~Deferred Taxes. To simplify~~ the ~~presentation~~accounting for ofshare-based ~~deferred income taxes~~payments, ~~the~~including ~~amendments~~immediate inrecognition ~~this~~of ~~ASU~~all ~~require~~excess ~~that deferred~~ tax ~~assets~~benefits and ~~liabilities~~deficiencies ~~be classified as non-current~~ in athe ~~classified~~income ~~balance sheet. As permitted~~statement, changing the ~~Company~~threshold ~~elected~~ to ~~early~~qualify ~~adopt~~for ~~this~~equity ~~ASU~~classification ~~using~~up to the ~~retrospective~~employees’ ~~approach,~~maximum ~~effective~~statutory ~~with~~tax ~~its~~rates, allowing ~~Form~~an 10entity-Qwide ~~filing~~accounting ~~for~~policy ~~March 31,~~election ~~2016.~~to Aseither aestimate ~~result~~the number of ~~adopting~~awards ~~this~~that ~~ASU,~~are ~~current~~expected ~~net deferred~~to ~~taxes~~vest ofor ~~$4.0~~account ~~million~~for ~~were~~forfeitures ~~reclassified~~as tothey ~~net~~occur, ~~non-current~~and ~~deferred~~clarifying ~~taxes~~the asclassification on the statement of ~~December 31,~~cash ~~2015.~~flows ~~The~~for ~~adoption~~the ofexcess ~~ASU~~tax benefit ~~2015-17~~and ~~had~~employee notaxes ~~impact~~paid onwhen ~~the~~an ~~Company’s~~employer ~~consolidated~~withholds ~~statements~~shares offor ~~income~~tax-withholding orpurposes. ~~cash~~The ~~flows~~Company ~~for~~adopted ~~the~~ASU ~~year~~2016-09 ~~ended December~~effective January 311, ~~2015~~2017 oron ~~the~~a prospective ~~condensed~~basis. ~~consolidated~~The ~~statements~~Company ofelected ~~income~~to orcontinue ~~cash~~to ~~flows~~estimate ~~for~~ the ~~three~~number ~~and~~of ~~nine~~awards ~~month~~that ~~periods~~are ~~ended~~expected ~~September 30,~~to ~~2016~~vest.

In February 2016, the FASB issued ASU 2016-02, which requires the recognition of right-to-use assets and lease liabilities arising from capital leases and operating leases in the statement of comprehensive income and the statement of financial position, respectively2. ~~The~~Business ~~Company~~Overview will adopt the standard effective January 1, 2019. The Company has not yet completed its evaluation of the impact that the standard may have on its consolidated balance sheet. The actual impact will depend on the Company’s lease portfolio at the time of adoption.

~~In March~~NCI ~~2016,~~is ~~the~~a ~~FASB~~leading ~~issued~~provider ~~ASU~~of ~~2016-08~~enterprise solutions and services to U.S. defense, ~~which~~intelligence, ~~clarifies~~health care and civilian government agencies. We have the expertise ~~implementation~~and ~~guidance~~proven ~~with~~track ~~respect~~record to ~~principal~~solve ~~versus~~our ~~agent~~customers’ ~~considerations~~most ~~under~~important ~~the~~and ~~new~~complex ~~revenue~~mission ~~recognition~~challenges ~~standard,~~through ~~ASU~~technology ~~2014-09,~~and ~~Revenue~~innovation. ~~from~~Our ~~Contracts~~team ~~with~~of ~~Customers.~~highly Inskilled ~~April~~professionals ~~2016,~~focuses on delivering cost-effective solutions and services in the ~~FASB~~areas ~~issued~~of ~~ASU~~agile ~~2016-10,~~software ~~which~~application ~~clarifies~~and ~~the~~systems ~~implementation~~development/integration; ~~guidance~~cybersecurity ~~with~~and ~~respect~~information toassurance; ~~identifying~~engineering ~~promised~~and ~~goods~~logistics orsupport; ~~services~~enterprise ~~from~~information amanagement ~~principal~~and advanced analytics; cloud computing and ~~agent~~IT ~~perspective~~infrastructure optimization; ~~under~~health ~~ASU~~IT ~~2014-09~~and medical support; IT service management; and modeling, simulation and training. Headquartered in Reston, Virginia, we have approximately 2,000 employees operating at more than 100 locations worldwide. The majority of the Company’s ~~will~~revenue ~~adopt~~was derived from contracts with the ~~standard~~U.S. ~~effective~~Federal ~~January 1~~Government, ~~2018~~ ~~and~~directly isas ~~continuing~~a toprime ~~evaluate~~contractor ~~the~~or ~~full~~as ~~effect~~a ~~that~~subcontractor. ~~ASU~~NCI ~~2014-09~~primarily ~~and~~conducts ~~related~~business ~~subsequent~~throughout ~~updates~~the ~~will~~U. ~~have~~S. onThe ~~its~~Company ~~consolidated~~reports ~~financial~~operating ~~statements~~results and ~~related~~financial ~~disclosures~~data as one reportable segment.

InFor ~~March 2016,~~ the ~~FASB~~three ~~issued~~months ~~ASU~~ended ~~2016-09~~March 31, ~~which~~2017, ~~simplifies several aspects of~~ the ~~accounting~~Company ~~for~~generated ~~share-based~~approximately ~~payments,~~61% ~~including immediate recognition~~ of ~~all~~ ~~excess~~revenue ~~tax~~from ~~benefits and deficiencies in~~ the ~~income~~Department ~~statement~~of Defense, ~~changing~~including ~~the~~agencies ~~threshold~~within ~~to qualify for equity classification up to~~ the ~~employees’~~intelligence ~~maximum statutory tax rates~~community, ~~allowing~~and anapproximately ~~entity-wide~~39% ~~accounting policy election to either estimate the number~~ of ~~awards~~revenue ~~that~~from ~~are~~federal ~~expected~~civilian toagencies. ~~vest~~For orthe ~~account~~three ~~for~~months ~~forfeitures~~ended asMarch 31, ~~they occur~~2016, ~~and clarifying~~ the ~~classification~~Company ongenerated ~~the~~approximately ~~statement~~63% of ~~cash~~revenue ~~flows~~from ~~for~~ the ~~excess~~Department ~~tax benefit and employee taxes paid when an employer withholds shares~~of ~~for~~Defense, ~~tax-withholding~~including ~~purposes.~~agencies ~~The~~within ~~Company is evaluating~~ the ~~full~~intelligence ~~effect~~community, ~~that ASU 2016-09 will have on its consolidated financial statements~~ and ~~will~~approximately ~~adopt~~37% ~~the~~of ~~standard~~revenue ~~effective~~from ~~January 1,~~federal ~~2017,~~civilian ~~but at this time believe it will not have a material effect on its consolidated financial statements when it is adopted by the Company in 2017~~agencies.

InNCI’s ~~August~~Program Executive ~~2016,~~Office ~~the~~Soldier ~~FASB~~(“PEO ~~issued~~Soldier”) ~~ASU~~contract ~~2016~~is the Company’s largest revenue-~~15,~~generating ~~which provides~~contract ~~updated~~and ~~guidance~~accounted onfor ~~eight~~approximately ~~specific~~16% ~~cash~~of ~~flow~~revenue ~~issues~~for ~~and~~the ~~how~~three ~~they~~months ~~should~~ended beMarch 31, ~~presented~~2017 and ~~classified~~2016, inrespectively. ~~the~~The Company’s ~~statement~~PEO Soldier program is a cost-plus fee contract consisting of ~~cash~~a ~~flows~~base ~~under~~period ~~Topic~~and ~~230,~~four ~~Statement~~option periods for a total term of ~~Cash~~five ~~Flows~~years, ~~and~~which ~~other~~commenced ~~Topics.~~in ~~The~~October 1, ~~eight~~2015. ~~specific~~NCI’s ~~cash~~Cyber ~~flow~~Network ~~issues~~Operations ~~addressed~~and ~~are~~Security Support ~~being~~(“CNOSS”) ~~evaluated~~program, bysupporting the ~~Company~~U.S. asArmy toNetwork ~~the~~Enterprise ~~likelihood~~Technology Command accounted for approximately 12% and 10% of ~~those~~revenue ~~cash~~for ~~flow~~the ~~transactions~~three ~~occurring~~months ended March 31, 2017 and ~~potential~~2016, ~~corresponding~~respectively. ~~effect~~This cost-plus-fixed-fee, onsingle ~~the~~award ~~Company’s~~indefinite ~~statement~~delivery indefinite quantity contract consists of ~~cash~~a ~~flows.~~12-month ~~The~~base ~~Company~~period ~~will~~with ~~adopt~~two one-year ~~the~~option ~~standard~~periods ~~effective~~and ~~January 1~~one six-month option period, ~~2018~~and commenced in October 2014.

23. ~~Business~~Misappropriation ~~Overview~~Loss and Related Expenses

~~NCI~~As ispreviously adisclosed, ~~leading~~in ~~provider~~January ~~of enterprise solutions and services to U.S. defense~~2017, ~~intelligence,~~the ~~health~~Company ~~care~~identified ~~and~~a ~~civilian~~misappropriation ~~government~~of ~~agencies. The~~ Company ~~has~~funds ~~the expertise~~by ~~and proven track record to solve~~ its ~~customers’~~former ~~most important and complex mission challenges through technology and innovation~~controller. ~~The~~An ~~Company’s~~internal ~~team~~investigation of ~~highly~~the matter ~~skilled~~was ~~professionals~~completed ~~focuses~~in onMarch ~~delivering~~2017, ~~cost-effective solutions~~ and ~~services~~revealed inthat the ~~areas~~former ofcontroller ~~agile~~had ~~software~~embezzled ~~application~~$19.4 ~~and~~million ~~systems~~through ~~development/integration;~~a ~~cybersecurity~~circumvention ~~and~~of ~~information~~controls, ~~assurance;~~which ~~engineering~~included ~~and~~transfers ~~logistics~~from ~~support;~~the ~~enterprise~~payroll ~~information~~account ~~management~~to ~~and~~his ~~advanced~~personal ~~analytics;~~account, ~~cloud~~creating ~~computing~~fictitious ~~and~~invoices, ITand ~~infrastructure~~altering ~~optimization;~~bank ~~health~~account ITstatements ~~and~~to ~~medical~~conceal ~~support;~~the ITmisappropriations. ~~service~~Misappropriation ~~management;~~loss and ~~modeling,~~related ~~simulation~~expenses ~~and~~totaled ~~training~~approximately $6.6 million ~~Headquartered~~and in$1.5 million ~~Reston,~~for ~~Virginia,~~ the ~~Company~~quarter ~~has~~ended ~~approximately 2~~March 31,~~000~~ ~~employees~~2017 ~~operating~~and at2016, ~~more than 100 locations worldwide~~respectively. Misappropriation ~~The~~loss ~~majority~~and ofrelated ~~the~~expenses ~~Company’s~~includes ~~revenue is derived from contracts with~~ the ~~U.S.~~loss ~~Federal~~due ~~Government,~~to ~~directly~~embezzled funds as awell ~~prime contractor or~~ as aexternal ~~subcontractor.~~professional ~~NCI~~service ~~primarily~~fees ~~conducts~~including ~~business~~legal, ~~throughout~~forensic ~~the~~accounting, U.audit ~~S. The Company reports operating results~~ and ~~financial~~other ~~data~~consulting ~~as one reportable segment~~fees.

NCI’s Program Executive Office Soldier (“PEO Soldier”) contract is the Company’s largest revenue-generating contract and accounted for approximately 16% and 9% of revenue for the three months ended September 30, 2016 and 2015, respectively. PEO Soldier accounted for approximately 16% and 10% of revenue for the nine months ended September 30, 2016 and 2015, respectively. The Company’s PEO Soldier program is a cost-plus fee contract consisting of a base period and four option periods for a total term of five years, which commenced in October 2015. NCI’s Cyber Network Operations and Security Support (“CNOSS”) program, supporting the U.S. Army Network Enterprise Technology Command accounted for approximately 12% and 7% of revenue for the three months ended September 30, 2016 and 2015, respectively. CNOSS accounted for approximately 11% and 6% of revenue for the nine months ended September 30, 2016 and 2015, respectively. This cost-plus-fixed-fee, single-award indefinite delivery indefinite quantity contract consists of a 12-month base period with two one-year option periods and one six-month option period, and commenced in October 2014.


	Three months ended March 31,
	2017		2016
Misappropriation loss	$	380	$	1,541
Expenses related to the misappropriation loss		6,237		—

	$	6,617	$	1,541

34. (Loss) Earnings Per Share

Basic (loss) earnings per share ~~excludes~~ exclude dilution and are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted (loss) earnings per share ~~reflects~~reflect potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted (loss) earnings per share include the incremental effect of stock options calculated using the treasury stock method. Shares that are anti-dilutive are not included in the computation of diluted (loss) earnings per share. For the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, approximately 25 820,000 and 30,000 shares, respectively, were not included in the computation of diluted ~~earnings~~(loss) per share, because to do so would have been anti-dilutive. For the nine months ended September 30, 2016 and 2015, approximately 11,000 and 63,000 shares, respectively, were not included in the computation of diluted earnings per share, because to do so would have been anti-dilutive. The following ~~table~~ details the computation of basic and diluted (loss) earnings per common share (Class A and Class B) for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016.

	Three months endedSeptember 30,					Nine months endedSeptember 30,
	Three months ended March 31,
	2016			2015		2016		2015
	2017			2016
Net income	$	3,261		$	3,171	$	9,824	$	8,622
Net (loss) income	$	(807	)	$	2,589
Weighted average number of basic shares outstanding during the period		13,~~201~~277			13,~~029~~153		~~13,180~~		~~13,004~~
Dilutive effect of stock options and restricted stock after application of treasury stock method		656			668		683		655
Effect of dilutive potential common shares		—			714
Weighted average number of diluted shares outstanding during the period		13,~~857~~277			13,~~697~~867		~~13,863~~		~~13,659~~
Basic earnings per share	$	0.25		$	0.24	$	0.75	$	0.66
Basic (loss) earnings per share	$	(0.06	)	$	0.20
Diluted earnings per share	$	0.24		$	0.23	$	0.71	$	0.63
Diluted (loss) earnings per share	$	(0.06	)	$	0.19

5. Accounts Receivable

Accounts receivable consists of billed and unbilled amounts. The following table details accounts receivable at the end of each period:


	As of
	March 31, 2017		December 31, 2016
Billed receivables	$	24,827	$	19,367
Unbilled receivables:
Amounts billable at end of period		24,541		25,484
Other		5,231		7,003

Total unbilled receivables		29,772		32,487

Total accounts receivable		54,599		51,854
Less: Allowance for doubtful accounts		742		742

Total accounts receivable, net	$	53,857	$	51,112

4. Accounts Receivable

Accounts receivable consists of billed and unbilled amounts. The following table details accounts receivable at the end of each period:

	As of
	September 30,2016		December 31,2015
Billed receivables	$	22,762	$	23,621
Unbilled receivables:
Amounts billable at end of period		26,295		27,185
Other		5,017		9,980
Total unbilled receivables		31,312		37,165
Total accounts receivable		54,074		60,787
Less: Allowance for doubtful accounts		742		742
Total accounts receivable, net	$	53,332	$	60,044

Other unbilled receivables primarily consist of amounts that will be billed upon milestone completions and other accrued amounts that cannot be billed as of the end of the period. Substantially all unbilled receivables are expected to be billed and collected within the next 12 months.

56. Property and Equipment

The following table details property and equipment at the end of each period:

	As of
	September 30,2016		December 31,2015
	March 31,2017		December 31,2016
Property and equipment
Furniture and equipment	$	2021,~~949~~939	$	2621,~~573~~799
Leasehold improvements		7,~~411~~450		97,~~323~~450
Real property		549		549
		28,909		36,444
		29,938		29,798
Less: Accumulated depreciation and amortization		2224,~~571~~347		2923,~~746~~466
Property and equipment, net	$	65,~~338~~591	$	6,~~698~~332

Depreciation and amortization expense for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 was $0.~~8 million. Depreciation expense for the nine months ended September~~9 ~~30, 2016 and 2015 was $2.5~~ million ~~and $2~~.6 ~~million, respectively.~~

67. Intangible Assets

The following table details intangible assets at the end of each period:

	As of
	September 30,2016			December 31,2015
	March 31,2017			December 31,2016
Contract and customer relationships	$	3933,~~594~~284		$	3933,~~594~~284
Developed software		1,113			1,113
Less: Accumulated amortization		(2419,~~209~~719	)		(2118,~~476~~811	)
Intangible assets, net	$	1614,~~498~~678		$	1915,~~231~~586

Amortization expense of intangible assets for the three months ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016 was $0.9 ~~million and $1.0 million, respectively. Amortization expense of intangible assets for the nine months ended September~~ ~~30, 2016 and 2015 was $2.7~~ million ~~and $3~~.~~2 million, respectively.~~ Intangible assets are primarily amortized on a straight line basis over periods ranging from ~~three~~seven to 11 years. Expected amortization expense for the remainder of the fiscal year ending December 31, ~~2016~~2017, and for each of the fiscal years thereafter, is as follows:


For the year ending December 31,
2017 (remaining nine months)		2,724
2018		3,150
2019		3,049
2020		3,027
2021		2,728

	$	14,678

8. Share-Based Payments

During the three months ended March 31, 2017, the Company did not grant any stock options to purchase shares of common stock. During the three months ended March 31, 2017, 12,500 stock options were exercised at a weighted-average price of $10.13. As of March 31, 2017, there were approximately 1,000,000 stock options outstanding. During the three months ended March 31, 2017, no restricted shares were granted, and 21,253 restricted shares vested. As of March 31, 2017, there were 236,167 shares of restricted stock outstanding.

For the year ending December 31,
2016 (remaining three months)	$	911
2017		3,632
2018		3,149
2019		3,049
2020		3,027
Thereafter		2,730
	$	16,498

The following table summarizes stock compensation expense allocated to cost of revenue and general and administrative costs for the three months ended March 31, 2017 and 2016:

7. Share-Based Payments


	Three months ended March 31,
	2017		2016
Cost of revenue	$	36	$	79
General and administrative		325		250

	$	361	$	329

~~During~~As ~~the~~of ~~three months ended September~~March 3031, ~~2016~~2017, ~~the~~there ~~Company~~was ~~did~~approximately ~~not~~$3.0 million ~~grant~~of ~~any~~total ~~stock~~unrecognized ~~options,~~compensation ~~and~~cost ~~during~~related ~~the~~to unvested ~~nine~~stock ~~months~~compensation ~~ended~~arrangements. ~~September 30,~~This ~~2016, the~~cost ~~Company~~is ~~granted~~expected ~~25,000~~to ~~stock~~be ~~options~~fully toamortized ~~purchase~~over ~~shares~~the ofnext ~~Class A~~five ~~common~~years, ~~stock~~ with aapproximately ~~weighted-average~~$0.8 million, ~~exercise~~$0.9 million, ~~price of~~ $130.296 million, ~~which~~$0.5 million ~~represents~~and ~~the~~$0.2 million ~~fair~~amortized ~~market~~during ~~value~~the remainder of ~~the~~2017, ~~Company’s~~and ~~Class A common stock at~~ the ~~date~~full years of ~~grant.~~2018, ~~During the~~2019, ~~three~~2020, ~~months~~and ~~ended September 30~~2021, ~~2016,~~respectively. aThe ~~total~~cost of ~~35,426~~ stock ~~options~~compensation ~~were~~is ~~exercised~~included atin ~~a weighted-average exercise price of $6.38. During~~ the ~~nine~~Company’s ~~months~~Condensed ~~ended~~Consolidated ~~September 30,~~Statements ~~2016, a total~~ of ~~73,758~~Operations ~~stock~~and ~~options~~expensed ~~were~~over ~~exercised~~the atservice ~~a weighted-average~~period ~~exercise price~~ of ~~$5.66.~~the ~~As of September 30, 2016, there were 1,499,074 stock options outstanding~~equity awards.

~~During~~On January 6, 2017, pursuant to the ~~three~~terms ~~months~~of ~~ended September 30~~the Separation Agreement entered into on November 29, 2016, nobetween ~~restricted~~the ~~stock~~Company ~~was~~and ~~granted~~Marco ~~and~~de 5Vito,~~000~~ our ~~shares~~former ofChief ~~restricted~~Operating ~~stock~~Officer, ~~were~~the ~~cancelled~~Company paid Mr. ~~During~~de ~~the~~Vito ~~nine~~$2.1 ~~months~~million ~~ended~~for ~~September 30,~~the ~~2016,~~repurchase 25of 272,000 ~~shares~~vested ofstock ~~restricted~~options, ~~stock~~which ~~were~~repurchase ~~granted~~represents ~~and~~the ~~25,000~~difference ~~shares~~between the closing price on the date of ~~restricted~~the ~~stock~~agreement and the exercise ~~were~~price ~~cancelled~~of the vested options. AsThe ofCompany ~~September 30,~~recorded ~~2016,~~the ~~there~~payment ~~were~~as ~~315,000~~a ~~shares~~reduction ofto ~~restricted~~additional ~~stock~~paid-in ~~outstanding~~capital in the Condensed Consolidated Balance Sheet.

~~The~~9. ~~following~~Debt ~~table summarizes stock compensation expense allocated to cost of revenue and general and administrative costs for the three and nine months ended September 30, 2016 and 2015:~~

	Three months ended September 30,				Nine months ended September 30,
	2016		2015		2016		2015
Cost of revenue	$	47	$	76	$	162	$	199
General and administrative		179		264		607		837
	$	226	$	340	$	769	$	1,036

On January 31, 2017, the Company entered into the Fourth Amendment (the “Amendment”) to the Amended and Restated Loan and Security Agreement, dated December 13, 2010, as amended by and among the Company and its subsidiaries, SunTrust Bank, which acted as administrative agent for the lenders, the lenders named therein and the other parties thereto (the “Credit Agreement”). The Amendment modifies certain provisions of the Credit Agreement to, among other things:

As• ofdecrease ~~September 30,~~the ~~2016,~~Borrowing ~~there~~capacity ~~was~~under ~~approximately~~the ~~$3.3~~revolving ~~million~~line of ~~total~~credit ~~unrecognized~~from ~~compensation cost related to unvested stock compensation arrangements. This cost is expected to be fully amortized over the next five years, with approximately~~ $080.~~2 million, $~~0.9 million, ~~$0.9~~to ~~million,~~ $050.~~7 million and $~~0.6 million amortized during the remainder of 2016, and the full years of 2017, 2018, 2019, and 2020, respectively. The cost of stock compensation is included in the Company’s Condensed Consolidated Statements of Income and expensed over the service period of the options. ;

8.• ~~Debt~~extend the commitment termination date from January 31, 2017 to May 31, 2017;

~~NCI’s~~• ~~senior~~amend ~~credit~~the ~~facility,~~definition ~~amended~~of ~~in December 2014, and referred to herein as the~~ “~~credit~~Required ~~facility,~~Lenders” ~~consists of a revolving line of credit with a borrowing capacity of up~~ to aninclude $80.0 million principal amount and a $45.0 million accordion feature allowing the Company to increase its borrowing capacity to up to a $125.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in substantially all ~~of the Company’s assets. The~~ lenders ~~also~~which require a direct assignment of all contracts at the lenders’ discretion. The outstanding balance under the credit facility accrues interest based on the one-month London Interbank offered rate or LIBORmeans, ~~plus~~among another ~~applicable margin~~things, ~~ranging~~that ~~from~~amendments ~~210~~ to ~~310~~and ~~basis~~waivers ~~points,~~of ~~based on~~ the ~~ratio~~terms of the ~~Company’s~~Credit ~~outstanding senior funded debt to Earnings before Interest~~Agreement, ~~Taxes,~~as ~~Depreciation~~amended, ~~and~~will ~~Amortization~~require ~~or EBITDA, as defined in~~ the ~~credit~~consent ~~facility.~~and ~~The~~approval ~~credit~~of ~~facility expires on January 31, 2017. Accordingly~~ all ~~borrowings~~lenders; ~~are classified as current liabilities as they are due~~ and ~~payable within the next 12 months.~~

~~The~~• ~~credit~~include ~~facility~~additional ~~contains~~restrictions ~~various~~with ~~covenants~~respect ~~that limit, among other things, the Company’s ability~~ to ~~incur or guarantee additional debt; make~~ certain ~~distributions,~~ ~~investments~~acquisitions and ~~other~~ restricted payments, including ~~limits on cash dividends on the Company’s outstanding common stock or equivalent equity interests; enter into transactions with~~ certain ~~affiliates; create or permit certain liens; and consolidate~~acquisitions, ~~merge~~dividends, or sell assets. In addition, the credit facility contains certain financial covenants that require the Company to maintain a minimum fixed charge coverage ratio, maintain a minimum funded debt to earnings ratio; and ~~limit~~ ~~capital~~repurchase ~~expenditures~~or ~~below~~redemption ~~certain thresholds. As~~ of ~~September 30,~~our ~~2016,~~capital ~~the Company was in compliance with all of its loan covenants~~stock.

The outstanding borrowings are collateralized by a security interest in substantially all of the Company’s assets. The lenders also require a direct assignment of all contracts at the lenders’ discretion. The outstanding balance under the Credit Agreement accrues interest based on one-month LIBOR plus an applicable margin, ranging from 210 to 310 basis points, based on the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) as defined in the Credit Agreement.

Our Credit Agreement (i) restricts our ability to repurchase or redeem our capital stock, or merge or consolidate with another entity; (ii) limits our ability to borrow additional funds or to obtain other financing in the future for working capital, capital expenditures, acquisitions, investments and general corporate purposes; and (iii) limits our ability to dispose of our assets, to create liens on our assets, to extend credit or to issue dividends to our stockholders.

For the first quarter of 2017 and 2016, the Company had a weighted average outstanding loan balance of $2.9 million and $16.5 million, respectively, and a weighted average borrowing rate of 2.9% and 2.5%, respectively.

As of March 31, 2017, the outstanding balance under the credit facility was $2.0 million and interest accrued at a rate of one-month LIBOR plus 210 basis points, or 2.9%.

As of March 31, 2017, the Company was in compliance with all our loan covenants.

10. Income Taxes

As of March 31, 2017, the Company accrued interest expense related to uncertain tax positions totaling $0.7 million. During the three months ended March 31, 2017, the Company recorded $0.1 million in interest expense related to its uncertain tax positions in Interest Expense in the Consolidated Statements of Operations.

~~The credit facility allows the Company to use borrowings thereunder of up to $17~~11.5 ~~million~~Leases to repurchase outstanding shares of Class A common stock. No stock repurchases took place in the three or nine months ended September 30, 2016. At September 30, 2016, $16.7 million was remaining under the board of directors’ authorization for share repurchases.

~~During~~In ~~the~~March ~~third quarter of 2016~~2017, the Company ~~had~~executed athe ~~weighted~~sixth ~~average~~amendment ~~outstanding~~to ~~loan~~the ~~balance~~corporate ofoffice ~~$6.5~~lease ~~million~~agreement ~~which~~(“the ~~accrued~~Lease ~~interest at~~Amendment”). aThe ~~weighted~~Lease ~~average~~Amendment ~~borrowing rate of 2.5%. During~~ extended the ~~third~~termination ~~quarter~~date ofto ~~2015~~October 31, ~~the~~2027 ~~Company~~and ~~had~~provided acertain ~~weighted~~rent ~~average~~abatement, ~~outstanding~~tenant ~~loan~~allowances, ~~balance~~and ofadjustments ~~$18.8~~to ~~million~~base ~~which~~rent. ~~accrued~~Minimum ~~interest~~lease atpayments aunder ~~weighted~~the ~~average~~Lease ~~borrowing~~Amendment ~~rate~~are ofas ~~2.3%.~~follows:

As of September 30, 2016, there was no outstanding balance under the credit facility.


	(in thousands)
For the year ending December 31,
2017 (remaining nine months)		$	1,671
2018			1,967
2019			2,022
2020			2,077
2021			2,135
Thereafter			13,674

Total minimum lease payments		$	23,546

912. ~~Computech~~Dividends ~~Acquisition~~

~~On January 1, 2015, the~~The Company’s ~~completed~~Board ~~its purchase~~ of ~~100%~~Directors ofdeclared ~~the outstanding stock of Computech, Inc. (“Computech”), a leader in agile~~ and ~~lean application software development and IT operations and maintenance, for approximately $56.7 million, net of cash acquired. The acquisition has been accounted for under~~ the ~~acquisition~~Company ~~method~~paid ~~of accounting, which requires~~ the ~~total~~following ~~purchase~~dividends ~~consideration~~during ~~to be allocated to~~ the ~~assets~~periods ~~acquired~~presented: and liabilities assumed based on estimates of fair value. The excess of the purchase consideration over the amounts assigned to tangible or intangible assets acquired and liabilities assumed was recognized as goodwill.

Allocation of Purchase Price

Declaration Date

Dividend
Per Share

Record Date

Total Amount

Payment Date

February 8, 2016

0.15

February 26, 2016

2,020

March 18, 2016

~~The Company has completed the valuation of the assets acquired and liabilities assumed of Computech~~13. ~~The~~Related ~~fair~~Party ~~values~~Transactions assigned to the intangible assets acquired were based on estimates, assumptions, and other information compiled by management, including independent valuations that utilized established valuation techniques. Based on the Company’s valuation, the total consideration of approximately $56.7 million, net of $3.3 million of cash acquired, has been allocated to assets acquired (including identifiable intangible assets and goodwill) and liabilities assumed, as follows:

Accounts receivable and other assets		8,407
Goodwill		33,878
Definite-life intangible assets		19,720
Accrued salary and benefits		(4,112	)
Other accrued expenses		(1,236	)
	$	56,657

The Company purchased services under a subcontract from Renegade Technology Systems, Inc., which is a government contractor wholly-owned by Rajiv Narang, the son of Charles K. Narang, Chairman of the Board of Directors. For the three months ended March 31, 2017 and 2016, the expense incurred under this agreement was approximately $0.4 million and $0.2 million, respectively. As of March 31, 2017 and 2016, outstanding amounts due to Renegade Technology Systems, Inc. under this agreement were $0.3 million and $0.1 million, respectively.

~~The definite life intangibles recognized in the allocation of the Computech purchase price consists of $18~~14.6 ~~million~~Contingencies in contracts and customer relationships and $1.1 million in developed software. The fair value of the definite-lived intangible asset for contracts and customer relationships is based on existing customer contracts and anticipated follow-on contracts with existing customers and will be amortized on a straight-line basis over its expected life of seven years. The fair value of the definite-lived intangible asset for developed software will be amortized on a straight-line basis over its expected useful life of three years.

All goodwill and intangible asset amortization related to the acquisition of Computech is expected to be deductible for income tax purposes.

10. Dividends

Our board of directors declared and the Company paid the following dividends during the periods presented:

Declaration Date	Dividend Per Share		Record Date		Total Amount		Payment Date
February 10, 2015	$	0.12		February 25, 2015	$	1,561		March 13, 2015
February 8, 2016	$	0.15		February 26, 2016	$	2,020		March 18, 2016

11. Related Party Transactions

The Company purchases services under a subcontract from Renegade Technology Systems, Inc., which is a government contractor wholly-owned by Rajiv Narang, the son of Charles K. Narang, Chairman of the board of directors. For the three months ended September 30, 2016 and 2015, the expense incurred under this agreement was approximately $298,000 and $177,000, respectively. For the nine months ended September 30, 2016 and 2015, the expense incurred under this agreement was approximately $656,000 and $525,000, respectively. As of September 30, 2016 and 2015, outstanding amounts due to Renegade Technology Systems, Inc. under this agreement were $103,150 and $51,137, respectively.

12. Contingencies

Government Audits

Payments to the Company on U.S. Federal Government contracts are subject to adjustment upon audit by various agencies of the U.S. Federal Government. Audits of costs and the related payments have been performed through ~~2007~~2009 for NCI Information Systems, Inc., the Company’s primary corporate vehicle for government contracting. In the opinion of management, the final determination of costs and related payments for unaudited years will not have a material effect on the Company’s financial position, results of operations, or liquidity.

Litigation

Civil Suit Against Former Controller

As previously disclosed on January 23, 2017, the Company commenced an internal investigation upon discovering that its former controller, Jon Frank, had been embezzling money from the Company. Upon completion of the internal investigation, the Company determined that the actual amount of the embezzlement by Mr. Frank during the period from January 2010 through 2017 was approximately $19.4 million. The Company believes that Mr. Frank acted alone and found no evidence that any other NCI employee was aware of or colluded in the embezzlement of Company funds and found no evidence of any unlawful activity apart from that associated with Mr. Frank’s embezzlement of Company funds.

On January 23, 2017, the Company filed a lawsuit against Mr. Frank in the Circuit Court of Fairfax County in the State of Virginia to recover the embezzled funds.

On February 2, 2017, the Honorable Chief Judge White entered an Order for Preliminary Injunction and Asset Freeze (the “Preliminary Injunction”) against Mr. Frank. Among other things, the Preliminary Injunction placed an immediate freeze on all monies and assets of Mr. Frank and ordered Mr. Frank to prepare and deliver to the Company an accounting of his personal assets. In addition, pursuant to the Preliminary Injunction, Mr. Frank agreed to cooperate with the Company to identify, recover and return to the Company all assets that he obtained wrongfully or acquired with wrongfully-obtained funds.

Government Agency Investigations

In connection with the discovery of Mr. Frank’s embezzlement of money from the Company, the Company self-reported such matter to the U.S. Securities and Exchange Commission (“SEC”) and the civil and criminal divisions of the U.S. Department of Justice (“DOJ”).

By letter to the Company dated February 1, 2017, the DOJ has identified the Company as a possible victim of Mr. Frank’s conduct. On February 8, 2017, the SEC commenced a formal investigation and has served the Company with a subpoena requesting certain documents and information relevant to the embezzlement of Company funds by Mr. Frank. The Company is cooperating fully with the DOJ and the SEC in connection with their respective investigations, which are ongoing.

The United States Attorney’s Office for the Eastern District of Virginia (“USAO EDVA”) has opened a civil fraud investigation into the impact of Mr. Frank’s conduct on the Company’s government contracts. The Company is cooperating fully with the USAO EDVA and the Inspectors General of relevant government agencies in connection with this investigation, which is ongoing. At this time, we do not have an estimate of the financial impact on the Company, if any, of the investigation being conducted by the USAO EDVA.

Other Legal Proceedings

The Company is party to various legal actions, claims, government inquiries, and audits resulting from the normal course of business. The Company believes that the probability is remote that any resulting liability will have a material effect on the Company’s financial position, results of operations, or liquidity.

13. Subsequent Events

Change in Management

On October 31, 2016, the Company announced that Brian J. Clark, the Company’s President and Chief Executive Officer (“CEO”), has resigned from his employment with the Company and as a member of the Board of Directors of the Company, effective as of October 31, 2016. In connection with his resignation, the Company and Mr. Clark entered into a Separation and Transition Agreement which provides for the payment of certain severance benefits to Mr. Clark including the following: (a) the Company will pay Mr. Clark a total fee of $250,000 for consulting services to be provided through April 30, 2017; (b) the Company will pay Mr. Clark a lump sum cash payment equal to twenty-four months of his annual base salary in the amount of $1,000,000; (c) the Company will pay Mr. Clark a lump sum cash payment equal to his prorated annual bonus for 2016 at the target level of performance in the amount of $420,000; (d) the Company will continue to provide Mr. Clark with health and welfare coverage and executive long-term disability coverage at no additional cost to him for one year; and (e) the Company will repurchase 390,000 stock options held by Mr. Clark that are vested and exercisable as of October 31, 2016 at a purchase price per option equal to the closing sale price of a share of NCI common stock on The Nasdaq Stock Market on October 28, 2016 less the applicable per share exercise price of the options.

The Board has appointed Paul A. Dillahay as the Company’s President and CEO and a member of the Board effective as of October 31, 2016. Mr. Dillahay will initially receive a one-time signing bonus in the amount of $325,000 and will be eligible for an annual cash bonus for the fourth quarter of 2016 equal to $125,000. He will receive an option award of 250,000 shares and a grant of 100,000 shares of restricted stock. The options vest in five equal annual installments beginning on the first anniversary of the grant date. The restricted stock awards vest in accordance with the following schedule: 33 1/3% vest on January 31, 2017; 33 1/3% vest one year from the grant date and 33 1/3% vest two years from the grant date.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements ~~within~~regarding ~~the~~our ~~meaning~~business, offinancial condition, ~~the~~results ~~Private~~of ~~Securities~~operations, ~~Litigation~~and ~~Reform Act of 1995~~prospects. ~~When~~There ~~used~~are ~~anywhere~~statements inmade ~~this~~herein, ~~Quarterly~~which ~~Report~~may onnot ~~Form~~address ~~10-Q,~~historical ~~the~~facts ~~words “expect”~~and, ~~“believe”~~therefore, ~~“anticipate”,~~ ~~“estimate”,~~could ~~“intend”,~~be ~~“plan”,~~interpreted ~~and similar expressions are intended~~ to ~~identify~~be forward -looking statements. ~~These~~as ~~statements~~that ~~reflect~~term ~~our~~is ~~current~~defined ~~views~~in ~~with~~the ~~respect~~Private ~~to future events or our future~~Securities ~~financial~~Litigation orReform ~~operational~~Act ~~performance~~of ~~and~~1995. ~~involve~~Such ~~known~~statements ~~and~~are ~~unknown~~subject ~~risks,~~to ~~uncertainties and other~~ factors that could cause ~~our~~ actual results ~~or performance~~ to differ materially from ~~those~~anticipated ~~expressed or implied by these forward looking statements~~results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following:

• our dependence on our contracts with U.S. Federal Government agencies, particularly within the U.S. Department of Defense, for the majority of our revenue; delays performing work under our contracts due to bid protests; changes in U.S. Federal Government spending priorities; changes in contract type, particularly changes from cost-plus fee or time-and-material type contracts to firm fixed-price type contracts

•

a reduction in the overall U.S. defense budget, volatility in spending authorizations for defense and intelligence-related programs by the U.S. Federal Government or a shift in spending to programs in areas where we do not currently provide services

• delays in the U.S. Federal Government appropriations process, or budgetary cuts resulting from Congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011; U.S. Federal Governmental shutdowns (such as the ~~shutdowns~~shutdown that occurred during the U.S. Federal Government’s 1996 and 2013 fiscal years); and other potential delays in the U.S. Federal Government appropriations process

•

changes in U.S. Federal Government programs or requirements, including the increased use of small business providers

•

failure to achieve contract awards in connection with recompetes for present business and/or competition for new business

•

U.S. Federal Government agencies more frequently awarding contracts on a technically acceptable/lowest cost basis in order to reduce expenditures

•

adverse results of U.S. Federal Government audits of our government contracts

•

the outcome of legal proceedings, investigations and other contingencies, as well as our ability to recover funds embezzled by our former controller

•

competitive factors, such as pricing pressures and competition to hire and retain employees (particularly those with security clearances)

•

failure to identify and successfully integrate acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions, or effectively integrate acquisitions appropriate to the achievement of our strategic plans

• economic conditions in the U.S., including conditions that result from terrorist activities or war

• material changes in policies, laws, or regulations applicable to our businesses, particularly legislation affecting (i) U.S. Federal Government contracts for services, (ii) outsourcing of activities that have been performed by the U.S. Federal Government, (iii) U.S. Federal Government contracts containing organizational conflict of interest clauses, (iv) delays related to agency specific funding freezes, and (v) competition for task orders under Government Wide Acquisition Contracts (“GWAC”), agency-specific Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts and/or schedule contracts with the General Services Administration

•

economic conditions in the United States, including conditions that result from terrorist activities or war

•

material changes in policies, laws, or regulations applicable to our businesses, particularly legislation affecting (i) U.S. Federal Government contracts for services, (ii) outsourcing of activities that have been performed by the U.S. Federal Government, (iii) U.S. Federal Government contracts containing organizational conflict of interest clauses, (iv) delays related to agency specific funding freezes, and (v) competition for task orders under Government Wide Acquisition Contracts (“GWAC”), agency-specific Indefinite Delivery/Indefinite Quantity (“IDIQ”) contracts and/or schedule contracts with the General Services Administration

•

the U.S. Federal Government’s “insourcing” of previously contracted support services and the realignment of funds to non-defense related programs

•

our ability to achieve the objectives of near-term or long-range business plans, particularly revenue growth, and the ability to realize benefits from future deferred tax assets; and

•

risk of contract non-performance or termination

Some of these important factors are outlined under Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016, as filed with the Securities and Exchange Commission (“SEC”), and from time to time in other filings with the SEC, such as our Current Reports on Forms 8-K and Quarterly Reports on Form 10-Q. ~~These~~Although ~~forward-looking~~we ~~statements~~believe that ~~reflect~~the ~~our~~expectations ~~views~~reflected ~~and~~in ~~assumptions~~the ~~only~~forward-looking asstatements ofare ~~the~~reasonable, ~~date~~we ~~such~~cannot ~~forward~~guarantee ~~looking~~our ~~statements~~future ~~are~~results, ~~made.~~level ~~Except~~of asactivity, ~~required~~or byperformance. ~~law~~We we undertake no obligation to update publicly or revise any forward-looking statements. You should not place undue reliance on any forward-looking statements.

In this document, unless the context indicates otherwise, the terms ~~the~~ “Company,” “NCI,” “we,” “us,” and “our” refer to NCI, Inc., a Delaware corporation, and, where appropriate, its subsidiaries.

OVERVIEW

We are a provider of information technology (“IT”) and professional services and solutions primarily to U.S. Federal Government agencies. Our technology and industry expertise enables us to provide a wide spectrum of services and solutions that assist our customers in achieving their program goals. We deliver these complex services and solutions by leveraging our skills across ~~eight~~six core capabilities:

• ~~Cloud~~Agile ~~Computing~~Development and ITLean ~~Infrastructure~~Software ~~Optimization~~O&M

•

Big Data and Data Analytics

•

Cybersecurity and Information Assurance

• Engineering and Logistics ~~Support~~

• ~~Enterprise~~IT ~~Information~~Infrastructure ~~Management~~Optimization and ~~Advanced~~Service ~~Analytics~~Management

• Health IT and ~~Medical~~Program ~~Support~~Integrity

• IT Service Management

• Modeling, Training and Simulation

• Agile Software Development and Integration

Our team of highly skilled professionals is committed to service excellence and delivers innovative, cost-effective enterprise services and solutions on time and within budget. We are focused on reshaping the way services and solutions are delivered to our customers in order to proactively understand and meet their mission needs and enable them to rapidly adapt to dynamic environments. Headquartered in Reston, Virginia, the Company currently operates in more than 100 locations around the globe.

Key Financial Metrics

Prime Contractor Revenue

The following table shows our revenue derived from contracts on which we serve as a prime contractor.

	Three months ended September 30,						Nine months ended September 30,
	Three months ended March 31,
	2016			2015			2016			2015
	2017			2016
Revenue derived from prime contracts		9291	%		9294	%		93	%		92	%

Customer Group Revenue

The following table shows our revenue from the customer groups listed as a percentage of total revenue for the periods shown.

	Three months ended September 30,						Nine months ended September 30,
	Three months ended March 31,
	2016			2015			2016			2015
	2017			2016
Department of Defense and intelligence agencies		6361	%		5963	%		63	%		60	%
U.S. Federal civilian agencies		3739	%		4137	%		37	%		40	%

Contract Type Revenue

Our services and solutions are provided under three types of contracts: time-and-materials; cost-plus fee; and firm fixed-price. Our contract mix varies from year to year due to numerous factors including our business strategies and U.S. Federal Government procurement objectives.

The following table shows our revenue from each of these types of contracts as a percentage of our total revenue for the periods shown.

	Three months ended September 30,						Nine months ended September 30,
	Three months ended March 31,
	2016			2015			2016			2015
	2017			2016
Time-and-materials		1718	%		2317	%		17	%		23	%
Cost-plus fee		6353	%		4959	%		60	%		48	%
Firm fixed-price		2029	%		2824	%		23	%		29	%

The amount of risk and potential reward varies under each type of contract. Under time-and-materials contracts, we are paid a fixed hourly rate by labor category. To the extent that our actual labor costs vary significantly from the negotiated hourly rates, we may generate more or less than the targeted amount of profit. We are typically reimbursed for other contract direct costs and expenses at our cost, and typically receive no fee on those costs. For cost-plus fee contracts, there is limited financial risk, because we are reimbursed all our allowable costs, therefore the profit margins tend to be lower on cost-plus fee contracts. Under firm fixed-price contracts, we perform specific tasks or provide specified goods for a predetermined price. Compared to time-and-materials and cost-plus fee contracts, firm fixed-price service contracts generally offer higher profit margin opportunities but involve greater financial risk because we would bear the impact of potential cost overruns in return for the full benefit of any cost savings. The increase in the percentage of revenue generated on our firm fixed-price contracts is primarily the result of new firm fixed-price contracts awarded in 2016.

Contract Backlog


	As of
	March 31, 2017		December 31, 2016
	(in millions)
Funded backlog	$	139	$	139
Total backlog	$	590	$	625

We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of those contracts that we believe are more likely than not to be exercised. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our GWAC, agency-specific IDIQ, or other multiple-award contract vehicles. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our funded backlog does not represent the full potential value of our contracts, as Congress often appropriates funds for a particular program or agency on a quarterly or yearly basis, even though the contract may provide for the provision of services over a number of years. We define unfunded backlog, not included above, as the total backlog less the funded backlog. Unfunded backlog includes values for contract options that have been priced but not yet funded. Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC.

Contract Backlog

	As of
	September 30, 2016		December 31, 2015
	(in millions)
Funded backlog	$	173	$	147
Total backlog	$	663	$	552

We define backlog as our estimate of the remaining future revenue from existing signed contracts over the remaining base contract performance period and from the option periods of those contracts that we believe are more likely than not to be exercised. Our backlog does not include any estimate of future potential delivery orders that might be awarded under our GWAC, agency-specific IDIQ, or other multiple-award contract vehicles. We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing agency, less the amount of revenue we have previously recognized. Our funded backlog does not represent the full potential value of our contracts, as Congress often appropriates funds for a particular program or agency on a quarterly or yearly basis, even though the contract may provide for the provision of services over a number of years. We define our unfunded backlog, which is not included above, as the total backlog less the funded backlog. Unfunded backlog includes values for contract options that have been priced but not yet funded. Additional information on how we determine backlog is included in our Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the SEC.

Results of Operations

Three Months Ended ~~September~~ March 3031, ~~2016~~2017 Compared to Three Months Ended ~~September~~March 3031, ~~2015~~2016

The following table sets forth certain items from our consolidated statements of ~~income~~operations and expresses each item in dollars and as a percentage of revenue for the periods indicated:

	Three months ended September 30,
	Three months ended March 31,
	2016			2015		2016			2015
	2017			2016		2017			2016
	(in thousands)					(as a percentage of revenue)
Revenue	$	7978,~~753~~751		$	8283,~~310~~655		100.0	%		100.0	%
Operating expenses:
Cost of revenue		6664,~~305~~696			6869,~~677~~693		8382.12			83.43
General and administrative expenses		6,~~434~~690			6,~~445~~107		8.15			7.83
Depreciation and amortization		1,~~737~~788			1,~~794~~792		2.23			2.21
Acquisition and integration related expenses		—			6		—			0.0
Misappropriation loss and related expenses		6,617			1,541		8.3			1.8
Total operating expenses		7479,~~476~~791			7679,~~922~~133		93101.43			9394.5
Operating income		5,277			5,388		6.6			6.5
Operating (loss) income		(1,040	)		4,522		(1.3	)		5.5
Interest expense, net		~~134~~208			~~204~~190		0.23			0.2
Income before income taxes		5,143			5,184		6.4			6.3
(Loss) income before income taxes		(1,248	)		4,332		(1.6	)		5.3
Provision for income taxes		1,882			2,013		2.3			2.4
(Benefit) provision for income taxes		(441	)		1,743		(0.6	)		2.1
Net income	$	3,261		$	3,171		4.1	%		3.9	%
Net (loss) income	$	(807	)	$	2,589		(1.0	)%		3.2	%

Revenue

For the three months ended ~~September~~March 3031, ~~2016~~2017, revenue decreased by 35.19%, or $24.6 9 million, over the same period a year ago. ~~The~~This decrease ~~was~~is principally due ~~mostly~~contracts to completed ~~contracts,~~in 2016 and reductions in staffing and scope of work on certain other contracts, ~~partially~~ offset by ~~higher~~increased revenues ~~derived~~from ~~under~~additional ~~the~~task ~~expanded~~orders ~~PEO~~on ~~Soldier~~the ~~program,~~expanded CNOSS program, and ~~other~~revenue derived from new contract awards ~~in the past year~~.

NCI’s PEO Soldier program accounted for $12.7 5 million, or 1615.09% of revenue, in the ~~third~~first quarter of ~~2016~~2017, updown $50.4 7 million from $713.3 2 million, or 815.8% of revenue, in the ~~third~~first quarter of ~~2015~~2016. NCI’s CNOSS program accounted for $9.9 4 million, or 1211.29% of revenue, in the ~~third~~first quarter of ~~2016~~2017, up $40.5 9 million from $58.4 5 million, or 610.61% of revenue, in the ~~third~~first quarter of ~~2015~~2016.

Cost of revenue

Cost of revenue for the three months ended ~~September~~March 3031, ~~2016~~2017 was $6664.3 7 million, or 8382.12% of revenue, compared to $6869.7 million, or 83.43% of revenue, for the three months ended ~~September~~March 3031, ~~2015~~2016. The decrease in cost of revenue as a percentage of revenue was primarily the result of ~~lower subcontractor~~improved ~~and~~gross ~~materials~~margin ~~costs,~~realized ~~partially~~from ~~offset~~the byincreased ~~higher~~portion ~~direct~~of ~~labor~~revenue ~~and~~derived anfrom ~~increase~~fixed inprice ~~indirect costs for the period~~contracts.

General and administrative expenses

General and administrative ~~expenses~~expense ~~decreased~~increased $0.26 million, or 9.5%, to $6.7 million for the three months ended ~~September~~March 3031, ~~2016~~2017, as compared to $6.1 million in the same period a year ago. General and administrative costs as a percentage of revenue increased from 7.3% in the three months ended March 31, 2016 to 8.5% in the three months ended March 31, 2017. The ~~decrease~~increase was primarily due to ~~decreased~~higher ~~stock~~recruiting ~~compensation~~and ~~expense~~business development costs.

Depreciation and amortization

Depreciation and amortization expense was approximately $1.~~7 million and $1.~~8 million for the ~~three~~quarters ~~months~~ ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. ~~The decrease was primarily due to certain fixed assets becoming fully depreciated in the beginning of the third quarter of 2016.~~

Misappropriation loss and related expenses

Misappropriation loss and related expenses totaled approximately $6.6 million and $1.5 million for the quarter ended March 31, 2017 and 2016, respectively. Misappropriation loss and related expenses includes the loss due to embezzled funds as well as external professional service fees including legal, forensic accounting, audit and other consulting fees. We incurred approximately $0.4 million and $1.5 million of loss related to the embezzlement of funds from our former corporate controller for the quarters ended March 31, 2017 and 2016, respectively.

Interest expense, net

Interest expense, net, was $0.~~1 million and $0.~~2 million for the quarters ended ~~September~~March 3031, ~~2016~~2017 and ~~2015~~2016, respectively. Interest expense for the quarter ended March 31, 2017 included approximately $0.1 million of interest related to uncertain tax position related to the misappropriation loss. During the ~~third~~first fiscal quarter of ~~2016~~2017, we had a weighted average outstanding loan balance of $62.5 9 million which accrued interest at a weighted average borrowing rate of 2.59%. During the ~~third~~first fiscal quarter of ~~2015~~2016, we had a weighted average outstanding loan balance of $1816.8 5 million which accrued interest at a weighted average borrowing rate of 2.35%.

~~Provision~~12 ~~for income taxes~~

Provision for income taxes decreased by $0.1 million in the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. The effective income tax rate for the quarters ended September 30, 2016 and 2015 was approximately 36.6% and 38.8%, respectively. The decrease in the effective income tax rate was due to a discrete item in the quarter for the period ended September 30, 2016 related to a corporate tax structure reorganization.

~~Nine~~(Benefit) ~~Months~~provision ~~Ended~~for ~~September 30,~~income ~~2016~~taxes ~~Compared to Nine Months Ended September 30, 2015~~

~~The~~For ~~following~~the ~~table~~three ~~sets~~months ~~forth~~ended ~~certain~~March 31, ~~items~~2017, ~~from~~our benefit for income taxes was 35.3% of our ~~consolidated~~loss ~~statements~~before tax. This represents a decrease from 40.3% of our income ~~and~~before ~~expresses~~tax ~~each~~for ~~item~~the inthree ~~dollars~~months ~~and~~ended asMarch 31, 2016. The decrease was primarily attributable to a ~~percentage~~change ofin ~~revenue~~certain ~~for~~ state tax rates during the ~~periods~~three ~~indicated:~~months ended March 31, 2017, offset by a tax benefit associated with certain stock transactions.

	Nine months ended September 30,
	2016		2015		2016			2015
	(in thousands)				(as a percentage of revenue)
Revenue	$	245,308	$	249,077		100.0	%		100.0	%
Operating expenses:
Cost of revenue		204,213		207,832		83.2			83.4
General and administrative expenses		19,375		19,941		7.9			8.0
Depreciation and amortization		5,213		5,774		2.2			2.3
Acquisition and integration related expenses		—		428		0.0			0.2
Total operating expenses		228,801		233,975		93.3			93.9
Operating income		16,507		15,102		6.7			6.1
Interest expense, net		477		662		0.2			0.3
Income before income taxes		16,030		14,440		6.5			5.8
Provision for income taxes		6,206		5,818		2.5			2.3
Net income	$	9,824	$	8,622		4.0	%		3.5	%

Misappropriation Loss—Costs and Recovery

~~Revenue~~As discussed in Note 14 to our financial statements, the Company initiated civil legal proceedings against our former controller seeking to recover assets acquired by him with funds wrongfully obtained by him through his embezzlement of Company funds and that litigation is ongoing. The court has frozen all of our former controller’s assets.

~~For~~In its Annual Report on Form 10-K for the ~~nine~~ ~~months~~year ended December 31, 2016 and its Quarterly Reports on Form 10-Q/A for the periods ended March 31, June 30 and September 30, 2016, ~~total~~the ~~revenue~~Company ~~decreased~~disclosed ~~1.5%,~~such ormisappropriation ~~$3.8~~losses ~~million~~and ~~from~~indicated ~~$249.1~~that ~~million~~it carried an insurance policy that could cover up to $~~245~~5 million dollars of the misappropriation losses.3 ~~million~~The Company was recently notified by letter from its insurance carrier, asBerkley ~~compared~~Regional toInsurance Company (“Berkley”), that the ~~same~~applicable ~~period~~insurance policy that could cover a ~~year~~portion ~~ago.~~of ~~The~~the ~~decrease~~misappropriation losses was ~~primarily~~terminated due to, ~~reductions~~misrepresentations made by the Company’s controller in ~~scope~~applying offor ~~work,~~and obtaining such policy. The Company rejects Berkeley’s position and intends to enforce the ~~expiration~~applicable policy to seek to recover the maximum possible insurance proceeds with respect to the misappropriation losses. The timing and amount of ~~task~~final ~~orders~~recoveries ~~and~~(if ~~contracts~~any), ~~and~~net ~~lower~~of ~~materials~~expenses ~~revenue~~of recovery, ~~partially~~is ~~offset~~uncertain. byThe ~~revenues~~Company ~~derived~~has ~~under~~not ~~our~~yet ~~PEO~~recognized ~~Soldier~~an ~~and~~estimated ~~CNOSS~~value ~~programs~~of ~~and,~~the potential recovery due to athe ~~lesser~~limited ~~extent,~~amount ~~from~~of ~~new~~information ~~awards~~available into it at this time. The Company expects that it will incur additional costs during fiscal 2017 related to the ~~past~~embezzlement, ~~year~~including legal, audit and other consulting fees.

Cost of revenue

Cost of revenue decreased 1.7% or $3.6 million from $207.8 million to $204.2 million, for the nine months ended September 30, 2016, as compared to the same period a year ago. This decrease was primarily the result of reduced subcontractor, materials, and software costs, partially offset by an increase in direct labor costs. Cost of revenue represented 83.2% of revenue for the nine months ended September 30, 2016, as compared to 83.4% for the nine months ended September 30, 2015. This decrease was primarily the result of the greater contribution of direct labor and more efficient absorption of indirect costs.

General and administrative expenses

General and administrative expenses decreased 2.8%, or $0.6 million, for the nine months ended September 30, 2016, as compared to the same period a year ago. The decrease was primarily due to lower indirect labor costs, more efficient allocation of business development expenses, lower executive compensation costs, and decreased stock compensation expense, partially offset by an increase in external strategic consulting costs.

Depreciation and amortization

Depreciation and amortization expense was approximately $5.2 and $5.8 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease was primarily due to certain intangible assets becoming fully amortized in the third quarter of 2015 and due to certain fixed assets becoming fully depreciated within the nine months ended September 30, 2016.

Interest expense, net

Interest expense, net, was approximately $0.5 million and $0.7 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease was primarily attributed to a lower weighted average loan balance.

Provision for income taxes

For the nine months ended September 30, 2016, the provision for income taxes increased to $6.2 million from $5.8 million in the same period a year ago, due to increased pretax income on an lower effective tax rate. The effective income tax rate for the nine months ended September 30, 2016 was approximately 38.7% as compared to an effective income tax rate of 40.3% for the nine months ended September 30, 2015. The lower effective income tax rate for the nine months ended September 30, 2016 was the result of a decrease in the blended state income tax rate from our current state revenue allocation, and partially due to a discrete item in the quarter related to a corporate tax structure reorganization.

Liquidity and Capital Resources

Our primary liquidity needs are for financing working capital, capital expenditures, stock repurchases, and making selective strategic acquisitions. Historically, we have relied primarily on our cash flow from operations and borrowings under our credit facility to provide the capital for our liquidity needs. As part of our growth strategy, we may pursue acquisitions that could require us to incur additional debt or issue new equity. We expect the combination of our current cash, cash flow from operations, and the available borrowing capacity under our credit facility to continue to meet our normal working capital, capital expenditures and other cash requirements.

During the ~~nine~~three months ended ~~September~~March 3031, ~~2016~~2017, the balance of accounts receivable ~~decreased~~increased by $62.7 million to $53.3 9 million at the end of the quarter. Days sales outstanding of accounts receivable (“DSO”) ~~decreased~~increased 4one ~~days~~day to 62 days at ~~September~~March 3031, ~~2016~~2017 as compared to 6661 days at December 31, ~~2015~~2016. ~~The decrease in DSO was mostly attributable to the payment of invoices related to certain contracts where payment had been delayed in prior periods.~~ As of ~~September~~March 3031, ~~2016~~2017, no$2.0 million ~~debt~~ was ~~outstanding and~~ due under the credit facility, as compared to ~~$10.0~~no ~~million~~balance outstanding as of December 31, ~~2015~~2016, reflecting $102.0 million of net ~~payments~~borrowings during the first ~~nine~~three months of ~~2016~~2017. Net cash provided by operating activities was $131.8 1 million atfor ~~September 30,~~the ~~2016~~three ~~and~~months ~~was used to pay down debt and meet working capital~~ended ~~requirements~~March 31, 2017.

~~Our~~On ~~board of directors authorized management to repurchase up to $25.0 million of our Class~~January ~~A common stock pursuant to a stock repurchase program. If shares are repurchased~~31, ~~the shares will be repurchased pursuant to open market purchases~~2017, ~~privately negotiated transactions~~NCI, orentered ~~block~~into ~~transactions. We have no obligation to repurchase shares under~~ the ~~authorization,~~Fourth ~~and~~Amendment ~~the timing, actual number and value of the shares which are repurchased~~ (~~and~~ the ~~manner of any such repurchase~~“Amendment”) ~~will~~to ~~be at~~ the ~~discretion~~Credit of management and will depend on a number of factors, including the price of our common stock, our Company’s cash needs, borrowing capacity under our credit facility, interest rates, and our financial performance and positionAgreement. ~~We may suspend or discontinue repurchases at any time.~~

~~During~~The ~~2015~~Amendment ~~and~~modifies ~~the~~certain ~~three~~provisions ~~and~~of ~~nine~~the ~~months~~Credit ~~ended~~Agreement ~~September 30~~to, ~~2016,~~among weother ~~did~~things: ~~not repurchase any shares. At September 30, 2016, we had $16.7 million remaining under the board of directors’ authorization for share repurchases.~~

~~Credit~~• ~~Facility:~~decrease ~~Our~~the ~~senior~~Company’s ~~credit~~borrowing ~~facility,~~capacity ~~amended~~under ~~in December 2014, and referred to herein as~~ the ~~“credit facility,” consists of a~~ revolving line of credit ~~with~~from ~~a borrowing capacity of up to an~~ $80.0 million ~~principal amount, and a $45.0 million accordion feature allowing us~~ to ~~increase our borrowing capacity to up to a~~ $~~125~~50.0 million principal amount, subject to obtaining commitments for the incremental capacity from existing or new lenders. The outstanding borrowings are collateralized by a security interest in substantially all of the Company’s assets. The lenders also require a direct assignment of all contracts at the lenders’ discretion. The outstanding balance under the credit facility accrues interest based on the one-month London Interbank offered rate or LIBOR, plus an applicable margin, ranging from 210 to 310 basis points, based on the ratio of our outstanding senior funded debt to Earnings before Interest, Taxes, Depreciation, and Amortization or EBITDA as defined in the credit facility. ;

~~The~~• ~~credit~~extend ~~facility allows us to use borrowings thereunder of up to $17.5 million to repurchase shares of our common stock. Funds borrowed under~~ the ~~credit facility~~commitment ~~may~~termination ~~also~~date befrom ~~used~~January ~~to finance possible future acquisitions~~31, ~~for~~2017 ~~working~~to ~~capital~~May ~~requirements~~31, ~~for stock repurchases, for cash dividends or for general corporate uses.~~ 2017;

~~The~~• ~~loan~~amend ~~interest~~the ~~accrual~~definition ~~rate~~of is“Required ~~set~~Lenders” ~~monthly~~to atinclude ~~one-month~~all ~~LIBOR~~lenders ~~plus~~which ameans, ~~set~~among ~~amount~~other ~~per~~things, that amendments to and waivers of the ~~credit~~terms ~~facility.~~of the Credit Agreement, as amended, will require the consent and approval of all lenders; and

~~The~~• ~~credit~~include ~~facility~~additional ~~contains~~restrictions ~~various~~with ~~restrictive~~respect ~~covenants that restrict, among other things, our ability~~ to ~~incur or guarantee additional debt; make~~ certain ~~distributions,~~ ~~investments~~acquisitions and ~~other~~ restricted payments, ~~such~~including ~~as dividends; enter into transactions with~~ certain ~~affiliates; create or permit certain liens; and consolidate~~acquisitions, ~~merge~~dividends, or sell assets. In addition, the credit facility contains certain financial covenants that require us to maintain a minimum tangible net worth; maintain a minimum fixed charge coverage ratio; maintain a minimum funded debt to earnings ratio; and ~~limit~~repurchase ~~capital~~or ~~expenditures~~redemption ~~below~~of ~~certain thresholds. There are no restrictions on~~ our ~~retained~~capital ~~earnings in the credit facility~~stock.

We ~~are~~intend ~~actively~~to ~~engaged~~amend ~~with~~and ~~our~~extend ~~bank group regarding~~ our credit facility before the current facility expires inon ~~January~~May 31, 2017. WeOur ~~anticipate~~goal ~~the~~is ~~new~~to ~~facility~~reestablish ~~will~~a becredit ~~larger~~agreement ~~and~~that will ~~with~~support ~~similar or better terms and conditions as~~ our ~~current~~stated ~~facility.~~goals Asfor offinancing ~~September 30,~~working ~~2016~~capital, wecapital ~~were~~expenditures, instock ~~compliance~~repurchases, ~~with~~and ~~all~~making ~~our~~selective ~~loan~~strategic ~~covenants~~acquisitions.

15As of March 31, 2017, we were in compliance with all our loan covenants.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

Critical Accounting Policies

There have been no significant changes to our Critical Accounting Policies during the ~~third~~first quarter of ~~2016~~2017. Refer to the Critical Accounting Policies section in our Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016, as filed with the SEC.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk relates to changes in interest rates for borrowings under its credit facility. For the quarter ended ~~September~~ March 3031, ~~2016~~ 2017, a change of one percentage point in interest rates would have changed ~~the Company~~NCI’s interest expense or cash flows by less than $0.1 million. This estimate is based on our average balances for the period.

Additionally, the Company is subject to credit risks associated with our cash, cash equivalents, and accounts receivable. ~~The~~NCI ~~Company~~ believes that the ~~concentration~~ concentration of credit risk with respect to cash equivalents is limited due to the high credit quality of these investments. ~~The Company~~NCI’s investment policy requires that the Company invest excess cash in high-quality investments, which preserve principal, provide liquidity, and minimize investment risk. ~~The~~NCI ~~Company~~ also believes that its credit risk associated with accounts receivable is limited as they are primarily with the U.S. Federal Government or prime contractors working for the U.S. Federal Government.

Item 4. Controls and Procedures

Evaluation of the Effectiveness of Disclosure Controls and Procedures

AsThe ~~of September 30~~Company, ~~2016,~~ under the ~~supervision~~direction ~~and~~of ~~with~~ the ~~participation of NCI’s management, including our~~ Chief Executive Officer and ~~our~~the Chief Financial Officer, ~~the~~has ~~Company~~established ~~had evaluated the effectiveness of its~~ disclosure controls and procedures, as defined in Rule 13a-15(e) ofunder the Securities Exchange Act of 1934, as amended (the “Exchange Act”). ~~Based~~that onare ~~this~~designed ~~evaluation, NCI’s~~to ~~Chief~~ensure ~~Executive~~that ~~Officer~~information ~~and~~required ~~Chief~~to ~~Financial~~be ~~Officer~~disclosed ~~concluded~~by ~~that~~ the Company’s ~~disclosure~~in ~~controls and procedures were effective, as of September 30, 2016, such that~~ the ~~information~~reports that ~~is required to be disclosed in~~ ~~NCI’s~~it ~~reports~~files ~~filed~~or ~~with~~submits under the ~~SEC~~Exchange ~~(i)~~ Act is recorded, processed, summarized and reported within the time periods specified in ~~SEC~~the ~~rules and forms and (ii) is accumulated and communicated to management, including NCI~~SEC’s ~~Chief~~rules ~~Executive Officer~~ and ~~Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure~~forms.

An evaluation was performed under the supervision and with the participation of NCI’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2017, the Company’s disclosure controls and procedures are not effective because of the material weakness in our internal control over financial reporting identified in our Annual Report on Form 10-K for the year ended December 31, 2016, as described below.

Remediation Plan

As noted in Item 9.A in our Annual Report on Form 10-K for the year ended December 31, 2016, as filed on with the SEC, management’s evaluation of our internal control over financial reporting identified material weaknesses resulting from several control deficiencies in the internal control system that allowed the misappropriation of funds by the Company’s former corporate controller and the failure to detect them for an extended period of time. Management is committed to remediating each of the material weaknesses identified by implementing changes to the Company’s internal control over financial reporting. Management has implemented, or is in the process of implementing, the following changes to the Company’s internal control systems and procedures:

•

We have completed the initial assessment of the most critical material weaknesses and implemented procedures with improved segregation of duties and a more diligent review of supporting documentation.

•

We have met with our banking treasury support team to review alternative account structures and more robust reporting tools to better streamline processes and improve controls over electronic payments.

•

We engaged a contract recruiter to support the identification of a candidate for the corporate controller position. While the search is underway, we have hired a qualified individual to fill the role on a temporary basis.

•

We continue to review alternatives within the treasury function for a more efficient long-term solution.

•

The Audit Committee of the Board of Directors has decided to seek a new outside accounting consultant to assist in the evaluation and testing of the Company’s internal controls over financial reporting and we intend to conduct a more expansive risk assessment, with additional oversight by the Audit Committee.

•

Pending other planned personnel changes in the accounting department, we have engaged additional qualified consultants to provide temporary accounting support.

•

We implemented a new account structure to better monitor and track expenses across all employee benefit plans and have begun the effort to establish a systematic process to ensure the actual expenses are consistent with the terms of each benefit plan.

Management intends to finalize its efforts around implementing effective internal controls and closely test and monitor the operating effectiveness of these controls throughout 2017 to ensure they meet their designed control objectives and, where necessary, take additional corrective measures to ensure that deficiencies are remediated.

Changes in Internal Control over Financial Reporting

~~The~~Except ~~Company~~as ~~made~~described above, there have been no ~~change~~changes to ~~its~~the Company’s internal control over financial reporting ~~(as~~that ~~defined~~occurred induring ~~Rule~~the ~~13a-15(f)~~quarter ofended March 31, ~~the~~2017, ~~Exchange~~that ~~Act) as~~have amaterially ~~result~~affected, ofor are reasonably likely to materially affect, the ~~evaluation~~Company’s ~~required~~internal bycontrol ~~Rule~~over ~~13a-15(d)~~financial ~~under~~reporting. ~~the~~The ~~Exchange~~remediation ~~Act~~plan ~~during~~noted ~~the~~above ~~three~~was ~~months~~initiated ~~ended~~in ~~September 30,~~the ~~2016~~first ~~that~~quarter ~~has~~of ~~materially~~2017 ~~affected,~~and orwe expect isthat ~~reasonably~~our ~~likely~~remediation toefforts, ~~materially~~including ~~affect~~design, ~~its~~implementation ~~internal~~and ~~control~~testing, ~~over~~will ~~financial reporting.~~continue throughout 2017.

1615

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

~~The~~Civil ~~Company~~Suit isAgainst ~~party~~Former toController various legal actions, claims, government inquiries, and audits resulting from the normal course of business. The Company currently believes that the probability is remote that any resulting liability will have a material effect on the Company’s financial position, results of operations, or cash flows.

On January 23, 2017, we filed a lawsuit against Mr. Frank in the Circuit Court of Fairfax County in the State of Virginia to recover the embezzled funds.

Government Agency Investigations

In connection with the discovery of Mr. Frank’s embezzlement of money from the Company, we self-reported such matter to the U.S. Securities and Exchange Commission (“SEC”) and the civil and criminal divisions of the U.S. Department of Justice (“DOJ”).

Other Legal Proceedings

Item 1A. Risk Factors

There have been no significant changes in our risk factors from those discussed in Item 1A. “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015~~2016, as filed with the SEC.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Number		Description
2.1		Stock Purchase Agreement among NCI Information Systems, Inc. (“NCIIS”), a wholly owned subsidiary of ~~the Registrant~~NCI, ~~the Sellers named therein~~Inc., ~~the~~and ~~Phantom~~stockholders ~~Stock~~of ~~Holders~~AdvanceMed ~~named~~Corporation ~~therein and Computech, Inc.~~ dated as of ~~December~~February 24, 2011 (incorporated herein by reference from Exhibit 2.1 to ~~the Registrant~~registrant’s Current Report on Form 8-K, as filed with the Commission on ~~December~~April 294, ~~2014~~2011)
3.1		Amended and Restated Certificate of Incorporation of the Registrant (incorporated herein by reference from Exhibit 3.1 to registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 4, 2005, as amended).
3.2		Bylaws of the Registrant (incorporated herein by reference from Exhibit 3.2 to ~~the Registrant~~registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on July 29, 2005).
4.1		Specimen Class A Common Stock Certificate (incorporated herein by reference from Exhibit 4.1 to ~~the Registrant~~registrant’s Registration Statement on Form S-1 (File No. 333-127006), as filed with the Commission on October 20, 2005, as amended).
4.2*		NCI, Inc. Amended and Restated 2005 Performance Incentive Plan (incorporated herein by reference from Appendix A to registrant’s Definitive Proxy Statement on Schedule 14A, as filed with the Commission on April 30, 2009).
4.3*		Form of Amended and Restated 2005 Performance Incentive Plan Notice of Stock Option Grant and Stock Option Agreement (incorporated herein by reference from Exhibit 4.2 to registrant’s Current Report on Form 8-K, as filed with the Commission on ~~September~~March 12, 2009).
31.1‡		Certification of the Chief Executive Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2‡		Certification of the Chief Financial Officer pursuant to rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1‡		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Extension Schema
101.CAL		XBRL Extension Calculation Linkbase
101.DEF		XBRL Extension Definition Linkbase
101.LAB		XBRL Extension Label Linkbase
101.PRE		XBRL Extension Presentation Linkbase

‡	Included with this filing.

*	Management Contract or Compensatory Plan or Arrangement.

SIGNATURES

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

		NCI, Inc.
		Registrant
Date: November 4, 2016	By:	/s/ LUCAS J. NAREL
Date: May 9, 2017	By:	/s/ LUCAS J. NAREL
		Lucas J. Narel
		Executive Vice President, Chief Financial Officer and Treasurer
		(Principal Financial Officer)
		(Principal Accounting Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

☐ (Do not check if a smaller reporting company)

Smaller Reporting Company

Filing Compare · NCI, Inc.